SECURITIES & EXCHANGE COMMISSION EDGAR FILING
LIGHTPATH TECHNOLOGIES INC
Form: 10-K
Date Filed: 2018-09-13
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, 2018
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, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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 Class A Common Stock on
the NASDAQ Capital Market) was approximately $47,403,296 as of December 31, 2017.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
As of September 10, 2018, the number of shares of the registrant’s Class A Common Stock outstanding was 25,773,605.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Fiscal 2019 Annual Meeting of Stockholders are incorporated by reference in Part II and Part III.
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. Business
Item 1A. Risk Factors
Item 2. Properties
Item 3. Legal Proceedings
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers of the Registrant and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Index to Consolidated Financial Statements
Signatures
Certifications
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18
30
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31
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35
F-1
S-1
See Exhibits
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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, molded
and diamond-turned infrared aspheric 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. All the products 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, diamond turned, conventional ground and polished and CNC ground 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, pharmaceutical research & development and defense; and
● Collimator assemblies are used in applications involving light detection and ranging (“LIDAR”) technology for autonomous vehicles, such as fork lifts
and other automated warehouse equipment.
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 (the “Shanghai 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 39,000 square foot manufacturing facility (the “Zhenjiang 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.
In December 2016, we acquired ISP Optics Corporation, a New York corporation (“ISP”), and its wholly-owned subsidiary, ISP Optics Latvia, SIA, a limited liability
company founded in 1998 under the Laws of the Republic of Latvia (“ISP Latvia”). ISP is a vertically integrated manufacturer offering a full range of infrared
products from custom infrared optical elements to catalog and high-performance lens assemblies. Historically, ISP’s Irvington, New York facility (the “Irvington
Facility”) functioned as its global headquarters for operations, while also providing manufacturing capabilities, optical coatings, and optical and mechanical design,
assembly, and testing. In July 2018, we announced plans to relocate this manufacturing facility to our existing facilities in Orlando, Florida and Riga, Latvia. We
expect the relocation to occur in phases through the end of fiscal 2019. ISP Latvia is a manufacturer of high precision optics and offers a full range of infrared
products, including catalog and custom infrared optics. ISP Latvia’s manufacturing facility is located in Riga, Latvia (the “Riga Facility”). See Note 3, Acquisition of
ISP Optics Corporation, to the Consolidated Financial Statements, for additional information.
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Product Groups and Markets
Overview
In 2015, we organized our business based on five product groups: low volume precision molded optics (“LVPMO”), high volume precision molded optics
(“HVPMO”), infrared products, specialty products, and non-recurring engineering (“NRE”). Our LVPMO product group consists of precision molded optics with a
sales price greater than $10 per lens and is 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 and is usually sold in larger lot quantities. Our infrared product group is comprised of both molded and turned lens and assemblies and
includes all of the products offered by ISP. Our specialty product group is comprised of value-added products, such as optical subsystems, assemblies and
collimators. Our NRE product group consists of those products we develop pursuant to product development agreements that 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. At the beginning of fiscal 2019, we combined the LVPMO and HVPMO product
groups into a single precision molded optics (“PMO”) product group. In addition, the NRE product group will now be added to the specialty product group.
Accordingly, beginning with our Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, we will present three product groups: PMO, infrared,
and specialty products.
We currently serve the following major markets: industrial, commercial, defense, medical, and telecommunications. 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 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 $1.7 billion 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. In addition to these major markets, a large percentage of our revenues are derived from
sales to unaffiliated companies that purchase our products to fulfill their customer’s orders, as well as unaffiliated companies that offer our products for sale in their
catalogs.
Product Groups
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, but a slowdown in the telecommunications market caused a decrease in revenue
generated by our LVPMO and HVPMO product groups for fiscal 2018, as compared to fiscal 2017. We continue to expect growth for the next several years, as
indications are that we have reached what appears to be the trough of the downward cycle for the telecommunications market. We believe we are nearing the
beginning of a multi-year growth cycle of the optical market. This multi-year growth cycle is driven by four major trends: data centers; digital video distribution;
wireless broadband; and machine-to-machine interface. 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. By 2021, it is estimated that there will be 1.5 mobile devices per capita. It
is also expected that there will be approximately 11.6 billion mobile-connected devices by 2021, including machine-to-machine (“M2M”) modules, exceeding the
world’s projected population of 7.8 billion. 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, barcode scanners and laser based spectrometers.
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● LVPMOs. The growth we experienced in our LVPMO business in previous years was 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 growth we experienced in our HVPMO business in previous years was driven by market applications supporting mostly the laser diode
applications for high volume markets in laser tools, range finders, laser gun sights, barcode 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. There are also indications that the telecommunications market will recover, particularly as the access networks
around the world are being upgraded to accommodate the conversion to 5G applications, which will provide us with opportunities for growth.
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. Molding is an excellent alternative to traditional lens processing methods particularly where volume and
repeatability is required.
Through ISP, our wholly-owned subsidiary, we also offer germanium, silicon or zinc selenide aspheres and spherical lenses which are manufactured by diamond
turning. This manufacturing technique allows us to offer larger lens sizes and the ability to use other optical materials which cannot be effectively molded. ISP
gives us the ability to meet complex optical challenges that demand more exotic optical substrate materials that are non-moldable.
Overall, we anticipate growth for infrared optics and increased requirements for systems requiring aspheric optics. 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
sights, and infrared counter measure systems, represent a market that is forecasted to grow from $4.8 billion in 2017 to $7.3 billion by 2023, at a compound
annual growth rate of 7.18% during the forecast period. 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 utilizing smaller lenses 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. In addition, there is a trend toward utilizing smaller size sensors in these devices which require smaller size lenses and that fits well
with our molding technology.
Specialty Product Group. We have a 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 collimator assemblies. We expect growth from defense communications
programs and commercial optical sub-assemblies.
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.
Growth Strategy
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:
● 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.
● 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.
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● Increase Customer Base and Continue to Develop New Products. 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 continually work closely with our customers to
provide solutions and productions that optimize their products. This market-driven product development enables us to offer a high-quality product portfolio
to our customers and provide our business with the ability to respond quickly and efficiently to changes in market demands.
● 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.
● 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.
● 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.
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 and copiers) to industrial (e.g., lasers, data storage, and infrared imaging), from products where the lenses are the central feature (e.g., telescopes,
microscopes, and lens systems) to products incorporating lens components (e.g., robotics and 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,
tool manufacturers,
telecommunications equipment manufacturers, medical and industrial measurement equipment manufacturers, government defense agencies, and research
institutions worldwide.
infrared-imaging systems vendors,
laser systems manufacturers,
laser OEMs,
industrial
including
laser
Technical Sales Model. To align the organization for specific goals and accountability, we created an executive structure with three direct reporting lines:
Operations, Sales and Marketing, and Finance. Our Sales and Marketing organization is led by the Vice President of Corporate Business Development, as well as
our National Sales Manager. We also combined the organizations supporting our aspheric visible lens products and our infrared products.
Sales Team & Channel. We have regional sales forces that market and sell our products directly to customers in North America, Europe and China. We also have
a master distributor in Europe. We have formalized relationships with 15 industrial, laser, and optoelectronics distributors and channel partners located in the
United States (“U.S.”) 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 websites (www.lightpath.com and www.ispoptics.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.
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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 2018 and SPIE Defense, Security and
Sensing in April 2018. In addition, we exhibit at the Laser World of Photonics in Munich, Germany to maintain our European presence. 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, particularly as related to our specialty product group . 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 Europe and 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 Co., Inc., Anteryon BV, Rochester Precision Optics, and Sunny Optical Technology (Group) Company Limited.
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 Corporation, Alps Electric Co., Ltd., Hoya
Corporation, as well as newer competitors from China and Taiwan, such as E-Pin Optical Industry Co., Ltd., 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.
Infrared Product Group. Our infrared aspheric optics compete with optical products produced by Janos Technology LLC, Ophir Optronics Solutions, Ernst Leitz
Canada (ELCAN) Optical Technologies, Clear Align and a variety of Eastern European and Asian manufacturers. 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. Our diamond turned aspheres from germanium are more expensive to produce in high volumes and
time consuming to manufacture. We believe our low cost, high volume lens business technology combined with our recently added traditional polishing and
diamond turning capabilities enables us to compete with the other manufacturers of traditional infrared lens by offering the best technology fit at a competitive
price.
Our molded infrared optics competes with products manufactured by Umicore N.V. (“Umicore”), Rochester Precision Optics, and Yunnan KIRP-CH Photonics Co.,
Ltd.. We believe that our optical design expertise, our diverse manufacturing flexibility and our manufacturing facilities located in Asia, Europe and North America
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.
Manufacturing
Facilities. Our manufacturing is largely performed in our 26,000 square foot production facility in Orlando, Florida (the “Orlando Facility”), in LPOIZ’s 39,000
square foot production facility in Zhenjiang, China and in ISP Latvia’s 23,000 square foot production facility in Riga, Latvia. LPOI sales and support functions
occupy a 1,900 square foot facility in Shanghai. ISP also has an approximately 13,000 square foot facility in Irvington, New York that functions as its operations
headquarters, providing manufacturing capabilities, optical coatings, optical and mechanical design, assembly and testing, as well as some engineering,
administrative and sales functions. We are in the process of adding approximately 12,000 square feet of additional manufacturing space near our existing Orlando
Facility, which we expect to complete during the second quarter of fiscal 2019. We will be relocating the manufacturing operations of ISP’s Irvington Facility to our
existing Orlando Facility and Riga Facility. The additional space being added in Orlando will accommodate this relocation. The relocation is expected to be
completed in phases through the end of fiscal 2019. Some of the manufacturing operations currently performed in the Irvington Facility will transition to our
Zhenjiang Facility.
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Our Orlando Facility and LPOI’s Zhenjiang Facility feature areas for each step of the manufacturing process, including coating work areas, preform manufacturing
and a clean room for pressing and integrated assembly. The Orlando and Zhenjiang Facilities include new product development laboratories and space that
includes development and metrology equipment. The Zhenjiang Facility has anti-reflective and infrared coating equipment to coat our lenses in-house. ISP’s
Irvington Facility and ISP Latvia’s Riga Facility include fully vertically integrated manufacturing processes to produce high precision infrared lenses and infrared
lens assemblies, including crystal growth, CNC grinding, conventional polishing, diamond turning, multilayer coatings, assemblies and state of the art metrology.
We are routinely adding additional production equipment at our Orlando, Zhenjiang and Riga Facilities. During fiscal 2018, we added additional space in both our
Zhenjiang and Riga Facilities. In fiscal 2019, we will complete the additional space in Orlando and the relocation of the Irvington Facility’s manufacturing
operations. In addition to adding additional equipment or space at our manufacturing facilities, we add additional work shifts, as needed, to increase capacity and
meet forecasted demand. We intend to monitor the capacity at our facilities, and will increase such space as needed. We believe our facilities are adequate to
accommodate our needs over the next year.
Production and Equipment. Our Orlando Facility contains glass melting capability for infrared glass, 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 and related metrology equipment. Most recently, in connection
with the relocation of the Irvington Facility, we have added a chamber for diamond-like carbon (“DLC”) coating in Orlando. LPOIZ’s Zhenjiang Facility features a
molded glass aspheres manufacturing area, clean room, machine shop, dicing area, and chambers for coating, including anti-reflective and infrared coatings and
related metrology equipment.
ISP’s Irvington Facility contains a manufacturing area for diamond turning, coating, lens assembly, and quality control. The facility is equipped with numerous
diamond turning machines and accompanying metrology equipment, offering full scale diamond turning capabilities. The facility is also equipped with multiple
chambers for various multi-layer coatings and a chamber for DLC coating. A cleaning room and metrology laboratory are also part of the coating area. The lens
assembly area is equipped with modulation transfer function (“MTF”) stations, lens assembly stations and the latest lens design software.
ISP Latvia’s Riga Facility consists of crystal growth, grinding, polishing, diamond turning, quality control departments and a mechanical shop to provide the
grinding and polishing departments with the necessary tools. The crystal growth department is equipped with multiple furnaces to grow water soluble crystals. The
grinding and polishing departments have numerous modern CNC equipment, lens centering and conventional equipment to perform spindle, double sided and
continuous polishing operations. The diamond turning department has numerous diamond turning machines accompanied with the latest metrology tools. In
connection with the relocation of the Irvington Facility, we have increased the diamond turning capacity in this facility. The quality control department contains
numerous inspection stations with various equipment to perform optical testing of finished optics.
The Orlando, Zhenjiang, and Irvington Facilities are ISO 9001:2015 certified. The Riga Facility is ISO 9001:2008 certified. The Zhenjiang Facility is also ISO/TS
1649:2009 certified for manufacturing of optical lenses and accessories used in automobiles. The Orlando, Irvington, and Riga Facilities are also International
Traffic in Arms and Regulation (“ITAR”) compliant.
For more information regarding our facilities, please see Item 2. Properties in this Annual Report on Form 10-K.
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 Ltd., Ohara Corporation, and Sumita Optical Glass, Inc. Base optical materials, used
in both infrared glass and collimator products, are manufactured and supplied by a number of optical and glass manufacturers. ISP utilizes major infrared material
suppliers located around the globe for a broad spectrum of infrared crystal and glass. We believe that a satisfactory supply of such production materials will
continue to be available, at reasonable or, in some cases, increased 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.
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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. 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 three remaining patents that relate to the fusing of certain of our lenses that are part of our
specialty products group. These patents 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®
ISP Optics®
Type
service mark
Trademark
Trademark
Trademark
Trademark
Trademark
service mark
Trademark
Environmental and Governmental Regulation
Registered
Yes
Yes
No
No
No
No
Yes
Yes
Country
United States
United States
-
-
-
-
People’s Republic of China
United States
Renewal
Date
October 22, 2022
April 29, 2027
-
-
-
-
September 13, 2025
August 12, 2020
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.
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New Product Development
In recent years, our new product development efforts have been focused on the development of our capabilities in molded aspheric lenses and infrared lenses.
We incurred expenditures for new product development during fiscal 2018 and 2017 of approximately $1.6 million and $1.2 million, respectively. In fiscal 2018 and
2017, 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, with emphasis on infrared products in fiscal 2018.
In fiscal 2019, we anticipate focusing our new product development efforts on infrared optics products for imaging and sensing, fiber lasers, spectrophotometry,
defense, medical devices, industrial, optical data storage, machine vision, sensors, and environmental monitoring. In addition, we plan on continuing to invest in
designing and developing the next generation of our proprietary precision glass molding machines. We currently plan to expend approximately $1.9 million for
new product development during fiscal 2019, 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 2018, we had sales to three customers that comprised an aggregate of approximately 28% of our annual revenue with one customer at 16% of our sales,
another customer at 7% of our sales and the third customer at 5% of our sales. In fiscal 2017, we had sales to three customers that comprised an aggregate of
approximately 26% of our annual revenue with one customer at 10% of our sales, another customer at 9% 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 2018, 58% of our net revenue was derived from sales outside of the United States, with 84% of our foreign sales derived from customers in Europe and
Asia. In fiscal 2017, 61% of our net revenue was derived from sales outside of the United States, with 88% of our foreign sales derived from customers in Europe
and Asia.
Employees
As of June 30, 2018, we had 342 employees, of which 331 were full-time equivalent employees, with 85 located in Orlando, Florida, 33 located in Irvington, New
York, 87 located in Riga, Latvia, and 126 located in Jiading and Zhenjiang, China. Of our 331 full-time equivalent employees, we have 41 employees engaged in
management, administrative, and clerical functions, 21 employees in new product development, 19 employees in sales and marketing, and 250 employees in
production and quality control functions. In connection with the relocation of our Irvington Facility into our existing Orlando and Riga Facilities, which we expect will
occur in phases throughout fiscal 2019, we anticipate that current Irvington employees will either be relocated to our Orlando or Riga Facilities or that we will hire
additional employees at these facilities. Any other employee additions or terminations over the next twelve months will be dependent upon the actual sales levels
realized during fiscal 2019. We have used and will continue utilizing part-time help, including interns, 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 1A. Risk Factors.
The following is a discussion of the primary factors that may affect the operations and/or financial performance of our business. Refer to the section entitled Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K for an additional discussion of
these and other related factors that affect our operations and/or financial performance.
Risks Related to Our Business and Financial Results
We have a history of losses. We achieved net income of $1.1 million for fiscal 2018 and $7.7 million for fiscal 2017; however, we have a history of losses in
previous periods. As of June 30, 2018, we had an accumulated deficit of approximately $195 million. We may incur losses in the future if we do not achieve
sufficient revenue to maintain profitability. We expect revenue to grow generating additional sales through promotion of our infrared products and cost reduction
efforts of our precision molded products, but we cannot guarantee such improvement or growth.
Factors which could adversely affect our future profitability, include, but are not limited to, a decline in revenue either due to lower sales unit volumes or
decreasing selling prices or both, our ability to order supplies from vendors, which, in turn, affects our ability to manufacture our products, and slow payments from
our customers on accounts receivable.
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Any failure to maintain profitability would have a materially adverse effect on our ability to implement our business plan, our results and operations, and our
financial condition, and could cause the value of our Class A common stock to decline.
We are dependent on a few key customers, and the loss of any key customer could cause a significant decline in our revenues. In fiscal 2018, we had
sales to three customers that comprised an aggregate of approximately 28% of our annual revenue with one customer at 16% of our sales, another customer at
7% of our sales, and the third customer at 5% of our sales. In fiscal 2017, we had sales to three customers that comprised approximately 26% of our annual
revenue, with one customer at 10% of our sales, another customer at 9% of our sales, and the third customer at 7% of our sales. Part of our continuing strategy
has been to gain key customer relationships of more significance and impact to generate higher revenues at lower costs. This strategy has met with some
success; however, we believe our operating results will continue to be notably dependent on sales to a relatively small number of significant customers. However,
we continue to diversify our business in order to minimize our sales concentration risk. The loss of any of these customers, or a significant reduction in sales to
any such customer, would adversely affect our revenues.
We may be affected by political and other risks as a result of our sales to international customers and/or our sourcing of materials from international
suppliers. In fiscal 2018, 58% of our net revenue was derived from sales outside of the United States, with 84% of our foreign sales derived from customers in
Europe and Asia. In fiscal 2017, approximately 61% of our net revenues were from sales to international customers, with 88% of foreign sales derived from
customers in Europe and Asia. Our international sales will be limited, and may even decline, if we cannot establish relationships with new international
distributors, maintain relationships with our existing international distributions, maintain and expand our foreign operations, expand international sales, and
develop relationships with international service providers. Additionally, our international sales may be adversely affected if international economies weaken. We
are subject to the following risks, among others:
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greater difficulty in accounts receivable collection and longer collection periods;
potentially different pricing environments and longer sales cycles;
the impact of recessions in economies outside the United States;
unexpected changes in foreign regulatory requirements;
the burdens of complying with a wide variety of foreign laws and different legal standards;
certification requirements;
reduced protection for intellectual property rights in some countries;
difficulties in managing the staffing of international operations, including labor unrest and current and changing regulatory environments;
potentially adverse tax consequences, including the complexities of foreign value-added tax systems, restrictions on the repatriation of earnings,
and changes in tax rates;
price controls and exchange controls;
government embargoes or foreign trade restrictions;
imposition of duties and tariffs and other trade barriers;
import and export controls;
transportation delays and interruptions;
terrorist attacks and security concerns in general; and
political, social, economic instability and disruptions.
As a U.S. corporation with international operations, we are subject to the U.S. Foreign Corrupt Practices Act and other similar foreign anti-corruption
laws, as well as other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other
remedial measures, and legal expenses, which could adversely affect our business, financial condition, and results of operations. Our operations are
subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”), and other foreign anti-corruption laws that apply in countries where we
do business. The FCPA and these other laws generally prohibit us and our employees and intermediaries from offering, promising, authorizing or making
payments to government officials or other persons to obtain or retain business or gain some other business advantage. In addition, we cannot predict the nature,
scope, or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be
administered or interpreted. Operations outside of the U.S. may be affected by changes in trade production laws, policies, and measures, and other regulatory
requirements affecting trade and investment.
We are also subject to other laws and regulations governing our international operations, including regulations administered by the U.S. Department of
Commerce’s Bureau of Industry and Security, the U.S. Department of Treasury’s Office of Foreign Asset Control, and various non-U.S. government entities,
including applicable export control regulations, economic sanctions on countries and persons, customs, requirements, currency exchange regulations, and
transfer pricing regulations (collectively, the “Trade Control Laws”).
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Despite our compliance programs, there can be no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption
laws, including the FCPA or other legal requirements, or Trade Control Laws. If we are not in compliance with the FCPA and other foreign anti-corruption laws or
Trade Control Laws, we may be subject to criminal and civil penalties, disgorgement, and other sanctions and remedial measures, and legal expenses, which
could have an adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the
FCPA, other anti-corruption laws, or Trade Control Laws by the U.S. or foreign authorities could also have an adverse impact on our reputation, business,
financial condition, and results of operations.
