================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
QUARTERLY REPORT FOR SMALL BUSINESS ISSUERS SUBJECT
TO THE 1934 ACT REPORTING REQUIREMENTS
FORM 10-QSB
---------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE REPORT OF 1934
For the transition period from ___________ to ____________
Commission file number 000-27548
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LIGHTPATH TECHNOLOGIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 86-0708398
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
6820 Academy Parkway East, N.E. http://www.light.net 87109
Albuquerque, New Mexico (ZIP Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(505)342-1100
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date:
Common Stock, Class A, $.01 par value 3,274,249 shares
Common Stock, Class E-1, $.01 par value 1,481,584 shares
Common Stock, Class E-2, $.01 par value 1,481,584 shares
Common Stock, Class E-3, $.01 par value 987,715 shares
- --------------------------------------- --------------
Class Outstanding at April 30, 1998
================================================================================
<PAGE>
LightPath Technologies, Inc.
Form 10-Q
Index
Item Page
- ---- ----
Part I Financial information
Balance Sheets 2
Statements of Operations 3
Statements of Cash Flows 4
Notes to Financial Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II Other information
Legal Proceedings 13
Changes in Securities and Use of Proceeds 13
Defaults Upon Senior Securities 14
Submission of Matters to a Vote of Security Holders 14
Other Information 14
Exhibits and Reports on Form 8-K 15
Signatures 15
<PAGE>
LightPath Technologies, Inc.
Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
----------------------------
<S> <C> <C>
Unaudited
Assets
Current assets:
Cash and cash equivalents $ 5,041,881 $ 993,505
Trade accounts receivable 170,883 167,258
Inventories 433,535 251,914
Advances to employees 29,566 2,865
Due from related parties 16,306 --
Prepaid expenses and other 40,450 38,604
----------------------------
Total current assets 5,732,621 1,454,146
Property and equipment - net 738,748 764,897
Intangible assets - net 509,544 490,272
Investment in LightChip, Inc. (Note 4) -- --
------------ ------------
Total assets $ 6,980,913 $ 2,709,315
============================
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable and accrued liabilities $ 150,876 $ 325,571
Accrued payroll and benefits 244,095 255,878
----------------------------
Total current liabilities 394,971 581,449
Note payable to stockholder 30,000 30,000
Redeemable common stock:
Class E-1 - performance based and redeemable common stock
1,481,584 and 1,449,942, shares issued and outstanding at March
31, 1998 and June 30, 1997, respectively 14,816 14,499
Class E-2 - performance based and redeemable common stock
1,481,584 and 1,449,942 shares issued and outstanding at March
31, 1998 and June 30, 1997, respectively 14,816 14,499
Class E-3 - performance based and redeemable common stock
987,715 and 966,621, issued and outstanding at March
31, 1998 and June 30, 1997, respectively 9,878 9,666
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
Series A convertible shares, 49 and 45 issued and outstanding at
March 31, 1998 and June 30, 1997, respectively,
Series B convertible shares, 154 and 0 issued and outstanding at
March 31, 1998 and June 30, 1997, respectively
Series C convertible shares, 375 and 0 issued and outstanding at
March 31, 1998 and June 30, 1997, respectively
$5,780,000 liquidation preference 6 1
Common stock:
Class A, $.01 par value; 34,500,000 shares authorized, voting
3,236,434 and 2,766,185, shares issued and outstanding at March
31, 1998 and June 30, 1997, respectively 32,364 27,662
Additional paid-in capital 26,360,534 19,244,055
Accumulated deficit (19,876,472) (17,212,516)
----------------------------
Total stockholders' equity 6,516,432 2,059,202
============================
Total liabilities and stockholders' equity $ 6,980,913 $ 2,709,315
============================
</TABLE>
See accompanying notes.
