SECURITIES & EXCHANGE COMMISSION EDGAR FILING
LIGHTPATH TECHNOLOGIES INC
Form: 10-K
Date Filed: 2016-09-15
Corporate Issuer CIK: 889971
© Copyright 2018, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the terms of use.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2016
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
LIGHTPATH TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
86-0708398
(I.R.S. Employer Identification No)
http://www.lightpath.com
2603 Challenger Tech Court, Suite 100
Orlando, Florida 32826
(Address of principal executive offices, including zip code)
(407) 382-4003
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of each class)
None
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
Series D Participating Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒
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 ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). YES ☒ NO ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check
One):
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☒
Indicate by check mark whether the registrant is a shell company, (as defined in Rule 12b-2 in the Exchange Act).
YES ☐ NO ☒.
The aggregate market value of the registrant’s voting stock held by non-affiliates (based on the closing sale price of the registrant’s Common Stock on the
NASDAQ Capital Market), was approximately $28,634,076 as of December 31, 2015.
As of September 12, 2016, the number of shares of the registrant’s Class A Common Stock outstanding was 15,633,258.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LightPath Technologies, Inc.
Form 10-K
Table of Contents
PART I
Item 1.
Item 2.
Item 3.
PART II
Item 5.
Item 7.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Business
Properties
Legal Proceedings
Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers of the Registrant and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules
Index to Consolidated Financial Statements
Signatures
Certifications
2
3
3
10
11
11
11
12
21
21
22
22
23
23
27
41
43
43
44
44
F-1
S-1
See Exhibits
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements and information in this Annual Report on Form 10-K may constitute “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the
Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements concerning plans, objectives, goals,
projections, strategies, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts. In some
cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”
“potential” or “continue,” or other comparable terminology. These forward-looking statements are based on our current expectations and beliefs concerning
future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made,
there can be no assurance that future developments affecting us will be those that we anticipate. Forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking
statements. Forward-looking statements represent management’s beliefs and assumptions only as of the date of this Annual Report on Form 10-K. You should
read this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect.
Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially
from those anticipated in these forward-looking statements, even if new information becomes available in the future.
PART I
Item 1.
Business.
General
LightPath Technologies, Inc. (“LightPath”, the “Company”, “we”, “our”, or “us”) was incorporated under Delaware law in 1992 as the successor to LightPath
Technologies Limited Partnership, a New Mexico limited partnership formed in 1989, and its predecessor, Integrated Solar Technologies Corporation, a New
Mexico corporation formed in 1985. We manufacture optical components and higher level assemblies including precision molded glass aspheric optics, infrared
aspheric lenses, GRADIUM glass lenses and other optical materials used to produce products that manipulate light. We design, develop, manufacture and
distribute optical components and assemblies utilizing advanced optical manufacturing processes. Our products are incorporated into a variety of applications by
our customers in many industries, including defense products, medical devices, laser aided industrial tools, automotive safety applications, barcode scanners,
optical data storage, hybrid fiber coax datacom, telecommunications, machine vision and sensors, among others. Products that we produce enable lasers and
imaging devices to function more effectively. For example:
•
•
•
Molded glass aspheres and assemblies are used in various high performance optical applications primarily based on laser technology;
Infrared molded lenses and assemblies using short (SWIR), mid (MWIR) and long (LWIR) wave materials imaging are used in applications for
firefighting, predictive maintenance, homeland security, surveillance, automotive, cell phone infrared cameras and defense; and
GRADIUM extends the performance of a spherically polished glass lens technology improving optical performance so that it approximates
aspheric lens performance.
In November 2005, we formed LightPath Optical Instrumentation (Shanghai) Co., Ltd (“LPOI”), a wholly-owned subsidiary, located in Jiading, People’s Republic
of China. The LPOI facility is primarily used for sales and support functions.
In December 2013, we formed LightPath Optical Instrumentation (Zhenjiang) Co., Ltd. (“LPOIZ”), a wholly-owned subsidiary located in the New City district, of
the Jiangsu province, of the People’s Republic of China. LPOIZ’s 26,000 square foot manufacturing facility serves as our primary manufacturing facility in China
and provides a lower cost structure for production of larger volumes of optical components and assemblies.
Recent Events – ISP Optics Corporation Acquisition
On August 3, 2016, we entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with ISP Optics Corporation (“ISP”) and Joseph Menaker
and Mark Lifshotz (the “ISP Stockholders”), pursuant to which we will acquire (the “Acquisition”) all of the outstanding common stock of ISP (the “Purchased
Shares”) from the ISP Stockholders. Following the closing of the Acquisition, ISP will become our wholly-owned subsidiary.
3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We will acquire the Purchased Shares for $18,000,000 (the “Purchase Price”), to be paid in a combination of cash (the “Cash Amount”) and a promissory note
(the “Note”). The Cash Amount, subject to a net working capital adjustment, debt adjustment, and cash adjustment as provided in the Stock Purchase
Agreement, will not be less than $12,000,000. The aggregate original principal amount of the Note will equal the Purchase Price less the Cash Amount, as
adjusted pursuant to the Stock Purchase Agreement, but in no event less than $3,000,000.
Completion of the Acquisition is subject to the satisfaction or waiver of certain conditions. In addition to customary closing conditions, our obligation to complete
the Acquisition is conditioned on receipt by us of financing we need to purchase the Purchased Shares and obtaining the requisite approval of our stockholders
related to the financing and the Acquisition, as applicable, as required by applicable NASDAQ rules and other applicable law.
The closing of the Acquisition will occur on a date and time mutually agreed upon by the ISP Stockholders and us, no later than five (5) business days following
the satisfaction or waiver of the closing conditions. Currently, we anticipate the Acquisition closing in the fourth quarter of calendar year 2016; however, there
can be no assurance that the Acquisition will close in the fourth quarter of calendar year 2016, or at all.
Product Groups and Markets
During fiscal 2015, we started evaluating our business based on five product groups: low volume precision molded optics (“LVPMO”), high volume precision
molded optics (“HVPMO”), specialty products, infrared products, and non-recurring engineering (“NRE”). Our LVPMO product group consists of precision molded
optics with a sales price greater than $10 per lens that are usually sold in smaller lot quantities. Our HVPMO product group consists of precision molded optics
with a sales price of less than $10 per lens that are usually sold in larger lot quantities. Our infrared product group is comprised of both molded lens and
assemblies. Our specialty product group is comprised of value added products such as optical subsystems, assemblies, GRADIUM lenses, and isolators. Our
NRE product group consists of those products we develop pursuant to product development agreements we enter into with customers. Typically, customers
approach us and request that we develop new products or applications for our existing products to fit their particular needs or specifications. The timing and
extent of any such product development is outside of our control.
We currently serve the following major markets: distribution and catalog, laser, industrial, instrumentation, telecommunications, and defense. Within our product
groups, we have various applications that serve these major markets. For example, our HVPMO lenses are typically used in industrial tools, especially in China.
Our HVPMO and LVPMO lenses are also used in applications for the telecommunications market, such as cloud computing, video distribution via digital
technology, wireless broadband, and machine to machine connection, and, the laser market, such as laser tools, scientific and bench top lasers, and bar code
scanners. Our infrared products can also be used in various applications within our major markets. Currently, sales of our infrared products are primarily for
customers in the industrial market that use thermal imaging cameras. Our infrared products can also be used for gas sensing devices, spectrometers, night
vision systems, automotive driver systems, thermal weapon gun sights, and infrared counter measure systems, among others. Within the larger overall markets,
which are estimated to be in the multi-billions of dollars, we believe there is a market of approximately $800 million for our current products and capabilities. We
continue to believe our products will provide significant growth opportunities over the next several years and, therefore, we will continue to target specific
applications in each of these major markets. Our strategy is to leverage our technology, know-how, established low cost manufacturing capability, and
partnerships to grow our business. We plan to accomplish this growth through the implementation of the following objectives:
•
•
Continue to Drive Operational Excellence and Asset Efficiency. Operational excellence, which includes a commitment to safety, environmental
stewardship, and improved reliability, is key to our future success. We continually evaluate our business to identify opportunities to increase operational
efficiency throughout our production facilities with a focus on maintaining operational excellence, reducing costs, and maximizing asset efficiency. We
intend to continue focusing on increasing manufacturing efficiencies through selected capital projects, process improvements, and best practices in order
to lower unit costs. We will also carefully manage our portfolio and take appropriate actions to address product lines that face challenging market
conditions and do not generate returns on invested capital that we believe are sufficient to create long-term shareholder value.
Focus on Cash Flow Generation. Our goal is to focus on cash flow generation and return on invested capital through the continuing optimization of our
cost structure, improvement in working capital and supply chain efficiencies, and a disciplined approach to capital expenditures. We have a proven track
record of mitigating fixed cost inflation with cost saving actions and productivity improvements. We intend to continue to identify incremental cost saving
opportunities based in large part on benchmarks of industry-leading performance and productivity improvements by utilizing our engineering and
manufacturing technology expertise and partnerships with low cost producers. Our goal is to maintain a cost structure that positions us favorably to
compete and grow. We intend to continue to upgrade our customer and product mix by adding products that move up the supply chain by offering
assemblies that use our lenses, thereby increasing our sales of value-added, differentiated products, and achieving premium pricing to improve margins
and enhance cash flow.
4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We also intend to actively manage our working capital by increasing inventory turnover and reducing finished goods and raw materials inventory without
affecting our ability to deliver products to our customers. We strive to improve our supply chain efficiency by focusing on reducing both operating costs
and working capital needs. Our supply chain efforts to lower operating costs have consisted of reducing procurement spending, lowering transportation
and warehouse costs, and optimizing production scheduling.
W e remain focused on disciplined capital allocation among our product groups. We plan to allocate our capital expenditures to projects required to
enhance the reliability of our manufacturing operations and maintain the overall asset portfolio. This includes key maintenance and repair activities in
each product group, and necessary regulatory and maintenance spending to ensure safe operations. We intend to optimize capital spending on growth
projects across our various product groups based on a thorough comparison of risk-adjusted returns for each project.
• Maintain Strong Customer Focus. A key component of our strategy is to produce innovative, high-performance products that offer enhanced value
propositions to our customers at competitive prices. Our goal is to work closely with our customers to provide solutions and products that optimize their
products. This market-driven product development enables us to offer a high-quality product portfolio to our customers and provides our business with
the ability to respond quickly and efficiently to changes in market demands.
•
•
•
Leverage our Leadership to Drive Organic Growth. We plan to continue to capitalize on our global operations network, distribution infrastructure, and
technology to pursue global growth. We will focus our efforts on those geographic areas and end products that we believe offer the most attractive
growth and long-term profit prospects.
Deepen Our Presence in Emerging Markets. Emerging markets are a strategic priority for our business. We are well positioned not only to leverage
our strong market positions in mature but highly sophisticated markets in North America and Europe, but also to participate in the expected growth of
emerging markets in Asia and Eastern Europe. We believe that improving living standards and growth in GDP across emerging markets are combining to
create increased demand for our products. We expect to capitalize on this growth opportunity by expanding our customer base and local capabilities in
order to increase our market share across emerging markets, especially in China. To accelerate our penetration of these markets and maintain our
competitive cost position, we may develop relationships with leading local partners, especially in businesses where participation in the fast-growing
Chinese market is particularly important for long-term sustainable growth. For example, we are well positioned to leverage our strong production
technology in the Chinese market as a result of an increasing percentage of aerospace, automotive, semiconductor, electronics, and telecommunications
manufacturing transitioning to China.
Drive Organizational Alignment. We believe that maintaining alignment of the efforts of our employees with our overall business strategy and
operational excellence goals is critical to our success. We have outstanding people and assets and, with the commitment to values of safety, customer
appreciation, simplicity, collective entrepreneurship, and integrity, we believe that we can maintain our competitiveness and help achieve our operational
excellence and asset efficiency strategic objectives.
The following further discusses the various products we offer and certain growth opportunities we anticipate for each such product.
LVPMO and HVPMO Product Groups. Aspheric lenses are known for their optimal performance. Aspheric lenses simplify and shrink optical systems by
replacing several conventional lenses. However, aspheric lenses are difficult and costly to machine. Our glass molding technology enables the production of both
low and high volumes of aspheric optics while still maintaining the highest quality at an affordable price. Molding is the most consistent and economical way to
produce aspheres and we have perfected this method to offer the most precise molded aspheric lenses available.
In recent years, sales of both our LVPMOs and HVPMOs have increased. We expect this growth to continue for the next several years with what we believe is a
multi-year growth cycle of the optical market. This multi-year growth cycle is driven by four major trends: cloud computing; video distribution via digital
technology; wireless broadband; and machine-to-machine connection. Cloud computing has caused a shift in enterprise technology with increased spending for
software-as-a-service (“SAAS”) and infrastructure-as-a-service (“IAAS”) capital investments. Delivery of applications and technology using SAAS or IAAS
requires larger and faster network bandwidth. The explosion of mobile devices, which includes smartphones and tablet devices, is also requiring the expansion of
network bandwidth as users are receiving and transferring larger amounts of data via their mobile devices. The number of mobile devices exceeded the global
population at the beginning of 2015 and is estimated to be 1.5 mobile devices per capita by 2019. Individuals are also streaming more video on their mobile
devices or through their smart TVs. This type of video distribution, which is estimated to be 80% of all network traffic by 2019, is creating a huge demand for
larger and faster bandwidth. Finally, machine-to-machine connection technology allows wireless and wired systems to communicate with other devices of the
same type. This type of networking often requires bandwidth in order for the machines to communicate with each other. All of these trends require the expansion
of bandwidth, and thus, the growth of optical communication networks. Our products, such as our precision molded optical lenses, can be used as a component
in optical communication networks. We also anticipate growth in our precision molded aspheres product revenues as we add new product lenses and
applications for a variety of markets and industries, including laser tools, telecom transceivers, micro-projectors, scientific and bench top lasers, range finders,
medical devices, bar code scanners and laser based spectrometers.
5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
•
•
LVPMOs. The growth in our LVPMO business is driven by a variety of market applications such as medical endoscopes, medical flow cytometers,
scientific and bench-top lasers, laser based spectrometers, military telecom, and telescopic weapon sights. These products have precision specifications
and 100% testing to verify that our lenses conform to a higher level of performance than most of the competition in these markets.
HVPMOs. The continued growth in our HVPMO business is driven by market applications supporting mostly the laser diode applications for high volume
markets in laser tools, range finders, laser gun sights, bar code scanners, and micro-projectors. The same basic tooling used for high precision in the
LVPMO applications allows us to realize a competitive advantage for high volume production that benefits the end customer while maintaining low price
targets. Markets for laser diode applications are expected to grow substantially in the next few years as applications such as Lidar, which uses light and
radar for distance tracking and speed detection, headlights for automobiles, and many other related disciplines begin to rely more and more on laser
technology.
Infrared Product Group. Advances in chalcogenide materials have enabled compression molding for MWIR and LWIR optics in a process similar to precision
molded lenses. Our molded infrared optics technology enables high performance, cost-effective infrared aspheric lenses that do not rely on traditional diamond
turning or lengthy polishing methods. Utilizing precision molded aspheric optics significantly reduces the number of lenses required for typical thermal imaging
systems and the cost to manufacture these lenses, as well as the size of the lens system. Traditional germanium or zinc selenide aspheres are manufactured by
diamond turning, which is a time-consuming and expensive process. Diamond turned lenses are made one at a time and the lenses suffer from variations in the
surface resulting in variations of performance from lens to lens. The infrared optics molding process allows lenses to be manufactured in high volume with a
highly repeatable, consistent performance and allows for sophisticated beam shaping or achromatization over a range of wavelengths to be molded directly into
the surfaces of the lens.
Overall, we anticipate growth for infrared optics and increased requirements for systems requiring molded aspheric optics over traditional ground and polished
lenses. Infrared systems, which include thermal imaging cameras, gas sensing devices, spectrometers, night vision systems, automotive driver awareness
systems such as blind spot detection, thermal weapon gun sights, and infrared counter measure systems, represent a market that is forecasted to grow to
greater than $5.6 billion at the complete systems level by 2020 at a compound annual growth rate of 10%. As infrared imaging systems become widely available,
the cost of optical components needs to decrease before the market demand will increase. Our aspheric molding process is an enabling technology for the cost
reduction and commercialization of infrared imaging systems because the aspheric shape of our lenses enables system designers to reduce the lens element in
a system and provide similar performance at a lower cost.
Specialty Product Group . We have a rapidly growing group of specialty products and assemblies that take advantage of our unique technologies and
capabilities. These products include custom optical designs, mounted lenses, optical assemblies, and GRADIUM lenses. We expect growth from defense
communications programs and commercial optical sub-assemblies.
Our GRADIUM glass is an optical quality glass material with axially varying refractive index, capable of reducing optical aberrations inherent in conventional
lenses and performing with a single lens tasks traditionally performed by multi-element, conventional lens systems. Typical applications include surgical lasers,
high power YAG lasers for welding, cutting and marking, defense-market uses, and test and measurement. GRADIUM has a unique capability to handle up to 10
kilowatts of power and is servicing a niche market for laser high-power cutting and laser welding.
We design, build, and sell optical assemblies into markets for test and measurement, medical devices, military, industrial, and communications based on our
proprietary technologies. Many of our optical assemblies consist of several products that we manufacture.
Sales and Marketing
Marketing. Extensive product diversity and varying levels of product maturity characterize the optics industry. Product markets range from consumer (e.g.,
cameras, copiers) to industrial (e.g., lasers, data storage, infrared imaging), from products where the lenses are the central feature (e.g., telescopes,
microscopes, lens systems) to products incorporating lens components (e.g., robotics, semiconductor production equipment) and communications (e.g., various
optics are required for bandwidth expansion and improved data transfer for the optical network). As a result, we market our products across a wide variety of
customer groups including laser systems manufacturers, laser OEMs, infrared-imaging systems vendors, industrial laser tool manufacturers, telecommunications
equipment manufacturers, medical and industrial measurement equipment manufacturers, government defense agencies, and research institutions worldwide.
6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Organization Optimization Plan. In February 2015, we transitioned to a technical sales process that leveraged the success of our existing demand-creation
model. To align the organization for specific goals and accountability, we created an executive structure with three direct reporting lines: Operations, China, and
Finance. Technical and engineering staffs are now more fully integrated with our sales force, and two new sales positions were created: (i) Executive Sales
Manager, which combined the responsibility for all sales and marketing, and (ii) Marketing Manager. We also combined the organizations supporting our aspheric
visible lens products and our infrared products. Sales, marketing, engineering, and quality report to the Executive Vice President – Operations.
Sales Organization. We have regional sales forces that market and sell our products directly to customers in North America and China. We also have a master
distributor in Europe. We have formalized relationships with 14 industrial, laser, and optoelectronics distributors and channel partners located in the United
States and various foreign countries to assist in the distribution of our products in highly specific target markets. We also have reseller arrangements with the top
three product catalog companies in the optics and opto-electronics market. In addition, we also maintain our own product catalog and internet website
(www.lightpath.com) as vehicles for broader promotion of our products. We make use of print media advertisements in various trade magazines and participate
in appropriate domestic and foreign trade shows.
All of our partners work diligently to expand opportunities in emerging geographic markets and through alternate channels of distribution. We believe that we
provide a high level of support in developing and maintaining our long-term relationships with our customers. Customer service and support are provided through
our offices and those of our partners that are located throughout the world.
Trade Shows. We display our product line additions and enhancements at one or more trade shows each year. For example, we participated in several United
States based shows including Society of Photographic Instrumentation Engineers (“SPIE”) Photonics West in January 2016 and SPIE Defense, Security and
Sensing in May 2016. We also participate in shows in China such as the China International Optoelectronic Exposition in Shenzhen. In addition, we partner with
key distributors to attend exhibitions such as Laser World of Photonics in Munich, Germany. This strategy underscores our strategic directive of broadening our
base of innovative optical components and assemblies. These trade shows also provide an opportunity to meet with and enhance existing business
relationships, meet and develop potential customers, and to distribute information and samples regarding our products.
Competition
The market for optical components generally is highly competitive and highly fragmented. We compete with manufacturers of conventional spherical lenses and
optical components, providers of aspheric lenses and optical components, and producers of optical quality glass.To a lesser extent, we compete with developers
of specialty optical components and assemblies.Many of these competitors have greater financial, manufacturing, marketing, and other resources than we do.
We believe our unique capabilities in optical design engineering, our low cost structure and our substantial presence in Asia, particularly in China, provides us
with a competitive edge and assists us in securing business. Additionally, we believe that we offer value to some customers as a second or backup supply
source in the United States should they be unwilling to commit to purchase their entire supply of a critical component from a foreign production source. We also
have a broad product offering to satisfy a variety of applications and markets.
LVPMOs and HVPMOs Product Groups . Our LVPMO products compete with conventional lenses and optical components manufactured by companies such
as Asia Optical, Anteryon, RPO, and Sunny Optics.
Aspheric lenses compete with lens systems comprised of multiple conventional lenses. Machined aspheric lenses compete with our molded glass aspheric
lenses, which are part of our HVPMO product group. Aspheric lens system manufacturers include Panasonic, ALP’s, Hoya Corporation, as well as newer
competitors from China and Taiwan such as E-pin Optical Industry Co. and Kinik Company. The use of aspheric surfaces provides the optical designer with a
powerful tool in correcting spherical aberrations and enhancing performance in state-of-the-art optical products. However, we believe that our optical design
expertise and our flexibility in providing custom high performance optical components at a low price are key competitive advantages for us over these
competitors.
Plastic molded aspheres and hybrid plastic/glass aspheric optics, on the other hand, allow for high volume production, but primarily are limited to low cost
consumer products that do not place a high demand on performance (such as plastic lenses in disposable or mobile phone cameras). Molded plastic aspheres
appear in products that stress cost or weight as their measure of success over performance and durability. Our low cost structure allows us to compete with
these lenses based on higher performance and durability from our glass lenses at only a small premium in price over plastic or plastic/glass hybrid lenses.
7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Infrared Product Group. Our infrared molded aspheric optics competes with traditional infrared lenses manufactured from germanium, such as those produced
by Janos Technologies, Ophir Optics or Elcan Optical Technologies. These traditional infrared lenses can either be polished spherical or are diamond turned
aspherical. Our molded lenses compete with spherical lenses because like all aspheres they can replace doublets or triplets based on the higher performance
of an aspheric lens. Diamond turned aspheres from germanium are expensive to produce in high volumes and time consuming to manufacture. We believe our
low cost, high volume lens business strategy enables us to compete with the manufacturers of traditional infrared lens.
Our molded infrared optics competes with products manufactured by Umicore, Kiro, and Free Form. We believe that our optical design expertise and our
flexibility in providing custom, high performance infrared optical components are key advantages over the products manufactured by these competitors. A
specific advantage over Umicore, a foreign company, is that the infrared market is highly dependent on the United States defense industry, which prefers to
purchase from United States based companies such as LightPath.
Specialty Product Group . GRADIUM lenses are often used for products in the niche high power laser optics market. GRADIUM lenses are produced using a
unique, well-established technology that no other manufacturer possesses, which provides us with a competitive advantage. However, there are other competing
technologies, such as traditional fused silica doublets and triplets, as well as newer large diameter aspheres, such as those manufactured by Asphericon or
Edmund Optics.
Manufacturing
Facilities. Our manufacturing is largely performed in our 26,000 square foot production facility in Orlando, Florida and in LPOIZ’s 26,000 square foot production
facility in Zhenjiang, China. In October 2015, LPOI moved its sales and support functions to a 1,700 square foot facility in Shanghai. With space remaining in the
Zhenjiang and Orlando facilities, we believe our facilities are adequate to accommodate our needs for the foreseeable future.
Our manufacturing facilities feature areas for each step of the manufacturing process, including coating work areas, preform manufacturing and a clean room for
pressing and integrated assembly. Our Orlando and Zhenjiang facilities include new product development laboratories and space that includes development and
metrology equipment. Our Zhenjiang facility has anti-reflective coating equipment to coat our lenses in-house.
Production and Equipment . Our Orlando facility contains a manufacturing area for our molded glass aspheres, a tooling and machine shop to support new
product development, commercial production requirements for our machined parts, the fabrication of proprietary press work stations and mold equipment, and a
clean room for our molding and assembly workstations. We also have glass coring equipment to meet our current needs of GRADIUM product sales worldwide.
The Orlando facility is also International Traffic in Arms and Regulation (ITAR) compliant. LPOIZ’s Zhenjiang facility features a molded glass aspheres
manufacturing area, clean room, and an area for anti-reflective coating. Our Orlando and Zhenjiang facilities are ISO 9001:2008 certified. For more information
regarding our facilities, please see Item 2. Properties in this Annual Report.
Subcontractors and Strategic Alliances . We believe that low-cost manufacturing is crucial to our long-term success. In that regard, we generally use
subcontractors in our production process to accomplish certain processing steps requiring specialized capabilities. For example, we presently use a number of
qualified subcontractors for fabricating, polishing, and coating certain lenses as necessary. We have taken steps to protect our proprietary methods of repeatable
high quality manufacturing by patent disclosures and internal trade secret controls.
Suppliers. We utilize a number of glass compositions in manufacturing our molded glass aspheres and lens array products. These glasses or equivalents are
available from a large number of suppliers, including CDGM Glass Company, Ohara, and Sumita. Base optical materials, used in both GRADIUM and collimator
products, are manufactured and supplied by a number of optical and glass manufacturers. We believe that a satisfactory supply of such production materials will
continue to be available at reasonable prices, although there can be no assurance in this regard.
We also rely on local and regional vendors for component materials and services such as housings, fixtures, magnets, chemicals and inert gases, specialty
ceramics, UV and AR coatings, and other specialty coatings. In addition, certain products require external processing such as anodizing and metallization. To
date, we are not dependent on any of these manufacturers and have found a suitable number of qualified vendors and suppliers for these materials and services.
We currently purchase a few key materials from single or limited sources. We believe that a satisfactory supply of production materials will continue to be
available at competitive prices, although there can be no assurance in this regard.
8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Intellectual Property
Our policy is to protect our technology by, among other things, patents, trade secret protection, trademarks, and copyrights. We primarily rely upon trade secrets
and unpatented proprietary know-how to protect certain process inventions, lens designs and innovations. For example, a key feature of GRADIUM glass is that,
once fabricated, it does not reveal our formula upon inspection and, to our knowledge, cannot be reverse-engineered. We have taken security measures to
protect our trade secrets and proprietary know-how, to the extent possible.
In addition to trade secrets and proprietary know-how, we have limited patents and/or patent applications in the areas of glass composition, glass molding,
gradient geometries, and certain production processes such as fiber attachment and micro-fabrication. The first of our issued patents expired in 2006; the
remainder expire at various times through 2023.
Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop technology or products that are similar to
ours or that compete with ours. Patent, trademark, and trade secret laws afford only limited protection for our technology and products. The laws of many
countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to obtain and use information that we regard as proprietary. Third parties may also design around our proprietary rights, which
may render our protected technology and products less valuable, if the design around is favorably received in the marketplace. In addition, if any of our products
or technology is covered by third-party patents or other intellectual property rights, we could be subject to various legal actions. We cannot assure you that our
technology platform and products do not infringe patents held by others or that they will not in the future. Litigation may be necessary to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement,
invalidity, misappropriation, or other claims.
We own several registered and unregistered service marks and trademarks that are used in the marketing and sale of our products. The following table sets
forth our registered and unregistered service marks and trademarks, if registered, the country in which the mark is filed, and the renewal date for such mark.
Mark
LightPath®
GRADIUM™
Circulight
BLACK DIAMOND
GelTech
Oasis
LightPath®
Type
service mark
Trademark
Trademark
Trademark
Trademark
Trademark
service mark
Environmental and Governmental Regulation
Registered
Yes
Yes
No
No
No
No
Yes
Country
United States
United States
Renewal Date
October 22, 2022
February 5, 2017
-
-
-
-
-
-
-
-
People’s Republic of China Application filed
Currently, emissions, and waste from our manufacturing processes are at such low levels that no special environmental permits or licenses are required. In the
future, we may need to obtain special permits for disposal of increased waste by-products. The glass materials we utilize contain some toxic elements in a
stabilized molecular form. However, the high temperature diffusion process results in low-level emissions of such elements in gaseous form. If production
reaches a certain level, we believe that we will be able to efficiently recycle certain of our raw material waste, thereby reducing disposal levels. We believe that
we are presently in compliance with all material federal, state, and local laws and regulations governing our operations and have obtained all material licenses
and permits necessary for the operation of our business.
We also utilize certain chemicals, solvents, and adhesives in our manufacturing process. We believe we maintain all necessary permits and are in full
compliance with all applicable regulations.
To our knowledge there are currently no United States federal, state or local regulations that restrict the manufacturing and distribution of our products. Certain
end-user applications require government approval of the complete optical system, such as United States Food and Drug Administration approval for use in
endoscopy. In these cases, we will generally be involved on a secondary level and our OEM customer will be responsible for the license and approval process.
The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes disclosure requirements regarding the use of “conflict minerals” mined from the
Democratic Republic of Congo and adjoining countries in products, whether or not these products are manufactured by third parties. The conflict minerals
include tin, tantalum, tungsten, and gold, and their derivatives. Pursuant to these requirements, we are required to report on Form SD the procedures we employ
to determine the sourcing of such minerals and metals produced from those minerals. There are costs associated with complying with these disclosure
requirements, including for diligence in regards to the sources of any conflict minerals used in our products, in addition to the cost of remediation and other
changes to products, processes, or sources of supply as a consequence of such verification activities. In addition, the implementation of these rules could
adversely affect the sourcing, supply, and pricing of materials used in our products. We strive to only use suppliers that source from conflict-free smelters and
refiners; however, in the future, we may face difficulties in gathering information regarding our suppliers and the source of any such conflict minerals.
9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
New Product Development
For many years, we engaged in basic research and development that resulted in the invention of GRADIUM glass and certain proprietary processes for
fabricating GRADIUM glass lenses. Thereafter, our new product development efforts led to the development of our capabilities in molded aspheric lenses and
infrared lenses. We incurred expenditures for new product development during fiscal 2016 and 2015 of approximately $669,000 and $1.1 million, respectively.
We concentrated our efforts to support existing and new customers in the design and manufacture of items in three of our product lines: HVPMO lenses, LVPMO
lenses and infrared products.
In fiscal 2017, we anticipate focusing our new product development efforts on infrared optics products for imaging and sensing, fiber lasers, defense, medical
devices, industrial, optical data storage, machine vision, sensors, and environmental monitoring. We currently plan to expend approximately $847,000 for new
product development during fiscal 2017, which could vary depending upon revenue levels, customer requirements, and perceived market opportunities.
For more difficult or customized products, we bill our customers for engineering services as a non-recurring engineering fee.
Concentration of Customer Risk
In fiscal 2016, we had sales to three customers that comprised an aggregate of approximately 25% of our annual revenue with one customer at 10% of our
sales, another customer at 8% of our sales and the third customer at 7% of our sales. In fiscal 2015, we had sales to three customers that comprised an
aggregate of approximately 28% of our annual revenue with one customer at 11% of our sales, another customer at 10% of our sales and the third customer at
7% of our sales. The loss of any of these customers, or a significant reduction in sales to any such customer, would adversely affect our revenues. We continue
to diversify our business in order to minimize our sales concentration risk.
In fiscal 2016, 59% of our net revenue was derived from sales outside of the United States, with 91% of our foreign sales derived from customers in Europe and
Asia.
Employees
As of June 30, 2016, we had 181 employees, of which 180 were full-time equivalent employees, with 71 located in Florida and 110 located in China. Of our 181
employees, we have 24 employees engaged in management, administrative, and clerical functions, 13 employees in new product development, 13 employees in
sales and marketing, and 131 employees in production and quality control functions. Any employee additions or terminations over the next twelve months will be
dependent upon the actual sales levels realized during fiscal 2017. We have used and will continue utilizing part-time help, temporary employment agencies, and
outside consultants, where appropriate, to qualify prospective employees and to ramp up production as required from time to time. None of our employees are
represented by a labor union.
Item 2.
Properties.
We occupy a 26,000 square foot facility in Orlando, Florida, which includes a 6,000 square foot clean room and houses our corporate headquarters, engineering,
marketing, internal sales, manufacturing management and some manufacturing operations. At our Orlando facility, our molded glass aspheres manufacturing
area includes lens pressing equipment, high precision mold production equipment, advanced metrology and inspection equipment, and coating facilities. It also
features a tooling and machine shop, which can support new product development, commercial production requirements for our machined parts, and the
fabrication of propriety press workstations and mold equipment. Our Orlando facility has glass coring equipment for our current needs of GRADIUM product sales
and also includes a clean room for our molding and assembly workstations, which include our proprietary laser fusion and housing equipment, automated testing
processes, and laser polishing stations. Our Orlando facility is International Traffic in Arms Regulations (ITAR) compliant.
The monthly rental payments for our Orlando facility will average approximately $22,000 through April 2022, which excludes all charges, common area
maintenance, escalation, and certain pass-through of taxes and other operating costs. In July 2014, we negotiated a new lease that increased our space from
approximately 22,000 square feet to approximately 26,000 square feet, or by 20%, and extended the lease term through April 2022. The additional space
allowed us to relocate our administration functions to new office space and reclaim needed manufacturing space for our business. We were also able to take
advantage of local market conditions and decrease our overall rent expense by 25%. Minimum rental rates for the extension term were established based on
annual increases of two and one half percent and start in the third year of the extension period. Additionally, there is one five-year extension option exercisable
by us. The minimum rental rates for such additional extension options will be determined at the time an option is exercised and will be based on a “fair market
value rate” as determined in accordance with the lease agreement.
10
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LPOI leases an approximately 1,700 square foot facility located in Jiading, People’s Republic of China. LPOI’s Shanghai facility is primarily used for sales and
support functions. The lease expires in October 2017 and houses 9 employees. The base rent is approximately $1,700 per month, which excludes all charges,
common area maintenance, and other operating costs.
LPOIZ leases an approximately 26,000 square foot facility located in Zhenjiang, Jiangsu Province, People’s Republic of China. LPOIZ’s Zhenjiang facility
features a molded glass aspheres manufacturing area, which includes lens pressing equipment, advanced metrology and inspection equipment. The clean room
in LPOIZ’s Zhenjiang facility features assembly manufacturing equipment and automated dispensing systems. The Zhenjiang facility also houses our precision
dicing equipment and anti-reflective coating equipment.
The LPOIZ lease is for a five-year term that will expire March 31, 2019. The Zhenjiang facility houses 101 employees. The rent is approximately $1,700 per
month, which excludes all charges, common area maintenance, and other operating costs.
We are ISO 9001:2008 certified at both our Orlando and LPOIZ manufacturing facilities. Much of our product qualification is performed in-house at our facilities.
Our test and evaluation capabilities include damp heat, high/low temp storage, and a thermal shock oven, which are representative of the equipment required to
meet Telecordia requirements for telecommunications customers as well as other customer required product specifications. Our new product development
department has computer aided design (CAD) tools and technical support. The continuing implementation of various statistical process controls (SPCs) is being
pursued to improve product yields and allows us to reduce costly manual testing operations. Quality control in manufacturing to ensure a quality end product is
critical to our ability to bring our products to market, as our customers may demand rigorous testing prior to their purchase of our products.
With space remaining in the Zhenjiang and Orlando facilities, we believe our facilities are adequate to accommodate our needs over the next year. We are in the
process of adding additional production equipment in Orlando and Zhenjiang. We will also add additional work shifts at the Zhenjiang facility, as needed, to
increase capacity and meet forecasted demand.
Our territorial sales personnel maintain an office from their homes to serve their geographical territories.
Item 3.
Legal Proceedings.
From time to time, we are involved in various legal actions arising in the normal course of business. We currently have no legal proceeding to which we are a
party to or to which our property is subject to and, to the best of our knowledge, no adverse legal activity is anticipated or threatened.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our Class A common stock is traded on the NASDAQ Capital Market (“NCM”) under the symbol “LPTH”.
PART II
The following table sets forth the range of high and low bid prices for our Class A common stock for the periods indicated, as reported by the NCM. The quotation
information below reflects inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions. The closing ask price
on June 30, 2016 was $1.74 per share.
Fiscal Year Ended June 30, 2016
Quarter ended June 30, 2016
Quarter ended March 31, 2016
Quarter ended December 31, 2015
Quarter ended September 30, 2015
Fiscal Year Ended June 30, 2015
Quarter ended June 30, 2015
Quarter ended March 31, 2015
Quarter ended December 31, 2014
Quarter ended September 30, 2014
Class A Common Stock
High
Low
$
$
$
$
$
$
$
$
2.06 $
3.43 $
2.82 $
2.03 $
1.79 $
1.32 $
1.46 $
1.54 $
1.71
1.80
1.43
1.45
0.88
0.87
0.88
1.15
11
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Holders
As of June 21, 2016, we estimate there were approximately 242 holders of record and approximately 5,227 street name holders of our Class A common stock.
Dividends
We have never declared or paid any cash dividends on our Class A common stock and do not intend to pay any cash dividends in the foreseeable future. We
currently intend to retain all future earnings in order to finance the operation and expansion of our business. In addition, the payment of dividends, if any, in the
future, will depend on our earnings, capital requirements, financial conditions and other relevant factors.
Securities Authorized For Issuance Under Equity Compensation Plans
The following table sets forth information with respect to compensation plans under which our equity securities are authorized for issuance as of the end of fiscal
2016:
Equity Compensation Arrangement
Amended and Restated Omnibus Incentive Plan
Employee Stock Purchase Plan
Award Shares
Authorized
3,915,625
400,000
4,315,625
Award Shares
Outstanding
at June 30,
2016
2,131,055
—
2,131,055
Available for
Issuance
at June 30,
2016
1,139,429
390,094
1,529,523
Please see section titled “Equity Compensation Plan Information” in Item 12 of this Annual Report on Form 10-K for information relating to compensation plans
approved and not approved by our stockholders.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our
consolidated financial statements and the accompanying notes.
The following discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and
intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Please also see the cautionary language at the
beginning of this Annual Report on Form 10-K regarding forward-looking statements.
Results of Operations
Operating Results for Fiscal Year Ended June 30, 2016 compared to the Fiscal Year Ended June 30, 2015 :
Revenue for fiscal 2016 totaled approximately $17.27 million compared to approximately $13.66 million for fiscal 2015, an increase of 26%. The 26% increase in
revenue primarily resulted from a $1.00 million increase in sales of specialty products due to higher volume of sales to defense customers, a $1.8 million
increase in sales of our HVPMO and LVPMO products, a $559,000 increase in sales of our infrared products, and a $297,000 increase in NRE fees. The $1.8
million increase in sales of our HVPMO and LVPMO products is due to revenue for LVPMO increasing by 4%, or $286,000, compared to fiscal 2015, while
revenue for HVPMO increased by 58%, or $1.46 million, compared to fiscal 2015. Unit shipment volume in precision molded optics in fiscal 2016 increased by
17% as compared to fiscal 2015 and the average selling price improved 2% period over period. This was due to a product mix shift in the LVPMO group with
higher volumes sold to customers in the distribution, medical applications, and telecommunications sectors. We expect continued growth in sales to be derived
primarily from our specialty products and our precision molded optics product line, particularly our HVPMOs sold in Asia, and our infrared product line based
upon recent quote activity and market trends.
12
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Gross margin percentage for fiscal 2016 was 54% compared to 44% in fiscal 2015. The improvement in gross margin is primarily attributed to a $3.6 million
increase in revenues with a favorable product mix of higher margin products, resulting in higher sales prices and providing leverage of our increased sales
volume against our fixed manufacturing overhead costs. Also, improvements in our infrared product group due to better yields and cost reductions with in-house
coating increased gross margin. Total manufacturing costs were approximately $7.97 million, an increase of approximately $286,000 as compared to fiscal 2015.
We plan to continue emphasizing unit cost reductions now that we have completed the consolidation of production in LPOIZ’s facility, efficiently purchasing raw
materials and continuing to increase the amount of anti-reflective coating we do in-house versus outsourcing this service. We also anticipate efficiency
improvements in production at LPOIZ’s Zhenjiang facility as the employees become a more experienced workforce.
Selling, general and administrative expenses increased by approximately $1.45 million to $6.58 million in fiscal 2016 as compared to $5.13 million in fiscal 2015.
The increase was primarily due to: (i) a $412,000 increase in the accrual for fiscal 2016 incentive compensation given the strong performance during fiscal
2016, which increased to $720,000 in fiscal 2016 from $380,000 in fiscal 2015 (ii) a $399,000 increase of wages from new product development as a result of
the transition to a technical sales process, which we announced in February 2015 as part of our organizational optimization plan, (iii) a $100,000 early termination
payment due pursuant to a sales agreement, (iv) a $67,000 increase for fees related to our 2016 stockholders’ annual meeting and related proxy solicitations, (v)
a $334,000 increase in legal expenses related to the 2016 stockholders’ annual meeting and the ISP acquisition, and (vi) a $139,000 increase in other
expenses. We project that our selling, general and administrative expenses will increase in fiscal 2017, due to an increase in commissions earned by our sales
force and incentive compensation paid to our named executive officers and key employees as a result of an increase in forecasted sales.
New product development costs in fiscal 2016 decreased by approximately $440,000 to $669,000 from $1.1 million in fiscal 2015. This decrease was primarily
due to a decrease in wages as a result of the re-positioning of personnel to selling, general and administrative expenses in connection with our transition to a
technical sales process and a decrease in materials used for engineering projects. We anticipate an increase in fiscal 2017 in product development spending as
compared to fiscal 2016.
Interest expense was approximately $37,600 for fiscal 2016 as compared to approximately $31,500 for fiscal 2015. Interest expense resulted from amortization
of debt costs related to our invoice-based working capital revolving line of credit (the “Invoiced Base Line”) with AvidBank Corporate Finance, a division of
AvidBank (“AvidBank”) and interest on capital lease obligations.
In fiscal 2016 and 2015, we recognized approximately $52,000 in income and approximately $464,000 in expense, respectively, related to the change in the fair
value of derivative warrants issued in connection with our June 2012 private placement. This fair value will be re-measured each reporting period throughout the
five year life of the warrants, or until exercised.
Investment and other income decreased by approximately $347,000 to an expense of $305,000 in fiscal 2016 primarily from the impact of foreign exchange
rates reflecting the change in foreign exchange rates during the period of time between when we received invoices and paid those invoices and the book value
change on our fixed assets and inventory in China.
We execute all foreign sales from our Orlando facility and inter-company transactions in United States dollars, mitigating the impact of foreign currency
fluctuations. Assets and liabilities denominated in non-United States currencies, primarily the Chinese Renminbi, are translated at rates of exchange prevailing
on the balance sheet date, and revenues and expenses are translated at average rates of exchange for the year. During the years ended June 30, 2016 and
2015, we incurred a gain of $75,428 and a loss of $1,000 on foreign currency translation, respectively.
Net income for fiscal 2016 was approximately $1.41 million compared with a net loss of approximately $715,000 in fiscal 2015, an increase of approximately
$2.13 million. This increase in net income from fiscal 2015 to fiscal 2016 was primarily driven by higher sales with increased gross margin, partially offset by the
negative impact of accounting entries for the change in the fair value of our warrant liability.
Liquidity and Capital Resources
At June 30, 2016, we had working capital of approximately $7.94 million and total cash and cash equivalents of approximately $2.91 million, of which
approximately $1.45 million of the total cash was held by our foreign subsidiaries.
Cash and cash equivalents held by our foreign subsidiaries in China were generated in China as a result of foreign earnings. Before any funds can be repatriated
the retained earnings in China must equal at least 150% of the registered capital. As of June 30, 2016, we had retained earnings of $1.18 million and we need to
have retained earnings of $11.3 million before repatriation will be allowed. We currently intend to permanently invest earnings generated from our foreign
operations, and, therefore, we have not previously provided for United States taxes on the related earnings. However, if in the future we change such intention,
we would provide for and pay additional United States taxes at that time.
13
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
We generally rely on cash from operations and equity and debt offerings, to the extent available, to satisfy our liquidity needs. From February 1996 (when our
initial public offering occurred) through the end of fiscal 2016, inclusive, we raised a net total of approximately $106 million from the issuance of common and
preferred stock, the sale of convertible debt and the exercise of options and warrants for shares of our common stock.
On December 23, 2014, we entered into the Amended and Restated Loan and Security Agreement (the “Amended LSA”) with AvidBank for the Invoice Based
Line. Pursuant to the Amended LSA, AvidBank will, in its discretion, make loan advances to us up to a maximum aggregate principal amount outstanding not to
exceed the lesser of (i) One Million Dollars ($1,000,000) or (ii) eighty percent (80%) (the “Maximum Advance Rate”) of the aggregate balance of our eligible
accounts receivable, as determined by AvidBank in accordance with the Amended LSA. AvidBank may, in its discretion, elect to not make a requested advance,
determine that certain accounts are not eligible accounts, change the Maximum Advance Rate or apply a lower advance rate to particular accounts or terminate
the Amended LSA. Our obligations under the Amended LSA are secured by a first priority security interest (subject to permitted liens) in cash, U.S. inventory and
accounts receivable.
On December 23, 2015, we executed the First Amendment to the Amended LSA to extend the term to December 23, 2016. Amounts borrowed under the
Amended LSA may be repaid and re-borrowed at any time prior to December 23, 2016, at which time all amounts shall be immediately due and payable. We did
not have any amount outstanding under the Amended LSA as of June 30, 2016. We do not anticipate the need to draw upon this facility during fiscal 2017.
However, if we would draw upon this facility, cash flows generated from U.S. operations are estimated to be sufficient to service this debt. For additional
information, see Note 16, Loan Payable, to the Notes to the Financial Statements to this Annual Report on Form 10-K.
We believe we have adequate financial resources to sustain our current operations in the coming year. We have established milestones that will be tracked to
ensure that as funds are expended we are achieving results before additional funds are committed. We anticipate sales growth in fiscal 2017 primarily from
precision molded optics, with the emphasis on HVPMO applications, specialty products, and infrared products. We also expect to be better positioned to
accelerate our revenue growth and profitability as a result of certain strategic growth initiatives and an organizational optimization plan where we transitioned to a
technical sales process that leverages the success of our existing demand-creation model. These growth initiatives and organizational modifications are
intended to further enhance our incremental organic growth position for our core aspheric lens business, prime our operations for the anticipated high growth of
our new infrared products, and allow for the integration of strategic acquisitions. We are also benefiting from a substantial increase in revenue generating
opportunities and broader market applications as a result of our investments in technologies that decreased our lens production costs and expanded our
production capacity. We believe we can further improve upon our track record of growth – and do so far more profitably.
There are a number of factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated sales growth,
increased material costs, increased labor costs, planned production efficiency improvements not being realized, increases in property, casualty, benefit and
liability insurance premiums, and increases in other discretionary spending, particularly sales and marketing related. We will also continue efforts to keep costs
under control as we seek renewed sales growth. Our efforts are directed toward generating positive cash flow and profitability. If these efforts are not successful,
we may need to raise additional capital. Should capital not be available to us at reasonable terms, other actions may become necessary in addition to cost
control measures and continued efforts to increase sales. These actions may include exploring strategic options for the sale of the Company, the sale of certain
product lines, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, the creation of licensing arrangements with
respect to our technology, or other alternatives.
