Annual Report
2014
About the pictures on the front cover (left to right):
Modular LED line Light, Multi-Wavelength, Highly Uniform, Long Working Distance
The modular LED line light produces a highly uniform line utilizing dual-axis collimation. The light can be
configured to maintain a specific line thickness across a wide working distance range. Highly uniform line
lights have applications within the machine vision industry for various types of inspection such as rail,
container, and optical sorting applications.
UV COBRA™ Cure Line Light
UV COBRA™ Cure is a compact LED line light illuminator with a modular form factor. It produces a uniform
line and offers field adjustable optics to allow users to select the optimum lens position for their application in
the field. The light has applications in machine vision systems, adhesive curing assembly lines and industrial
scale printing applications.
Green 3D PRO Laser Modules
The 3D PRO™ Laser Green series includes the 3D PRO Green, the Adjustable Focus 3D PRO Laser Green and
the 3D PRO Laser Mini Green. These direct emission green structured light lasers deliver excellent uniformity
making them an ideal solution for a wide range of applications such as 3D Printing and 3D imaging.
Compact LED Light Sources for Endoscopic applications
ProPhotonix has developed LED light sources for endoscopic applications in several different form factors. The
pictured light engine placement at the tip of the endoscope is unique. ProPhotonix utilized innovative
technologies to overcome thermal issues while staying within size and performance constraints of the product.
A 3D ceramic substrate containing laser patterning of interconnects forms the platform on which the LEDs are
precisely placed and bonded allowing for a precise placement into the scope.
Solutions for LEDs
ProPhotonix Limited (IRE)
3020 Euro Business Park
Little Island
Cork, Ireland
+353-21-5001300
Solutions for Lasers
ProPhotonix Limited
Sparrow Lane,
Hatfield Broad Oak
Hertfordshire, CM22 7BA UK
+44-1279-717170
Corporate
ProPhotonix Limited
32 Hampshire Road
Salem, NH 03079
+1-603-893-8778
Page 2
Business Activities:
ProPhotonix consists of two business units: an LED systems manufacturing business based in Ireland (Cork),
and a laser modules production and laser diode distribution business located in the United Kingdom (Hatfield
Broad Oak). Corporate headquarters and the North American sales activities are based in Salem, New
Hampshire, USA. The fundamental strategy of the Company is growth in revenue through its existing
customers, new customer activity, and new product and market expansion.
ProPhotonix Limited sells its products principally into three markets: industrial, (primarily machine vision
illumination), medical, and homeland security and defense. The Company foresees growth opportunities in all
three markets it serves which are briefly described below:
Industrial (Machine Vision)
Within the industrial market, machine vision is the term used to describe computerized analysis for controlling
manufacturing processes, for example automated inspection. In terms of quality and speed, lighting is often a
critical component in machine vision and the Company manufactures both LED systems and lasers designed
specifically for this market. The recently enhanced 3D Pro Laser line generators and improved LED line light
family specifically address this market.
Medical
The Company has experienced successes in the medical (including dental) market and has gained a foothold in
the market, supplying a variety of applications, with current customers including the world leader in stationary
imaging equipment, a portable x-ray equipment manufacturer, a dental imaging manufacturer and also a pioneer
in the manufacturing of devices offering eye tracking capability utilizing ProPhotonix’s custom infrared LED
arrays. The Company intends to broaden its product marketing effort in the medical field since it offers
significant long-term revenue growth opportunities.
Homeland Security & Defense
LED systems, laser modules and laser diodes are used in a wide variety of applications in the security and
defense fields. The Company currently supplies several defense sighting manufacturers in the US and Europe,
as well as leading manufacturers of Auto Number Plate Recognition systems. This market offers significant
growth opportunities for ProPhotonix over the next several years and the Company is currently marketing its
laser and LED capabilities to additional security and Optical Character Recognition systems companies in this
market space.
