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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
COMMISSION FILE NUMBER 000-27548
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LIGHTPATH TECHNOLOGIES, INC.
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(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.)
http://www.light.net
6820 Academy Parkway East, N.E.
Albuquerque, New Mexico 87109
- ---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(505)342-1100
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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 4,601,203 shares
Common Stock, Class E-1, $.01 par value 1,492,480 shares
Common Stock, Class E-2, $.01 par value 1,492,480 shares
Common Stock, Class E-3, $.01 par value 994,979 shares
- --------------------------------------- ----------------
Class Outstanding at January 29, 1999
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<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
FORM 10-QSB
INDEX
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 10
PART II OTHER INFORMATION
Legal Proceedings 15
Changes in Securities and Use of Proceeds 15
Defaults Upon Senior Securities 15
Submission of Matters to a Vote of Security Holders 15
Other Information 15
Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, JUNE 30,
1998 1998
------------ ------------
ASSETS UNAUDITED
Current assets:
Cash and cash equivalents $ 1,709,981 $ 4,237,400
Trade accounts receivable - less
allowance of $15,000 and $0 315,168 256,491
Inventories (NOTE 2) 597,521 488,710
Advances to employees and related parties 34,808 38,560
Prepaid expenses and other 38,101 43,629
------------ ------------
Total current assets 2,695,579 5,064,790
Property and equipment - net 888,996 723,838
Intangible assets - net 569,480 519,839
Investment in LightChip, Inc. (NOTE 3) 838,230 --
============ ============
Total assets $ 4,992,285 $ 6,308,467
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 322,955 $ 190,530
Accrued payroll and benefits 124,379 232,051
------------ ------------
Total current liabilities 447,334 422,581
Accrued loss of LightChip, Inc. -- 921,662
Note payable to stockholder 30,000 30,000
Commitments and contingencies
Redeemable common stock
Class E-1 - performance based and redeemable
common stock 1,492,480 and 1,481,584 shares
issued and outstanding 14,925 14,816
Class E-2 - performance based and redeemable
common stock 1,492,480 and 1,481,584 shares
issued and outstanding 14,925 14,816
Class E-3 - performance based and redeemable
common stock 994,978 and 987,715 issued and
outstanding 9,950 9,877
Stockholders' equity
Preferred stock, $.01 par value; 5,000,000
shares authorized;
Series A convertible shares, 37 and 49 issued
and outstanding, Series B convertible shares,
1 and 126 issued and outstanding, Series C
convertible shares, 155 and 361 issued and
outstanding, $1,930,000 liquidation preference
at December 31, 1998 2 5
Common stock:
Class A, $.01 par value, voting; 34,500,000
shares authorized; 4,601,203 and 3,330,607
shares issued and outstanding 46,012 33,306
Additional paid-in capital 29,705,102 28,103,439
Accumulated deficit (25,275,965) (23,242,035)
------------ ------------
Total stockholders' equity 4,475,151 4,894,715
------------ ------------
Total liabilities and stockholders' equity $ 4,992,285 $ 6,308,467
============ ============
SEE ACCOMPANYING NOTES
3
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
UNAUDITED 1998 1997 1998 1997
---------- ----------- ----------- -----------
REVENUES
Lenses and other $ 200,973 $ 123,969 $ 353,583 $ 271,688
Product development fees 53,596 82,115 91,714 100,515
---------- ----------- ----------- -----------
Total revenues 254,569 206,084 445,297 372,203
COSTS AND EXPENSES
Cost of goods sold 124,175 67,867 216,015 151,309
Selling, general and
administrative 759,589 839,154 1,513,067 1,688,953
Research and development 174,072 171,188 301,168 324,828
---------- ----------- ----------- -----------
Total costs and expenses 1,057,836 1,078,209 2,030,250 2,165,090
---------- ----------- ----------- -----------
Operating loss (803,267) (872,125) (1,584,953) (1,792,887)
OTHER INCOME(EXPENSE)
Investment income 24,795 35,697 70,659 55,221
Interest and other expense (8,798) (1,223) (9,648) (2,904)
Equity in loss of LightChip,
Inc.(NOTE 3) (125,913) (14,040) (351,347) (23,720)
---------- ----------- ----------- -----------
Net loss $ (913,183) $ (851,691) $(1,875,289) $(1,764,290)
========== =========== =========== ===========
Net loss applicable to
common shareholders $ (972,247) $(1,313,509) $(2,033,930) $(2,496,856)
========== =========== =========== ===========
Basic and diluted net loss
per share (NOTE 5) $ (.23) $ (.46) $ (.53) $ (.88)
========== =========== =========== ===========
Number of shares used in
per share calculation 4,213,215 2,881,147 3,841,778 2,836,586
========== =========== =========== ===========
SEE ACCOMPANYING NOTES.
