May 11, 1998
LIGHTPATH TECHNOLOGIES INC (LPTHA)
Quarterly Report (SEC form 10QSB)
Management's Discussion and Analysis of Financial Condition And Results of Operations
Results of Operations -
The Private Securities Litigation Reform Act of 1995 ("the Act") provides a safe harbor for forward looking statements made by or on behalf of the Company. All statements, other than statements of historical facts, which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as future capital expenditures, growth, product development, sales, business strategy and other such matters are forward-looking statements. These forward-looking statements are based largely on the Company's expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond the Company's control. Actual results could differ materially from the forward-looking statements as a result of a number of factors, including, but not limited to, the Company's early state of development, the need for additional financing, intense competition in various aspects of its business and other risks described in the Company's 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 the Company will be realized. The Company undertakes no obligation to update or revise any of the forward looking statements contained herein.
Three months ended March 31, 1998,("1998") compared with three months ended March 31,1997,("1997")
Revenues totaled $123,963 for the third quarter of 1998, a decrease of approximately $257,000 or 67% from 1997. The decrease was attributable to a decrease of $296,000 in product development/license fees, which was offset by an increase of $39,000 in lens sales. The Company's increase in lens sales is primarily due to sales in the lasers and distributors markets. The Company's decrease in product development/license fees was due to the 1997 receipt of $200,000 license fee from Karl Storz. The start up phase of the license expires in the fourth quarter of 1998 at which time the Company anticipates entering into the production phase of the agreement with Karl Storz. The endoscope lenses provided to Karl Storz during the second quarter of 1998 have been under field test. The remaining decrease in development/license fees is due to a reduction in government funded projects as the Company's solar contract concluded at the end of the second quarter of 1998. The government has recommended the satellite solar concentrator be presented directly to the private sector for commercialization. DR Technologies, US Air Force Research Laboratory and the Company, will make a joint presentation on the solar concentrator to interested private sector representatives during May 1998. The Company received a $10,000 licensing fee extension from CHUGAI BOYEKI (AMERICA) CORP. "CBC", which is a wholly-owned subsidiary of CHUGAI BOYEKI CO., Ltd., for the exclusive right to use GRADIUM glass in CBC product lines. The original option expired on March 31, 1998, and CBC requested a 60 day extension, at which time CBC will have the right to engage in a long-term license and purchase agreement with LightPath. The Company provided The Fuji Photo Optical Co., Ltd. ("Fuji"), which is a subsidiary of Fuji Photo Film Co., GRADIUM profiles under the terms of an exclusive agreement whereby Fuji will evaluate the lenses in its TV broadcast systems. The initial agreement expired in November 1997, however, Fuji requested an extension to the agreement for the evaluation of another glass profile which the Company provided them in December 1997 for an additional fee of $25,000. The current extension expired in late April 1998, at which time Fuji has the right to engage in a long-term license and purchase agreement with LightPath. The Company is in negotiations with Fuji concerning the future of this agreement. At March 31, 1998, a backlog of $160,000 existed for lens sales.
During the 1998 quarter the Company completed an internal evaluation of its sales and marketing plan, both in terms of the short term and the long term potential of its products and the target markets. The purpose of the evaluation was to determine which emerging markets such as optoelectronics, photonics and solar have the greatest potential to utilize GRADIUM glass and the method to expand the Company's presence in traditional optics markets. Customer inquiries into the ability of GRADIUM glass to solve optoelectronic problems, (specifically in the areas of telecommunications), the unique properties of GRADIUM glass and advances made by the Company's subsidiary, LightChip, Inc. ("LightChip"), led the Company to further develop its strategy for optoelectronic products. GRADIUM glass is the enabling material which the Company's believes will provide the Company's optoelectronics products competitive advantages. Further research for glass profiles is not required as our initial product line utilizes lenses currently produced. Future engineering efforts to develop prototypes for the Company's product line will be incurred. During the quarter the Company developed its first passive optoelectronic product which was demonstrated at the Optical Fiber Conference ("OFC") in February, a single mode fiber collimator. The Company is offering two current product levels, the collimating lens and the single mode fiber collimator (SMF). The collimating lens can replace existing lenses with immediate improvements in performance, repeatability and cost. A large beam collimator has been delivered for testing to a potential customer and a prototype design of a high performance SMF will be available in the first quarter of fiscal 1999.
LightPath Technologies, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Based on the cost of the Company's prototypes and GRADIUM lenses, the Company believes the profit margin in optoelectronics will equal or exceed the margins historically experienced in the traditional optics markets. The SMF prototype will be the foundation for optoelectronic products which the Company intends to market to the fiber telecommunications and optics industry, which is projected to generate $10 billion in gross sales by the year 2000. The Company will continue to serve traditional optics and pursue opportunities within the solar industry, but the Company intends to devote its resources and focus to the fiber telecommunications and optoelectronics markets.