Page 3
To the Shareholders of ProPhotonix Limited:
2014 Annual Report to Shareholders
2014 has been a landmark year in a number of respects – our first full year of positive operating income in
nearly two decades, our first full year of positive EBITDA in fourteen years, and we have achieved three
consecutive half-yearly periods of positive EBITDA. In addition to a continuation of improving financial
results, Team ProPhotonix has been diligently pursuing new customer engagement and new product and
market initiatives which help set the stage for 2015 and beyond.
Financial Progress:
Our financial performance has dramatically improved during 2014. Revenue grew a modest 5% while
operating income improved by $1.3 million ($0.7 million adjusted for 2013 one-time charges) and EBITDA
improved similarly by $1.3 million ($0.7 million adjusted for the 2013 one-time charges of $0.6 million).
The growth in revenue, improvement in the gross margin rate, and continuing costs reductions, all factors
into the continued financial improvement of ProPhotonix. I am pleased with the revenue growth in 2014, but
more importantly, the improvement in operating income and EBITDA. The balance sheet also continued to
improve in 2014. Term debt was reduced by $293,000 in accordance with the various loan facilities and total
available credit from the Company’s various loan facilities was $1.9 million as of December 31, 2014.
During 2014, order bookings declined 9% to $16.1 million from 2013 and the book-to-bill ratio ended at 0.98
(2013: 1.13). Our order backlog at December 31, 2014 was down 20% from 2013 to $5.6 million. Several
factors contributed to the decline in bookings and backlog including: customers’ reluctance to place large
blanket orders opting instead for smaller short-cycle orders, business softness or delays in several industrial
customers, the decline in foreign currency translation rates from year-end 2013 to year-end 2014 and, as
compared to 2013, several large non-recurring engineering (NRE) orders received in 2013 and completed in
2014.
Since May 2014, the exchange rates of the Euro and British Pound (GBP) to the dollar (USD) have been
weakening. The Euro to USD and GBP to USD exchange rates, as of March 18, 2015, have eroded 20% and
10% respectively from the 2014 average and 13% and 5% respectively since the beginning of the year. The
effect of a strengthening dollar may negatively impact 2015 revenue growth on a comparative basis when
Euro and GBP denominated revenue is translated into USD. EBITDA will likely be less impacted due to the
translation of costs at lower exchange rates, our natural operating hedges in the locations we operate in and
the supply chain we utilize. Recent booking trends, the macroeconomic environment, and foreign exchange
rate impacts cause us to be cautious for the first half of 2015, but we remain very positive about our growing
business pipeline and confident in our ability to achieve continued positive momentum toward our
profitability objectives.
Customer development initiatives:
New customer activity is a cornerstone for our growth and I am pleased that we are continuously partnering
with new customers. New customer orders received, in 2014, accounted for $0.8 million of the total growth
across several market sectors, including: Glass Inspection, Medical Devices, Metrology, Entertainment
Industry, Aeronautics, and Industrial Automation and Inspection. In addition, several large non-recurring
engineering (NRE) orders received in 2013 were completed in 2014 for which we now await production
orders from these customers based on their go-forward schedules.
We continue to add new customer opportunities through customer sponsored development. Such
development has resulted in the release of two new products in 2014. I expect the custom/OEM versions of
these products will deploy commercially beginning in the second half 2015 with the announced new products
lines gaining commercial acceptance late in 2015.
Page 4
Product development and market development:
During the year, ProPhotonix completed the development of a multi-channel compact fiber-coupled high
power UV laser light source (32 channels). This new capability is now being marketed to the computer-to-
plate (Ctp) and maskless lithography industries. Our technology roadmap in this area includes: single-mode
fiber coupled lasers, multi-spectral beam combiners, multi-channel beam combiners, and expansion of the
multi-mode fiber laser product. Target markets for future systems include sensing, such as optical sorting,
medical, and microscopy applications. Product development initiatives in 2014 also included the release of
one new laser module and three new LED products. All in, the ProPhotonix development team announced
four new products during 2014. The New Year will be even more interesting with the release of six new
products early in the first quarter alone; obviously the team has been very busy developing new products for
our addressable markets during 2014 which should positively impact 2015 and beyond.