2
<PAGE>
LightPath Technologies, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
Unaudited 1998 1997 1998 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Product development fees $ 10,000 $ 306,000 $ 110,515 $ 419,153
Lenses and other 113,963 74,959 385,651 113,440
--------------------------------------------------------
Total revenues 123,963 380,959 496,166 532,593
Costs and expenses
Cost of goods sold 71,419 60,148 222,728 90,471
Selling, general and administrative 883,178 790,882 2,572,131 2,137,162
Research and development 122,651 201,928 447,479 741,235
--------------------------------------------------------
Total costs and expenses 1,077,248 1,052,958 3,242,338 2,968,868
--------------------------------------------------------
Operating loss (953,285) (671,999) (2,746,172) (2,436,275)
Other income(expense)
Investment income 54,877 22,065 110,098 97,664
Interest expense (1,258) (1,171) (4,162) (2,744)
Equity in loss of
LightChip, Inc.(Note 4) -- -- (23,720) --
--------------------------------------------------------
Net loss $ (899,666) $ (651,105) $(2,663,956) $(2,341,355)
========================================================
Net loss applicable to common
shareholders (Note 5) $(1,429,878) $ (651,105) $(3,926,735) $(2,341,355)
========================================================
Basic net loss per share (Note 5) $ (.46) $ (.24) $ (1.34) $ (.85)
========================================================
Number of shares used in per share
calculation 3,080,463 2,764,338 2,916,691 2,751,623
========================================================
</TABLE>
See accompanying notes.
3
<PAGE>
LightPath Technologies, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
Unaudited 1998 1997
--------------------------
<S> <C> <C>
Operating activities
Net loss $(2,663,956) $(2,341,355)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 199,420 134,139
Services provided for common stock 27,489 252,509
Equity in loss of LightChip, Inc. 23,720 --
Changes in operating assets and liabilities:
Receivable, advances to employees, related parties (46,632) (318,892)
Inventories (181,621) (154,300)
Prepaid expenses and other (1,846) 5,670
Accounts payable and accrued expenses (186,478) 19,246
--------------------------
Net cash used in operating activities (2,829,904) (2,402,983)
Cash flows from investing activities
Property and equipment additions (162,134) (460,856)
Costs incurred in acquiring patents (30,409) (71,917)
Investment in LightChip, Inc. (23,720) --
--------------------------
Net cash used in investing activities (216,263) (532,773)
Cash flows from financing activities
Proceeds from sales of Convertible Series A, Series B and
Series C preferred stock, net 6,802,576 --
Proceeds from exercise of common stock options 291,967 --
Repurchase of common stock -- (100,000)
--------------------------
Net cash provided by (used in) financing activities 7,094,543 (100,000)
--------------------------
Net increase (decrease) in cash and cash equivalents 4,048,376 (3,035,756)
Cash and cash equivalents at beginning of period 993,505 4,335,133
==========================
Cash and cash equivalents at end of period $ 5,041,881 $ 1,299,377
==========================
Supplemental disclosure of cash flow information:
Class A common stock issued for services $ 27,489 $ 252,509
Class E common stock issued $ 846 --
</TABLE>
See accompanying notes.
4
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Unaudited
Organization and Purpose
LightPath Technologies, Inc. (the Company) was incorporated in Delaware on June
15, 1992 as the successor to LightPath Technologies Limited Partnership formed
in 1989, and its predecessor, Integrated Solar Technologies Corporation formed
on August 23, 1985. The Company is engaged in the production of GRADIUM(R) glass
lenses and the research and development of additional GRADIUM applications.
During the period from August 23, 1985 to June 30, 1996 the Company was a
development stage company as defined in Statement of Financial Accounting
Standards No. 7 "Development Stage Enterprises". Planned principal operations
commenced during fiscal year 1997 and, accordingly, the Company is no longer
considered a development stage company.
GRADIUM glass is an optical quality glass material with varying refractive
indices, capable of reducing optical aberrations inherent in conventional lenses
and performing with a single lens, or fewer lenses, tasks performed by
multi-element conventional lens systems and enabling technology for emerging
markets such as optoelectronics and telecommunications.