Cost of sales during the third quarter of 1998 was 63% of product sales, a decrease from the third quarter of 1997 when cost of sales equaled 80% of product sales. The decrease was primarily due to reductions in outside finishing expenses and more efficient production techniques. It is anticipated that with increased volume and the increased utilization of off-shore lens finishers, the cost of production could be decreased further. Administrative costs increased $92,296, or 12% from 1997, primarily due to the addition of personnel in sales and marketing, administration and operations along with increased overhead in these areas. Research and development costs decreased $79,277 in 1998 versus 1997. Several members of the research department staff have been dedicated to work on LightChip projects and a portion of their costs are being reimbursed by the subsidiary.
Investment income increased approximately $33,000 in 1998 due to an increase in funds from the February private placement. Interest expense was not significant in 1998 or 1997.
Net loss of $899,666 in 1998 was an increase of $248,561 from 1997 due to the $200,000 decrease in license fees and an additional $68,267 reduction in gross margin and increases in selling, general and administrative and research and development costs of $13,019 offset by an increase in other income(expense) of $32,725. Net loss applicable to common shareholders of $1,429,878 included additional charges of $432,575 for the imputed deemed dividend and $97,637 for the 8% preferred stock premium attributable to the Series A, Series B and Series C Preferred Stock. Basic net loss per share of $.46 was an increase of $.22 of which $.17 was due to the imputed deemed dividend and the 8% preferred stock premium on the Series A, Series B and Series C Preferred Stock and the remaining $.05 increase was due to reduced gross margin and a net increase in selling, general and administrative costs, and research and development expenses of $.06 and a increase in other income of $.01.
Nine months ended March 31, 1998,("1998") compared with nine months ended March 31,1997,("1997")
Revenues totaled $496,166 for 1998, a decrease of approximately $36,000 or 7% over 1997. The decrease was attributable to a decrease of $309,000 in product development/license fees offset by an increase of $273,000 in lens sales. The Company's increase in lens sales is primarily due to sales for lasers, distributors and wafer chip inspection markets. During the first quarter of 1998, the Company filled a production order from Karl Storz for 500 lenses and anticipates more significant production orders in 1998 after they have evaluated their product. In addition, the Company received a production order for $80,000 in catalog lenses from a U.S. distributor for their international catalog. During the third quarter of 1997, the Company received a $200,000 license fee from Karl Storz, which expires in the fourth quarter of 1998, which fee is the primary reason for the decline in nine month product development/license fees. During the second and third quarters of 1998, the Company entered into an evaluation option with CBC for $40,000 which expires June 30, 1998. The Company is in negotiations with Fuji concerning their contract extension with expired in late April 1998. Revenues for government funded subcontracts in the area of solar energy totaled $68,000 for 1998 versus $180,000 in l997. This billing concludes phase 2 funding for the solar energy subcontract. The government has recommended that phase 3 funding is not required for this project, as in its opinion, the product is ready for commercialization. The Company has submitted several additional funding requests to the U.S. government for solar and optoelectronic projects, none of which have been awarded as of this date. At March 31, 1998, a backlog of $160,000 existed for lens sales.
The Company continues to work with a number of OEM's towards the completion of projects which may result in production orders for LightPath. The Company formalized relationships with four additional foreign distributors in 1998 bringing its total to eight industrial, optoelectronic and medical component distributors based around the globe. The Company believes these distributors may create new markets for GRADIUM in their countries primarily in the area of sales into the YAG laser market. The first quarter of 1998 saw the addition of a Vice President of Marketing and Sales whose responsibility is to expand the Company's presence in traditional optics and develop emerging markets such as optoelectronics, photonics and solar. Product development in the area of optoelectronics during the third quarter lead to the first passive optoelectronic product which was
LightPath Technologies, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
demonstrated at the OFC conference in February, a single mode fiber collimator. The development of these products is anticipated to facilitate the Company's presence as a leader in this emerging telecommunications optoelectronics market place which is projected to exceed $10 billion in gross sales by the year 2000. However, this industry is subject to, among other risks, intense competition and rapidly changing technology, and there can be no assurances as to the Company's ability to anticipate and respond to the demands and competitive aspects of this industry.
Cost of sales during the nine month period of fiscal year 1998 was 58% of product sales, a significant decrease from the nine month period of fiscal year 1997, when cost of sales was 80% of product sales. The decrease was primarily due to reductions in outside finishing expenses and more efficient production techniques. It is anticipated that with increased volume and the increased utilization of off-shore lens finishers, the cost of production could be decreased further. Administrative costs increased $434,969, or 20% from 1997, primarily due to the addition of personnel in sales and marketing, administration and operations along with increased overhead in these areas. The Company's public awareness campaign, through print advertising, web site and trade shows continues to generate inquiries. Research and development costs decreased $293,756 in 1998 versus 1997. During 1997, the Company issued shares of Class A Common Stock valued at approximately $238,000 to perform a benchmarking and prediction analysis of technologies related to the Company's proprietary processes in the manufacturing of GRADIUM glass. These costs were not recurring. Several of the research department staff are being charged to LightChip and a portion of their costs are being reimbursed by the subsidiary. The focus of the development efforts has been to expand GRADIUM product lines to the areas of multiplexers and interconnects for the telecommunications field, the addition of the crown glass product line to supplement its existing flint products, and the development of acrylic axial gradient material to extend the product range.