We also continue to pursue our existing market activities. In 2014, we added eight new diodes to the
distribution product line-up. We also improved our distribution network coverage with the addition of Alava
Ingenieros S.A. group, representing us in Spain and Portugal.
Last year, I mentioned the UV LED market as a high potential target market. One of the new products
released during 2014 is the COBRA Cure, one of the several ProPhotonix UV LED products. We are
currently working with several potential customers to provide robust UV LED illuminators in markets
including: 3D printing, pinning in the printing market, and UV curing. We are very excited about the LED
UV market and believe the additional markets for these products include: disinfection, DNA sequencing,
protein analysis, and drug discovery.
Growth, Prosperity, the Future
I am happy with our financial performance, but not nearly satisfied. Whilst the macroeconomic and
notably foreign exchange issues are beyond our control, we are confident that the work we have
done on new product and customer development will bear fruit. We remain committed to revenue
growth through our existing customer base, but also by securing new customers. We must build on the 2014
success, furthering new customer revenue, while growing within our existing customer base by helping all
customers prosper with ever evolving products for their applications. ProPhotonix’ near-term perspective has
not changed, seeking sustained positive: EBITDA, cash flow, and net income. We will accomplish these
goals through a relentless focus on cost management and most importantly through revenue growth.
ProPhotonix’s growth in the medium-term will be accomplished with not only new customer wins in our
currently served markets, but also through expansion into new markets and with new products. In addition to
the few important areas where we are focused, we will continuously evaluate additional high growth
opportunities.
In conclusion, I remain deeply grateful for the continued support of you my co-workers, and our customers,
suppliers, service providers, and investors!
Respectfully submitted,
Tim Losik
President and Chief Executive Officer
Page 5
Director Remuneration Report
For the year ended December 31, 2014
Executive Director Compensation - Executive Director Compensation is reviewed by the
Independent Non-Executive Directors.
Executive Director
($)
Bonus ($)
Salary
Pension
($)
Other (1)
($)
Total Cash
Compensation
($)
Options
($)
Total ($)
Total All
Compensation
2014 ($)
Total All
Compensation
2013 ($)
Tim Losik
300,750
-
5,750
-
306,500
29,271
29,271
335,771
270,957
Total Executive
Compensation
Non-Executive Director
300,750
-
5,750
-
306,500
29,271
29,271
335,771
270,957
Ray Oglethorpe
Timothy Steel
-
-
-
-
-
-
25,000
25,000
3,507
3,507
28,507
28,731
25,000
25,000
3,507
3,507
28,507
28,731
Vincent Thompson
-
-
-
25,000
25,000
3,507
3,507
28,507
28,731
Mark Weidman
-
-
-
25,000
25,000
3,507
3,507
28,507
16,231
Total Non-Executive
Compensation
Director Share Options:
-
-
-
100,000
100,000
14,028
14,028
114,028
102,424
Director
Options @
12/31/13
Options
Granted
Options
Forfeited
Options @
12/31/14
Tim Losik
1,400,000
3,500,000
-
4,900,000
Ray Oglethorpe
1,684,006
150,000
(25,000)
1,809,006
Timothy Steel
1,145,433
150,000
-
1,295,433
Vincent Thompson
1,145,433
150,000
-
1,295,433
Mark Weidman
700,000
150,000
-
850,000
Total All Directors
6,074,872
4,100,000
(25,000)
10,149,872
(1) Other compensation for non-executive directors represents cash payments expensed in the current year.
Page 6
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Page 7
ProPhotonix Limited
Consolidated Financial Statements
Years Ended December 31, 2014 and 2013
Page 8
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item
Page
Independent Auditor’s Report .......................................................................................................................
10
Consolidated Balance Sheets as of December 31, 2014 and 2013 ...............................................................
12
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31,
2014 and 2013 ...........................................................................................................................................