Cash Flows – Financings:
Net cash provided by financing activities was approximately $237,000 in fiscal 2016 compared to approximately $963,000 in fiscal 2015. As of June 30, 2016
and 2015, we had an accumulated deficit of approximately $204 million and $205 million, respectively.
On January 20, 2015, we closed a sale of our securities in accordance with that certain Securities Purchase Agreement with Pudong Science & Technology
Investment (Cayman) Co., Ltd. (“Pudong Investment”). Prior to the closing, the Securities Purchase Agreement was amended (as amended, the “SPA”) and
assigned by Pudong Science & Technology (Cayman) Co., Ltd. (“Pudong”) to its affiliate, Pudong Investment.
In connection with the closing, we sold to Pudong Investment 930,790 shares of Class A common stock at a price of $1.40 per share, which was adjusted from
the initial per share purchase price of $1.62 pursuant to the terms of the SPA. We received gross cash proceeds from the issuance of the Class A common
stock in the amount of approximately $1,303,000. The costs associated with this equity raise were approximately $181,000, leaving net proceeds of
approximately $1,122,000. We used the sale proceeds to provide working capital in support of our continued growth, particularly new product development, sales
and marketing of our infrared product line, capital expenditures related to the acquisition of new equipment and for working capital needs for our U. S. and
Chinese operations.
14
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Immediately following the issuance of the shares of Class A common stock pursuant to the SPA, Pudong Investment beneficially owned 14.9% of our
outstanding shares of Class A common Stock.
The shares of Class A common stock issued were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”). The shares
of Class A common stock are restricted securities that have not been registered under the Act and may not be offered or sold absent registration or applicable
exemption from the registration requirements.
Cash Flows – Operating and Investing:
Cash flow provided by operations was approximately $1.53 million for the year ended June 30, 2016, an increase of approximately $1.44 million from fiscal
2015. Our cash flow provided by operations was approximately $290,000 for the fourth quarter of fiscal 2016, compared to cash flow provided by operations of
approximately $747,000 for the fourth quarter of fiscal 2015. We anticipate improvement in our cash flows provided by operations in future years due to sales
growth and continued margin improvements based on production efficiencies and reductions in product costs, offset by marginal increases in selling,
administrative, and new product development expenditures.
During fiscal 2016, we expended approximately $1.13 million for capital equipment as compared to $689,000 during fiscal 2015. In fiscal 2015, we initiated
capital leases in the amount of $524,000 for manufacturing equipment. The majority of our capital expenditures during both fiscal 2016 and fiscal 2015 were
related to the purchase of equipment used to enhance or expand our production capacity, tooling for our precision molded products, and equipment and facility
improvements for our new facility in Zhenjiang. We anticipate an increase in capital expenditures during fiscal 2017; however, the total amount expended will
depend on opportunities and circumstances.
License Agreement:
On April 28, 2015, we entered into a License Agreement with one of our specialty products customers (the “Customer”) whereby we granted an irrevocable
license of certain technology to be used by the Customer to manufacture fiber collimator assemblies. As we no longer intend to produce such assemblies for the
Customer in the future, we provided process work instructions, training and inventory to the Customer in order for them to continue manufacturing these
assemblies on their own. Pursuant to the License Agreement, we received $200,000 in fees in consideration of our disclosure of the technology and the grant of
a license to the Customer to use the technology to manufacture specific fiber collimator assemblies. The license fees were paid in two installments. The first
installment of $100,000 was received in May 2015 and the second installment of $100,000 was received in August 2015. The transaction was accounted for
under the guidance of ASC 605-10, Revenue Recognition and was recognized over the ninety-day training period which was completed in August 2015.
Pursuant to the License Agreement, the Customer also agreed to order and purchase from us a certain number of fiber collimator assemblies during the
transition process. We recognized approximately $76,000 of revenue in fiscal 2016, with expenses of $15,000. We recognized approximately $124,000 of
revenue in fiscal 2015, with expenses of $18,000. The costs associated with this License Agreement were approximately $33,000.
How We Operate
We have continuing sales of two basic types: occasional sales via ad-hoc purchase orders of mostly standard product configurations (our “turns” business) and
the more challenging and potentially more rewarding business of customer product development. In this latter type of business we work with customers to help
them determine optical specifications and even create certain optical designs for them, including complex multi-component designs that we call “engineered
assemblies.” This is followed by “sampling” small numbers of the product for the customers’ test and evaluation. Thereafter, should a customer conclude that our
specification or design is the best solution to their product need; we negotiate and “win” a contract (sometimes called a “design win”) – whether of a “blanket
purchase order” type or a supply agreement. The strategy is to create an annuity revenue stream that makes the best use of our production capacity as
compared to the turns business, which is unpredictable and uneven. This annuity revenue stream can also generate low-cost, high-volume type orders. A key
business objective is to convert as much of our business to the design win and annuity model as is possible. We face several challenges in doing so:
•
•
•
Maintaining an optical design and new product sampling capability, including a high-quality and responsive optical design engineering staff;
The fact that as our customers take products of this nature into higher volume, commercial production (for example, in the case of molded
optics, this may be volumes over one million pieces per year) they begin to work seriously to reduce costs – which often leads them to turn to
larger or overseas producers, even if sacrificing quality; and
Our small business mass means that we can only offer a moderate amount of total productive capacity before we reach financial constraints
imposed by the need to make additional capital expenditures – in other words, because of our limited cash resources and cash flow, we may not
be able to service every opportunity that presents itself in our markets without arranging for such additional capital expenditures.
15
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Despite these challenges to winning more “annuity” business, we nevertheless believe we can be successful in procuring this business because of our unique
capabilities in optical design engineering that we make available on the merchant market, a market that we believe is underserved in this area of service offering.
Additionally, we believe that we offer value to some customers as a source of supply in the United States should they be unwilling to commit to purchase their
entire supply of a critical component to foreign merchant production sources. We also continue to have the proprietary GRADIUM lens glass technology to offer
to certain laser markets.
Our Key Performance Indicators
Usually on a weekly basis, management reviews a number of performance indicators. Some of these indicators are qualitative and others are quantitative. These
indicators change from time to time as the opportunities and challenges in the business change. They are mostly non-financial indicators such as units of
shippable output by product line, production yield rates by major product line, and the output and yield data from significant intermediary manufacturing processes
that support the production of the finished shippable product. These indicators can be used to calculate such other related indicators as fully yielded unit
production per-shift, which varies by the particular product and our state of automation in production of that product at any given time. Higher unit production per
shift means lower unit cost, and, therefore, improved margins or improved ability to compete where desirable for price sensitive customer applications. The data
from these reports is used to determine tactical operating actions and changes. We believe that our non-financial production indicators, such as those noted, are
proprietary information.
The discussions of our results as presented in this Annual Report include use of the non-GAAP terms “EBITDA” and “gross margin.” EBITDA is discussed below.
Gross margin is determined by deducting the cost of sales from operating revenue. Cost of sales includes manufacturing direct and indirect labor, materials,
services, fixed costs for rent, utilities and depreciation, and variable overhead. Gross margin should not be considered an alternative to operating income or net
income, both of which are determined in accordance with GAAP. We believe that gross margin, although a non-GAAP financial measure, is useful and
meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates our cost structure and provides
funds for our total costs and expenses. We use gross margin in measuring the performance of our business and have historically analyzed and reported gross
margin information publicly. Other companies may calculate gross margin in a different manner.
Financial indicators that are usually reviewed at the same time include the major elements of the micro-level business cycle:
•
sales backlog;
•
•
•
•
revenue dollars and units by product group;
inventory levels;
accounts receivable levels and quality; and
other key indicators.
These indicators are similarly used to determine tactical operating actions and changes and are discussed in more detail below.
Sales Backlog:
Sales growth has been and continues to be our best indicator of success. Our best view into the efficacy of our sales efforts is in our “order book.” Our order
book equates to sales “backlog.” It has a quantitative and a qualitative aspect: quantitatively, our backlog’s prospective dollar value and qualitatively, what
percent of the backlog is scheduled by the customer for date-certain delivery. We define our “12-month backlog” as that which is requested by the customer for
delivery within one year and which is reasonably likely to remain in the backlog and be converted into revenues. This includes customer purchase orders and
may include amounts under supply contracts if they meet the aforementioned criteria. Generally, a higher 12-month backlog is better for us.
16
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our 12-month backlog grew while we increased our shipment volume by 26%, maintaining our strong booking performance. Our 12-month backlog at June 30,
2016 was approximately $6.60 million compared to $6.49 million as of June 30, 2015. Backlog growth rates for fiscal 2016 and 2015 are:
Quarter
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Backlog ($ 000)
Change From Prior
Year End
Change From
Prior Quarter End
$
$
$
$
$
$
$
$
5,340
5,592
6,153
6,493
5,064
6,424
6,969
6,598
25%
31%
44%
52%
-22%
-1%
7%
2%
25%
5%
10%
6%
-22%
27%
8%
-5%
Our order intake remained strong in fiscal 2016 with solid bookings across all of the major markets we serve with particular strength in our telecommunications
products and infrared products. China’s construction industry experienced some recovery during fiscal 2016, which resulted in an increase in order intake for our
industrial tool products. Our infrared products group, achieved an 80% increase in product bookings during fiscal 2016 compared to fiscal 2015, partially due to
an increase in bookings of commercial fire safety equipment.
We have been able to diversify our business by developing new applications for our products in markets such as digital imaging, laser tools, telecommunications,
digital projectors, industrial equipment, weapon sights, and green lasers. Examples of these new applications are: 2D scanning, fiber laser delivery systems,
disposable medical instruments and infrared sensor applications. Based on recent quote activity, we expect to show increases in revenue of our LVPMOs,
HVPMOs, specialty products, and infrared products for fiscal 2017.
Revenue Dollars and Units by Product Group:
The following table sets forth revenue dollars and units by our five product groups for the three and twelve month periods ended June 30, 2016 and 2015:
Revenue LVPMO
HVPMO
Infrared Products
Speciality Products
NRE
Total sales, net
Units
LVPMO
HVPMO
Infrared Products
Speciality Products
NRE
(unaudited)
Quarter ended
June 30,
2016
1,925,100
1,392,659
641,320
716,637
57,888
4,733,604
2015
2,092,363
853,328
417,873
995,452
147,531
4,506,547
83,400
388,706
12,887
44,526
1,460
530,979
82,533
303,004
9,226
59,365
9
454,137
QTR %
Change
-8%
63%
53%
-28%
-61%
5%
Year ended
June 30,
2016
7,180,741
4,000,155
1,753,221
3,769,584
568,537
17,272,238
2015
6,894,663
2,535,199
1,194,234
2,765,693
271,778
13,661,568
1%
28%
40%
-25%
16122%
17%
301,487
1,448,555
32,631
137,537
1,914
1,922,124
283,868
1,216,313
22,761
186,075
75
1,709,092
Year-to-date
% Change
4%
58%
47%
36%
109%
26%
6%
19%
43%
-26%
2452%
12%
Overall, our global diversification strategies have resulted in revenue increasing 26% for fiscal 2016 as compared fiscal 2015, with growth in shipments for all of
our product groups, with particularly strong growth in our HVPMO, infrared, and NRE product groups. Our specialty products group experienced a decrease in
units sold during fiscal 2016, as compared to fiscal 2015, but the average selling price increased during fiscal 2016, as compared to fiscal 2015.
17
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
There was a 19% increase in the unit shipment volume of HVPMO lenses in fiscal 2016 compared to fiscal 2015 driven by the recovery in the Chinese
construction industry due to increased stimulus by the Chinese government.
We also had significant growth in the infrared product group. Our infrared product group revenue increased 47% in fiscal 2016 as compared to fiscal 2015. The
increase in revenue is primarily derived from sales to customers in the distribution, telecommunications and medical markets.
Finally, we experienced significant growth in our NRE product group. NRE revenue is project-based and increases or decreases based on customer
requirements. We typically do not include NRE revenues in our projections due to being unable to control when our customers will have a project.
Inventory Levels:
We manage inventory levels to minimize investment in working capital but still have the flexibility to meet customer demand to a reasonable degree. We review
our inventory for obsolete items quarterly. While the mix of inventory is an important factor, including adequate safety stocks of long lead-time materials, an
important aggregate measure of inventory in all phases of production is the quarter’s ending inventory expressed as a number of days’ worth of the quarter’s
cost of sales, also known as “days cost of sales in inventory,” or “DCSI.” It is calculated by dividing the quarter’s ending inventory by the quarter’s cost of goods
sold, multiplied by 365 and divided by 4. Generally, a lower DCSI measure equates to a lesser investment in inventory, and, therefore, more efficient use of
capital. The table below shows our DCSI for the immediately preceding eight fiscal quarters:
Fiscal Quarter
Q4-2016
Q3-2016
Q2-2016
Q1-2016
Fiscal 2016 average
Q4-2015
Q3-2015
Q2-2015
Q1-2015
Fiscal 2015 average
Ended
6/30/2016
3/31/2016
12/31/2015
9/30/2015
6/30/2015
3/31/2015
12/31/2014
9/30/2014
DCSI (days)
155
178
163
155
163
122
195
145
197
165
Our average DCSI for fiscal 2016 was 163, compared to 165 for fiscal 2015. The decrease in DCSI from the previous fiscal year end is due to an increase in
revenue offset by higher levels of finished inventory to support our 12-month backlog and our sales forecast.
Accounts Receivable Levels and Quality:
Similarly, we manage our accounts receivable to minimize investment in working capital. We measure the quality of receivables by the proportions of the total
that are at various increments past due from our normally extended terms, which are generally 30 days. The most important aggregate measure of accounts
receivable is the quarter’s ending balance of net accounts receivable expressed as a number of days’ worth of the quarter’s net revenues, also known as “days
sales outstanding,” or “DSO.” It is calculated by dividing the quarter’s ending net accounts receivable by the quarter’s net revenues, multiplied by 365 and
divided by 4. Generally, a lower DSO measure equates to a lesser investment in accounts receivable, and therefore, more efficient use of capital. The table
below shows our DSO for the preceding eight fiscal quarters:
18
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Fiscal Quarter
Q4-2016
Q3-2016
Q2-2016
Q1-2016
Fiscal 2016 average
Q4-2015
Q3-2015
Q2-2015
Q1-2015
Fiscal 2015 average
Ended
6/30/2016
3/31/2016
12/31/2015
9/30/2015
6/30/2015
3/31/2015
12/31/2014
9/30/2014
DSO (days)
68
67
62
63
65
62
67
66
72
67
Our average DSO for fiscal 2016 was 65 compared to 67 for fiscal 2015. The increased revenue lowered the DSO days as compared to the previous fiscal year.
We strive to have a DSO no higher than 65.
Other Key Indicators:
Other key indicators include various operating metrics, some of which are qualitative and others are quantitative. These indicators change from time to time as
the opportunities and challenges in the business change. They are mostly non-financial indicators such as on time delivery trends, units of shippable output by
major product line, production yield rates by major product line, and the output and yield data from significant intermediary manufacturing processes that support
the production of the finished shippable product. These indicators can be used to calculate such other related indicators as fully-yielded unit production per-shift,
which varies by the particular product and our state of automation in production of that product at any given time. Higher unit production per shift means lower
unit cost, and, therefore, improved margins or improved ability to compete where desirable for price sensitive customer applications. The data from these reports
is used to determine tactical operating actions and changes. Management also assesses business performance and makes business decisions regarding our
operations using certain non-GAAP measures. These non-GAAP measures are described in more detail below under the heading “Non-GAAP Financial
Measures”.
Non-GAAP Financial Measures
We report our historical results in accordance with GAAP; however, our management also assesses business performance and makes business decisions
regarding our operations using certain non-GAAP measures. We believe these non-GAAP financial measures provide useful information to management and
investors that is supplementary to our financial condition and results of operations computed in accordance with GAAP; however, we acknowledge that our non-
GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with
GAAP, and they are not necessarily comparable to non-GAAP measures that other companies use.
Adjusted Net Income (Loss):
We calculate adjusted net income (loss) by excluding the change in the fair value of the June 2012 warrants from net income (loss). The fair value of the June
2012 warrants is re-measured each reporting period until the warrants are exercised or expire. Each reporting period, the change in the fair value of the June
2012 warrants is either recognized as non-cash expense or non-cash income. The change in the fair value of the June 2012 warrants is not impacted by our
actual operations but is instead strongly tied to the change in the market value of our Class A common stock and the assumptions on when the warrant shares
will be exercised. Management uses adjusted net income (loss) to evaluate our operating performance and for planning and forecasting future business
operations, as the change in fair value of the June 2012 warrants are not tied directly to operating activities. We are focused on profitable growth and as such we
monitor trends in adjusted net income. We believe the use of adjusted net income (loss) may be useful to investors as one means of evaluating our operational
performance. The following table reconciles net income (loss) to adjusted net income (loss) for the three and twelve month period ended June 30, 2016 and
2015:
(unaudited)
Quarter ended:
Year ended:
June 30, 2016 June 30, 2015 June 30, 2016 June 30, 2015
Net income (loss)
Change in fair value of warrant liability
Adjusted net income (loss)
$
$
331,467 $
27,243
358,710 $
(367,234) $
839,347
472,113 $
1,414,615 $
52,454
1,467,069 $
(715,280)
464,039
(251,241)
19
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our adjusted net income for fiscal 2016 was approximately $1.47 million, as compared to adjusted net loss of approximately $251,000 for fiscal 2015. The
difference in adjusted net income (loss) between the periods was principally caused by net income being recognized in fiscal 2016 versus a net loss in fiscal
2015. We also recognized lower non-cash expense as a result of the change in the fair value of the June 2012 warrant liability during fiscal 2016, as compared
to the prior year period.
EBITDA and Adjusted EBITDA:
EBITDA and adjusted EBITDA are non-GAAP financial measures used by management, lenders, and certain investors as a supplemental measure in the
evaluation of some aspects of a corporation’s financial position and core operating performance. Investors sometimes use EBITDA as it allows for some level of
comparability of profitability trends between those businesses differing as to capital structure and capital intensity by removing the impacts of depreciation and
amortization. EBITDA also does not include changes in major working capital items such as receivables, inventory and payables, which can also indicate a
significant need for, or source of, cash. Since decisions regarding capital investment and financing and changes in working capital components can have a
significant impact on cash flow, EBITDA is not a good indicator of a business’s cash flows. We use EBITDA for evaluating the relative underlying performance of
our core operations and for planning purposes. We calculate EBITDA by adjusting net income (loss) to exclude net interest expense, income tax expense or
benefit, depreciation and amortization, thus the term “Earnings Before Interest, Taxes, Depreciation and Amortization” and the acronym “EBITDA.”
We also calculate an adjusted EBITDA, which excludes the effect of the non-cash income or expense associated with the mark-to-market adjustments, related to
our June 2012 Warrants. The fair value of the June 2012 Warrants is re-measured each reporting period until the warrants are exercised or expire. Each
reporting period, the change in the fair value of the June 2012 Warrants is either recognized as a non-cash expense or non-cash income. The change in the fair
value of the June 2012 Warrants is not impacted by our actual operations but is instead strongly tied to the change in the market value of our common stock and
the assumptions on when the warrant shares will be exercised. Management uses adjusted EBITDA to evaluate our underlying operating performance and for
planning and forecasting future business operations. We believe this adjusted EBITDA is helpful for investors to better understand our underlying business
operations. The following table reconciles EBITDA and adjusted EBITDA to net income (loss) for the three and twelve month periods ended June 30, 2016 and
2015:
(unaudited)
Quarter ended:
Year ended:
Net income (loss)
Depreciation and amortization
Income taxes
Interest expense
EBITDA
Change in fair value of warrant liability
Adjusted EBITDA
June 30, 2016 June 30, 2015 June 30, 2016 June 30, 2015
(715,280)
537,143
2,316
31,549
(144,272)
464,039
319,767
1,414,615 $
847,990
199,274
37,626
2,499,505 $
52,454
2,551,959 $
(367,234) $
145,055
480
5,217
(216,482) $
839,347
622,865 $
331,467 $
238,961
68,221
7,527
646,176 $
27,243
673,419 $
$
$
$
Our adjusted EBITDA for fiscal 2016 was approximately $2.55 million, compared to approximately $320,000 for fiscal 2015. The difference in adjusted EBITDA
between the periods was principally caused by higher revenue and profit margins achieved in fiscal 2016.
20
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Off Balance Sheet Arrangements
We do not engage in any activities involving variable interest entities or off balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of income and expense during the reporting periods presented. Our critical estimates include the allowance for trade
receivables which is made up of reserves for bad debts, inventory reserves for obsolescence, revenue recognition, valuation of compensation expense on stock-
based awards and warrant valuation related to a private placement. Although we believe that these estimates are reasonable, actual results could differ from
those estimates given a change in conditions or assumptions that have been consistently applied.
Management has discussed the selection of critical accounting policies and estimates with our board of directors (the “Board”), and the Board has reviewed our
disclosure relating to critical accounting policies and estimates in this prospectus. The critical accounting policies used by management and the methodology for
its estimates and assumptions are as follows:
Allowance for accounts receivable is calculated by taking 100% of the total of invoices that are over 90 days past due from due date and 10% of the total of
invoices that are over 60 days past due from the due date for U.S. based accounts and 100% on invoices that are over 120 days past due for China based
accounts without an agreed upon payment plan. Accounts receivable are customer obligations due under normal trade terms. We perform continuing credit
evaluations of our customers’ financial condition. Recovery of bad debt amounts which were previously written off is recorded as a reduction of bad debt expense
in the period the payment is collected. If our actual collection experience changes, revisions to our allowance may be required. After attempts to collect a
receivable have failed, the receivable is written off against the allowance.
Inventory obsolescence reserve is calculated by reserving 100% for items that have not been sold in two years or that have not been purchased in two years
or which we have more than a two year supply. These items as identified are reserved at 100%, as well as reserving 50% for other items deemed to be slow
moving within the last twelve months and reserving 25% for items deemed to have low material usage within the last six months. The parts identified are adjusted
for recent order and quote activity to determine the final inventory reserve.
Revenue is recognized from product sales when products are shipped to the customer, provided that we have received a valid purchase order, the price is fixed,
title has transferred, collection of the associated receivable is reasonably assured, and there are no remaining significant obligations. Revenues from product
development agreements are recognized as milestones as completed in accordance with the terms of the agreements and upon shipment of products, reports or
designs to the customer. Invoiced amounts for value-added taxes (VAT) related to sales are posted to the balance sheet and not included in revenue. Revenue
recognized from equipment leasing is recognized over the lease term.
Stock based compensation is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite
service period. We estimate the fair value of each stock option as of the date of grant using the Black-Scholes-Merton pricing model. Most options granted under
the Amended and Restated Omnibus Incentive Plan (the “Plan”) vest ratably over two to four years and generally have ten-year contract lives. The volatility rate
is based on four-year historical trends in common stock closing prices and the expected term was determined based primarily on historical experience of
previously outstanding options. The interest rate used is the U.S. Treasury interest rate for constant maturities. The likelihood of meeting targets for option grants
that are performance based are evaluated each quarter. If it is determined that meeting the targets is probable then the compensation expense will be amortized
over the remaining vesting period.
Item 8.
Financial Statements and Supplementary Data.
The information required by this Item is incorporated herein by reference to the consolidated financial statements and supplementary data set forth in “Item 15-
Exhibits, Financial Statement Schedules” of Part IV of this Annual Report on Form 10-K.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
As previously disclosed by us in a Current Report on Form 8-K filed on August 5, 2015 with the SEC, on August 1, 2015, we were notified that effective August
1, 2015, the accounting practice of Cross, Fernandez & Riley LLP (“CFR”), our former independent public accountant, was combined with BDO USA, LLP
(“BDO”), and, as a result, CFR’s professional employees and partners joined BDO either as employees or partners. Accordingly, effective August 1, 2015, CFR
resigned as our auditors and with the approval of the Audit Committee, BDO was engaged as our independent public accountant for the year ended June 30,
2015, in connection with the audit of our financial statements, and the review of our quarterly reports for fiscal 2016.
Prior to engaging BDO, we did not consult with BDO regarding (a) the application of accounting principles to a specific completed or contemplated transaction or
regarding the type of audit opinions that might be rendered by BDO on our financial statements, and BDO did not provide any written or oral advice that was an
important factor considered by us in reaching a decision as to any such accounting, auditing, or financing reporting issue, or (b) a disagreement or reportable
event as described under Item 304(a)(2)(ii) of Regulation S-K.
The Report of Independent Registered Public Accounting Firm of CFR regarding our financial statements for the fiscal years ended June 30, 2014 and 2013 did
not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
21
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
During the years ended June 30, 2014 and 2015, and during the interim period from the end of the most recently completed fiscal year through August 1, 2015,
the date of resignation, there were no (a) disagreements, as described under Item 304(a)(1)(iv) of Regulation S-K, with CFR on any matter of accounting
principles or disagreements, if not resolved to the satisfaction of CFR would have caused it to make reference to such disagreement in its reports, or (b)
reportable events, as described under Item 304(a)(1)(v) of Regulation S-K.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the fiscal year ended June 30, 2016, we carried out an evaluation, under the supervision and with the participation of members of our
management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Our CEO and our CFO have
concluded, based on their evaluation, that as of June 30, 2016, our disclosure controls and procedures were effective at the end of the fiscal year to provide
reasonable assurance that information required to be disclosed by us in the reports that we file or submit with the SEC under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management,
including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Internal control over financial reporting is a process, including policies and procedures, designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting
principles. Our management assessed our internal control over financial reporting based on the Internal Control—Integrated Framework (2013 Framework)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of this assessment, our management
concluded that our internal control over financial reporting was effective as of June 30, 2016 based on such criteria.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met under all potential conditions, regardless of how remote, and may not prevent or detect all errors and all fraud. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within LightPath have been
prevented or detected. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Auditor’s Report on Internal Control over Financial Reporting
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide
only management’s report in this Annual Report.
Changes in Internal Controls over Financial Reporting
In connection with our continued monitoring and maintenance of our controls procedures as part of the implementation of Section 404 of the Sarbanes-Oxley Act,
we continue to review, test and improve the effectiveness of our internal controls. There have not been any changes in our internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter and since the year ended June 30, 2016 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information.
None.
22
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
Each of our directors serves until his or her successor is elected and qualified. Currently, we have seven directors. The Class I directors’ term expires at the
annual meeting of stockholders proposed to be held in fiscal 2017. The Class II directors’ term expires at the annual meeting of stockholders proposed to be
held in fiscal 2019. The Class III directors’ term expires at the annual meeting of stockholders proposed to be held in fiscal 2018. Effective September 6, 2016,
Xudong Zhu resigned as a director in order to devote more of his time to his other business interests.
The table below lists each director, each such director’s committee memberships, the chairman of each Board committee, and each such director’s class.
Name
Robert Ripp
J. James Gaynor
Sohail Khan
Steven Brueck
Louis Leeburg
M. Scott Faris
Xudong Zhu
Craig Dunham
Committee Chairman:
Committees
Audit
Compensation
R
Finance
R
R
R
R
R
R
R
R
R
R
Leeburg
Ripp
Khan
Ripp
Nominating &
Governance
R
R
R
Class
I
I
II
II
III
II
III
III
The following is an overview of the biographical information for each of our directors and officers, including their age, the year they became directors or officers,
their principal occupations or employment for at least the past five years, and certain of their other directorships.
Class I Directors
Robert Ripp, 75
Director (Chairman of the Board)
Mr. Ripp has served as one of our directors since 1999 and as Chairman of the Board since November
1999. During portions of fiscal year 2002 he also served as our Interim President and Chief Executive
Officer. Previously, Mr. Ripp served on the board of directors of Ace Limited (“Ace”) from March 1993 to
June 2016. In January 2016, Ace announced its acquisition of Chubb Limited and changed its name to
Chubb Limited. Mr. Ripp also previously served on the board of directors of PPG Industries (“PPG”) from
March 2003 to June 2016 and Axiall Corporation (“Axiall”) from February 2013 to June 2016. Ace, PPG,
and Axiall all are listed on the New York Stock Exchange. Mr. Ripp has previous management experience,
including serving as AMP Incorporated’s Chairman and Chief Executive Officer from August 1998 until April
1999 and as Vice President and Treasurer of IBM of Armonk, New York from 1989 to 1993. Mr. Ripp
graduated from Iona College and earned a Master’s degree in Business Administration from New York
University. Mr. Ripp’s extensive business, executive management, and financial expertise gained from
various executive positions coupled with his ability to provide leadership skills to access strategic plans,
business operational performance, and potential mergers and acquisitions, qualify him for service as one of
our directors.
23
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
J. James Gaynor, 65
President & Chief Executive Officer,
Director
Class II Directors
Sohail Khan, 62
Director
Dr. Steven Brueck, 72
Director
Mr. Gaynor has served as our President, Chief Executive Officer, and as a director since January 2008,
and, prior to that, served as Interim Chief Executive Officer commencing in September 2007. From July
2006 to September 2007, Mr. Gaynor previously served as our Corporate Vice President of Operations. Mr.
Gaynor is also a director of LPOI, our wholly owned subsidiary, located in Jiading, People’s Republic of
China, and LPOIZ, our wholly owned subsidiary, located in the New City District, of the Jingsu province of
the People’s Republic of China. Mr. Gaynor is a mechanical engineer with over 30 years of business and
manufacturing experience in volume component manufacturing in the electronics and optics industries.
Prior to joining us, Mr. Gaynor served as Director of Operations and Manufacturing for Puradyn Filter
Technologies, the Vice President of Operations and General Manager for JDS Uniphase Corporation’s
Transmission Systems Division and has also held various executive positions with Spectrum Control,
Rockwell International, and Corning Glass Works. Mr. Gaynor holds a Bachelor’s degree in Mechanical
Engineering from the Georgia Institute of Technology and has worked in the manufacturing industries since
1976. His experience includes various engineering, manufacturing, and management positions in specialty
glass, electronics, telecommunications components, and mechanical assembly operations. His global
business experience encompasses strategic planning, budgets, capital investment, employee development,
cost reduction programs with turnaround and startup companies, acquisitions, and management.
Mr. Gaynor has an in-depth knowledge of the optics industry gained through over 25 years of working in
various capacities in the industry and understands the engineering aspects of our business, due to his
engineering background. Mr. Gaynor’s experience and knowledge is necessary to lead us and qualify him
for service as one of our directors.
Mr. Khan has served as one of our directors since February 2005. Since September 2015, he has served
as the President and Chief Executive Officer of ViSX Systems Inc., a pioneer and leader in media
processing semiconductor solutions for video over IP streaming solutions. From May 2013 to July 2014, he
served as the Chief Executive Officer of Lilliputian Systems, a developer of portable power products for
consumer electronics. From July 2011 to April 2013, he served as the managing partner of K5 Innovations,
a technology consulting venture. He was the President and Chief Executive Officer and a member of the
board of directors of SiGe Semiconductor (“SiGe”), a leader in silicon based radio frequency front-end
solutions from April 2007 until it was acquired by Skyworks Solutions Inc. in June 2011. Prior to SiGe, Mr.
Khan was Entrepreneur in Residence and Operating Partner of Bessemer Venture Partners, a venture
capital group focused on technology investments. From 2007 to 2012, Mr. Khan served on the board of
directors for Gainspan Corporation. Mr. Khan received a Bachelor of Science in Electrical Engineering from
the University of Engineering and Technology in Pakistan. Additionally, he earned a Master’s degree in
Business Administration from the University of California at Berkeley. Mr. Khan is currently on the board of
directors of Intersil Corporation, which is listed on the NASDAQ Global Select Market. Mr. Khan’s
experience in venture financing, specifically technology investments, is an invaluable asset Mr. Khan
contributes to the Board composition. In addition, Mr. Khan’s significant experience in executive
management, profit and loss management, mergers and acquisitions, and capital raising, as well as his
background in engineering qualifies him for service as one of our directors.
Dr. Brueck has served as one of our directors since July 2001. He is a Distinguished Professor, Emeritus of
Electrical and Computer Engineering and of Physics at the University of New Mexico in Albuquerque, New
Mexico, which he joined in 1987. Although he retired in 2014, he remains active as a University of New
Mexico Research Professor. From 1986 to 2013, he served as Director of the Center for High Technology
Materials. He is a graduate of Columbia University with a Bachelor of Science degree in Electrical
Engineering and a graduate of the Massachusetts Institute of Technology where he received his Masters of
Science degree in Electrical Engineering and Doctorate of Science degree in Electrical Engineering. Dr.
Brueck is a fellow of The Optical Society, the Institute of Electrical and Electronics Engineers, the American
Association for the Advancement of Science, and the National Academy of Inventors. Dr. Brueck’s expertise
in optics and optics applications, as well as his extensive forty years of research experience in optics,
lasers, detectors, lithography, nonlinear optics, and related fields qualify him for service as one of our
directors.
24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Class III Directors
Louis Leeburg, 62
Director
Craig Dunham, 60
Director
Mr. Leeburg has served as one of our directors since May 1996. Mr. Leeburg is currently a self-employed
business consultant. Since 1993, Mr. Leeburg has served as the senior financial advisor of The Fetzer
Institute, and before that he served as the Vice President for Finance. Mr. Leeburg was an audit manager
for Price Waterhouse & Co. until 1980. He is a member of Financial Foundation Officers Group and the
chairman and trustee for the John E. Fetzer Memorial Trust Fund. Mr. Leeburg received a Bachelor of
Science degree in Accounting from Arizona State University. Mr. Leeburg has a broad range of experience
in accounting and financial matters. His expertise gained in various roles in financial management and
investment oversight for over thirty years, coupled with his knowledge gained as a certified public
accountant, add invaluable knowledge to our Board and qualify him for service as one of our directors.
Mr. Dunham has served as one of our directors since April 2016, and prior to his appointment to the Board,
he served as a consultant to the Board beginning in March 2014. Since March 2015, he has served as an
Operating Partner with Clarity Corporate Growth, a merger and acquisition advisory firm, as well as doing
business consulting. From May 2011 until March 2015, Mr. Dunham served as the Chief Executive Officer
of Applied Pulsed Power Inc. (“APP”), a pulsed power components and systems company near Ithaca, New
York. Mr. Dunham currently serves as a director of APP. From 2004 until 2011, Mr. Dunham was President,
Chief Executive Officer and director of Dynasil Corporation (“Dynasil”), a NASDAQ listed company. He
continues to be a director at Dynasil and is a member of their audit committee. Prior to joining Dynasil, Mr.
Dunham spent approximately one year partnering with a private equity group to pursue acquisitions of mid-
market manufacturing companies. From 2000 to 2003, he was Vice President/General Manager of the
Tubular Division at Kimble Glass Corporation. From 1979 to 2000, he held progressively increasing
leadership responsibilities at Corning Incorporated (“Corning”) in manufacturing, engineering, commercial,
and general management positions. At Corning, Mr. Dunham delivered results in various glass and
ceramics businesses including optics and photonics businesses. Mr. Dunham earned a Bachelor of Science
degree in Mechanical Engineering and a Master’s degree in Business Administration from Cornell
University. Mr. Dunham’s expertise in executive leadership, financial, operations and management,
business acumen, optics/photonics market knowledge, and knowledge of the acquisitions process, qualifies
him for service as one of our directors.
25
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Executive Officers Who Do Not Serve as Directors
Dorothy Cipolla, 60
Chief Financial Officer,
Secretary and Treasurer
Alan Symmons, 44
Executive Vice President of
Operations
Ms. Cipolla has served as our Chief Financial Officer, Secretary, and Treasurer since February 2006. Ms.
Cipolla has also served as a director of LPOI since 2006 and LPOIZ since 2013. From March 2004 to
February 2006, Ms. Cipolla was Chief Financial Officer and Secretary of LaserSight Technologies, Inc.
(“LaserSight”). Prior to joining LaserSight, she served in various financial management positions. From
1994 to 1999, she was Chief Financial Officer and Treasurer of Network Six, Inc., a NASDAQ-listed
professional services firm. From 1999 to 2002, Ms. Cipolla was Vice President of Finance with Goliath
Networks, Inc., a privately held network consulting company. From 2002 to 2003, Ms. Cipolla was
Department Controller of Alliant Energy Corporation, a regulated utility. She received a Bachelor of Science
degree in Accounting from Northeastern University and is a Certified Public Accountant in Massachusetts.
Mr. Symmons has served as our Executive Vice President of Operations since February 2015. Previously,
Mr. Symmons served as our Vice President of Corporate Engineering beginning in September 2010 and our
Director of Engineering from October 2007 to September 2010. Prior to that, Mr. Symmons served as our
Opto-Mechanical Manager from October 2006 to October 2007. Prior to joining us, Mr. Symmons was
Engineering Manager for Aurora Optical, a subsidiary of Multi-Fineline Electronix (“MFLEX”), dedicated to
the manufacture of cell phone camera modules. From 2000 to 2006, Mr. Symmons worked for Applied
Image Group – Optics (“AIG/O”), a recognized leader in precision injection molded plastic optical
components and assemblies, working up to Engineering Manager. AIG/O was purchased by MFLEX in
2006. Prior to 2000, Mr. Symmons held engineering positions at Ryobi N.A., SatCon Technologies, and
General Dynamics. Mr. Symmons has a Bachelor of Science degree in Mechanical Engineering from
Rensselaer Polytechnic Institute and a Master’s degree in Business Administration from the Eller School of
Management at the University of Arizona.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, requires that our directors and executive officers and persons who beneficially own more than 10% of our Class A common
stock (referred to herein as the “Reporting Persons”) file with the SEC various reports as to their ownership of and activities relating to our Class A common
stock. Except as set forth below, to the best of our knowledge, all Reporting Persons complied on a timely basis with all filing requirements applicable to them
with respect to transactions during the period covered by this report. In making these statements, we have relied solely on our review of copies of the reports
furnished to us, representations that no other reports were required and other knowledge relating to transactions involving Reporting Persons.
Berg & Berg Enterprises, LLC (“Berg”), one of our stockholders who beneficially owns more than 10% of our Class A common stock, recently advised us that it
had not made any filings pursuant to Section 16(a) of the Exchange Act. During the period covered by this report, Berg failed to file three Form 4s that relate to
transactions occurring over the span of 14 days, in addition to the initial Form 3, which should have been filed outside the period covered by this report.
Code of Ethics
The Board approved an amended and restated Code of Business Conduct and Ethics on April 28, 2016 (the “Code”). The Code applies to all of our employees,
officers, and directors including our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing
similar functions. The Board also approved an amended and restated Code of Business Conduct and Ethics for Senior Financial Officers (the “Senior Financial
Officer Code”), which applies to our Chief Executive Officer, Chief Financial Officer, principal accounting officer, controller, accounting manager, and persons
performing similar functions. Copies of the Code and the Senior Financial Officer Code are available on our website at www.lightpath.com or may be obtained
free of charge by writing to: Secretary, LightPath Technologies, Inc., 2603 Challenger Tech Court, Suite 100, Orlando, Florida 32826.
26
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Audit Committee and Audit Committee Financial Expert
The Audit Committee, which consists of Dr. Steven Brueck, M. Scott Faris, Craig Dunham, and Louis Leeburg (Chairman), met six times during fiscal 2016. The
meetings included discussions with management and with our independent auditors to discuss our interim and annual financial statements and our annual
report, and the effectiveness of our financial and accounting functions and organization. The Audit Committee acts pursuant to a written charter adopted by the
Board, a copy of which is available on our website at www.lightpath.com. The Audit Committee’s responsibilities include, among others, direct responsibility for
the engagement and termination of our independent accountants, and overseeing the work of the accountants and determining the compensation for their
engagement(s). The Board has determined that the Audit Committee is comprised entirely of independent members as defined under applicable listing standards
set out by the SEC and the NCM. The Board has also determined that at least one member of the Audit Committee, Mr. Leeburg, is an “audit committee financial
expert” as defined by SEC rules and qualifies as independent in accordance with the NCM rules. Mr. Leeburg’s business experience that qualifies him to be
determined an “audit committee financial expert” is described above.
Item 11.
Executive Compensation.
Summary Compensation Table for Named Executive Officers
The following table sets forth certain compensation awarded to, earned by or paid to (i) our Chief Executive Officer and (ii) our two other most highly
compensated executive officers serving as executive officers at the end of fiscal 2016, which includes our Chief Financial Officer. We did not have any
individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer as of the end of fiscal 2016.
Name and Position
(a)
J. James Gaynor
President & Chief Executive Officer
Dorothy M. Cipolla
Chief Financial Officer, Treasurer & Secretary
Alan Symmons
Executive Vice President of Operations
Notes:
Fiscal
Year
(b)
Salary
($)
(c)
2016 285,385 (3)
2015 285,435
2016 190,000 (6)
2015 193,704
2016 197,500 (7)
2015 189,954
Option
Awards
($) (1)
(f)
237,110 (4)
127,864 (5)
79,438 (4)
52,955 (5)
83,156 (4)
65,627 (5)
Non-Equity
Incentive Plan
Compensation
($)
(g)
138,188 (4)
70,000 (5)
46,885 (4)
35,625 (5)
49,353 (4)
40,000 (5)
All Other
Compensation
($) (2)
(i)
Total
($)
(j)
—
—
—
—
—
—
660,683
483,299
316,323
282,284
330,009
295,581
(1) For valuation assumptions on stock option awards refer to note 8 to the Consolidated Financial Statements of this Annual Report on Form 10-K for fiscal
2016. The disclosed amounts reflect the fair value of the stock option awards that were earned during the fiscal years ended June 30, 2016 and 2015 in
accordance with FASB ASC Topic 718.
(2) Other Compensation, as defined by SEC rules does not include the amounts that qualify under the applicable de minimis rule for all periods presented.
The de minimis rule does not require reporting of perquisites and other compensation that totals less than $10,000 in the aggregate. The nature of these
compensatory items include our contribution toward the premium costs for employee and dependent medical, life, and disability income insurances,
benefits generally available to our employees.
(3) Mr. Gaynor’s base salary was 43% of his total compensation for fiscal 2016 and 59% of his total compensation for fiscal 2015.
(4) Based on the achievement of certain criteria, the named executive officers earned their respective incentive bonus awards for fiscal 2016. Pursuant to
the terms of the Plan, the earned portion of each named executive officer’s award is to be paid out 50% in cash and 50% in stock option awards;
however, even though the awards were earned for fiscal 2016, neither the cash portion nor the stock option portion were paid in fiscal 2016. The
Compensation Committee retains the discretion to adjust the portion of the award that will be paid in cash and the portion that will be paid in stock
options. In the event the Compensation Committee exercises its discretion to adjust the portion of the award that is paid in cash and stock options, we
will file a Form 8-K to disclose such adjustment. For additional information, please see “Discussion of Summary Compensation Table of Named
Executive Officers” below.
27
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(5) Based on the achievement of certain criteria, the named executive officers partially earned their respective incentive bonus awards for fiscal 2015.
Pursuant to the terms of the Plan, the earned portion of each named executive officer’s award was paid out 50% in cash and 50% in stock option
awards; however, neither the cash portion nor the stock option portion were paid in fiscal 2015. For additional information, please see “Discussion of
Summary Compensation Table of Named Executive Officers” below.
(6) Ms. Cipolla’s base salary was 60% of her total compensation for fiscal 2016 and 69% of her total compensation for fiscal 2015.
(7) Mr. Symmons’ base salary was 60% of his total compensation for fiscal 2016 and 64% of her total compensation for fiscal 2015.
Discussion of Summary Compensation Table of Named Executive Officers
The following is a discussion of the material information that we believe is necessary to understand the information disclosed in the foregoing Summary
Compensation Table.
The Compensation Committee has several objectives in establishing our executive officers’ compensation. Overall, our compensation structure is intended to (i)
be competitive to ensure that we can attract and retain high quality executive officers; and (ii) more closely align the interests of our executive officers with the
interests of our stockholders by making it based in part on achievement of performance goals.
Fiscal 2016 Incentive Bonus Program.
Our fiscal 2016 incentive bonus program was comprised of two types of awards: (i) awards based on the achievement of specific fiscal year financial objectives
of the Company (the “Corporate Performance Award”) and (ii) discretionary awards based on achievement of subjective larger corporate goals (the
“Discretionary Performance Award”).
Our incentive bonus program includes different levels of bonus opportunity based on a participant’s position with the Company. For fiscal 2016, Mr. Gaynor was
the “level one” participant and Ms. Cipolla and Mr. Symmons were the “level two” participants. Bonus opportunities for level one and level two participants for
fiscal 2016 were calculated by applying designated portions of their respective annual base salary amounts to formulas for the Discretionary Performance Award
and each of the four components of the Corporate Performance Award.
For fiscal 2016, 75% of Mr. Gaynor’s base salary amount was used to calculate his Corporate Performance Award and 25% of his base salary amount was used
to calculate his Discretionary Performance Award. For fiscal 2016, 37.5% of Ms. Cipolla’s and Mr. Symmons’ respective base salary amounts were used to
calculate their respective Corporate Performance Awards and 12.5% of their respective base salary amounts were used to calculate their respective Discretionary
Performance Awards.
Corporate Performance Awards
In order to determine a participant’s Corporate Performance Award, the portion of such participant’s annual base salary applicable to the Corporate Performance
Award calculation (75% in the case of Mr. Gaynor and 37.5% in the case of Ms. Cipolla and Mr. Symmons), was divided by four and the quotient was used as a
baseline for determining the bonus for each component of the Corporate Performance Award (for each component, the “Corporate Baseline”). The Corporate
Baseline is $52,500, $17,813, and $18,750 for Mr. Gaynor, Ms. Cipolla, and Mr. Symmons, respectively.
Our fiscal 2016 corporate financial objectives upon which the Corporate Performance Awards were based were as follows: (i) revenue growth over that of the
prior fiscal year (the “Revenue Component”); (ii) strategic revenue growth (which is based upon the revenues generated by certain product lines and customers
specified by the Compensation Committee at the time that the incentive bonus program was established for fiscal 2016) over that of the prior fiscal year (the
“Strategic Revenue Component”); (iii) adjusted EBITDA (which is earnings before income, taxes, depreciation, and amortization, as adjusted to exclude the effect
of the non-cash income or expense associated with the mark-to-market adjustments related to our June 2012 warrants) (the “Adjusted EBITDA Component”);
and (iv) return on assets (adjusted to exclude the effect or the non-cash income or expense associated with the mark-to-market adjustments related to our June
2012 warrants) (the “ROA Component”). Each component of the Corporate Performance Award is evaluated independently of the other components, and the
Discretionary Performance Award is evaluated independently of the Corporate Performance Award.
28
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Revenue Component
If our total revenue in fiscal 2016 exceeded our total revenue in fiscal 2015, our named executive officers would be entitled to a bonus award under the Revenue
Component equal to such officer’s Corporate Baseline multiplied by the sum of (i) 100% plus (ii) the percentage that actual revenue for fiscal 2016 exceeded the
actual revenue for fiscal 2015.