Investment income increased approximately $12,000 in 1998 due to the increase in interest earned on temporary investments as cash levels increased due to the February private placement. Interest expense was not significant in 1998 or 1997. The Company funded its portion of LightChip during 1998 and announced the hiring of LightChip's CEO. The Company has accounted for the investment in LightChip under the equity method and recognized a loss of $23,720 in 1998.
Net loss of $2,663,956 in 1998 was an increase of $322,601 from 1997 due to decrease in gross margin of $168,684 of which $200,000 is directly attributable to the Karl Storz license fee) and an increases in selling, general and administrative costs of $434,969 which are offset by lower research and development costs of $293,756 and the increase in other income(expense) of $11,016. Net loss applicable to common shareholders of $3,926,735 included additional charges of $1,055,800 for the imputed deemed dividend and $206,979 for the 8% premium on the Preferred stock. Basic net loss per share of $1.34 was an increase of $.49 of which $.43 was due to the imputed deemed dividend and the 8% premium on the Preferred Stock.
Financial Resources and Liquidity -
LightPath had previously financed its operations through private placements of equity, or debt until February 1996 when the IPO generated net proceeds of approximately $7,200,000. In July 1997, the Company completed a preferred stock private placement which generated net proceeds of approximately $1,596,000. Some of the Series A Preferred Stock investors entered into two additional private placements, the Series B Preferred Stock which generated net proceeds of approximately $2,068,000 when completed on October 2, 1997 and the Series C Preferred Stock which generated net proceeds of approximately $3,535,000 when completed on February 9, 1998. The Company intends to continue to explore additional funding opportunities in fiscal year 1998. The Company expects to continue to incur losses until such time, if ever, as it obtains market acceptance for its products at sale prices and volumes which provide adequate gross revenues to offset its operating costs. The Company has budgeted operating and research cash requirements for fiscal 1998 at $3,000,000 which is comparable to the actual results for fiscal year 1997. Included in the cash requirements is $700,000 to continue the Company's research and development efforts in fiscal year 1998. For the third quarter 1998, the Company exceeded its quarterly budget by approximately $75,000. For the year to date in 1998, the Company has exceeded the fiscal budget by approximately $140,000. During fiscal 1998, the Company projects approximately $500,000 will be expended for capital equipment and patent protection. To date, actual expenditures were approximately $192,000 and commitments for $250,000 are outstanding. The majority of the capital expenditures during the quarter were for additional computers and equipment to expand its manufacturing facilities. The Company purchased its 51% share in LightChip for $23,720. LightChip completed $590,000 of bridge financing in March 1998 from a syndicated group of accredited investors. Additional bridge loan financing of $500,000 is
LightPath Technologies, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
being sought in the fourth quarter although LightChip does not currently have any commitments to provide such financing. LightChip is currently making presentations to obtain a significant equity investment in LightChip by year end or the first quarter of fiscal 1999.
The Company believes that projected product sales and proceeds from the Series A and Series B Convertible Preferred Stock private placements will be sufficient to cover the fiscal 1998 operating and capital budget. Funds from the Series C Convertible Preferred Stock are planned to provide working capital into fiscal 1999 and the facilitation of a more rapid entrance into optoelectronics development and sales. The Company intends to satisfy its capital requirements by revenues generated from projected future product sales. Such sales will depend on the extent that GRADIUM glass becomes commercially accepted and the success of the Company's sales program in generating sales sufficient to sustain its operations. Although lens sales for 1998 have increased 3.4 times 1997 levels, there can be no assurance that the Company will generate sufficient revenues to fund its future operations and growth strategies. In addition, the Company may be required to seek additional financing or alter its business plan in the event of delays for commercial production orders or unanticipated expenses. The Company currently has no credit facility with a bank or other financial institution. There also can be no assurance that any additional financing will be available if needed, or, if available, will be on terms acceptable to the Company. In the event necessary financing is not obtained, the Company's business and results of operations will be materially adversely affected and the Company have to cease or substantially reduce its operations. Any commercial financing obtained by the Company in the future is likely to impose certain financial and other restrictive covenants upon the Company and result in additional interest expense. Further, any issuance of additional equity or debt securities could result in further dilution to the existing investors.
The Company has not been significantly impacted by inflation due to the nature of its product components and in prior years the Company was principally engaged in basic research and development. The Company does not believe that seasonality will have a significant impact on its business.
LightPath Technologies, Inc.
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