1. Summary of Significant Accounting Matters
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Article 10 of Regulation S-X and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles. These financial statements should be
read in conjunction with the Company's financial statements and related notes
included in its Form 10-KSB for the fiscal year ended June 30, 1997, as filed
with the Securities and Exchange Commission on September 11, 1997.
The information furnished, in the opinion of management, reflects all
adjustments, which include normal recurring adjustments, necessary to present
fairly the results of operations of the Company for the three month and nine
month periods ended March 31, 1998 and 1997. Results of operations for interim
periods are not necessarily indicative of results which may be expected for the
year as a whole.
Cash and cash equivalents consist of cash in the bank and temporary investments
with maturities of ninety days or less when purchased.
Inventories are stated at the lower of cost or market, on a first-in, first-out
basis. Inventory costs include material, labor and manufacturing overhead.
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets from
three to seven years.
Intangible assets consisting of patents and trademarks, are recorded at cost.
Upon issuance of the patent or trademark, these assets are being amortized on
the straight-line basis over the estimated useful lives of the related assets
from ten to seventeen years. The recoverability of carrying values of these
assets is evaluated on a recurring basis.
Investment consists of the Company's 51% ownership interest in LightChip Inc.,
which is accounted for under the equity method as the Company anticipates their
equity position to fall below 50% during the current fiscal year.
Income taxes are accounted for under the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which requires an
asset and liability approach to financial accounting and reporting for income
taxes.
Deferred income tax assets and liabilities are computed for differences between
the financial statement and tax bases of assets and liabilities that will result
in taxable or deductible amounts in the future based upon enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change in
deferred tax assets and liabilities during the period.
5
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Unaudited
Revenue recognition occurs upon shipment of products or as earned under product
development agreements.
Research and development costs are expensed as incurred.
Stock based employee compensation is accounted for under the provision of APB
Opinion No. 25, Accounting for Stock Issued to Employees, which requires no
recognition of compensation expense when the exercise price of the employees
stock option equals the market price of the underlying stock on the date of
grant.
Pro forma information required by Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, has been presented under the
fair value method using a Black-Scholes option pricing model.
Per share data is computed using the weighted average number of common shares
and dilutive potential common shares outstanding during each period. Restricted
Class E common shares and stock options for the purchase of Class E common
shares are considered contingently issuable and, accordingly, are excluded
because all necessary conditions have not been satisfied.
The Company has adopted Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, on December 31, 1997. The impact of Statement 128
on the calculation of earnings (loss) per share was not material.
Management uses estimates and makes assumptions during the preparation of the
Company's financial statements that affect amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known, which in turn could impact the
amounts reported and disclosed herein.
Financial instruments of the Company are valued as required by Statement of
Financial Accounting Standards No. 107, Disclosures about Fair Values of
Financial Instruments. The carrying amounts of cash and cash equivalents, trade
accounts receivable, accounts payable and accrued liabilities, and notes payable
to stockholder approximate fair value.
Impairment of long-lived assets was adopted for the fiscal year 1997 by the
Company as required by Statement of Financial Accounting Standards No. 121,
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In
the event that facts and circumstances indicate that the cost of intangible or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value is
required. Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
2. Inventories
The components of inventories include the following:
March 31,
1998
Finished goods and work in process $318,981
Raw materials 114,554
--------
Total inventories $433,535
========
6
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Unaudited
3. Stockholders' Equity
Authorized 5,000,000 shares of preferred stock; no par value. In June 1997, the
Board of Directors designated 250 shares as Series A Convertible Preferred
Stock; $.01 par value. The Company entered into a private placement transaction
which provided proceeds on the sale of 180 shares of Series A Preferred Stock
totaling $1,800,000, less issuance costs of approximately $204,000, resulting in
net proceeds of approximately $1,596,000 by the final closing date, July 25,
1997. In September 1997, the Board of Directors designated 300 shares as Series
B Convertible Preferred Stock; $.01 par value. The Company entered into a
private placement transaction which provided proceeds on the sale of 230 shares
of Series B Preferred Stock totaling $2,300,000, less issuance costs of
approximately $232,000 resulting in net proceeds of approximately $2,068,000 by
the final closing date, October 2, 1997. In January 1998, the Board of Directors
designated 500 shares as Series C Convertible Preferred Stock; $.01 par value.