4
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
DECEMBER 31
UNAUDITED 1998 1997
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OPERATING ACTIVITIES
Net loss $(1,875,289) $(1,764,290)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 170,129 121,073
Allowance for doubtful accounts 15,000 --
Services provided for common stock -- 27,491
Equity in loss of LightChip, Inc. 351,347 23,720
Changes in operating assets and liabilities:
Receivables, advances to employees,
related parties (69,925) (150,554)
Inventories (108,811) (140,623)
Prepaid expenses and other 5,528 (4,001)
Accounts payable and accrued expenses 24,753 (178,840)
----------- -----------
Net cash used in operating activities (1,487,268) (2,066,024)
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions - net (324,787) (129,127)
Costs incurred in acquiring patents (60,141) (19,350)
Investment in LightChip, Inc. (713,333) (23,720)
----------- -----------
Net cash used in investing activities (1,098,261) (172,197)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of Convertible Series A
and Series B preferred stock, net -- 3,268,973
Proceeds from exercise of common stock
options and warrants 39,950 --
Proceeds from issuance of common stock 18,160 291,967
----------- -----------
Net cash provided by financing activities 58,110 3,560,940
----------- -----------
Net (decrease) increase in cash and cash
equivalents (2,527,419) 1,322,719
Cash and cash equivalents at beginning of period 4,237,400 993,505
----------- -----------
Cash and cash equivalents at end of period $ 1,709,981 $ 2,316,224
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Class A common stock issued for services $ -- $ 27,490
Sale of securities by LightChip, Inc. $ 1,397,906 $ --
Class E common stock issued $ 291 $ 845
Conversions of preferred stock to
Class A common stock $ 12,703 $ --
SEE ACCOMPANYING NOTES.
5
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 1998
ORGANIZATION
LightPath Technologies, Inc. (the Company or LightPath) 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 other optical materials and performs research and
development for optical solutions for the fiber telecommunications and
traditional optics markets. 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.
BASIS OF PRESENTATION
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, 1998, as filed
with the Securities and Exchange Commission on September 17, 1998.
The information furnished, in the opinion of management, reflects all
adjustments, which include normal recurring adjustments, necessary to present
fairly the financial position, results of operations and cash flows of the
Company for the interim periods presented. Results of operations for interim
periods are not necessarily indicative of results which may be expected for the
year as a whole.
1. SUMMARY OF SIGNIFICANT ACCOUNTING MATTERS
CASH AND CASH EQUIVALENTS consist of cash in the bank and temporary investments
with maturities of ninety days or less when purchased.
INVENTORIES which consists principally of raw materials, lenses and components
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
ranging from three to seven years.
INTANGIBLE ASSETS consisting of licenses, patents and trademarks, are recorded
at cost. Upon issuance of the license, patent or trademark, these assets are
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.
INVESTMENTS consists of the Company's ownership interest in LightChip Inc.
(LightChip) which is accounted for under the equity method.
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.
6
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
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.
REVENUE RECOGNITION occurs from sales of products upon shipment or as earned
under product development agreements.
RESEARCH AND DEVELOPMENT costs are expensed as incurred.
STOCK BASED EMPLOYEE COMPENSATION is accounted for under the provisions of APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, which requires no
recognition of compensation expense when the exercise price of the employee's
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 accounted for under the provisions of the Statement of
Financial Accounting Standards No. 128 (FAS 128), EARNINGS PER SHARE, which was
adopted by the Company on December 31, 1997. The impact of adopting FAS 128 on
the calculation of earnings (loss) per share was not material, however, all
prior period amounts were restated to conform to FAS 128. See Note 5.
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.
FAIR VALUES OF FINANCIAL INSTRUMENTS of the Company are disclosed 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 note payable to stockholder approximate fair value.
IMPAIRMENT OF LONG-LIVED ASSETS is accounted for under the provisions of
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 fair value is required.