Rising threats of international tariffs, including tariffs applied to goods traded between the United States and China, could materially and adversely
affect our business and results of operations. Since the beginning of 2018, there has been increasing discussion, in some cases coupled with legislative or
executive action, from several United States and foreign leaders regarding the possibility of instituting tariffs against foreign imports of certain materials. More
specifically, in March and April of 2018, the United States and China have applied tariffs to certain of each other’s exports. The institution of trade tariffs both
globally and between the United States and China specifically carries the risk of negatively impacting China’s overall economic condition, which could have
negative repercussions on us. Furthermore, imposition of tariffs could cause a decrease in the sales of our products to customers located in China or other
customers selling to Chinese end users, which would directly impact our business.
The current United States President, members of his Administration, and other public officials, including members of the current United States Congress, have
made public statements indicating possible significant changes in United States trade policy and have taken certain actions that may impact United States trade
policy, including new or increased tariffs on certain goods imported into the United States. Further, changes in United States trade policy could trigger retaliatory
actions by affected countries, which could impose restrictions on our ability to do business in or with affected countries or prohibit, reduce, or discourage
purchases of our products by foreign customers, leading to increased costs of products that contain our components, increased costs of manufacturing our
products, and higher prices of our products in foreign markets. Changes in, and responses to, United States trade policy could reduce the competitiveness of our
products and cause our sales and revenues to drop, which could materially and adversely impact our business and results of operations.
Our future growth is partially dependent on our market penetration efforts. Our future growth is partially dependent on our market penetration efforts, which
include diversifying our sales to high-volume, low-cost optical applications and other new market and product opportunities in multiple industries. While we believe
our existing products are commercially viable, we anticipate the need to educate the optical components markets in order to generate market demand and market
feedback may require us to further refine these products. Expansion of our product lines and sales into new markets will require significant investment in
equipment, facilities, and materials. There can be no assurance that any proposed products will be successfully developed, demonstrate desirable optical
performance, be capable of being produced in commercial quantities at reasonable costs, or be successfully marketed.
We rely, in large part, on key business and sales relationships for the successful commercialization of our products, which if not developed or
maintained, will have an adverse impact on achieving market awareness and acceptance and will result in a loss of business opportunities. To achieve
wide market awareness and acceptance of our products and technologies, as part of our business strategy, we will attempt to enter into a variety of business
relationships with other companies that will incorporate our technologies into their products and/or market products based on our technologies. The successful
commercialization of our products and technologies will depend in part on our ability to meet obligations under contracts with respect to the products and related
development requirements. The failure of these business relationships will limit the commercialization of our products and technologies, which will have an
adverse impact on our business development and our ability to generate revenues.
If we do not expand our sales and marketing organization, our revenues may not increase. The sale of our products requires prolonged sales and
marketing efforts targeted at several key departments within our prospective customers’ organizations and often time involves our executives, personnel, and
specialized systems and applications engineers working together. Currently, our direct sales and marketing organization is somewhat limited. We believe we will
need to continue to strengthen our sales force in order to increase market awareness and sales of our products. There is significant competition for qualified
personnel, and we might not be able to hire the kind and number of sales and marketing personnel and applications engineers we need. If we are unable to
expand our sales operations, particularly in China, we may not be able to increase market awareness or sales of our products, which would adversely affect our
revenues, results of operations, and financial condition.
If we are unable to develop and successfully introduce new and enhanced products that meet the needs of our customers, our business may not be
successful. Our future success depends, in part, on our ability to anticipate our customers’ needs and develop products that address those needs. Introduction of
new products and product enhancements will require that we effectively transfer production processes from research and development to manufacturing, and
coordinate our efforts with the efforts of our suppliers to rapidly achieve efficient volume production. If we fail to effectively transfer production processes, develop
product enhancements, or introduce new products that meet the needs of our customers as scheduled, our net revenues may decline, which would adversely
affect our results of operations and financial condition.
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If we are unable to effectively compete, our business and operating results could be negatively affected. We face substantial competition in the optical
markets in which we operate. Many of our competitors are large public and private companies that have longer operating histories and significantly greater
financial, technical, marketing, and other resources than we have. As a result, these competitors are able to devote greater resources than we can to the
development, promotion, sale, and support of their products. In addition, the market capitalization and cash reserves of several of our competitors are much larger
than ours, and, as a result, these competitors are much better positioned than we are to exploit markets, develop new technologies, and acquire other companies
in order to gain new technologies or products. We also compete with manufacturers of conventional spherical lens products and aspherical lens products,
producers of optical quality glass, and other developers of gradient lens technology, as well as telecommunications product manufacturers. In both the optical lens
and communications markets, we are competing against, among others, established international companies, especially in Asia. Many of these companies also
are primary customers for optical and communication components, and, therefore, have significant control over certain markets for our products. There can be no
assurance that existing or new competitors will not develop technologies that are superior to or more commercially acceptable than our existing and planned
technologies and products or that competition in our industry will not lead to reduced prices for our products. If we are unable to successfully compete with
existing companies and new entrants to the markets we compete in, our business, results of operations, and financial condition could be adversely affected.
We anticipate further reductions in the average selling prices of some of our products over time, and, therefore, must increase our sales volumes,
reduce our costs, and/or introduce higher margin products to reach and maintain financial stability. We have experienced decreases in the average
selling prices of some of our products over the last ten years, including most of our passive component products. We anticipate that as products in the optical
component and module market become more commodity-like, the average selling prices of our products will decrease in response to competitive pricing
pressures, new product introductions by us or our competitors, or other factors. We attempt to offset anticipated decreases in our average selling prices by
increasing our sales volumes and/or changing our product mix. If we are unable to offset anticipated future decreases in our average selling prices by increasing
our sales volumes or changing our product mix, our net revenues and gross margins will decline, increasing the projected cash needed to fund operations. To
address these pricing pressures, we must develop and introduce new products and product enhancements that will generate higher margins or change our
product mix in order to generate higher margins. If we cannot maintain or improve our gross margins, our financial position, and results of operations may be
harmed.
Because of our limited product offerings, our ability to generate additional revenues may be limited without additional growth. We organized our
business based on five product groups: LVPMOs, HVPMOs, infrared products, specialty products, and NREs. In fiscal 2018, sales of infrared products
represented approximately 50% of our net revenues. In the future, we expect a larger percentage of our revenues to be generated from sales of our infrared
products, particularly sales of ISP’s infrared products. Demand for products in the optical market has declined materially in recent years. Continued and
expanding market acceptance of these products is critical to our future success. There can be no assurance that our current or new products will achieve market
acceptance at the rate at which we expect, or at all, which could adversely affect our results of operations and financial condition.
We may need additional capital to sustain our operations in the future, and may need to seek further financing, which we may not be able to obtain on
acceptable terms or at all, which could affect our ability to implement our business strategies. We have limited capital resources. Our operations have
historically been largely funded from the proceeds of equity financings with some level of debt financing. In recent years we have generated sufficient capital to
fund our operations and necessary investments. Accordingly, in future years, we anticipate only requiring additional capital to support acquisitions that would
further expand our business and product lines. We may not be able to obtain additional financing when we need it on terms acceptable to us, or at all.
Our future capital needs will depend on numerous factors including: (i) profitability; (ii) the release of competitive products by our competition; (iii) the level of our
investment in research and development; and (iv) the amount of our capital expenditures, including equipment and acquisitions. We cannot assure you that we
will be able to obtain capital in the future to meet our needs. If we are unable to raise capital when needed, our business, financial condition, and results of
operations would be materially adversely affected, and we could be forced to reduce or discontinue our operations.
Litigation may adversely affect our business, financial condition, and results of operations. From time to time in the normal course of business operations,
we may become subject to litigation that may result in liability material to our financial statements as a whole or may negatively affect our operating results if
changes to our business operations are required. The cost to defend such litigation may be significant and is subject to inherent uncertainties. Insurance may not
be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. There also may be adverse publicity with litigation that
could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. An adverse
result in any such matter could adversely impact our operating results or financial condition. Additionally, any litigation to which we are subject could also require
significant involvement of our senior management and may divert management’s attention from our business and operations.
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We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows. We execute all foreign
sales from our U.S.-based facilities and inter-company transactions in United States dollars in order to partially mitigate the impact of foreign currency
fluctuations. However, a portion of our international revenues and expenses are denominated in foreign currencies. Accordingly, we experience the risks of
fluctuating currencies and corresponding exchange rates. In fiscal years 2018 and 2017, we recognized gains of approximately $141,000 and $78,000 on foreign
currency transactions, respectively. Any such fluctuations that result in a less favorable exchange rate could adversely affect a portion of our revenues and
expenses, which could negatively impact our results of operations and financial condition.
We also source certain raw materials from outside the United States. Some of those materials, priced in non-dollar currencies, fluctuate in price due to the value
of the United States dollar against non-dollar-pegged currencies, especially the Euro and Renminbi. As the dollar strengthens, this increases our margins and
helps with our ability to reach positive cash flow and profitability. If the strength of the United States dollar decreases, the cost of foreign sourced materials could
increase, which would adversely affect our financial condition and results of operations.
A significant portion of our cash is generated and held outside of the United States. The risks of maintaining significant cash abroad could adversely
affect our cash flows and financial results. During fiscal 2018, approximately 50% of our cash was held abroad. We generally consider unremitted earnings of
our subsidiaries operating outside of the United States to be indefinitely reinvested and it is not our current intent to change this position. Cash held outside of the
United States is primarily used for the ongoing operations of the business in the locations in which the cash is held. Certain countries, such as China, have
monetary laws that limit our ability to utilize cash resources in China for operations in other countries. Before any funds can be repatriated, the retained earnings
in China must equal at least 150% of the registered capital. As of June 30, 2018, we had retained earnings in China of $1.9 million and we need to have retained
earnings of $11.3 million before repatriation will be allowed. This limitation may affect our ability to fully utilize our cash resources for needs in the U.S. or other
countries and may adversely affect our liquidity. Further, since repatriation of such cash is subject to limitations and may be subject to significant taxation, we
cannot be certain that we will be able to repatriate such cash on favorable terms or in a timely manner. If we incur operating losses and/or require cash that is
held in international accounts for use in our operations based in the United States, a failure to repatriate such cash in a timely and cost-effective manner could
adversely affect our business and financial results.
Our business may be materially affected by changes to fiscal and tax policies. Potentially negative or unexpected tax consequents of these policies, or
the uncertainty surrounding their potential effects, could adversely affect our results of operations and the price of our Class A common stock. The
U.S. Tax Cuts and Jobs Act of 2017 (the “TCJA”) was approved by the United States Congress on December 20, 2017 and signed into law on December 22,
2017. This legislation makes significant changes to the United States Internal Revenue Code of 1986, as amended (the “IRC”). Such changes include a reduction
in the corporate tax rate from 35% to 21% and limitations on certain corporate deductions and credits, among other changes. In addition, the TCJA requires
complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the
TCJA and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced.
While we have provided for the effect of the TCJA in our consolidated financial statements, the final impacts of the TCJA could be materially different from our
expectations. For example, adverse changes in the underlying profitability and financial outlook of our operations or changes in tax law could lead to changes in
our valuation allowances against deferred tax assets on our consolidated balance sheets, which could materially affect our results of operations. The U.S.
Treasury Department, the Internal Revenue Service (the “IRS”), and other standard-setting bodies could interpret or issue guidance on how provisions of the
TCJA will be applied or otherwise administered that is different from our interpretation. The TCJA may also impact our repatriation strategies in the future. Finally,
foreign governments may enact tax laws in response to the TCJA that could result in further changes to global taxation and materially affect our financial position
and results of operations. The uncertainty surrounding the effect of the reforms on our financial results and business could also weaken confidence among
investors in our financial condition. This could, in turn, have a materially adverse effect on the price of our Class A common stock.
Further, our worldwide operations subject us to the jurisdiction of a number of taxing authorities. The income earned in these various jurisdictions is taxed on
differing basis, including net income actually earned, net income deemed earned, and revenue-based tax withholding. The final determination of our income tax
liabilities involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction, as well as the use of estimates and assumptions
regarding the scope of future operations and results achieved and the timing and nature of income earned and expenditures incurred. Changes in or
interpretations of tax law and currency/repatriation control could impact the determination of our income tax liabilities for a tax year, which, in turn, could have a
materially adverse effect on our financial condition and results of operations.
Our future success depends on our key executive officers and our ability to attract, retain, and motivate qualified personnel. Our future success largely
depends upon the continued services of our key executive officers, management team, and other engineering, sales, marketing, manufacturing, and support
personnel. If one or more of our key employees are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all.
Additionally, we may incur additional expenses to recruit and retain new key employees. If any of our key employees joins a competitor or forms a competing
company, we may lose some or all of our customers. Because of these factors, the loss of the services of any of these key employees could adversely affect our
business, financial condition, and results of operations.
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Our continuing ability to attract and retain highly qualified personnel will also be critical to our success because we will need to hire and retain additional personnel
to support our business strategy. We expect to continue to hire selectively in the manufacturing, engineering, sales and marketing, and administrative functions to
the extent consistent with our business levels and to further our business strategy. We face significant competition for skilled personnel in our industry. This
competition may make it more difficult and expensive to attract, hire, and retain qualified managers and employees. Because of these factors, we may not be able
to effectively manage or grow our business, which could adversely affect our financial condition or business.
We depend on single or limited source suppliers for some of the key materials or process steps in our products, making us susceptible to supply
shortages, poor performance, or price fluctuations. We currently purchase several key materials, or have outside vendors perform process steps, such as
lens coatings, used in or during the manufacture of our products from single or limited source suppliers. We may fail to obtain required materials or services in a
timely manner in the future, or could experience delays as a result of evaluating and testing the products or services of these potential alternative suppliers. The
decline in demand in the telecommunications equipment industry may have adversely impacted the financial condition of certain of our suppliers, some of whom
have limited financial resources. We have in the past, and may in the future, be required to provide advance payments in order to secure key materials from
financially limited suppliers. Financial or other difficulties faced by these suppliers could limit the availability of key components or materials. For example,
increasing labor costs in China has increased the risk of bankruptcy for suppliers with operations in China, and has led to higher manufacturing costs for us and
the need to identify alternate suppliers. Additionally, financial difficulties could impair our ability to recover advances made to these suppliers. Any interruption or
delay in the supply of any of these materials or services, or the inability to obtain these materials or services from alternate sources at acceptable prices and
within a reasonable amount of time, would impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders,
thereby negatively affecting our business, financial condition, and results of operation.
We face product liability risks, which could adversely affect our business. The sale of our optical products involves the inherent risk of product liability
claims by others. We do not currently maintain product liability insurance coverage. Product liability insurance is expensive, subject to various coverage
exclusions, and may not be obtainable on terms acceptable to us if we decide to procure such insurance in the future. Moreover, the amount and scope of any
coverage may be inadequate to protect us in the event that a product liability claim is successfully asserted. If a claim is asserted and successfully litigated by an
adverse party, our financial position and results of operations could be adversely affected.
Business interruptions could adversely affect our business. We manufacture our products at manufacturing facilities located in Orlando, Florida, Irvington,
New York, Riga, Latvia, and Zhenjiang, China. Our revenues are dependent upon the continued operation of these facilities. The Orlando Facility is subject to two
leases, one that expires in April 2022 and the other in July 2022, the Irvington Facility is subject to a lease that expires in September 2020, the Riga Facility is
subject to a lease that expires in December 2019, and the Zhenjiang Facility is subject to two leases that expire in March 2019 and December 2021. Our
operations are vulnerable to interruption by fire, hurricane winds and rain, earthquakes, electric power loss, telecommunications failure, and other events beyond
our control. We do not have detailed disaster recovery plans for our facilities and we do not have a backup facility, other than our other facilities, or contractual
arrangements with any other manufacturers in the event of a casualty to or destruction of any facility or if any facility ceases to be available to us for any other
reason. If we are required to rebuild or relocate either of our manufacturing facilities, a substantial investment in improvements and equipment would be
necessary. We carry only a limited amount of business interruption insurance, which may not sufficiently compensate us for losses that may occur.
Our facilities may be subject to electrical blackouts as a consequence of a shortage of available electrical power. We currently do not have backup generators or
alternate sources of power in the event of a blackout. If blackouts interrupt our power supply, we would be temporarily unable to continue operations at such
facility.
Any losses or damages incurred by us as a result of blackouts, rebuilding, relocation, or other business interruptions, could result in a significant delay or
reduction in manufacturing and production capabilities, impair our reputation, harm our ability to retain existing customers and to obtain new customers, and could
result in reduced sales, lost revenue, and/or loss of market share, any of which could substantially harm our business and our results of operations.
Our failure to accurately forecast material requirements could cause us to incur additional costs, have excess inventories, or have insufficient
materials to manufacture our products. Our material requirements forecasts are based on actual or anticipated product orders. It is very important that we
accurately predict both the demand for our products and the lead times required to obtain the necessary materials. Lead times for materials that we order vary
significantly and depend on factors, such as specific supplier requirements, the size of the order, contract terms, and the market demand for the materials at any
given time. If we overestimate our material requirements, we may have excess inventory, which would increase our costs. If we underestimate our material
requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these
occurrences would negatively impact our results of operations. Additionally, in order to avoid excess material inventories, we may incur cancellation charges
associated with modifying existing purchase orders with our vendors, which, depending on the magnitude of such cancellation charges, may adversely affect our
results of operations.
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If we do not achieve acceptable manufacturing yields our operating results could suffer. The manufacture of our products involves complex and precise
processes. Our manufacturing costs for several products are relatively fixed, and, thus, manufacturing yields are critical to the success of our business and our
results of operations. Changes in our manufacturing processes or those of our suppliers could significantly reduce our manufacturing yields. In addition, we may
experience manufacturing delays and reduced manufacturing yields upon introducing new products to our manufacturing lines. The occurrence of unacceptable
manufacturing yields or product yields could adversely affect our financial condition and results of operations.
If our customers do not qualify our manufacturing lines for volume shipments, our operating results could suffer. Our manufacturing lines have passed
our qualification standards, as well as our technical standards. However, our customers may also require that our manufacturing lines pass their specific
qualification standards, and that we be registered under international quality standards, such as ISO 9001:2015 certification. This customer qualification process
determines whether our manufacturing lines meet the customers’ quality, performance, and reliability standards. Generally, customers do not purchase our
products, other than limited numbers of evaluation units, prior to qualification of the manufacturing line for volume production. We may be unable to obtain
customer qualification of our manufacturing lines or we may experience delays in obtaining customer qualification of our manufacturing lines. If there are delays in
the qualification of our products or manufacturing lines, our customers may drop the product from a long-term supply program, which would result in significant
lost revenue opportunity over the term of each such customer’s supply program, or our customers may purchase from other manufacturers. The inability to obtain
customer qualification of our manufacturing lines, or the delay in obtaining such qualification, could adversely affect our financial condition and results of
operations.
Our business could suffer as a result of the United Kingdom’s decision to end its membership in the European Union. The decision of the United
Kingdom to exit from the European Union (generally referred to as “BREXIT”) could cause disruptions to and create uncertainty surrounding our business,
including affecting our relationships with existing and potential customers, suppliers, and employees. The effects of BREXIT will depend on any agreements the
United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. The measures could potentially
disrupt some of our target markets and jurisdictions in which we operate, and adversely change tax benefits or liabilities in these or other jurisdictions. In addition,
BREXIT could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to
replace or replicate. BREXIT also may create global economic uncertainty, which may cause our customers and potential customers to monitor their costs and
reduce their budgets for either our products or other products that incorporate our products. Any of these effects of BREXIT, among others, could materially
adversely affect our business, business opportunities, results of operations, financial condition, and cash flows.
Risks Related To Our Intellectual Property
If we are unable to protect and enforce our intellectual property rights, we may be unable to compete effectively. We believe that our intellectual property
rights are important to our success and our competitive position, and we rely on a combination of patent, copyright, trademark, and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. Although we have devoted substantial resources to the establishment and protection of our
intellectual property rights, the actions taken by us may be inadequate to prevent imitation or improper use of our products by others or to prevent others from
claiming violations of their intellectual property rights by us.
In addition, we cannot assure that, in the future, our patent applications will be approved, that any patents that may be issued will protect our intellectual property,
or that third parties will not challenge any issued patents. Other parties may independently develop similar or competing technology or design around any patents
that may be issued to us. We also rely on confidentiality procedures and contractual provisions with our employees, consultants, and corporate partners to protect
our proprietary rights, but we cannot assure the compliance by such parties with their confidentiality obligations, which could be very time consuming and
expensive to enforce.
It may be necessary to litigate to enforce our patents, copyrights, and other intellectual property rights, to protect our trade secrets, to determine the validity of and
scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation can be time consuming, distracting to
management, expensive, and difficult to predict. Our failure to protect or enforce our intellectual property could have an adverse effect on our business, financial
condition, prospects, and results of operation.
We do not have patent protection for our formulas and processes, and a loss of ownership of any of our formulas and processes would negatively
impact our business. We believe that we own our formulas and processes. However, we have not sought, and do not intend to seek, patent protection for all of
our formulas and processes. Instead, we rely on the complexity of our formulas and processes, trade secrecy laws, and employee confidentiality agreements.
However, we cannot assure you that other companies will not acquire our confidential information or trade secrets or will not independently develop equivalent or
superior products or technology and obtain patent or similar rights. Although we believe that our formulas and processes have been independently developed and
do not infringe the patents or rights of others, a variety of components of our processes could infringe existing or future patents, in which event we may be
required to modify our processes or obtain a license. We cannot assure you that we will be able to do so in a timely manner or upon acceptable terms and
conditions and the failure to do either of the foregoing would negatively affect our business, results of operations, financial condition, and cash flows.