The Company entered into a private placement transaction which provided proceeds
on the sale of 375 shares of Series C Preferred Stock totaling $3,750,000, less
issuance costs of approximately $215,000 resulting in net proceeds of
approximately $3,535,000 by the final closing date, February 9, 1998.
The Series A, Series B and the Series C Convertible Preferred Stock has a stated
value and liquidation preference of $10,000 per share, plus an 8% per annum
premium. The holders of the Series A, Series B and Series C Convertible
Preferred Stock are not entitled to vote or to receive dividends. Each share of
Series A, Series B and Series C Convertible Preferred Stock is convertible into
Class A common stock at the option of the holder, with volume limitations during
the first 9 months after the respective final closing date, based on its stated
value at the conversion date divided by a conversion price. Approximately
680,500 shares of Class A Common Stock was issued upon the conversion of 131
shares of Series A Preferred Stock and 76 shares of Series B Preferred Stock
during the nine month period ending March 31, 1998. The conversion price is
defined as the lesser of $5.625, $7.2375 and $6.675 for the Series A, Series B
and Series C Convertible Preferred Stock, respectively, or 85% of the average
closing bid price of the Company's Class A common stock for the five days
preceding the conversion date. The discount provision in each of the Series A,
Series B and Series C Preferred Stock is recognized as an imputed deemed
dividend in the amount of $318,200, $406,700, and $661,800, respectively,
reducing income available to common shareholders on a pro rata basis from the
date of issuance to the first date that conversion can occur.
Designations, rights, and preferences related to the remaining preferred stock
may be determined by the Board of Directors. The terms of any series of
preferred stock may include priority claims to assets and dividends and voting
or other rights.
Warrants
Approximately 35,000 shares of Class A Common Stock were issued upon the
conversion of 132,139 Class C and Class D warrants during the nine month period
ending March 31, 1998. Class E and F, and Class G and H warrants were issued in
connection with the private placements of the Series B Convertible Preferred
Stock which was completed by October 2, 1997 and the Series C Preferred Stock
issued on February 9, 1998 respectively. A total of 317,788 Class E warrants
were granted to the Series B preferred stockholders which entitles the holder to
purchase one share of Class A common stock at an exercise price of $7.24 until
September 2000. A total of 47,668 Class F warrants were granted to the placement
agent which entitles the holder to purchase one share of Class A common stock at
an exercise price defined as $7.24. The Company registered the resale of the
Class A common stock underlying the Series B Preferred Stock and the Class E and
Class F warrants on Form S-3 which became effective November 13, 1997. A total
of 337,078 Class G warrants were granted to the Series C preferred stockholders
which entitles the holder to purchase one share of Class A common stock at an
exercise price of $6.68 until February 2000. A total of 58,427 Class H warrants
were granted to the placement agent which entitles the holder to purchase one
share of Class A common stock at an exercise price defined as $6.68. The Company
registered the resale of the Class A common stock underlying the Series C
Preferred Stock and the Class G and Class H warrants on Form S-3 which became
effective March 31, 1998.
7
<PAGE>
LightPath Technologies, Inc.
Notes to Financial Statements - Unaudited
4. Investment in LightChip, Inc.
The Company applied the equity method of accounting for its investment in
LightChip, Inc. until its share of net losses reduced the investment to zero.
The Company shall resume applying the equity method once the Company's share of
net income equals the share of net losses not recognized during the period the
equity method was suspended.