2. INVENTORIES
The components of inventories include the following:
December 31, June 30,
1998 1998
--------- ---------
Finished goods and work in process $ 436,483 $ 362,176
Raw materials 161,038 126,534
--------- ---------
Total inventories $ 597,521 $ 488,710
========= =========
7
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
3. INVESTMENT IN LIGHTCHIP, INC.
During fiscal 1998, the Company applied the equity method of accounting to its
$23,720 cash investment in LightChip, a development stage company, until its
share of net losses were reduced to zero at which time the Company discontinued
applying the equity method of accounting. In June 1998, the Company committed to
purchase $1.25 million of LightChip convertible preferred stock thereby
requiring the Company to recognize a loss of $921,662 for substantially all of
LightChip's losses during fiscal 1998.
On September 9, 1998, LightPath purchased 2,266,667 shares of voting Series A
convertible preferred stock of LightChip in a private placement participating
with AT&T Ventures who acquired 9,400,000 shares of voting Series A convertible
preferred stock (Preferred Stock) for an aggregate of approximately $3.5
million. LightPath and AT&T Ventures have committed to purchase an additional
$570,000 and $2.5 million, respectively, of voting Series A1 convertible
preferred stock due upon completion of product design requirements. Each share
of Preferred Stock was issued at $.30 per share, 8% per annum dividend if
declared, noncumulative and a liquidation preference equal to the purchase price
plus any declared but unpaid dividends. In conjunction with the private
placement all the convertible bridge loans outstanding at LightChip, totaling
$890,000, converted to Preferred Stock at $.30 per share as permitted in the
debt agreement. In addition, substantially all of the warrant holders of
LightChip exercised their warrants, including 111,111 shares received upon
exercise by LightPath. In total, LightChip issued approximately 16,460,000
shares of Preferred Stock. Each share of Preferred Stock is convertible into one
share of Common Stock at (i) the option of the holder, (ii) the consent of the
majority of the outstanding Preferred Stock or (iii) an initial public offering
if gross proceeds from the offering exceed 5 times that paid by the Preferred
Stock holders.
Accordingly, the Company recognized all of LightChip's losses from July 1, 1998
through the closing of the private placement on September 9, 1998, which upon
completion, reduced the Company's voting interest to approximately 26%. From the
closing date through December 31, 1998, the Company recognized its pro-rata
share of LightChip's losses (approximately 26%). Upon completion of the sale of
the Preferred Stock by LightChip, the Company recorded an increase to additional
paid in capital of $1,397,906 which represents an amount necessary to increase
LightPath's Investment in LightChip to its pro rata share of total LightChip
equity at this date. Due to the Company's tax position, no deferred tax effects
were recognized related to this increase to stockholders' equity.
8
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
4. STOCKHOLDERS' EQUITY
The Series A, Series B and the Series C Convertible Preferred Stock have 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 at
the option of the holder, into Class A common stock 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, $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. Approximately 1,259,000 shares of Class A Common
Stock were issued upon the conversion of 343 shares of Series A, Series B and
Series C Preferred Stock during the six months ended December 31, 1998.
<TABLE>
<CAPTION>
Preferred
Stock - Common Warrants Warrants Warrants Common
Series Stock Class Class Class Stock
Shares Outstanding A, B & C Class A A & B C, E & G D, F & H Options
- ------------------ -------- ------- ----- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
June 30, 1998 536 3,330,607 4,519,000 914,068 123,345 983,875
Issuance of shares -- 4,644 -- -- -- --
Conversions (343) 1,258,688 -- -- -- --
Option grants -- -- -- -- -- 248,600
Exercise of options -- 7,264 -- -- -- (7,264)
Forfeitures -- -- -- -- -- (2,200)
Outstanding at
December 31, 1998 193 4,601,203 4,519,000 914,068 123,345 1,223,011
</TABLE>
9
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
5. NET LOSS PER SHARE
Basic and Diluted 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 does not differ from the basic
computation because potentially issuable securities would be anti-dilutive. The
following outstanding securities were not included in the computation of diluted
earnings per share at December 31, 1998,: Class A common stock options
1,223,011, private placement warrants 1,037,413, IPO warrants 4,519,000, 325,000
Class A shares reserved for the convertible preferred stock and the Class E
common stock that is automatically converted into Class A common stock upon
attainment of certain performance criteria. However, an eight percent premium
earned by the preferred shareholders was added to the net loss to reflect the
net loss applicable to common shareholders (see table below). In addition, net
loss applicable to common shareholders was increased by an imputed dividend in
the amount of $384,575 and $623,225 for the three and six months ended December
31, 1997, respectively. The prior year imputed dividend resulted from a discount
provision included in the Series A and Series B Preferred Stock.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------------- --------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
1998