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We may become involved in intellectual property disputes and litigation, which could adversely affect our business. We anticipate, based on the size
and sophistication of our competitors and the history of rapid technological advances in our industry that several competitors may have patent applications in
progress in the United States or in foreign countries that, if issued, could relate to products similar to ours. If such patents were to be issued, the patent holders or
licensees may assert infringement claims against us or claim that we have violated other intellectual property rights. These claims and any resulting lawsuits, if
successful, could subject us to significant liability for damages and invalidate our proprietary rights. The lawsuits, regardless of their merits, could be time-
consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation could also force us to do one or
more of the following, any of which could harm our business and adversely affect our financial condition and results of operations:
●
●
●
stop selling, incorporating or using our products that use the disputed intellectual property;
obtain from third parties a license to sell or use the disputed technology, which license may not be available on reasonable terms, or at all; or
redesign our products that use the disputed intellectual property.
Item 2. Properties.
Our properties consist primarily of leased office and manufacturing facilities. Our corporate headquarters are located in Orlando, Florida and our manufacturing
facilities are primarily located in Zhenjiang, China and Riga, Latvia. The following schedule presents the approximate square footage of our facilities as of June
30, 2018:
Location
Orlando, Florida
Irvington, New York
Zhenjiang, China
Shanghai, China
Riga, Latvia
Square Feet
38,000
13,000
39,000
1,900
23,000
Commitment and Use
Leased; 3 suites used for corporate headquarters offices, manufacturing, and research and development
Leased; 1 floor of 1 building used for administrative offices and manufacturing
Leased; 1 building used for manufacturing
Leased; 1 suite used for sales, marketing and administrative offices
Leased; 2 suites used for administrative offices, manufacturing and crystal growing
Our territorial sales personnel maintain an office from their homes to serve their geographical territories.
For additional information regarding our facilities, please see Item 1. Business in this Annual Report on Form 10-K. For additional information regarding leases,
see Note 13, Lease Commitments, to the Notes to the Consolidated Financial Statements to this Annual Report on Form 10-K.
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.
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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, 2018 was $2.30 per share.
Fiscal Year Ended June 30, 2018
Quarter ended June 30, 2018
Quarter ended March 31, 2018
Quarter ended December 31, 2017
Quarter ended September 30, 2017
Fiscal Year Ended June 30, 2017
Quarter ended June 30, 2017
Quarter ended March 31, 2017
Quarter ended December 31, 2016
Quarter ended September 30, 2016
Holders
Class A CommonStock
High
Low
$
$
$
$
$
$
$
$
2.84
4.08
2.64
2.39
$
$
$
$
3.31
3.22
1.81
2.50
$
$
$
$
2.29
2.03
2.01
1.95
2.35
1.42
1.21
1.47
As of July 30, 2018, we estimate there were approximately 198 holders of record and approximately 11,125 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.
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.
The following discussions also include use of the non-GAAP term “gross margin,” as well as other non-GAAP measures discussed in more detail under the
heading “Non-GAAP Financial Measures.” 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.
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Results of Operations
Operating Results for Fiscal Year Ended June 30, 2018 compared to the Fiscal Year Ended June 30, 2017:
Revenues:
Revenue for fiscal 2018 totaled approximately $32.5 million, an increase of $4.2 million, or 15%, as compared to approximately $28.4 million for fiscal 2017. The
increase in revenue is primarily attributable to an approximately $6.8 million increase, or 73%, in revenues generated by sales of our infrared products, offset by
decreases in sales of both our HVPMO and LVPMO lenses due to a decrease in demand from customers in the telecommunications industry. Sales to customers
in the telecommunications industry decreased by approximately $3.1 million in fiscal 2018, as compared to fiscal 2017. Sales of infrared products primarily
consisted of revenues generated by sales of ISP’s infrared products. Fiscal 2018 includes the financial results of ISP for the full fiscal year, whereas fiscal 2017
only included the financial results of ISP for approximately half of the fiscal year.
Cost of Sales and Gross Margin:
Gross margin for fiscal 2018 was approximately $12.5 million, compared to approximately $14.7 million in the prior year period, a decrease of $2.2 million, or
15%. Gross margin as a percentage of revenue for fiscal 2018 was 39%, compared to 52% in fiscal 2017. The change in gross margin as a percentage of
revenue is primarily attributable to the larger percentage of sales attributable to our infrared products, particularly ISP’s infrared products, which have lower gross
margins than PMO products, and a decrease in gross margin from PMO products as a result of the decrease in sales of telecommunications products, which
typically have higher gross margins than many of our other PMO products. Gross margin for fiscal 2018 was also unfavorably impacted by foreign currency
fluctuations, and the rising cost of germanium, a key component in many of our infrared lenses. Revenues generated by ISP, and the associated cost of sales,
were not included until the end of the second quarter of fiscal 2017. Total cost of sales was approximately $20.0 million for fiscal 2018, an increase of
approximately $6.3 million, as compared to fiscal 2017. The increase in total cost of sales is primarily due to the increase in volume of sales, particularly as a
result of sales attributable to ISP, as well as an increase in overhead expenses during fiscal 2018 associated with capacity expansions in anticipation of future
sales growth.
Selling, General and Administrative Expenses:
Selling, general and administrative (“SG&A”) expenses increased by approximately $570,000 to approximately $9.2 million in fiscal 2018 as compared to
approximately $8.7 million in fiscal 2017. The increase was primarily attributable to the addition of ISP’s SG&A costs for the entire fiscal year, compared to the
prior year in which ISP’s SG&A costs were not included until the end of the second quarter of fiscal 2017. Specifically, the increase was primarily due to an
approximately $920,000 increase in wages, an approximately $225,000 increase in travel expenses, and an approximately $265,000 increase in professional
fees, offset by the absence of approximately $653,000 in expenses incurred during fiscal 2017 in connection with the acquisition of ISP. Additionally, fiscal 2018
does not include any amounts for payment of incentive compensation to our executive officers as the financial targets were not met. We project that our SG&A
expenses will increase in fiscal 2019, due to increases in commissions and other related expenses driven by the increase in forecasted sales.
New Product Development:
New product development costs in fiscal 2018 increased by approximately $380,000 to approximately $1.6 million, compared to approximately $1.2 million in
fiscal 2017. This increase primarily consists of an approximately $310,000 increase in wages, and an approximately $70,000 increase in patent and other
expenses, for projects to expand and enhance our existing products. Currently, we are forecasting a slight increase in new product development spending for
fiscal 2019 as compared to fiscal 2018.
Interest Expense:
Interest expense was approximately $187,000 for fiscal 2018 as compared to approximately $413,400 for fiscal 2017. Interest expense for fiscal 2018 was lower
due to the full satisfaction on January 16, 2018 (the “Satisfaction Date”) of the five-year note in the aggregate principal amount of $6 million issued by us to the
ISP stockholders (the “Sellers Note”), and the reversal of the associated fair value adjustment liability balance as of that date, which resulted in a gain on
extinguishment of debt of approximately $467,000.
Excluding the impact of this gain, interest expense was approximately $654,000 for fiscal 2018, an increase of $241,000 as compared to fiscal 2017. The increase
is due to the timing of certain acquisition-related loans, for which interest was only included for approximately half of fiscal 2017, as compared to a full year in
fiscal 2018. Fiscal 2018 includes a full year of interest on either (i) the acquisition term loan (the “Term Loan”), issued on December 21, 2016 pursuant to the
Second Amended and Restated Loan and Security Agreement (the “Amended LSA”) with Avidbank Corporate Finance, a division of Avidbank (“Avidbank”), or (ii)
the Term II Loan (as defined below), compared to the inclusion of the Term Loan for approximately half of fiscal 2017. The Sellers Note, also issued on December
21, 2016, was fully satisfied on the Satisfaction Date, which decreased interest expense beginning in the third quarter of fiscal 2018. However, because the
Sellers Note was included for approximately half of both fiscal 2018 and fiscal 2017, the decreased interest expense in the third quarter of fiscal 2018 did not
significantly impact year-over-year results. For additional information regarding the Term Loan, Term II Loan, and Sellers Note, see “Liquidity and Capital
Resources” below.
Other Income (Expense):
In fiscal 2018, we recognized non-cash expense of approximately $195,000 related to the change in the fair value of warrant liability of our warrants issued in
connection with our June 2012 private placement (the “June 2012 Warrants”), compared to non-cash expense of approximately $467,500 in fiscal 2017. The
change in the fair value of the June 2012 Warrants was not impacted by our actual operations but was instead strongly tied to the change in market value of our
Class A common stock. The June 2012 Warrants expired on December 11, 2017; therefore, there was no remaining warrant liability as of that date.
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Other income increased by approximately $135,000 to approximately $241,000 in fiscal 2018, as compared to approximately $106,000 in fiscal 2017, primarily
from the impact of 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 and Latvia. We execute all foreign sales from our U.S.-based facilities and inter-company transactions in
United States dollars, partially mitigating the impact of foreign currency fluctuations. Assets and liabilities denominated in non-United States currencies, primarily
the Chinese Renminbi and Euro, 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, 2018 and 2017, we recognized gains of $141,000 and $78,000, respectively, on foreign currency
translation.
Income taxes:
Income taxes for fiscal 2018 was a benefit of approximately $827,000, compared to a benefit of approximately $4.3 million in fiscal 2017. The income tax benefit
for fiscal 2018 is attributable to changes in taxation related to certain subsidiaries in China and Latvia, as well as a decrease in the valuation allowance on our
U.S. deferred tax assets. The income tax benefit in fiscal 2017 was attributable to a decrease in the valuation allowance recorded against our U.S. deferred tax
assets, primarily driven by the $5.4 million in deferred tax liabilities recorded in conjunction with the acquisition of ISP. This benefit was offset by income tax
expense associated with our Chinese subsidiaries and, to a much lesser extent, income taxes attributable to ISP Latvia.
Our Chinese subsidiaries, LPOI and LPOIZ, are governed by the Income Tax Law of the People’s Republic of China, which is applicable to privately run and
foreign invested enterprises, and which generally subjects such enterprises to a statutory rate of 25% on income reported in the statutory financial statements
after appropriate tax adjustments. During fiscal 2018, the statutory rate applicable to LPOIZ decreased from 25% to 15%, in accordance with an incentive
program for technology companies in China. This rate change was retroactive to January 1, 2017. Accordingly, the Company recognized a benefit during fiscal
2018 related to this rate change. ISP Latvia is governed by the Law of Corporate Income Tax of Latvia, which is applicable to privately run and foreign invested
enterprises, and which, through December 31, 2017, generally subjected such enterprises to a statutory rate of 15% on income reported in the statutory financial
statements after appropriate tax adjustments. Effective January 1, 2018, the Republic of Latvia enacted tax reform, which resulted in the recognition of a tax
benefit, due to the reduction of the previously recorded net deferred tax liability to zero during fiscal 2018.
Net Income:
Net income for fiscal 2018 was approximately $1.1 million, or $0.04 basic and diluted earnings per share, respectively, compared to approximately $7.7 million, or
$0.39 basic and $0.36 diluted earnings per share in fiscal 2017. The approximately $6.6 million decrease is primarily due to the approximately $4.3 million net tax
benefit for fiscal 2017, compared to a tax benefit of approximately $827,000 for fiscal 2018. Excluding these tax differences, the remaining $3.1 million decrease
in net income from fiscal 2017 to fiscal 2018 was primarily driven by the aforementioned decrease in gross margin and increases in operating costs resulting from
the inclusion of ISP’s costs for a full year, which were only included for approximately half of the prior fiscal year, including an approximately $623,000 increase in
the amortization of intangibles.
Weighted average common shares outstanding increased, primarily as a result of the issuance of 8 million shares of Class A common stock in connection with the
acquisition of ISP in December 2017. In fiscal 2018, these shares are included in the weighted average for the full year. In addition, 967,208 shares of Class A
common stock were issued in January 2018 in connection with the satisfaction of the Sellers Note.
Liquidity and Capital Resources
At June 30, 2018, we had working capital of approximately $13.8 million and total cash and cash equivalents of approximately $6.5 million. Approximately $3.2
million of our total cash and cash equivalents was held by our foreign subsidiaries in China and Latvia.
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, 2018, we had retained earnings of $1.9 million and we need to
have retained earnings of $11.3 million before repatriation will be allowed. We currently intend to permanently invest earnings from our foreign Chinese operations
and, therefore, we have not previously provided for future Chinese withholding taxes on the related earnings. However, if, in the future, we change such intention,
we would provide for and pay additional foreign taxes, if any, at that time.
In December 2016, we executed the Amended LSA with Avidbank for the Term Loan in the aggregate principal amount of $5 million and a working capital
revolving line of credit (the “Revolving Line”), with availability of up to $1 million. The Amended LSA amended and restated that certain Loan and Security
Agreement between us and Avidbank dated September 30, 2013, as amended and restated pursuant to that certain Amended and Restated Loan and Security
Agreement dated as of December 23, 2014, and as further amended pursuant to that certain First Amendment to Amended and Restated Loan and Security
Agreement dated as of December 23, 2015. Also in December 2016, we issued the Sellers Note in the aggregate principal amount of $6 million to Joseph
Menaker and Mark Lifshotz (the “Sellers”).
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On December 20, 2017, we executed the First Amendment to the Amended LSA (the “First Amendment”). The First Amendment amended, among other items,
the maturity date of the Revolving Line from December 21, 2017 to March 21, 2018.
On January 16, 2018, we entered into a Note Satisfaction and Securities Purchase Agreement (the “Note Satisfaction Agreement”) with the Sellers with respect to
the Sellers Note. Pursuant to the Note Satisfaction Agreement, we and the Sellers agreed to satisfy the Sellers Note in full by (i) converting 39.5% of the
outstanding principal amount of the Sellers Note into shares of the Company’s Class A common stock, and (ii) paying the remaining 60.5% of the outstanding
principal amount of the Sellers Note, plus all accrued but unpaid interest, in cash to the Sellers. As of the Satisfaction Date, the outstanding principal amount of
the Sellers Note was approximately $5.7 million, including accrued but unpaid interest. Accordingly, we made a cash payment of approximately $3.5 million and
issued 967,208 shares of Class A common stock to satisfy the remaining balance of approximately $2.2 million.
On the Satisfaction Date, we executed the Second Amendment to the Amended LSA (the “Second Amendment”), pursuant to which, Avidbank paid a single cash
advance to us in an original principal amount of $7,294,000 (the “Term II Loan”). The Term II Loan is for a five-year term. The proceeds of the Term II Loan were
used to repay all amounts owed with respect to the Term Loan, which was approximately $4.4 million as of the Satisfaction Date, and the remaining
approximately $2.9 million was used to repay the amounts owing under the Sellers Note. We also used approximately $600,000 of cash on hand in order to make
the aforementioned cash payment of $3.5 million. As of the Satisfaction Date, the Term Loan and Sellers Note were deemed satisfied in full.
As of June 30, 2018, the amount outstanding under the Term II Loan was approximately $6.7 million, and there was no amount outstanding of the $1 million
available under the Revolving Line. Costs incurred of approximately $72,000 were recorded as a discount on debt and will be amortized over the five-year term of
the Term Loan. Additional costs of approximately $60,000 were incurred in conjunction with the Second Amendment and were also recorded as a discount on
debt, and the combined costs will be amortized over the five-year term of the Term II Loan. Amortization of approximately $20,000 and $7,700 is included in
interest expense for the fiscal years ended June 30, 2018 and 2017, respectively.
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. Additionally, the Amended LSA requires us to maintain a fixed charge coverage ratio (as defined in the Amended LSA) of at least 1.15 to 1.00
and an asset coverage ratio (as defined in the Amended LSA) of at least 1.50 to 1.00. The fixed charge coverage ratio was amended for the quarters ended
March 31, 2018 and June 30, 2018, pursuant to the Third Amendment to the Amended LSA (the “Third Amendment”). As of June 30, 2018, we were not in
compliance with the fixed charge coverage ratio; however, Avidbank provided a waiver of compliance pursuant to that certain Fourth Amendment to the Amended
LSA, dated September 7, 2018, entered into between us and Avidbank (the “Fourth Amendment”).
For additional information, see Note 18, Loans Payable, and Note 19, Note Satisfaction and Securities Purchase Agreement, to the Notes to the Consolidated
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 2019 primarily from
infrared products, as well as some growth in our precision molded optics and specialty products. We structured our sales team to 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 more profitably.
We generally rely on cash from operations and equity and debt offerings, to the extent available, to satisfy our liquidity needs and to maintain our ability to repay
the Term II Loan.
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 used in financing activities was approximately $1.3 million in fiscal 2018, compared to net cash provided by financing activities of approximately $14.2
million in fiscal 2017. In fiscal 2017, we received approximately $5.0 million in proceeds from the Term Loan and approximately $8.7 million in net proceeds
related to the public offering of 8,000,000 shares of our Class A common stock in connection with the acquisition of ISP. We also received net proceeds of
approximately $706,000 from the exercise of June 2012 Warrants in fiscal 2017. In fiscal 2018, net repayments on debt were $1.8 million, including approximately
$600,000 related to the satisfaction of the Sellers Note. These repayments were offset by net proceeds of approximately $534,000 from the exercise of the June
2012 Warrants, as well as proceeds from exercises of stock options of approximately $226,000 during fiscal 2018. As of June 30, 2018 and 2017, we had an
accumulated deficit of approximately $195.2 million and $196.3 million, respectively.
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Cash Flows – Operating and Investing:
Cash flow provided by operations was approximately $2.6 million for the year ended June 30, 2018, a decrease of approximately $2.4 million from fiscal 2017.
This decrease is primarily the result of the lower gross margin in fiscal 2018 as compared to fiscal 2017, particularly in the fourth quarter. We anticipate
improvement in our cash flows provided by operations in future years, over time, based on our forecasted sales growth and anticipated margin improvements
based on production efficiencies, including the relocation of our Irvington Facility, offset by marginal increases in SG&A and new product development
expenditures.
During fiscal 2018, we expended approximately $2.5 million for capital equipment, as compared to approximately $2.2 million during fiscal 2017. In fiscal 2018,
we initiated capital leases in the amount of approximately $760,000 for manufacturing equipment, compared to $230,000 in fiscal 2017. The majority of our capital
expenditures during both fiscal 2018 and fiscal 2017 were related to the purchase of equipment used to enhance or expand our production capacity in alignment
with sales growth opportunities, including facility improvements for our Zhenjiang and Riga Facilities. During fiscal 2017, we also expended approximately $11.8
million for the acquisition of ISP. See Note 3, Acquisition of ISP Optics Corporation, to the Consolidated Financial Statements, for additional information.
We anticipate a lower level of capital expenditures during fiscal 2019; however, the total amount expended will depend on sales growth opportunities and
circumstances.
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.
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 from foreign merchant production sources.
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.
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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:
We believe our 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.
Our 12-month backlog grew in comparison to the prior year, while we also increased our shipment volume by 15%, compared to the prior year, maintaining our
strong booking performance. Our 12-month backlog at June 30, 2018 was approximately $12.8 million, compared to $9.3 million as of June 30, 2017. Backlog
growth rates for fiscal 2018 and 2017 are:
Quarter
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
$
$
$
$
$
$
$
$
Backlog ($ 000)
Change From Prior Year End
Change From Prior Quarter
End
5,806
12,422
11,086
9,322
8,618
12,306
12,898
12,828
-12%
88%
68%
41%
-8%
32%
38%
38%
-12%
114%
-11%
-16%
-8%
43%
5%
-1%
Our order intake remained strong in fiscal 2018 with solid bookings across all product groups and markets, with the exception of telecommunications. The
increase in our 12-month backlog from the first quarter to the second quarter of 2018 is largely due to the renewal of a large annual contract during the second
quarter, which we began shipping against in the third quarter of fiscal 2018. Our 12-month backlog remained at or above this level through the end of fiscal 2018,
even as we made significant shipments against that contract during the third and fourth quarters, due to continued bookings growth from the consumer, industrial,
and medical market sectors.
We continue to diversify our business by developing new applications for our products in markets, including advanced driver assistance systems (“ADAS”), LIDAR
sensing, spectrographic, and fiber delivery technologies. Many of these products are being designed for higher margin applications within the automotive
electronics, healthcare and defense sectors. In addition, the ISP acquisition broadened our capabilities to include additional glass types and the ability to make
much larger lenses, providing longer term opportunities for our technology roadmap and market share expansion. Based on recent quote activity, we expect
increases in revenue from sales of our infrared products and precision molded optics products for fiscal 2019.