5. Net Loss Per Share
Basic net loss per common share is computed based upon the weighted average
number of common shares outstanding during each period presented. The
computation of diluted net loss per common share is not presented as the effect
was antidilutive for the assumed conversion at March 31, 1998 of the following
outstanding securities approximately: Class A options 832,075, private placement
warrants 1,030,165, IPO warrants 2,679,000 and 2,570,000 Class A shares reserved
for the convertible preferred stock. However, the eight percent premium earned
by the preferred shareholders was added to the net loss for computation purposes
increasing the net loss per common share by $.03 and $.07, respectively, for the
three month and nine month periods ending March 31, 1998. In addition, net loss
applicable to common shareholders was increased by an imputed deemed dividend in
the amount of $432,575 or $.14 per share, and $1,055,800 or $.36 per share,
respectively, for the three months and nine months ended March 31, 1998. The
imputed deemed dividend resulted from a discount provision included in the
Series A Preferred Stock issued on July 25, 1997, the Series B Preferred Stock
issued on October 2, 1997 and the Series C Preferred Stock issued on February 9,
1998. The remaining unamortized imputed deemed dividend of $330,900 from the
Series C Preferred Stock will be recognized in the fourth quarter.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- ----------------- ----------- --------------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
1998
- ----
Net loss $(899,666) $(.29) $(2,663,956) $(.91)
Less: Preferred Stock Premium (97,637) $(.03) (206,979) $(.07)
Imputed dividend on Series A, (432,575) $(.14) (1,055,800) $(.36)
Series B and Series C Preferred Stock
Basic EPS
Net loss applicable to common shareholders $(1,429,878) 3,080,463 $(.46) $(3,926,735) 2,916,691 $(1.34)
1997
- ----
Net loss $(651,105) $(.24) $(2,341,355) $(.85)
Basic EPS
Net loss applicable to common shareholders $(651,105) 2,764,338 $(.24) $(2,341,355) 2,751,623 $(.85)
</TABLE>
8
<PAGE>
LightPath Technologies, Inc.
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.
9
<PAGE>
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
10
<PAGE>
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
11
<PAGE>
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.
12
<PAGE>
LightPath Technologies, Inc.
PART II
-------
Item 1. Legal Proceedings
There have been no material developments in any legal actions since the
period reported as to in the Company's Form 10-KSB for the year ended June 30,
1997. LightPath is subject to various claims and lawsuits in the ordinary course
of business, none of which are considered material to the Company's financial
condition and results of operations.
Item 2. Changes in Securities and Use of Proceeds
The issuance of Series A, Series B and Series C Convertible Preferred
Stock (collectively the "Preferred Stock") by the Company limits the rights of
the Company's Common Stock in the following manner. Each share of Preferred
Stock has a stated value and liquidation preference of $10,000, plus an 8% per
annum premium. The holders of the Preferred Stock are not entitled to vote or to
receive dividends. In the event of liquidation of the Company or a Liquidation
Event (as defined in the Certificate of Designation) holders of the Preferred
Stock are entitled to receive distributions prior to any distribution to holders
of the Company's Common Stock. Conversion of the Preferred Stock could
potentially have a material dilutive effect upon shares of Common stock
outstanding at the time of such conversion. A full description of the rights and
preferences of the Preferred Stock have been included in previous filings as
follows: Series A - Form 10KSB, Series B - Form 10QSB dated December 31, 1997
and Series C - Form S-3 dated March 31, 1998.
The Company completed the private placement which began June 30, 1997
for an aggregate of 180 shares of Series A Convertible Preferred Stock (the
"Series A Stock") and 320,000 attached Class C warrants on July 25, 1997. Each
share of Series A Stock is convertible into Class A Common Stock at the option
of holder, with volume limitations during the first 9 months, based on its
stated value at the conversion date divided by a conversion price. The
conversion price is defined as the lesser of $5.625 or 85% of the average
closing bid price of the Company's Class A Common Stock for the five days
preceding the conversion date. Each Class C Warrant entitles the holder to
purchase one share of Class A Common Stock at $5.63 per share at any time
through July 2000. The gross amount received for the private placement of Series
A Stock was $1,800,000, less placement fees and related expenses resulting in
net proceeds of approximately $1,596,000. In addition, the placement agent was
granted 64,000 Class D warrants to purchase shares of the Company's Class A
common stock at a price of $5.63 per share at any time through July 2002.