Net loss $ (913,183) $(1,875,289)
Less: Preferred Stock Premium (59,064) (158,641)
BASIC AND DILUTED EPS
Net loss applicable to common
shareholders $ (972,247) 4,213,215 $(.23) $(2,033,930) 3,841,778 $(.53)
1997
Net loss $ (851,691) $(1,764,290)
Less: Preferred Stock Premium (77,243) (109,341)
Imputed dividend on
Series A and Series B
Preferred Stock (384,575) (623,225)
BASIC AND DILUTED EPS
Net loss applicable to common
shareholders $(1,313,509) 2,881,147 $(.46) $(2,496,856) 2,836,586 $(.88)
</TABLE>
10
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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 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 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 SET FORTH HEREIN AS A RESULT OF A NUMBER OF
FACTORS, INCLUDING, BUT NOT LIMITED TO, THE COMPANY'S EARLY STAGE 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998 ("1999") COMPARED WITH THE THREE MONTHS
ENDED DECEMBER 31, 1997 ("1998")
During the second quarter of fiscal 1999 the Company's management
focused its efforts on 1) the distribution of collimator lens and assembly
samples to potential customers for testing and 2) the licensing agreements for
fiberoptic switches between the Company and Herzel Laor. The Company's internal
focus has been on the development and shipment of product samples of LightPath's
newly designed single-mode fiber collimator assembly (SMF assembly) and the
scale-up of manufacturing equipment to meet anticipated volumes. The LightPath
SMF assembly is approximately 50-60% smaller than the existing collimator. This
entry level product currently used by the telecommunications industry prevents
light from diverging and shepherds it into the next piece of equipment or fiber.
The Company offers two product levels, the collimating lens and a SMF assembly.
The collimating lens can replace existing lenses with immediate improvements in
performance, repeatability and cost. The SMF assembly offers superior
performance in the areas of back reflection and insertion loss. To date in
fiscal 1999, production line SMF assembly and collimating lenses were delivered
for testing to approximately 45 potential customers in the U.S. and Asia. The
Company has received mostly favorable comments on the collimating lenses due to
the improvement potential customers have noted in insertion loss. The SMF
assembly is still undergoing testing and modification based on customer
feedback. The Company will display both products at trade shows in late January
and February 1999. These shows provide the Company with the ability to deliver
additional samples and meet with potential customers to distribute information
on our products or to discuss test results from samples previously sent.
During December 1998, LightPath and Herzel Laor entered into exclusive
licensing agreements for the commercialization of two fiberoptic opto-mechanical
switch technologies. The Company believes these agreements will accelerate its
planned introduction of fiberoptic switching products for the telecommunications
market. Mr. Laor and his businesses have been active in the development of
fiberoptic switches for 20 years. The new products, which patent applications
have been filed, are expected to enter into field trials in the middle of
calendar 1999. Industry estimates of the current market sales for the mechanical
switch are approximately $100 million. The Company anticipates sales of
LightPath switches in calendar 2000, although there can be no assurances in this
regard. The mechanical switch products are an excellent bridge to the material
development the Company is undertaking for the more advanced optical matrix
switch. It also continues the Company's strategy of incorporating its
proprietary material technology into an increasing number of optical
telecommunication components. With follow-on products such as isolators and
amplifiers, the Company could develop their own products or strategically
partner with another company that already has a product offering.
During December 1998, the Company and the German optical products
manufacturer Rodenstock Prazisionsoptik GmbH ("Rodenstock") held their marketing
kick-off program in Germany for the development, production and
joint-distribution of GRADIUM based optical products in Europe based upon the
five year Strategic Agreement the companies entered into in the first quarter of
fiscal 1999. The Company believes the relationship with Rodenstock and its
remaining distributors may create new and sustain existing markets for GRADIUM
in their respective countries primarily in the area of the YAG laser market.
11
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Revenues totaled $255,000 for 1999, an increase of approximately
$48,000 or 24% over 1998. The increase was attributable to $77,000 in additional
product sales, primarily for lasers and wafer chip inspection, and a decrease of
$29,000 in product development/license fees. Sales of laser lenses during this
period did not grow at the rate the Company had projected due to reduced laser
equipment sales into Asia. The Company expects this trend of relatively flat
laser lens sales to continue for fiscal 1999. Sales for wafer chip inspection
lenses increased slightly over 1998 levels. Revenues for government funded
subcontracts in the area of optoelectronics totaled $51,000 for 1999 versus
$49,000 for solar energy work and $33,000 in development fees in 1998. At
December 31, 1998, a backlog of $120,000 existed for lens sales and $261,000 in
government project funding. In addition, an agreement with Karl Storz requires
an increase in the license fee to $20,833 per month effective January 1999.