Our total revenue in fiscal 2016 was 26.43% higher than that for fiscal 2015. Accordingly, under the formula used to calculate each named executive officer’s
Revenue Component bonus (Corporate Baseline x 126.43%), Mr. Gaynor earned $66,375, Ms. Cipolla earned $22,520, and Mr. Symmons earned $23,706.
Strategic Revenue Component
If our total strategic revenue in fiscal 2016 exceeded our total strategic revenue for fiscal 2015, our named executive officers would be entitled to a bonus award
under the Strategic Revenue Component equal to such officer’s Corporate Baseline multiplied by the sum of (i) 100% plus (ii) the percentage that actual strategic
revenue for fiscal 2016 exceeded the actual strategic revenue for fiscal 2015, up to a maximum growth rate of 50%.
Our strategic revenue in fiscal 2016 was 93% higher than that for fiscal 2015. Accordingly, under the formula used to calculate each named executive officer’s
Strategic Revenue Component bonus (Corporate Baseline x 150%), Mr. Gaynor earned $78,750, Ms. Cipolla earned $26,719, and Mr. Symmons earned
$28,125.
Adjusted EBITDA Component
In order for our named executive officers to earn a bonus with respect to the Adjusted EBITDA Component, we had to meet or exceed a minimum adjusted
EBITDA margin target established by the Compensation Committee for fiscal 2016. The adjusted EBITDA margin was calculated by dividing the fiscal 2016
adjusted EBITDA by the fiscal 2016 revenues and the target was set at 15% for fiscal 2016. If our adjusted EBITDA margin for fiscal 2016 equaled or exceeded
the target, then each named executive officer earned a bonus equal to such officer’s Corporate Baseline multiplied by the sum of (i) 100% plus (ii) the
percentage that our adjusted EBITDA for fiscal 2016 exceeded our adjusted EBITDA for fiscal 2015, up to a maximum growth rate of 50%. If we did not achieve
at least the adjusted EBITDA margin target, or if there was no growth year-over-year in adjusted EBITDA, our officers would not earn a bonus with respect to
the Adjusted EBITDA Component.
Our actual adjusted EBITDA margin for fiscal 2016 equaled 15%, which satisfied the adjusted EBITDA margin target requirement. For fiscal 2016, our adjusted
EBITDA was 772% higher than that for fiscal 2015. Accordingly, under the formula used to calculate each named executive officer’s Adjusted EBITDA
Component bonus (Corporate Baseline x 150%), Mr. Gaynor earned $78,750, Ms. Cipolla earned $26,719, and Mr. Symmons earned $28,125.
ROA Component
The ROA Component was based on achieving a return on assets target of at least 15% for fiscal 2016. If our return on assets for fiscal 2016 equaled or
exceeded the target, then the named executive officers would be entitled to a bonus award under the ROA Component equal to such officer’s Corporate Baseline
multiplied by 100%.
For fiscal 2016, our actual return on assets rate equaled 15% which met the target. Accordingly, under the formula used to calculate each named executive
officer’s ROA Component bonus (Corporate Baseline x 100%), Mr. Gaynor earned $52,500, Ms. Cipolla earned $17,813, and Mr. Symmons earned $18,750.
29
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The following table sets forth (i) each named executive officer’s base salary for fiscal 2016, (ii) the percentage of base salary, and the corresponding Corporate
Baseline dollar amount, used in the calculation of the Corporate Performance Award bonus, and (iii) the amount earned for each component of the Corporate
Performance Award:
Base
Salary for
Corporate
Performance
Award
Calculation
(%)
Baseline
for Each
Component
of Corporate
Performance
Award
($)
Total 2016
Base Salary
($)
Bonus Award Earned
Revenue
($)
Strategic
Revenue
($)
Adjusted
EBITDA
($)
280,000
190,000
200,000
75
37.5
37.5
52,500
17,813
18,750
66,375
22,520
23,706
78,750
26,719
28,125
78,750
26,719
28,125
ROA
($)
52,500
17,813
18,750
Participant
J. James Gaynor
Dorothy Cipolla
Alan Symmons
Discretionary Performance Awards
In order to determine a participant’s Discretionary Performance Award, the portion of such participant’s annual base salary applicable to the Discretionary
Performance Award calculation (25% in the case of Mr. Gaynor and 12.5% in the case of Ms. Cipolla and Mr. Symmons), was used as a baseline for determining
the bonus opportunity for the Discretionary Performance Award (the “Discretionary Baseline”). The Discretionary Baseline is $70,000, $47,500 and $50,000 or
Mr. Gaynor, Ms. Cipolla, and Mr. Symmons, respectively.
The Discretionary Performance Awards are discretionary awards made by our Compensation Committee that are based on achievement of certain corporate
goals set by the Compensation Committee for fiscal 2016. At the end of fiscal 2016, our Chief Executive Officer provided an executive summary to the
Compensation Committee, which summarized our achievements with respect to each such corporate goal. The Compensation Committee determined whether
the corporate goals were met and whether Discretionary Performance Awards would be made.
For fiscal 2016, the corporate goals included: (i) the execution of our plan to increase infrared capacity and reduce our costs with respect to our infrared lenses,
(ii) the expansion, improvement, and reorganization our sales and marketing organization, (iii) increased investor awareness, and (iv) the identification of
potential acquisition growth targets.
After reviewing our Chief Executive Officer’s executive summary, the Compensation Committee determined that for fiscal 2016, each named executive officer
met the corporate goals established with respect to the Discretionary Performance Award. Accordingly, under the formula used to calculate each named
executive officer’s Discretionary Performance Award bonus (Discretionary Baseline x 100%, if the goals are met), each named executive officer earned a
Discretionary Performance Award as follows:
Participant
J. James Gaynor
Dorothy Cipolla
Alan Symmons
Payment of Awards
Discretionary
Baseline
($)
Total Amount
Earned
($)
70,000
47,500
50,000
70,000
47,500
50,000
Corporate Performance Awards are paid 50% in cash and 50% in stock options; however, the Compensation Committee retains the discretion to adjust the
percentage of the Corporate Performance Award paid in cash and stock options prior to payment.
The Discretionary Performance Awards are stock option grants, which vest in four equal annual installments beginning on the first anniversary of the grant date,
and have an exercise price equal to the closing stock price on the day before the grant date plus a premium of 15%. The dollar amount of the award will be
divided by the Black-Scholes-Merton value per share to determine the number of stock options to be issued.
2015 Incentive Bonus Program
Our fiscal 2015 incentive bonus program was solely comprised of awards based on the achievement of specific corporate fiscal year financial objectives (the
“2015 Performance Award”).
30
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The fiscal 2015 incentive bonus program included different levels of bonus opportunity based on a participant’s position with the Company. For fiscal 2015, Mr.
Gaynor was the sole “level one” participant and Ms. Cipolla and Mr. Symmons were the “level two” participants. Bonus opportunities for level one and level two
participants for fiscal 2015 were calculated by applying designated portions of their respective annual base salary amounts (the “Potential Baseline”) to formulas
for the 2015 Performance Award. For fiscal 2015, 100% of Mr. Gaynor’s base salary was used to calculate his 2015 Performance Award. For fiscal 2015, 75%
of Ms. Cipolla’s and Mr. Symmons’ respective base salary amounts were used to calculate their respective 2015 Performance Awards. Accordingly, the Potential
Baseline was $280,000, $142,500, and $150,000 for Mr. Gaynor, Ms. Cipolla, and Mr. Symmons, respectively.
The 2015 Performance Awards were based on three performance goals specified by the Compensation Committee at the time the bonus program was
established for fiscal 2015: (i) revenues, (ii) gross margin, and (iii) EBITDA.
The maximum 2015 Performance Award bonus opportunity was based on the revenue performance goal, varying from a potential bonus opportunity of 25% of
the Potential Baseline, if we had revenues equal to $12.2 million, to a potential bonus opportunity of 100% of the Potential Baseline, if we had revenues equal to
or exceed $13.5 million. Our revenues in fiscal 2015 were approximately $13.7 million, and, therefore the revenue performance goal was met at 100%.
Accordingly, each named executive officer’s maximum 2015 Performance Award bonus opportunity was equal to 100% their respective Potential Baselines (the
“2015 Baseline”). The 2015 Baseline was $280,000, $142,500, and $150,000 for Mr. Gaynor, Ms. Cipolla, and Mr. Symmons, respectively.
The portion of the 2015 Baseline earned was determined by the achievement of certain gross margin and EBITDA performance goals, with each performance
goal tied to 50% of the 2015 Baseline. The gross margin component was based on achieving a gross margin percentage of 44%. If our gross margin percentage
was below the target, then no amount was earned. If our gross margin percentage for fiscal 2015 equaled or exceeded the target, then the named executive
officers earned a bonus equal to such officer’s 2015 Baseline multiplied by 50%. For fiscal 2015, our actual gross margin percentage equaled 44%. Accordingly,
under the formula used to calculate each named executive officer’s gross margin component (2015 Baseline x 50%), Mr. Gaynor earned $140,000, Ms. Cipolla
earned $71,250, and Mr. Symmons earned $75,000.
The EBITDA component was based on achieving EBITDA of $950,000. If EBITDA was below the target, then no amount was earned. If EBITDA for fiscal 2015
equaled or exceeded the target, then the named executive officers earned a bonus equal to such officer’s 2015 Baseline multiplied by 50%. For fiscal 2015, our
actual EBITDA equaled ($144,272). Accordingly, we did not meet the EBITDA goal.
The following table sets forth (i) each named executive officer’s base salary for fiscal 2015, (ii) the percentage of base salary, and the corresponding dollar
amount used in the calculation of the 2015 Performance Award bonus, (iii) the 2015 Baseline and (iv) the amount earned with respect to the gross margin
component and the EBITDA component:
Base Salary
for 2015
Performance
Award
Calculation
(%)
Potential
Baseline
($)
2015
Baseline
($)
Gross
Margin
Component
($)
EBITDA
Component
($)
100
75
75
280,000
142,500
150,000
280,000
142,500
150,000
140,000
71,250
75,000
—
—
—
Total 2015
Base
Salary
($)
280,000
190,000
200,000
Participant
J. James Gaynor
Dorothy Cipolla
Alan Symmons
Payments of Awards
The 2015 Performance Awards were paid 50% in cash and 50% in stock options. The Compensation Committee retained the discretion to adjust the percentage
of the 2015 Performance Award paid in cash and stock options prior to payment; however, the Compensation Committee did not exercise such discretion.
The stock options vested immediately upon issuance. The exercise price equaled the closing stock price on the day before the grant date. The dollar amount of
the award was divided by the Black-Scholes-Merton value per share to determine the number of stock options that were issued.
31
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Additional details regarding the stock options granted to each named executive officer is set forth below.
J. James Gaynor
Stock Option
Grants (1)
Grant Date
11/3/2010
10/27/2011
10/25/2012
1/31/2013
10/31/2013
10/30/2014
10/29/2015
10/29/2015
Number
of Shares
Number of
Vested Shares
25,000
40,000
40,000
13,000
50,000
50,000
55,556
23,000
25,000
40,000
20,000
9,750
25,000
12,500
55,556
(3)
(3)
(3)
(3)
(3)
(3)
(4)
— (3)
Actual
Fiscal 2015
$
2,797
6,992
4,752
1,355
8,772
6,330
69,864
—
100,862
Actual
Fiscal 2016
$
Compensation Expense (2)
Projected
Projected
Fiscal 2018
Fiscal 2017
$
$
Projected
Fiscal 2019
$
Projected
Fiscal 2020
$
—
1,747
4,752
1,355
8,772
8,439
—
3,146
28,211
—
—
1,188
677
8,772
8,439
—
4,194
23,270
—
—
—
—
2,192
8,439
—
4,194
14,825
—
—
—
—
—
2,109
—
4,194
6,303
—
—
—
—
—
—
—
1,048
1,048
(1) This table does not include the stock options award equal to $208,188 that Mr. Gaynor earned, but has not received,based on the achievement of certain
performance goals in fiscal 2016.
(2) Compensation expense for grants of stock options is recognized or expected to be recognized in accordance with ASC Topic 718, Stock Compensation.
(3) Represents the number of shares vested as of June 30, 2016. One-fourth of the stock option shares vests on each of the first, second, third and fourth
anniversaries of the grant date.
(4) Represents the number of shares vested as of June 30, 2016. The stock options, which were earned based on the achievement of certain performance
goals in fiscal 2015, were granted in fiscal 2016 and vested immediately. The expense associated with such stock options was accrued in fiscal 2015.
Dorothy Cipolla
Stock Option
Grants (1)
Grant Date
11/3/2010
10/27/2011
10/25/2012
1/31/2013
10/31/2013
10/30/2014
10/29/2015
10/29/2015
Number
of Shares
Number of
Vested Shares
9,000
12,500
12,500
4,000
15,000
15,000
28,274
7,000
9,000 (3)
12,500 (3)
9,375 (3)
3,000 (3)
7,500 (3)
3,750 (3)
28,274 (4)
— (3)
Actual
Fiscal 2015
$
1,007
2,185
1,485
417
2,632
1,898
35,556
—
45,180
Actual
Fiscal 2016
$
Compensation Expense (2)
Projected
Projected
Fiscal 2018
Fiscal 2017
$
$
Projected
Fiscal 2019
$
Projected
Fiscal 2020
$
—
545
1,485
417
2,632
2,532
—
958
8,569
—
—
371
208
2,632
2,532
—
1,276
7,019
—
—
—
—
658
2,532
—
1,276
4,466
—
—
—
—
—
633
—
1,276
1,909
—
—
—
—
—
—
—
318
318
(1) This table does not include the stock options award equal to $70,635 that Ms. Cipolla earned, but has not received, based on the achievement of certain
performance goals in fiscal 2016.
(2) Compensation expense for grants of stock options is recognized or expected to be recognized in accordance with ASC Topic 718, Stock Compensation.
(3) Represents the number of shares vested as of June 30, 2016. One-fourth of the stock option shares vests on each of the first, second, third and fourth
anniversaries of the grant date.
(4) Represents the number of shares vested as of June 30, 2016. The stock options, which were earned based on the achievement of certain performance
goals in fiscal 2015, were granted in fiscal 2016 and vested immediately. The expense associated with such stock options was accrued in fiscal 2015.
32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Alan Symmons
Stock Option
Grants (1)
Grant Date
11/3/2010
10/27/2011
10/25/2012
1/31/2013
10/31/2013
10/30/2014
1/12/2015
10/29/2015
10/29/2015
Compensation Expense (2)
Number
of Shares
Number of
Vested
Shares
Actual
Fiscal 2015
$
Actual
Fiscal 2016
$
Projected
Fiscal 2017
$
Projected
Fiscal 2018
$
Projected
Fiscal 2019
$
Projected
Fiscal 2020
$
7,000
12,500
12,500
4,000
15,000
15,000
10,000
29,762
7,000
7,000 (3)
12,500 (3)
9,375 (3)
3,000 (3)
7,500 (3)
3,750 (3)
2,500 (4)
29,762 (3)
—
784
2,185
1,485
417
2,632
1,898
787
37,427
—
47,615
—
545
1,485
417
2,632
2,532
1,572
—
958
10,141
—
—
371
208
2,632
2,532
1,572
—
1,276
8,591
—
—
—
—
658
2,532
1,569
—
1,276
6,035
—
—
—
—
—
633
784
—
1,276
2,693
—
—
—
—
—
—
—
—
318
318
(1) This table does not include the stock options award equal to $74,353 that Mr. Symmons earned, but has not received, based on the achievement of certain
performance goals in fiscal 2016.
(2) Compensation expense for grants of stock options is recognized or expected to be recognized in accordance with ASC Topic 718, Stock Compensation.
(3) Represents the number of shares vested as of June 30, 2016. One-fourth of the stock option shares vests on each of the first, second, third and fourth
anniversaries of the grant date.
(4) Represents the number of shares vested as of June 30, 2016. The stock options, which were earned based on the achievement of certain performance
goals in fiscal 2015, were granted in fiscal 2016 and vested immediately. The expense associated with such stock options was accrued in fiscal 2015.
Potential Payments Upon Termination or Change-of-Control
Mr. Gaynor is our only named executive officer entitled to any payments upon termination. If Mr. Gaynor is terminated without cause, he is entitled to a
severance payment equal to three months’ salary, as well as three months’ paid COBRA benefits.
All of our named executive officers are entitled to certain payments in the event of a change-of-control. The following table sets forth the change-of-control
payments due to each of our named executive officers.
Executive Officer
J. James Gaynor (2)
Dorothy Cipolla (3)
Alan Symmons (3)
(1) A change-of-control is defined as any of the following transactions occurring:
• The dissolution or liquidation of the Company;
Amount of
Payment Upon
A Change of
Control (1)
$
$
$
560,000
47,500
50,000
• Our stockholders approve an agreement providing for a sale, lease or other disposition of all or substantially all of our assets and the
•
•
•
transactions contemplated by such agreement are consummated;
A merger or a consolidation in which we are not the surviving entity;
Any person acquires the beneficial ownership of securities of the Company representing at least fifty percent (50%) of the combined voting
power entitled to vote in the election of directors; and
The individuals who, prior to the transaction, are members of the Board (the “Incumbent Board”) cease for any reason to constitute at lease
fifty percent (50%) of the Board, except that if the election of or nomination for election by the stockholders of any new director was approved
by a vote of at least fifty percent (50%) of the Incumbent Board, such new director shall be deemed to be a member of the Incumbent Board.
33
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Notwithstanding the foregoing, a public offering of our common stock shall not be considered a change-of-control.
(2) Mr. Gaynor is entitled to twenty-four months’ compensation in the event of a change-of-control. Payments made pursuant to a change-of-control to
Mr. Gaynor would be paid in a lump sum and would only be paid out in the event Mr. Gaynor was no longer employed by us. All of Mr. Gaynor’s
unvested stock options immediately vest upon a change-of-control.
(3) Ms. Cipolla and Mr. Symmons are entitled to three months’ compensation in the event of a change-of-control. Payments made pursuant to a change-of-
control to Ms. Cipolla or Mr. Symmons would occur according to our normal payroll schedule and would only be paid out in the event they were no
longer employed by us.
34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Outstanding Equity Awards at Fiscal Year-End
(a)
Name
J. James Gaynor (1)
Dorothy Cipolla (2)
Alan Symmons (3)
(b)
Number of Securities
Underlying
Unexercised Options
(#) Exercisable
15,000
20,000
15,000
30,000
50,000
25,000
40,000
30,000
9,750
25,000
12,500
—
55,556
20,000
10,000
10,000
9,000
12,500
9,375
3,000
7,500
3,750
28,274
—
5,000
5,000
10,000
7,000
12,500
9,375
3,000
7,500
3,750
2,500
29,762
—
(c)
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
—
—
—
—
—
—
—
10,000
3,250
25,000
37,500
23,000
—
—
—
—
—
—
3,125
1,000
7,500
11,250
—
7,000
—
—
—
—
—
3,125
1,000
7,500
11,250
7,500
—
7,000
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(e)
Option Exercise
Price ($)
Vesting
Schedule
3.47
4.80
3.05
2.10
2.66
2.69
1.39
0.98
0.87
1.41
1.37
1.48
1.48
4.80
3.05
2.66
2.69
1.39
0.98
0.87
1.41
1.37
1.48
1.48
5.24
3.27
2.66
2.69
1.39
0.98
0.87
1.41
1.37
1.27
1.48
1.48
2 year cliff
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
immediate
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
immediate
25%/yr for 4 yrs
4 year cliff
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
25%/yr for 4 yrs
immediate
25%/yr for 4 yrs
(f)
Option
Expiration Date
7/24/2016
10/27/2016
11/6/2017
1/31/2018
2/4/2020
11/3/2020
10/27/2021
10/25/2022
1/31/2023
10/31/2023
10/30/2024
10/29/2025
10/29/2025
10/27/2016
11/6/2017
2/4/2020
11/3/2020
10/27/2021
10/25/2022
1/31/2023
10/31/2023
10/30/2024
10/29/2025
10/29/2025
10/18/2016
12/3/2017
2/4/2020
11/3/2020
10/27/2021
10/25/2022
1/31/2023
10/31/2023
10/30/2024
1/12/2025
10/29/2025
10/29/2025
(1)
(2)
(3)
This table does not include the stock options award equal to $208,188 that Mr. Gaynor earned, but has not yet received, based on the achievement of
certain performance goals in fiscal 2016.
This table does not include the stock options award equal to $70,635 that Ms. Cipolla earned, but has not yet received, based on the achievement of
certain performance goals in fiscal 2016.
This table does not include the stock options award equal to $74,353 that Mr. Symmons earned, but has not yet received, based on the achievement of
certain performance goals in fiscal 2016.
35
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The stock options were issued pursuant to the Plan and have a ten year life. The options will terminate 90 days after termination of employment, or in the case of
termination due to death or permanent disability, the options will terminate one year after the date of termination.
Director Compensation
Director Summary Compensation Table
The table below summarizes the compensation paid by us to non-employee directors for fiscal 2016. Dr. Zhu served as a director during fiscal 2016; however,
he resigned effective September 6, 2016.
(a)
Name (1)
Robert Ripp
Sohail Khan
Dr. Steven Brueck
Louis Leeburg
M. Scott Faris
Dr. Xudong Zhu
Craig Dunham
Fees Earned
or Paid in
Cash
($)(2)
(b)
Stock
Awards
($)(3)
(c)
All Other
Compensation
($)
(g)
$
$
$
$
$
$
$
94,000
34,000
30,000
38,000
30,000
30,000
$
$
$
$
$
$
7,500(4) $
50,001
50,001
50,001
50,001
50,001
50,001
—
$
$
$
$
$
$
$
—
—
—
—
—
—
72,501(5)
$
$
$
$
$
$
$
Total
($)
(h)
144,001
84,001
80,001
88,001
80,001
80,001
80,001
(1)
(2)
(3)
(4)
(5)
J. James Gaynor, our President and Chief Executive Officer during fiscal 2016, is not included in this table as he was an employee, and, thus, received
no compensation for his services as a director. The compensation received by Mr. Gaynor as an employee is disclosed in the Summary Compensation
Table on page 29.
Total fees earned for fiscal 2016 includes all fees earned, including earned but unpaid fees. The amounts of unpaid fees for each director are as follows:
Mr. Ripp - $23,500, Mr. Leeburg - $9,500, Dr. Brueck - $7,500, Mr. Khan - $8,500, Mr. Faris - $7,500, Dr. Zhu - $7,500, and Mr. Dunham - $7,500.
Reflects the fair value amount for RSUs granted for the fiscal year ended June 30, in accordance with ASC Topic 718.
Mr. Dunham was appointed as a director in April 2016; therefore the amount reflects solely the compensation paid to Mr. Dunham as a director.
Mr. Dunham served as a consultant to the Board starting in March 2014 until he was appointed to the Board in April 2016 and was paid compensation
equal to our Board members during this period. The amount reflects compensation paid to Mr. Dunham as a consultant, of which $22,500 was in cash
and $50,001 was in restricted stock units.
36
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Discussion of the Summary Compensation Table of Directors
The following is a discussion of the material information that we believe is necessary to understand the information disclosed in the previous table. We use a
combination of cash and stock-based incentive compensation to attract and retain qualified candidates to serve on our Board. In setting director compensation,
we consider the significant amount of time that directors expend in fulfilling their duties as a director as well as the skill-level required by us of members of our
Board.
Cash Compensation Paid to Board Members
During fiscal 2016, directors received a monthly retainer of $2,500. There are no meeting attendance fees paid unless, by action of the Board, such fees are
deemed advisable due to a special project or other effort requiring extra-normal commitment of time and effort. Additionally, fees are paid to the Chairman of the
Board and Committee Chairmen for their additional responsibilities in overseeing their respective functions. The following table sets forth the annual fees paid to
each director for fiscal 2016:
Name
Robert Ripp
J. James Gaynor (1)
Sohail Khan
Steven Brueck
Louis Leeburg
M. Scott Faris
Xudong Zhu
Craig Dunham (2)
Board Fee
Chairman Fee
Committee Chair
Fee
Total Fees
Earned for Fiscal
Year 2015
$
$
$
$
$
$
$
$
30,000 $
—
30,000
30,000
30,000
30,000
30,000
30,000
60,000 $
$
$
4,000 $
$
4,000 $
$
8,000 $
$
$
$
94,000
—
34,000
30,000
38,000
30,000
30,000
30,000
(1)
(2)
Mr. Gaynor did not receive any compensation for his service as a director because he is also an employee.
Mr. Dunham joined the Board in April 2016. Accordingly, Mr. Dunham was only entitled to Board fees of $7,500 for the fourth quarter of fiscal 2016. The
remaining $22,500 was earned in his capacity as a consultant to the Board.
Stock Option/Restricted Stock Program
All directors are eligible to receive equity incentives under the Plan, including stock options, restricted stock awards or units. In fiscal 2016, the following
directors received grants under the Plan:
Restricted Stock Units
Name of Director (1)
Dr. Steven Brueck
Sohail Khan
Louis Leeburg
Robert Ripp
M. Scott Faris
Dr. Xudong Zhu
Craig Dunham (2)
Number of Units
Granted
33,785
33,785
33,785
33,785
33,785
33,785
33,785
236,495
Grant Date
10/29/2015
10/29/2015
10/29/2015
10/29/2015
10/29/2015
10/29/2015
10/29/2015
$
$
$
$
$
$
$
Fair Value Price
Per Share
1.48
1.48
1.48
1.48
1.48
1.48
1.48
(1)
(2)
Mr. Gaynor did not receive any compensation for his service as a director because he is also an employee.
Mr. Dunham joined the Board in April 2016, and, prior to that, served as a consultant to our Board. The restricted stock units were granted to Mr.
Dunham as compensation for his consulting services.
37
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Additional details regarding the restricted stock units granted to each director, other than Mr. Gaynor, is set forth below.
Robert Ripp
Restricted
Stock Unit
Grant Date
10/27/2011
1/31/2013
10/31/2013
10/30/2014
10/29/2015
Number
of Shares
29,000
40,000
35,460
36,500
33,785
Number of
Vested Shares
(2)
29,000
40,000
23,640
12,167
—
Actual
Fiscal 2015
$
3,358
11,534
16,692
12,457
—
44,041
Actual
Fiscal 2016
$
Compensation Expense (1)
Projected
Fiscal 2017
$
Projected
Fiscal 2018
$
—
5,766
16,692
16,607
12,501
51,566
—
—
4,173
16,608
16,668
37,449
—
—
—
4,151
16,668
20,819
Projected
Fiscal 2019
$
—
—
—
—
4,165
4,165
Positions:
Committees:
Chairman of the Board, Compensation Committee Chairman, Nominating & Governance Committee Chairman
Compensation, Finance and Nominating & Governance Committees
(1)
(2)
Compensation expense for grants of restricted stock units is recognized or expected to be recognized in accordance with ASC Topic 718, Stock
Compensation.
The number of shares vested are as of June 30, 2016. One-third of the restricted stock unit shares vests on each of the first, second and third
anniversaries of the grant date.
Sohail Khan
Restricted
Stock Unit
Grant Date
10/27/2011
1/31/2013
10/31/2013
10/30/2014
10/29/2015
Number
of Shares
29,000
40,000
35,460
36,500
33,785
Number of
Vested Shares
(2)
29,000
40,000
23,640
12,167
—
Actual
Fiscal 2015
$
3,358
11,534
16,692
12,457
—
44,041
Actual
Fiscal 2016
$
Compensation Expense (1)
Projected
Fiscal 2017
$
Projected
Fiscal 2018
$
—
5,766
16,692
16,607
12,501
51,566
—
—
4,173
16,608
16,668
37,449
—
—
—
4,151
16,668
20,819
Projected
Fiscal 2019
$
—
—
—
—
4,165
4,165
Positions:
Committees:
Finance Committee Chairman
Finance, Compensation and Nominating & Governance Committees
(1)
(2)
Compensation expense for grants of restricted stock units is recognized or expected to be recognized in accordance with ASC Topic 718, Stock
Compensation.
The number of shares vested are as of June 30, 2016. One-third of the restricted stock unit shares vests on each of the first, second and third
anniversaries of the grant date.
38
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Dr. Steven Brueck
Restricted Stock
Unit
Grant Date
10/27/2011
1/31/2013
10/31/2013
10/30/2014
10/29/2015
Number
of Shares
29,000
40,000
35,460
36,500
33,785
Number of
Vested Shares
(2)
29,000
40,000
23,640
12,167
—
Actual
Fiscal 2015
$
3,358
11,534
16,692
12,457
—
44,041
Actual
Fiscal 2016
$
Compensation Expense (1)
Projected
Fiscal 2017
$
Projected
Fiscal 2018
$
—
5,766
16,692
16,607
12,501
51,566
—
—
4,173
16,608
16,668
37,449
—
—
—
4,151
16,668
20,819
Projected
Fiscal 2019
$
—
—
—
—
4,165
4,165
Committees:
Audit Committee
(1)
(2)
Compensation expense for grants of restricted stock units is recognized or expected to be recognized in accordance with ASC Topic 718, Stock
Compensation.
The number of shares vested are as of June 30, 2016. One-third of the restricted stock unit shares vests on each of the first, second and third
anniversaries of the grant date.
Louis Leeburg
Restricted Stock
Unit
Grant Date
10/27/2011
1/31/2013
10/31/2013
10/30/2014
10/29/2015
Number
of Shares
29,000
40,000
35,460
36,500
33,785
Number of
Vested Shares
(2)
29,000
40,000
23,640
12,167
—
Actual
Fiscal 2015
$
3,358
11,534
16,692
12,457
—
44,041
Actual
Fiscal 2016
$
Compensation Expense (1)
Projected
Fiscal 2017
$
Projected
Fiscal 2018
$
—
5,766
16,692
16,607
12,501
51,566
—
—
4,173
16,608
16,668
37,449
—
—
—
4,151
16,668
20,819
Projected
Fiscal 2019
$
—
—
—
—
4,165
4,165
Positions:
Committees:
Audit Committee Chairman
Audit and Compensation Committees
(1)
(2)
Compensation expense for grants of restricted stock units is recognized or expected to be recognized in accordance with ASC Topic 718, Stock
Compensation.
The number of shares vested are as of June 30, 2016. One-third of the restricted stock unit shares vests on each of the first, second and third
anniversaries of the grant date.
39
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
M. Scott Faris
Restricted Stock
Unit
Grant Date
12/23/2011
1/31/2013
10/31/2013
10/30/2014
10/29/2015
Number
of Shares
15,000
40,000
35,460
36,500
33,785
Number of
Vested Shares
(2)
15,000
40,000
23,640
12,167
—
Actual
Fiscal 2015
$
2,061
11,534
16,692
12,457
—
42,744
Actual
Fiscal 2016
$
Compensation Expense (1)
Projected
Fiscal 2017
$
Projected
Fiscal 2018
$
—
5,766
16,692
16,607
12,501
51,566
—
—
4,173
16,608
16,668
37,449
—
—
—
4,151
16,668
20,819
Projected
Fiscal 2019
$
—
—
—
—
4,165
4,165
Committees:
Audit, Finance and Nominating & Governance Committees
(1)
(2)
Compensation expense for grants of restricted stock units is recognized or expected to be recognized in accordance with ASC Topic 718, Stock
Compensation.
The number of shares vested are as of June 30, 2016. One-third of the restricted stock unit shares vests on each of the first, second and third
anniversaries of the grant date.
Craig Dunham (1)
Restricted Stock
Unit
Grant Date
10/30/2014
10/29/2015
Number
of Shares
36,500
33,785
Number of
Vested Shares
(3)
12,167
—
Actual
Fiscal 2015
$
12,457
—
12,457
$
$
Actual
Fiscal 2016
$
16,607
12,501
29,108
Compensation Expense (2)
Projected
Fiscal 2017
$
16,608
16,668
33,276
$
$
Projected
Fiscal 2018
$
Projected
Fiscal 2019
$
4,151
16,668
20,819
$
—
4,165
4,165
Committees:
Audit Committees
(1)
(2)
(3)
Mr. Dunham served as a consultant to the Board from March 2014 until April 2016. In April 2016, he was appointed as a director. During the time period
Mr. Dunham served as a consultant to the Board, he earned compensation equivalent to the compensation paid to the directors. The amounts disclosed
include the compensation he earned as a consultant and director.
Compensation expense for grants of restricted stock units is recognized or expected to be recognized in accordance with ASC Topic 718, Stock
Compensation.
The number of shares vested are as of June 30, 2016. One-third of the restricted stock unit shares vests on each of the first, second and third
anniversaries of the grant date.
40
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Xudong Zhu (1)
Restricted Stock
Unit
Grant Date
10/29/2015
Number
of Shares
Number of
Vested Shares
(3)
Actual
Fiscal 2015
$
33,785
—
—
Actual
Fiscal 2016
$
12,502
Compensation Expense (2)
Projected
Fiscal 2017
$
16,668
Projected
Fiscal 2018
$
16,668
Projected
Fiscal 2018
$
4,165
Committees:
Finance Committee
(1)
(2)
(3)
Dr. Zhu served as a director and a member of the Finance Committee during fiscal 2016. He resigned effective September 6, 2016.
Compensation expense for grants of restricted stock units is recognized or expected to be recognized in accordance with ASC Topic 718, Stock
Compensation.
The number of shares vested are as of June 30, 2016. One-third of the restricted stock unit shares vests on each of the first, second and third
anniversaries of the grant date.
Item 12.
Security Ownership of Certain Beneficial Owners and Management.
Equity Compensation Plan Information
The following table sets forth as of June 30, 2016, the end of our most recent fiscal year, information regarding (i) all compensation plans previously approved by
our stockholders and (ii) all compensation plans not previously approved by our stockholders:
Plan category
Equity Compensation Plans
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted average exercise
and grant price of
outstanding options, warrants
and rights
Number of securities
remaining available for
future issuance
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
3,915,625
—
$
1.21
—
1,139,429
—
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of September 12, 2016, the number and percentage of outstanding shares of our Class A common stock, owned by: (i) each
director (which includes all nominees) at such date, (ii) each of the named executive officers named in the Summary Compensation Table for Executive Officers
in Item 11 above, (iii) our directors and named executive officers as a group, and (iv) each person known by us to be the beneficial owner of more than 5% of our
outstanding Class A common stock. The number of shares of Class A common stock outstanding as of September 12, 2015 was 15,633,258.
The number of shares beneficially owned by each director, named executive officer and greater than 5% beneficial owner is determined under SEC rules, and the
information is not necessarily indicative of the beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares to which
the individual has the sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days of
September 12, 2016, through the exercise of any stock option or other right to purchase, such as a warrant. Unless otherwise indicated, each person has sole
investment and voting power (or shares such power with his or her spouse) with respect to the shares set forth in the following table. In certain instances, the
number of shares listed may include, in addition to shares owned directly, shares held by the spouse or children of the person, or by a trust or estate of which
the person is a trustee or an executor or in which the person may have a beneficial interest. The table that follows is based upon information supplied in a
questionnaire completed by each named executive officer and director and stockholders beneficially owning greater than 5% of our Class A common stock.
41
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Amount of Shares
Class A Common Stock
Securities
Restricted (2)
261,445
261,445
262,645
261,445
160,745
70,285
—
—
Unrestricted
611,107
67,898
—
46,077
—
—
51,504
1,117
Options
30,000
—
—
—
—
—
347,806
126,774
of Class A
Common Stock
Beneficially
Owned
902,552
329,343
262,645
307,522
160,745
70,285
399,310
127,891
(3) (4)
(5)
(6)
—
4,240
110,887
115,127
(7)
1,278,010
781,943
615,467
2,675,420
—
1,890,298
—
2,270,026
—
—
1,890,298
2,270,026
(8)
Percent
Owned
(%)
5.7%
2.1%
1.7%
1.9%
1.0%
*
2.5%
*
*
15.3%
12.1%
14.5%
Name and Address (1)
Robert Ripp, Director
Louis Leeburg, Director
Sohail Khan, Director
Dr. Steven Brueck, Director
M. Scott Faris, Director
Craig Dunham, Director
J. James Gaynor, President & CEO
Dorothy Cipolla, CFO, Secretary & Treasurer
Alan Symmons, Executive Vice President of
Operations
All directors and named executive officers
currently holding office as a group
(9 persons)
Berg & Berg Enterprises, LLC
Pudong Science and Technology Investment
(Cayman) Co., Ltd.
*Less than 1%
Notes:
(1)
(2)
(3)
(4)
(5)
Except as otherwise noted, each of the parties listed above has sole voting and investment power over the securities listed. The address for all directors
and officers is “in care of” LightPath Technologies, Inc., 2603 Challenger Tech Court, Suite 100, Orlando, Florida 32826. The address for Berg & Berg
Enterprises, LLC, as listed on a Schedule 13G filed February 14, 2008, is 10050 Bandley Drive, Cupertino, California, 94014. The address for Pudong
Science and Technology (Cayman) Co. Ltd., as filed on a Schedule 13G filed August 15, 2013, is 13 Building, No. 439, Chunxiao Rd., Zhangjiang High-
tech Park, Pudong, Shanghai 201203, People’s Republic of China.
Restricted stock units awarded to our directors vest over three years. All directors have elected to defer receipt of the vested shares until after they leave
the Board, either by reason of resignation, termination, or otherwise. Therefore, these vested shares remain unissued. All of the director’s unvested
restricted stock units will vest upon such director’s resignation or termination from the Board. The amounts of restricted stock set forth above reflects
both vested and unvested shares included in the restricted stock unit awards. The amounts of vested shares for each director, other than Mr. Gaynor,
are as follow: Mr. Ripp – 191,506, Mr. Leeburg – 191,506, Mr. Khan – 192,706, Dr. Brueck – 191,506, Mr. Faris – 90,806, and Mr. Dunham – 12,166.
Does not include 7,812 shares of Class A common stock and warrants to purchase 15,000 shares of Class A common stock which are owned by trusts
for Mr. Ripp’s adult children and for which he disclaims beneficial ownership.
Includes 30,000 shares of Class A common stock with respect to which Mr. Ripp has the right to acquire. Mr. Ripp holds options that are currently
exercisable for an aggregate of 36,100 shares of Class A common stock.
Includes 362,806 shares of Class A common stock with respect to which Mr. Gaynor has the right to acquire. Mr. Gaynor holds options that are currently
exercisable for an aggregate of 362,806 shares of Class A common stock. This amount does not include 63,750 shares of Class A common stock
underlying options that remain unvested.
42
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(6)
(7)
(8)
Includes 126,774 shares of Class A common stock with respect to which Ms. Cipolla has the right to acquire. Specifically, Ms. Cipolla holds options that
are currently exercisable for an aggregate of 126,774 shares of Class A common stock. This amount does not include 16,500 shares of Class A common
stock underlying options that remain unvested.
Includes 110,887 shares of Class A common stock with respect to which Mr. Symmons has the right to acquire. Mr. Symmons holds options that are
currently exercisable for an aggregate of 110,887 shares of Class A common stock. This amount does not include 21,875 shares of Class A common
stock underlying options that remain unvested.
Pudong Science and Technology Investment (Cayman) Co., Ltd. is wholly owned by Shanghai Pudong Science and Technology Investment Co., Ltd.,
and for purposes hereof is also deemed as a beneficial owner of the shares.
There are no arrangements known to the Company which may at a subsequent date result in a change-in-control.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Certain Relationships and Related Transactions
When we are contemplating entering into any transaction in which any executive officer, director, nominee or any family member of the foregoing would have
any direct or indirect interest, regardless of the amount involved, the terms of such transaction have to be presented to the full Board (other than any interested
director) for approval. The Board has not adopted a written policy for related party transaction review but when presented with such transaction, the transaction
is discussed by the full Board and documented in the Board minutes.
We had no related party transactions since July 1, 2015, which was the beginning of our last fiscal year.
Director Independence
In accordance with NCM and SEC rules, the Board affirmatively determines the independence of each director and nominee for election as a director in
accordance with guidelines it has adopted, which include all elements of independence set forth in the NCM listing standards. Based on these standards, the
Board has determined that each of the following non-employee directors is independent and has no relationship with us, except as one of our directors and
stockholders.
Robert Ripp
M. Scott Faris
Craig Dunham
Louis Leeburg
Dr. Steven Brueck
Sohail Khan
Dr. Zhu, one of our directors during fiscal 2016, was also determined to be independent by the Board. Dr. Zhu resigned as a director effective September 6,
2016.
All of the members of the audit finance, nominating and governance and, compensation committees are also independent.
14.
Principal Accountant Fees and Services.
The following table presents fees paid or to be paid for professional audit services rendered by CFR and BDO for the audit of our annual financial statements
during the years ended June 30, 2016 and 2015, review of financial statements included in our quarterly reports during the years ended June 30, 2016 and
2015, and fees billed for other services rendered by CFR or BDO, as applicable:
Audit Fees (1)
Audit-Related Fees
Tax Fees
All Other Fees (2)
Total All Fees
Fiscal 2016
BDO
Fiscal 2015
BDO
CFR
$
$
117,645
—
—
199,981
317,626
$
$
30,975
—
—
—
30,975
$
$
76,650
—
—
—
76,650
(1)
(2)
Audit Fees consisted of fees billed for professional services rendered for the audit of our annual financial statements and review of the interim financial
statements included in quarterly reports, and review of other documents filed with the SEC within those fiscal years.
Other fees in fiscal 2016 pertained to work performed concerning the due diligence and audit of ISP. We entered into the Stock Purchase Agreement, by
and among ISP, the ISP Stockholders, and us, pursuant to which we will acquire all of the outstanding common stock of ISP upon satisfaction of certain
closing conditions.
43
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Audit Committee has adopted policies and procedures to oversee the external audit process including engagement letters, estimated fees and solely pre-
approving all permitted audit and non-audit work performed by CFR or BDO, as applicable. The Audit Committee has pre-approved all fees for audit and non-
audit work performed.
PART IV
Item 15.
Exhibits, Financial Statement Schedules.
(a)
The following documents are filed as part of this Annual Report on Form 10-K:
(1)
Financial Statements – See Index on page F-1 of this report
(b)
The following exhibits are filed herewith as a part of this report
Description
Notes
1
1
1
2
3
3
4
5
6
7
16
5
10
8
Exhibit
Number
3.1.1
3.1.2
Certificate of Incorporation of Registrant, filed June 15, 1992 with the Secretary of State of Delaware
Certificate of Amendment to Certificate of Incorporation of Registrant, filed October 2, 1995 with the Secretary of State of
Delaware
3.1.3
Certificate of Designations of Class A common stock and Class E-1 common stock, Class E-2 common stock, and Class E-3
common stock of Registrant, filed November 9, 1995 with the Secretary of State of Delaware
3.1.4
3.1.5
3.1.6
Certificate of Designation of Series A Preferred Stock of Registrant, filed July 9, 1997 with the Secretary of State of Delaware
Certificate of Designation of Series B Stock of Registrant, filed October 2, 1997 with the Secretary of State of Delaware
Certificate of Amendment of Certificate of Incorporation of Registrant, filed November 12, 1997 with the Secretary of State of
Delaware
3.1.7
Certificate of Designation of Series C Preferred Stock of Registrant, filed February 6, 1998 with the Secretary of State of
Delaware
3.1.8
Certificate of Designation, Preferences and Rights of Series D Participating Preferred Stock of Registrant filed April 29, 1998
with the Secretary of State of Delaware
3.1.9
Certificate of Designation of Series F Preferred Stock of Registrant, filed November 2, 1999 with the Secretary of State of
Delaware
3.1.10
Certificate of Amendment of Certificate of Incorporation of Registrant, filed February 28, 2003 with the Secretary of State of
3.2
4.1
4.2
Delaware
Amended and Restated Bylaws of Registrant
Rights Agreement dated May 1, 1998, between Registrant and Continental Stock Transfer & Trust Company
First Amendment to Rights Agreement dated as of February 28, 2008, between LightPath Technologies, Inc. and Continental
Stock Transfer & Trust Company
10.1
Amended and Restated Omnibus Incentive Plan dated October 15, 2002
44
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10.2
10.3
10.4
10.5
10.6
10.7
10.8
14.1
14.2
21.1
23.1
24
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Employee Letter Agreement dated June 12, 2008, between LightPath Technologies, Inc., and J. James Gaynor, its Chief
Executive Officer & President
LightPath Technologies, Inc. Employee Stock Purchase Plan effective January 30, 2015
Form of Common Stock Purchase Warrant dated as of June 11, 2012, issued by LightPath Technologies, Inc. to certain
investors
9
11
12
Amended and Restated Loan and Security Agreement dated as of December 23, 2014 between LightPath Technologies, Inc.
and AvidBank Corporate Finance, a division of AvidBank
13
Sixth Amendment to Lease dated as of July 2, 2014 between LightPath Technologies, Inc. and Challenger Discovery LLC
14
First Amendment to Amended and Restated Loan and Security Agreement dated as of December 23, 2015 between
LightPath Technologies, Inc. and Avidbank Corporate Finance, a division of Avidbank
17
Stock Purchase Agreement dated August 3, 2016 by and among LightPath Technologies, Inc, ISP Optics Corporation, Mark
Lifshotz and Joseph Menaker**
*
Code of Business Conduct and Ethics
Code of Business Conduct and Ethics for Senior Financial Officers
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Power of Attorney
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 of Chapter 63 of Title 18 of the United States
Code
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 of Chapter 63 of Title 18 of the United States Code
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Presentation Linkbase Document
15
15
*
*
*
*
*
*
*
*
*
*
*
*
*
Notes:
1. This exhibit was filed as an exhibit to our Registration Statement on Form SB-2 (File No: 33-80119) filed with the Securities and Exchange Commission on
December 7, 1995 and is incorporated herein by reference thereto.
2. This exhibit was filed as an exhibit to our annual report on Form 10-KSB40 filed with the Securities and Exchange Commission on September 11, 1997 and is
incorporated herein by reference thereto.
3. This exhibit was filed as an exhibit to our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 1997 and is
incorporated herein by reference thereto.
45
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4. This exhibit was filed as an exhibit to our Registration Statement on Form S-3 (File No. 333-47905) filed with the Securities and Exchange Commission on
March 13, 1998 and is incorporated herein by reference thereto.
5. This exhibit was filed as an exhibit to our Registration Statement on Form 8-A filed with the Securities and Exchange Commission on April 28, 1998 and is
incorporated herein by reference thereto.
6. This exhibit was filed as an exhibit to our Registration Statement on Form S-3 (File No: 333-94303) filed with the Securities and Exchange Commission on
January 10, 2000 and is incorporated herein by reference thereto.
7. This exhibit was filed as an exhibit to our Proxy Statement filed with the Securities and Exchange Commission on January 24, 2003 and is incorporated herein
by reference thereto.