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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, 2018 and 2017:
Revenue
Units
LVPMO
HVPMO
Infrared Products
Speciality Products
NRE
Total sales, net
LVPMO
HVPMO
Infrared Products
Speciality Products
NRE
(unaudited)
Three Months Ended
June 30,
2018
2017
QTR
% Change
Year Ended
June 30,
Year-to-
Date
2018
2017
% Change
$ 1,762,194 $ 2,242,934
1,607,785 1,942,896
4,056,357 4,127,499
632,755
61,296
$ 8,088,377 $ 9,007,380
595,934
66,107
-21% $ 7,540,664 $ 8,386,953
-17% 5,974,887 7,706,745
-2% 16,230,103 9,408,425
-6% 2,316,172 2,459,033
406,333
8%
-10% $32,525,471 $28,367,489
463,645
74,814
491,409
45,947
9,886
5
622,061
90,327
595,387
42,369
18,691
3
746,777
299,292
364,333
-17%
-17% 1,906,910 2,163,931
106,820
153,258
8%
91,095
62,176
-47%
58
29
67%
-17% 2,421,665 2,726,237
-10%
-22%
73%
-6%
14%
15%
-18%
-12%
43%
-32%
-50%
-11%
Three months ended June 30, 2018 compared to three months ended June 30, 2017
Our revenue decreased by 10% in the fourth quarter of fiscal 2018, as compared to the same period in the prior year primarily as a result of a decline in demand
from customers in the telecommunications market. The majority of the decrease was in the LVPMO and HVPMO product groups, with infrared relatively flat.
We had a 21% decrease in revenue from our LVPMO products in the fourth quarter of fiscal 2018, as compared to the same period of the prior fiscal year. During
the fourth quarter of fiscal 2018, sales of our LVPMO lens units decreased by 17%, and the average sales price also decreased by 5%, both as compared to the
fourth quarter of 2017. The decrease in revenue is attributed to fewer sales to customers in the telecommunications, defense and industrial sectors.
We also had a 17% decrease in revenue from our HVPMO products in the fourth quarter of fiscal 2018, as compared to the same period of the prior fiscal year.
During the fourth quarter of fiscal 2018, sales of HVPMO lens units decreased by 17%, with no significant changes to the average sales prices, both as compared
to the fourth quarter of 2017. This decrease is primarily attributable to fewer sales to customers in the telecommunications industry. In the fourth quarter of 2017,
the HVPMO product group benefitted from the strength in the telecommunications sector, driven by demand for increased bandwidth. However, this demand did
not continue into fiscal 2018. Revenues from sales to customers in the telecommunications industry increased sequentially in the fourth quarter of fiscal 2018, as
compared to the third quarter of fiscal 2018; however, revenues did not return to fiscal 2017 levels.
The infrared product group was relatively flat, with a 2% decrease in revenue in the fourth quarter of fiscal 2018, as compared to the same period of the prior
fiscal year. During the fourth quarter of fiscal 2018, sales of infrared units increased by 8%, as compared to the prior year period; however, average selling prices
decreased by 9%, compared to the prior fiscal year, due to fewer sales to customers in the defense industry, which generally have higher average selling prices.
24
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In the fourth quarter of fiscal 2018, our specialty product revenue decreased by 6%, as compared to the same period of the prior fiscal year. During the fourth
quarter of 2018, unit sales of our specialty products decreased by 47%, and the average sales price increased by 78%, both as compared to the fourth quarter of
2017. The decrease in revenue is attributed to the timing of customer orders.
Revenues generated by our NRE product group increased by 8% in the fourth quarter of fiscal 2018, as compared to the same period of the prior fiscal year,
primarily due to the timing of customer orders. NRE revenue is project based and the timing of any such projects is wholly dependent on our customers and their
project activity. Accordingly, management does not include NRE in its projections or forecasts for purposes of developing its operating plan and budget.
Year ended June 30, 2018 compared to year ended June 30, 2017
Our revenue increased by 15% in fiscal 2018, as compared to fiscal 2017, with growth driven primarily from the infrared product group, which expanded
significantly with the acquisition of ISP in fiscal 2017. The increase in infrared revenues was offset by revenue decreases in our LVPMO and HVPMO product
groups, primarily driven by soft demand from the telecommunications industry.
We had a 10% decrease in revenue generated by LVPMO sales in fiscal 2018, as compared to fiscal 2017. Our unit shipment volume of LVPMO lenses
decreased by 18% in fiscal 2018, as compared to the prior fiscal year; however, average selling prices increased by 9% for fiscal 2018, as compared to fiscal
2017. The decrease in unit shipment volume is primarily attributable to fewer sales to customers in the telecommunications industry, partially offset by higher
sales to customers in the medical and industrial sectors, with higher average sales prices.
We also had a 22% decrease in revenue generated by our HVPMO product group in fiscal 2018, as compared to fiscal 2017. During fiscal 2018, sales of HVPMO
lens units decreased 12%, and average sales prices decreased 12%, both as compared to the prior fiscal year. This decrease is almost entirely attributable to
fewer sales to customers in the telecommunications industry. In fiscal 2017, the HVPMO product group benefitted from strength in the telecommunications sector,
driven by demand for increased bandwidth. However, this demand did not continue into fiscal 2018. The decrease in sales to customers in the
telecommunications industry was partially offset by increases in sales to medical and industrial customers, as well as catalog parts sold through distribution.
We had significant growth in the infrared product group, which primarily consisted of revenues generated by ISP. Fiscal 2018 includes revenues attributable to
ISP for the full year, whereas fiscal 2017 only included revenues attributable to ISP post-acquisition, or for approximately half of the fiscal year. During fiscal
2018, revenues from sales of infrared products increased 73%, as compared to fiscal 2017. Unit shipment volume increased by 43% and average selling prices
increased 20% for fiscal 2018, as compared to fiscal 2017.
Specialty product revenue decreased by 6% for fiscal 2018, as compared to the prior fiscal year, primarily as a result of fewer orders from customers in the
medical industry.
Revenues generated by our NRE product group increased by 14% in fiscal 2018, as compared to the prior year period, due to specific projects for customers in
the defense and industrial markets. NRE revenue is project based and timing of any such projects is wholly dependent on our customers and their project activity.
Accordingly, management does not include NRE in its projections or forecasts for purposes of developing its operating plan and budget.
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
Q4-2018
Q3-2018
Q2-2018
Q1-2018
Fiscal 2018 average
Q4-2017
Q3-2017
Q2-2017
Q1-2017
Fiscal 2017 average
Ended
6/30/2018
3/31/2018
12/31/2017
9/30/2017
6/30/2017
3/31/2017
12/31/2016
9/30/2016
DCSI (days)
103
112
113
109
109
100
109
177
168
139
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Our average DCSI for fiscal 2018 was 109, compared to 139 for fiscal 2017. The decrease in DCSI from the previous fiscal year average is due to the inclusion
of ISP’s cost of goods and inventory for the full fiscal year, which had a favorable impact on this ratio. We expect DCSI to continue to stay below 110.
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:
Fiscal
Quarter
Q4-2018
Q3-2018
Q2-2018
Q1-2018
Fiscal 2018 average
Q4-2017
Q3-2017
Q2-2017
Q1-2017
Fiscal 2017 average
Ended
DSO (days)
6/30/2018
3/31/2018
12/31/2017
9/30/2017
6/30/2017
3/31/2017
12/31/2016
9/30/2016
61
61
62
62
62
60
62
87
60
67
Our average DSO for fiscal 2018 was 62, compared to 67 for fiscal 2017. In the second quarter of 2017,
the addition of ISP’s receivables and revenue increased
DSO, as compared to previous periods; however, by the end of fiscal 2017, DSO had returned to more normal levels. 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:
Adjusted net income is a non-GAAP financial measure used by management, lenders, and certain investors as a supplemental measure in the evaluation of some
aspects of a corporation's financial position and core operating performance. Management uses adjusted net income to evaluate our underlying operating
performance and for planning and forecasting future business operations. We believe adjusted net income may be helpful for investors as one means of evaluating
our operational performance
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We calculate adjusted net income by excluding the change in the fair value of the June 2012 Warrants from net income. The fair value of the June 2012 Warrants
was re-measured each reporting period until the warrants were exercised or expired on December 11, 2017. In each reporting period during the term of the June
2012 Warrants, the change in the fair value of the June 2012 Warrants was either recognized as non-cash expense or non-cash income. The change in the fair
value of the June 2012 Warrants was not impacted by our actual operations but was instead strongly tied to the change in the market value of our Class A
common stock. The following table reconciles net income to adjusted net income for the three and twelve month periods ended June 30, 2018 and 2017:
Net income (loss)
Change in fair value of warrant liability
Adjusted net income (loss)
% of revenue
(unaudited)
Quarter Ended:
Year Ended:
June 30,
2018
$
$
(807,220)
—
(807,220)
$
$
June 30,
2017
6,364,099
9,759
6,373,858
$
$
June 30,
2018
1,060,104
194,632
1,254,736
$
$
June 30,
2017
7,703,086
467,543
8,170,629
-10%
71%
4%
29%
Our adjusted net loss for the quarter ended June 30, 2018 was approximately $807,000, as compared to adjusted net income of approximately $6.4 million for the
quarter ended June 30, 2017. The decrease in net income was primarily due to the $5.1 million net income tax benefit recorded during the fourth quarter of fiscal
2017, compared to a tax benefit of approximately $508,000 for the fourth quarter of fiscal 2018. The tax benefit for the fourth quarter of fiscal 2017 was largely
attributable to a decrease in the valuation allowance recorded against our deferred tax assets, driven by the deferred tax liabilities recorded in conjunction with the
acquisition of ISP. The remaining decrease in adjusted net income is due to a decrease in the gross margin, partially offset by lower SG&A costs. The fourth
quarter of fiscal 2018 was also unfavorably impacted by foreign exchange rates, with foreign exchange losses of approximately $714,000 for the quarter ended
June 30, 2018, compared to foreign exchange gains of approximately $333,000 for the quarter ended June 30, 2017.
Our adjusted net income for fiscal 2018 was approximately $1.3 million, as compared to approximately $8.2 million for fiscal 2017. The decrease in adjusted net
income was primarily attributable to the $4.3 million net income tax benefit recorded for fiscal 2017, compared to a tax benefit of approximately $827,000 for fiscal
2018. The benefit was largely attributable to a decrease in the valuation allowance recorded against our deferred tax assets, driven by the deferred tax liabilities
recorded in conjunction with the acquisition of ISP. The remaining decrease in adjusted net income from fiscal 2017 to fiscal 2018 was primarily driven by the
aforementioned decrease in gross margin and increases in operating costs resulting from the inclusion of ISP’s costs for a full year, which were only included for
approximately two quarters of the prior fiscal year, including an approximately $623,000 increase in the amortization of intangibles.
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 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 was re-measured each reporting period until the warrants were either exercised or expired on
December 11, 2017. Each reporting period, the change in the fair value of the June 2012 Warrants was either recognized as a non-cash expense or non-cash
income. The change in the fair value of the June 2012 Warrants was not impacted by our actual operations but was instead strongly tied to the change in the
market value of our Class A common stock. 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 adjusts net income to EBITDA and adjusted EBITDA for the three and twelve month periods ended June 30, 2018 and 2017:
27
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Net income (loss)
Depreciation and amortization
Provision for income taxes
Interest expense
EBITDA
Change in fair value of warrant liability
Adjusted EBITDA
% of revenue
(unaudited)
Quarter Ended:
Year Ended:
June 30,
2018
$
$
$
(807,220)
911,577
(508,399)
134,736
(269,306)
—
(269,306)
$
$
$
June 30,
2017
6,364,099
840,207
(5,112,900)
207,256
2,298,662
9,759
2,308,421
$
$
$
June 30,
2018
1,060,104
3,403,581
(827,077)
186,948
3,823,556
194,632
4,018,188
$
$
$
June 30,
2017
7,703,086
2,080,439
(4,341,300)
413,427
5,855,652
467,543
6,323,195
-3%
26%
12%
22%
Our adjusted EBITDA for the quarter ended June 30, 2018 was a loss of approximately $269,000, compared to earnings of approximately $2.3 million for the
quarter ended June 30, 2017. The decrease in adjusted EBITDA between the periods was principally caused by the lower gross margin in the fourth quarter of
fiscal 2018, as compared to the fourth quarter of fiscal 2017. The fourth quarter of fiscal 2018 was also unfavorably impacted by foreign exchange rates, with
foreign exchange losses of approximately $714,000 for the quarter ended June 30, 2018, compared to foreign exchange gains of approximately $333,000 for the
quarter ended June 30, 2017.
Our adjusted EBITDA for fiscal 2018 was approximately $4.0 million, compared to approximately $6.3 million for fiscal 2017. The decrease in adjusted EBITDA
between the periods was principally caused by the lower gross margin for fiscal 2018, as compared to fiscal 2017, particularly in the fourth quarter of fiscal 2018.
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 allowances for bad debts, allowances for obsolete inventory, valuation of compensation expense on stock-based awards and
accounting for income taxes. 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. We also have other policies that we consider key accounting policies, such as our policy for
revenue recognition, however, the application of these policies does not require us to make significant estimates or judgments that are difficult or subjective.
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 the due date and 10% of the total of
invoices that are over 60 days past due from the due date for U.S.- and Latvia-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. To date, our actual results have been materially consistent with our estimates, and we
expect such estimates to continue to be materially consistent in the future.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Inventory obsolescence allowance 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 items for which we have more than a two-year supply. These items, as identified, are allowed for at 100%, as well as allowing 50% for other items deemed to
be slow moving within the last twelve months and allowing 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 allowance. To date, our actual results have been materially consistent with our
estimates, and we expect such estimates to continue to be materially consistent in the future.
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 are not included in revenue.
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 “Omnibus 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.
Goodwill and intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods appropriate for the
type of intangible asset and reported separately from goodwill. Purchased intangible assets other than goodwill are amortized over their useful lives unless these
lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated
useful lives of the respective assets, generally two to fifteen years. We periodically reassesses the useful lives of its intangible assets when events or
circumstances indicate that useful lives have significantly changed from the previous estimate. Definite-lived intangible assets consist primarily of customer
relationships, know-how/trade secrets and trademarks. They are generally valued as the present value of estimated cash flows expected to be generated from
the asset using a risk-adjusted discount rate. When determining the fair value of our intangible assets, estimates and assumptions about future expected revenue
and remaining useful lives are used. Goodwill and intangible assets are tested for impairment on an annual basis and during the period between annual tests if
events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.
We assess the qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount as a basis
for determining whether it is necessary to perform the goodwill impairment analysis. If we determine that it is more likely than not that its fair value is less than its
carrying amount, then the goodwill impairment test is performed. The fair value of the reporting unit is compared to its carrying amount, and if the carrying amount
exceeds its fair value, then an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, up to
the total amount of goodwill allocated to that reporting unit.
Accounting for income taxes requires estimates and judgments in determining income tax expense for financial statement purposes. These estimates and
judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in
the timing of the recognition of revenue and expense for tax and financial statement purposes. We assessed the likelihood of the realization of deferred tax assets
and concluded that a valuation allowance is needed to reserve the amount of the deferred tax assets that may not be realized due to the uncertainty of the timing
and amount of taxable income in certain jurisdictions. In reaching our conclusion, we evaluated certain relevant criteria, including the amount of pre-tax income
generated during the current and prior two years, the existence of deferred tax liabilities that can be used to realize deferred tax assets, the taxable income in
prior carryback years in the impacted jurisdictions that can be used to absorb net operating losses and taxable income in future years. Our judgments regarding
future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require
material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are
made, which, in turn, may result in an increase or decrease to our tax provision in a subsequent period.
In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties
arise as a consequence of cost reimbursement and royalty arrangements among related entities, which could impact our income or loss in each jurisdiction we
operate in. Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that
which is reflected in our historical income tax provisions and accruals. In the event our assumptions are incorrect, the differences could have a material impact on
our income tax provision and operating results in the period in which such determination is made. In addition to the factors described above, our current and
expected effective tax rate is based on then-current tax law. Significant changes during the year in enacted tax law could affect these estimates.
Impact of recently issued accounting pronouncements that have recently been issued but have not yet been implemented by us are described in Note 2,
Summary of Significant Accounting Policies, to the Notes to the Consolidated Financial Statements to this Annual Report on Form 10-K, which describes the
potential impact that these pronouncements are expected to have on our financial condition, results of operations and cash flows.
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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.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the fiscal year ended June 30, 2018, 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, 2018, 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, 2018 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 Securities and Exchange
Commission (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, 2018 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Entry Into a Material Definitive Agreement
Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of Registrant
On September 7, 2018, we entered into the Fourth Amendment to the Amended LSA, relating to our previously disclosed Term II Loan and Revolving Loan, with
Avidbank. The Fourth Amendment amends Section 4.5 to provide that for so long as the Term II Loan is outstanding, One Million Dollars ($1,000,000) of our cash
maintained at Avidbank (the “Cash Collateral”) is pledged to Avidbank as specific collateral (as defined in the Amended LSA) to secure our obligations under the
Amended LSA. Avidbank is entitled to hold the Cash Collateral in pledge, and to decline to honor any withdrawals thereon or any request by us to pay or
otherwise transfer any part of the Cash Collateral. Upon satisfying a Fixed Charge Coverage Ratio (as defined in the Amended LSA) of at least 1.15 to 1.00 for
two consecutive quarters, and so long as no event of default has occurred that is continuing on that date, Avidbank will release the Cash Collateral from these
restrictions and pledge. During the period of time the Cash Collateral is pledged to Avidbank, the calculation of Fixed Charge Coverage Ratio will be determined
as if the outstanding principal amount of the Term II Loan is $1,000,000 less than the actual outstanding principal amount of the Term II Loan. Additionally,
pursuant to the Fourth Amendment, Avidbank granted us a waiver of default arising prior to the Fourth Amendment from our failure to comply with the Fixed
Charge Coverage Ratio covenant measured on June 30, 2018. Based on the waiver, we are no longer in default of the Term II Loan or Revolving Line.
The foregoing descriptions of the Fourth Amendment are summaries only, and are qualified in their entirety by reference to the complete text of the Fourth
Amendment filed herewith as Exhibit 10.21.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required under this item is incorporated herein by reference to our proxy statement for our fiscal 2019 Annual Stockholders’ Meeting to be filed
with the SEC not later than 120 days after the end of fiscal 2018.
Item 11. Executive Compensation.
The information required under this item is incorporated herein by reference to our proxy statement for our fiscal 2019 Annual Stockholders’ Meeting to be filed
with the SEC not later than 120 days after the end of fiscal 2018.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required under this item is incorporated herein by reference to our proxy statement for our fiscal 2019 Annual Stockholders’ Meeting to be filed
with the SEC not later than 120 days after the end of fiscal 2018, with the exception of those items listed below.
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
2018:
Equity Compensation Arrangement
Omnibus Plan
2014 ESPP
Award Shares
Authorized
5,115,625
400,000
5,515,625
Outstanding
at June 30,
2018
2,654,482
—
2,654,482
Available for
Issuance
at June 30,
2018
1,650,870
358,008
2,008,878
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required under this item is incorporated herein by reference to our proxy statement for our fiscal 2019 Annual Stockholders’ Meeting to be filed
with the SEC not later than 120 days after the end of fiscal 2018.
Item 14. Principal Accountant Fees and Services.
The information required under this item is incorporated herein by reference to our proxy statement for our fiscal 2019 Annual Stockholders’ Meeting to be filed
with the SEC not later than 120 days after the end of fiscal 2018.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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
Exhibit Number
Description
3.1.1
3.1.2
3.1.3
3.1.4
3.1.5
3.1.6
3.1.7
3.1.8
Certificate of Incorporation of LightPath Technologies, Inc., filed June 15, 1992 with the Secretary of State of Delaware, which 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.
Certificate of Amendment to Certificate of Incorporation of LightPath Technologies, Inc., filed October 2, 1995 with the Secretary of State of
Delaware, which 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.
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 LightPath Technologies, Inc., filed November 9, 1995 with the Secretary of State of Delaware, which 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.
Certificate of Designation of Series A Preferred Stock of LightPath Technologies, Inc., filed July 9, 1997 with the Secretary of State of
Delaware, which was filed as Exhibit 3.4 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.
Certificate of Designation of Series B Stock of LightPath Technologies, Inc., filed October 2, 1997 with the Secretary of State of Delaware,
which was filed as Exhibit 3.2 to our Quarterly Report on Form 10-QSB (File No. 000-27548) filed with the Securities and Exchange
Commission on November 14, 1997, and is incorporated herein by reference thereto.
Certificate of Amendment of Certificate of Incorporation of LightPath Technologies, Inc., filed November 12, 1997 with the Secretary of State
of Delaware, which was filed as Exhibit 3.1 to our Quarterly Report on Form 10-QSB (File No. 000-27548) filed with the Securities and
Exchange Commission on November 14, 1997, and is incorporated herein by reference thereto.
Certificate of Designation of Series C Preferred Stock of LightPath Technologies, Inc., filed February 6, 1998 with the Secretary of State of
Delaware, which was filed as Exhibit 3.2 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.
Certificate of Designation, Preferences and Rights of Series D Participating Preferred Stock of LightPath Technologies, Inc. filed April 29,
1998 with the Secretary of State of Delaware, which was filed as Exhibit 1 to our Registration Statement on Form 8-A (File No. 000-27548)
filed with the Securities and Exchange Commission on April 28, 1998, and is incorporated herein by reference thereto.
3.1.9
Certificate of Designation of Series F Preferred Stock of LightPath Technologies, Inc., filed November 2, 1999 with the Secretary of State of
Delaware, which was filed as Exhibit 3.2 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.