In 1999, cost of sales was 62% of product sales, an increase from 1998,
when cost of sales was 55% of product sales. The increase was primarily due to
lower margins in sales to the wafer chip inspection markets and some large scale
laser optics. It is anticipated that with increased volume and the increased
utilization of off-shore lens finishers, the cost of traditional optics
production could be decreased. Selling, general and administrative costs
decreased $79,565, or 9% from 1998, primarily due to the reduction of personnel
in administration and the reduction in overhead and personnel costs associated
with LightChip. Research and development costs increased $2,884 in 1999 versus
1998. The majority of development work consisted of expenses associated with the
SMF assembly design and manufacturing process. In addition, development work is
on-going to expand GRADIUM products to the areas of multiplexers, interconnects
and cross-connects for the telecommunications industry.
Investment income decreased approximately $11,000 in 1999 due to the
decrease in interest earned on temporary investments as a result of a decrease
in cash reserves. Interest expense was not significant in 1999 or 1998. The
Company incurred a loss of approximately $8,000 on the disposal of property used
in California for a government contract. The Company accounts for the investment
in LightChip under the equity method. The Company's 26% share of LightChip
losses was $125,913 for the quarter versus $14,040 in 1998.
Net loss of $913,183 in 1999 was an increase of $61,492 from 1998 of
which $111,873 relates to recognition of LightChip's loss, $28,519 due to a
decrease in product development fees while the gross margin on product sales
increased $20,969, and $18,477 due to a decrease in other income (expense).
These increased costs were offset by a $76,681, decrease in operating costs
primarily in selling, general and administrative expense. Net loss applicable to
common shareholders of $972,247 included an additional charge of $59,064 for the
8% premium on the preferred stock. Net loss per share of $.23 was a decrease of
$.23 from 1998 net loss per share of $.46 of which $.11 was due to the increase
in the number of weighted shares outstanding due to the conversion of Preferred
Stock. The 1999 net loss per share was negatively impacted by $.03 due to
LightChip's losses and $.01 due to the 8% premium on the preferred stock. The
1998 net loss per share contains an imputed dividend of $.13 arising from the
issuance of preferred stock and $.03 due to the 8% premium on the preferred
stock.
SIX MONTHS ENDED DECEMBER 31, 1998 ("1999") COMPARED WITH THE SIX MONTHS ENDED
DECEMBER 31, 1997 ("1998")
During the six months ended December 31, 1998, the Company's management
focused its efforts on three key areas 1) the completion of the AT&T Ventures'
financing for the Company's subsidiary LightChip, 2) the distribution of
collimator lens and assembly samples to potential customers for testing and 3)
the licensing agreement for fiberoptic switches between LightPath and Herzel
Laor. On September 9, 1998, LightChip received approximately $3.5 million from
AT&T Ventures and LightPath as consideration for the issuance of Series A
Convertible Preferred Stock. The balance of the $6.5 million commitment ($3
million) is due upon completion of certain product design requirements by
LightChip. In addition, $890,000 of LightChip's bridge loans converted to equity
and LightChip's warrants totaling $508,333 were exercised. LightChip has
relocated to the Boston metro area to begin scale-up of their research and
development efforts to meet product design milestones. The Company believes
LightChip is making significant progress in the development of its products
which will include GRADIUM glass for next-generation wavelength division
multiplexing (WDM) products for metro and local area network applications. The
Company will experience further dilution of its ownership in LightChip when the
balance of the private placement is funded, currently anticipated to occur in
fiscal 1999. The Company's internal focus has been on the development and
shipment of product samples of LightPath's newly designed single-mode fiber
collimator assembly (SMF assembly) which is approximately 50-60% smaller than
12
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
the existing collimator. This entry level product currently used by the
telecommunications industry prevents light from diverging and shepherds it into
the next piece of equipment or fiber. The Company offers two product levels, the
collimating lens and a SMF assembly. The collimating lens can replace existing
lenses with immediate improvements in performance, repeatability and cost. The
SMF assembly offers superior performance in the areas of back reflection and
insertion loss. It is also more compact and the Company believes it can be
manufactured at a significantly lower cost than the competitive products
currently available in commercial quantities. In addition, LightPath is seeking
to attract customers interested in obtaining a second source supplier since the
majority of existing collimator sales are through one manufacturer. In 1999,
production line SMF assembly and collimating lenses were delivered for testing
to approximately 45 potential customers in the U.S. and Asia. The first scale-up
production orders are expected in early 1999 due to the amount of testing time
required by telecommunication customers. The Company has received mostly
favorable comments from potential customers on the collimating lenses due to
improved insertion loss. The SMF assembly is still undergoing testing and
modification based on customer feedback. The Company will display both products
at trade shows during January and February 1999. Based on the cost of the
Company's prototypes and GRADIUM lenses, the Company believes the profit margin
in these optoelectronics products will equal or exceed the margins historically
experienced in the traditional optics markets.