8. The Amended and Restated Omnibus Incentive Plan, dated October 15, 2002 was filed as an exhibit to our Proxy Statement filed with the Securities and
Exchange Commission on September 12, 2002. Amendment No. 1, dated October 20, 2004 and Amendment No. 2, dated December 6, 2004, were filed as an
exhibit to our Registration Statement on Form S-8 (File No. 333-121389) filed with the Securities and Exchange Commission on December 17, 2004.
Amendment No. 3, dated November 1, 2007 and Amendment No. 4, dated January 1, 2009, were filed as an exhibit to our Proxy Statement filed with the
Securities and Exchange Commission on December 10, 2012. Amendment No. 5 dated January 1, 2013 was filed as an exhibit to our Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on May 9, 2013. Amendment No. 6 dated January 29, 2015 was filed as an exhibit to our Proxy
Statement filed with the Securities and Exchange Commission on December 19, 2014.
9. This exhibit was filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 12, 2008, and is
incorporated herein by reference thereto.
10. This exhibit was filed as an exhibit to Amendment No. 1 to the Registration Statement on Form 8A/A filed with the Securities and Exchange Commission on
February 25, 2008, and is incorporated herein by reference thereto.
11. This exhibit was filed as an Appendix A to our Proxy Statement (File No, 333-27548) filed with the Securities and Exchange Commission on December 19,
2014, and is incorporated herein by reference thereto.
12. This exhibit was filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 11, 2012, and is
incorporated herein by reference thereto.
13. This exhibit was filed as an exhibit to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on February 5, 2015, and is
incorporated herein by reference thereto.
14. This exhibit was filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 8, 2014, and is
incorporated herein by reference thereto.
15. This exhibit was filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2016, and is
incorporated herein by reference thereto.
16. This exhibit was filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 3, 2015 and is
incorporated herein by reference thereto.
17. This exhibit was filed as an exhibit to our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on February 4, 2016 and is
incorporated herein by reference thereto.
* filed herewith
** The Schedules to the Stock Purchase Agreement filed as Exhibit 10.8 have been omitted pursuant to Item 601(b)(2) or Regulation S-K. The Registrant hereby
undertakes to provide copies of the omitted Schedules to the Securities and Exchange Commission upon request.
46
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LightPath Technologies, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2016 and 2015
Consolidated Statements of Comprehensive Income (Loss) for the years ended June 30, 2016 and 2015
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended June 30, 2016 and 2015
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-5
F-6
F-7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Board of Directors and Shareholders
LightPath Technologies, Inc.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of LightPath Technologies, Inc., and its subsidiaries (the “Company”) as of June 30, 2016 and
2015, and the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing our audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30,
2016 and 2015, and the results of their operations and their cash flows for each of the years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ BDO USA, LLP
Orlando, Florida
September 15, 2016
F-2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LIGHTPATH TECHNOLOGIES, INC.
Consolidated Balance Sheets
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable, net of allowance of $4,598 and $6,282
Inventories, net
Other receivables
Prepaid expenses and other assets
Total current assets
Property and equipment, net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued liabilities
Accrued payroll and benefits
Loan payable, current portion
Capital lease obligation, current portion
Total current liabilities
Capital lease obligation, less current portion
Deferred rent
Warrant liability
Total liabilities
Commitments and contingencies (Notes 11 and 12)
Stockholders’ equity:
Preferred stock: Series D, $.01 par value, voting; 100,000 shares authorized; none issued and
outstanding
Common stock: Class A, $.01 par value, voting; 34,500,000 shares authorized; 15,590,945 and
15,235,073 shares issued and outstanding
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated statements.
F-3
June 30,
2016
June 30,
2015
$
$
$
2,908,024
3,545,871
3,836,809
209,172
652,308
11,152,184
4,370,045
66,964
15,589,193
1,361,914
328,144
1,356,255
—
166,454
3,212,767
178,919
548,202
717,393
4,657,281
1,643,920
3,048,754
3,181,377
253,880
244,075
8,372,006
4,275,552
66,964
12,714,522
1,551,885
84,039
842,506
51,585
166,454
2,696,469
310,260
512,679
1,195,470
4,714,878
—
—
155,909
214,661,617
126,108
(204,011,722)
10,931,912
15,589,193
$
152,351
213,222,950
50,680
(205,426,337)
7,999,644
12,714,522
$
$
$
$
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LIGHTPATH TECHNOLOGIES, INC.
Consolidated Statements of Comprehensive Income (Loss)
Sales, net
Cost of sales
Gross margin
Operating expenses:
Selling, general and administrative
New product development
(Gain) Loss on disposal of equipment
Total costs and expenses
Operating income (loss)
Other income (expense)
Interest expense
Interest expense - debt costs
Change in fair value of warrant liability
Other income (expense)
Net income (loss) before taxes
Income taxes
Net income (loss)
Income (loss) per share - basic
Number of shares used in per share calculation- basic
Income (loss) per common share - diluted
Number of shares used in per share calculation- diluted
Foreign currency translation adjustment
Comprehensive income (loss)
The accompanying notes are an integral part of these consolidated statements.
F-4
Year ended
2016
17,272,238
7,967,728
9,304,510
6,581,218
668,840
45,037
7,295,095
2,009,415
(37,627)
—
(52,454)
(305,444)
1,613,890
199,275
1,414,615
0.09
15,401,893
0.08
16,875,383
75,428
1,490,043
$
$
$
$
2015
13,661,569
7,682,194
5,979,375
5,130,414
1,109,095
(1,482)
6,238,027
(258,652)
(18,279)
(13,270)
(464,039)
41,276
(712,964)
2,316
(715,280)
(0.05)
14,711,586
(0.05)
14,711,586
(1,001)
(716,281)
$
$
$
$
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LIGHTPATH TECHNOLOGIES, INC.
Consolidated Statement of Stockholders’ Equity
Years ended June 30, 2016 and 2015
Balances at June 30, 2014
Issuance of common stock for:
Employee Stock Purchase Plan
Private placement of common stock
Stock based compensation on stock options & RSU
Foreign currency translation adjustment
Net loss
Balances at June 30, 2015
Issuance of common stock for:
Exercise of warrants
Employee Stock Purchase Plan
Exercise of RSU or options
Cashless exercise of warrants
Settlement for Class E shares
Reclassification of warrant liability upon exercise
Stock based compensation on stock options & RSU
Foreign currency translation adjustment
Net income
Balances at June 30, 2016
Class A
Common
Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comphrehensive
Income
Accumulated
Deficit
14,293,305 $ 142,933 $ 211,812,134 $
51,681 $ (204,711,057)
Total
Stockholders’
Equity
7,295,691
10,978
930,790
—
—
—
110
9,308
—
—
—
13,120
1,112,746
284,950
—
—
—
—
—
(1,001)
—
—
—
—
—
(715,280)
15,235,073 $ 152,351 $ 213,222,950 $
50,680 $ (205,426,337) $
13,230
1,122,054
284,950
(1,001)
(715,280)
7,999,644
313,081
9,906
6,077
26,808
—
—
—
—
—
3,130
99
61
268
—
—
—
—
—
388,221
22,804
6,369
(536)
(582)
530,531
491,860
—
—
15,590,945 $ 155,909 $ 214,661,617 $
—
—
—
—
—
—
—
75,428
—
391,351
—
22,903
—
6,430
—
(268)
—
(582)
—
530,531
—
491,860
—
75,428
—
1,414,615
1,414,615
126,108 $ (204,011,722) $ 10,931,912
The accompanying notes are an integral part of these unaudited consolidated statements.
F-5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LIGHTPATH TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Year Ended
June 30,
2016
2015
$
1,414,615
$
(715,280)
Depreciation and amortization
Interest from amortization of debt costs
Loss on disposal of property and equipment
Stock based compensation
Provision for doubtful accounts receivable
Change in fair value of warrant liability
Deferred rent
Changes in operating assets and liabilities:
Trade accounts receivables
Other receivables
Inventories
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Net cash provided by operating activities
Cash flows from investing activities
Purchase of property and equipment
Proceeds from sale of equipment
Net cash used in investing activities
Cash flows from financing activities
Proceeds from exercise of stock options
Proceeds from sale of common stock, net of costs of $181,052
Proceeds from sale of common stock from employee stock purchase plan
Settlement for Class E Shares
Proceeds from exercise of warrants, net of costs
Net payments on loan payable
Payments on capital lease obligations
Net cash provided by financing activities
Effect of exchange rate on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Interest paid in cash
Income taxes paid
Supplemental disclosure of non-cash investing & financing activities:
Landlord credits for leasehold improvements
Purchase of equipment through capital lease arrangements
Derecognition of liability associated with stock option grants
The accompanying notes are an integral part of these unaudited consolidated statements.
F-6
$
$
$
$
847,990
—
45,037
348,735
(289)
52,454
35,523
(650,753)
40,597
(916,899)
(415,444)
724,147
1,525,713
(1,131,098)
5,916
(1,125,182)
6,430
—
22,903
(582)
391,083
(51,585)
(131,341)
236,908
626,665
1,264,104
1,643,920
2,908,024
37,627
4,296
—
—
143,125
$
$
$
$
$
537,143
13,270
(1,482)
284,950
(15,745)
464,039
16,175
(560,810)
(53,838)
22,130
1,556
90,074
82,182
(688,798)
—
(688,798)
—
1,122,054
13,230
—
—
(113,472)
(59,412)
962,400
91,056
446,840
1,197,080
1,643,920
18,280
2,316
420,014
523,660
—
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
1.
Organization and History
LightPath Technologies, Inc. (“LightPath”, the “Company”, “we”, “us” or “our”) was incorporated in Delaware in 1992. It was the successor to LightPath
Technologies Limited Partnership formed in 1989, and its predecessor, Integrated Solar Technologies Corporation formed in 1985. On April 14, 2000, the
Company acquired Horizon Photonics, Inc. (“Horizon”). On September 20, 2000, the Company acquired Geltech, Inc. (“Geltech”). The Company completed its
initial public offering during fiscal 1996. In November 2005, we formed LightPath Optical Instrumentation (Shanghai) Co., Ltd (“LPOI”), a wholly-owned
subsidiary located in Jiading, People’s Republic of China. In December 2013, we formed LightPath Optical Instrumentation (Zhenjiang) Co., Ltd (“LPOIZ”), a
wholly-owned subsidiary located in Zhenjiang, Jiangsu Province, People’s Republic of China.
LightPath is a manufacturer and integrator of families of precision molded aspheric optics, high-performance fiber-optic collimator, GRADIUM glass lenses and
other optical materials used to produce products that manipulate light. LightPath designs, develops, manufactures and distributes optical components and
assemblies utilizing the latest optical processes and advanced manufacturing technologies. LightPath also performs research and development for optical
solutions for the traditional optics markets and communications markets. As used herein, the terms “LightPath,” the “Company,” “we,” “us” or “our,” refer to
LightPath individually or, as the context requires, collectively with its subsidiaries on a consolidated basis.
2.
Summary of Significant Accounting Policies
Consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and cash equivalents consist of cash in the bank and temporary investments with maturities of 90 days or less when purchased.
Allowance for accounts receivable, is calculated by taking 100% of the total of invoices that are over 90 days past due from the due date and 10% of the total
of invoices that are over 60 days past due from the due date for U.S. based accounts and 100% of invoices that are over 120 days past due for China based
accounts. Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its customers’
financial condition. If the Company’s actual collection experience changes, revisions to its allowance may be required. After all attempts to collect a receivable
have failed, the receivable is written off against the allowance.
Inventories, which consist principally of raw materials, tooling, work-in-process and finished lenses, collimators and assemblies are stated at the lower of cost or
market, on a first-in, first-out basis. Inventory costs include materials, labor and manufacturing overhead. Acquisition of goods from our vendors has a purchase
burden added to cover customs, shipping and handling costs. Fixed costs related to excess manufacturing capacity have been expensed. We look at the
following criteria for parts to consider for the inventory reserve: items that have not been sold in two years or that have not been purchased in two years or of
which we have more than a two-year supply. These items as identified are reserved at 100%, as well as reserving 50% for other items deemed to be slow
moving within the last twelve months and reserving 25% for items deemed to have low material usage within the last six months. The parts identified are adjusted
for recent order and quote activity to determine the final inventory reserve.
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
one to ten years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the related assets using the straight-
line method. Construction in process represents the accumulated costs of assets not yet placed in service and primarily relates to manufacturing equipment.
Long-lived assets, such as property, plant, and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair
value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value
less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet.
Deferred rent relates to certain of the Company’s operating leases containing predetermined fixed increases of the base rental rate during the lease term being
recognized as rental expense on a straight-line basis over the lease term, as well as applicable leasehold improvement incentives provided by the landlord. The
Company has recorded the difference between the amounts charged to operations and amounts payable under the leases as deferred rent in the accompanying
consolidated balance sheets.
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are computed on the basis of differences
between the financial statement and tax basis 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 have been established to reduce
deferred tax assets to the amount expected to be realized.
F-7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company has not recognized a liability for uncertain tax positions. A reconciliation of the beginning and ending amount of unrecognized tax benefits or
penalties has not been provided since there has been no unrecognized benefit or penalty. If there were an unrecognized tax benefit or penalty, the Company
would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
The Company files U.S. Federal income tax returns, and returns in various states and foreign jurisdictions. The Company’s open tax years subject to
examination by the Internal Revenue Service and the Florida Department of Revenue generally remain open for three years from the date of filing.
Our cash, cash equivalents totaled $2.91million at June 30, 2016. Of this amount, approximately 50% was held by our foreign subsidiaries in China. These
foreign funds were generated in China as a result of foreign earnings. Before any funds can be repatriated, the retained earnings in China must equal at least
150% of the registered capital. As of June 30, 2016, we have retained earnings of $2.26 million and we need to have $11.3 million before repatriation will be
allowed. We currently do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event that funds from
foreign operations are needed to fund operations in the United States, if United States taxes have not been previously provided on the related earnings, we
would provide for and pay additional United States taxes at the time we change our intention with regard to the reinvestment of those earnings.
Revenue is recognized from product sales when products are shipped to the customer, provided that the Company has received a valid purchase order, the
price is fixed, title has transferred, collection of the associated receivable is reasonably assured, and there are no remaining significant obligations. Product
development agreements are generally short term in nature with revenue recognized upon shipment to the customer for products, reports or designs. Invoiced
amounts for sales for value-added taxes (“VAT”) are posted to the balance sheet and not included in revenue. Revenue recognized from equipment leasing is
recognized over the lease term based on straight-lining of total lease payments. Equipment leasing revenue was approximately $11,500 for the year ended June
30, 2016, and was included in sales on the accompanying consolidated statement of comprehensive income (loss). Equipment under lease of $55,210, was
included in property and equipment, net as of June 30, 2016, on the accompanying consolidated balance sheet.
Value added tax is computed on the gross sales price on all sales of the Company’s products sold in the People’s Republic of China. The VAT rates range up
to 17%, depending on the type of products sold. The VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost
of producing or acquiring its finished products. The Company recorded a VAT receivable net of payments in the accompanying financial statements.
New product development costs are expensed as incurred.
Stock-based compensation is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite
service period. We estimate the fair value of each restricted stock unit or stock option as of the date of grant using the Black-Scholes-Merton pricing model. Most
awards granted under our Amended and Restated Omnibus Incentive Plan (the “Plan”) vest ratably over two to four years and generally have four to ten-year
contract lives. The volatility rate is based on historical trends in common stock closing prices and the expected term was determined based primarily on
historical experience of previously outstanding awards. The interest rate used is the U.S. Treasury interest rate for constant maturities. The likelihood of meeting
targets for option grants that are performance based are evaluated each quarter. If it is determined that meeting the targets is probable then the compensation
expense will be amortized over the remaining vesting period.
Management estimates. Management makes estimates and assumptions during the preparation of the Company’s consolidated 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 available, which in turn could impact the amounts reported and disclosed herein.
Fair value of financial instruments. The Company accounts for financial instruments in accordance with the Financial Accounting Standard Board’s Accounting
Standards Codification Topic 820 – Fair Value Measurements and Disclosures (“ASC 820”) , which provides a framework for measuring fair value and expands
required disclosure about fair value measurements of assets and liabilities. ASC 820 defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
F-8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.
Level 3 - Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the
assumptions that market participants would use in pricing.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2016.
The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments which include cash,
receivables, accounts payable and accrued liabilities. Fair values were assumed to approximate carrying values for these financial instruments since they are
short term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The fair value of the Company’s loan
payable approximates its carrying value based upon current rates available to the Company.
The Company values its warrant liabilities based on open-form option pricing models which, based on the relevant inputs, render the fair value measurement at
Level 3. The Company bases its estimates of fair value for warrant liabilities on the amount it would pay a third-party market participant to transfer the liability
and incorporates inputs such as equity prices, historical and implied volatilities, dividend rates and prices of convertible securities issued by comparable
companies maximizing the use of observable inputs when available. See further discussion at Note 15.
The Company does not have any other financial or non-financial assets or liabilities that would be characterized as Level 2 or Level 3 instruments.
Derivative financial instruments. The Company accounts for derivative instruments in accordance with Financial Accounting Standard Board’s Accounting
Standards Codification Topic 815 – Derivatives and Hedging (“ASC 815”), which requires additional disclosures about the Company’s objectives and strategies
for using derivative instruments, how the derivative instruments and related hedged items are accounted for, and how the derivative instruments and related
hedging items affect the financial statements.
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible debt instruments are
reviewed to determine whether or not they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately from the
host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with
corresponding changes in fair value recorded in current period operating results. The fair value of the June 2012 warrants is estimated using the Lattice option-
pricing model.
Freestanding warrants issued by the Company in connection with the issuance or sale of debt and equity instruments are considered to be derivative
instruments. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to
be classified as equity or as a derivative liability.
Comprehensive income (loss) of the Company is defined as the change in equity (net assets) of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners
and distributions to owners. Comprehensive income (loss) has two components, net income (loss) and other comprehensive income (loss), and is included on
the statement of operations and comprehensive income (loss). Our other comprehensive income (loss) consists of foreign currency translation adjustments made
for financial reporting purposes.
Business segments are required to be reported by the Company. As the Company only operates in principally one business segment, no additional reporting is
required.
Recent accounting pronouncements. There are new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) that are not
yet effective. Management does not believe any of these accounting pronouncements will have a material impact on our financial position or operating results.
In July 2015, the FASB issued No. 2015-11, Inventory - Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 provides additional guidance
regarding the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. This guidance is
effective for fiscal years and interim periods beginning after December 15, 2016. Early adoption is permitted. We do not expect the adoption of this guidance to
have a material impact on our consolidated financial position, results of operations or cash flows.
F-9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In April 2015, the FASB issued ASU No. 2015-03, Interest -Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU
2015-03”). The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with debt discounts and the accounting for debt issue costs under the International Financial
Reporting Standards. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. Given the
absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, in August 2015, the FASB issued ASU
2015-15, Interest - Imputation of Interest (Subtopic 835-30), which clarifies ASU 2015-03 by stating that the SEC staff would not object to an entity deferring and
presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit
arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 was effective for the annual period
ending after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments in ASU 2015-03 was permitted for financial
statements that have not been previously issued. The adoption of this guidance did not have a material impact on our consolidated financial position, results of
operations or cash flows.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly
all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are
transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.
ASU 2014-09 provides that an entity should apply a five-step approach for recognizing revenue, including (1) identifying the contract with a customer; (2)
identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in
the contract; and (5) recognizing revenue when, or as, the entity satisfies a performance obligation. Also, the entity must provide various disclosures concerning
the nature, amount and timing of revenue and cash flows arising from contracts with customers. The effective date will be the first quarter of our fiscal year
ending June 30, 2019, using one of two retrospective application methods. We are currently analyzing the impact of this new accounting guidance.
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This guidance requires an entity to recognize lease liabilities and a right-of-use
asset for all leases on the balance sheet and to disclose key information about the entity’s leasing arrangements. ASU 2016-02 is effective for annual reporting
periods beginning after December 15, 2018, including interim periods within that reporting period, with earlier adoption permitted. ASU 2016-02 must be adopted
using a modified retrospective approach for all leases existing at, or entered into after the date of initial adoption, with an option to elect to use certain transition
relief. We are evaluating the impact of this new standard on our financial position, results of operations, cash flows and related disclosures.
3.
Inventories – net
The components of inventories include the following:
Raw materials
Work in process
Finished goods
Reserve for obsolescence
June 30, 2016
June 30, 2015
$
$
1,791,791 $
1,269,539
1,171,343
(395,864)
3,836,809 $
1,730,153
919,444
812,643
(280,863)
3,181,377
During fiscal 2016 and 2015, the Company evaluated all reserved items and disposed of $24,590 and $85,261, respectively, of inventory parts and wrote them
off against the reserve for obsolescence.
The value of tooling in raw materials was approximately $1.16 million at June 30, 2016 and approximately $1.06 million at June 30, 2015.
F-10
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4.
Property and Equipment – net
Property and equipment consist of the following:
Manufacturing equipment
Computer equipment and software
Furniture and fixtures
Leasehold improvements
Construction in progress
Total property and equipment
Estimated
Life (Years)
5 - 10
3 - 5
5
5 - 7
$
June 30,
2016
6,818,382 $
339,723
92,705
1,225,099
597,452
9,073,361
June 30,
2015
5,796,912
327,920
105,402
1,711,018
886,624
8,827,876
Less accumulated depreciation and amortization
Total property and equipment, net
$
4,703,316
4,370,045 $
4,552,325
4,275,551
During fiscal 2015, we extended our Orlando lease term and received a tenant improvement allowance from the landlord of $420,014. This allowance was used
to construct improvements and was recorded as leasehold improvements and deferred rent liability. It is being amortized over the corresponding lease term.
5.
Accounts Payable
The accounts payable balance includes $69,250 and $56,500 representing earned but unpaid board of directors’ fees as of June 30, 2016 and 2015,
respectively.
6.
Stockholders’ Equity
The Company’s authorized capital stock consists of 45,000,000 shares, divided into 40,000,000 shares of common stock, par value $0.01 per share, and
5,000,000 shares of preferred stock, par value $0.01 per share.
Of the 5,000,000 shares of preferred stock authorized, the board of directors has previously designated:
•
•
•
•
•
250 shares of preferred stock as Series A Preferred Stock, all previously outstanding shares of which have been previously redeemed or
converted into shares of our Class A common stock and may not be reissued;
300 shares of our preferred stock as Series B Preferred Stock, all previously outstanding shares of which have been previously redeemed or
converted into shares of our Class A common stock and may not be reissued;
500 shares of our preferred stock as Series C Preferred Stock, all previously outstanding shares of which have been previously redeemed or
converted into shares of our Class A common stock and may not be reissued;
100,000 shares of our preferred stock as Series D Preferred Stock, none of which have been issued; however in 1998, our board of directors
declared a dividend distribution as a right to purchase one share of Series D Preferred Stock for each outstanding share of Class A common
stock. The stockholders of Series D Preferred Stock are entitled to one vote for each share held; and
500 shares of our preferred stock as Series F Preferred Stock, all previously outstanding shares of which have been previously redeemed or
converted into shares of our Class A common stock and may not be reissued.
Of the 40,000,000 shares of common stock authorized, the board of directors has previously designated 34,500,000 shares authorized as Class A common. The
stockholders of Class A common stock are entitled to one vote for each share held. The remaining 5,500,000 shares of authorized common stock were
designated Class E-1 common stock, Class E-2 common stock, or Class E-3 common stock, all previously outstanding shares of which have been previously
redeemed or converted into shares of Class A common.
At June 30, 2016, the Company had outstanding warrants to purchase up to 1,080,371 shares of Class A common stock at $1.26 per share at any time through
December 11, 2017 issued in connection with a private placement in fiscal 2012.
During fiscal 2016, the Company received approximately $391,351 in net proceeds from the exercise of warrants. The Company issued 313,081 shares of
Class A common stock in connection with these exercises. The exercise price was $1.26 per share of Class A common stock. During fiscal 2016, warrants to
purchase 101,549 shares of Class A common stock, at an exercise price of $2.48 per share, expired.
F-11
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
7.
Income Taxes
Due to the Company’s previous losses from domestic operations, the Company had no provision for U.S. income taxes during the years ended June 30, 2016
and 2015. All net loss carryforwards for both China locations are now exhausted and a provision for taxes due in China of approximately $199,000 and $2,000
has been recorded for the years ending June 30, 2016 and 2015, respectively. The tax effects of temporary differences that give rise to significant portions of
deferred tax assets and deferred tax liabilities are as follows at June 30:
Deferred tax assets:
Net operating loss and credit carryforwards
Intangible assets
Stock-based compensation
Capital loss and R&D credits
Research development expenses
Inventory
Accrued expenses and other
Gross deferred tax assets
Valuation allowance for deferred tax assets
Total deferred tax assets
Deferred tax liabilities:
Depreciation and other
Total deferred tax liabilities
Net deferred tax liability
2016
2015
$
32,440,000
—
813,000
1,517,000
576,000
177,000
492,000
36,015,000
(35,971,000)
44,000
(44,000)
(44,000)
—
$
33,279,000
6,000
—
1,500,000
657,000
135,000
306,000
35,883,000
(35,789,000)
94,000
(94,000)
(94,000)
—
$
$
The reconciliation of income tax attributable to operations computed at the United States federal statutory tax rates and the actual tax provision of zero results
primarily from the change in the valuation allowance.
In assessing the potential future recognition of deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future
taxable income of approximately $86.2 million prior to the expiration of net operating loss carry-forwards from 2019 through 2035. Based on the level of historical
taxable income, management has provided for a valuation adjustment against the deferred tax assets of $35,971,000 at June 30, 2016, a decrease of
approximately $182,000 over June 30, 2015.
At June 30, 2016, in addition to net operating loss carry forwards, the Company also has research and development credit carry forwards of approximately
$1,500,000, of which $38,505 will expire in fiscal 2019 and the remainder will expiration from 2020 through 2036. A portion of the net operating loss carry
forwards may be subject to certain limitations of the Internal Revenue Code Sections 382 and 383 which would restrict the annual utilization in future periods due
principally to changes in ownership in prior periods.
The Company utilized all net operating loss carry forwards in China during fiscal 2016. We are now accruing income taxes in China. The Company’s Chinese
subsidiaries are governed by the Income Tax Law of the People’s Republic of China concerning the privately run and foreign invested enterprises, which are
generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. No deferred tax
provision has been recorded for China as the effect is deemed de minimis.
F-12
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
8.
Compensatory Equity Incentive Plan and Other Equity Incentives
Share-based payment arrangements — The Plan included several available forms of stock compensation of which incentive stock options, non-qualified stock
options and restricted stock units have been granted to date.
These plans are summarized below:
Equity Compensation Arrangement
Amended and Restated Omnibus Incentive Plan
Employee Stock Purchase Plan
Award Shares
Authorized
3,915,625
400,000
4,315,625
Award Shares
Outstanding
at June 30,
2016
2,131,055
—
2,131,055
Available for
Issuance
at June 30,
2016
1,139,429
390,094
1,529,523
The 2004 Employee Stock Purchase Plan (“ESPP”) permitted employees to purchase common stock through payroll deductions, not to exceed 15% of an
employee’s compensation, at a price not less than 85% of the market value of the stock on specified dates (June 30 and December 31). In no event could any
participant purchase more than $25,000 worth of shares of Class A common stock in any calendar year and an employee could purchase no more than 4,000
shares on any purchase date within an offering period of 12 months and 2,000 shares on any purchase date within an offering period of six months. The ESPP
expired on December 6, 2014, and was replaced by the LightPath Technologies, Inc. Employee Stock Purchase Plan (“2014 ESPP”), which was adopted by the
Company’s Board of Directors on October 30, 2014 and approved by the Company’s stockholders on January 29, 2015. The 2014 ESPP permits employees to
purchase common stock through payroll deductions, which may not exceed 15% of an employee’s compensation, at a price not less than 85% of the market
value of the stock on specified dates (June 30 and December 31). In no event can any participant purchase more than $25,000 worth of shares of Class A
common stock in any calendar year and an employee cannot purchase more than 8,000 shares on any purchase date within an offering period of 12 months and
4,000 shares on any purchase date within an offering period of six months. This discount of $2,303 and $1,356 for fiscal 2016 and 2015, respectively, is included
in the selling, general and administrative expense in the accompanying consolidated statements comprehensive income (loss).
Grant Date Fair Values and Underlying Assumptions; Contractual Terms— The Company estimates the fair value of each stock option as of the date of
grant. The Company uses the Black-Scholes-Merton pricing model. The ESPP or the 2014 ESPP fair value is the market value of the Company’s stock when
issued, as described above.
For stock options and restricted stock units (“RSUs”) granted in the years ended June 30, 2016 and 2015, the Company estimated the fair value of each stock
award as of the date of grant using the following assumptions:
Expected volatility
Weighted average expected volatility
Dividend yields
Risk-free interest rate
Expected term, in years
Year ended
June 30, 2016
68% - 103%
68% - 103%
0%
0.37% - 1.49%
4.29 - 7.50
Year ended
June 30, 2015
103% - 104%
103% - 104%
0%
1.64% - 1.77%
7.49
Most options granted under the Plan vest ratably over two to four years and are generally exercisable for ten years. The assumed forfeiture rates used in
calculating the fair value of options and restricted stock unit grants with both performance and service conditions were 20% for each of the years ended June 30,
2016 and 2015. The volatility rate and expected term are based on seven-year historical trends in Class A common stock closing prices and actual forfeitures.
The interest rate used is the U.S. Treasury interest rate for constant maturities.
Information Regarding Current Share Based Payment Awards— A summary of the activity for share-based payment awards in the years ended June 30,
2016 and 2015 is presented below:
F-13
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
June 30, 2014
Granted
Exercised
Cancelled/Forfeited
June 30, 2015
Granted
Exercised
Cancelled/Forfeited
June 30, 2016
Awards exercisable/vested as of
June 30, 2016
Awards unexercisable/unvested as of
June 30, 2016
Restricted
Stock Units (RSUs)
Stock Options
Weighted
Average
Exercise
Price
(per share)
Weighted
Average
Remaining
Contract
Life (YRS)
$
$
$
$
$
$
$
$
2.25
1.35
—
3.06
2.08
1.49
1.07
3.26
1.90
5.5
9.4
—
2.9
5.3
9.4
3.7
—
5.6
Shares
654,158
103,000
—
(34,675)
722,483
155,592
(6,077)
(52,738)
819,260
Shares
856,300
219,000
—
—
1,075,300
236,495
—
—
1,311,795
637,010
$
2.06
4.8
870,196
182,250
819,260
$
1.35
8.2
441,599
1,311,795
Weighted
Average
Remaining
Contract
Life (YRS)
0.9
2.3
—
—
0.9
2.3
—
—
0.9
—
0.9
The total intrinsic value of share options exercised for years ended June 30, 2016 and 2015 was $9,919 and $0, respectively.
The total intrinsic value of shares options outstanding and exercisable at both June 30, 2016 and 2015 was $148,000 and $86,000, respectively.
The total fair value of shares options vested during the years ended June 30, 2016 and 2015 was $234,000 and $122,000, respectively.
The total intrinsic value of RSUs exercised was $0 during both years ended June 30, 2016 and 2015.
The total intrinsic value of RSUs outstanding and exercisable at June 30, 2016 and 2015 was $1.51 million and $1.18 million, respectively.
The total fair value of RSUs vested during the years ended June 30, 2016 and 2015 was $389,000 and $200,000, respectively.
As of June 30, 2016 there was $494,555 of total unrecognized compensation cost related to non-vested share-based compensation arrangements (including
share options and restricted stock units) granted under the Plan. The cost expected to be recognized as follows:
F-14
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Year ended June 30, 2017
Year ended June 30, 2018
Year ended June 30, 2019
Year ended June 30, 2020
Stock
Options
42,434
28,667
12,929
Restricted
Stock
Share/
Units
237,187
141,580
29,153
$
2,605
86,635
$
—
407,920
$
Total
279,621
170,247
42,082
2,605
494,555
The table above does not include shares under the Company’s 2014 ESPP, which has purchase settlement dates in the second and fourth fiscal quarters. The
Company’s 2014 ESPP is not administered with a look back option provision and, as a result, there is not a population of outstanding option grants during the
employee contribution period.
RSU awards vest immediately or from two to four years from the grant date.
The Company issues new shares of common stock upon the exercise of stock options. The following table is a summary of the number and weighted average
grant date fair values regarding our unexercisable/unvested awards as of June 30, 2016 and 2015 and changes during the two years then ended:
Unexercisable/unvested awards
June 30, 2014
Granted
Vested
Cancelled/Forfeited
June 30, 2015
Granted
Vested
Cancelled/Forfeited
June 30, 2016
Stock
Options
Shares
193,000
103,000
(71,500)
—
224,500
155,592
(197,842)
—
182,250
RSU Shares
Total
Shares
354,303
219,000
(169,433)
—
403,870
236,495
(198,766)
—
441,599
547,303
322,000
(240,933)
—
628,370
392,087
(396,608)
—
623,849
$
$
$
$
$
$
$
Weighted-
Average
Grant Date
Fair Values
(per share)
1.18
1.30
1.28
—
1.10
1.39
1.21
—
1.35
Acceleration of Vesting—The Company does not generally accelerate the vesting of any stock options.
Financial Statement Effects and Presentation—The following table shows total stock-based compensation expense for the years ended June 30, 2016 and
2015 included in the Consolidated Statement of Comprehensive Income (Loss):
F-15
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Stock options
RSU
Total
The amounts above were included in:
Selling, general & administrative
Cost of sales
New product development
9.
Earnings Per Share
Year ended
June 30, 2016
Year ended
June 30, 2015
$
$
$
$
49,293 $
299,442
348,735 $
347,206 $
316
1,213
348,735 $
53,584
231,367
284,951
283,962
158
831
284,951
Basic earnings per share is computed by dividing net income by the weighted-average number of shares of Class A common stock outstanding, during each
period presented. Diluted earnings per share is computed similarly to basic earnings per share except that it reflects the potential dilution that could occur if
dilutive securities or other obligations to issue shares of Class A common stock were exercised or converted into shares of Class A common stock. The
computations for basic and diluted earnings per share are described in the following table:
Net income (loss)
Weighted average common shares outstanding:
Basic
Effect of dilutive securities:
Options to purchase common stock
Restricted stock units
Common stock warrants
Diluted
Earnings (Loss) per common share:
Basic
Diluted
Excluded from computation:
Options to purchase common stock
Restricted stock units
Common stock warrants
Year ended
June 30,
2016
2015
$
1,414,615 $
(715,280)
15,401,893
14,711,586
71,859
944,274
457,357
16,875,383
—
—
—
14,711,586
$
$
0.09 $
0.08 $
(0.05)
(0.05)
718,684
289,982
848,927
1,857,593
703,721
1,002,700
1,916,671
3,623,092
F-16
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
10.
Defined Contribution Plan
The Company discontinued its profit sharing plan that permitted participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal
Revenue Code of 1986, as amended, in January 2009. Effective January 1, 2009, the Company transferred all plan assets to the ADP Total Source 401(k) plan.
The ADP plan is a defined 401(k) contribution plan which all employees, over the age of 21, are eligible to participate in after three months of employment. The
Company matched 25% of the first 6% of employee contributions until February 27, 2009, when the match was eliminated. Currently, there are 24 employees
who are enrolled in this program. The 401(k) contribution plan is administered by a third party. Annual discretionary contributions, if any, are made by the
Company to match a portion of the funds employees contribute. The Company made no matching contributions during the years ended June 30, 2016 and 2015.
11.
Lease Commitments
The Company has operating leases for office space. At June 30, 2015, the Company has a lease agreement for its manufacturing and office facility in Orlando,
Florida (the “Orlando Lease”). The Orlando Lease, which is for a seven-year original term with renewal options, expires April 2022 and expanded our space to
25,847 square feet, including space added in July 2014. Minimum rental rates for the extension term were established based on annual increases of two and one
half percent starting in the third year of the extension period. Additionally, there are two 3-year extension options exercisable by the Company. The minimum
rental rates for such additional extension options will be determined at the time an option is exercised and will be based on a “fair market rental rate” as
determined in accordance with the sixth lease amendment.
The Company received $420,014 in a leasehold improvement allowance in fiscal 2015. This amount is included in the property and equipment and deferred rent
on the consolidated balance sheets. Amortization of leasehold improvements was $60,720 as of June 30, 2016.
As of June 30, 2016, the Company, through its wholly-owned subsidiary, LPOI, has a lease agreement for an office facility in Shanghai, China (the “China
Lease”). The China Lease expires October 2017.
As of June 30, 2016, the Company, through its wholly-owned subsidiary, LPOIZ, has a lease agreement for a manufacturing and office facility in Zhenjiang,
China (the “Zhenjiang Lease”). The Zhenjiang Lease, which is for a five-year original term with renewal options, expires March 2019.
During fiscal 2014 and 2015, the Company entered into four capital lease agreements, with three to five year terms, for computer and manufacturing equipment,
which are included as part of Property and Equipment. Assets under capital lease include approximately $547,000 in computer equipment and software and
manufacturing equipment, with accumulated amortization of approximately $202,000 as of June 30, 2016. Amortization related to capital leases is included in
depreciation expense.
Rent expense totaled $529,341 and $581,679 during the years ended June 30, 2016 and 2015, respectively.
The approximate future minimum lease payments under capital and operating leases at June 30, 2016 were as follows:
F-17
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Fiscal year ending June 30,
2017
2018
2019
2020
2021
2022 and beyond
Total minimum payments
Less imputed interest
Present value of minimum lease payments included in capital lease obligations
Less current portion
Non-current portion
12.
Contingencies
Capital Leases
Operating Lease
378,000
376,000
370,000
357,000
365,000
311,000
2,157,000
$
$
$
$
169,322
167,335
39,000
6,825
—
—
382,482
(37,109)
345,373
166,454
178,919
The Company from time to time is involved in various legal actions arising in the normal course of business. Management, after reviewing with legal counsel all
of these actions and proceedings, believes that the aggregate losses, if any, will not have a material adverse effect on the Company’s financial position or results
of operations.
13.
Foreign Operations
Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the balance sheet date, and revenues and expenses
are translated at average rates of exchange for the period. Gains or losses on the translation of the financial statements of a non-U.S. operation, where the
functional currency is other than the U.S. dollar, are reflected as a separate component of equity, which was a gain of $126,108 and $50,680 at June 30, 2016
and 2015, respectively. The Company as of June 30, 2016 had approximately $11,311,000 in assets and $9,942,000 in net assets located in China. The
Company as of June 30, 2015 had approximately $8,862,000 in assets and $7,305,000 in net assets located in China.
14.
Significant Suppliers and Customers
We utilize a number of glass compositions for the manufacture of our molded glass aspheres and lens array products. We purchase glass from Hikari, Ohara,
CDGM and other suppliers.
Base optical materials, used in both GRADIUM and collimator products, are manufactured and supplied by a number of major optical and glass manufacturers.
Optical fiber and collimator housings are manufactured and supplied by a number of major manufacturers.
In fiscal 2016, sales to three customers comprised an aggregate of approximately 25% of our annual sales. The loss of any of these customers, or a significant
reduction in sales to any such customer, would adversely affect our revenues.
In fiscal 2015, sales to three customers comprised an aggregate of approximately 27% of our annual sales. The loss of any of these customers, or a significant
reduction in sales to any such customer, would adversely affect our revenues.
F-18
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
15.
Derivative Financial Instruments (Warrant Liability)
On June 11, 2012, we executed a Securities Purchase Agreement with respect to a private placement of an aggregate of 1,943,852 shares of our Class A
common stock at $1.02 per share and warrants to purchase up to 1,457,892 shares of our Class A common stock at an initial exercise price of $1.32 per share,
which was subsequently reduced to $1.26 (the “June 2012 Warrants”). The June 2012 Warrants are exercisable for a period of five years beginning on
December 11, 2012. The Company accounted for the June 2012 Warrants issued to investors in accordance with ASC 815-10. ASC 815-10 provides guidance
for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. This applies to any freestanding financial
instrument or embedded feature that has all the characteristics of a derivative under ASC 815-10, including any freestanding financial instrument that is
potentially settled in an entity’s own stock.
Due to certain adjustments that may be made to the exercise price of the June 2012 Warrants if the Company issues or sell shares of its Class A common stock
at a price that is less than the then-current warrant exercise price, the June 2012 Warrants have been classified as a liability, as opposed to equity, in accordance
with ASC 815-10 as it was determined that the June 2012 Warrants were not indexed to the Company’s Class A common stock.
The fair value of the outstanding June 2012 Warrants was re-measured on June 30, 2016 to reflect their fair market value at the end of the current reporting
period. The June 2012 Warrants will be re-measured at each subsequent financial reporting period until the warrants are either fully exercised or expire. The
change in fair value of the June 2012 Warrants is recorded in the statement of operations and comprehensive loss and is estimated using the Lattice option-
pricing model using the following assumptions:
Inputs into Lattice model for warrants:
Equivalent volatility
Equivalent interest rate
Floor
Greater of estimated stock price or floor
Probability price < strike price
Fair value of call
Probability of fundamental transaction occuring
June 30, 2016
75.50%
0.50%
1.1500
1.1500
55.90%
0.7900
5%
$
$
$
All warrants issued by the Company other than the above noted June 2012 Warrants are classified as equity.
The warrant liabilities are considered a recurring Level 3 fair value measurement, with a fair value of approximately $717,000 at June 30, 2016.
The following table summarizes the activity of Level 3 financial instruments measured on a recurring basis for the year ended June 30, 2016:
Fair value, June 30, 2015
Exercise of common stock warrants
Change in fair value of warrant liability
Fair value, June 30, 2016
16.
Loan Payable
Warrant Liability
1,195,470
(530,531)
52,454
717,393
$
$
On September 30, 2013, we entered into a Loan and Security Agreement (the “LSA”) with AvidBank Corporate Finance, a division of AvidBank (“AvidBank”).
Pursuant to the LSA, AvidBank agreed to lend us under a revolving credit facility (the “Revolving Line”) an aggregate principal outstanding amount not to exceed
the lesser of (i) One Million Dollars ($1,000,000) or (ii) an amount equal to eighty percent (80%) of eligible accounts, as determined by AvidBank in accordance
with the LSA. We could have borrowed amounts under the Revolving Line at any time prior to December 30, 2014, at which time all outstanding amounts would
have been immediately due and payable.
Pursuant to the LSA, AvidBank also agreed to make equipment advances to us, each in a minimum amount of $100,000, and in an aggregate principal amount
not to exceed One Million Dollars ($1,000,000). Equipment advances during any particular three-month draw period were due and repayable in thirty-six (36)
equal monthly payments. All amounts due under outstanding equipment advances made during any particular draw period were due on the tenth (10th) day
following the end of such draw period, and in any event, no later than September 30, 2017.
F-19
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
On December 23, 2014, we entered into an Amended and Restated Loan and Security Agreement (the “Amended LSA”) with AvidBank for an invoice-based
working capital revolving line of credit (the “Invoiced Based Line”). The Amended LSA amended and restated the LSA. Pursuant to the Amended LSA, AvidBank
will, in its discretion, make loan advances to us up to a maximum aggregate principal amount outstanding not to exceed the lesser of (i) One Million Dollars
($1,000,000) or (ii) eighty percent (80%) (the “Maximum Advance Rate”) of the aggregate balance of our eligible accounts receivable, as determined by
AvidBank in accordance with the Amended LSA. On December 23, 2015, we executed the First Amendment to the Amended LSA to extend the term of the
Amended LSA to December 23, 2016.
Avid Bank may, in its discretion, elect to not make a requested advance, determine that certain accounts are not eligible accounts, change the Maximum
Advance Rate or apply a lower advance rate to particular accounts and terminate the Amended LSA. As of June 30, 2016 and 2015, the principal outstanding on
the Invoiced Based Line was $0 and $51,585, respectively.
Amounts borrowed under the Invoiced Based Line may be repaid and re-borrowed at any time prior to December 23, 2016, at which time all amounts shall be
immediately due and payable. The advances under the Invoiced Based Line bear interest, on the outstanding daily balance, at a per annum rate equal to three
percent (3%) above the Prime Rate (6.50% at June 30, 2016). Interest payments are due and payable on the last business day of each month. Payments
received with respect to accounts upon which advances are made will be applied to the amounts outstanding under the Amended LSA.
Our obligations under the Amended LSA are secured by a first priority security interest (subject to permitted liens) in cash, U.S. inventory and accounts
receivable. In addition, our wholly-owned subsidiary, Geltech, has guaranteed our obligations under the Amended LSA.
The Amended LSA contains customary covenants, including, but not limited to: (i) limitations on the disposition of property; (ii) limitations on changing our
business or permitting a change in control; (iii) limitations on additional indebtedness or encumbrances; (iv) restrictions on distributions; and (v) limitations on
certain investments.
Late payments are subject to a late fee equal to the lesser of five percent (5%) of the unpaid amount or the maximum amount permitted to be charged under
applicable law. Amounts outstanding during an event of default accrue interest at a rate of five percent (5%) above the interest rate applicable immediately prior
to the occurrence of the event of default. The Amended LSA contains other customary provisions with respect to events of default, expense reimbursement, and
confidentiality.
17.
Pudong Private Placement
On January 20, 2015, we issued and sold securities to Pudong Science & Technology Investment (Cayman) Co. Ltd. (“Pudong Investment”) in accordance with
that certain Securities Purchase Agreement with Pudong Science & Technology (Cayman) Co., Ltd. (“Pudong”). Prior to the closing, the Securities Purchase
Agreement was amended (as amended, the “SPA”) and assigned by Pudong to its affiliate, Pudong Investment.
In connection with the closing, we sold to Pudong Investment 930,790 shares of Class A common stock at a price of $1.40 per share, which was adjusted from
the initial per share purchase price of $1.62 pursuant to the terms of the SPA. We received gross cash proceeds from the issuance of the Class A common
stock in the amount of approximately $1,303,000 and incurred costs of $180,946. We used the sale proceeds of the sale to provide working capital in support of
its continued growth, particularly new product development, sales and marketing of its infrared product line, and capital expenditures related to the acquisition of
new equipment.
Immediately following the issuance of the shares of Class A common stock pursuant to the SPA, Pudong Investment beneficially owned 14.9% of our
outstanding shares of Class A common stock.
The shares of Class A common stock issued were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”). The shares
of Class A common stock are restricted securities that have not been registered under the Act and may not be offered or sold absent registration or applicable
exemption from the registration requirements.
18.
Technology Transfer and License Agreement
On April 28, 2015, we entered into a Technology Transfer and License Agreement (“License Agreement”) with one of our specialty products customers (the
“Customer”) regarding the granting of an irrevocable license of certain technology, to be used by the Customer to manufacture specific fiber collimator
assemblies used by the Customer. As we no longer intend to produce such assemblies in the future for the Customer, we have agreed to provide to the
Customer process work instructions, training, inventory and access to intellectual property specifically related to the manufacturing process of that Customer’s
fiber collimator assemblies. Pursuant to the License Agreement, the Customer paid to us an aggregate of $200,000 in fees, in consideration of our disclosure of
the technology and the granting of a license to the Customer to use the technology to manufacture such fiber collimator assemblies. The first installment of
$100,000 was received in May 2015 and the second installment of $100,000 was received in August 2015. Pursuant to the License Agreement, the Customer
also agreed to order and purchase from us a certain number of fiber collimator assemblies during the transition process. Costs associated with the License
Agreement were approximately $33,000. The license fees and sales generated as a result of the License Agreement have been recognized as revenue over the
duration of the training period. Revenue of approximately $76,000, which includes the amortization of the license fee, was included in sales on the
accompanying consolidated statement of comprehensive income (loss) for the year ended June 30, 2016. The License Agreement has been fully recognized as
revenue.