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3.1.10
3.1.11
3.1.12
3.1.13
3.1.14
Certificate of Amendment of Certificate of Incorporation of LightPath Technologies, Inc., filed February 28, 2003 with the Secretary of State
of Delaware, which was filed as Appendix A to our Proxy Statement (File No. 000-27548) filed with the Securities and Exchange Commission
on January 24, 2003, and is incorporated herein by reference thereto.
Certificate of Amendment of Certificate of Incorporation of LightPath Technologies, Inc., filed March 1, 2016 with the Secretary of State of
Delaware, which was filed as Exhibit 3.1.11 to our Quarterly Report on Form 10-Q (File No: 000-27548) filed with the Securities and
Exchange Commission on November 14, 2016, and is incorporated herein by reference thereto.
Certificate of Amendment of Certificate of Incorporation of LightPath Technologies, Inc., filed October 30, 2017 with the Secretary of State of
Delaware, which was filed as Exhibit 3.1 to our Current Report on Form 8-K (File No: 000-27548) filed with the Securities and Exchange
Commission on October 31, 2017, and is incorporated herein by reference thereto.
Certificate of Amendment of 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 LightPath Technologies, Inc., filed October 30, 2017 with the Secretary of State of Delaware, which
was filed as Exhibit 3.2 to our Current Report on Form 8-K (File No: 000-27548) filed with the Securities and Exchange Commission on
October 31, 2017, and is incorporated herein by reference thereto.
Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series D Participating Preferred Stock of LightPath
Technologies, Inc., filed January 30, 2018 with the Secretary of State of Delaware, which was filed as Exhibit 3.1 to our Current Report on
Form 8-K (File No: 000-27548) filed with the Securities and Exchange Commission on February 1, 2018, and is incorporated herein by
references thereto.
3.2.1
Amended and Restated Bylaws of LightPath Technologies, Inc., which was filed as Exhibit 3.1 to our Current Report on Form 8-K (File No:
000-27548) filed with the Securities and Exchange Commission on February 3, 2015, and is incorporated herein by reference thereto.
3.2.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
First Amendment to Amended and Restated Bylaws of LightPath Technologies, Inc., which was filed as Exhibit 3.1 to our Current Report on
Form 8-K (File No: 000-27548) filed with the Securities and Exchange Commission on September 21, 2017, and is incorporated herein by
reference thereto.
Rights Agreement dated May 1, 1998, between LightPath Technologies, Inc. and Continental Stock Transfer & Trust Company, as Rights
Agent, which was filed as Exhibit 1 to Registration Statement on Form 8-A filed with the Securities and Exchange Commission on April 28,
1998, and is incorporated herein by reference thereto.
First Amendment to Rights Agreement dated February 25, 2008 between LightPath Technologies, Inc. and Continental Stock Transfer &
Trust Company, as Rights Agent, which was filed as Exhibit 2 to Amendment No. 1 to Form 8-A filed with the Securities and Exchange
Commission on February 25, 2008, and is incorporated herein by reference thereto.
Second Amendment to Rights Agreement dated January 30, 2018 between LightPath Technologies, Inc. and Continental Stock Transfer &
Trust Company, as Rights Agent, which was filed as Exhibit 4.1 to our Current Report on Form 8-K (File No: 000-27548) filed with the
Securities and Exchange Commission on February 1, 2018, and is incorporated herein by reference thereto.
Amended and Restated Omnibus Incentive Plan dated October 15, 2002, as amended, which was filed as Exhibit 10.1 to our Current Report
on Form 8-K (File No.: 000-27548) filed with the Securities and Exchange Commission on October 31, 2017, and is incorporated herein by
reference thereto.
Employee Letter Agreement dated June 12, 2008, between LightPath Technologies, Inc., and J. James Gaynor, its Chief Executive Officer &
President, which was filed as Exhibit 99.1 to our Current Report on Form 8-K (File No.: 000-27548) filed with the Securities and Exchange
Commission on June 17, 2008, and is incorporated herein by reference thereto.
LightPath Technologies, Inc. Employee Stock Purchase Plan effective January 30, 2015, which was filed as Appendix A to our Definitive
Proxy Statement on Schedule 14A (File No.: 000-27548) filed with the Securities and Exchange Commission on December 19, 2014, and is
incorporated herein by reference thereto.
Second Amended and Restated Loan and Security Agreement dated December 21, 2016 by and between LightPath Technologies, Inc. and
AvidBank Corporate Finance, a division of AvidBank, which was filed as Exhibit 10.2 to our Current Report on Form 8-K (File No.: 000-
27548) filed with the Securities and Exchange Commission on December 27, 2016, and is incorporated herein by reference thereto.
Sixth Amendment to Lease dated as of July 2, 2014 between LightPath Technologies, Inc. and Challenger Discovery LLC, which was filed as
Exhibit 10.1 to our Current Report on Form 8-K (File No.: 000-27548) filed with the Securities and Exchange Commission on July 8, 2014,
and is incorporated herein by reference thereto.
Stock Purchase Agreement dated August 3, 2016 by and among LightPath Technologies, Inc., ISP Optics Corporation, Mark Lifshotz, and
Joseph Menaker, which was filed as Exhibit 10.8 to our Annual Report on Form 10-K (File No.: 000-27548) filed with the Securities and
Exchange Commission on September 15, 2016, and is incorporated herein by reference thereto.**
Unsecured Promissory Note dated December 21, 2016 in favor of Joseph Menaker and Mark Lifshotz, which was filed as Exhibit 10.1 to our
Current Report on Form 8-K (File No. 000-27548) filed with the SEC on December 27, 2016, and is incorporated herein by reference thereto.
Affirmation of Guarantee of Geltech, Inc., which was filed as Exhibit 10.3 to our Current Report on Form 8-K (File No.: 000-27548) filed with
the SEC on December 27, 2016, and is incorporated herein by reference thereto.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
33
10.9
10.10
10.11
10.12
10.13
10.14
Joinder Agreement dated December 22, 2016 by and between ISP Optics Corporation and Avidbank Corporate Finance, a division of
Avidbank, which was filed as Exhibit 10.4 to our Current Report on Form 8-K (File No. 000-27548) filed with the Securities and Exchange
Commission on December 27, 2016, and is incorporated herein by reference thereto.
Underwriting Agreement dated December 16, 2016, between LightPath Technologies, Inc. and Roth Capital Partners, LLC, as representative
of the several underwriters, which was filed as Exhibit 1.1 to our Current Report on Form 8-K (File No.: 000-27548) filed with the Securities
and Exchange Commission on December 20, 2016, and is incorporated herein by reference thereto.
First Amendment to Second Amended and Restated Loan and Security Agreement dated December 20, 2017 by and between LightPath
Technologies, Inc. and Avidbank Corporate Finance a division of Avidbank, which was filed as Exhibit 10.1 to our Current Report on Form 8-
K (File No.: 00027548) filed with the Securities and Exchange Commission on December 22, 2017, and is incorporated herein by reference
thereto.
Note Satisfaction and Securities Purchase Agreement dated January 16, 2018, by and between LightPath Technologies, Inc., Joseph
Menaker, and Mark Lifshotz, which was filed as Exhibit 10.1 to our Current Report on Form 8-K (File No.: 000-27548) filed with the
Securities and Exchange Commission on January 17, 2018, and is incorporated herein by reference thereto.
Registration Rights Agreement dated January 16, 2018, by and between LightPath Technologies, Inc., Joseph Menaker, and Mark Lifshotz,
which was filed as Exhibit 10.1 to our Current Report on Form 8-K (File No.: 000-27548) filed with the Securities and Exchange Commission
on January 17, 2018, and is incorporated by reference thereto.
Second Amendment to Second Amended and Restated Loan and Security Agreement dated December 20, 2017 by and between LightPath
Technologies, Inc. and Avidbank Corporate Finance, a division of Avidbank, which was filed as Exhibit 10.3 to our Current Report on Form 8-
K (File No.: 000-27548) filed with the Securities and Exchange Commission on January 17, 2018, and is incorporated herein by reference
thereto.
10.15
Affirmation of Guarantee of GelTech, Inc., which was filed as Exhibit 10.4 to our Current Report on Form 8-K (File No.: 000-27548) filed with
the Securities and Exchange Commission on January 17, 2018, and is incorporated herein by reference thereto.
10.16
10.17
10.18
Amendment No. 8 to the Amended and Restated LightPath Technologies, Inc. Omnibus Incentive Plan dated February 8, 2018, which was
filed as Exhibit 10.7 to our Quarterly Report on Form 10-Q (File No. 000-27548) filed with the Securities and Exchange Commission on
February 13, 2018, and is incorporated herein by reference thereto.
Lease dated April 20, 2018, by and between LightPath Technologies, Inc. and CIO University Tech, LLC, which was filed as Exhibit 10.1 to
our Current Report on Form 8-K (File No: 000-27548) filed with the Securities and Exchange Commission on April 26, 2018, and is
incorporated herein by reference thereto.
Third Amendment to Second Amended and Restated Loan and Security Agreement dated May 11, 2018, by and between LightPath
Technologies, Inc. and Avidbank, which was filed as Exhibit 10.7 to our Quarterly Report on Form 10-Q (File No.: 000-27548) filed with the
Securities and Exchange Commission on May 14, 2018, and is incorporated herein by reference thereto.
10.19
Affirmation of Guarantee of Geltech, Inc., which was filed as Exhibit 10.8 to our Quarterly Report on Form 10-Q (File No.: 000-27548) filed
with the Securities and Exchange Commission on May 14, 2018, and is incorporated herein by reference thereto.
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10.20
Offer Letter between LightPath Technologies, Inc. and Donald O. Retreage, Jr., dated May 31, 2018, which was filed as Exhibit 10.1 to our
Currently Report on Form 8-K (File No.: 000-27548) filed with the Securities and Exchange Commission on June 5, 2018, and is
incorporated herein by reference thereto.
10.21
Fourth Amendment to the Second Amended and Restated Loan and Security Agreement dated September 7, 2018, by and between
LightPath Technologies, Inc. and Avidbank*
14.1
14.2
21.1
23.1
23.2
24
31.1
31.2
32.1
32.2
Code of Business Conduct and Ethics, which was filed as Exhibit 14.1 to our Current Report on Form 8-K (File No.: 000-27548) filed with the
Securities and Exchange Commission on May 3, 2016, and is incorporated herein by reference thereto.
Code of Business Conduct and Ethics for Senior Financial Officers, which was filed as Exhibit 14.2 to our Current Report on Form 8-K (File
No.: 000-27548) filed with the Securities and Exchange Commission on May 3, 2016, and is incorporated herein by reference thereto.
Subsidiaries of the Registrant*
Consent of Moore Stephens Lovelace, P.A.*
Consent of BDO USA, LLP*
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*
101.INS XBRL Instance Document*
101.SCH XBRL Taxonomy Extension Schema Document*
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
101.PRE XBRL Taxonomy Presentation Linkbase Document*
*filed herewith
** The schedules to the Stock Purchase Agreement filed as Exhibit 10.6 hereto have been omitted pursuant to Item 601(b)(2) of Regulation S-K. We hereby
undertake to provide copies of the omitted schedules to the SEC upon request.
Item 16. Form 10-K Summary.
None.
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LightPath Technologies, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm – Moore Stephens Lovelace, P.A.
Report of Independent Registered Public Accounting Firm – BDO USA, LLP
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2018 and 2017
Consolidated Statements of Comprehensive Income for the years ended June 30, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended June 30, 2018 and 2017
Notes to Consolidated Financial Statements
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-1
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
LightPath Technologies, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of LightPath Technologies, Inc. (the “Company”) as of June 30, 2018, and the related
consolidated statements of comprehensive income, changes in stockholders’ equity, and cash flows for the year ended June 30, 2018, and the related notes
(collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of June 30, 2018, and the results of its operations and its cash flows for the year ended June 30, 2018, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. As a part of our audit, we are required to obtain an understanding of
internal control over financial reporting, 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.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ MOORE STEPHENS LOVELACE, P.A.
We have served as the Company’s auditor since 2017.
Orlando, Florida
September 13, 2018
F-2
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, 2017, and
the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit 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 audit provides 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,
2017, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ BDO USA, LLP
Orlando, Florida
September 14, 2017
F-3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Item 1. Financial Statements
LIGHTPATH TECHNOLOGIES, INC.
Consolidated Balance Sheets
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Trade accounts receivable, net of allowance of $13,364 and $7,356
Inventories, net
Other receivables
Prepaid expenses and other assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Deferred tax assets, net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued liabilities
Accrued payroll and benefits
Loans payable, current portion
Capital lease obligation, current portion
Total current liabilities
Capital lease obligation, less current portion
Deferred rent
Deferred tax liabilities
Warrant liability
Loans payable, less current portion
Total liabilities
Commitments and Contingencies
Stockholders’ equity:
Preferred stock: Series D, $.01 par value, voting;
500,000 shares authorized; none issued and outstanding
Common stock: Class A, $.01 par value, voting;
44,500,000 shares authorized; 25,764,544 and 24,215,733
shares issued and outstanding
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
June 30,
2018
June 30,
2017
$
$
$
5,508,620
1,000,000
5,370,508
6,404,741
46,574
1,058,610
19,389,053
11,809,241
9,057,970
5,854,905
624,000
381,945
47,117,114
2,032,834
685,430
1,228,120
1,458,800
307,199
5,712,383
550,127
377,364
—
—
5,119,796
11,759,670
8,085,015
—
5,890,113
5,074,576
29,202
641,469
19,720,375
10,324,558
10,375,053
5,854,905
285,000
112,323
46,672,214
1,536,121
966,929
1,896,530
1,111,500
239,332
5,750,412
142,101
458,839
182,349
490,500
9,926,844
16,951,045
—
—
257,645
229,874,823
473,508
(195,248,532)
35,357,444
47,117,114
$
242,157
225,492,252
295,396
(196,308,636)
29,721,169
46,672,214
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LIGHTPATH TECHNOLOGIES, INC.
Consolidated Statements of Comprehensive Income
Revenue, net
Cost of sales
Gross margin
Operating expenses:
Selling, general and administrative
New product development
Amortization of intangibles
(Gain) loss on disposal of property and equipment
Total operating costs and expenses
Operating income
Other income (expense):
Interest expense, net
Change in fair value of warrant liability
Other income, net
Total other expense, net
Income before income taxes
Provision for income taxes
Net income
Foreign currency translation adjustment
Comprehensive income
Earnings per common share (basic)
Number of shares used in per share calculation (basic)
Earnings per common share (diluted)
Number of shares used in per share calculation (diluted)
Years Ended June 30,
2018
32,525,471
19,997,740
12,527,731
9,218,346
1,618,994
1,317,082
(258)
12,154,164
373,567
(186,948)
(194,632)
241,040
(140,540)
233,027
(827,077)
1,060,104
178,112
1,238,216
$
$
2017
28,367,489
13,648,030
14,719,459
8,651,023
1,235,934
693,947
1,444
10,582,348
4,137,111
(413,427)
(467,543)
105,645
(775,325)
3,361,786
(4,341,300)
7,703,086
169,288
7,872,374
0.04
$
0.39
25,006,467
20,001,868
0.04
$
0.36
26,811,468
21,666,392
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LIGHTPATH TECHNOLOGIES, INC.
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 2018 and 2017
Class A
Common Stock
Additional
Other
Total
Paid-in
Comphrehensive
Accumulated
Stockholders’
Shares
15,590,945
Amount
$
155,909
Capital
$ 214,661,617
Income
$
126,108
Deficit
$ (204,011,722)
Equity
$
10,931,912
Accumulated
578,897
12,106
33,785
8,000,000
5,789
121
338
80,000
699,890
19,511
(338)
8,669,496
—
—
694,436
—
—
—
—
—
—
—
—
—
—
—
—
—
24,215,733
433,810
19,980
127,813
967,208
—
—
—
242,157
747,640
—
—
225,492,252
—
169,288
—
295,396
—
—
7,703,086
(196,308,636)
4,338
200
1,278
9,672
529,980
48,391
224,723
2,237,392
—
—
685,132
—
—
—
—
—
—
—
—
—
—
705,679
19,632
—
8,749,496
694,436
747,640
169,288
7,703,086
29,721,169
534,318
48,591
226,001
2,247,064
685,132
—
—
—
25,764,544
$
—
—
—
257,645
656,953
—
—
$ 229,874,823
$
—
178,112
—
473,508
—
—
1,060,104
$ (195,248,532)
$
656,953
178,112
1,060,104
35,357,444
Balances at June 30, 2016
Issuance of common stock for:
Exercise of warrants
Employee Stock Purchase Plan
Exercise of RSU
Public equity placement, net of costs
Reclassification of warrant liability upon
exercise
Stock-based compensation on stock options
& RSU
Foreign currency translation adjustment
Net income
Balances at June 30, 2017
Issuance of common stock for:
Exercise of warrants
Employee Stock Purchase Plan
Exercise of stock options
Settlement of Sellers Note
Reclassification of warrant liability upon
exercise
Stock-based compensation on stock options
& RSU
Foreign currency translation adjustment
Net income
Balances at June 30, 2018
The accompanying notes are an integral part of these consolidated financial statements.
F-6
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
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Interest from amortization of debt costs
(Gain) loss on disposal of property and equipment
Stock-based compensation on stock options & RSU, net
Bad debt expense
Change in fair value of warrant liability
Change in fair value of Sellers Note
Deferred rent amortization
Inventory write-offs to reserve
Deferred tax benefit
Changes in operating assets and liabilities:
Trade accounts receivable
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
Acquisiton of ISP Optics, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options
Proceeds from sale of common stock from Employee Stock Purchase Plan
Loan costs
Borrowings on loan payable
Proceeds from issuance of common stock under public equity placement
Proceeds from exercise of warrants, net of costs
Net Payments on loan payable
Payments on capital lease obligations
Net cash (used in) provided by financing activities
Effect of exchange rate on cash and cash equivalents
Change in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash, beginning of period
Cash and cash equivalents and restricted cash, end of period
Supplemental disclosure of cash flow information:
Interest paid in cash
Income taxes paid
Supplemental disclosure of non-cash investing & financing activities:
Purchase of equipment through capital lease arrangements
Reclassification of warrant liability upon exercise
Derecognition of liability associated with stock option grants
Sellers Note issued to acquire ISP Optics, at fair value
Conversion of Sellers Note to common stock
Years Ended June 30,
2018
2017
$
1,060,104
$
7,703,086
3,403,581
19,685
(258)
373,554
(16,417)
194,632
(396,163)
(81,475)
187,547
(533,806)
618,393
(15,997)
(1,330,994)
(685,260)
(178,138)
2,618,988
2,080,439
7,721
1,444
394,875
(29,551)
467,543
68,955
(89,363)
90,268
(5,493,704)
(1,042,426)
160,070
(318,645)
151,821
846,511
4,999,044
(2,517,685)
—
(2,517,685)
(2,223,126)
(11,777,336)
(14,000,462)
226,001
48,591
(61,253)
2,942,583
—
534,318
(4,716,536)
(287,354)
(1,313,650)
(364,048)
(1,576,395)
8,085,015
6,508,620
$
—
19,632
(72,224)
5,000,000
8,749,496
705,679
—
(193,940)
14,208,643
(30,234)
5,176,991
2,908,024
8,085,015
546,306
386,471
$
$
334,589
680,055
763,247
685,132
283,399
—
2,247,064
$
$
$
$
230,000
694,436
352,765
6,327,208
—
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LIGHTPATH TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
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. In December 2016, we acquired ISP Optics Corporation, a New York corporation
(“ISP”), and its wholly-owned subsidiary, ISP Optics Latvia, SIA, a limited liability company founded in 1998 under the Laws of the Republic of Latvia (“ISP
Latvia”). See Note 3, Acquisition of ISP Optics Corporation, to these Consolidated Financial Statements for additional information.
LightPath is a manufacturer of optical components and higher level assemblies, including precision molded glass aspheric optics, molded and diamond-turned
infrared aspheric lenses, and other optical materials used to produce products that manipulate light. LightPath designs, develops, manufactures, and distributes
optical components and assemblies utilizing advanced optical manufacturing processes. LightPath products are incorporated into a variety of applications by
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.
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.
Reclassifications. The classification of certain prior-year amounts have been adjusted in our Consolidated Financial Statements to conform to current-year
classifications. Reclassifications include the line item “Interest expense – debt costs” which is now combined with the “Interest expense, net” line item in our
Consolidated Statements of Comprehensive Income.
Management estimates. Management makes estimates and assumptions during the preparation of the Company’s Consolidated Financial Statements that affect
amounts reported in the Consolidated 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.
Cash and cash equivalents consist of cash in the bank and cash equivalents with maturities of 90 days or less when purchased. The Company maintains its
cash accounts in various institutions with high credit ratings. The Company’s domestic cash accounts are maintained in one financial institution, and balances
may exceed federal insured limits at times. The Company’s foreign cash accounts are not insured.
Restricted cash consists of amounts held in restricted accounts as collateral associated with our debt covenants. See Note 18, Loans Payable, to these
Consolidated Financial Statements for additional information. Our restricted cash is invested in a money market account. During fiscal year 2018, the Company
adopted ASU 2016-18, “Statement of Cash Flows (Topic 320): Restricted Cash” (“ASU 2016-18”), which provides guidance on the presentation of restricted cash
and restricted cash equivalents in the statement of cash flows. Cash and cash equivalents and restricted cash presented in the Consolidated Balance Sheet as of
June 30, 2018 are combined in the Consolidated Statement of Cash Flows for the year ended June 30, 2018.