In December 1998, LightPath and Herzel Laor entered into an exclusive
licensing agreement for the commercialization of two fiberoptic switch
technologies. The Company believes these agreements will accelerate its planned
introduction of fiberoptic switching products for the telecommunications market.
Mr. Laor and his businesses have been active in the development of fiberoptic
switches for 20 years. The new products, which patent applications have been
filed, are expected to enter into field trials in the middle of calendar 1999.
Industry estimates of the current market sales for the mechanical switch are
approximately $100 million, and the Company anticipates sales of LightPath
switches in calendar 2000. However, the telecommunications 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.
Consistent with the Company's strategy to focus its efforts in the
optoelectronics and telecommunications market, it has continued to work towards
further agreements with strategic companies to distribute GRADIUM into
traditional optic products. During 1999, the Company announced a five year
Strategic Agreement with the German optical products manufacturer Rodenstock
Prazisionsoptik GmbH for the development, production and joint-distribution of
GRADIUM based optical products in Europe. Rodenstock products include high-end
camera lenses, precision optical components, medical instruments and laser and
imaging systems. During December 1998, the Company and Rodenstock held a joint
marketing meeting in Germany to kick-off the program and coordinate efforts
under the Agreement. The Company anticipates that this Agreement will provide a
vehicle to expand the presence of its products in Europe to a much higher level
without expanding its resources, although there can be no assurances in this
regard. Sales to the largest YAG laser manufactures and suppliers in the world
continued as well as work with Karl Storz in the area of endoscopes. Although
the Company worked with Fuji to retain an exclusive agreement for television
camera lenses after the April 1998 contract expired, Fuji indicated after
further evaluation of lens data, that they will not proceed with an exclusive
agreement. The Company currently has relationships with eight industrial,
optoelectronic and medical component distributors based around the globe. The
Company believes these distributors may create new and sustain existing markets
for GRADIUM in their respective countries primarily in the area of the YAG laser
market.
Revenues totaled $445,000 for 1999, an increase of approximately
$73,000 or 20% over 1998. The increase was attributable to $82,000 in additional
lens sales, primarily for lasers and wafer chip inspection, and a decrease of
$9,000 in product development/license fees. Sales of laser lenses during this
period did not grow at the rate the Company had projected due to reduced laser
equipment sales into Asia. The Company expects this trend of relatively flat
laser lens sales to continue for fiscal 1999. Sales for wafer chip inspection
lenses increased to 1998 levels in the second quarter of fiscal 1999. Revenues
for government funded subcontracts in the area of optoelectronics totaled
$90,000 for 1999 versus $68,000 for solar energy work and $33,000 in development
fees during 1998. At December 31, 1998, a backlog of $120,000 existed for lens
sales and $261,000 in government project funding. In addition, the agreement
with Karl Storz requires an increase in the license fee to $20,833 per month
effective January 1999.
13
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In 1999, cost of sales was 61% of product sales, an increase from 1998,
when cost of sales was 56% of product sales. The increase was primarily due to
lower margins in sales to the wafer chip inspection markets and some large laser
optics. It is anticipated that with increased volume and the increased
utilization of off-shore lens finishers, the cost of traditional optics
production could be decreased. Selling, general and administrative costs in 1999
decreased $175,886, or 10% from 1998, primarily due to the reduction of
personnel in administration and the reduction in overhead and personnel costs
associated with LightChip. Research and development costs decreased $23,660 in
1999 versus 1998. The majority of development work consisted of expenses
associated with the design and manufacturing process for telecommunications
industry products.