F-20
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
19.
Subsequent Events – ISP Optics Corporation Acquisition
On August 3, 2016, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with ISP Optics Corporation (“ISP”) and Joseph
Menaker and Mark Lifshotz (the “ISP Stockholders”), pursuant to which the Company will acquire (the “Acquisition”) all of the outstanding common stock of ISP
(the “Purchased Shares”) from the ISP Stockholders. Following the closing of the Acquisition, ISP will become a wholly-owned subsidiary of the Company.
The Company will acquire the Purchased Shares for $18,000,000 (the “Purchase Price”), to be paid in a combination of cash (the “Cash Amount”) and a
promissory note (the “Note”). The Cash Amount, subject to a net working capital adjustment, debt adjustment, and cash adjustment as provided in the Stock
Purchase Agreement, will not be less than $12,000,000. The aggregate original principal amount of the Note will equal the Purchase Price less the Cash
Amount, as adjusted pursuant to the Stock Purchase Agreement, but in no event less than $3,000,000.
During the period commencing on the date that the Note is issued (the “Issue Date”) and continuing until the fifteen month anniversary of the Issue Date (the
“Initial Period”), interest will accrue on only the unpaid principal amount of the Note in excess of $2,700,000 at an interest rate equal to ten percent (10%) per
annum. After the Initial Period, interest will accrue on the entire unpaid principal amount of the Note from time to time outstanding, at an interest rate equal to ten
percent (10%) per annum. Interest is payable semi-annually in arrears. The term of the Note is five years, and any unpaid interest and principal, together with
any other amounts payable under the Note, is due and payable on the maturity date. The Company may prepay the Note in whole or in part without penalty or
premium. If the Company does not pay any amount payable when due, whether at the maturity date, by acceleration, or otherwise, such overdue amount will
bear interest at a rate equal to twelve percent (12%) per annum from the date of such non-payment until the Company pays such amount in full.
In addition, upon the occurrence of a payment default, or any other “event of default,” such as a bankruptcy event or a change of control of the Company, the
entire unpaid and outstanding principal balance of the Note, together with all accrued and unpaid interest and any and all other amounts payable under the Note,
will immediately be due and payable.
Completion of the Acquisition is subject to the satisfaction or waiver of certain conditions. In addition to customary closing conditions, our obligation to complete
the Acquisition is conditioned on receipt by us of financing we need to purchase the Purchased Shares and obtaining the requisite approval of our stockholders
related to the financing and the Acquisition, as applicable, as required by applicable NASDAQ rules and other applicable law.
The closing of the Acquisition will occur on a date and time mutually agreed upon by the ISP Stockholders and us, no later than five (5) business days following
the satisfaction or waiver of the closing conditions. Currently, we anticipate the Acquisition closing in the fourth quarter of calendar year 2016; however, there
can be no assurance that the Acquisition will close in the fourth quarter of calendar year 2016, or at all.
End of Consolidated Financial Statements
F-21
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SIGNATURES
Date: September 15, 2016
LIGHTPATH TECHNOLOGIES, INC.
By:
/s/ J. JAMES GAYNOR
J. James Gaynor
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ J. J AMES GAYNOR
J. James Gaynor,
President & Chief Executive Officer (Principal
Executive Officer)
September 15, 2016
/s/ DOROTHY M. CIPOLLA
Dorothy M. Cipolla,
Chief Financial Officer
(Principal Financial Officer)
/s/ ROBERT RIPP
Robert Ripp
Director (Chairman of the Board)
/s/ DR. STEVEN R. J. BRUECK
Dr. Steven R. J. Brueck
Director
/s/ M. S COTT FARIS
M. Scott Faris
Director
/s/ CRAIG DUNHAM
Craig Dunham
Director
/s/ S OHAIL KHAN
Sohail Khan
Director
/s/ L OUIS L EEBURG
Louis Leeburg
Director
September 15, 2016
September 15, 2016
September 15, 2016
September 15, 2016
S-1
September 15, 2016
September 15, 2016
September 15, 2016
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LightPath Technologies, Inc. 10-K
Exhibit 10.8
STOCK PURCHASE AGREEMENT
by and among
ISP OPTICS CORPORATION,
THE STOCKHOLDERS OF ISP OPTICS CORPORATION
SET FORTH ON THE STOCKHOLDER SIGNATURE PAGE HERETO,
AND
LIGHTPATH TECHNOLOGIES, INC.
Dated August 3, 2016
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Page
1
1
1
1
2
2
5
6
7
7
8
8
9
9
9
9
9
10
10
11
11
11
11
11
12
12
12
12
13
13
14
16
16
16
17
18
19
20
21
TABLE OF CONTENTS
ARTICLE I THE CLOSING; PURCHASE AND SALE OF STOCK
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
1.11
Purchase of Purchased Shares
Consideration
Closing
Payment of the Purchase Price
Net Working Capital Adjustment
Cash Adjustment
Debt Adjustment
Limitation on Adjustments
Seller Closing Documents
Buyer Closing Documents
Further Actions to be Taken at Closing
ARTICLE II REPRESENTATIONS AND WARRANTIES REGARDING BUYER
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
Organization; Corporate Power and Authorization
Binding Effect and Noncontravention
Broker Fees
No Litigation
Investment
Acknowledgement by Buyer
SEC Documents
Solvency
ARTICLE III REPRESENTATIONS AND WARRANTIES REGARDING THE SELLERS
3.1
3.2
3.3
Power and Authorization
Binding Effect and Noncontravention
Capital Stock
ARTICLE IV REPRESENTATIONS AND WARRANTIES REGARDING THE ACQUIRED COMPANIES
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
Organization; Qualification; Corporate Power and Authorization
Capitalization; Subsidiary
Binding Effect and Noncontravention
Financial Statements
Events Subsequent to the Latest Balance Sheet
Undisclosed Liabilities; Indebtedness
Title to and Sufficiency of Assets
Compliance with Laws
Tax Matters
Environmental Matters
Intellectual Property
Real Estate; Tangible Assets
Litigation
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
21
22
23
24
24
25
25
26
26
26
27
27
27
27
29
30
30
30
32
32
32
33
33
34
34
35
35
36
36
38
38
42
42
42
42
43
44
44
45
45
45
45
46
47
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
Employee and Labor Relations
Employee Plans
Government Contracts
Export Control Matters; Trade Regulations
Affiliate Transactions
Insurance
Contracts
Broker Fees
Inventory
Product Warranties
Accounts Receivable
Disclaimer of the Acquired Companies
Article V COVENANTS AND OTHER AGREEMENTS
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5.11
5.12
5.13
5.14
5.15
5.16
5.17
5.18
5.19
Conduct of Business
No Solicitation
Access
Notification of Certain Matters
Efforts; Regulatory Approvals
Financial Statements
Transition
Noncompetition and Nonsolicitation
Release
Financing Matters
Disclosure Schedule Updates
Public Announcements; Confidentiality
Litigation Support
Employee Matters
Record Retention
Indemnification of Directors and Officers; Insurance
Acknowledgement of Personal Property
Tax Matters
Further Assurances
Article VI CONDITIONS TO CLOSING; TERMINATION
6.1
6.2
6.3
6.4
6.5
6.6
6.7
Conditions to Each Party’s Obligations
Conditions to Obligation of the Sellers
Conditions to Obligation of Buyer
Frustration of Closing Conditions
Termination
Effect of Termination
Notice of Termination
Article VII INDEMNIFICATIONS; SURVIVAL
7.1
7.2
7.3
Indemnification by Sellers
Indemnification by Buyer
Losses Net of Insurance, Etc.
ii
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
49
49
50
51
51
60
60
60
60
61
61
61
61
63
63
63
63
63
64
64
64
64
64
7.4
7.5
7.6
7.7
Termination of Indemnification
Procedures Relating to Indemnification
Survival of Representations and Warranties
Tax Treatment of Indemnification Payments
Article VIII DEFINITIONS
Article IX MISCELLANEOUS
9.1
9.2
9.3
9.4
9.5
9.6
9.7
9.8
9.9
9.10
9.11
9.12
9.13
9.14
9.15
9.16
9.17
Expenses
Governing Law
Jurisdiction; Service of Process
Waiver of Jury Trial
Attorneys’ Fees
Waiver; Remedies Cumulative
Notices
Assignment
No Third-Party Beneficiaries
Amendments
Disclosure Schedules
Non-Recourse
Construction
Entire Agreement
Severability
Mutual Drafting
Counterparts; Facsimile
EXHIBITS
Exhibit A
Form of Buyer Note
SCHEDULES
Schedule 1.4(b)
Schedule 1.5(a)
Schedule 1.9(h)
Schedule 5.17
Schedule 8
Buyer Disclosure Schedule
Seller Disclosure Schedule
Company Disclosure Schedule
Seller Payments
Net Working Capital Methodology
Required Approvals and Consents
List of Seller Personal Property
Permitted Liens
iii
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (the “Agreement”) is made as of August 3, 2016, by and among LIGHTPATH TECHNOLOGIES, INC., a
Delaware corporation (“Buyer”), ISP OPTICS CORPORATION, a New York corporation (the “ Company”), and the stockholders of the Company listed on the
Sellers signature page attached hereto (each a “Seller” and collectively the “Sellers”). Buyer, the Company and the Sellers are sometimes referred to individually
as a “Party” and collectively as the “ Parties.” Certain capitalized terms that are used herein are defined in ARTICLE VIII below.
WHEREAS, as of the date hereof, the Sellers collectively own 100% of the issued and outstanding shares of the Common Stock (as defined below) of
the Company; and
WHEREAS, the Parties desire that, subject to the terms and conditions of this Agreement, in exchange for the consideration set forth herein, Buyer shall
purchase from the Sellers 100% of the issued and outstanding shares of the Common Stock (the “Purchased Shares”).
NOW, THEREFORE, in consideration of the premises and the mutual promises made herein, and in consideration of the representations, warranties,
covenants and agreements herein contained, intending to be legally bound, the Parties hereby agree as follows:
ARTICLE I
THE CLOSING; PURCHASE AND SALE OF STOCK
1.1
Purchase of Purchased Shares. At the Closing, subject to the terms and conditions of this Agreement, Buyer shall purchase and accept from the
Sellers and the Sellers shall sell, transfer and deliver to Buyer, the Purchased Shares, in exchange for the Purchase Price as provided in Section 1.2 and
Section 1.4.
1.2
Consideration. The aggregate consideration for the Purchased Shares pursuant to the Transactions (the “ Purchase Price”) shall be the sum of
Eighteen Million Dollars ($18,000,000) to be paid in a combination of cash and a Buyer Note (as defined below), as follows:
(a)
A cash payment to the Sellers in an amount of not less than Twelve Million Dollars ($12,000,000) (the “ Cash Amount”), as adjusted
pursuant to Section 1.4 through Section 1.7 (the “Closing Payment”), to be paid by Buyer as described in Section 1.4; and
(b)
An issuance to the Sellers of a promissory note in the aggregate principal amount equal to the Purchase Price less the Cash Amount,
but in no event less than Three Million Dollars ($3,000,000), and in the form attached hereto as Exhibit A (the “Buyer Note”).
1.3
Closing. The closing of the Transactions (collectively, the “Closing”) shall take place at the offices of Blank Rome LLP, The Chrysler Building,
405 Lexington Avenue, New York, NY 10174 (or at such other location as the Parties may agree or via the electronic exchange of execution versions of this
Agreement and the Transaction Documents and the signature pages thereto via email by .pdf) on a date and time to be mutually agreed upon by Buyer and the
Sellers, not later than five (5) Business Days following the satisfaction (or written waiver) of the conditions set forth in ARTICLE VI, or at such other date or time
as the Parties may agree in writing. The date and time of the closing are referred to as the “Closing Date.”
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
1.4
Payment of the Purchase Price. At the Closing:
(a)
Buyer shall pay, or cause to be paid, on behalf of the Sellers and the Acquired Companies, the Closing Costs and the Estimated Closing
Debt by wire transfer of immediately available funds as directed by the Acquired Companies or such third parties at or prior to the Closing;
(b)
Buyer shall pay the Closing Payment, (i) less the total dollar amount of the payments described in Section 1.4(a), and (ii) plus or minus
(without duplication of the amounts contemplated by the immediately preceding clause (i)) the adjustments contemplated in Sections 1.5 through 1.7, to the
respective Sellers, in accordance with their Pro Rata Shares and in such amounts set forth next to each Seller’s name on Schedule 1.4(b) attached hereto, by
wire transfer of immediately available funds pursuant to written instructions delivered to Buyer prior to the Closing; and
(c)
Buyer shall issue to the Sellers the Buyer Note, dated as of the Closing Date.
1.5
Net Working Capital Adjustment . The Closing Payment shall be adjusted (such adjustment may be positive or negative), if at all, on a dollar-for-
dollar basis to the extent that the Net Working Capital is greater than or less than the Target Net Working Capital as set forth below:
(a)
Within ten (10) Business Days prior to the Closing, but in no event less than three (3) Business Days prior to the Closing, the Sellers
shall (or shall cause the Acquired Companies’ accountants to) prepare and deliver to Buyer a certificate that contains a good faith and reasonable best estimate
of the Net Working Capital as of 11:59 p.m. Eastern Standard Time (“EST”) on the Closing Date (the “Estimated Net Working Capital ”), which Estimated Net
Working Capital shall be prepared in accordance with GAAP using the same accounting methods, standards, policies, practices, classifications, estimation
methodologies, assumptions and procedures as were used to prepare the Financial Statements and as set forth on Schedule 1.5(a). If the Estimated Net
Working Capital exceeds the Target Net Working Capital Ceiling, then the Closing Payment payable to the Sellers at the Closing pursuant to Section 1.2 and
Section 1.4 shall be increased by an amount equal to the amount by which the Estimated Net Working Capital exceeds the Target Net Working Capital Ceiling. If
the Estimated Net Working Capital is less than the Target Net Working Capital Floor, then the Closing Payment payable to the Sellers at the Closing pursuant to
Section 1.2 and Section 1.4 shall be reduced by an amount equal to the amount by which the Target Net Working Capital Floor exceeds the Estimated Net
Working Capital. If the Estimated Net Working Capital is equal to or greater than the Target Net Working Capital Floor and equal to or less than the Target Net
Working Capital Ceiling, then no adjustments shall be made pursuant to this Section 1.5(a).
2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(b)
Buyer shall prepare and deliver to the Sellers within ninety (90) days after the Closing Date an unaudited consolidated balance sheet of
the Acquired Companies as of 11:59 p.m. EST on the Closing Date (as adjusted, if at all, pursuant to Section 1.5(c) and Section 1.5(d), the “Closing Balance
Sheet”), which shall also set forth a calculation of Net Working Capital determined from the Closing Balance Sheet (the “ Net Working Capital Calculation ”) and
the amount, if any, by which the Net Working Capital so determined is less than or greater than the Estimated Net Working Capital (the “Adjustment
Calculation”). The Closing Balance Sheet, the Net Working Capital Calculation and the Adjustment Calculation shall be prepared in accordance with GAAP using
the same accounting methods, standards, policies, practices, classifications, estimation methodologies, assumptions and procedures as were used by the
Acquired Companies to prepare the Financial Statements and as set forth on Schedule 1.5(a).
(c)
On or prior to the twenty-fifth (25th) day following Buyer’s delivery of the Closing Balance Sheet, the Net Working Capital Calculation and
the Adjustment Calculation, the Sellers may give Buyer a written notice stating in reasonable detail the Sellers’ objections (an “Objection Notice”) to the Closing
Balance Sheet or the determination of the Net Working Capital Calculation or the Adjustment Calculation. Any Objection Notice shall specify in reasonable detail
the dollar amount of any objection and the reasonable basis therefore. Any determination set forth on the Closing Balance Sheet, the Net Working Capital
Calculation or the Adjustment Calculation that is not specifically objected to in the Objection Notice shall be deemed acceptable and shall be final and binding
upon the Parties upon delivery of the Objection Notice. If the Sellers do not give Buyer an Objection Notice within such twenty-five (25) day period, then the
Closing Balance Sheet, the Net Working Capital Calculation and the Adjustment Calculation will be conclusive and binding upon the Parties and the Net Working
Capital Calculation and the Adjustment Calculation set forth with the Closing Balance Sheet will constitute the Net Working Capital Calculation and the
Adjustment Calculation for purposes of Section 1.5(b) above.
(d)
Following Buyer’s receipt of any Objection Notice, Sellers and Buyer shall attempt to negotiate in good faith to resolve such dispute. In
the event that Sellers and Buyer fail to agree on any of the Sellers’ proposed adjustments set forth in the Objection Notice within thirty (30) days after Buyer
receives the Objection Notice, Sellers and Buyer agree that a mutually acceptable Neutral Accounting Firm (the “Accounting Arbitrator”) shall, within the thirty
(30) day period immediately following such failure to agree, make the final determination of the Net Working Capital in accordance with the terms of this
Agreement; provided that (i) if the Parties are unable to agree on a Neutral Accounting Firm to act as Accounting Arbitrator, Buyer and the Sellers shall each
select a Neutral Accounting Firm and such firms together shall select the Neutral Accounting Firm to act as the Accounting Arbitrator and (ii) if any Party does not
select a Neutral Accounting Firm within ten (10) days of written demand therefor by the other Party, the Neutral Accounting Firm selected by the other Party shall
act as the Accounting Arbitrator. Buyer and the Sellers each shall provide the Accounting Arbitrator with their respective determinations of the Net Working
Capital Calculation. The Accounting Arbitrator’s determination of the Net Working Capital Calculation in accordance with this Section 1.5 shall be final and
binding on the Sellers and Buyer if such independent determination shall be within the range proposed by Buyer and the Sellers in the Net Working Capital
Calculation and the Objection Notice; provided that if the Accounting Arbitrator’s determination of the Net Working Capital is outside of the range proposed by
Sellers and Buyer in the Net Working Capital Calculation and the Objection Notice, then the Net Working Capital Calculation that was closer to that of the
Accounting Arbitrator shall be final and binding on the Sellers and Buyer. The scope of the disputes to be resolved by the Accounting Arbitrator shall be limited to
those items or amounts in the Closing Balance Sheet, the Net Working Capital Calculation or the Adjustment Calculation to which the Sellers objected in the
Objection Notice and whether the Closing Balance Sheet or such calculation(s) were done in accordance with GAAP using the accounting methods, standards,
policies, practices, classifications, estimation methodologies, assumptions, procedures or level of prudence used by the Acquired Companies to prepare the
Financial Statements, and whether there were mathematical errors in the calculation of the Net Working Capital Calculation, and the Accounting Arbitrator is not
to make any other determination. The Accounting Arbitrator shall make its determination based solely on presentations and supporting material provided by the
Parties and not pursuant to any independent review. The fees, costs and expenses of the Accounting Arbitrator shall be paid by the Party whose Net Working
Capital Calculation was different by the greater amount from that of the final determination of the Accounting Arbitrator.
3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(e)
Subject to Section 1.8, if there was no adjustment to the Closing Payment pursuant to Section 1.5(a), and, following the final
determination of the Net Working Capital Calculation pursuant to this Section 1.5:
(i) the Target Net Working Capital Floor exceeds the Net Working Capital Calculation, then Buyer shall receive from the Sellers, by wire
transfer of immediately available funds an amount equal to the amount by which the Target Net Working Capital Floor exceeds the Net Working
Capital Calculation;
(ii) the Net Working Capital Calculation exceeds the Target Net Working Capital Ceiling, then Buyer shall pay to the Sellers (based on
each Seller’s Pro Rata Share) by wire transfer of immediately available funds an amount equal to the amount by which the Net Working Capital
Calculation exceeds the Target Net Working Capital Ceiling; and
(iii) the Net Working Capital Calculation is equal to or less than the Target Net Working Capital Ceiling and equal to or greater than the
Target Net Working Capital Floor, there shall be no adjustment owing pursuant to this Section 1.5(e).
(f)
Subject to Section 1.8, if there was an adjustment that increased the Closing Payment pursuant to Section 1.5(a), and, following the
final determination of the Net Working Capital Calculation pursuant to this Section 1.5:
(i) the Estimated Net Working Capital exceeds the Net Working Capital Calculation, then Buyer shall receive from the Sellers, by wire
transfer of immediately available funds an amount equal to (A) the amount by which the Estimated Net Working Capital exceeds the greater of
(1) the Net Working Capital Calculation or (2) the Target Net Working Capital Ceiling, plus (B) the amount, if any, by which the Target Net
Working Capital Floor exceeds the Net Working Capital Calculation;
4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(ii) the Net Working Capital Calculation exceeds the Estimated Net Working Capital, then Buyer shall pay to the Sellers (based on each
Seller’s Pro Rata Share) by wire transfer of immediately available funds an amount equal to the amount by which the Net Working Capital
Calculation exceeds the Estimated Net Working Capital; and
(iii) the Net Working Capital Calculation is equal to the Estimated Net Working Capital, there shall be no adjustment owing pursuant to
this Section 1.5(f).
(g)
Subject to Section 1.8, if there was an adjustment that decreased the Closing Payment pursuant to Section 1.5(a), and, following the
final determination of the Net Working Capital Calculation pursuant to this Section 1.5:
(i) the Estimated Net Working Capital exceeds the Net Working Capital Calculation, then Buyer shall receive from the Sellers, by wire
transfer of immediately available funds an amount equal to the amount by which the Estimated Net Working Capital exceeds the Net Working
Capital Calculation;
(ii) the Net Working Capital Calculation exceeds the Estimated Net Working Capital, then Buyer shall pay to the Sellers (based on each
Seller’s Pro Rata Share) by wire transfer of immediately available funds an amount equal to (A) the amount by which the lesser of (1) the Net
Working Capital Calculation or (2) the Target Net Working Capital Floor, exceeds the Estimated Net Working Capital, plus (B) the amount, if
any, by which the Net Working Capital Calculation exceeds the Target Net Working Capital Ceiling; and
(iii) the Net Working Capital Calculation is equal to the Estimated Net Working Capital, there shall be no adjustment owing pursuant to
this Section 1.5(g).
(h)
Any amount owing pursuant to Section 1.5(e), Section 1.5(f) or Section 1.5(g) shall include interest on the amount owing at the Prime
Rate (as of the Closing Date) compounded daily from the Closing Date to and including the date of payment.
(i)
Any adjustment amount due under this Section 1.5 shall be paid pursuant to Section 1.8. The Parties shall treat any payments made
pursuant to this Section 1.5 as an adjustment to the Closing Payment and the Purchase Price for all purposes.
1.6
Cash Adjustment. The Closing Payment shall be adjusted upward on a dollar-for-dollar basis by the amount of any Cash held by the Acquired
Companies as of the Closing Date as set forth below:
(a)
Within three (3) Business Days prior to the Closing, the Sellers shall prepare and deliver to Buyer a certificate that contains a good faith
and reasonable best estimate of the Cash of the Acquired Companies as of the close of business on the Closing Date (collectively, the “Estimated Closing Date
Cash”), which Estimated Closing Date Cash shall be prepared using the same methodologies provided for in Section 1.5(a). The Closing Payment payable to the
Sellers at the Closing pursuant to Section 1.4 shall be increased by an amount equal to the Estimated Closing Date Cash.
5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(b)
The Estimated Closing Date Cash shall be reconciled after the Closing Date using the same methodologies provided for in Section
1.5(b) to determine the actual Cash as of the Business Day before the Closing Date (the “ Closing Date Cash Calculation”).
(c)
Calculation.
The mechanisms for dispute resolution provided for in Section 1.5 shall also govern any dispute as to the Closing Date Cash
(d)
Subject to Section 1.8, if the Estimated Closing Date Cash exceeds the Closing Date Cash Calculation, then Buyer shall have the right
to be paid an amount equal to the full amount by which the Estimated Closing Date Cash exceeds the Closing Date Cash Calculation, together with interest
thereon at the Prime Rate (as of the Closing Date) from the Closing Date to and including the date of payment.
(e)
Subject to Section 1.8, if the Closing Date Cash Calculation exceeds the Estimated Closing Date Cash, then Buyer shall pay to Sellers
in proportion to their Pro Rata Shares by wire transfer of immediately available funds an amount equal to the amount by which the Closing Date Cash Calculation
exceeds the Estimated Closing Date Cash, together with interest thereon at the Prime Rate (as of the Closing Date) from the Closing Date to and including date
of payment.
(f)
Any adjustment amount due under this Section 1.6 shall be paid pursuant to Section 1.8. The Parties shall treat any payments made
pursuant to this Section 1.6 as an adjustment to the Closing Payment and the Purchase Price for all purposes.
1.7
Debt Adjustment. The Closing Payment shall be adjusted downward on a dollar-for-dollar basis by the amount of any Indebtedness of the
Acquired Companies as of the Business Day before the Closing Date as set forth below; provided, however, that any Indebtedness of the Acquired Companies
satisfied by the Sellers or the Acquired Companies prior to the Closing shall not constitute “Indebtedness” for purposes of this Section 1.7:
(a)
Within three (3) Business Days prior to the Closing, the Sellers shall prepare and deliver to Buyer a certificate of the Company that
contains a good faith and reasonable best estimate of the Indebtedness of the Acquired Companies as of the close of business on the Closing Date (collectively,
“Estimated Closing Date Debt”), which Estimated Closing Date Debt shall be prepared using the same methodologies provided for in Section 1.5(a). The Closing
Payment payable to the Sellers at the Closing pursuant to Section 1.4 shall be decreased by an amount equal to the Estimated Closing Date Debt.
(b)
The Estimated Closing Date Debt shall be reconciled after the Closing Date using the same methodologies provided for in Section
1.5(b) to determine the actual Indebtedness as of the Closing Date (the “ Closing Date Debt Calculation”).
(c)
The mechanisms for dispute resolution provided for in Section 1.5 shall also govern any dispute as to the Closing Date Debt Calculation.
6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(d)
Subject to Section 1.8, if the Closing Date Debt Calculation exceeds the Estimated Closing Date Debt, then Buyer shall have the right to
be paid an amount equal to the full amount by which the Closing Date Debt Calculation exceeds the Estimated Closing Date Debt, together with interest thereon
at the Prime Rate (as of the Closing Date) from the Closing Date to and including the date of payment.
(e)
Subject to Section 1.8, if the Estimated Closing Date Debt exceeds the Closing Date Debt Calculation, then Buyer shall pay to Sellers in
proportion to their Pro Rata Shares by wire transfer of immediately available funds an amount equal to the amount by which the Estimated Closing Date Debt
exceeds the Closing Date Debt Calculation, together with interest thereon at the Prime Rate (as of the Closing Date) from the Closing Date to and including date
of payment.
(f)
Any adjustment amount due under this Section 1.7 shall be paid pursuant to Section 1.8. The Parties shall treat any payments made
pursuant to this Section 1.7 as an adjustment to the Closing Payment and the Purchase Price for all purposes.
(g)
The Sellers shall deliver to Buyer all appropriate payoff letters and shall make arrangements reasonably satisfactory to Buyer to deliver
all applicable UCC-3 termination statements, applications of discharge from the Latvian Commercial Pledges Registry or other documents evidencing the
termination of all Liens held by the lenders under the Indebtedness, all in form and substance reasonably acceptable to Buyer.
1.8
Limitation on Adjustments.
(a)
. Notwithstanding anything to the contrary in Section 1.5 through Section 1.7, the Parties agree that the reconciliation amounts due from
Buyer to the Sellers and from the Sellers to Buyer pursuant to Section 1.5 through Section 1.7 hereof shall be aggregated and offset one against the other such
that only Buyer, on the one hand, or the Sellers, on the other hand, shall be required to make payment to the other Party hereunder. Final amounts due under
Section 1.5 through Section 1.7 shall be paid no later than five (5) Business Days following the final determination of all such amounts and the aggregation
thereof. If payment is owing to Buyer under this Section 1.8, and such payment is not made (in whole or in part) when due in accordance with the immediately
preceding sentence, Buyer may elect, by delivering written notice to the Sellers, that any such unpaid amount shall be paid by deemed prepayment of principal
(together with all accrued but unpaid interest thereon) under the Buyer Note of an amount equal to such unpaid amount.
1.9
Seller Closing Documents . At the Closing, the Sellers shall deliver to Buyer the following:
(a)
assignment documents;
of New York;
(b)
(c)
the stock certificates representing the Common Stock held by the Sellers, endorsed in blank or accompanied by duly executed
a certified copy of the certificate of incorporation (and each amendment thereto) of the Company from the Secretary of State of the State
the resignations of all of the directors and officers of each Acquired Company, effective as of the Closing;
7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(d)
a certificate, dated not more than ten (10) Business Days prior to the Closing, as to the good standing of the Company from the
Secretary of State of New York;
(e)
(f)
(g)
exercise of good faith;
a list of employees terminated by any Acquired Company in the ninety (90) days preceding the Closing pursuant to Section 5.14 hereof;
appropriate payoff letters or other documents evidencing the termination of Liens pursuant to Section 1.7(g) hereof;
a consulting agreement or employment agreement executed by each of the Sellers, in form and substance acceptable to Buyer in the
(h)
any approvals or consents of Government Entities and third parties as set forth on Schedule 1.9(h);
(i)
evidence reasonably satisfactory to Buyer that the Lease Agreement, No. S-114/04, for non-residential premises located at JSC
“Dambis” address 24a, Building 31, Ganibu Dambis, Riga, dated as of December 10, 2004, between JSC “Dambis” and the Subsidiary, as amended thereafter,
has been registered in the Latvian Land Registry; and
(j)
all other documents, certificates, instruments or writings required to be delivered by the Sellers at or prior to the Closing pursuant to this
Agreement.
1.10
Buyer Closing Documents. At the Closing, Buyer shall deliver to the Sellers the following:
(a)
wire transfers representing each Seller’s Pro Rata Share of the Closing Payment determined in accordance with Section 1.4, as adjusted
pursuant to Section 1.5 through Section 1.8;
(b)
a copy of the resolutions duly adopted by the board of directors and the stockholders of Buyer authorizing Buyer’s execution, delivery
and performance of each Transaction Document to which Buyer is a party and the consummation of the Transactions, as in effect as of the Closing, certified, on
behalf of Buyer, by an officer of Buyer (which such certification shall include a representation as to the incumbency and signatures of the officers of Buyer
executing the Transaction Documents);
(c)
a certificate, dated not less than ten (10) Business Days prior to the Closing, from the Secretary of State of the State of Delaware as to
the good standing of Buyer; and
(d)
Agreement.
all other documents, certificates, instruments or writings required to be delivered by Buyer at or prior to the Closing pursuant to this
1.11
Further Actions to be Taken at Closing. Each of the Parties agrees and undertakes to execute and deliver any other agreements, documents,
certificates or other instruments reasonably necessary to consummate the transactions contemplated by this Agreement and the other Transaction Documents,
as reasonably requested by the other Party.
8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ARTICLE II
REPRESENTATIONS AND WARRANTIES REGARDING BUYER
Except as set forth on the Buyer Disclosure Schedule, Buyer hereby represents and warrants to each Seller that as of the date hereof, and as of Closing
(except for representations and warranties that speak as of an earlier date or period):
2.1
Organization; Corporate Power and Authorization. Buyer is a corporation duly organized, validly existing and in good standing under the Laws of
the State of Delaware. Buyer has the requisite corporate power and authority necessary to enter into, deliver and carry out its obligations pursuant to each of the
Transaction Documents to which it is a party. Buyer’s execution, delivery and performance of each Transaction Document to which it is a party has been or will
be duly authorized by Buyer and, except as set forth on the Buyer Disclosure Schedule, no other corporate proceeding on the part of Buyer will be necessary to
authorize the Transaction Documents and the Transactions.
2.2
Binding Effect and Noncontravention .
(a)
Each Transaction Document to which Buyer is a party constitutes, or when executed will constitute, a valid and binding obligation of
Buyer enforceable against Buyer in accordance with its terms, except as such enforceability may be limited by (i) applicable insolvency, bankruptcy,
reorganization, moratorium or other similar Laws affecting creditors’ rights generally; and (ii) applicable equitable principles (whether considered in an Action or
Proceeding at Law or in equity).
(b)
Except as set forth on the Buyer Disclosure Schedule, the execution, delivery and performance by Buyer of the Transaction Documents
to which Buyer is a party and the consummation of the Transactions do not and shall not (with or without notice or lapse of time or both): (i) conflict with or result
in a breach of the terms, conditions or provisions of the charter or bylaws of Buyer; (ii) result in the imposition of any Lien upon any of the properties or assets of
Buyer, cause the acceleration or material modification of any obligation under, create in any party the right to terminate, constitute a default or breach of, or
violate or conflict with the terms, conditions or provisions of any material Contract to which Buyer is a party or by which Buyer is bound; (iii) result in a material
breach or violation by Buyer of any of the terms, conditions or provisions of any Law or Order to which Buyer or any of its properties or assets is subject; or (iv)
require any authorization, consent, approval, exemption or other action by or declaration or notice to or registration with any third Person or Government Entity.
2.3
Broker Fees. Except as set forth on the Buyer Disclosure Schedule, Buyer has no Liability to pay any fees or commissions to any broker, finder,
or agent with respect to the Transactions for which the Sellers could become liable or obligated.
2.4
No Litigation. There is no Action or Proceeding pending or, to Buyer’s Knowledge, threatened against Buyer or its properties, assets or
businesses, or Order to which Buyer is subject which would restrict the ability of Buyer to consummate the Transactions or otherwise perform its obligations
under the Transaction Documents.
9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2.5
Investment. Buyer is acquiring the Purchased Shares for its own account, for investment only, and not with a view to any resale or public
distribution thereof. Buyer shall not offer to sell or otherwise dispose of the Purchased Shares in violation of any Law applicable to any such offer, sale or other
disposition. Buyer acknowledges that (a) the Purchased Shares have not been registered under the Securities Act, or any state securities Laws; (b) there is no
public market for the Purchased Shares and there can be no assurance that a public market will develop; and (c) Buyer must bear the economic risk of its
investment in the Purchased Shares for an indefinite period of time. Buyer is an “accredited investor” within the meaning of Rule 501 of the Securities Act as
presently in effect, and has knowledge and experience in financial and business matters such that it is capable of evaluating the merits and risks of acquiring and
holding the Purchased Shares.
2.6
Acknowledgement by Buyer .
(a)
Buyer has conducted its own independent review and analysis of the Evaluation Material, the Acquired Companies, the Business and
the assets, Liabilities, results of operations and financial condition of the Acquired Companies, and acknowledges that Buyer has been provided access to the
personnel, properties, premises and records of the Acquired Companies for such purpose and that Buyer and its Representatives have been provided with the
opportunity to ask questions of the officers and management employees of the Acquired Companies and to acquire such additional information about the
Business and the assets, Liabilities, results of operations and financial condition of the Acquired Companies as Buyer and its Representatives have requested.
Buyer is informed and sophisticated participants in the Transactions and has undertaken such investigation, and has been provided with and has evaluated such
documents and information, as it has deemed necessary in connection with the execution, delivery and performance of this Agreement and the other
Transaction Documents and the consummation of the Transaction. With respect to any projection or forecast delivered by or on behalf of the Acquired
Companies to Buyer, Buyer acknowledges that (A) there are uncertainties inherent in attempting to make such projections and forecasts; (B) the accuracy and
correctness of such projections and forecasts may be affected by information that may become available through discovery or otherwise after the date of such
projections and forecasts; and (C) they are familiar with each of the foregoing.
(b)
Buyer acknowledges that it is consummating the Transactions without any representation or warranty, express or implied, by the
Sellers, their Affiliates or any other Person except as expressly set forth in ARTICLE III or ARTICLE IV (as modified by the Disclosure Schedules). Further,
except for the specific representations and warranties expressly made by the Sellers in ARTICLE III or ARTICLE IV (as modified by the Disclosure Schedules),
Buyer specifically disclaims that it is relying upon or has relied upon any other representations or warranties that may have been made by the Sellers, their
Affiliates or any other Person, and acknowledges and agrees that the Sellers have specifically disclaimed and do hereby specifically disclaim any such other
representation or warranty made by the Sellers, their Affiliates or any other Person.
10
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
2.7
SEC Documents . Buyer has made available to the Sellers Buyer’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015,
including the financial statements contained therein, its Quarterly Reports on Form 10-Q for the fiscal quarters ended September 30, 2015, December 31, 2015
and March 31, 2016, and its Current Reports on Form 8-K filed since June 30, 2015 (collectively, the “LPTH SEC Documents ”). The LPTH SEC Documents were
true and complete in all material respects as at their respective dates, did not contain any untrue statement of a material fact nor omit to state any material fact
required to be stated therein or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading.
Since the filing of its Annual Report on Form 10-K for the fiscal year ended June 30, 2015, there has not been any material adverse change in Buyer’s financial
condition, results of operations or liabilities not specifically disclosed in the LPTH SEC Documents.
2.8
Solvency. Immediately after giving effect to the transactions contemplated hereby, Buyer shall be solvent and shall: (a) be able to pay its debts
as they become due in the Ordinary Course of Business; (b) own property that has a fair saleable value greater than the amounts required to pay its debts
(including a reasonable estimate of the amount of all contingent liabilities); and (c) have adequate capital to carry on its business.
ARTICLE III
REPRESENTATIONS AND WARRANTIES REGARDING THE SELLERS
Except as set forth on the Seller Disclosure Schedule, each Seller, severally and not jointly, hereby represents and warrants to Buyer that as of the date
hereof, and as of Closing (except for representations and warranties that speak as of an earlier date or period):
3.1
Power and Authorization. Each Seller has the requisite power, authority and capacity to enter into, deliver and perform his obligations pursuant
to each of the Transaction Documents to which such Seller is a party. Each Seller’s execution, delivery and performance of each Transaction Document to which
he is a party has been duly authorized by such Seller.
3.2
Binding Effect and Noncontravention .
(a)
Each Transaction Document to which each Seller is a party constitutes, or when executed will constitute, a valid and binding obligation of
such Seller enforceable against such Seller in accordance with its terms, except as such enforceability may be limited by (i) applicable insolvency, bankruptcy,
reorganization, moratorium or other similar Laws affecting creditors’ rights generally and (ii) applicable equitable principles (whether considered in an Action or
Proceeding at Law or in equity).
(b)
Except in the case of clause (iii) pursuant to any Contract that is terminated in connection with Closing, the execution, delivery and
performance by each Seller of the Transaction Documents to which such Seller is a party and the consummation of the Transactions do not and shall not (with or
without notice or lapse of time or both): (i) result in the imposition of any Lien upon any of the properties or assets of such Seller, cause the acceleration or
material modification of any obligation under, create in any party the right to terminate, constitute a default or breach of, or violate or conflict with the terms,
conditions or provisions of any material Contract to which such Seller is a party or by which such Seller is bound; (ii) result in a material breach or material
violation by such Seller of any of the terms, conditions or provisions of any Law or Order to which such Seller or any of its properties or assets is subject; or (iii)
require any authorization, consent, approval, exemption or other action by or declaration or notice to or registration with any third Person or Government Entity.
11
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
3.3
Capital Stock. Each Seller holds of record, owns beneficially and has good and marketable title to all of the Common Stock set forth next to such
Seller’s name on Section 4.2 of the Company Disclosure Schedule, free and clear of any and all Liens other than Permitted Liens. No Seller is a party to any
voting trust, proxy or other agreement or understanding with respect to the voting of any Common Stock that will survive the Closing Date.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES REGARDING THE ACQUIRED COMPANIES
Except as set forth on the Company Disclosure Schedule, the Sellers hereby jointly and severally represent and warrant to Buyer that as of the date
hereof, as of Closing (except for representations and warranties that speak as of an earlier date or period):
4.1
Organization; Qualification; Corporate Power and Authorization. The Company is a corporation duly incorporated and subsisting or in good
standing under the Laws of the jurisdiction of its incorporation and the Subsidiary is duly organized and subsisting or in good standing under the Laws of the
jurisdiction of its formation. Each Acquired Company is duly authorized to conduct business and is in good standing under the Laws of each jurisdiction where
such authorization is required, except where the failure to be so authorized or to be in good standing would not result in a Company Material Adverse Change.
The Company has the requisite corporate power and authority necessary to enter into, deliver and carry out its obligations pursuant to this Agreement. The
Company’s execution and delivery of this Agreement have been duly authorized by the Company and no other corporate proceeding on the part of the Company
will be necessary to authorize this Agreement and the consummation of the Transactions.
4.2
Capitalization; Subsidiary.
(a)
The entire authorized capital stock of the Company consists of 200 shares of Common Stock. Except for the Common Stock, there are
no other equity or other securities of the Company issued or outstanding. All of the issued and outstanding shares of the Common Stock have been duly
authorized, are validly issued, fully paid, and non-assessable, and are held of record and beneficially by the Sellers and are not subject to any preemptive or
subscription rights. There are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, or other
contracts or commitments that could require the Company to issue, sell, or otherwise cause to become outstanding any of its capital stock. Except as set forth
on the Company Disclosure Schedule, there are no outstanding or authorized stock appreciation, phantom stock, profit participation or similar rights with respect
to the Company. There are no voting trusts, proxies or other agreements or understandings with respect to the voting of any Common Stock that will survive the
Closing Date.
12
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(b)
The Sellers have delivered or made available to Buyer true, correct and complete copies of the organizational documents of the
Acquired Companies. None of the Acquired Companies is in default under or in violation of any provision of its respective organizational documents.
(c)
Except as set forth on the Company Disclosure Schedule, the Company holds of record, owns beneficially and has good and
marketable title to all of the outstanding equity interests of the Subsidiary of the Company. None of the Acquired Companies controls, directly or indirectly, or has
any direct or indirect equity participation in any Person other than the Subsidiary.
4.3
Binding Effect and Noncontravention .
(a)
This Agreement constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its
terms, except as such enforceability may be limited by (i) applicable insolvency, bankruptcy, reorganization, moratorium or other similar Laws affecting creditors’
rights generally and (ii) applicable equitable principles (whether considered in an Action or Proceeding at Law or in equity).
(b)
Except as otherwise set forth in the Company Disclosure Schedule and except, in the case of clause (iv), pursuant to any Contract that
is terminated in connection with Closing, the consummation of the Transactions do not and shall not (with or without notice or lapse of time or both): (i) result in
the imposition of any Lien upon any of the properties or assets of any Acquired Company, (ii) cause the acceleration or material modification of any obligation
under, create in any party the right to terminate, constitute a default or breach of, or violate or conflict with the terms, conditions or provisions of any Material
Contract; (iii) result in a material breach or material violation by an Acquired Company of any of the terms, conditions or provisions of any Law or Order to which
an Acquired Company or any of its properties or assets is subject; or (iv) require any authorization, consent, approval, exemption or other action by or
declaration or notice to or registration with any third Person or Government Entity; provided, however, in the cause of clauses (ii) and (iv), except to the extent (x)
that any such acceleration, modification, creation, default, breach, violation or conflict, or failure to obtain any authorization, consent, approval or exemption, will
not, individually or in the aggregate, subject the Acquired Companies to any Liability in excess of $75,000, and (y) for Contracts that are terminated in connection
with the Closing.
4.4
Financial Statements.
(a)
“Financial Statements”):
Attached to the Company Disclosure Schedule are the following financial statements of the Acquired Companies (collectively, the
December 31, 2014 and 2015 (the “Audited Financial Statements”),
(i)
the Acquired Companies’ audited balance sheets and related statements of income and cash flows for the years ended
2014 and 2015 (the “Subsidiary Financial Statements”), and
(ii)
the Subsidiary’s audited balance sheets and related statements of income and cash flows for the years ended December 31,
13
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
by management for June 30, 2016 (the “Interim Financial Statements”).
(iii)
the Acquired Companies’ unaudited consolidated balance sheets and related statements of income and cash flows as prepared
(b)
Each of the Audited Financial Statements and the Interim Financial Statements (including the notes thereto, as applicable) has been
prepared in accordance with GAAP, consistently applied, and fairly presents in all material respects the consolidated financial condition of the Acquired
Companies, taken as a whole, as of the respective dates thereof and the results of the Acquired Companies’ operations for the periods specified, except as
disclosed therein; provided that (i) the Financial Statements do not contain all footnotes required under GAAP and (ii) the Acquired Companies’ unaudited
consolidated balance sheets and related statements of income and cash flows as prepared by management for June 30, 2016 are subject to normal year-end
audit adjustments; provided, further, that the Subsidiary Financial Statements were prepared in accordance with the International Financial Reporting Standards
and, in connection with the Transactions, have been converted to GAAP.
(c)
Except as set forth on the Company Disclosure Schedule, the Subsidiary Financial Statements have been prepared in accordance with
the International Financial Reporting Standards (and the interpretations thereto, as promulgated by the International Accounting Standards Board), consistent
with the past practices of the Subsidiary and present fairly in all material respects the financial position of the Subsidiary as of the respective dates thereof.