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.- and Latvia-based accounts and 100% of invoices that are over 120 days past due for Chinese-
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
net realizable value, 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. The Company
looks at the following criteria for parts to consider for the inventory allowance: (i) items that have not been sold in two years, (ii) items that have not been
purchased in two years, or (iii) items of which we have more than a two-year supply. These items, as identified, are allowed for at 100%, as well as allowing 50%
for other items deemed to be slow moving within the last twelve months and allowing 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 allowance.
F-8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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 Consolidated Balance Sheet and reported at the lower of the carrying amount
or fair value less costs to sell, and would no longer be 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 Consolidated Balance Sheet.
Goodwill and Intangible Assets acquired in a business combination are recognized at fair value using generally accepted valuation methods appropriate for the
type of intangible asset and reported separately from goodwill. Purchased intangible assets other than goodwill are amortized over their useful lives unless these
lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated
useful lives of the respective assets, generally two to fifteen years. The Company periodically reassesses the useful lives of its intangible assets when events or
circumstances indicate that useful lives have significantly changed from the previous estimate. Definite-lived intangible assets consist primarily of customer
relationships, know-how/trade secrets and trademarks. They are generally valued as the present value of estimated cash flows expected to be generated from
the asset using a risk-adjusted discount rate. When determining the fair value of our intangible assets, estimates and assumptions about future expected revenue
and remaining useful lives are used. Goodwill and intangible assets are tested for impairment on an annual basis and during the period between annual tests if
events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.
The Company will assess the qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying
amount as a basis for determining whether it is necessary to perform the goodwill impairment analysis. If the Company determines that it is more likely than not
that its fair value is less than its carrying amount, then the goodwill impairment test is performed. The first step, identifying a potential impairment, compares the
fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the second step would need to be performed; otherwise, no
further steps are required. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of the
goodwill. Any excess of the goodwill carrying amount over the implied fair value is recognized as an impairment loss, and the carrying value of goodwill is written
down to fair value. During fiscal year 2018, the Company adopted ASU 2017-4, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment” (“ASU 2017-4”), which amends the goodwill impairment test to compare the fair value of a reporting unit with its carrying amount and recognize an
impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, up to the total amount of goodwill allocated to that
reporting unit. The Company did not record any goodwill impairment during the fiscal years ended June 30, 2018 or 2017.
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.
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, as well as tax returns in various states and foreign jurisdictions. Open tax years subject to examination by the
Internal Revenue Service generally remain open for three years from the filing date. Tax years subject to examination by the state jurisdictions generally remain
open for up to four years from the filing date. In Latvia, tax years subject to examination remain open for up to five years from the filing date, and in China, tax
years subject to examination remain open for up to ten years from the filing date.
F-9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Our cash, cash equivalents and restricted cash totaled $6.5 million at June 30, 2018. Of this amount, approximately 50% was held by our foreign subsidiaries in
China and Latvia. These foreign funds were generated in China and Latvia as a result of foreign earnings. With respect to the funds generated by our foreign
subsidiaries in China, the retained earnings in China must equal at least 150% of the registered capital before any funds can be repatriated. As of June 30, 2018,
we have retained earnings in China of approximately $1.9 million and we need to have $11.3 million before repatriation will be allowed.
Accumulated earnings from the Company’s non-U.S. subsidiaries were subject to inclusion in the Company’s current period U.S. and state income tax returns as
a result of the impact of the U.S. tax law changes. However, no income tax was due on the inclusion of these earnings due to utilization of net operating losses.
See Note 9, Income Taxes, to these Consolidated Financial Statements for additional information.
The Company intends to permanently invest earnings generated from its foreign Chinese operations, and, therefore, has not previously provided for future
Chinese withholding taxes on such related earnings. However, if, in the future, the Company changes such intention, the Company would provide for and pay
additional foreign taxes, if any, at that time.
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 are not included in revenue.
VAT is computed on the gross sales price on all sales of the Company’s products sold in the People’s Republic of China and Latvia. The VAT rates range up to
21%, 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 payables in the accompanying Consolidated 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, as amended (the “Omnibus 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.
Fair value of financial instruments. The Company accounts for financial instruments in accordance with the Financial Accounting Standards 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:
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.
The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include 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 capital lease obligations
and acquisition term loan payable to Avidbank Corporate Finance, a division of Avidbank (“Avidbank”) approximates their carrying values based upon current
rates available to us. Loans payable as of June 30, 2017 also included a note payable to the sellers of ISP, in the aggregate principal amount of $6 million (the
“Sellers Note”). The carrying value of the Sellers Note included a fair value premium based on a risk-adjusted discount rate, a Level 2 fair value measurement.
On January 16, 2018, the Sellers Note was satisfied in full and, therefore, is not included in loans payable as of June 30, 2018. See Note 18, Loans Payable, to
these Consolidated Financial Statements for additional information.
F-10
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company valued 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 based 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 Note 17, Derivative Financial Instruments (Warrant Liability), to these Consolidated Financial
Statements for additional information.
The Company does not have any other financial or non-financial assets or liabilities that would be characterized as Level 1, Level 2 or Level 3 instruments.
Debt issuance costs are recorded as a reduction to the carrying value of the related notes payable, by the same amount, and are amortized ratably over the term
of the related note.
Derivative financial instruments. The Company accounts for derivative instruments in accordance with Financial Accounting Standards 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 Company issued warrants in connection with our June 2012 private
placement (the “June 2012 Warrants”). The fair value of the June 2012 Warrants was 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 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 has two components, net income, and other comprehensive income, and is included on the Consolidated Statements of
Comprehensive Income. Our other comprehensive income consists of foreign currency translation adjustments made for financial reporting purposes.
Business segments. 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 for the Company for the year ended June 30, 2018.
Revenue from Contracts with Customers – In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) (“ASU 2014-09”),
which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. ASU 2014-09 is based
on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred
to obtain or fulfill a contract. ASU 2014-09 must be applied using one of two retrospective methods and were originally set to be effective for annual and interim
periods beginning after December 15, 2016. On July 9, 2015, the FASB modified ASU 2014-09 to be effective for annual reporting periods beginning after
December 15, 2017, including interim periods within that reporting period. As modified, the FASB permits the early adoption of the new revenue standard, but not
before the annual periods beginning after December 15, 2017. A public organization would apply the new revenue standard to all interim reporting periods within
the year of adoption. The Company will adopt this standard in the first quarter of its fiscal year ended June 30, 2019, using the modified retrospective method.
We have substantially completed our analysis, and the adoption of this guidance will not have a material impact on our Consolidated Financial Statements and our
internal controls over financial reporting.
Leases – In February 2016, the FASB issued ASU No. 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 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. 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. Our current operating lease portfolio is primarily comprised of real estate leases. Upon adoption of this standard, the Company expects its
Consolidated Balance Sheet to include a right-of-use asset and liability related to substantially all of its operating lease arrangements. ASU 2016-02 will be
effective for the Company in the first quarter of its fiscal year ending June 30, 2020.
F-11
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Income Taxes – In October 2016, the FASB issued ASU 2016-16, “Income Taxes” (Topic 740) (“ASU 2016-16”). ASU 2016-16 requires an entity to recognize the
income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual reporting period for
which financial statements have not been issued or made available for issuance. ASU 2016-16 is effective for the Company in the first quarter of its fiscal year
ending June 30, 2019. The Company does not expect this accounting standard to have a significant impact on its financial results when adopted.
Compensation – Stock Compensation – In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation” (Topic 718): Scope of Modification
Accounting (“ASU 2017-09”). The new guidance clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a
modification. ASU 2017-09 is effective for fiscal years, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption
permitted. ASU 2017-09 is effective for the Company in the first quarter of its fiscal year ending June 30, 2019. The Company does not expect this accounting
standard to have a significant impact on its financial results when adopted.
Comprehensive Income - In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 allows entities to elect to reclassify the income tax effects
of the Tax Act on items within accumulated other comprehensive income to retained earnings and requires additional related disclosures. ASU 2018-02 is effective
for the Company in the first quarter of its fiscal year ending June 30, 2020. The Company is currently evaluating the impact that ASU 2018-02 will have on its
Consolidated Financial Statements.
No other new accounting pronouncement recently issued or newly effective had or is expected to have a material impact on the Consolidated Financial
Statements.
3. Acquisition of ISP Optics Corporation
On December 21, 2016 (the “Acquisition Date”), the Company acquired 100% of the issued and outstanding shares of common stock (the “Acquisition”) of ISP
pursuant to the Stock Purchase Agreement, dated as of August 3, 2016 (the “Purchase Agreement”). The Company’s Consolidated Financial Statements reflect
the financial results of ISP’s operations beginning on the Acquisition Date.
Part of our growth strategy is to identify appropriate opportunities that would enhance our profitable growth through acquisition. As we developed our molded
infrared capability and learned more about the infrared market, we became aware of larger business opportunities in this market that might be available with a
broader range of product capability. We believed acquiring ISP would provide an excellent complementary fit with our business that would meet our requirement of
profitable growth in a market space we are investing in, and saw the Acquisition as an opportunity to accelerate our growth, and expand our capabilities and our
global reach.
For the purposes of financing the Acquisition, simultaneous with the closing, the Company sold 8,000,000 shares of its Class A common stock, raising net
proceeds of approximately $8.7 million. See Note 20, Public Offering of Class A Common Stock, to these Consolidated Financial Statements for additional
information. The Company also closed a $5 million Term Loan with Avidbank. See Note 18, Loans Payable, to these Consolidated Financial Statements for
additional information.
In lieu of cash paid, the Company financed a portion of the Acquisition through the issuance of the Sellers Note in the aggregate prin cipal amount of $6 million to
Joseph Menaker and Mark Lifshotz (the “Sellers”). For additional information, see Note 18, Loans Payable, to these Consolidated Financial Statements.
The Acquisition Date fair value of the consideration transferred totaled approximately $19.1 million, which consisted of the following:
Cash Purchase Price
Cash acquired
Tax payable assumed debt
Fair value of Sellers Note
Working capital adjustment
Total purchase price
Sellers Note issued at fair value
Preliminary working capital adjustment
Adjustment to beginning cash
Adjustment to beginning assumed debt
Cash paid at Acquisition Date
F-12
$
$
12,000,000
1,243,216
(200,477)
6,327,208
(315,003)
19,054,944
(6,327,208)
(760,822)
(163,878)
(25,700)
11,777,336
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Subsequently in March 2017, a portion of the working capital adjustment, in the amount of $292,816, was applied to the Sellers Note as a payment, thereby
decreasing the outstanding principal amount due under the Sellers Note, as reflected in these Consolidated Financial Statements.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date:
Cash
Accounts receivable
Inventory
Other current assets
Property and equipment
Security deposit and other assets
Identifiable intangibles
Total identifiable assets acquired
Accounts payable
Accrued expenses and other payables
Other payables
Deferred tax liability
Total liabilities assumed
Net identifiable assets acquired
Goodwill
Net assets acquired
$
$
$
$
$
1,243,216
1,108,980
1,134,628
153,450
4,666,634
45,359
11,069,000
19,421,267
(554,050)
(133,974)
(146,324)
(5,386,880)
(6,221,228)
13,200,039
5,854,905
19,054,944
As part of the valuation analysis, the Company identified intangible assets, including customer relationships, customer backlog, trade secrets, trademarks and
non-compete agreements. The customer relationships, customer backlog, trade secrets, trademarks and non-compete agreements were determined to have
estimated values of $3,590,000, $366,000, $3,272,000, $3,814,000, and $27,000, respectively, and estimated useful lives of 15, 2, 8, 8, and 3 years,
respectively. The estimated fair value of identifiable intangible assets is determined primarily using the "income approach," which requires a forecast of all future
cash flows. The estimated fair values of assets acquired reflects a $2,744,262 adjustment to increase the basis of the acquired property, plant and equipment to
reflect fair value of the assets at the Acquisition Date. The estimated useful lives range from 3 years to 10 years. Depreciation and amortization of intangible
assets and property, plant and equipment is calculated on a straight-line basis. The estimated fair values of assets acquired and liabilities assumed also reflects
a $153,132 adjustment to increase the basis of the acquired inventory to reflect fair value of the inventory and a $230,407 adjustment to decrease the basis of
the acquired deferred revenue to reflect the fair value of the deferred revenue at the Acquisition Date. The tax effects of these fair value adjustments resulted in
a net deferred tax liability of approximately $5.4 million.
The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of ISP. None of the goodwill is expected to be deductible for
income tax purposes.
F-13
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Company recognized approximately $650,000 of Acquisition related costs that were expensed during the year ended June 30, 2017. These costs are
included in the Consolidated Statements of Comprehensive Income in the line item entitled “Selling, general and administrative.” The Company also recognized
approximately $930,000 in expenses associated with the public offering of shares of Class A common stock, the net proceeds of which were used to provide
funds to pay for a portion of the purchase price of the Acquisition. These expenses were deducted from the gross proceeds received as a result of the public
offering of Class A common stock, as reflected in stockholders’ equity. For additional information on this public offering, see Note 20, Public Offering of Class A
Common Stock, to these Consolidated Financial Statements.
The amounts of revenue and net income of ISP included in the Company’s Consolidated Statements of Comprehensive Income from the Acquisition Date to the
period ending June 30, 2017 are as follows:
Revenue
Net income
$
$
8,009,349
981,125
Our Consolidated Financial Statements include the financial results of ISP’s operations for the year ended June 30, 2018. The following represents unaudited
pro forma consolidated information as if ISP had been included in the consolidated results of the Company for the year ended June 30, 2017:
Revenue – pro forma
Net income – pro forma
Year Ended
June 30,
2017
$
$
34,498,656
2,647,533
These amounts have been calculated after applying the Company’s accounting policies and adjusting the results for Acquisition expenses and to reflect the
additional interest expense and depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and
equipment and intangible assets had been applied on July 1, 2015, together with the consequential tax effects. For the year ended June 30, 2017, pro forma net
income reflects adjustments of approximately $600,000 for amortization of intangibles and approximately $250,000 in additional interest, and excludes
approximately $5.4 million for deferred tax benefits, approximately $650,000 in Acquisition expenses and approximately $600,000 of non-recurring fees incurred
by ISP.
Prior to the Acquisition, the Company had a preexisting relationship with ISP. The Company ordered anti-reflective coating services from ISP on an arms’ length
basis. The Company had also partnered with ISP to develop and sell molded optics as part of a multiple lens assembly sold to a third party and had provided
certain standard molded optics for resale through ISP’s catalog. At the Acquisition Date, the Company had amounts payable to ISP of $8,000 for services
provided prior to the Acquisition and ISP had payables of $24,500 due to the Company.
4.
Inventories, net
The components of inventories include the fol lowing:
Raw materials
Work in process
Finished goods
Allowance for obsolescence
June 30,
2018
June 30,
2017
$
$
2,309,454
2,506,891
2,263,121
(674,725)
6,404,741
$
$
2,282,880
1,654,653
1,904,497
(767,454)
5,074,576
F-14
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
During fiscal 2018 and 2017, the Company evaluated all allowed items and disposed of approximately $188,000 and $90,000, respectively, of inventory parts and
wrote them off against the allowance for obsolescence.
The value of tooling in raw materials was approximately $1.6 million at both June 30, 2018 and 2017.
5. 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
Less accumulated depreciation and amortization
Total property and equipment, net
Estimated
Life (Years)
June 30,
2018
June 30,
2017
5 - 10
3 - 5
5
5 - 7
$
$
16,534,124
513,681
199,872
1,350,482
954,317
19,552,476
13,804,964
375,775
112,307
1,228,797
709,571
16,231,414
7,743,235
5,906,856
$
11,809,241
$
10,324,558
During fiscal 2015, we extended the term of our Orlando lease 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.
6. Goodwill and Intangible Assets
The change in the net carrying amount of goodwill for fiscal years 2018 and 2017 was as follows:
Goodwill at June 30, 2016
Additions
Goodwill at June 30, 2017
Additions
Goodwill at June 30, 2018
$
$
-
5,854,905
5,854,905
-
5,854,905
The increase in goodwill during the first half of fiscal 2017 was due to the Acquisition of ISP. There were no changes to the carrying amount of goodwill during
the year ended June 30, 2018.
Identifiable intangible assets as a result of the Acquisition of ISP were comprised of:
Customer relationships
Backlog
Trade secrets
Trademarks
Non-compete agreement
Total intangible assets
Less accumulated amortization
Total intangible assets, net
Useful
Lives (Yrs)
$
15
2
8
8
3
$
June 30,
2018
3,590,000
366,000
3,272,000
3,814,000
27,000
11,069,000
June 30,
2017
3,590,000
366,000
3,272,000
3,814,000
27,000
11,069,000
(2,011,030)
(693,947)
$
9,057,970
$
10,375,053
F-15
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Future amortization of identifiable intangibles is as follows:
Fiscal year ending:
June 30, 2019
June 30, 2020
June 30, 2021
June 30, 2022
June 30, 2023 and later
7. Accounts Payable
$
$
1,220,664
1,129,342
1,125,083
1,125,083
4,457,798
9,057,970
The accounts payable balance includes $82,000 and $73,000 of earned but unpaid board of directors’ fees, as of June 30, 2018 and 2017, respectively.
8. Stockholders’ Equity
The Company’s authorized capital stock consists of 55,000,000 shares, divided into 50,000,000 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;
● 500,000 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
upon occurrence of certain events. The rights will be exercisable only if a person or group acquires twenty percent (20%) or more of our Class A
common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of twenty percent (20%) or
more of our Class A common stock. As of the date of the filing of this Annual Report on Form 10-K, no such triggering event has occurred. If, in the
future, any Series D Preferred Stock are issued, 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 50,000,000 shares of common stock authorized, the board of directors has previously designated 44,500,000 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 stock.
At June 30, 2017, the Company had outstanding warrants to purchase up to 501,474 shares of Class A common stock at $1.22 per share, as adjusted, at any
time through December 11, 2017. The warrants were issued in connection with a private placement in fiscal 2012. During fiscal 2018 and 2017, the Company
received approximately $534,000 and $706,000, respectively, in net proceeds from the exercise of the June 2012 warrants. The Company issued 433,810 and
578,897 shares of Class A common stock during fiscal 2018 and 2017, respectively, in connection with these exercises. The June 2012 Warrants expired on
December 11, 2017. There were no oustanding warrants as of June 30, 2018.
F-16
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
9. Income Taxes
For financial reporting purposes, income before income taxes includes the following compon ents:
Pretax income:
United States
Foreign
Income before income taxes
The components of the provision for income taxes are as follows:
Current:
Federal tax
State
Foreign
Total current
Deferred:
Federal tax
State
Foreign
Total deferred
Year Ended June 30,
2018
2017
$
$
359,027
(126,000)
233,027
$
$
(485,966)
3,847,752
3,361,786
Year Ended June 30,
2018
2017
$
$
57,315
-
(117,852)
(60,537)
98,787
-
1,053,617
1,152,404
(510,125)
(72,875)
(183,540)
(766,540)
(5,384,171)
(121,000)
11,467
(5,493,704)
Total income tax (benefit)
$
(827,077)
$
(4,341,300)
F-17
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The reconciliation of income tax computed at the U.S federal statutory rates to income tax expense is as follows:
U.S. federal statutory tax rate
Income tax provision reconciliation:
Tax at statutory rate:
Net foreign income subject to lower tax rate
State income taxes, net of federal benefit
Valuation allowance
Changes in statutory income tax rates
IRC 965 repatriation
Federal research and development and other credits
Stock-based compensation
Change in fair value of derivative warrants
Acquisiton costs
Other permanent differences
Other, net
Tax Cuts and Jobs Act
Year Ended June 30,
2018
2017
27.5%
34.0%
$
$
64,082
25,927
(107,997)
(11,763,000)
9,114,886
1,809,603
(163,165)
43,818
53,524
-
30,758
64,487
1,143,010
(464,335)
2,418,932
(8,085,000)
-
-
(118,128)
100,469
158,965
75,332
(43,295)
472,750
$
(827,077)
$
(4,341,300)
In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 Act”), which changes existing U.S. tax law and includes various provisions that are
expected to affect companies. Among other things, the 2017 Act: (i) changes U.S. corporate tax rates, (ii) generally reduces a company’s ability to utilize
accumulated net operating losses, and (iii) requires the calculation of a one-time transition tax on certain foreign earnings and profits (“foreign E&P”) that had not
been previously repatriated.
As of June 30, 2018, we have not fully completed our accounting for the income tax impact of enactment of the 2017 Act. In accordance with SEC Staff
Accounting Bulletin No.118, we have recognized provisional amounts for income tax effects of the 2017 Act that we were able to reasonably estimate. We intend
to adjust the tax effects for the relevant items during the allowed measurement period. We are still evaluating certain aspects of the Tax Act and refining our
calculations, which could potentially affect our tax balances.