Investment income increased approximately $15,000 in 1999 due to the
increase in interest earned on temporary investments primarily as a result of
increased cash due to the 1998 private placements of convertible preferred
stock. Interest expense was not significant in 1999 or 1998. The Company
accounts for the investment in LightChip under the equity method. In June 1998,
the Company committed to purchase $1.25 million of LightChip preferred stock
thereby requiring the Company to recognize approximately all of LightChip's loss
until the private placement occurred. With the completion of the September 1998
private placement, the Company's share of LightChip losses was reduced to its
ownership percentage of approximately 26%. The Company has recognized $351,347
in LightChip losses in 1999 versus $23,720 in 1998.
Net loss of $1,875,289 in 1999 was an increase of $110,999 from 1998 of
which $327,627 relates to recognition of LightChip's loss. The remaining
decrease of $216,628 was due to a $8,801 decrease in product development fees
while the gross margin on product sales increased $17,189 and decreases in
selling, general and administrative costs, and lower research and development
costs totaling $199,546 and the increase in other income (expense) of $8,694.
Net loss applicable to common shareholders of $2,033,930 included additional
charges of $158,641 for the 8% premium on the preferred stock. Net loss per
share of $.53 was a decrease of $.35 from 1998 net loss per share of $.88 of
which $.19 was due to the increase is weighted shares due to conversion of
Preferred Stock. The 1999 net loss per share was negatively impacted by $.09 due
to LightChip's losses and $.04 due to the 8% premium on the preferred stock. The
1998 net loss per share contains an imputed dividend of $.22 arising from the
issuance of preferred stock and $.04 due to 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 $7.2 million. From June 1997 through February 1998,
the Company completed three preferred stock private placements which generated
total net proceeds of approximately $7.2 million. The Company intends to
continue to explore additional funding opportunities in fiscal year 1999,
although it currently has no commitments for such funding. Cash used in
operations for the first quarter fiscal 1999 totaled approximately $1,487,000, a
decrease of $579,000 from fiscal 1998, primarily due to administrative cost
reductions. 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.
During fiscal 1999, the Company currently anticipates that approximately
$500,000 will be expended for capital equipment and patent protection. To date,
actual expenditures were approximately $325,000 and commitments for $100,000 are
outstanding. The majority of the capital expenditures during the quarter were
for equipment used to expand the Company's manufacturing facilities for
collimator production.
The Company purchased its 51% of the voting stock of LightChip for
$23,720 in 1998. In September 1998, LightChip obtained a significant equity
commitment of $6.5 million from the sale of convertible preferred stock to
LightPath ($1.25 million) and AT&T Ventures ($5.25 million). In September 1998,
Phase one or approximately $3.5 million was received and the balance is due at
the next stage of product development, currently anticipated to occur in fiscal
1999. In addition, debt holders of LightChip converted all of their outstanding
balances to preferred stock and exercised substantially all of the outstanding
warrants as part of the equity investment. As a result of these transactions,
the Company currently controls approximately 26% of LightChip's voting stock.
The Company believes that projected product sales and proceeds from the
sale of its Series C Convertible Preferred Stock will provide adequate working
capital into fiscal 1999 and will be used primarily to assist the Company's
entrance into optoelectronics products development and sales. The Company
14
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
intends to satisfy its obligation to purchase preferred stock in LightChip,
which should occur in the fall of calendar 1999, and other capital requirements
by revenues generated from projected future product sales, and the reduction of
operating expenses. Such sales will depend on the extent that the SMF assembly,
collimating lenses and GRADIUM glass become commercially accepted and at levels
sufficient to sustain its operations. 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 to fund its obligation to provide future capital investments in
LightChip 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 may 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 Company's existing investors.
YEAR 2000 RISKS; INFLATION; SEASONALITY
Some computer applications were originally designed to recognize
calendar years by their last two digits. As a result, calculations performed
using these truncated fields will not work properly with dates from the year
2000 and beyond. This problem is commonly referred to as the "Year 2000 Issue".
The Company has determined that its internal computer systems, manufacturing
equipment and software products were produced in compliance with the Year 2000
Issue and no material remediation costs have been incurred or are expected to be
incurred by the Company. The Company has undertaken to confirm in writing
whether the internal business operations of third parties with whom it has a
material relationship will be affected by the Year 2000 Issue. The Company's
assessment of third parties is not yet complete and the Company projects the
assessment process will be completed prior to March 31, 1999. Given the status
of our assessment a formal contingency plan has not yet been established for
non-compliant third parties.
The Company has not been significantly impacted by inflation in 1999
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 seasonal factors will have a significant impact on its business.