4.5
Events Subsequent to the Latest Balance Sheet . Except as set forth in the Latest Balance Sheet, there has not been any Company Material
Adverse Change. Without limiting the generality of the foregoing, except as set forth on the Company Disclosure Schedule or in the Latest Balance Sheet, since
the date of the Latest Balance Sheet:
(a)
the Acquired Companies have not incurred any material obligations required by GAAP, consistently applied, to be reflected or reserved
against on a balance sheet of the Acquired Companies;
(b)
the Ordinary Course of Business;
the Acquired Companies have not sold, leased, transferred, or assigned any of its material assets, tangible or intangible, other than in
(c)
the Acquired Companies have not entered into any agreement, lease, or license (or series of related agreements, leases, and licenses)
either involving more than $75,000 or outside the Ordinary Course of Business;
(d)
the Acquired Companies have not entered into, committed itself to, or completed, any transaction with any Seller or any of their Affiliates
outside the Ordinary Course of Business, or at other than arm’s length terms;
(e)
the Acquired Companies have not accepted liability for any Liability of any Seller or any of their Affiliates, or provided any guarantee or
other commitment in favor of any Seller or any of their Affiliates;
14
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(f)
no Person (including the Acquired Companies) has accelerated, terminated, modified, or cancelled any agreement, lease, or license (or
series of related agreements, leases, and licenses) to which an Acquired Company is a party or by which it is bound either involving more than $75,000 or
outside the Ordinary Course of Business;
(g)
(h)
no Lien (other than Permitted Liens) has been imposed upon any of the assets, tangible or intangible of an Acquired Company;
the Acquired Companies have not made any capital expenditure (or series of related capital expenditures) either involving more than
$75,000 or outside the Ordinary Course of Business;
(i)
the Acquired Companies have not made any capital investment in, any loan to, or any acquisition of the securities or assets of, any
other Person (or series of related capital investments, loans, and acquisitions) either involving more than $75,000 or outside the Ordinary Course of Business;
(j)
the Acquired Companies have not issued any debt security or created, incurred, assumed, or guaranteed any Indebtedness either
involving more than $75,000 or outside the Ordinary Course of Business;
(k)
the Acquired Companies have not (i) delayed or postponed the payment of accounts payable and other Liabilities outside the Ordinary
Course of Business, (ii) accelerated the collection of accounts receivable outside the Ordinary Course of Business, (iii) materially increased its inventory levels
outside the Ordinary Course of Business or (iv) materially increased any reserve on its balance sheet;
(l)
the Acquired Companies have not cancelled, compromised, waived, or released any right or claim (or series of related rights and claims)
either involving more than $75,000 or outside the Ordinary Course of Business;
(m)
the Acquired Companies have not granted any license, sublicense or assignment of any rights under or with respect to any Intellectual
Property Rights or has not granted any consents or permission to use or entered into any coexistence agreement with respect to any Intellectual Property
Rights, in each case outside the Ordinary Course of Business;
(n)
Acquired Companies;
there has been no amendment, modification or other change made or authorized in any of the organizational documents of the
(o)
the Acquired Companies have not experienced any damage, destruction, or loss (whether or not covered by insurance) to its property in
an amount in excess of $75,000;
(p)
the Acquired Companies have not made any loan in excess of $7,500, to, or entered into any other transaction with, any of its
shareholders, officers, directors or employees outside the Ordinary Course of Business;
15
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(q)
the Acquired Companies have not entered into any employment contract or collective bargaining agreement, written or oral, or modified
any existing such contract nor made any other change in employment terms for any of its shareholders, officers, directors or employees outside the Ordinary
Course of Business;
(r)
the Acquired Companies have not granted any material increase in the base compensation of any of its shareholders, officers, directors
or employees outside the Ordinary Course of Business; or
(s)
the Acquired Companies have not adopted, amended, modified, or terminated any Employee Plan, Employee Benefit Arrangement or
any material Contract for the benefit of any of its shareholders, officers, directors or employees.
4.6
Undisclosed Liabilities; Indebtedness. No Acquired Company has any Liability (and, to the Knowledge of the Sellers, there is no basis for any
present or future Action or Proceeding against an Acquired Company giving rise to any material Liability), except for (a) Liabilities reflected in the Financial
Statements and (b) Liabilities that have arisen after the date of the Latest Balance Sheet in the Ordinary Course of Business (none of which results from, arises
out of, relates to, is in the nature of, or was caused by any breach of Contract, breach of warranty, tort, infringement, or violation of Law).
4.7
Title to and Sufficiency of Assets. Except as set forth on the Company Disclosure Schedule, the Acquired Companies have good and valid title
to, or a valid leasehold interest in, the assets used by them, located on any premises of the Acquired Companies or elsewhere, reflected on the Latest Balance
Sheet or acquired since the date thereof (other than assets disposed of in the ordinary course of business since the date of the Latest Balance Sheet or assets
permitted to be distributed to the Sellers or their Affiliates prior to the Closing pursuant to this Agreement), free and clear of any and all Liens other than
Permitted Liens. Neither Seller nor any Affiliate of any Seller (other than the Acquired Companies) owns any material assets or rights used in the business of the
Acquired Companies. The Acquired Companies have rights to all material assets, tangible and intangible, of any nature whatsoever, necessary to operate its
business in the manner presently operated by them.
4.8
Compliance with Laws.
(a)
Except with regard to the tax matters addressed in Section 4.9, environmental matters addressed in Section 4.10, employee and labor
relations matters addressed in Section 4.14, employee benefit matters addressed in Section 4.15, government contract matters addressed in Section 4.16,
export control matters addressed in Section 4.17 and product warranty matters discussed in Section 4.23, each of the Acquired Companies has complied, in all
material respects, with all Laws and Orders applicable to the Business. None of the Acquired Companies has received written (or, to the Knowledge of the
Sellers, oral) notice alleging any violations of applicable Laws within the twelve (12) month period prior to the date hereof.
(b)
The Acquired Companies hold all Permits that are material to their business. All such Permits have been duly obtained and are valid and
in full force and effect and have been listed in the Company Disclosure Schedule. There is no pending, or to the Knowledge of the Sellers, threatened, Action or
Proceeding to revoke, terminate, cancel, suspend, revise or otherwise declare any such Permit invalid. Neither of the Acquired Companies has violated any such
Permits in any material respect. The consummation of the transactions contemplated hereby will not result in the termination, cancellation, suspension,
restriction or violation of any material Permit.
16
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4.9
Tax Matters.
(a)
The Acquired Companies have filed (or will have filed) all applicable Tax Returns that they were required to file on or before the Closing
Date and have paid all Taxes shown thereon as owing, or have adequately provided for such Taxes on the Financial Statements. All such Tax Returns were
true, correct and complete in all material respects. Except as set forth on the Company Disclosure Schedule, the Acquired Companies are not currently the
beneficiary of any extension of time within which to file any Tax Return that has continuing effect. Except as set forth on the Company Disclosure Schedule,
during the five (5) year period prior to the date hereof, no deficiencies for any Tax have been proposed in writing by any Tax authority against the Acquired
Companies. There are no Liens with respect to Taxes upon any of the properties or assets, real or personal, tangible or intangible of the Acquired Companies
(other than Permitted Liens).
(b)
There is no material dispute or claim concerning any Tax Liability of the Acquired Companies either (i) claimed or raised by any Tax
authority in writing or (ii) to the Knowledge of the Sellers, based upon personal contact with any agent of such Tax authority.
(c)
The Sellers have made available to Buyer true and complete copies of all Tax Returns, examination reports, and statements of
deficiencies assessed against, or agreed to by the Acquired Companies since December 31, 2012. Except as set forth on the Company Disclosure Schedule,
none of the Acquired Companies has been subject to an audit or administrative, judicial, or other proceeding relating to Taxes.
(d)
The Acquired Companies are not a party to any tax allocation or sharing agreement. To the Knowledge of the Sellers, the Acquired
Companies have not been a member of an Affiliated Group filing a consolidated federal Tax Return.
(e)
Except as set forth on the Company Disclosure Schedule, the Acquired Companies have not agreed to make, nor are any of them
required to make, any adjustment under Section 481(a) of the Code (or any similar provision of applicable state, local or foreign Law) by reason of a change in
accounting method or otherwise, and the Internal Revenue Service has not proposed any such adjustment or change in accounting method. The Acquired
Companies will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof)
ending after the Closing Date as a result of any: (i) “closing agreement” as described in Section 7121 of the Code (or any corresponding provision of state, local
or foreign income Tax Law); (ii) installment sale or open transaction disposition made on or prior to the Closing Date; or (iii) prepaid amount received on or prior
to the Closing Date.
17
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(f)
None of the Acquired Companies has been the “distributing company” (within the meaning of Section 355(a)(1) of the Code) or the
“controlled corporation” (within the meaning of Section 355(a)(1) of the Code) (i) within the two-year period ending as of the date of this Agreement or (ii) in a
distribution that could otherwise constitute part of a “plan” or “series of transactions” (within the meaning of Section 355(e) of the Code) in conjunction with this
Agreement.
(g)
The Acquired Companies have complied in all material respects with all obligations to withhold Taxes and have withheld from amounts
paid or owing to any employee, independent contractor, creditor, stockholder, or other third party and paid over to the proper Tax authority all amounts required
to have been withheld and paid over under the applicable Tax laws.
(h)
None of the Acquired Companies has made any payments, is obligated to make any payments, and is a party to any Contract that could
obligate it to make any payments that will not be deductible under Code Sections 280G as a result of the consummation of the transactions contemplated by this
Agreement.
(i)
The Acquired Companies have not engaged in any transaction identified as a “reportable transaction” for purposes of Section 1.6011-
4(b) of the treasury regulations promulgated under the Code.
(j)
Notwithstanding anything to the contrary contained in this Agreement, the representations and warranties contained in this Section 4.9
are the sole representations and warranties with respect to tax matters of the Acquired Companies.
4.10
Environmental Matters.
(a)
The Acquired Companies are, and during the five (5) year period prior to the date hereof have been, in compliance in all material
respects with all applicable Environmental Laws. Without limiting the generality of the foregoing, the Acquired Companies have obtained, and are, and during
the five (5) year period prior to the date hereof have been, in compliance, in all material respects, with all Permits that are required pursuant to Environmental
Laws for the occupation of its facilities and the operation of its business and all such Permits are valid and in full force and effect. All such Permits required under
any Environmental Laws are listed in the Company Disclosure Schedule and true, correct and complete copies of such Permits have been delivered to Buyer.
(b)
None of the Acquired Companies has received written (or, to the Knowledge of the Sellers, oral) notice of any violations of applicable
Environmental Laws relating to the operation of the Business. There are no claims arising under or related to applicable Environmental Laws (“Environmental
Claims”) pending or, to the Knowledge of the Sellers, threatened against any of the Acquired Companies or against any Person whose liability for any
Environmental Claim has been retained or assumed by any Acquired Company or any real property which any Acquired Company owns, leases or operates.
(c)
No Acquired Company has treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled or released any
Hazardous Materials in a manner that has given rise to any Environmental Claim. There are no underground storage tanks on the facilities operated by the
Acquired Companies.
18
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(d)
Notwithstanding anything to the contrary contained in this Agreement, the representations and warranties contained in this Section 4.10
are the sole representations and warranties with respect to environmental matters of the Acquired Companies.
4.11
Intellectual Property.
(a)
Except as set forth on the Company Disclosure Schedule, each Acquired Company is the sole owner or has the right to use pursuant to
license, sublicense, agreement, or permission on the basis of license agreements all Intellectual Property Rights necessary for the operation of its business as it
is currently conducted. None of the Company Intellectual Property Rights are licensed to an Acquired Company by any Seller or any of its Affiliates and none is
licensed by an Acquired Company to any Seller or any of its Affiliates. All issuance, renewal, maintenance and other fees and payments that are or have become
due with respect to Company Intellectual Property Rights on or prior to the Closing have been timely paid by or on behalf of the Company, or accrued for in the
Financial Statements.
(b)
To the Knowledge of the Sellers, no Acquired Company has interfered with, infringed upon or misappropriated any Intellectual Property
Rights of third parties. No Acquired Company has received in the last five (5) years any written (or, to the Knowledge of the Sellers, oral) charge, complaint,
claim, demand, or notice alleging any such interference, infringement, misappropriation, or violation (including any claim that an Acquired Company must license
or refrain from using any Intellectual Property Rights of any third party). To the Knowledge of the Sellers, no third party has interfered with, infringed upon or
misappropriated any Intellectual Property Rights of an Acquired Company.
(c)
The Company Disclosure Schedule sets forth a true and complete list of all: (i) each patent or registration that has been issued to an
Acquired Company, each pending patent application or application for registration which an Acquired Company has made, (ii) each trade name and unregistered
trademark, service mark, trade dress and logo owned and/or used by an Acquired Company, (iii) each copyright and all applications, registrations and renewals
in connection with any copyright owned and/or used by an Acquired Company, (iv) any other Intellectual Property Right owned and/or used by an Acquired
Company that is registered or pending registration anywhere in the world, (v) each license, assignment, Contract, consent or other permission that an Acquired
Company has granted to any third party with respect to its Intellectual Property Rights (together with any exceptions) and (vi) all material Intellectual Property
Right licenses, assignments, Contracts, consents or other permissions granted to an Acquired Company relating to the Intellectual Property Rights of any third
party (other than off-the-shelf software with a total annual replacement cost and/or license fee of less than $25,000), and identifies the owner thereof. The
Acquired Companies have no such patents, registrations, applications, licenses, assignments, Contracts, or permissions (as amended to date), or any other
written documentation evidencing ownership and prosecution of each such item. With respect to each item of Intellectual Property Rights used by an Acquired
Company and except as disclosed in the Company Disclosure Schedule:
(i)
the item is valid, subsisting, enforceable and in full force and effect;
19
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
respect to the Intellectual Property Rights licensed by an Acquired Company, to the Knowledge of the Sellers, the item is not subject to any outstanding Order;
(ii)
(A) with respect to the Company Intellectual Property Rights, the item is not subject to any outstanding Order, and (B) with
(iii)
(A) with respect to the Company Intellectual Property Rights, no Action is pending or, to the Knowledge of the Sellers, is
threatened that challenges the legality, validity, enforceability, use, or ownership of the item, and (B) with respect to the Intellectual Property Rights licensed by
an Acquired Company, to the Knowledge of the Sellers, no Action is pending or is threatened that challenges the legality, validity, enforceability, use, or
ownership of the item; and
conflict with respect to the item, other than pursuant to contractual protections entered into in the Ordinary Course of Business.
(iv)
no Acquired Company has indemnified any Person for or against any interference, infringement, misappropriation, or other
(d)
The Company has taken all commercially reasonable precautions and actions to protect the proprietary nature of each material item of
Company Intellectual Property Rights, and to maintain in confidence all material trade secrets and Confidential Information of the Company’s business
comprising a part thereof.
(e)
Except as set forth on the Company Disclosure Schedule, no open source materials are currently utilized in any way by an Acquired
Company in the development or use of any Intellectual Property Rights owned and/or used by it.
(f)
Notwithstanding anything to the contrary contained in this Agreement, the representations and warranties contained in this Section 4.11
are the sole representations and warranties with respect to intellectual property matters of the Acquired Companies.
4.12
Real Estate; Tangible Assets.
(a)
None of the Acquired Companies owns any real property.
(b)
The Company Disclosure Schedule sets forth all real property that each of the Acquired Companies leases or subleases from any other
Person (“Leased Real Property ”). With respect to each lease and sublease listed on the Company Disclosure Schedule, (i) each of the Acquired Companies (as
applicable) has a good and valid leasehold interest, free and clear of any and all Liens other than Permitted Liens and (ii) each lease or sublease is the legal,
valid, binding and enforceable obligation of the applicable Acquired Company and is in full force and effect. The Company Disclosure Schedule lists the street
address of each parcel of Leased Real Property, and provides a list, as of the date of this Agreement, of all leases for each parcel of Leased Real Property. True,
correct and complete copies of all such leases have been delivered to Buyer.
(c)
No Acquired Company is party to any Contract that would provide any Person (other than the Acquired Companies) the contractual right
to use or occupy, and no Person (other than the Acquired Companies) is using or occupying, any portion of the Leased Real Property.
20
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(d)
All facilities located on the Leased Real Property (i) have received all approvals of Government Entities (including Permits) required in
connection with the ownership or operation thereof, (ii) have been operated and maintained in accordance with applicable Laws in all material respects, and (iii)
to the Knowledge of the Sellers, are in compliance with all applicable zoning and building Laws.
(e)
No real estate other than the Leased Real Estate is currently used by the Acquired Companies to conduct their business as conducted
on the date hereof or on the Closing Date. The Leased Real Estate, and the buildings and other fixtures thereon, have been properly maintained in all material
respects, are in good order and repair (normal wear and tear excepted), are fit for the intended use and are in a condition adequate to conduct the business of
the Acquired Companies as currently conducted.
(f)
Each tangible asset of the Acquired Companies has been maintained in accordance with normal industry practice, is in good operating
condition and repair (subject to normal wear and tear), is suitable for the purposes for which it presently is used and is located at the Leased Real Property.
4.13
Litigation. There is no (a) outstanding Order to which an Acquired Company or any of its assets or property are subject, (b) Action or Proceeding
pending or, to the Knowledge of the Sellers, threatened against any of the Acquired Companies by or before any Government Entity, or (c) Action or Proceeding
pending or, to the Knowledge of the Sellers, threatened against any of the Acquired Companies which would give rise to any right of indemnification on the part
of any officer, manager, employee or agent of any Acquired Company.
4.14
Employee and Labor Relations .
(a)
The Company Disclosure Schedule sets forth a true and complete list as of June 30, 2016 of (i) the employees employed by the
Acquired Companies having an annual base salary in calendar year 2016 of $75,000 or more, and (ii) the rate of all compensation due to be paid by the Acquired
Companies to each such employee in calendar year 2016, plus any bonus, contingent or deferred compensation related to calendar year 2016. To the
Knowledge of the Sellers, no employee listed on the Company Disclosure Schedule in connection with this Section 4.14(a) has indicated to an Acquired
Company an intention to terminate employment with any of the Acquired Companies. No employee listed on the Company Disclosure Schedule in connection
with this Section 4.14(a), as of the date of this Agreement is on leave of absence, workers’ compensation, family or medical leave, long or short-term disability or
any other type of extended leave, other than holiday, paid time off or sick days taken in the Ordinary Course of Business by any such employee.
(b)
The Acquired Companies have complied in all material respects with all applicable Laws relating to employment practices. Except as set
forth on the Company Disclosure Schedule, the Acquired Companies do not have any temporary staffing or similar arrangements.
21
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(c)
There has not been pending or existing during the twelve (12) month period preceding the date of this Agreement any strike, slowdown,
work stoppage or lockout involving the Acquired Companies.
(d)
As of the date of this Agreement, there is no unfair labor practice charge or complaint against the Acquired Companies pending before
the National Labor Relations Board or similar governmental agency outside of the United States, and to the Knowledge of the Sellers, no such charge or
complaint has been made against the Acquired Companies during the twelve (12) months prior to the date of this Agreement.
(e)
No application or petition for an election of or for certification of a collective bargaining agent relating to the Acquired Companies is
pending as of the date of this Agreement.
(f)
There has been no charge of discrimination filed against any Acquired Company with the Equal Employment Opportunity Commission
or similar Government Entity during the last twelve (12) months prior to the date of this Agreement.
4.15
Employee Plans.
(a)
The Company Disclosure Schedule sets forth each of the Employee Plans and Employee Benefit Arrangements. The Acquired
Companies have made available to Buyer currently effective copies of the Employee Plans and all amendments thereto, together with, where applicable, each
Employee Plan’s summary plan description and any summaries of material modifications thereto.
(b)
Neither the Acquired Companies, nor any other Person or entity that, together with the Acquired Companies is treated as a single
employer under Section 414(b) or (c) of the Code or Section 4001 of ERISA, has, during the six (6) year period preceding the Closing Date, incurred (i) any
Liability under Title IV of ERISA arising in connection with the termination of any plan covered or previously covered by Title IV of ERISA; (ii) any Liability under
Sections 412, 430, 431 or 432 of the Code; or (iii) any Liability as a result of the failure to comply with the continuation of coverage requirements of Section 601
et seq. of ERISA and Section 4980B of the Code.
(c)
None of the Employee Plans or Employee Benefit Arrangements covering the employees of the Acquired Companies provides for
medical or death benefits beyond the month of termination of service or retirement, other than (i) coverage mandated by applicable Law; and (ii) death or
retirement benefits under a benefit plan qualified under Section 401(a) of the Code.
(d)
None of the Employee Plans covering any Business Employee is a multiemployer plan within the meaning of Section 4001(a)(3) of
ERISA (“Multiemployer Plan”); and neither the Acquired Companies nor any other Person or entity that together with any Acquired Company is treated as a
single employer under Section 414(b) or Section 414(c) of the Code or Section 4001 of ERISA, has at any time during the six (6) year period preceding the
Closing Date, contributed to or been obligated to contribute to any Multiemployer Plan on behalf of any employees of the Acquired Companies.
22
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(e)
Notwithstanding anything to the contrary contained in this Agreement, the representations and warranties contained in this Section 4.15
are the sole representations and warranties with respect to employee benefit matters of the Acquired Companies.
4.16
Government Contracts.
(a)
Sellers have delivered or made available to Buyer a correct and complete copy of each active Government Contract entered into by the
Company during the two (2) year period prior to the date hereof which has generated or is reasonably expected to generate revenue of over $75,000 per year for
either or both of the Acquired Companies, all of which are listed in the Company Disclosure Schedule (as amended to date).
(b)
Except as set forth in the Company Disclosure Schedule, as of the date hereof (i) all representations, warranties and certifications made
by the Company with respect to a Government Contract, including all invoices and claims arising therefrom, were proper and accurate in all material respects as
of their effective date, and the Company has complied in all material respects with such representations, warranties and certifications; (ii) no Government Entity,
prime contractor or higher-tier subcontractor under a Government Contract or any other Person acting on behalf of the foregoing, has provided written notice to
the Company of any actual or alleged violation or breach of any statute, regulation, representation, certification, disclosure obligation, contract term, condition,
clause, provision or specification; (iii) there are no active Government Contracts pursuant to which the Company has experienced any material cost, schedule,
technical or quality problems; (iv) no Government Contract that is currently active in performance has incurred or currently projects any material losses; (v) no
termination for default, notice of potential termination for default, cure notice, show cause notice or other similar written notice has been issued and/or remains
unresolved with respect to any Government Contract and, to the Knowledge of the Sellers, no termination for default has been threatened with respect to any
Government Contract; and (vi) all of the Government Contracts (A) were legally awarded, (B) are binding on the Acquired Companies and, to the Knowledge of
the Seller Parties, the other parties thereto, and (C) are in full force and effect with respect to any Acquired Company, as applicable, except as such
enforceability may be limited by (x) applicable insolvency, bankruptcy, reorganization, moratorium, or other similar Laws affecting creditors’ rights generally and
(y) applicable equitable principles (whether considered in a proceeding at Law or in equity).
(c)
Except as set forth in the Company Disclosure Schedule, no consent, approval or authorization of, notification to, or designation,
declaration, registration or filing with, any Government Entity or other third party is required to be made or obtained on the part of the Company with respect to
the execution or delivery of this Agreement or the consummation of the Transactions.
(d)
The Company maintains systems of internal controls that are in material compliance with all applicable requirements of all of the
Government Contracts and all applicable Laws. The Company is not, and has not been, party to any Action or Proceeding regarding any fraud, defective pricing,
mischarging, or improper payments on the part of the Company, and the Company has not taken any action nor is a party to any Action or Proceeding that
would be reasonably likely to give rise to (i) liability under the False Claims Act or (ii) a claim for price adjustment under the Truth in Negotiations Act.
23
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(e)
The Company has not made any mandatory disclosure under Federal Acquisition Regulation (“ FAR”) 52.203-13(b)(3)(i) or FAR Part 3,
or any voluntary disclosure to any Government Entity with respect to any alleged unlawful conduct, misstatement or omission arising under or relating to any
Government Contract. The Company has undertaken the appropriate level of review or investigation, if required, to determine whether the Company is required
to make any disclosures to any Government Entity under FAR 52.203-13(b)(3)(i) or FAR Part 3, and, to the Knowledge of the Sellers, there are no facts that
would require mandatory disclosure under FAR 52.203-13(b)(3)(i) or FAR Part 3.
4.17
Export Control Matters; Trade Regulations .
(a)
Except as set forth on the Company Disclosure Schedule, no Government Entity has communicated with the Company in a manner
indicating that the Company is required to register, obtain Permits, or take other actions pursuant to the Trade Regulations in connection with or as a result of
work performed by the Company or other Persons under the direction or supervision of the Company.
(b)
Except as set forth on the Company Disclosure Schedule, the Company has not registered, obtained any Permits, or taken any other
actions pursuant to the Trade Regulations.
(c)
To the Knowledge of the Sellers, the operations of the Company are, and have at all times been, in compliance in all material respects
with all Trade Regulations, and the operations of the Company are, and have at all times been, in compliance in all material respects with all applicable foreign
Laws, statutes, regulations, executive orders, rules, codes, or ordinances relating to the import or export of goods, technology, or services or trading embargoes
or restrictions. Consummation of the Transactions will not require re-transfer or other authorizations to be issued under any such Laws.
4.18
Affiliate Transactions. Except as set forth on the Company Disclosure Schedule, no officer, director, employee, shareholder or Affiliate of any of
the Acquired Companies or any individual related by blood, marriage or adoption to any such individual, or any entity in which any such Person owns any
beneficial interest, is a party to any Contract with any of the Acquired Companies or has any material interest in any material assets or property used by the
Acquired Companies.
24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4.19
Insurance. The Company Disclosure Schedule sets forth a list of each insurance policy currently maintained by the Acquired Companies with
respect to their respective properties, assets and business, which such policies are in full force and effect. Such policies are issued in such types and amounts
and covering such risks as are commercially reasonable. Sellers have delivered or made available to Buyer a correct and complete copy of each such policy.
With respect to each such insurance policy, except as set forth on the Company Disclosure Schedule: (i) it is the legal, valid, binding and enforceable obligation
of the applicable Acquired Company, and in full force and effect; (ii) the consummation of the transactions contemplated hereby will not result in such insurance
policy ceasing to be legal, valid, binding, enforceable, and in full force and effect; (iii) neither any Acquired Company nor, to the Knowledge of the Sellers, any
other party thereto is in breach or default (including with respect to the payment of premiums or giving of notices), and, to the Knowledge of the Sellers, no event
has occurred which, with notice or the lapse of time, would constitute such a breach or default, or permit termination, modification, or acceleration, thereof; and
(iv) no Acquired Company has received a written (or, to the Knowledge of the Sellers, oral) notice of cancellation or notice of failure to renew any insurance
policy or refusal of coverage thereunder or any other notice that such policies are no longer in full force or effect or that the issuer of any such policy is no longer
willing or able to perform its obligations thereunder. The Company does not self-insure and has not self-insured in the five (5) year period prior to the date
hereof.
4.20
Contracts.
(a)
The Company Disclosure Schedule sets forth as of the date of this Agreement each of the following Contracts of the Acquired
Companies (collectively, the “Material Contracts ”):
compensation to its current or former directors, officers or employees or any other employee benefit plan, arrangement or practice, whether formal or informal;
(i)
pension, profit sharing, stock option, employee stock purchase or other plan or arrangement providing for deferred or other
(ii)
collective bargaining agreement or any other contract with any labor union, or severance agreements, programs, policies or
arrangements;
(iii)
management agreement or contract for the employment of any officer, individual employee or other Person on a full-time, part-
time, consulting or other basis (A) providing annual cash or other compensation in excess of $75,000, (B) providing for the payment of any cash or other
compensation or benefits upon the consummation of the Transactions or (C) otherwise restricting its ability to terminate the employment of any employee at any
time for any lawful reason or for no reason without penalty or Liability;
(iv)
ordinary course of Business;
contract or agreement involving any Government Entity which involves consideration in excess of $75,000 annually or not in the
(v)
agreement or indenture relating to borrowed money or other indebtedness or to mortgaging or pledging any material asset;
contract or agreement which involves consideration in excess of $75,000 annually between any Acquired Company and any of
the 10 largest suppliers and the 10 largest customers of the Acquired Companies (in each case as measured by dollar volume of business during the 2015
calendar year);
(vi)
lease or agreement under which any Acquired Company is: (A) lessee of or holds or operates any personal property, owned by
any other party, except for any lease of personal property under which the aggregate annual rental payments do not exceed $75,000 per year; or (B) lessor of or
permits any third party to hold or operate any property, real or personal, owned or controlled by any of the Acquired Companies;
(vii)
25
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
agreements and excluding non-solicitation provisions in Contracts entered into in the Ordinary Course of Business); and
(viii)
any Contract concerning exclusivity, non-competition or non-solicitation (excluding standard employee confidentiality
(other than those agreements required to be disclosed or excepted pursuant to clauses (i) through (viii) above).
(ix)
contract or agreement which involves consideration in excess of $75,000 annually and not in the Ordinary Course of Business
(b)
The Acquired Companies have made available to Buyer true and complete copies of all of the written Material Contracts. With respect to
each Material Contract, as of the date of this Agreement, (i) such Material Contract is legal, valid, binding, enforceable, and in full force and effect with respect to
any Acquired Company, as applicable, except as such enforceability may be limited by (A) applicable insolvency, bankruptcy, reorganization, moratorium, or
other similar Laws affecting creditors’ rights generally and (B) applicable equitable principles (whether considered in a proceeding at Law or in equity); (ii) no
Acquired Company is in material breach or default under any Material Contract; and (iii) to the Knowledge of the Sellers, no other party to any Material Contract
is in material breach or material default thereof.
4.21
Broker Fees. Except as set forth on the Company Disclosure Schedule with respect to fees payable to KippsDeSanto & Co., which shall
constitute Closing Costs paid by the Sellers at the Closing, neither the Sellers nor any of the Acquired Companies has any Liability to pay any fees or
commissions to any broker, finder, or agent with respect to the Transactions for which Buyer could become liable or obligated.
4.22
Inventory. All inventory of the Acquired Companies consists of a quality and quantity usable and salable in the Ordinary Course of Business,
except for obsolete, damaged, defective or slow-moving items that have been written off or written down to fair market value or for which adequate reserves have
been established. All such inventory is owned by the Acquired Companies free and clear of all Liens except Permitted Liens, and no inventory is held on a
consignment basis.
4.23
Product Warranties. Each of the products sold and services provided by the Acquired Companies meets, in all material respects, all applicable
standards for quality and workmanship prescribed by Law. No warranty claims outside the Ordinary Course of Business have been made within the five (5) year
period prior to the date hereof against any of the Acquired Companies in connection with the Business. There exists no pending or, to the Knowledge of the
Sellers, threatened Proceeding alleging product liability or warranty claims by or before any court or Government Entity relating to any product or service alleged
to have been distributed, completed or sold by any Acquired Company.
26
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4.24
Accounts Receivable. All accounts receivable that are reflected on the Financial Statements and the Latest Balance Sheet represent valid
obligations arising from sales actually made or services actually performed by the Acquired Companies in the Ordinary Course of Business. To the Knowledge of
the Sellers, there is no contest, claim, defense or right of setoff with regard to any such account receivable. To the Knowledge of the Sellers, no Acquired
Company has received any payments from customers or other third parties who have declared bankruptcy or had insolvency Actions instituted against it or will
declare bankruptcy or have insolvency Actions instituted against it, within the applicable preference period under applicable Law.
4.25
Disclaimer of the Acquired Companies . Except as otherwise specifically provided in ARTICLE III or this ARTICLE IV (as modified by the
Disclosure Schedules), the Purchased Shares are being acquired WITHOUT ANY OTHER EXPRESSED OR IMPLIED WARRANTY and neither the Sellers, the
Acquired Companies nor any directors, managers, partners, officers, employees, equityholders, optionholders, agents, Affiliates or Representatives thereof, nor
any other Person, has made or shall be deemed to have made any representation or warranty to Buyer, express or implied, at Law or in equity, with respect to
the Sellers, the Acquired Companies, the Business or the assets, Liabilities, results of operations or financial condition of the Acquired Companies, including any
representations and warranties as to the accuracy or completeness of any Evaluation Material or any other information provided to Buyer or any of its Affiliates
or Representatives pursuant to the Confidentiality Agreement or as to the future sales, revenue, profitability or success of the Business, or any representations
or warranties arising from statute or otherwise in Law, from a course of dealing or a usage of trade. All such other representations and warranties are expressly
disclaimed by the Sellers.
ARTICLE V
COVENANTS AND OTHER AGREEMENTS
5.1
Conduct of Business. From and after the date hereof and prior to the Closing Date, and except (i) as required by Law (provided, that any Party
availing itself of such exception must first consult with the other Party), (ii) as may be agreed in writing by the Sellers and Buyer, or (iii) as expressly
contemplated by the Transaction Documents:
(a)
The Sellers and the Company covenant and agree with Buyer that the Business shall be conducted only in, and that the Acquired
Companies shall not take any action except in, the Ordinary Course of Business; and subject to the terms of this Agreement, the Company and the Sellers agree
with Buyer to, and the Sellers agree to cause the Company to, (i) use reasonable efforts to preserve intact the business organizations and goodwill of the
Acquired Companies and maintain their assets and properties in good operating condition, repair and continued maintenance, (ii) pay or perform its material
Liabilities when due, (iii) use commercially reasonable efforts to retain the services of the officers and key employees of the Acquired Companies and maintain
the relationships and goodwill of the Acquired Companies with their respective customers and suppliers and others with which it has business relationships, (iv)
comply with applicable Laws, and (v) maintain insurance coverage consistent with the Ordinary Course of Business.
(b)
The Sellers and the Company agree that between the date hereof and the Closing Date, except as contemplated by the Transaction
Documents or to facilitate the consummation of the transactions contemplated thereunder, the Sellers and the Company shall not permit the Acquired
Companies to:
27
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
split, combine, redeem, repurchase or reclassify any of the Acquired Companies’ capital stock or issue or authorize or propose
the issuance of any other securities in respect of, in lieu of or in substitution for, shares of the Acquired Companies’ capital stock, or grant any options or grant
any depositary receipts for shares of the Acquired Companies’ capital stock;
(i)
(ii)
except as required pursuant to existing employment agreements or Employee Plans or Employee Benefit Arrangements in effect
prior to the execution of this Agreement, or as otherwise required by Law, (A) materially increase the compensation, severance or other benefits payable or to
become payable to the directors, officers or employees, or former employees of any of the Acquired Companies, or (B) establish, adopt, enter into, amend or
terminate any collective bargaining agreement, plan, trust, fund, policy or arrangement for the benefit of any current or former directors, officers or employees of
any of the Acquired Companies, or any of their beneficiaries;
(iii)
enter into or make any loans to any of the officers, directors, employees, agents or consultants of any of the Acquired
Companies or any Affiliates of any such Persons (other than loans or advances in the Ordinary Course of Business) or make any change in its existing
borrowing or lending arrangements for or on behalf of any of such Persons, except as required by the terms of any Employee Plan or Employee Benefit
Arrangement in effect prior to the execution of this Agreement;
items for income Tax purposes, except as required by GAAP or applicable Law;
(iv)
materially change accounting policies or procedures or any of its methods of reporting income, deductions or other material
authorize, propose or announce an intention to authorize or propose, or enter into agreements with respect to, any mergers,
consolidations or business combinations or material acquisitions of assets (other than the purchase of inventory in the Ordinary Course of Business) or
securities;
(v)
(vi)
(vii)
adopt any amendments to the organizational documents of any Acquired Company;
issue, sell, pledge, dispose of or encumber, or authorize the issuance, sale, pledge, disposition or encumbrance of, any shares
of capital stock of an Acquired Company or any securities convertible into or exchangeable for any such shares;
Course of Business not in excess of $75,000;
(viii)
incur, assume, guarantee, or otherwise become liable for any Indebtedness, except for Indebtedness incurred in the Ordinary
(ix)
(x)
Business);
form or cause to be formed any other subsidiary;
make any loans, advances or capital contributions to, or investments in, any other Person (other than in the Ordinary Course of
28
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
sell, lease, license, transfer, exchange or swap, mortgage or otherwise encumber (including securitizations), or subject to any
Lien or otherwise dispose of, any of its properties or assets, except (A) in the Ordinary Course of Business or (B) pursuant to existing agreements in effect prior
to the execution of this Agreement;
(xi)
(xii)
enter into, modify, amend, terminate or waive any rights under any Material Contract in any material respect outside the
Ordinary Course of Business;
(xiii)
(xiv)
settle any Action other than in the Ordinary Course of Business involving solely money damages not in excess of $75,000;
take (or authorize or permit any other Person to take) or suffer any action that would have required disclosure pursuant to
Section 4.5 had such action occurred on or prior to the date hereof (but after the date of the Latest Balance Sheet); or
(xv)
authorize, commit to or agree, in writing or otherwise, to take any of the foregoing actions.
5.2
No Solicitation. Each of the Sellers and the Company agrees that, through the earlier of the Closing Date or the termination of this Agreement in
accordance with ARTICLE VII, such Party shall not, and such Party shall cause its respective Representatives and Affiliates not to, directly or indirectly (i) solicit,
initiate, encourage (including by way of furnishing non-public information), facilitate or induce any inquiry with respect to, or the making, submission or
announcement of, any Alternative Proposal, (ii) participate in any discussions, negotiations or other communications regarding, or furnish to any Person any
non-public information with respect to, any Alternative Proposal or in response to any inquiries or proposals that would reasonably be expected to lead to any
Alternative Proposal, (iii) engage in discussions, negotiations or other communications, or otherwise cooperate in any way, with any Person with respect to any
Alternative Proposal, except to notify such Person as to the existence of the provisions of this Section 5.2, (iv) approve, endorse or recommend any Alternative
Proposal, or (v) consummate or effect, or enter into any letter of intent, agreement, commitment or similar document providing for, any Alternative Proposal. The
Sellers and the Company shall immediately terminate, and shall cause their respective Representatives and Affiliates to immediately terminate, all discussions or
negotiations, if any, that are ongoing as of the date hereof with any third party with respect to an Alternative Proposal. The Sellers and the Company shall notify
Buyer promptly if any such Alternative Proposal, or any inquiry or other contact with any Person with respect thereto, is made. As used in this Agreement,
“Alternative Proposal” shall mean any proposal or offer made by any Person for the direct or indirect acquisition by any Person of any stock or assets of one or
both of the Acquired Companies, except for the sale of inventory of an Acquired Company in the Ordinary Course of Business.
29
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
5.3
Access. From the date hereof through the earlier of the Closing Date or the termination of this Agreement in accordance with ARTICLE VII, the
Company shall, and the Sellers shall cause the Company to, afford to Buyer and to its Representatives reasonable access during normal business hours,
throughout the period from the date hereof until the Closing, to the Acquired Companies’ assets, properties, contracts, commitments, documents, books and
records, employees and Representatives, including to permit Buyer and its Representatives to make such inspections as it may reasonably require, and shall
use its reasonable best efforts to cause the Representatives of the Sellers and the Acquired Companies to furnish promptly to Buyer or its Representatives such
additional data and other information as to the Acquired Companies’ business, assets, property and operations as Buyer or its Representatives may from time to
time reasonably request, except that nothing herein shall require the Sellers or the Acquired Companies to disclose any information that, as determined in the
reasonable discretion of the Sellers, acting in good faith, (a) would cause a risk of a loss of privilege to the Party disclosing such data or information, or (b) would
constitute a violation of applicable Laws, unless such information is disclosed pursuant to a joint defense agreement entered into with Buyer. The information
observed or learned of by, or otherwise communicated to, Buyer and its Representatives pursuant to this Section 5.3 shall be subject to Section 5.12.
5.4
Notification of Certain Matters. From the date hereof through the earlier of the Closing Date or the date of termination of this Agreement in
accordance with ARTICLE VII, the Sellers shall give prompt notice to Buyer, and Buyer shall give prompt notice to the Sellers, of (a) the occurrence of any event
known to it which would reasonably be expected to, individually or in the aggregate, (i) in the case of the Sellers, result in a Company Material Adverse Change
or Seller Material Adverse Change, or, in the case of Buyer, significantly impair or delay the consummation of the transactions contemplated hereby or by any
Transaction Document, or (ii) cause any condition set forth in ARTICLE VI to be unsatisfied at any time prior to the Closing Date or incapable of being satisfied
or delay or frustrate the Closing in any respect; (b) any Action or Proceeding pending or, to the Knowledge of the Sellers or the Knowledge of Buyer (as the case
may be), threatened, which questions or challenges the validity of this Agreement or seeks to enjoin the consummation of the transactions contemplated hereby;
or (c) any fact or circumstance that would result in any breach or inaccuracy of any of such Party’s representations and warranties under this Agreement;
provided, however, that the delivery of any notice pursuant to this Section 5.4 shall not (A) qualify, modify, amend or otherwise affect any representations,
warranties, covenants or other agreements of any party hereto set forth in this Agreement, any Transaction Document, or any certificate or other instrument
delivered in connection with the transactions contemplated hereby and the other transactions contemplated hereby or thereby, (B) amend or otherwise affect the
Disclosure Schedules hereto, (C) waive any applicable closing condition, or (D) limit or otherwise affect the remedies available hereunder to the party receiving
such notice, nor shall the party giving such notice be prejudiced with respect to any such matters solely by virtue of having given such notice.
5.5
Efforts; Regulatory Approvals.
(a)
Each of the Parties agrees to use its commercially reasonable efforts to prepare and file as promptly as practicable all documentation to
effect all necessary filings, notices, consents, waivers, approvals, authorizations, Permits or Orders from all applicable Government Entities and otherwise to
cause each of the conditions to Closing set forth in ARTICLE VI to be satisfied as soon as reasonably practicable. In furtherance and not in limitation of the
foregoing, each Party agrees to supply as promptly as reasonably practicable any additional information and documentary material that may be requested by any
Government Entity pursuant to applicable Laws.
30
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(b)
Further, and without limiting the generality of the rest of this Section 5.5, each of the Parties shall reasonably cooperate with each other
in connection with any filing or submission and in connection with any investigation or other inquiry and shall promptly (i) furnish to the other such necessary
information and reasonable assistance as the other Parties may request in connection with the foregoing, (ii) inform the other of any communication received
from or given to any Government Entity or any material communication received from or given to a customer, supplier or other vendor relating to any regulatory
approval or review by any Government Entity, and (iii) provide counsel for the other Parties with copies of all correspondence between such Party (and its
advisors) with any Government Entity and any other information supplied by such Party and such Party’s Affiliates to a Government Entity or received from such
a Government Entity in connection with the transactions contemplated by this Agreement; provided, however, that materials may be withheld or redacted as
necessary to comply with contractual arrangements and with applicable Law, and as necessary to address reasonable attorney-client or other privilege or
confidentiality concerns. Each Party shall, subject to applicable Law, permit counsel for the other Parties to review in advance, and consider in good faith the
views of the other parties in connection with, any proposed written communication to any Government Entity or, in the case of any proceedings by a private
party, any other Person, in connection with the transactions contemplated hereby. The Parties shall consult with each other if practicable in advance of any
meeting, discussion, telephone call or conference with any Government Entity or, in connection with any proceeding by a private party, with any other Person,
and to the extent not expressly prohibited by the Government Entity or Person, applicable Law or any Contract of the Acquired Companies, give the other Party
the opportunity to attend and participate in such meetings and conferences, in each case, regarding the transactions contemplated hereby; provided, however,
that a Party may prohibit the other Party from attending any such meeting or conference where commercially sensitive or privileged information may be
discussed.
(c)
Each Party shall not, and shall cause each of its respective Affiliates not to, take any action which is intended to or which would
reasonably be expected to adversely affect the ability of any of the Parties from obtaining (or cause delay in obtaining) any necessary approvals or clearances of
any Government Entity required for the transactions contemplated hereby, from performing its covenants and agreements under this Agreement, or from
consummating the transactions contemplated hereby. Each Party and its respective Affiliates shall not directly or indirectly extend any waiting period under
applicable Laws or enter into any agreement to delay or not to consummate the transactions contemplated by this Agreement except with the prior written
consent of the other Party. Notwithstanding anything contained herein, Buyer shall be under no obligation (i) to sell, divest, license or dispose of any assets or
businesses of Buyer (or its Affiliates) or the Acquired Companies, (ii) to enter into any agreement to take or commit to take actions that limit Buyer or its
Affiliates’ freedom of action with respect to, or their ability to retain, any of the business, product lines or assets of Buyer (or its Affiliates) or the Acquired
Companies, or (iii) to institute or defend any Action or Proceeding, including appeals, asserted in or before any Government Entity by any Party.
31
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
5.6
Financial Statements. No later than twenty (20) days after the completion of each fiscal month following the date hereof and prior to the Closing
Date, the Company shall (and the Sellers shall cause the Company to) deliver to Buyer an unaudited balance sheet of the Acquired Companies as of the last
day of such month, together with the related unaudited statements of income, stockholder’s equity and cash flows (including the related notes, if any) in
accordance with the format used by the Company for the Interim Financial Statements (the “Monthly Financial Statements”). As used herein, and for purposes of,
the representation under Section 4.4 (including for purposes of the “bring down” of such representation) the term “Financial Statements” shall be deemed to
include any Monthly Financial Statement delivered pursuant to this Section 5.6.
5.7
Transition. The Sellers will not take any action after the Closing that is designed or intended to have the effect of discouraging any lessor,
licensor, customer, supplier, or other business associate of the Acquired Companies from maintaining the same business relationships with the Acquired
Companies after the Closing as it maintained prior to the Closing.
5.8
Noncompetition and Nonsolicitation.
(a)
Each Seller hereby agrees that for a period beginning on the Closing Date and ending three (3) years after the Closing Date, such Seller
will not, and will cause its Affiliates not to, at any time directly or indirectly (other than ownership as a passive investor of less than 2% of the voting stock of a
company listed on a national stock exchange):
own, manage, operate, finance, control, act as consultant to or participate in the ownership, management, operation, financing,
or control of, or otherwise have an interest in any business that competes, or has the intention of using such Seller or such Affiliate to compete, anywhere in the
world, with the Business;
(i)
intended to compete with any products or services of the Business anywhere in the world; and
(ii)
sell or solicit the sale of any product or service of any Person in existence or under development that competes with or is
whether for such Seller’s or its Affiliate’s own account or for the account of any other Person, intentionally interfere with the
relationship of the Company with, or endeavor to entice away from any of them, any Person or entity who, during the period of twelve months prior to the
Closing Date, is or was a customer, supplier, vendor or client of, and who is engaged in ongoing business with, the Company with respect to the Business.
(iii)
(b)
Each Seller hereby agrees that for a period of two (2) years from the Closing Date, such Seller will not, and will cause its Affiliates not to,
at any time except as expressly permitted by Buyer or its successors or assigns in advance in writing, directly or indirectly, solicit any employee of any Acquired
Company as of the Closing Date (the “Restricted Persons”) to leave the employ of Buyer or any of its Affiliates or hire any Restricted Person, or attempt to hire
any Restricted Person in any capacity; provided, however, that, the foregoing shall not prohibit (i) a general solicitation to the public by general advertising or
similar methods of solicitation (including by search firms) not specifically directed at the Restricted Persons, or (ii) the hiring or solicitation of any Restricted
Person who has ceased to be employed by, or provide services to, Buyer or its Affiliates.
32
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(c)
If it is judicially determined, in a final, non-appealable judgment, that a Seller or any of its Affiliates has violated any of such Seller’s
obligations hereunder, then the period of the covenants contained herein automatically will be extended by a period of time equal in length to the period during
which such violation(s) occurred. Each Seller acknowledges and agrees that Buyer’s remedies at law for any breach of any of such Seller’s obligations hereunder
would be inadequate, and agree and consent that, in addition to any other relief available to Buyer at law or in equity, temporary and permanent injunctive relief
may be granted in a proceeding brought to enforce any provision hereof without the necessity of proof of actual damage or the posting of a bond or other
security. The foregoing will not in any way relieve Buyer of the burden of proving that a breach by the Sellers of their respective obligations hereunder occurred. If
a court of competent jurisdiction finds the time limits or geographic provisions hereof to be so burdensome as to be unenforceable, then the time and/or
geographic limitations will be reduced to such extent as is necessary to enable the court to enforce the intention of the restrictive covenants contained herein.