We were also able to reasonably estimate the tax treatment of our foreign E&P as per the 2017 Act. The 2017 Act provides for a one-time transition tax on our
post-1986 foreign E&P that have not been previously repatriated. We have provisionally determined our foreign E&P inclusion is $6.9 million and anticipate that
we will not owe any one-time transition tax due to utilization of U.S. net operating loss (“NOL”) carryforward benefits against these earnings. However, we are still
refining our calculations, including estimated foreign E&P layers for fiscal 2018, which could impact these amounts. Additionally, U.S. gross deferred tax assets
and liabilities have been reduced by an estimated $9.5 million based on the U.S. income tax rate change; however, this reduction was primarily offset by a
corresponding reduction to the valuation allowance against the net deferred tax assets, which resulted in minimal net effect to the provision for income taxes as a
result of the U.S. income tax rate change.
The Company currently intends to permanently invest earnings generated from its foreign Chinese operations, and, therefore, has not previously provided for
future Chinese withholding taxes on such related earnings. However, if in the future the Company changes such intention, the Company would provide for and
pay additional foreign taxes, if any, at that time.
The Company’s Chinese subsidiaries, LPOI and LPOIZ, 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. During the three months ended December 31, 2017, the statutory tax rate applicable to LPOIZ was lowered from 25% to 15% in accordance
with an incentive program for technology companies. The lower rate applies to LPOIZ’s 2017 tax year, beginning January 1, 2017. Accordingly, we recorded a tax
benefit of approximately $100,000 during the year ended June 30, 2018 related to this retroactive rate change. For the fiscal year ended June 30, 2018, income
taxes were accrued at the applicable rates. No deferred tax provision has been recorded for China, as the effect is deemed de minimis.
The Company’s Latvian subsidiary is governed by the Law of Corporate Income Tax of Latvia, which is applicable to privately run and foreign invested enterprises,
and which generally subjects such enterprises to a statutory rate of 15% on income reported in the statutory financial statements after appropriate tax
adjustments. Effective January 1, 2018, the Republic of Latvia enacted tax reform with the following key provisions: (i) corporations are no longer subject to
income tax, but are instead subject to a distribution tax on distributed profits (or deemed distributions, as defined) and (ii) the rate of tax was changed to 20%;
however, distribution amounts are first divided by 0.8 to arrive at the profit before tax amount, resulting in an effective tax rate of 25%. Our intent is to distribute
profits from ISP Latvia to ISP, its parent company in the U.S.; therefore, we will accrue distribution taxes, if any, as profits are generated. With this change, the
concept of taxable income and tax basis in assets and liabilities has been eliminated and is no longer relevant for determining income taxes; therefore, the
previously recorded net deferred tax liability related to ISP Latvia was adjusted to zero during the fiscal year ended June 30, 2018, resulting in a tax benefit of
approximately $184,000.
F-18
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and defer red tax liabilities are as follows at June 30:
Deferred tax assets:
Net operating loss and credit carryforwards
Stock-based compensation
R&D and other credits
Capitalized R&D 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
Intangible assets
Total deferred tax liabilities
Net deferred tax asset
2018
2017
$
$
16,282,000
710,000
1,899,000
373,000
143,000
83,000
19,490,000
(16,123,000)
3,367,000
29,014,000
943,000
1,983,000
562,000
243,000
407,091
33,152,091
(27,886,000)
5,266,091
(563,000)
(2,180,000)
(2,743,000)
624,000
$
(1,187,440)
(3,976,000)
(5,163,440)
102,651
$
The above deferred balances include a reduction of approximately $244,000 in federal credits related to alternative minimum tax (“AMT”) that have been
reclassified to income taxes receivable, as the Company expects to recover these amounts within the next five years due to changes made by the 2017 Act.
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 $75 million prior to the expiration of NOL 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 $16,123,000 at June 30, 2018, a decrease of approximately $11,763,000
as compared to June 30, 2017. The reduction in the valuation allowance for deferred tax assets as compared to the prior year is primarily the result of a $9.5
million decrease resulting from the reduction of the U.S. statutory corporate income tax rate from a maximum of 35% to a flat 21%, effective January 1, 2018. The
net deferred tax asset results from federal and state tax credits with indefinite carryover periods and approximately $500,000 in federal NOL carryforwards that
management expects to utilize in a future period. State income tax expense disclosed on the effective tax rate reconciliation above includes state deferred taxes
that are offset by a full valuation allowance.
F-19
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
At June 30, 2018, in addition to net operating loss carry-forwards, the Company also has research and development credit carry forwards of approximately
$1,630,000, of which $38,505 will expire in fiscal 2019 and the remainder will expire from 2020 through 2036. A portion of the NOL 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 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 tax 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.
10. Compensatory Equity Incentive Plan and Other Equity Incentives
Share-based payment arrangements — The Omnibus Plan provides several available forms of stock compensation, including incentive stock options, non-
qualified stock options and restricted stock unit (“RSU”) awards. 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. The Company estimates 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 Omnibus 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.
The LightPath Technologies, Inc. Employee Stock Purchase Plan (“2014 ESPP”) 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 Class A 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 Class A common 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 approximately $4,900 and $1,900 for fiscal 2018 and 2017, respectively, is included in the
selling, general and administrative expense in the accompanying Consolidated Statements Comprehensive Income, which represents the value of the 10%
discount given to the employees purchasing stock under the 2014 ESPP.
These plans are summarized below:
Equity Compensation Arrangement
Omnibus Plan
2014 ESPP
Outstanding
at June 30,
Available for
Issuance
at June 30,
2018
2,654,482
—
2,654,482
2018
1,650,870
358,008
2,008,878
Award Shares
Authorized
5,115,625
400,000
5,515,625
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 2014 ESPP fair value is the amount of the discount the employee obtains at the date of the
purchase transaction.
For stock options and RSUs granted in the years ended June 30, 2018 and 2017, the Company estimated the fair value of each stock award as of the date of
grant using the following assumptions:
Weighted-average expected volatility
Dividend yields
Weighted-average risk-free interest rate
Weighted-average expected term, in years
F-20
Year Ended June 30,
2018
63% - 75%
0%
1.28% - 2.82%
7.27
2017
77% - 83%
0%
1.24% - 1.90%
7.49
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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, 2018 and 2017. 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,
2018 and 2017 is presented below:
Stock
Options
Weighted- Weighted-
Average Average
Exercise Remaining
Contract
Price
Shares
Restricted
Stock Units (RSUs)
Weighted-
Average
Remaining
Contract
Shares
June 30, 2016
Granted
Exercised
Cancelled/Forfeited
June 30, 2017
Granted
Exercised
Cancelled/Forfeited
June 30, 2018
Awards exercisable/
vested as of
June 30, 2018
Awards unexercisable/
unvested as of
June 30, 2018
819,260 $
1.90
5.6 1,311,795
346,926 $
—
(70,000) $
1.63
—
4.04
9.4
—
—
230,772
(33,785)
—
1,096,186 $
1.68
6.3 1,508,782
68,849 $
(127,813) $
(32,093) $
1,005,129 $
3.88
1.80
2.62
1.77
—
140,571
—
—
—
—
6.3 1,649,353
0.9
2.3
—
—
0.9
2.2
—
—
0.9
786,710 $
1.63
5.7 1,287,370
—
218,419 $
1,005,129
2.26
8.4
361,983
1,649,353
0.9
The total intrinsic value of stock options exercised for the years ended June 30, 2018 and 2017 was approximately $1,000 and $0, respectively.
The total intrinsic value of stock options outstanding and exercisable at June 30, 2018 and 2017 was approximately $573,000 and $803,000, respectively.
The total fair value of stock options vested during the years ended June 30, 2018 and 2017 was approximately $103,000 and $318,000, respectively.
The total intrinsic value of RSUs exercised during the years ended June 30, 2018 and 2017 was approximately $0 and $79,000, respectively.
The total intrinsic value of RSUs outstanding and exercisable at June 30, 2018 and 2017 was approximately $3.0 million and $2.8 million, respectively.
The total fair value of RSUs vested during the years ended June 30, 2018 and 2017 was approximately $320,000 and $386,000, respectively.
F-21
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
As of June 30, 2018, there was approximately $484,000 of total unrecognized compensation cost related to n on-vested share-based compensation arrangements,
including share options and restricted stock units (“RSUs”), granted under the Omnibus Plan. The expected compensation cost to be recognized is as follows:
Year ending June 30, 2019
Year ending June 30, 2020
Year ending June 30, 2021
Year ending June 30, 2022
Stock
Options
RSUs
Total
21,953
264,982
286,935
8,926
5,939
149,944
158,870
29,978
35,917
$
2,021
38,839
$
—
444,904
$
2,021
483,743
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 Class A 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, 2018 and 2017 and changes during the two years then ended:
Unexercisable/Unvested Awards
June 30, 2016
Granted
Vested
Cancelled/Forfeited
June 30, 2017
Granted
Vested
Cancelled/Forfeited
June 30, 2018
Stock
Options
Shares
RSU Shares Total Shares
(per share)
Weighted-
Average
Grant Date Fair Values
182,250
346,926
(275,915)
(8,750)
244,511
68,849
(85,191)
(9,750)
218,419
441,599
230,772
(233,459)
—
438,912
140,571
(217,500)
—
361,983
$
623,849
577,698
$
(509,374) $
(8,750) $
$
683,423
209,420
$
(302,691) $
(9,750) $
$
580,402
1.35
1.33
1.28
1.02
1.39
3.61
3.78
2.36
1.53
Acceleration of Vesting — The Company does not generally accelerate the vesting of any stock options.
F-22
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Financial Statement Effects and Presentation — The following table shows total stock-based compensation expense for the years ended June 30, 2018 and
2017 included in the accompanying Consolidated Statements of Comprehensive Income:
Stock options
RSUs
Total
The amounts above were included in:
Selling, general & administrative
Cost of sales
New product development
11. Earnings Per Share
Year Ended June 30,
2018
2017
38,572
334,982
373,554
$
$
46,840
348,035
394,875
366,407
5,910
1,237
373,554
$
$
389,675
3,876
1,324
394,875
$
$
$
$
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
Weighted-average common shares outstanding:
Basic number of shares
Effect of dilutive securities:
Options to purchase common stock
RSUs
Common stock warrants
Diluted number of shares
Earnings per common share:
Basic
Diluted
Year Ended June 30,
2018
2017
$
1,060,104
$
7,703,086
25,006,467
20,001,868
331,985
1,387,348
85,668
26,811,468
142,482
1,167,540
354,502
21,666,392
$
$
0.04
0.04
$
$
0.39
0.36
The following potential dilutive shares were not included in the computation of diluted earnings per share, as their effects would be anti-dilutive:
Options to purchase common stock
RSUs
Common stock warrants
739,864
216,946
85,018
1,041,828
378,278
289,036
518,087
1,185,401
F-23
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
12. Defined Contribution Plan
The Company provides retirement benefits to its U.S.-based employees through a defined contribution retirement plan. Until April 12, 2018, these benefits were
offered under the ADP Total Source 401(k) plan (the “ADP Plan”). The ADP Plan was a defined 401(k) contribution plan, administered by a third party, that all U.S.
employees, over the age of 21, were eligible to participate in after three months of employment. Under the ADP Plan, annual discretionary contributions could be
made by the Company to match a portion of the funds contributed by employees. Effective April 12, 2018, all plan assets were transferred to the Insperity 401(k)
plan (the “Insperity Plan”). The Insperity Plan is a defined 401(k) contribution plan that all employees, over the age of 21, are eligible to participate in after three
months of employment. Under the Insperity Plan, the Company matches 100% of the first 2% of employee contributions. As of June 30, 2018, there were 56
employees who are enrolled in this plan. The Company made matching contributions of approximately $34,000 during the year ended June 30, 2018. There were
no matching contributions during the year ended June 30, 2017.
13. Lease Commitments
The Company has operating leases for its manufacturing and office space. At June 30, 2018, the Company has a lease agreement for its corporate headquarters
and manufacturing facility in Orlando, Florida (the “Orlando Lease”). The Orlando Lease, which is for a seven-year original term with renewal options, expires in
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 is one five-year extension option
exercisable by the Company. The minimum rental rates for such additional extension option 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 Orlando Lease, as amended.
The Company received $420,000 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 approximately $187,000 as of June 30, 2018. The deferred rent is being
amortized as a reduction in lease expense over the term of the lease.
On April 20, 2018, the Company entered into a lease agreement for an additional 12,378 square feet in Orlando, Florida (the “Orlando Lease II”). The Orlando
Lease II will provide additional manufacturing and office space near the Company’s corporate headquarters. The anticipated commencement date of the Orlando
Lease II is November 1, 2018, with a four-year original term with one renewal option for a five-year term. The Orlando Lease II provides for a tenant improvement
allowance of up to $309,450.
As of June 30, 2018, the Company, through its wholly-owned subsidiary, LPOI, has a lease agreement for an office facility in Shanghai, China (the “Shanghai
Lease”) for 1,900 square feet. The Shanghai Lease commenced in October 2015. During fiscal 2018, the Shanghai Lease was renewed for an additional one-year
term, and now expires in October 2019.
As of June 30, 2018, the Company, through its wholly-owned subsidiary, LPOIZ, has a lease agreement for a manufacturing and office facility in Zhenjiang, China
(the “Zhenjiang Lease”) for 26,000 square feet. The Zhenjiang Lease, which is for a five-year original term with renewal options, expires in March 2019. During
fiscal 2018, another lease was executed for 13,000 additional square feet in this same facility. This new lease has a 54-month term, and expires in December
2021.
At June 30, 2018, the Company, through its wholly-owned subsidiary ISP, has a lease agreement for a manufacturing and office facility in Irvington, New York
(the “ISP Lease”) for 13,000 square feet. The ISP Lease, which is for a five-year original term with renewal options, expires in September 2020. We will be
relocating the Irvington manufacturing operations to our existing facilities in Orlando and Riga during fiscal 2019, and some of the manufacturing operations
currently performed in the Irvington facility will transition to our facility in Zhenjiang.
At June 30, 2018, the Company, through ISP’s wholly-owned subsidiary ISP Latvia, has two lease agreements for a manufacturing and office facility in Riga,
Latvia (the “Riga Leases”) for an aggregate of 23,000 square feet. The Riga Leases, each of which is for a five-year original term with renewal options, expires in
December 2019.
As of June 30, 2018, the Company has obligations under five capital lease agreements, entered into during fiscal years 2015, 2016, 2017 and 2018, with terms
ranging from three to five years. The leases are for manufacturing equipment, which are included as part of property and equipment in the accompanying
Consolidated Balance Sheets. Assets under capital lease include approximately $1.5 million and $749,000 in manufacturing equipment, with accumulated
amortization of approximately $646,000 and $361,000 as of June 30, 2018 and 2017, respectively. Amortization related to assets under capital leases is included
in depreciation expense.
Rent expense totaled $1.0 million and $770,000 during the years ended June 30, 2018 and 2017, respectively.
F-24
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The approximate future minimum lease payments under capital and operating leases at June 30, 2018 were as fo llows:
Fiscal year ending June 30,
2019
2020
2021
2022
2023
Total minimum payments
Less imputed interest
Present value of minimum lease payments included in capital lease obligations
Less current portion
Non-current portion
14. Contingencies
Capital
Leases
Operating
Leases
$
$
909,000
917,000
679,000
558,000
60,869
3,123,869
$
$
360,256
309,122
234,478
58,308
—
962,164
(104,838)
857,326
307,199
550,127
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.
15. 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. During the years ended June 30, 2018 and 2017, we recognized a gain of approximately $141,000 and
$78,000 on foreign currency translation, respectively, included in the Consolidated Statements of Comprehensive Income in the line item entitled “Other income
(expense), net.” 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 approximately $474,000 and $295,000 at June 30, 2018 and 2017, respectively.
Assets and net assets in foreign countries are as follows:
Assets
Net assets
16. Supplier and Customer Concentrations
China
Latvia
June 30,
2018
$14.7 million
$12.6 million
June 30,
2017
$14.0 million
$12.3 milllion
June 30,
2018
$6.4 million
$5.9 million
June 30,
2017
$6.1 million
$6.0 million
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 Ltd., Ohara Corporation, and Sumita Optical Glass, Inc . Base optical materials, used in certain of
our specialty products, are manufactured and supplied by a number of optical and glass manufacturers. ISP utilizes major infrared material suppliers located
around the globe for a broad spectrum of infrared crystal and glass. The Company believes that a satisfactory supply of such production materials will continue to
be available, at reasonable prices or, in some cases, at increased prices, although there can be no assurance in this regard.
F-25
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
In fiscal 2018, sales to three customers comprised an aggregate of approximately 28% of our annual revenue, and 28% of accounts receivable as of June 30,
2018. In fiscal 2017, sales to three customers comprised an aggregate of approximately 26% of our annual revenue, and 26% of accounts receivable as of June
30, 2017. The loss of any of these customers, or a significant reduction in sales to any such customer, would adversely affect our revenues.
In fiscal 2018, 58% of our net revenue was derived from sales outside of the United States, with 84% of our foreign sales derived from customers in Europe and
Asia. In fiscal 2017, 61% of our net revenue was derived from sales outside of the United States, with 88% of our foreign sales derived from customers in Europe
and Asia.
17. Derivative Financial Instruments (Warrant Liability)
On June 11, 2012, the Company executed a Securities Purchase Agreement with respect to a private placement of an aggregate of 1,943,852 shares of its Class
A common stock at $1.02 per share and the June 2012 Warrants to purchase up to 1,457,892 shares of its Class A common stock at an initial exercise price of
$1.32 per share, which was subsequently reduced to $1.26, and then to $1.22 on December 21, 2016 as a result of our public offering. 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 at the end of each reporting period to reflect the then-current fair market value. The fair
value was also re-measured upon each warrant exercise, to determine the fair value adjustment to the warrant liability related to the warrant exercise. As of June
30, 2017, there were 329,195 shares of Class A common stock underlying our outstanding June 2012 Warrants that were issued to investors. As of June 30,
2017, there were also 172,279 shares of Class A common stock underlying the outstanding June 2012 Warrants, which were issued to investment bankers, that
do not require fair value re-measurement as they contain different provisions. The June 2012 Warrants expired on December 11, 2017. All warrants that required
fair value re-measurement were exercised prior to expiration, and as such, the warrant liability was reduced to zero as of that date. The change in fair value of the
June 2012 Warrants is recorded in the Consolidated Statements of Comprehensive Income, as estimated using the Lattice option-pricing model using the
following range of assumptions for the respective periods:
Inputs into Lattice model for warrants:
Equivalent volatility
Equivalent interest rate
Floor
Stock price
Probability price < strike price
Fair value of call
Probability of fundamental transaction occurring
Year Ended June 30,
2018
2017
21.06% - 162.92% 47.39% - 75.80%
0.95% - 1.14%
$1.15
$2.56 - $2.60
0.00%
$1.13 - $2.79
0%
0.62% - 1.13%
$1.15
$1.15 - $3.25
4.70%
$0.30 - $2.04
0%
All warrants issued by the Company other than the above noted June 2012 Warrants are classified as equity.
The warrant liabilities were considered recurring Level 3 financial instruments. The following table summarizes the activity of Level 3 financial instruments
measured on a recurring basis for the years ended June 30, 2018 and 2017:
Fair value, June 30, 2016
Reclassification of warrant liability upon exercise
Change in fair value of warrant liability
Fair value, June 30, 2017
Reclassification of warrant liability upon exercise
Change in fair value of warrant liability
Fair value, June 30, 2018
F-26
Warrant
Liability
717,393
(694,436)
467,543
490,500
(685,132)
194,632
-
$
$
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
18. Loans Payable
Avidbank Note
Amended LSA and Term Loan
On December 21, 2016, the Company executed the Second Amended and Restated Loan and Security Agreement (the “Amended LSA”) with Avidbank for the
acquisition term loan (the “Term Loan”) in the aggregate principal amount of $5 million and a working capital revolving line of credit (the “Revolving Line”). The
Amended LSA amends and restates that certain Loan and Security Agreement between Avidbank and the Company dated September 30, 2013, as amended and
restated pursuant to that certain Amended and Restated Loan and Security Agreement dated as of December 23, 2014, and as further amended pursuant to that
certain First Amendment to Amended and Restated Loan and Security Agreement dated as of December 23, 2015.
The Term Loan, which was paid in full on January 16, 2018, pursuant to the Second Amendment, as defined below, was for a five-year term. Pursuant to the
Amended LSA, interest on the Term Loan began accruing on December 21, 2016 and was paid monthly for the first six months of the term of the Term Loan.
Thereafter, both principal and interest was due and payable in fifty-four (54) monthly installments. The Term Loan bore interest at a per annum rate equal to two
percent (2.0%) above the Prime Rate; provided, however, that at no time was the applicable rate permitted to be less than five and one-half percent (5.50%) per
annum. Prepayment was permitted; however, in order to prepay the Term Loan, certain prepayment fees applied.
Pursuant to the Amended LSA, Avidbank agreed, in its discretion, to make loan advances under the Revolving Line 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. Upon the occurrence and during the continuance
of an event of default, Avidbank may, in its discretion, cease making advances and terminate the Amended LSA; provided, that at the time of termination, no
obligations remain outstanding and Avidbank has no obligation to make advances under the Amended LSA. Avidbank also has the discretion to determine that
certain accounts are not eligible accounts.