15
<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,
1998. In addition, LightPath is subject to various claims and lawsuits in the
ordinary course of its 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
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
LightPath Technologies, Inc. conducted its regular 1998 Annual Meeting
of Stockholders on October 19, 1998. Actions concluded at the meeting through
submission of matters to a vote by stockholders was conducted by proxy and
included the following:
1. Election of three Class I Directors to hold office until the Annual
Meeting of Stockholders in 2001. The election of Ms. Leslie Danziger,
Mr. Haydock H. Miller, Jr. and Mr. James A. Wimbush as Class I
Director of the Company was approved by the stockholders by a vote of
6,040,778 FOR and 31,446 WITHHOLD AUTHORITY. The terms of the
Company's Class II Directors, James L. Adler, Jr. and Dr. Milton Klein
and of its Class III Directors, Louis Leeburg and Donald Lawson
continued after the date of the Annual Meeting. After the Annual
Meeting Dr. Klein resigned his position after serving on the board
since the Company's inception, due to professional and personal
commitments. Katerine Dietze was nominated by the other Directors to
fill the vacancy
2. Ratification of the selection of KPMG Peat Marwick LLP as independent
accountants for the Company for the fiscal year ending June 30, 1999
was approved by the stockholders by a vote of 6,022,372 FOR, 42,937
AGAINST and 3,415 ABSTENTIONS.
ITEM 5. OTHER INFORMATION
Katherine E. Dietze joined the Board of Directors on October 19, 1998.
Ms. Dietze is currently employed as Managing Director in the Global
Telecommunications and Media Group in the investment banking department of
Credit Suisse First Boston, a leading global investment bank. Ms. Dietze was
nominated by the other Directors to fill the vacancy left by Milton Klein, M.D.
who resigned his position on October 19, 1998, after serving on the board since
the Company's inception, due to professional and personal commitments.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 11 - Computation of Net Loss Per Share 1
Exhibit 27 - Financial Data Schedule 1
1. Filed herewith.
b) No reports on Form 8-K were filed under the Securities and Exchange Act of
1934 during the quarter ended December 31, 1998.
16
<PAGE>
LIGHTPATH TECHNOLOGIES, INC.
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 January 29, 1999
-----------------------------------
Donald Lawson Date
Chief Executive Officer
17
EXHIBIT 11
COMPUTATION OF NET LOSS PER SHARE
FOR THE THREE MONTHS
ENDED DECEMBER 31
-------------------------------
1998 1997
---- ----
Net loss $ (913,183) $ (851,691)
Preferred stock 8% premium (59,064) (77,243)
Imputed dividend on Series A
and Series B Preferred Stock -- (384,575)
----------- -----------
Net loss applicable to common
shareholders $ (972,247) $(1,313,509)
----------- -----------
Weighted average common shares
outstanding 4,213,215 2,881,147
=========== ===========
Basic and Diluted net loss per
common share $ (.23) $ (.46)
=========== ===========
FOR THE SIX MONTHS
ENDED DECEMBER 31
-------------------------------
1998 1997
---- ----
Net loss $(1,875,289) $(1,764,290)
Preferred stock 8% premium (158,641) (109,341)
Imputed dividend on Series A and
Series B Preferred Stock -- (623,225)
----------- -----------
Net loss applicable to common
shareholders $(2,033,930) $(2,496,856)
----------- -----------
Weighted average common shares
outstanding 3,841,778 2,836,586
=========== ===========
Basic and Diluted net loss per
common share $ (.53) $ (.88)
=========== ===========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-QSB FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 1,709,981
<SECURITIES> 0
<RECEIVABLES> 330,168
<ALLOWANCES> 15,000
<INVENTORY> 597,521
<CURRENT-ASSETS> 2,695,579
<PP&E> 1,884,238
<DEPRECIATION> 995,242
<TOTAL-ASSETS> 4,992,285
<CURRENT-LIABILITIES> 447,334
<BONDS> 0
0
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<COMMON> 46,012
<OTHER-SE> 29,705,102
<TOTAL-LIABILITY-AND-EQUITY> 4,992,285
<SALES> 353,583
<TOTAL-REVENUES> 445,297
<CGS> 216,015
<TOTAL-COSTS> 216,015
<OTHER-EXPENSES> 7,933
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,715
<INCOME-PRETAX> (1,875,289)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,875,289)
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<NET-INCOME> (1,872,289)
<EPS-PRIMARY> (.53)
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