5.9
Release. Effective as of the Closing, each Seller, on its own behalf and on behalf of its successors, assigns and Affiliates does hereby
irrevocably, unconditionally, voluntarily, knowingly, fully, finally and completely forever release and discharge each Acquired Company and its Affiliates,
successors, assigns and predecessors and their present and former owners, representatives, successors and assigns, individually and collectively, but
specifically excluding Buyer (each, a “Released Party”), from, against and with respect to any and all actions, accounts, causes of action, complaints, charges,
covenants, contracts, liabilities, obligations, defenses, duties, executions, fees, injuries, interest, judgments, liabilities, penalties, promises, reimbursements,
remedies, suits, sums of money, and torts, of whatever kind or character, whether in law, equity or otherwise, direct or indirect, fixed or contingent, foreseeable
or unforeseeable, liquidated or unliquidated, known or unknown, matured or unmatured, absolute or contingent, determined or determinable, that such Seller or
owners, representatives, successors, assigns and Affiliates ever had or now has, or may hereafter have or acquire, against the Released Parties that arise out of
or in any way relate, directly or indirectly, to any matter, cause or thing, act or failure to act whatsoever occurring at any time on or prior to the Closing Date,
including such Seller’s ownership of the shares in the Company or the ownership, operation, business, affairs, management, prospects or financial condition of
the Acquired Companies. Notwithstanding the foregoing, (a) this Section 5.9 shall not release any Released Party from any future obligation set forth in this
Agreement or any applicable Transaction Documents, and (b) with respect to any Covered Persons, all rights of such Covered Persons expressly provided for in
Section 5.16 shall be unaltered, unimpaired and otherwise unaffected by this Section 5.9, and shall remain in full force and effect and are not released or limited,
as applicable, hereby.
5.10
Financing Matters.
(a)
The Buyer shall use its good faith efforts to obtain the Financing. In order to assist with Buyer obtaining the Financing, the Sellers shall,
and shall cause the Acquired Companies to, at the sole cost and expense of Buyer, provide such reasonable assistance and cooperation as Buyer and its
Affiliates and Representatives may reasonably request, including, but not limited to, assistance in the preparation of any offering memorandum or similar
document, assisting with initial purchasers or placements agents, making senior management of the Acquired Companies reasonably available for customary
“roadshow” presentations and cooperation with prospective lenders in performing their due diligence, entering into customary agreements with underwriters,
initial purchasers or placement agents, and entering into other definitive financing documents or other requested certificates or documents, including a
customary certificate of the chief financial officer of the Company with respect to solvency matters, comfort letters of accountants, legal opinions and title
documentation.
33
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(b)
Buyer shall promptly (i) furnish to the Sellers copies of all written commitment letters, letters of intent, or other agreements in principle
with respect to all debt or equity financing reasonably expected to be obtained in connection with the Financing, and (ii) advise the Sellers orally and, if
requested by the Sellers, in writing of (A) any significant change in the status of any such financing arrangements, or (B) to the Knowledge of Buyer, any other
event which could reasonably be expected to materially delay or prevent the consummation of the Financing. Buyer shall promptly provide the Sellers with
copies of any written changes or termination of the commitments described in clause (i) and any written commitments for alternate financing.
5.11
Disclosure Schedule Updates . From time to time prior to the Closing, Sellers shall have the right (but not the obligation) to supplement or amend
the Company Disclosure Schedules with respect to any matter hereafter arising or of which the Sellers become aware after the date hereof, which, if existing,
occurring or known at the date of this Agreement, would have been required to be set forth or described in the Company Disclosure Schedules (each a
“Schedule Supplement”). Any disclosure in any such Schedule Supplement shall not be deemed to have cured any inaccuracy in or breach of any
representation or warranty contained in this Agreement, including for purposes of the indemnification or termination rights contained in this Agreement or of
determining whether or not the conditions set forth in ARTICLE VI have been satisfied; provided, however, that if Buyer has the right to, but do not elect to,
terminate this Agreement within five (5) Business Days of its receipt of such Schedule Supplement, then Buyer shall be deemed to have irrevocably waived any
right to terminate this Agreement with respect to such matter and, further, shall have irrevocably waived its right to indemnification under ARTICLE VII with
respect to such matter.
5.12
Public Announcements; Confidentiality.
(a)
None of the Sellers or Buyer shall make, or permit any agent or Affiliate to make, any public statements, including any press releases,
with respect to this Agreement and the Transactions without the prior written consent of the other (which consent shall not be unreasonably withheld or
delayed), except as may be required by any applicable Law or Order, in which case the Party required to make the release or announcement shall allow the
other Party reasonable time to comment on such release or announcement in advance of such issuance. Buyer and the Sellers shall jointly agree on the content
and substance of all public announcements concerning the Transactions. Notwithstanding the foregoing, the Parties agree that an announcement of the
Transactions to the employees shall be made after trading has closed on the Nasdaq Capital Market on a Business Day to be mutually agreed upon by the
Sellers and Buyer, and that the Form 8-K and press release associated with the Transactions shall be filed and released prior to the opening of trading on the
Nasdaq Capital Market on the following Business Day.
34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(b)
The Parties acknowledge that the information being provided to one another in connection with the Transactions (including the terms
and conditions of this Agreement and the other Transaction Documents) is subject to the terms of the Confidentiality Agreement, the terms of which are
incorporated herein by reference. Buyer agrees that it will only use and disclose the Transferred Information disclosed to it by the Acquired Companies and the
Sellers in connection with the Transactions or as otherwise permitted by applicable Privacy Laws.
(c)
If Buyer determines based on the advice of counsel that it is required by applicable Law to file the Disclosure Schedules, Buyer shall
submit a confidential treatment request under Rule 406 of the Securities Act and Rule 24b-2 of the Exchange Act with respect to any information reasonably
identified by Sellers as sensitive and confidential. To the extent such treatment is denied by the SEC, Buyer shall be permitted to file the Disclosure Schedules
without any redaction which has been so denied.
5.13
Litigation Support. In the event and for so long as any Party actively is contesting or defending against any third party Action or Proceeding in
connection with (a) the Transactions; or (b) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure
to act, or transaction involving the Acquired Companies or the Sellers, Buyer agrees to (i) cooperate with the contesting or defending party and its counsel; (ii)
make available any employee then employed by Buyer to provide testimony, to be deposed, to act as witnesses and to assist counsel; and (iii) provide access to
the books and records as shall be necessary in connection with the defense or contest, all at the sole cost and expense of the contesting or defending party.
5.14
Employee Matters.
(a)
For a period of ninety (90) days after the Closing Date, Buyer shall not terminate Business Employees in such numbers as would trigger
any Liabilities under the Worker Adjustment, Retraining and Notification Act, 29 U.S.C. § 2101, et seq. (“WARN”) or any state plant closing or other severance
Law. Buyer shall, and shall cause the Acquired Companies to, comply with any notice or filing requirements under WARN and any state plant closing or other
severance Law occurring on or after the Closing Date. The Acquired Companies shall provide Buyer at Closing with a list of all employment terminations for the
ninety (90) days prior to the Closing Date, and for each employment termination, the Acquired Companies shall provide the employee’s name, date of
termination and location of employment.
(b)
From and after the Closing Date, Buyer shall, and shall cause the Acquired Companies to, honor (without modification) each written
Contract between the Acquired Companies and any Business Employee that (i) existed as of the date hereof; and (ii) is set forth on the Company Disclosure
Schedule.
(c)
During the twelve (12) month period commencing at the Closing Date, Buyer shall provide, or shall cause the Acquired Companies to
provide, to any Business Employee compensation and benefits, including the Employee Plans and Employee Benefit Arrangements, that are in the aggregate,
substantially comparable to and no less favorable than the compensation and benefits being provided to Business Employees as of the date of this Agreement;
provided that nothing herein shall prohibit Buyer from replacing any such existing Employee Plan or Employee Benefit Arrangement with a plan, policy program
or arrangement which provide such Business Employees with benefits that are in the aggregate substantially comparable to and no less favorable than the
benefits that would have been provided under such existing Employee Plan or Employee Benefit Arrangement.
35
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(d)
Without limiting the generality of Section 5.14(c), Buyer shall cause any employee benefit plan, policy, program or arrangement as may
be maintained for Business Employees from time to time following the Closing Date (including plans, policies, programs or arrangements providing severance
benefits and vacation entitlement), to credit such Business Employees with their service performed for the Acquired Companies prior to Closing as service with
Buyer or the Acquired Companies, as the case may be, for purposes of determining eligibility to participate, vesting and benefit accruals. Such service also shall
apply for purposes of satisfying any waiting periods, evidence of insurability requirements, or the application of any preexisting condition limitations. Buyer shall
also honor, or cause the Acquired Companies, as the case may be, to honor, all vacation, personal and sick days accrued by the Business Employees under the
Employee Plans and Employee Benefit Arrangements immediately prior to the Closing Date.
(e)
Without limiting the generality of Section 5.14(c), Buyer shall cause the Acquired Companies to honor, in accordance with their terms,
and shall, or shall cause the Acquired Companies to, make required payments when due under, all Employee Plans and Employee Benefit Arrangements
maintained or contributed to by the Acquired Companies or to which the Acquired Companies are a party (including employment, incentive and severance
agreements and arrangements), that are applicable with respect to any Business Employee or any director of any Acquired Company (whether current, former
or retired) or their beneficiaries; provided that the foregoing shall not preclude Buyer or the Acquired Companies from amending or terminating any Employee
Plan or Employee Benefit Arrangement in accordance with its terms.
5.15
Record Retention. The Parties agree that for a period of five (5) years after the Closing Date, or for a longer period if required by applicable Law,
without the prior written consent of the Sellers, neither Buyer nor any of its Affiliates shall dispose of or destroy any of the books and records purchased
hereunder which may be relevant to any legal, regulatory or Tax audit, investigation, inquiry or requirement of any of the Sellers without first offering such records
to the Sellers.
5.16
Indemnification of Directors and Officers; Insurance .
(a)
Buyer agrees that all rights to indemnification, advancement of expenses and exculpation now existing in favor of each individual who,
as of the Closing Date, is a current or former director or officer of the Acquired Companies (collectively, the “Covered Persons”) pursuant to the respective
charter documents, bylaws, limited liability company operating agreements, individual indemnity agreements, board resolutions or otherwise, shall survive the
Closing and shall continue in full force and effect in accordance with their terms for a period of not less than six years from the Closing Date. Following the
Closing, neither Buyer nor the Acquired Companies shall amend, repeal or otherwise modify such arrangements in any manner that would adversely affect the
rights of the Covered Persons thereunder.
36
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(b)
Buyer shall cause the Acquired Companies to honor, to the fullest extent permitted by applicable Law, all of the obligations of the
Acquired Companies to indemnify (including any obligations to advance funds for expenses) the Covered Persons to the extent that such obligations of the
Acquired Companies exist on the Closing Date, whether pursuant to charter documents, bylaws or limited liability company operating agreements of the Acquired
Companies, individual indemnity agreements, board resolutions or otherwise, and such obligations shall survive the Closing and shall continue in full force and
effect in accordance with the terms of such arrangements until the expiration of the applicable statute of limitations with respect to any claims; provided that such
indemnification rights shall not apply to any Covered Person with respect to any Liability for which such Covered Person is obligated to indemnify Buyer under
ARTICLE VII of this Agreement.
(c)
In the event that Buyer, the Acquired Companies or any of their respective successors or assigns after the Closing Date (i) consolidates
with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger; or (ii) transfers or
conveys all or a substantial portion of its properties and assets to any Person, then, and in each such case, proper provision shall be made so that the
successors and assigns of Buyer, the Acquired Companies or of their respective successors or assigns assume the obligations of Buyer and/or the Acquired
Companies or their respective successors or assigns as contemplated by this Section 5.16.
(d)
Buyer and/or the Acquired Companies or their respective successors or assigns shall pay all reasonable expenses, including, without
limitation, reasonable attorneys’ fees, that may be incurred by any Covered Person in enforcing the indemnity and other obligations provided in this Section 5.16.
The provisions of this Section 5.16 shall survive the consummation of the Closing and expressly are intended to benefit each of the Covered Persons.
Notwithstanding anything to the contrary, it is agreed that the rights of a Covered Person under this Section 5.16 shall be in addition to, and not a limitation of,
any other rights such Covered Person may have under the charter documents, bylaws or limited liability company operating agreements of the Acquired
Companies, individual indemnity agreements, board resolutions or otherwise, and nothing in this Section 5.16 shall have the effect of, or be construed as having
the effect of, reducing the benefits to the Covered Persons under such arrangements.
(e)
Buyer hereby acknowledges that the Covered Persons may have certain rights to indemnification, advancement of expenses and/or
insurance provided by other Persons. Buyer hereby agrees (i) that the Acquired Companies are the indemnitors of first resort (i.e., their obligations to the
Covered Persons are primary and any obligation of such other Persons to advance expenses or to provide indemnification for the same expenses or Liabilities
incurred by any such Covered Person are secondary); (ii) that the Acquired Companies shall be required to advance the full amount of expenses incurred by any
Covered Person and shall be liable for the full indemnifiable amounts, in each case in accordance with the indemnification obligations described in this Section
5.16, without regard to any rights any such Covered Person may have against any such other Person; and (iii) that Parties irrevocably waives, relinquishes and
releases (and shall cause the Acquired Companies to irrevocably waive, relinquish and release) such other Persons from any and all claims against any such
other Persons for contribution, subrogation or any other recovery of any kind in respect thereof. Each of Buyer and the Acquired Companies further agrees that
no advancement or payment by any of such other Persons on behalf of any such Covered Persons with respect to any claim for which such Covered Person has
sought indemnification from the Acquired Companies shall affect the foregoing.
37
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
5.17
Acknowledgement of Personal Property. The Parties acknowledge and agree that the personal property set forth on Schedule 5.17 is personal
property owned by a Seller or its Affiliates and that such Seller or its Affiliates shall be entitled to remove such personal property from the premises of the
Acquired Companies.
5.18
Tax Matters.
(a)
Tax Periods Ending on or Before the Closing Date . Buyer shall prepare or cause to be prepared and file or cause to be filed all Tax
Returns for the Acquired Companies for all periods ending on or prior to the Closing Date (“Pre-Closing Tax Period”) that are filed after the Closing Date. Such
Tax Returns shall be prepared consistently with the past practice of the Acquired Companies, unless otherwise required by applicable Law. Buyer shall permit
Sellers to review and comment on each such Tax Return described in the preceding sentence prior to filing and shall accept all comments that are reasonable.
The Sellers, jointly and severally, shall reimburse Buyer for Taxes of the Acquired Companies with respect to such periods within five (5) days of payment by
Buyer or the Acquired Companies of such Taxes, except to the extent such Taxes are taken into account in the adjustments contemplated under Sections 1.5
through 1.8 (for the avoidance of doubt, the Sellers’ obligation to reimburse Buyer under this Section 5.18(a) shall not be limited under the terms of ARTICLE
VII).
(b)
Tax Periods Beginning Before and Ending After the Closing Date . Buyer shall prepare or cause to be prepared and file or cause to be
filed any Tax Returns of the Acquired Companies for Tax periods that begin before the Closing Date and end after the Closing Date (a “Straddle Tax Period”).
Such Tax Returns shall be prepared consistently with the past practice of the Acquired Companies unless otherwise required by applicable Law. Buyer shall
permit Sellers to review and comment on each such Tax Return described in the preceding sentence prior to filing and shall accept all comments that are
reasonable. The Sellers, jointly and severally, shall reimburse Buyer within five (5) days of the date on which Taxes are paid with respect to such periods an
amount equal to the portion of such Taxes which relates to the portion of such taxable period ending on the Closing Date, except to the extent such Taxes are
taken into account in the adjustments contemplated under Sections 1.5 through 1.8 (for the avoidance of doubt, the Sellers’ obligation to reimburse Buyer under
this Section 5.18(b) shall not be limited under the terms of ARTICLE VII). For purposes of this Section 5.18, in the case of any Taxes that are imposed on a
periodic basis and are payable for a taxable period that includes (but does not end on) the Closing Date, the portion of such Tax which relates to the portion of
such taxable period ending on the Closing Date shall (i) in the case of any Taxes other than the Taxes based upon or related to income or receipts, be deemed
to be the amount of such Tax for the entire taxable period multiplied by a fraction the numerator of which is the number of days in the taxable period ending on
the Closing Date and the denominator of which is the number of days in the entire taxable period, and (ii) in the case of any Tax based upon or related to income
or receipts be deemed equal to the amount which would be payable if the relevant taxable period ended on the Closing Date. For purposes of this Section 5.18,
in the case of any Tax credit relating to a taxable period that begins before and ends after the Closing Date, the portion of such Tax credit which relates to the
portion of such taxable period ending on the Closing Date shall be the amount which bears the same relationship to the total amount of such Tax credit as the
amount of Taxes described in (y) above bears to the total amount of Taxes for such taxable period.
38
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(c)
Cooperation on Tax Matters.
(i)
Buyer, the Acquired Companies and the Sellers shall cooperate fully, as and to the extent reasonably requested by the other
Party, in connection with the filing of Tax Returns pursuant to this Section 5.18 and any audit, Action or Proceeding, with respect to Taxes. Such cooperation
shall include the retention and (upon the other Party’s request) the provision of records and information which are reasonably relevant to any such audit, Action
or Proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided
hereunder. The Acquired Companies and the Sellers agree (A) to retain all books and records with respect to Tax matters pertinent to the Acquired Companies
relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Buyer or the
Sellers, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority, and (B)
to give the other Party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other Party so requests, the
Acquired Companies or the Sellers, as the case may be, shall allow the other Party to take possession of such books and records.
Buyer and the Sellers further agree, upon request, to use their commercially reasonable efforts to obtain any certificate or other
document from any Government Entity or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including with
respect to the Transactions).
(ii)
(d)
Amended Tax Returns .
(i)
Any amended Tax Return of any of the Acquired Companies or claim for Tax refund on behalf any of the Acquired Companies
for any period ending on or prior to the Closing Date shall be filed, or caused to be filed, only by Sellers. The Sellers shall not, without the prior written consent of
Buyer (which consent shall not be unreasonably withheld or delayed), make or cause to be made, any such filing, to the extent such filing, if accepted,
reasonably might change the Tax Liability of Buyer for any period ending after the Closing Date.
(ii)
Any amended Tax Return of any Acquired Company or claim for Tax refund on behalf of an Acquired Company for any period
ending after the Closing Date shall be filed, or caused to be filed, only by Buyer. Buyer shall not, without the prior written consent of Sellers (which consent shall
not be unreasonably withheld or delayed), make or cause to be made, any such filing, to the extent such filing, if accepted, reasonably might change the Tax
Liability of the Sellers for any period or portion thereof ending on or prior to the Closing Date.
39
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(e)
Audits.
(i)
Buyer shall provide the Sellers with notice of any written inquiries, audits, examinations or proposed adjustments by the Internal
Revenue Service (“IRS”) or any other taxing authority, which relate to any Pre-Closing Tax Periods within ten (10) days of the receipt of such notice. Sellers shall
have the sole right to represent the interests of the Acquired Companies in any Tax audit or other proceeding relating to any Pre-Closing Tax Periods, to employ
counsel of its choice at its own expense, and to settle any issues and to take any other actions in connection with such proceedings relating to such taxable
periods; provided that the Sellers shall inform Buyer of the status of any such proceedings, shall provide Buyer (at Buyer’s cost and expense) with copies of any
pleadings, correspondence, and other documents as Buyer may reasonably request and shall consult with Buyer prior to the settlement of any such proceedings
and shall obtain the prior written consent of Buyer prior to the settlement of any such proceedings that could reasonably be expected to adversely affect Buyer in
a material manner in any taxable period ending after the Closing Date, which consent shall not be unreasonably withheld or delayed; provided further that Buyer
and counsel of its own choosing shall have the right to participate in, but not direct, the prosecution or defense of such proceedings at Buyer’s sole expense.
(ii)
Buyer and the Sellers shall provide each other with notice of any written inquiries, audits, examinations or proposed adjustments
by the IRS or any other taxing authority that relate to any Straddle Tax Period within ten (10) days of the receipt of such notice. Buyer and the Sellers shall jointly
control the conduct of any Tax audits or other proceedings relating to Taxes for a Straddle Tax Period, and neither Party shall settle any such Tax audit or other
proceeding without the written consent of the other Party, which consent shall not be unreasonably withheld or delayed.
Buyer shall have the right to control all other Tax audits or proceedings of the Acquired Companies. Buyer shall obtain the prior
written consent of Sellers prior to the settlement of any such proceedings that could reasonably be expected to increase the Sellers’ Tax Liability for a Pre-
Closing Tax Period, which consent shall not be unreasonably withheld or delayed.
(iii)
necessary or appropriate to give effect to the foregoing.
(iv)
The Acquired Companies shall execute and deliver to the Sellers such powers of attorney and other documents as may be
(f)
Certain Taxes. All transfer, documentary, sales, use, stamp, registration and other such transfer-related Taxes and fees (including any
penalties and interest) incurred in connection with this Agreement shall be paid by the Sellers when due, and the Sellers will, at their own respective expense, file
all necessary Tax Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration and other such transfer Taxes
and fees, and, if required by applicable Law, Buyer or the Acquired Companies will join in the execution of any such Tax Returns and other documentation.
40
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(g)
Tax Covenants.
(i)
Buyer covenants that without obtaining the prior written consent of Sellers it will not, and will not cause or permit any Acquired
Company or any Affiliate of Buyer, to (A) take any action on or after the Closing Date other than in the ordinary course of business that could give rise to any
Tax Liability of the Sellers or any indemnification obligation of the Sellers under Section 7.1, or (B) make or change any material Tax election (including a Section
338(g) election), amend any Tax Return, take any Tax position on any Tax Return, or compromise or settle any Tax Liability, in each case if such action could
have the effect of increasing the Tax Liability of the Sellers or reducing any Tax asset of any Acquired Company with respect to any Pre-Closing Tax Period or
portion of a Straddle Tax Period ending on the Closing Date.
After the Closing Date, Buyer and the Acquired Companies will not, without obtaining the written consent of Sellers, agree to the
waiver or any extension of the statute of limitations relating to any Taxes of the Acquired Companies for any Pre-Closing Tax Period or any Straddle Tax Period.
(ii)
(iii)
The Sellers shall have the right to (A) any Tax refunds received by any Acquired Company for any Pre-Closing Tax Period or
portion of any Straddle Tax Period that ends on the Closing Date (except to the extent such amounts are taken into consideration in calculating the Net Working
Capital) or (B) any credits against Taxes in lieu of refunds described in clause (A). Buyer shall pay such amounts to the Sellers no later than ten (10) days after
the receipt by any such Acquired Company of such Tax refunds or credits. Buyer will cooperate with Sellers to prepare and file any Tax Returns required to claim
Tax refunds that the Sellers are entitled to pursuant to this Section 5.18(g)(iii).
(h)
Payment of Company Tax Benefits. The Parties hereby agree and acknowledge that the Tax deductions associated with the Transaction
Payments shall be for the sole benefit of the Sellers and shall be allocated to the applicable Pre-Closing Tax Periods ending on the Closing Date or portions of
the applicable Straddle Tax Periods ending on the Closing Date, in each case to the extent permitted by applicable Law and that notwithstanding anything to the
contrary in this Agreement, the Sellers shall be entitled to the benefits of each such Tax deduction. The method to compensate the Sellers for the benefit
associated with Tax deductions that neither reduce amounts the Sellers would otherwise have to pay pursuant to Section 5.18(a) or Section 5.18(b), nor are
reflected as a reduction in Taxes payable for purposes of determining Net Working Capital, is through the payment of the Company Tax Benefits. In the event
that the Tax deductions associated with the Transaction Payments result in a net operating loss of any of the Acquired Companies for a Pre-Closing Tax Period
ending on the Closing Date, such net operating loss shall, to the extent permitted by Law, be first carried back to all available prior Pre-Closing Tax Periods of
such Acquired Company, as applicable, to claim refunds for any Taxes that were previously paid by the Acquired Companies in such Pre-Closing Tax Periods.
Buyer shall pay or cause to be paid to the Sellers the amount of any Company Tax Benefits within ten (10) days after such Company Tax Benefits are actually
realized or obtained. A Company Tax Benefit is actually realized or obtained only (i) upon the filing of a Tax Return (including a short period Tax Return) that
shows a reduced Tax Liability or (ii) upon receipt of a Tax refund.
41
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(i)
Tax Dispute Resolution Mechanism . Any dispute among the Parties involving Taxes arising under this Agreement shall be resolved as
follows: (i) the Parties will in good faith attempt to negotiate a prompt resolution of the dispute; (ii) if the Parties are unable to negotiate a resolution of the
dispute within thirty (30) days, the dispute will be submitted to the national office of a firm of independent accountants of nationally recognized standing
reasonably satisfactory to Sellers and Buyer (the “Tax Dispute Accountant ”); (iii) the Tax Dispute Accountant shall resolve the dispute, in a fair and equitable
manner and in accordance with applicable Tax Law and the provisions of this Agreement, within thirty (30) days after the Parties have submitted the dispute to
the Tax Dispute Accountant, whose decision shall be final, conclusive and binding on the Parties, absent fraud or manifest error; (iv) any payment to be made as
a result of the resolution of a dispute shall be made, and any other action taken as a result of the resolution of a dispute shall be taken, on or before the fifth (5th)
day following the date on which the dispute is resolved (except that if the resolution requires the filing of an amended Tax Return, such amended Tax Return
shall be filed within thirty (30) days following the date on which the dispute is resolved); and (v) the fees and expenses of the Tax Dispute Accountant shall be
paid by the Party who the Tax Dispute Accountant determines has derived the least benefit from the issues to be resolved by the Tax Dispute Accountant;
provided that, (A) if the Parties are unable to agree on a national office of a firm of independent accountants of nationally recognized standing to act as Tax
Dispute Accountant, Sellers and Buyer shall each select a national office of a firm of independent accountants of nationally recognized standing and such firms
together shall select the national office of a firm of independent accountants of nationally recognized standing to act as the Tax Dispute Accountant; and (B) if
any Party does not select a national office of a firm of independent accountants of nationally recognized standing within ten (10) days of written demand therefor
by the other Party, the firm selected by the other Party shall act as the Tax Dispute Accountant.
5.19
Further Assurances. From and after the Closing, Buyer and the Sellers shall execute and deliver such further instruments of conveyance and
transfer and take such other action as reasonably may be necessary to further effectuate the Transactions.
ARTICLE VI
CONDITIONS TO CLOSING; TERMINATION
6.1
Conditions to Each Party’s Obligations . The respective obligations of the Sellers, the Company and Buyer to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment (or written waiver by all Parties) at or prior to the Closing of the following conditions:
(a)
No Law shall be in place or have been enacted, entered, promulgated or enforced by any court or other tribunal or Government Entity of
competent jurisdiction which prohibits the consummation of the transactions contemplated by this Agreement, and shall continue to be in effect; and
(b)
No Action or Proceeding shall be pending or threatened in writing before any Government Entity in which an unfavorable judgment
would prevent consummation of the transactions contemplated by this Agreement, and no injunction or other Order preventing the consummation of the
transactions contemplated by this Agreement shall have been issued and remain in effect.
6.2
Conditions to Obligation of the Sellers . The obligation of the Sellers and the Company to consummate the transactions contemplated by this
Agreement is further subject to the fulfillment (or written waiver by the Sellers) of the following conditions:
42
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(a)
Each of the representations and warranties of Buyer contained in this Agreement shall be true and correct (without giving regard to any
materiality or Material Adverse Change qualifications set forth therein) as of the Closing Date with the same effect as though made on and as of the Closing Date
except (i) that the accuracy of representations and warranties that by their terms speak as of the date of this Agreement or some other date will be determined as
of such date and not as of the Closing Date and (ii) where any such failure of the representations and warranties in the aggregate to be true and correct would
not reasonably be expected to significantly impair or delay the consummation of the transactions contemplated hereby; and
(b)
Buyer shall have performed and complied in all material respects with all of its obligations, covenants and agreements required by this
Agreement to be performed or complied with by them at or prior to the Closing; and
(c)
Buyer shall have taken the actions required to be taken by Buyer pursuant to Section 1.10 and Section 1.11.
6.3
Conditions to Obligation of Buyer. The obligation of Buyer to consummate the transactions contemplated by this Agreement is subject to the
fulfillment (or written waiver by Buyer) of the following conditions:
(a)
Each of the representations and warranties of the Sellers contained in this Agreement shall be true and correct (without giving regard to
any materiality, Company Material Adverse Change, or Seller Material Adverse Change qualifications set forth therein) as of the Closing Date with the same
effect as though made on and as of the Closing Date except (i) that the accuracy of representations and warranties that by their terms speak as of the date of this
Agreement or some other date will be determined as of such date and not as of the Closing Date and (ii) where the failure to be so true and correct would not
reasonably be expected, individually or in the aggregate, to have a Company Material Adverse Change or Seller Material Adverse Change;
(b)
The Sellers and the Company shall have performed and complied in all material respects with all of their respective obligations,
covenants and agreements required by this Agreement to be performed or complied with by it at or prior to the Closing Date;
(c)
and Section 1.11;
The Sellers and the Company shall have taken the actions required to be taken by the Sellers and the Company pursuant to Section 1.9
(d)
Between the date of this Agreement and the Closing Date, no change or event shall have occurred that has had or would be reasonably
likely to have a Company Material Adverse Change or Seller Material Adverse Change;
(e)
Prior to the Closing, Buyer shall have obtained on terms and conditions acceptable to Buyer, in its sole and exclusive discretion, all of
the financing it needs in order to purchase the Purchased Shares and to otherwise consummate the transactions contemplated by this Agreement (the
“Financing”); and
43
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(f)
Buyer shall have received the requisite stockholder approval for the Financing and/or the transactions contemplated by this Agreement,
if required, either at a special meeting of stockholders or pursuant to a written stockholder consent.
6.4
Frustration of Closing Conditions. Neither the Sellers or Buyer may rely on the failure of any condition set forth in Section 6.1, Section 6.2, or
Section 6.3, as the case may be (but specifically excluding Section 6.3(e)), to be satisfied if such failure was caused by such Party’s (or any of its Affiliates’)
breach of this Agreement or failure to act in good faith or use its reasonable efforts to consummate the transactions contemplated by this Agreement.
6.5
Termination. Anything to the contrary in this Agreement notwithstanding, this Agreement may be terminated and the transactions contemplated
by this Agreement abandoned at any time prior to the Closing:
(a)
by mutual written consent of the Sellers and Buyer;
(b)
by the Sellers, if any of Buyer’s representations and warranties contained in ARTICLE II of this Agreement shall fail to be true and
correct or Buyer shall have breached or failed to perform in any material respect any of its covenants or other agreements contained in this Agreement, and such
failure or breach would give rise to the failure of a condition set forth in Section 6.2(a) or Section 6.2(b) and has not been cured by the earlier of (i) the date that
is thirty (30) days after the date that the Sellers have notified Buyer of such failure or breach and (ii) the Outside Date; provided, that the Sellers are not then in
breach of any of their representations, warranties, covenants or agreements contained in this Agreement such that the conditions set forth in Section 6.3(a) or
Section 6.3(b) would fail to be satisfied;
(c)
by Buyer, if any of the representations and warranties contained in ARTICLE III or ARTICLE IV of this Agreement shall fail to be true
and correct or the Sellers shall have breached or failed to perform in any material respect any of their covenants or other agreements contained in this
Agreement, and such failure or breach would give rise to the failure of a condition set forth in Section 6.3(a), Section 6.3(b), Section 6.3(c) or Section 6.3(d) and
has not been cured by the earlier of (i) the date that is thirty (30) days after the date that Buyer has notified the Sellers of such failure or breach and (ii) the
Outside Date; provided, that Buyer is not then in breach of any of its representations, warranties, covenants or agreements contained in this Agreement such
that the conditions set forth in Section 6.2(a) or Section 6.2(b) would fail to be satisfied;
(d)
by the Sellers, on the one hand, or by Buyer, on the other hand, if the Closing shall not have occurred on or prior to December 31, 2016
(the “Outside Date”); provided, however, that the right to terminate this Agreement under this Section 6.5(d) shall not be available to any Party whose failure to
perform any material covenant or obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before the
Outside Date;
(e)
by the Sellers, on the one hand, or by Buyer, on the other hand, if the Closing shall not have occurred on or prior to the Outside Date
due to the failure of the condition set forth in Section 6.3(e) to have been satisfied;
44
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(f)
by the Sellers, on the one hand, or by Buyer, on the other hand, if (x) at a special meeting of the stockholders of Buyer, if required, such
stockholders do not approve of the Financing and/or the transactions contemplated by this Agreement, or (y) the Closing shall not have occurred on or prior to
the Outside Date due to the failure of the conditions set forth in Section 6.3(f) to have been satisfied; or
(g)
by Buyer, if, after the date of this Agreement, any change or event shall have occurred that has had or would be reasonably likely to
have a Company Material Adverse Change or Seller Material Adverse Change.
For purposes of clarity, if (x) the Closing shall not have occurred on or prior to the Outside Date, (y) the conditions set forth in Section 6.1, Section
6.3(a), (b), (c), and (d) have been satisfied, but (z) the conditions set forth in Section 6.3(e) or Section 6.3(f) have not been satisfied, any termination of this
Agreement by the Sellers, on the one hand, or by Buyer, on the other hand, pursuant to Section 6.5(d) shall be deemed to be a termination pursuant to Section
6.5(e) or Section 6.5(f).
6.6
Effect of Termination. If this Agreement is terminated and the transactions contemplated by this Agreement are abandoned as described in
Section 6.5, this Agreement shall become null and void and of no further force and effect, except for the provisions of Sections 5.12, 6.5, 6.6 and 6.7 and
ARTICLE XI; provided, however, in the event this Agreement is terminated pursuant to Section 6.5(e) or Section 6.5(f), then Buyer shall reimburse the Sellers
and the Company for all of their documented out of pocket expenses, including, without limitation, legal, accounting and travel expenses, up to Two Hundred
Fifty Thousand Dollars ($250,000) within three (3) Business Days of the later of (x) the termination date or (y) the date all reasonable documentation evidencing
such expenses has been delivered to Buyer. Nothing in this Section 6.6 shall be deemed to release any Party from any liability for fraud or a willful breach by
such Party of the terms and provisions of this Agreement.
6.7
Notice of Termination. In the event of termination by the Sellers or by Buyer pursuant to Section 6.5, written notice of such termination shall be
given by the terminating Party to the other Party(ies) to this Agreement, and such written notice shall specify the specific subsection(s) of Section 6.5 pursuant to
which such terminating Party is terminating this Agreement.
ARTICLE VII
INDEMNIFICATIONS; SURVIVAL
7.1
Indemnification by Sellers . Subject to the terms, conditions and limitations of this ARTICLE VII, following the Closing, Buyer and each of its
Affiliates, and each of their respective successors, assigns, officers, directors, managers, members, partners, equityholders, employees, Representatives and
agents, shall be indemnified:
(a)
by the Sellers, severally (and not jointly), from and against any Loss suffered or incurred by any such Indemnified Person resulting from
any breach of any representation or warranty of such Seller contained in ARTICLE III of this Agreement;
45
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(b)
by the Sellers, severally (and not jointly), from and against any Loss suffered or incurred by any such Indemnified Person resulting from
the breach of any post-Closing covenant of such Seller contained in this or any other Transaction Document to which such Seller is a party;
(c)
by the Sellers, jointly and severally, from and against any Loss arising or resulting from or based upon any breach of any representation
or warranty regarding the Acquired Companies contained in ARTICLE IV of this Agreement as of the Closing Date;
(d)
by the Sellers, jointly and severally, from and against any Loss arising or resulting from or based upon any bonuses payable to any
employees or independent contractors of any of the Acquired Companies and triggered by the Closing; and
(e)
by the Sellers, jointly and severally, from and against any Loss arising or resulting from or based upon any misclassification of any
Person providing services to any of the Acquired Companies as independent contractors as opposed to “employees” for purposes of the Code and the treasury
regulations promulgated thereunder.
provided that (x) there shall be no indemnification Liability under clause (a) or clause (c) above, unless (1) the Loss related to each individual claim or series of
related claims arising thereunder for which indemnification Liability would, but for this proviso, exist exceeds Twenty Thousand Dollars ($20,000), and (2) the
aggregate of all Losses arising under clause (a) or clause (c) above for which indemnification Liability would, but for this proviso, exist exceeds an amount equal
to One Hundred Thirty-Five Thousand Dollars ($135,000), after which time only such Losses in excess of such amount will be recoverable by the Indemnified
Parties and (y) the aggregate Liability under clause (a) or clause (c) above shall in no event exceed Two Million Seven Hundred Thousand Dollars ($2,700,000);
provided further that the limitations set forth in clauses (x) and (y) above shall not apply to any Loss arising from actual fraud or intentional misrepresentations or
from a breach of Section 3.1 (Power and Authorization), Section 3.3 (Capital Stock), Section 4.1 (Organization; Qualification; Corporate Power and
Authorization), Section 4.2(a) (Capitalization) (sentences one and two only), Section 4.9 (Tax Matters), Section 4.15 (Employee Plans), and Section 4.21 (Broker
Fees) (collectively, the “Fundamental Representations”). Notwithstanding anything herein to the contrary, except in the case of actual fraud, the aggregate
liability of the Sellers under this Section 7.1 shall in no event exceed the Purchase Price.
7.2
Indemnification by Buyer. Subject to the terms, conditions and limitations of this ARTICLE VII, following the Closing, Buyer and the Acquired
Companies, jointly and severally, shall indemnify the Sellers and each of their respective Affiliates, and each of their respective successors, assigns, officers,
directors, managers, members, partners, equityholders, employees, Representatives and agents, and the Acquired Companies’ pre-Closing officers, directors,
managers, members, partners, employees, Representatives and agents, against, and hold them harmless from, any Loss suffered or incurred by any such
Indemnified Person arising or resulting from or based upon:
(a)
any breach of any representation or warranty of Buyer contained in contained in ARTICLE II of this Agreement;
46
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Document; and
(b)
(c)
the breach of any post-Closing covenant of Buyer or the Acquired Companies contained in this Agreement or any other Transaction
any post-Closing operations of the Acquired Companies and their Affiliates;
provided that (x) there shall be no indemnification Liability under clause (a) above, unless (1) the Loss related to each individual claim or series of related claims
arising thereunder for which indemnification Liability would, but for this proviso, exist exceeds Twenty Thousand Dollars ($20,000), and (2) the aggregate of all
Losses arising under clause (a) above for which indemnification Liability would, but for this proviso, exist exceeds an amount equal to One Hundred Thirty-Five
Thousand Dollars ($135,000), after which time only such Losses in excess of such amount will be recoverable by the Indemnified Parties and (y) the aggregate
Liability under clause (a) above shall in no event exceed Two Million Seven Hundred Thousand Dollars ($2,700,000); provided further that the foregoing
limitation shall not apply to any Loss arising actual fraud or intentional misrepresentations or from a breach of Section 2.1 (Organization; Corporate Power and
Authorization), and Section 2.3 (Broker Fees).
7.3
Losses Net of Insurance, Etc . Subject to the terms and conditions of this ARTICLE VII, following the Closing:
(a)
For purposes of determining (i) whether a breach of a representation or warranty exists solely for purposes of the indemnification
provisions of this Agreement and (ii) the amount of Losses arising from such a breach for which the Indemnified Parties are entitled to indemnification under the
indemnification provisions of this Agreement, the representations and warranties made by the Parties in this Agreement or any other Transaction Document
shall be construed as if any qualification or limitation that is based on materiality (including all usages of “material”, “Company Material Adverse Change”, “Seller
Material Adverse Change” or similar qualifiers) were omitted from the text of such representation or warranty.
(b)
The amount of any Loss for which indemnification is provided under this ARTICLE VII shall be net of any amounts actually recovered
under insurance policies in effect and applicable to such Loss.
(c)
Any payment or indemnity required to be made pursuant to Section 7.1 or Section 7.2 shall be adjusted to take into account any
reduction or increase in Taxes that may be realized at any time by the Indemnified Person (which term shall, for purposes of this paragraph, include the ultimate
payer(s) of Taxes in the case of an Indemnified Person that is a branch or a disregarded entity or other pass-through entity for any Tax purpose) as a result of
the Loss giving rise to the payment or indemnity or as a result of the payment or indemnity. In determining the amount necessary to be added to or subtracted
from any payment or indemnity in order to accomplish the foregoing, the Parties agree to treat all Taxes required to be paid by, and all reductions in Tax realized
by, any Indemnified Person, as if such Indemnified Person were subject to Tax at the highest marginal Tax rates (for both federal and state, as determined on a
combined basis) applicable to such Indemnified Person.
47
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(d)
In connection with an Indemnified Person’s rights under this ARTICLE VII, an Indemnified Person may only seek actual damages and
may not seek any other damages, including but not limited to punitive, consequential (including lost profits) and incidental damages, or damages argued to be
associated with a diminution in value, and in particular, without limitation, no “multiple of profits” or “multiple of cash flow” or similar valuation methodology shall
be used in connection with the calculation of Losses as to any matter under, relating to or arising out of the Transaction Documents or the Transactions.
(e)
Any Liability for indemnification under this ARTICLE VII shall be determined without duplication of recovery by reason of the set of facts
giving rise to such Liability constituting a breach of more than one representation, warranty, covenant or undertaking, or one or more rights to indemnification.
Without limiting the generality of the foregoing and notwithstanding Section 7.1, Buyer shall not be entitled to indemnification under this ARTICLE VII with
respect to any Loss to the extent that any such Loss would constitute a duplicative payment of amounts recovered as a purchase price adjustment pursuant to
Section 1.8 or such Loss is reflected as a Liability on the Latest Balance Sheet or reflected in the footnotes to the Financial Statements.
(f)
No Person shall be entitled to indemnification under this ARTICLE VII with respect to any Loss that is attributable to any action taken or
omitted to be taken by such Person or any of its Affiliates. The Indemnified Person shall cooperate with each Indemnifying Person with respect to resolving any
Liabilities with respect to which such Person is obligated to indemnify the other Person, including by making commercially reasonable efforts to mitigate or
resolve any such Liabilities. In the event that the Indemnified Person shall fail to cooperate and make such efforts to mitigate or resolve any such Liabilities, then
notwithstanding anything else to the contrary contained herein, each Indemnifying Person shall not be required to indemnify any Person for any Loss that could
reasonably be expected to have been avoided if the Indemnified Person had made such efforts. The Indemnified Person shall act in a commercially reasonable
manner in addressing any Liabilities, events or actions that may provide the basis for indemnification hereunder (that is, such Indemnified Person shall respond
to such Liability, event or action in the same manner that it would respond in the absence of the indemnification provided for in this Agreement, but in no event
less than a commercially reasonable response).
(g)
As between the Parties and any Indemnified Person and Indemnifying Person, the indemnification provisions contained in this ARTICLE
VII are intended to provide the sole and exclusive remedy following the Closing as to all Losses any Party may incur arising from or relating to the Transaction
Documents (or the representations, warranties or covenants contained therein) or the Transactions, and each Party (on behalf of itself and its Affiliates) hereby
waives, to the full extent they may do so, any other rights or remedies that may arise under any applicable statute, rule or regulation and hereby covenants that it
and all of its Affiliates shall refrain from, directly or indirectly, asserting any Action or Proceeding of any kind against any Person based on any matter purported
to be waived hereby. Nothing in this ARTICLE VII shall limit any Party’s right to seek and obtain (i) any equitable relief, including specific performance, temporary
restraining order or temporary or permanent injunction, or (ii) any remedy on account of fraud or criminal conduct in connection with the execution and delivery
of this Agreement of the performance of a Party’s obligation hereunder.
48
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(h)
As between the Parties and any Indemnified Person and Indemnifying Person, the sole source to satisfy any and all indemnification
claims of Buyer or any Indemnified Person pursuant to Section 7.1 shall be to set off against up to Two Million Seven Hundred Thousand Dollars ($2,700,000) of
the Buyer Note, except for such indemnification claims based on actual fraud, intentional misrepresentations, breaches of Fundamental Representations and
except for such indemnification claims under Section 7.1(b). Notwithstanding anything herein to the contrary, for any claims arising under Section 7.1(b) against a
particular Seller, Buyer shall have the right to, and shall only have the right to, make a claim against such Seller directly and not the Buyer Note or any other
Seller.
(i)
Upon making any payment to an Indemnified Person for any indemnification claim pursuant to this ARTICLE VII, the Indemnifying
Person shall be subrogated, to the extent of such payment, to any rights which the Indemnified Person or its Affiliates may have against any other Persons with
respect to the subject matter underlying such indemnification claim and the Indemnified Person shall take such actions as the Indemnifying Person may
reasonably require to perfect such subrogation or to pursue such rights against such other persons as the Indemnified Person or its Affiliates may have.
(j)
The indemnities herein are intended solely for the benefit of the Parties and the Persons expressly identified in Section 5.14 and Section
5.16 and this ARTICLE VII (and their permitted successors and assigns) and are in no way intended to, nor shall they, constitute an agreement for the benefit of,
or be enforceable by, any other Person.
7.4
Termination of Indemnification. The obligations to indemnify and hold harmless an Indemnified Person pursuant to Section 7.1 and Section 7.2
shall terminate on the date that the survival period for the applicable representation, warranty or covenant expires pursuant to Section 7.6; provided that such
obligations to indemnify and hold harmless shall not terminate with respect to any specific matter as to which the person to be indemnified shall have, before the
expiration of the applicable period, previously made a claim by delivering a written notice (a “Claim Notice”) to the Indemnifying Person containing (1) a detailed
description and, if known, the estimated amount of any Loss incurred or reasonably expected to be incurred by the Indemnified Person together with such
supporting documents reasonably available to such Indemnified Person; (2) a reasonable explanation of the basis for the Claim Notice to the extent of the facts
then known by the Indemnified Person; and (3) a demand for payment of such Loss.
7.5
Procedures Relating to Indemnification.
(a)
In order for an Indemnified Person to be entitled to any indemnification provided for under this Agreement in respect of, arising out of or
involving a claim or demand made by any third Person against the Indemnified Person (a “Third-Party Claim”), such Indemnified Person must provide the
Indemnifying Person with a Claim Notice regarding the Third-Party Claim promptly and in any event within ten (10) Business Days after receipt by such
Indemnified Person of written notice of the Third-Party Claim; provided that failure to give such notification shall not affect the indemnification provided hereunder
except to the extent the Indemnifying Person shall have been actually prejudiced as a result of such failure (except that the Indemnifying Person shall not be
liable for any expense incurred during the period in which the Indemnified Person failed to give such notice). Thereafter, the Indemnified Person shall deliver to
the Indemnifying Person, within five (5) Business Days after the Indemnified Person’s receipt thereof, copies of all notices and documents (including court
papers) received by the Indemnified Person relating to the Third-Party Claim together with such supporting documents reasonably available to such Indemnified
Person. Notwithstanding the foregoing, any Third-Party Claims with respect to Taxes shall be addressed in the manner set forth in Section 5.18(e).