The Company completed a private placement for an aggregate of 230
shares of Series B Convertible Preferred Stock (the "Series B Stock") and
317,788 attached Class E warrants on October 2, 1997. Each share of Series B
Stock is convertible into Class A Common Stock at the option of holder, with
volume limitations during the first 9 months, based on its stated value at the
conversion date divided by a conversion price. The conversion price is defined
as the lesser of $7.2375 or 85% of the average closing bid price of the
Company's Class A Common Stock for the five days preceding the conversion date.
Each Class E Warrant entitles the holder to purchase one share of Class A Common
Stock at $7.24 per share at any time through September 2000. The gross amount
received for the private placement of Series B Stock was $2,300,000, less
placement fees and related expenses resulting in net proceeds of approximately
$2,068,000. In addition, the placement agent was granted 47,668 Class F warrants
to purchase shares of the Company's Class A common stock at a price of $7.24 per
share at any time through September 2002.
The Company completed a private placement for an aggregate of 375
shares of Series C Convertible Preferred Stock (the "Series C Stock") and
337,078 attached Class G warrants on February 9, 1998. Each share of Series C
Stock is convertible into Class A Common Stock at the option of holder, with
volume limitations during the first 9 months, based on its stated value at the
conversion date divided by a conversion price. The conversion price is defined
as the lesser of $6.675 or 85% of the average closing bid price of the Company's
Class A Common Stock for the five days preceding the conversion
14
<PAGE>
LightPath Technologies, Inc.
date. Each Class G Warrant entitles the holder to purchase one share of Class A
Common Stock at $6.68 per share at any time through February 2001. The gross
amount received for the private placement of Series C Stock was $3,750,000, less
placement fees and related expenses resulting in net proceeds of approximately
$3,535,000. In addition, the placement agent was granted 58,427 Class H warrants
to purchase shares of the Company's Class A common stock at a price of $6.68 per
share at any time through February 2003.
All of the Preferred Stock, Class C, Class D, Class E, Class F, Class G
and Class H Warrants were issued to accredited investors in private placements
pursuant to Rule 506 of Regulation D promulgated under the Securities Act of
1933, as amended. Restrictions have been imposed on the resale of such
securities, including the placement of legends thereon noting such restrictions,
and written disclosure of such restrictions was made prior to issuance of the
securities.
On February 25, 1998, the Board of Directors of LightPath Technologies,
Inc. (the "Company") declared a dividend distribution of a right to purchase (a
"Right") one share of Series D Participating Preferred Stock for each
outstanding share of Class A Common Stock, $0.01 par value (the "Common
Shares"), of the Company. The dividend became payable on May 1, 1998 (the
"Record Date") to stockholders of record as of the close of business on that
date. Each Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series D Participating Preferred Stock, $.01 par
value, of the Company (the "Preferred Shares"), subject to adjustment, at a
price of $35.00 per share, subject to adjustment (the "Purchase Price")
following the occurrence of certain events. The description and terms of the
Rights are set forth in a Rights Agreement (the "Rights Agreement"), dated as of
May 1, 1998 between the Company and Continental Stock Transfer & Trust Company,
as Rights Agent (the "Rights Agent"). A copy of the Rights Agreement, including
the Certificate of Designation, the form of Rights Certificate and the Summary
of Rights to Purchase Preferred Stock to be provided to stockholders of the
Company, was attached as Exhibit 1 to the Company's Registration Statement filed
on Form 8-A, dated April 28, 1998.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Effective April 18, 1998, Donald E. Lawson, President and Chief
Operating Officer of LightPath Technologies, Inc. was promoted by the Board of
Directors to President and Chief Executive Officer. Leslie A. Danziger,
LightPath's inventor of GRADIUM glass, served as Founder and Chief Executive
Officer until the promotion of Mr. Lawson, will continue to serve as Chairwoman
of the Board of Directors. In that full-time role, she will focus on the
expansion of LightPath's patented GRADIUM technology into telecommunications and
other high-growth, high-margin applications, and on the development of strategic
relationships with key customers and the financial community.