Amounts borrowed under the Revolving Line may be repaid and re-borrowed at any time prior to the maturity date, at which time all amounts shall be immediately
due and payable. The advances under the Revolving Line bear interest, on the outstanding daily balance, at a per annum rate equal to one percent (1%) above
the Prime Rate; provided, however, that at no time shall the applicable rate be less than four and one-half percent (4.5%) per annum. 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. There were no borrowings under the Revolving Line during the fiscal years ended June 30, 2018 and 2017. As of June 30,
2018 and 2017, there was no outstanding balance under the Revolving Line.
The Company’s obligations under the Amended LSA are collateralized by a first priority security interest (subject to permitted liens) in cash, U.S. inventory,
accounts receivable, inventory and equipment. In addition, the Company’s wholly-owned subsidiary, Geltech, has guaranteed its 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. Additionally, the Amended LSA requires us to maintain a fixed charge coverage ratio (as defined in the Amended LSA) of at least 1.15 to 1.00
and an asset coverage ratio (as defined in the Amended LSA) of at least 1.50 to 1.00. The fixed charge coverage ratio was amended for the quarters ended
March 31, 2018 and June 30, 2018, pursuant to the Third Amendment, as defined below. As of June 30, 2018, we were not in compliance with the fixed charge
coverage ratio; however, Avidbank provided a waiver of compliance pursuant to that certain Fourth Amendment to the Amended LSA, dated September 7, 2018,
entered into between us and Avidbank (the “Fourth Amendment”), as discussed below.
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.
First Amendment to the Amended LSA
On December 20, 2017, the Company executed the First Amendment to the Amended LSA (the “First Amendment”). The First Amendment amended, among
other items, the maturity date of the Revolving Line from December 21, 2017 to March 21, 2018, increased the maximum amount of indebtedness collateralized
by permitted liens from $600,000 to $800,000 in the aggregate, and increased the aggregate amount the Company may maintain in accounts with financial
institutions in Riga, Latvia from $500,000 to $1,000,000. The maturity date of the Revolving Line was extended to December 21, 2018, pursuant to the Second
Amendment (as defined below).
F-27
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Second Amendment to the Amended LSA
On January 16, 2018, the Company entered into a Second Amendment to the Amended LSA (the “Second Amendment”) relating to the Term Loan. Pursuant to
the Second Amendment, Avidbank paid a single cash advance to the Company in an original principal amount of $7,294,000 (the “Term II Loan”). The proceeds
of the Term II Loan were used to repay all amounts owing with respect to the Term Loan, which was approximately $4.4 million, with the remaining $2.9 million in
proceeds used to repay the amounts owing under the Sellers Note. As of January 16, 2018, the Term Loan was deemed satisfied in full and terminated. The
Term II Loan is for a five-year term. Pursuant to the Second Amendment, interest on the Term II Loan accrues starting on January 16, 2018 and both principal and
interest is due and payable in sixty (60) monthly installments beginning on the tenth day of the first month following the date of the Second Amendment (or
February 10, 2018), and continuing on the same day of each month thereafter for so long as the Term II Loan is outstanding. The Term II Loan bears interest at a
per annum rate equal to two percent (2.0%) above the Prime Rate, or 7.0% as of June 30, 2018; provided, however, that at no time shall the applicable rate be
less than five-and-one-half percent (5.50%) per annum. Prepayment by the Company is permitted; however, the Company must pay a prepayment fee in an
amount equal to (i) 0.75% of the Excess Prepayment Amount if prepayment occurs on or prior to January 16, 2019, or (ii) 0.5% of the Excess Prepayment
Amount if prepayment occurs after January 16, 2019 but on or before January 16, 2020, or (iii) 0.25% of the Excess Prepayment Amount if prepayment occurs
after January 16, 2020 but on or prior to January 16, 2021, or (iv) 0.10% of the Excess Prepayment Amount if such prepayment occurs after January 16, 2021
but on or prior to January 16, 2022. For purposes of the Second Amendment, the “Excess Prepayment Amount” equals the amount of the Term II Loan being
prepaid in excess of $2,850,000.
The Second Amendment amended, among other items, (1) certain definitions related to the fixed charge coverage ratio, and (2) the maturity date of the Revolving
Line from March 21, 2018 to December 21, 2018.
Costs incurred of approximately $72,000 were recorded as a discount on debt and will be amortized over the five-year term of the Term Loan. Additional costs of
approximately $60,000 were incurred in conjunction with the Second Amendment and were also recorded as a discount on debt, and the combined costs will be
amortized over the five-year term of the Term II Loan. Amortization of approximately $19,700 and $7,700 is included in interest expense for the years ended June
30, 2018 and 2017, respectively.
Third Amendment to the Amended LSA
On May 11, 2018, the Company and Avidbank entered into the Third Amendment to the Amended LSA (“the Third Amendment”). The Third Amendment (i)
amends the definition of “Permitted Indebtedness” and (ii) amends Section 6.8(a) of the Amended LSA to require that the Company, and each of its domestic
subsidiaries, maintain all of its domestic depository and operating accounts with Avidbank beginning on June 1, 2018 and to prohibit the Company from
maintaining a domestic account balance outside of Avidbank that exceeds Ten Thousand Dollars ($10,000) during the transition period. The Third Amendment
also amends Section 6.9(a) of the Amended LSA to require that the Company maintain a fixed charge coverage ratio, as measured on June 30, 2018, of at least
1.10 to 1.00,and thereafter, beginning with the quarter ending on September 30, 2018, to maintain a fixed charge coverage ratio of at least 1.15 to 1.00.
Additionally, pursuant to the Third Amendment, Avidbank granted the Company a waiver of default arising prior to the Third Amendment from its failure to comply
with the fixed charge coverage ratio measured on March 31, 2018.
Fourth Amendment to the Amended LSA
On September 7, 2018, the Company entered into the Fourth Amendment. Pursuant to the Fourth Amendment, Avidbank granted the Company a waiver of
default arising prior to the Fourth Amendment from its failure to comply with the fixed charge coverage ratio covenant measured on June 30, 2018. Based on the
waiver, the Company is no longer in default on the Term II Loan or Revolving Line. The Fourth Amendment also provides for the restriction of $1 million of the
Company’s cash, which will be released upon two consecutive quarters of compliance with the fixed charge coverage ratio covenant, and so long as no event of
default has occurred that is continuing on that date. The Fourth Amendment also provides that during the restrictive period, the calculation of the fixed charge
coverage ratio will be determined as if the outstanding principal amount of the Term II Loan is $1,000,000 less than the actual outstanding principal amount of the
Term II Loan. As a result, the Term II Loan is classified in the Consolidated Balance Sheets according to the original minimum maturity schedule.
Sellers Note
On December 21, 2016, the Company also entered into the Sellers Note in the aggregate principal amount of $6 million. The Sellers Note was fully satisfied on
January 16, 2018, as discussed in Note 19, Note Satisfaction and Securities Purchase Agreement, to these Consolidated Financial Statements.
Pursuant to the Sellers Note, during the period commencing on December 21, 2016 (the “Issue Date”) and continuing until the fifteen-month anniversary of the
Issue Date (the “Initial Period”), interest accrued on only the principal amount of the Sellers Note in excess of $2.7 million at an interest rate equal to ten percent
(10%) per annum. After the Initial Period, interest would have accrued on the entire unpaid principal amount of the Sellers Note from time to time outstanding, at
an interest rate equal to ten percent (10%) per annum. Given that the Sellers Note was satisfied in full in January 2018, the Company paid interest semi-annually
in arrears solely during the Initial Period. The Sellers Note originally had a five-year term. The Company had the right to prepay the Sellers Note in whole or in
part without penalty or premium.
F-28
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Sellers Note was valued based on the present value of expected cash flows. The fair value of the Sellers Note was determined to be approximately
$6,327,200 based on the present value of expected future cash flows, using a risk-adjusted discount rate of 7.5%. The Sellers Note is included in loans payable,
less current portion on the accompanying Consolidated Balance Sheet as of June 30, 2017. As of January 16, 2018, the date the note was satisfied in full, the fair
value adjustment liability was approximately $467,000. Upon satisfaction of the note, this amount was reduced to zero and the resulting gain in extinguishment of
debt is in the accompanying Consolidated Statements of Comprehensive Income in the line item entitled “Interest expense, net.”
There were no payment defaults or other events of default prior to the Sellers Note being paid in full on January 16, 2018. If a pay ment default, or any other
“event of default,” such as a bankruptcy event or a change of control of the Company had occurred, the entire unpaid and outstanding principal balance of the
Sellers Note, together with all accrued and unpaid interest and any and all other amounts payable under the Sellers Note, would have been immediately be due
and payable.
Future maturities of loans payable are as follows:
Year ending June 30,
2019
2020
2021
2022
2023
Total payments
Less current portion
Non-current portion
Avidbank
Note
Unamortized
Debt Costs
Total
$
$
1,458,800
1,458,800
1,458,800
1,458,800
850,967
6,686,167
$
$
(22,924)
(22,924)
(22,924)
(22,924)
(15,875)
(107,571)
$
$
$
1,435,876
1,435,876
1,435,876
1,435,876
835,092
6,578,596
(1,458,800)
5,119,796
19. Note Satisfaction and Securities Purchase Agreement
Note Satisfaction and Securities Purchase Agreement
On January 16, 2018 (the “Satisfaction Date”), the Company entered into a Note Satisfaction and Securities Purchase Agreement (the “Note Satisfaction
Agreement”) with the Sellers with respect to the Sellers Note. At the closing of the Acquisition of ISP, as partial consideration for the shares of ISP, the Company
issued the Sellers Note in the original principal amount of $6,000,000, which principal payment amount was subsequently reduced to $5.7 million, after applying
the approximately $293,000 working capital adjustment, as discussed in Note 3, Acquisition of ISP Optics Corporation, to these Consolidated Financial
Statements.
Pursuant to the Note Satisfaction Agreement, the Company and the Sellers agreed to satisfy the Sellers Note in full by (i) converting 39.5% of the outstanding
principal amount of the Sellers Note into shares of the Company’s Class A common stock, and (ii) paying the remaining 60.5% of the outstanding principal
amount of the Sellers Note, plus all accrued but unpaid interest, in cash to the Sellers. As of the Satisfaction Date, the outstanding principal amount of the Sellers
Note was $5,707,183, and there was $20,883 in accrued but unpaid interest thereon (collectively, the “Note Satisfaction Amount”). Accordingly, the Company
paid approximately $3,453,582 plus all accrued but unpaid interest on the Sellers Note, in cash (the “Cash Payment”) and issued 967,208 shares of Class A
common stock (the “Shares”), which represents the balance of the Note Satisfaction Amount divided by the Conversion Price. The “Conversion Price” equaled
$2.33, representing the average closing bid price of the Class A common stock, as reported by Bloomberg for the five (5) trading days preceding the Satisfaction
Date. The Cash Payment was paid using approximately $600,000 of cash on hand and approximately $2.9 million in proceeds from the Term II Loan from
Avidbank. As of the Satisfaction Date, the Sellers Note was deemed satisfied in full and terminated.
F-29
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The Shares issued to the Sellers were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”), pursuant to Section 4(a)
(2) of the Act (in that the Shares were issued by us in a transaction not involving any public offering), and pursuant to Rule 506 of Regulation D as promulgated by
the SEC under the Act.
Registration Rights Agreement
In connection with the Note Satisfaction Agreement, the Company and the Sellers also entered into a Registration Rights Agreement dated January 16, 2018,
pursuant to which the Company agreed to file with the Securities and Exchange Commission by February 15, 2018, and to cause to be declared effective, a
registration statement to register the resale of the Shares issued to partially pay the Note Satisfaction Amount. The Registration Statement on Form S-3 (File No.
333-223028) was declared effective by the SEC on March 8, 2018.
20. Public Offering of Class A Common Stock
On December 16, 2016, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC (“Roth Capital”),
as representative of the several underwriters identified therein (collectively, the “Underwriters”), relating to the firm commitment offering of 7,000,000 shares of the
Company’s Class A common stock, at a public offering price of $1.21 per share. Under the terms of the Underwriting Agreement, the Company also granted the
Underwriters an option, exercisable for 45 days, to purchase up to an additional 1,000,000 shares of Class A common stock to cover any over-allotments.
On December 21, 2016, the Company completed its underwritten public offering of 8,000,000 shares of Class A common stock, which included the full exercise
by the Underwriters of their option to purchase 1,000,000 shares of Class A common stock to cover over-allotments, at a public offering price of $1.21 per share.
The Company realized net proceeds of approximately $8.7 million, after deducting underwriting discounts and commissions and estimated offering expenses. The
net proceeds from the offering provided funds for a portion of the purchase price of the Acquisition of ISP, as well as provided funds for the payment of transaction
expenses and other costs incurred in connection with the Acquisition.
The offering of the shares of Class A common stock was made pursuant to a Registration Statement on Form S-1, as amended (Registration No. 333-213860),
which the SEC declared effective on December 15, 2016, and the final prospectus dated December 16, 2016.
End of Consolidated Financial Statements
F-30
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 13, 2018
By: /s/ J. James Gaynor
LIGHTPATH TECHNOLOGIES, INC.
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/ DONALD O. RETREAGE, Jr.
Donald O. Retreage, Jr.
Chief Financial Officer
(Principal Financial Officer)
/s/ SOHAIL KHAN
Sohail Khan
Director
/s/ LOUIS LEEBURG
Louis Leeburg
Director
September 13, 2018
September 13, 2018
September 13, 2018
/s/ J. JAMES GAYNOR
September 13, 2018
J. James Gaynor
President & Chief Executive Officer
(Principal Executive Officer)
/s/ ROBERT RIPP
Robert Ripp
Director (Chairman of the Board)
September 13, 2018
/s/ DR. STEVEN R. J. BRUECK
September 13, 2018
Dr. Steven R. J. Brueck
Director
/s/ M. SCOTT FARIS
M. Scott Faris
Director
/s/ CRAIG DUNHAM
Craig Dunham
Director
September 13, 2018
September 13, 2018
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
FOURTH AMENDMENT
TO
SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
Exhibit 10.21
This Fourth Amendment to Second Amended and Restated Loan and Security Agreement is entered into as of September 7, 2018 (the “Amendment”), by
and between AVIDBANK (“Bank”), LIGHTPATH TECHNOLOGIES, INC. (“Parent”) and ISP OPTICS CORPORATION (“ISP”). Parent and ISP are each also
referred to as a “Borrower” and together as the “Borrowers”.
RECITALS
Borrowers and Bank are parties to that certain Second Amended and Restated Loan and Security Agreement dated as of December 21, 2016 and as
amended from time to time, including pursuant to that certain First Amendment to Second Amended and Restated Loan and Security Agreement dated as of
December 20, 2017, that certain Second Amendment to Second Amended and Restated Loan and Security Agreement dated as of January 16, 2018 and that
certain Third Amendment to Second Amended and Restated Loan and Security Agreement dated as of May 11, 2018 (collectively, the “Agreement”). The parties
desire to amend the Agreement in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. Borrowers acknowledge that there is an existing and uncured Event of Default arising from Borrowers’ failure to comply with Section 6.9(a) of the
Agreement with respect to the Fixed Charge Coverage Ratio measured on June 30, 2018 (the “Covenant Default”). Subject to the conditions contained herein
and performance by Borrowers of all of the terms of the Agreement after the date hereof, Bank waives the Covenant Default. Except as otherwise provided in the
foregoing sentence, Bank does not waive Borrowers’ obligations under such section after the date hereof, and Bank does not waive any other failure by Borrowers
to perform their Obligations under the Loan Documents.
2. The following is added as a new Section 4.5 to the end of Section 4 of the Agreement:
4.5 Pledge of Cash Collateral. For so long as the Term II Loan is outstanding, One Million Dollars ($1,000,000) of Borrowers’ cash
maintained at Bank (the “Cash Collateral”) is hereby pledged to Bank as specific Collateral to secure Borrowers’ Obligations. Borrowers
authorize Bank to hold Cash Collateral in pledge and to decline to honor any withdrawals thereon or any request by Borrowers or any
other Person to pay or otherwise transfer any part of the Cash Collateral. On the date of Bank’s receipt of evidence satisfactory to
Bank that the Fixed Charge Coverage Ratio has been least 1.15 : 1.00 for two consecutive calendar quarters, and as long as no Event
of Default has occurred that is continuing on such date, the Cash Collateral shall be released from the foregoing restrictions and
pledge.
3. Section 6.9(a) of the Agreement is amended and restated in its entirety to read as follows:
(a) Fixed Charge Coverage Ratio. Borrowers shall maintain a Fixed Charge Coverage Ratio of at least 1.15 to 1.00, measured at the end
of each calendar quarter beginning with the quarter ending on September 30, 2018 on a rolling twelve (12) month basis. For so long as
the Cash Collateral is pledged to Bank pursuant to Section 4.5, solely for purposes of calculating Borrowers’ compliance with the
foregoing sentence, the amount used to calculate clause (i) of subsection (b) of the definition of the Fixed Charge Coverage Ratio (with
respect to the scheduled principal and interest payments to be made to Bank with respect to the Term II Loan) shall be calculated as if
the outstanding principal amount of the Term II Loan is $1,000,000 less than the actual outstanding principal amount of the Term II
Loan.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
4. Unless otherwise defined, all initially capitalized terms in this Amendment shall be as defined in the Agreement. The Agreement, as amended
hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. Except as expressly
set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy
of Bank under the Agreement, as in effect prior to the date hereof. Each Borrower ratifies and reaffirms the continuing effectiveness of all agreements entered into
in connection with the Agreement.
5. Borrowers represent and warrant that the representations and warranties contained in the Agreement are true and correct as of the date of this
Amendment, and that no Event of Default has occurred and is continuing.
6. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall
constitute one instrument. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature
shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such
facsimile or “.pdf” signature page were an original hereof. Notwithstanding the foregoing, Borrowers shall deliver all original signed documents no later than ten
(10) Business Days following the date of execution.
7. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following:
(a) this Amendment, duly executed by Borrowers;
(b) payment of a waiver fee in the amount of $7,500 plus all Bank Expenses incurred through the date of this Amendment; and
(c) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.
[SIGNATURE PAGE FOLLOWS]
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written.
BORROWERS:
LIGHTPATH TECHNOLOGIES, INC.
By: /s/ J. James Gaynor
Name: J. James Gaynor
Title: President and Chief Executive Officer
ISP OPTICS CORPORATION
By: /s/ J. James Gaynor
Name: J. James Gaynor
Title: President and Chief Executive Officer
BANK:
AVIDBANK
By: /s/ Lawrence F. LaCroix
Name: Lawrence F. LaCroix
Title: Executive Vice President
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 21.1
Subsidiaries
GelTech Inc.
Delaware
LightPath Optical Instrumentation (Shanghai) Co., Ltd
People’s Republic of China
LightPath Optical Instrumentation (Zhenjiang) Co., Ltd
People’s Republic of China
ISP Optics Corporation
ISP Optics Latvia, SIA
New York
Latvia
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 23.1
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
LightPath Technologies, Inc.
Orlando, Florida
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, 333-201872 and 333-221665), 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, 333-182240 and 333-223028) and Form S-1 (No. 333-213860) of LightPath
Technologies, Inc., of our report dated September 13, 2018, relating to the consolidated financial statements, which appear in this Annual Report on Form 10-K.
MOORE STEPHENS LOVELACE, P.A.
Orlando, Florida
September 13, 2018
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
LightPath Technologies, Inc.
Orlando, Florida
Exhibit 23.2
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, 333-201872 and 333-221665), 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, 333-182240 and 333-223028) and Form S-1 (No. 333-213860) of LightPath
Technologies, Inc. of our report dated September 14, 2017, relating to the consolidated financial statements, which appear in this Annual Report on Form 10-K.
BDO USA, LLP
Certified Public Accountants
September 13, 2018
R-221 (6/14)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 24
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the undersigned constitutes and appoints J. James Gaynor and Donald O. Retreage, Jr., 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, 2018, 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 31 ST day of August 2018 by the following persons.
/s/ Robert Ripp
Robert Ripp
/s/ Sohail Khan
Sohail Khan
/s/ Steven Brueck
Steven Brueck
/s/ M. Scott Faris
M. Scott Faris
/s/ J. James Gaynor
J. James Gaynor
/s/ Craig Dunham
Craig Dunham
/s/ Louis Leeburg
Louis Leeburg
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
Exhibit 31.1
I, J. James Gaynor, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended June 30, 2018 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.
Date: September 13, 2018
/s/ J. James Gaynor
J. James Gaynor
President and Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, Donald O. Retreage, Jr., certify that:
1. I have reviewed this annual report on Form 10-K for the year ended June 30, 2018 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.
Date: September 13, 2018
/s/ Donald O. Retreage, Jr.
Donald O. Retreage, Jr.
Chief Financial Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Certification of Chief Executive Officer
Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
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 annual period ended June 30, 2018 (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.
Exhibit 32.1
Dated: September 13, 2018
/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.
Certification of Chief Financial Officer
Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
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 annual period ended June 30, 2018 (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.
Exhibit 32.2
Dated: September 13, 2018
/s/ Donald O. Retreage, Jr.
Donald O. Retreage, Jr.
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.