49
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(b)
If a Third-Party Claim is made against an Indemnified Person, the Indemnifying Person will be entitled to participate in the defense
thereof and, if it so chooses, to assume the defense thereof with counsel selected by the Indemnifying Person. If the Third-Party Claim includes allegations for
which the Indemnifying Person both would and would not be obligated to indemnify the Indemnified Person, the Indemnifying Person and the Indemnified Person
shall in that case jointly assume the defense thereof. Should the Indemnifying Person so elect to assume the defense of a Third-Party Claim, notwithstanding
anything to the contrary, the Indemnifying Person will not be liable to the Indemnified Person for legal fees and expenses subsequently incurred by the
Indemnified Person in connection with the defense thereof. If the Indemnifying Person assumes such defense, the Indemnified Person shall have the right, at its
own expense, to participate in the defense thereof and, at its own expense, to employ counsel reasonably acceptable to the Indemnifying Person, separate from
the counsel employed by the Indemnifying Person, it being understood that the Indemnifying Person shall control such defense. The Indemnifying Person shall
be liable for the fees and expenses of counsel employed by the Indemnified Person for any period during which the Indemnifying Person has not assumed the
defense thereof (other than during any period in which the Indemnified Person shall have failed to give notice of the Third-Party Claim as provided above). If the
Indemnifying Person chooses to defend or prosecute any Third-Party Claim, all the Parties shall cooperate in the defense or prosecution thereof. Such
cooperation shall include the retention and (upon the Indemnifying Person’s request) the provision to the Indemnifying Person of records and information which
are reasonably relevant to such Third-Party Claim, and making officers, directors, employees and agents of the Indemnified Person available on a mutually
convenient basis to provide information, testimony at depositions, hearings or trials, and such other assistance as may be reasonably requested by the
Indemnifying Person. Whether or not the Indemnifying Person shall have assumed the defense of a Third-Party Claim, the Indemnified Person shall not admit
any Liability with respect to, or settle, compromise or discharge, such Third-Party Claim without the Indemnifying Person’s prior written consent (which consent
shall not be unreasonably withheld or delayed). The Indemnifying Person shall not admit any Liability with respect to, or settle, compromise or discharge any
Third-Party Claim without the Indemnified Person’s prior written consent (which consent shall not be unreasonably withheld or delayed); provided that the
Indemnified Person shall agree to any admission of Liability, settlement, compromise or discharge of a Third-Party Claim that the Indemnifying Person may
recommend and that by its terms obligates the Indemnifying Person to pay the full amount of the Liability in connection with such Third-Party Claim and which
releases the Indemnified Person completely in connection with such Third-Party Claim.
7.6
Survival of Representations and Warranties . All representations, warranties and covenants contained in this Agreement and the other
Transaction Documents shall survive the Closing and remain in full force and effect as follows: (a) for a period of fifteen (15) months following the Closing Date,
with respect to all representations and warranties (other than with respect to the Fundamental Representations which shall survive the Closing and remain in full
force and effect until the expiration of the applicable statute of limitations), or (b) with respect to each other covenant or agreement contained in this Agreement
or any other Transaction Document, until the last date on which such covenant or agreement is to be performed or, if no such date is specified, for a period of
twelve (12) months following the Closing Date.
50
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
7.7
Tax Treatment of Indemnification Payments. Any indemnification payments made to Buyer pursuant to this Agreement shall be treated as an
adjustment to the final Purchase Price, unless otherwise required under applicable Tax Laws.
For the purposes of this Agreement, the following terms have the meanings set forth below:
“Acquired Company(ies)” means the Company and the Subsidiary.
ARTICLE VIII
DEFINITIONS
“Action or Proceeding” means any action, suit, claim, hearing, proceeding or arbitration by any Person, or any investigation or audit by any Government
Entity.
“Affiliate” means with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such first
Person within the meaning of the Exchange.
“Affiliated Group” means any affiliated group within the meaning of Section 1504(a) of the Code, or any similar group defined under a similar provision of
state, local or foreign Law.
“Business” means the business of the Acquired Companies conducted on the date of this Agreement.
“Business Day” means any day excluding Saturday, Sunday and any day that is a legal holiday under the Laws of the State of New York or is a day on
which banking institutions located in such State are authorized or required by Law to close.
“Business Employee” means each individual who works primarily or exclusively for the Business and who, on the Closing Date, is actively employed by
the Acquired Companies, including any employee who is on vacation leave or jury duty, or on other authorized leave of absence (other than long-term disability
in cases in which the employee has no present expectation of continued employment), family or workers’ compensation leave, or military leave as of the Closing
Date, whether paid or unpaid; provided that the term Business Employee shall exclude any other inactive or former employee, including any individual who (a) is
on long-term disability leave or unauthorized leave of absence, layoff with or without recall rights at the Closing Date; or (b) has been terminated or has
terminated his or her employment or retired before the Closing Date.
“Buyer Disclosure Schedule ” means the disclosure schedule constituting exceptions to and applicable disclosures associated with Buyer’s
representations and warranties set forth in ARTICLE II hereof, prepared and delivered by Buyer concurrently with the execution of this Agreement, as the same
may be amended or supplemented from time to time, as required and/or permitted herein.
51
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
“Cash” means, as of any date, any cash on hand, cash in bank or other accounts, readily marketable securities, and other cash equivalent liquid assets
of any nature as of such date, determined in accordance with GAAP applied in a manner consistent with past practice.
“Closing Costs” means all fees and expenses incurred by any Acquired Company or any Seller in connection with the Transactions or in connection with
the proposed sale of the Acquired Companies, such as the fees and expenses of any investment bankers, lawyers, accountants and other outside financial and
other advisors, the fees and expenses of the electronic data room and any Transaction related bonuses or other change of control payments.
“Code” means the Internal Revenue Code of 1986, as amended.
“Common Stock” means the authorized shares of common stock of the Company consisting of common stock, no par value per share.
“Company Disclosure Schedule ” means the disclosure schedule constituting exceptions to and applicable disclosures associated with the Acquired
Companies’ representations and warranties set forth in ARTICLE IV hereof, prepared and delivered by the Acquired Companies concurrently with the execution
of this Agreement, as the same may be amended and supplemented from time to time, as required and/or permitted herein.
“Company Intellectual Property Rights ” means all of the Intellectual Property Rights owned by the Acquired Companies.
“Company Material Adverse Change ” means any material adverse change in the Business, results of operations or financial condition of the Acquired
Companies taken as a whole, other than any material adverse change or effect arising from or related to the following (either alone or in combination): (a) any
general condition affecting the industry in which the Business is engaged, (b) changes in any Law or applicable accounting regulations or principles, (c) the
announcement or pendency of any of the Transactions, (d) any action taken by the Sellers or the Acquired Companies at Buyer’s request or pursuant to the
Transaction Documents, (e) acts of war or terrorism or any escalation or material worsening of any such acts of war or terrorism existing as of the date hereof, (f)
such change against which the Acquired Company is fully insured, (g) general economic, political and financial market changes, foreign or domestic, (h) any
changes in applicable Laws or accounting rules or principles, including changes in GAAP, and (i) any matters specifically disclosed in the Disclosure Schedules;
unless, in the cases of (a), (g) or (h) above, such changes or effects would reasonably be likely to have a materially disproportionate adverse impact on the
Business, results of operations or financial condition of the Acquired Companies taken as a whole, relative to other affected participants in the industries in which
the Acquired Companies operate.
52
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
“Company Tax Benefits ” means the amount of reduction in Tax Liability realized and any Tax refunds obtained in any Tax period of any Acquired
Company that is attributable to (i.e. would not be available but for) any deductions available to such Acquired Company with respect to the option cancellation
payments and the Transaction Payments; provided that no such reduction in Tax Liability or Tax refunds shall be taken into account as Company Tax Benefits
(x) to the extent reflected as a reduction in Taxes payable for purposes of determining Net Working Capital, or (y) to the extent that they reduce amounts that the
Sellers would otherwise have to pay pursuant to Section 5.18(a) or Section 5.18(b).
“Confidential Information Presentation” means the confidential information presentation provided to Buyer in expectation of the Transactions.
“Confidentiality Agreement” means the Confidentiality Agreement regarding the confidentiality obligations of Buyer, executed by the Company and Buyer
as of September 10, 2015.
“Contracts” means all written and oral binding executory contracts, agreements, subcontracts, indentures, notes, bonds (including surety bonds), loans,
instruments, leases, mortgages, franchises, licenses, purchase orders, sale orders, proposals, bids, understandings or commitments, which are legally binding.
“Current Assets” means, without duplication, the sum of (a) trade and other accounts receivable, (b) prepaid expenses (including prepaid Taxes), (c)
inventory and (d) other current assets, but excluding Cash; all as determined in accordance with GAAP applied in a manner consistent with the preparation of
the Financial Statements.
“Current Liabilities” means, without duplication, the sum of (a) trade and other accounts payable; (b) accrued payroll and related expenses; (c) other
current accruals; (d) customer deposits; and (e) other current liabilities, but excluding any Indebtedness, all as determined in accordance with GAAP applied in a
manner consistent with the preparation of the Financial Statements.
“Employee Benefit Arrangements” means each and all pension, supplemental pension, deferred compensation, option or other equity-based program,
accidental death and dismemberment, life and health insurance and benefits (including medical, dental, vision and hospitalization), short- and long-term disability,
fringe benefit, cafeteria plan, flexible spending account programs, severance and other employee benefit arrangements, plans, contracts, policies or practices
providing employee or executive compensation or benefits to any employee of any of the Acquired Companies, other than the Employee Plans.
“Employee Plans” means each and all “employee benefit plans,” as defined in Section 3(3) of ERISA, maintained or contributed to by the Acquired
Companies or in which the Acquired Companies participate or participated and which provides benefits to employees of any Acquired Company.
“Environmental Laws” means all federal, state, and local statutes, regulations and ordinances concerning the pollution or protection of the environment,
including the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response and
Compensation, and Liability Act of 1980.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
53
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
“Evaluation Material ” means any information, documents or materials regarding the Acquired Companies or the Business furnished or made available to
Buyer and its Representatives in any “data rooms,” “virtual data rooms,” management presentations or in any other form in expectation of, or in connection with,
the Transactions, including, but not limited to, the Confidential Information Presentation.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“GAAP” means United States generally accepted accounting principles as in effect from time to time.
“Government Contract” means any Contract between an Acquired Company, on the one hand, and (i) any Government Entity; (ii) any prime contractor of
a Government Entity in its capacity as a prime contractor; or (iii) any subcontractor at any tier with respect to any Contract of a type described in clauses (i) or
(ii) above, on the other hand. For the avoidance of doubt, a task, purchase or delivery order under a Government Contract shall not constitute a separate
Government Contract, for purposes of this definition, but shall be part of the Government Contract to which it relates.
“Government Entity” means any court, tribunal, arbitrator or any government or political subdivision thereof, whether federal, state, county, local or
foreign, or any agency, authority, official or instrumentality of such governmental or political subdivision, or any entity exercising executive, legislative, judicial,
regulatory or administrative functions of government.
“Hazardous Materials” means any toxic or hazardous substance, material, or waste, and any other contaminant or pollutant, whether liquid, solid, semi
solid, sludge and/or gaseous, including chemicals, compounds, by products, pesticides, asbestos containing materials, petroleum or petroleum products, and
polychlorinated biphenyls, and any other material or substance, whether waste materials, raw materials or finished products regulated or governed by any
Environmental Law.
“Indebtedness” means, with respect to the Acquired Companies, without duplication: (i) all indebtedness for borrowed money, whether current, short-
term, or long-term, secured or unsecured (excluding trade accounts payable incurred in the Ordinary Course of Business); (ii) all indebtedness for the deferred
purchase price for purchases of property that is not evidenced by trade accounts payable incurred in the Ordinary Course of Business (other than any such
accounts payable owed to any Seller or any of such Seller’s Affiliates); (iii) any Liability in respect of letters of credit (other than stand-by letters of credit in
support of trade accounts payable incurred in the Ordinary Course of Business); (iv) any Liability with respect to interest rate swaps, collars, caps and similar
hedging obligations; (v) any obligations under leases that are required to be accounted for as capital or financial leases under GAAP; (vi) all off-balance sheet
financing, including synthetic leases and project financing; (vii) all unearned income and all income recorded on the books and records for services not yet
rendered; (viii) accrued corporate income tax and other unpaid Taxes; (ix) factored receivables; (x) sales bonuses or other payments made or payable to
employees in connection with the transactions contemplated by this Agreement, transaction costs and pension underfunding; (xi) any indebtedness referred to in
clauses (i) through (x) above that is directly or indirectly guaranteed by an Acquired Company; (xii) payment obligations under the Share Purchase Agreement,
dated as of June 15, 2013, as amended, between the Company and Natalja Cujeva, and (xiii) accrued and unpaid interest on, and prepayment or termination
premiums or fees, penalties or similar charges or expense reimbursements arising as a result of the discharge of any such foregoing obligation.
54
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
“Indemnified Person ” means any Person claiming indemnification under any provision of ARTICLE VII.
“Indemnifying Person ” means any Person(s) against whom a claim for indemnification is being asserted under any provision of ARTICLE VII.
“Intellectual Property Rights” means (a) all industrial designs and inventions (whether patentable or unpatentable and whether or not reduced to
practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part,
revisions, extensions, divisionals, reissues, substitutions and reexaminations thereof, (b) all United States and foreign trademarks, service marks, certification
marks, trade dress, designs, logos, trade names, and corporate names, together with all translations, adaptations, derivations, and combinations thereof and
including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information (including technology, ideas, research and development, know-how, formulae, compositions,
engineering, manufacturing and production processes, procedures and techniques, technical data, records of invention, invention disclosures, designs, plans,
drawings, blueprints, specifications, customer and supplier lists and related information, databases, pricing and cost information, and business and marketing
plans and proposals), and improvements thereto, (f) all computer software (in source code and object code form), including data, formulations and analyses and
related documentation, user manuals and training manuals, (g) all domain names, URL addresses, electronic mail addresses and design rights (including any
word, symbol, product configuration, icon and logo), (h) all other proprietary rights, including all goodwill of the business and all rights to sue, recover damages or
otherwise claim for past, present or future infringement or unauthorized use or disclosure or breach of any of the assets, properties or rights described above,
and (i) all copies and tangible embodiments thereof (in whatever form or medium).
“Knowledge of Sellers” means (a) as it applies to the representations and warranties made by any of the Acquired Companies in ARTICLE IV, the
knowledge of Joseph Menaker, Mark Lifshotz and Ēriks Bediķis, in each case after reasonable investigation and inquiry; and (b) as it applies to representations
and warranties made by a particular Seller in ARTICLE III, the knowledge of such Seller, after reasonable investigation and inquiry (provided that the knowledge
of any particular Seller shall not be imputed to another Seller).
“Knowledge of Buyer” or “Buyer’s Knowledge” means and shall be limited to the knowledge of J. James Gaynor and Dorothy Cipolla, in each case after
reasonable investigation and inquiry.
55
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
“Latest Balance Sheet” means the Acquired Companies’ unaudited consolidated balance sheet as prepared by management as of June 30, 2016.
“Law” means any law, statute, rule, regulation, ordinance and other pronouncement having the effect of law of the United States of America, the
Republic of Latvia, any other foreign country or any domestic or foreign state, county, city or other political subdivision or of any Government Entity.
“Liability” or “Liabilities” means any and all debts, liabilities and obligations of any nature whatsoever, whether accrued or fixed, known or unknown,
asserted or unasserted, absolute or contingent, liquidated or unliquidated, mature or unmatured or determined or indeterminable, including any liability for Taxes.
“Lien” means any mortgage, lien, pledge, charge, security interest, claim, contractual restriction, easement, right-of-way, option, hypothecation,
conditional sale or other title retention agreement or encumbrance of any kind.
“Loss” means any direct or indirect Liability, indebtedness, claim, loss, damage, Lien, deficiency, obligation, judgment, penalty, responsibility or other
costs or expenses (including reasonable attorneys’ fees and expenses paid in connection with any of the foregoing).
“Net Working Capital ” means, for purposes of Section 1.5 above, the difference between (a) Current Assets of the Acquired Companies as of the close
of business on the Closing Date, and (b) Current Liabilities of the Acquired Companies as of the close of business on the Closing Date.
“Neutral Accounting Firm” means an independent accounting firm of nationally recognized standing that has not rendered services to any of Buyer, the
Acquired Companies or the Sellers, or any Affiliate thereof, within twenty-four (24) months prior to the date hereof.
“Off-The-Shelf Software” means shrinkwrap or clickwrap software licenses granted to any Acquired Company for third party software used by any
Acquired Company.
“Order” means any writ, judgment, decree, injunction or similar order of any Government Entity, in each case whether preliminary or final.
“Ordinary Course of Business” means the ordinary course of business of the Acquired Companies, consistent with past custom and practice.
“Permits” means all licenses, certificates of occupancy and other permits, consents and approvals required by any Government Entity to lawfully operate
the Business (including any pending applications for such licenses, certificates, permits, consents or approvals).
56
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
“Permitted Liens” means (a) Liens for Taxes or assessments and similar charges, which either are (i) not delinquent; or (ii) being contested in good faith
and by any appropriate Action or Proceeding, and adequate reserves (as determined in accordance with GAAP) have been established on the Acquired
Companies’ books with respect thereto; (b) interests or title of, or Liens to secure, landlords, sublandlords, licensors, sublicensors or licensees under real estate
leases, licenses or other rental or lease agreements; (c) deposits or pledges made in connection with, or to secure payment of, utilities or similar services,
workers’ compensation, unemployment insurance, pension or other social security, governmental insurance and governmental benefits mandated under
applicable Laws, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, Government Contracts, Government
Bids, performance and return of money bonds and similar obligations; (d) mechanics’, materialmen’s or contractors’ Liens or any similar statutory Lien; (e)
zoning, entitlement, building and other similar restrictions which are not violated by the current conduct of the Business; (f) purchase money Liens in any
property acquired by any Acquired Company in the Ordinary Course of Business; (g) any items set forth on Schedule 8 attached hereto; and (h) easements,
covenants, rights of way or other encumbrances or restrictions, if any, that do not materially impair the use of the assets to which they relate to the Business,
taken as a whole, as conducted on the date hereof.
“Person” means any individual, partnership, corporation, association, limited liability company, joint stock company, a trust, joint venture, firm,
association, unincorporated organization, Government Entity or other entity.
“Personal Information” means the type of information regulated by Privacy Laws and collected, used, disclosed or retained by the Acquired Companies,
including information regarding the Business’ customers, suppliers, employees and agents, such as an individual’s name, address, age, gender, identification
number, income, family status, citizenship, employment, assets, liabilities, source of funds, payment records, credit information, personal references and health
records.
“Prime Rate” means the prime rate of interest as from time to time published by The Wall Street Journal (Eastern Edition) .
“Privacy Laws” means all applicable Law in the United States and Europe governing the collection, use, disclosure and retention of Personal
Information.
“Pro Rata Share ” means the percentage set forth opposite a Seller’s name on Schedule 1.4(b) under the heading “Pro Rata Share” and represents such
Seller’s pro rata portion of the Closing Payment received by such Seller.
“Representatives” means with respect to a particular Person, any director, officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants and financial advisors.
“Securities Act” means the Securities Act of 1933, as amended.
“Seller” and “Sellers” have the meaning set forth in the recitals to this Agreement.
“Seller Disclosure Schedule ” means the disclosure schedule constituting exceptions to and applicable disclosures associated with the Seller’s
representations and warranties set forth in ARTICLE III hereof, prepared and delivered by the Sellers concurrently with the execution of this Agreement, as the
same may be amended or supplemented from time to time, as required and/or permitted herein.
57
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
“Seller Material Adverse Change ” means a material adverse change in the ability of the Sellers to perform their obligations under this Agreement and the
Transaction Documents or on the ability of the Sellers to consummate the Transactions.
“Subsidiary” means ISP Optics Latvia, SIA, a limited liability company formed under the Laws of the Republic of Latvia and registered with the
commercial register under registration No. 40103009686.
“Target Net Working Capital Ceiling ” means $1,900,000.
“Target Net Working Capital Floor ” means $1,800,000.
“Tax” or “Taxes” means: (i) any federal, state, local or foreign income, gross receipts, capital gains, license, occupancy, payroll, employment, excise,
severance, stamp, occupation, premium, windfall profits, environmental (including Taxes under Section 59A of the Code), Medicare, Medicaid, Affordable Care
Act of 2010 obligation, customs duties, exercise duties, capital stock, net worth, franchise, unincorporated business, profits, withholding, information,
employment, unemployment, disability, workers’ compensation, social security, retirement, pension plan, general property, real property, personal property,
intangible property, unclaimed property, fuel, parking, ad valorem, sales, use, transfer, occupancy, registration, value added, alternative or add-on minimum,
accumulated earnings, personal holding company, estimated, or other tax, contributions, report, or assessment of any kind whatsoever imposed by any
governmental authority, including any estimated payments related thereto, any interest, penalty, assessment, or addition thereto, whether disputed or not; and (ii)
any obligations to indemnify or otherwise assume or succeed to an Tax liability of any Person.
“Tax Returns” means all returns and reports, amended returns, information returns, statements, declarations, estimates, schedules, notices, notifications,
forms, elections, certificates or other documents required to be filed or submitted to any Government Entity with respect to the determination, assessment,
collection or payment of any Tax or in connection with the administration, implementation or enforcement of, or compliance with, any Tax.
“Trade Regulations” means all applicable federal, state and local Laws, statutes, regulations, executive orders, rules, codes, or ordinances enacted,
adopted, issued or promulgated by the United States or any United States state or local Government Entity, and all authorizations, in each case relating to the
import or export of goods, technology, or services or trading embargoes or other trading restrictions, including the Export Administration Act, the Export
Administration Regulations, the Arms Export Control Act, the International Traffic in Arms Regulations, the Foreign Corrupt Practices Act, the Trading with the
Enemy Act, the International Emergency Economic Powers Act, and executive orders and regulations administered by the Office of Foreign Assets Control of
the U.S. Department of the Treasury.
“Transaction Documents” means this Agreement, the Buyer Note and all other agreements, instruments, certificates and other documents to be entered
into or delivered by any Party, pursuant to any of the foregoing.
58
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
“Transaction Payments” means the Closing Costs, the accelerated write-off of deferred finance fees and loan costs, all other legal, accounting,
investment banking and other fees and expenses paid by the Sellers prior to the Closing or by the Acquired Companies and any bonuses or other payments due
to employees or other service providers, in each case, in connection with the Transactions and the Closing.
“Transactions” means the transactions contemplated by this Agreement and the Transaction Documents.
“Transferred Information” means all Personal Information to be disclosed or conveyed to Buyer or any of its Affiliates or Representatives by or on behalf
of the Acquired Companies as a result of or in conjunction with the compliance by the Sellers, the Acquired Companies or Sellers with the terms of the
Transaction Documents, and includes all such Personal Information disclosed to Buyer and its Affiliates and Representatives during the period leading up to and
including the Closing;
Term
Accounting Arbitrator
Adjustment Calculation
Agreement
Alternative Proposal
Audited Financial Statements
Buyer
Buyer Note
Cash Amount
Claim Notice
Closing
Closing Balance Sheet
Closing Date
Closing Date Cash Calculation
Closing Date Debt Calculation
Closing Payment
Company
Covered Persons
Disclosure Schedules
Environmental Claims
EST
Estimated Closing Date Cash
Estimated Closing Date Debt
Estimated Net Working Capital
FAR
Financial Statements
Financing
Fundamental Representations
Interim Financial Statements
IRS
Leased Real Property
INDEX OF OTHER DEFINED TERMS
Section Reference
1.5(d)
1.5(b)
Preamble
5.2
4.4(a)(i)
Preamble
1.2(b)
1.2(a)
7.4
1.3
1.5(b)
1.3
1.6(b)
1.7(b)
1.2(a)
Preamble
5.16(a)
9.11
4.10(b)
1.5(a)
1.6(a)
1.7(a)
1.5(a)
4.16(e)
4.4(a)
6.3(e)
7.1
4.4(a)(iii)
5.18(e)(i)
4.12(b)
59
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LPTH SEC Documents
Material Contracts
Monthly Financial Statements
Multiemployer Plan
Net Working Capital Calculation
Objection Notice
Outside Date
Party or Parties
Pre-Closing Tax Period
Purchase Price
Purchased Shares
Released Party or Released Parties
Restricted Persons
Schedule Supplement
Seller or Sellers
Straddle Tax Period
Subsidiary Financial Statements
Tax Dispute Accountant
Third-Party Claim
WARN
2.7
4.20
5.6
4.15(d)
1.5(b)
1.5(b)
6.5(d)
Preamble
5.18(a)
1.2
Preamble
5.9
5.8(b)
5.11
Preamble
5.18(b)
4.4(a)(ii)
5.18(i)
7.5
5.14(a)
ARTICLE IX
MISCELLANEOUS
9.1
Expenses. Whether or not the Transactions are consummated, and except as otherwise provided in this Agreement, each Party to this
Agreement will bear its respective fees, costs and expenses incurred in connection with the preparation, negotiation, execution and performance of this
Agreement or the Transactions (including legal, accounting and other professional fees).
9.2
Governing Law. This Agreement will be governed by and construed in accordance with the internal Laws of the State of New York applicable to
agreements made and to be performed entirely within such State, without regard to the conflicts of Law principles that would require the application of any other
Law.
9.3
Jurisdiction; Service of Process. Any Action or Proceeding arising out of or relating to this Agreement or any of the Transactions may be brought
in the federal and state courts located in New York, New York, and each of the Parties irrevocably submits to the exclusive jurisdiction of such courts in any such
Action or Proceeding, waives any objection it may now or hereafter have to venue or to convenience of forum, agrees that all claims in respect of the Action or
Proceeding shall be heard and determined only in any such court and agrees not to bring any Action or Proceeding arising out of or relating to this Agreement or
any of the Transactions in any other court. The Parties agree that any or all of them may file a copy of this Section 9.3 with any court as written evidence of the
knowing, voluntary and bargained-for agreement among the Parties irrevocably to waive any objections to venue or to convenience of forum. Process in any
Action or Proceeding referred to in the first sentence of this Section 9.3 may be served on any Party anywhere in the world.
60
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
9.4
Waiver of Jury Trial. THE PARTIES HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. THE PARTIES AGREE THAT ANY OF THEM MAY FILE A COPY OF THIS PARAGRAPH
WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY AND BARGAINED-FOR AGREEMENT AMONG THE PARTIES
IRREVOCABLY TO WAIVE TRIAL BY JURY AND THAT ANY ACTION OR PROCEEDING WHATSOEVER BETWEEN THEM RELATING TO THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A
JUDGE SITTING WITHOUT A JURY.
9.5
Attorneys’ Fees. If any Action or Proceeding for the enforcement of this Agreement is brought with respect to or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions hereof, the successful or prevailing Party shall be entitled to recover reasonable
attorneys’ fees and other costs incurred in that Action or Proceeding, in addition to any other relief to which it may be entitled.
9.6
Waiver; Remedies Cumulative. The rights and remedies of the Parties to this Agreement are cumulative and not alternative. Neither any failure
nor any delay by any Party in exercising any right, power or privilege under this Agreement or any of the other Transaction Documents will operate as a waiver
of such right, power or privilege, and no single or partial exercise of any such right, power or privilege will preclude any other or further exercise of such right,
power or privilege or the exercise of any other right, power or privilege. To the maximum extent permitted by applicable Law, (a) no claim or right arising out of
this Agreement or any of the other Transaction Documents can be discharged by one Party, in whole or in part, by a waiver or renunciation of the claim or right
unless in writing signed by the other Parties; (b) no waiver that may be given by a Party will be applicable except in the specific instance for which it is given; and
(c) no notice to or demand on one Party will be deemed to be a waiver of any obligation of that Party or of the right of the Party giving such notice or demand to
take further action without notice or demand as provided in this Agreement or any of the other Transaction Documents.
9.7
Notices. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be deemed given to a
Party when (a) delivered by hand, (b) one Business Day after being sent by a nationally recognized overnight courier service (costs prepaid), (c) sent by facsimile
or email with confirmation of transmission by the transmitting equipment, or (d) received by the addressee, if sent by certified mail, postage prepaid and return
receipt requested, in each case to the following:
61
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
if to Buyer, to:
LightPath Technologies, Inc.
2603 Challenger Tech Ct., Suite 100
Orlando, Florida 32826
Attention:
Tel:
Fax:
Email:
J. James Gaynor
407-382-4003
407-382-4007
jgaynor@lightpath.com
with a copy (which shall not constitute notice) to:
Baker & Hostetler LLP
SunTrust Center
200 South Orange Ave., Suite 2300
Orlando, Florida 32801
Attention:
Tel:
Fax:
Email:
Jeffrey E. Decker
407-649-4017
407-841-0168
jdecker@bakerlaw.com
to the Sellers, to:
69 Hallocks Run
Somers, NY 10589
Attention:
Tel:
Fax:
Email:
Joseph Menaker
914-591-3070
914-591-3715
josephm@ispoptics.com
515 Oradell Ave.
Oradell, NJ 07649
Attention:
Tel:
Fax:
Email:
Mark Lifshotz
914-591-3070
914-591-3715
markl@ispoptics.com
with a copy (which shall not constitute notice) to:
Blank Rome LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
Attention: Peter Schnur
Tel: (212) 885-5435
Email: PSchnur@blankrome.com
62
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Any Party may change its contact information for notices and other communications hereunder by notice to the other Parties hereto in accordance with
this Section 9.7.
9.8
Assignment. This Agreement shall be binding upon, and shall be enforceable by and inure solely to the benefit of the Parties hereto and their
respective successors and assigns; provided, that this Agreement and the rights and obligations hereunder shall not be assignable or transferable by any Party
without the prior written consent of the other Parties hereto. Notwithstanding the foregoing, Buyer may (a) assign any or all of its rights and interests hereunder
to one or more of its Affiliates, and (b) designate one or more of its Affiliates to perform its obligations hereunder (in the case of both (a) and (b), Buyer
nonetheless shall remain responsible for the performance of all of Buyer’s obligations hereunder).
9.9
No Third-Party Beneficiaries. Except for contemplated third party beneficiaries as expressly provided otherwise in this Agreement (including
provisions benefiting the Persons contained in Section 5.14 and Section 5.16 hereof and ARTICLE VII hereof), this Agreement is for the sole benefit of the
Parties hereto and their permitted successors and assigns and nothing herein expressed or implied shall give or be construed to give to any Person, other than
the Parties hereto and such successors and assigns, any legal or equitable rights, remedy or claim hereunder.
9.10
Amendments. No amendment to this Agreement shall be effective unless it shall be in writing and signed by Buyer and Sellers.
9.11
Disclosure Schedules . The Seller Disclosure Schedule and the Company Disclosure Schedule (collectively, the “ Disclosure Schedules ”) shall be
subject to the following terms and conditions: (a) no disclosure of any matter contained in the Disclosure Schedule shall create an implication that such matter
meets any standard of materiality (matters reflected in the Disclosure Schedule are not necessarily limited to matters required by this Agreement to be reflected
in the Disclosure Schedule; such additional matters are set forth for informational purposes only and do not necessarily include other matters of a similar nature,
nor shall the inclusion of any item be construed as implying that any such item is “material” for any purpose); (b) any item disclosed in any particular part of the
Disclosure Schedules shall be deemed to be disclosed in all parts of the Disclosure Schedules to the extent its relevance is reasonably apparent on its face, (c)
any disclosures contained in the Disclosure Schedule which refer to a document are qualified in their entirety by reference to the text of such document, a true
and complete copy of which was included in the due diligence information supplied to Buyer; and (d) headings and introductory language have been inserted on
the sections of the Disclosure Schedule for convenience of reference only and shall to no extent have the effect of amending or changing the express description
of the sections as set forth in this Agreement.
9.12
Non-Recourse. Other than the express representations and warranties of the Sellers, and their Liability therefor, pursuant to this Agreement, no
past, present or future director, manager, officer, employee, incorporator, agent, attorney or Representative of the Acquired Companies or any of their respective
Affiliates shall have be deemed to (a) have made any representations or warranties in connection with the Transactions, or (b) have any personal Liability to
Buyer for any obligations or Liabilities of the Acquired Companies under this Agreement for any claim based on, in respect of, or by reason of, the Transactions.
It is further understood that any certificate or certification contemplated by this Agreement and executed by an officer of a Party shall be deemed to have been
delivered only in such officer’s capacity as an officer of such Party (and not in his or her individual capacity) and shall not entitle any Party to assert a claim
against such officer in his or her individual capacity.
63
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
9.13
Construction. In construing this Agreement, including the Exhibits and Schedules and hereto, the following principles shall be followed: (a) the
terms “herein,” “hereof,” “hereby,” “hereunder” and other similar terms refer to this Agreement as a whole and not only to the particular Article, Section or other
subdivision in which any such terms may be employed; (b) except as otherwise set forth herein, references to Articles, Sections, Schedules and Exhibits refer to
the Articles, Sections, Schedules and Exhibits of this Agreement, which are incorporated in and made a part of this Agreement; (c) a reference to any Person
shall include such Person’s predecessors; (d) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP;
(e) no consideration shall be given to the headings of the Articles, Sections, Schedules, Exhibits, subdivisions, subsections or clauses, which are inserted for
convenience in locating the provisions of this Agreement and not as an aid in its construction; (f) the word “includes” and “including” and their syntactical variants
mean “includes, but is not limited to” and “including, without limitation,” and corresponding syntactical variant expressions; (g) a defined term has its defined
meaning throughout this Agreement, regardless of whether it appears before or after the place in this Agreement where it is defined, including in any Schedule or
Exhibit; (h) the word “dollar” and the symbol “$” refer to the lawful currency of the United States of America; and (i) the plural shall be deemed to include the
singular and vice versa.
9.14
Entire Agreement. This Agreement (including any Exhibit or Schedule attached hereto) and the Transaction Documents contain the entire
agreement and understanding among the Parties hereto with respect to the subject matter hereof and, except as explicitly set forth herein, supersede all prior
and contemporaneous oral and written agreements and understandings relating to such subject matter.
9.15
Severability. If any provision of this Agreement or the application of any such provision to any Person or circumstance shall be held invalid,
illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision hereof.
9.16
Mutual Drafting. The Parties hereto are sophisticated and have been represented by counsel who have carefully negotiated the provisions
hereof. As a consequence, the Parties do not intend that the presumptions of any Laws or other rules relating to the interpretation of contracts against the drafter
of any particular clause should be applied to this Agreement and therefore waive their effects.
9.17
Counterparts; Facsimile. This Agreement may be executed in one or more counterparts, including by facsimile or email, all of which shall be
considered one and the same agreement, and shall become effective when one or more such counterparts have been signed by each of the Parties and
delivered to the other Party.
[SIGNATURES ON NEXT PAGE]
64
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
INTENDING TO BE LEGALLY BOUND, the undersigned Buyer has executed this Stock Purchase Agreement as of the date first written above.
BUYER:
LIGHTPATH TECHNOLOGIES, INC.
By:
/s/ J. James Gaynor
Name:
Title:
J. James Gaynor
President & CEO
[BUYER SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT ]
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
INTENDING TO BE LEGALLY BOUND, the undersigned Company has executed this Stock Purchase Agreement as of the date first written above.
BUYER:
ISP OPTICS CORPORATION
By:
/s/ Joseph Menaker
Name:
Title:
Joseph Menaker
President
[COMPANY SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT ]
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
INTENDING TO BE LEGALLY BOUND, the undersigned Sellers have executed this Stock Purchase Agreement as of the date first written above.
SELLERS:
/s/ Joseph Menaker
Joseph Menaker
/s/ Mark Lifshotz
Mark Lifshotz
[SELLERS SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT ]
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
THIS PROMISSORY NOTE IS MADE AND ISSUED PURSUANT TO THE PROVISIONS OF A STOCK PURCHASE AGREEMENT. THE MAKER MAY, IN
THE MANNER AUTHORIZED IN THE STOCK PURCHASE AGREEMENT, OFFSET AGAINST PAYMENTS DUE HEREUNDER ANY AMOUNTS DUE BY
THE PAYEE TO THE MAKER ARISING UNDER THE STOCK PURCHASE AGREEMENT. ANY SUCH AMOUNTS CLAIMED BY MAKER WHICH ARE
OFFSET AGAINST THIS PROMISSORY NOTE SHALL REDUCE THE PRINCIPAL BALANCE OF THIS PROMISSORY NOTE.
Exhibit A
U.S. $__,000,000.00
UNSECURED PROMISSORY NOTE
________, 2016
New York, New York
FOR VALUE RECEIVED, the undersigned, LightPath Technologies, Inc., a Delaware corporation (“ Maker”), promises to pay to the order of Joseph Menaker,
an individual, and Mark Lifshotz, an individual (collectively, “Payee”), at __________________ or at such other place as Payee may designate, the principal
sum of _____ Million Dollars ($__,000,000.00), with interest thereon as provided in this Unsecured Promissory Note (“Note”).
1.
This Note is being executed in connection with the closing of a Stock Purchase Agreement dated as of August 3, 2016 by and between Maker,
ISP Optics Corporation, a New York corporation (“ISP”) and all of the shareholders of ISP, including Payee (the “ Purchase Agreement”). All capitalized terms not
otherwise defined herein shall have the meanings set forth in the Purchase Agreement. As is further set forth in the Purchase Agreement, this Note shall be
delivered on the Closing Date, and the principal amount of the Note may be adjusted in accordance with the Purchase Agreement.
2.
During the period commencing on the date hereof and continuing until the fifteen month anniversary of the Closing Date (the “ Initial Period”),
interest shall accrue on only that amount of the principal amount of this Note in excess of Two Million Seven Hundred Thousand Dollars ($2,700,000) at an
interest rate equal to ten percent (10%) per annum. After the Initial Period, interest shall accrue on the entire unpaid principal amount of this Note from time to
time outstanding, at an interest rate equal to ten percent (10%) per annum. If any amount payable hereunder is not paid when due (without regard to any
applicable grace periods), whether at stated maturity, by acceleration or otherwise, such overdue amount shall bear interest at the rate equal to twelve percent
(12%) per annum from the date of such non-payment until such amount is paid in full. All interest shall be computed on the basis of a 365-day year and the
actual number of days elapsed.
3.
Interest shall be payable to Payee semi-annually in arrears on each __________ and __________ that this Note is outstanding, commencing on
the first such date to occur after the Closing Date (each an “Interest Payment Date”). If any such Interest Payment Date is not a Business Day, then such
payment shall be due on the next succeeding Business Day. Any unpaid interest and principal, together with any other amounts payable hereunder, shall be due
and payable on the fifth anniversary of the date of this Note. All payments under this Note shall first be applied to any accrued and unpaid interest and thereafter
to the unpaid principal amount hereof.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4.
It shall be an “ Event of Default ” under this Note if:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Maker fails to make any payment when due under this Note and such payment is not cured within five (5) days after Maker’s receipt of
written notice of such failure.
Maker commences any case, proceeding or other action (i) under any existing or future Law relating to bankruptcy, insolvency,
reorganization, or other relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it as
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other
relief with respect to it or its debts or (ii) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it
or for all or any substantial part of its assets, or Maker makes a general assignment for the benefit of its creditors;
there is commenced against Maker any case, proceeding or other action of a nature referred to in Section 4(b) which (i) results in the
entry of an order for relief or any such adjudication or appointment or (ii) remains undismissed, undischarged or unbonded for a period
of ninety (90) days;
there is commenced against Maker any case, proceeding or other action seeking issuance of a warrant of attachment, execution or
similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which has not
been vacated, discharged, or stayed or bonded pending appeal within ninety (90) days from the entry thereof;
Maker takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in Section
4(b), (c) and (d);
Maker is generally not, or shall be unable to, or admits in writing its inability to pay its debts as they become due; or
There occurs a change of control of Maker as a result of (i) a sale of all or substantially all of the assets of Maker or (ii) a transaction by
and between Maker and any “Person” (having the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in
Sections 13(d) and 14(d) thereof, including a “group” within the meaning of Section 13(d)(3)), whereby the stockholders of Maker
immediately prior to such transaction own less than fifty percent (50%) of the total fair market value or total voting power of the equity of
the acquiring or surviving entity, as applicable.
2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
5.
Upon the occurrence of an Event of Default, without any further act of Payee or any other Person, the entire unpaid and outstanding principal
balance of this Note, together with all accrued and unpaid interest and any and all other amounts payable hereunder, shall immediately be due and payable, and
Payee may exercise all or any of its rights under applicable Law.
6.
States of America.
This Note may be prepaid in whole or in part without penalty or premium. All references to Dollars herein are to lawful currency of the United
7.
Any extension of this Note granted to Maker by Payee shall not release Maker, or constitute a waiver, of any payment due on principal or
interest, or otherwise diminish the rights of Payee. The obligations evidenced or created by this Note, as well as all waivers of rights by Maker contained herein,
shall effectively bind and be the obligations and waivers of any and all others who may at any time become liable for the payment of all or any part of this Note,
including, without limitation, all endorsers and guarantors. Payee may not assign or transfer, by operation of law or otherwise, this Note or any of Payee’s rights
or obligations hereunder, in whole or in part, without the express prior written consent of Maker. Subject to the foregoing, this Note shall be binding upon and
inure to the benefit of the Parties and their respective heirs, representatives, successors and permissible assigns.
8.
No delay or omission on the part of Payee in exercising any of its remedies hereunder shall be deemed a continuing waiver of that right or any
other right. The acceptance of Payee of any payment pursuant to the terms of this Note which is less than payment in full of all amounts due and payable at the
time of such payment shall not constitute a waiver of the right to (a) collect such payment(s) in full and/or (b) exercise any of the foregoing options at that time or
at any subsequent time or nullify any prior exercise of any such option, without the express written consent of Payee, except and as to the extent otherwise
required by law.
9.
Nothing herein shall be construed or operate as to require Maker, or any person liable for the payment of the Note, to pay interest or charges in
an amount or at a rate greater than the highest rate permissible under applicable law. Should any interest or other charges paid by Maker result in the
computation or earning of interest in excess of such rate, then any and all such excess shall be and the same is hereby waived by Payee, and all such excess
shall be automatically credited against the principal balance of this Note, and any portion of said excess that exceeds the principal balance shall be paid by
Payee to Maker.
10.
Any provision of this Note may be amended, waived or modified only upon the written consent of Maker and Payee. If any provision of this Note
is found to be illegal or unenforceable, the other provisions shall remain effective and enforceable to the fullest extent permitted by law. Maker and Payee have
each had the opportunity to have independent legal counsel review and seek to revise this Note, and this Note therefore shall not be interpreted against any
party as the drafter. This Note shall be governed by, construed and enforced in accordance with the laws of the State of New York.
11.
All notices or other communications required or permitted hereunder shall be in writing and shall be deemed given or delivered in the manner
provided in the Purchase Agreement.
3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
IN WITNESS WHEREOF, Maker has executed this Note in favor of Payee as of the date first written above.
“MAKER”
LightPath Technologies, Inc., a Delaware corporation
By:
Its:
4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LightPath Technologies, Inc. 10-K
GelTech Inc.
LightPath Optical Instrumentation (Shanghai) Co., Ltd
LightPath Optical Instrumentation (Zhenjiang) Co., Ltd
Subsidiaries
Exhibit 21.1
Delaware Corporation
People’s Republic of China
People’s Republic of China
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LightPath Technologies, Inc. 10-K
LightPath Technologies, Inc.
Orlando, Florida
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-23515, 333-23511, 333-41705, 333-92017, 333-
121389, 333-121385, 333-96083, 333-50976, 333-50974, 333-155044, 333-188482, 333-201871 and 333-201872) and Form S-3 (Nos. 333-113814, 333-
37443, 333-39641, 333-47905, 333-86185, 333-93179, 333-94303, 333-31014, 333-37622, 333-47992, 333-51474, 333-75528, 333-127053, 333-133772,
333-146550, 333-153743, 333-159603, 333-162342, 333-163416, 333-166633 and 333-182240) of LightPath Technologies, Inc. of our report dated September
15, 2016, relating to the consolidated financial statements, which appears in the Annual Report to Shareholders, which is incorporated by reference in this
Annual Report on Form Form 10-K.
BDO USA, LLP
Orlando, Florida
September 15, 2016
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LightPath Technologies, Inc. 10-K
POWER OF ATTORNEY
Exhibit 24
KNOW ALL BY THESE PRESENTS, that the undersigned constitutes and appoints J. James Gaynor and Dorothy Cipolla, and each of them, his true and lawful
attorneys’-in-fact and agents, with full power of substitution and resubstitution, for and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K for the fiscal year ended June 30, 2016, and any and all amendments thereto and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as
might or could be done in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed on this 20th day of August, 2016 by the following persons.
/s/ Robert Ripp
Robert Ripp
/s/ Sohail Khan
Sohail Khan
/s/ Steven Brueck
Steve Brueck
/s/ M. Scott Faris
M. Scott Faris
/s/ J. James Gaynor
J. James Gaynor
/s/ Xudong Zhu
Xudong Zhu
/s/ Louis Leeburg
Louis Leeburg
/s/ Craig Dunham
Craig Dunham
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LightPath Technologies, Inc. 10-K
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, J. James Gaynor, certify that:
1. I have reviewed this annual report on Form 10-K of LightPath Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Dated: September 15, 2016
/s/ J. James Gaynor
J. James Gaynor
President and Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LightPath Technologies, Inc. 10-K
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, Dorothy M. Cipolla, certify that:
1. I have reviewed this annual report on Form 10-K of LightPath Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Dated: September 15, 2016
/s/ Dorothy M. Cipolla
Dorothy M. Cipolla
Chief Financial Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LightPath Technologies, Inc. 10-K
Certifications of Chief Executive Officer
Pursuant to 1350 of Chapter 63 of Title 18 of the United States Code
Exhibit 32.1
Pursuant to U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer of LightPath
Technologies, Inc. (the “Company”) does hereby certify, to the best of such officer’s knowledge, that:
1. The Annual Report on Form 10-K of the Company for the year ended June 30, 2016 (the “Report”) fully complies with the requirements of Section 13(a)
or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: September 15, 2016
/s/ J. James Gaynor
J. James Gaynor
President and Chief Executive Officer
The certifications set forth above are being furnished as an exhibit solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be
deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any
filing under the Securities Act of 1933, as amended.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature
that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to LightPath Technologies, Inc. and
will be retained by LightPath Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LightPath Technologies, Inc. 10-K
Certifications of Chief Financial Officer
Pursuant to 1350 of Chapter 63 of Title 18 of the United States Code
Exhibit 32.2
Pursuant to U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Financial Officer of LightPath
Technologies, Inc. (the “Company”) does hereby certify, to the best of such officer’s knowledge, that:
1. The Annual Report on Form 10-K of the Company for the year ended June 30, 2016 (the “Report”) fully complies with the requirements of Section 13(a)
or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: September 15, 2016
/s/ Dorothy M. Cipolla
Dorothy M. Cipolla
Chief Financial Officer
The certifications set forth above are being furnished as an exhibit solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be
deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any
filing under the Securities Act of 1933, as amended.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature
that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to LightPath Technologies, Inc. and
will be retained by LightPath Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.