D.H. Blair & Co., Inc., ("Blair & Co.") is a selling group member which
distributed a substantial portion of the Company's original IPO Units. Until
February 1998, Blair & Co. made a market in the Company's securities. On January
9, 1998, Blair & Co. announced that its brokerage service assets would be
acquired by Barington Capital Group L.P. , a New York investment bank. In
February 1998, the transaction was completed. The Company has not noted any
adverse impact of the acquisition on the Company's securities to date, however
the Company is unable to determine what future impact, if any, such acquisition
may have upon the Company's securities.
14
<PAGE>
LightPath Technologies, Inc.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit 3 - Certificate of Designation for Series C Preferred Stock 1
Exhibit 11 - Computation of Net Loss Per Share 2
Exhibit 27 - Financial Data Schedule 2
</TABLE>
1. This exhibit was filed as an exhibit to the Company's Registration
Statement on Form S-3 (File No: 333-47905) dated March 13, 1998 and are
incorporated herein.
2. Filed herewith.
b) No reports on Form 8-K were filed under the Securities and Exchange Act of
1934 during the quarter ended March 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed in its behalf by the
undersigned, thereunto duly authorized.
LIGHTPATH TECHNOLOGIES, INC.
By: /s/ Donald Lawson May 11, 1998
------------------------------
Donald Lawson Date
Chief Executive Officer
15
LightPath Technologies, Inc.
Exhibit 11
----------
Computation of Net Loss Per Share
For the Three Months
Ended March 31
----------------------------
1998 1997
---- ----
Net loss $ (899,666) $ (651,105)
Preferred stock 8% premium (97,637) --
Imputed dividend on Series B and Series C
Preferred Stock (432,575) --
----------------------------
Net loss applicable to common shareholders $(1,429,878) $ (651,105)
----------------------------
Weighted average common shares outstanding 3,080,463 2,764,338
===========================
Net loss per common share basic and diluted $ (.46) $ (.24)
===========================
For the Nine Months
Ended March 31
----------------------------
1998 1997
---- ----
Net loss $(2,663,956) $(2,341,355)
Preferred stock 8% premium (206,979) --
Imputed dividend on Series A, Series B and Series C
Preferred Stock (1,055,800) --
----------------------------
Net loss applicable to common shareholders $(3,926,735) $(2,341,355)
----------------------------
Weighted average common shares outstanding 2,916,691 2,751,623
===========================
Net loss per common share basic and diluted $ (1.34) $ (.85)
===========================
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
----------
Article 5 of Regulation S-X
This schedule contains summary financial information extracted from the Form
10-QSB for the nine month period ended March 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 5,041,881
<SECURITIES> 0
<RECEIVABLES> 170,883
<ALLOWANCES> 0
<INVENTORY> 433,535
<CURRENT-ASSETS> 5,732,621
<PP&E> 1,523,751
<DEPRECIATION> 785,003
<TOTAL-ASSETS> 6,980,913
<CURRENT-LIABILITIES> 394,971
<BONDS> 0
0
6
<COMMON> 32,364
<OTHER-SE> 26,360,534
<TOTAL-LIABILITY-AND-EQUITY> 6,980,913
<SALES> 385,651
<TOTAL-REVENUES> 496,166
<CGS> 222,728
<TOTAL-COSTS> 222,728
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,162
<INCOME-PRETAX> (2,663,956)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,663,956)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,663,956)
<EPS-PRIMARY> (1.34)
<EPS-DILUTED> (1.34)
</TABLE>