13
Consolidated Statements of Stockholders’ (Deficit) for the Years Ended December 31, 2014 and 2013 ...
14
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2013 .....................
15
Notes to Consolidated Financial Statements………………………………………………………………. 16
Page 9
Independent Auditors’ Report
The Board of Directors
ProPhotonix Limited
32 Hampshire Road
Salem
New Hampshire
United States of America
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of ProPhotonix Limited and its
subsidiaries, which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related
consolidated statements of operations and comprehensive loss, stockholders’ (deficit), and cash flows for the
years then ended, and the related notes to the consolidated financial statements.
This report is made solely to the company’s stockholders, as a body, in accordance with the terms of our
engagement. Our audit work has been undertaken so that we might state to the company’s stockholders those
matters we have been engaged to state to them in this report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than the company and the
company’s stockholders, as a body, for our audit work, for this report, or for the opinions we have formed.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and
maintenance of internal control relevant to the preparation and fair presentation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Page 10
Opinion
In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the
financial position of ProPhotonix Limited and its subsidiaries as of December 31, 2014 and 2013, and the
results of their operations and their cash flows for the years then ended in accordance with U.S. generally
accepted accounting principles.
Cambridge
United Kingdom
(cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:21)(cid:23)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)
Page 11
FINANCIAL STATEMENTS
PROPHOTONIX LIMITED
CONSOLIDATED BALANCE SHEETS
($ in thousands except share and per share data)
December 31
2014
2013
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowances of $20 in 2014 and $19 in 2013
Inventories
Prepaid expenses and other current assets
Total current assets
Net property, plant and equipment
Goodwill
Acquired intangible assets, net
Other long-term assets
Total assets
Liabilities and Stockholders’(Deficit)
Current liabilities:
Revolving credit facility
Current portion of long-term debt
Capital lease obligations
Accounts payable
Accrued expenses
Total current liabilities
Long-term debt, net of current portion
Other long-term liabilities
Total liabilities
Stockholders’ deficit:
Common stock, par value $0.001; shares authorized 250,000,000 at December 31, 2014 and
150,000,000 at December 31, 2013; 83,665,402 shares issued and outstanding at December 31,
2014 and at December 31, 2013
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income / (loss)
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
$
$
331
2,606
1,686
180
4,803
184
429
-
206
402
2,559
2,003
220
5,184
303
486
102
354
$ 5,622
$ 6,429
$
$
1,140
770
-
1,463
965
4,338
1,641
178
6,157
1,127
265
10
1,542
1,296
4,240
2,445
178
6,863
84
111,583
(113,014)
812
84
111,302
(111,674)
(146)
(535)
(434)
$
5,622
$
6,429
See the notes to consolidated financial statements.
Page 12
PROPHOTONIX LIMITED
Consolidated Statements of Operations and Comprehensive Loss
($ in thousands except share and per share data)
Revenue
Cost of Revenue
Gross Profit
Research & Development Expenses
Selling, General & Administrative Expenses
Amortization of Intangible Assets
Operating Income (Loss)
Other Income / (Expense), net
Foreign Currency Translation (losses) / gains
Warrant & Debt Acquisition Expense
Interest Expense
Loss Before Taxes
Tax Benefit
Net Loss
Other Comprehensive Income / (Loss):
Foreign currency translation
Total Comprehensive Loss
Years Ended
December 31,
2014
2013
$ 16,431
(10,006)
$ 15,599
(9,628)
6,425
(879)
(5,350)
(100)
96
93
(1,031)
(198)
(300)
(1,340)
-
5,971
(941)
(6,091)
(120)
(1,181)
117
178
(103)
(237)
(1,226)
73
$ ( 1,340)
$ (1,153)
958
(368)
$ ( 382)
$ ( 1,521)
Loss Per Share:
Basic and diluted:
Net loss per share
Basic and diluted weighted average shares outstanding
($0.02)
83,665,402
($0.01)
80,496,977
See the notes to consolidated financial statements.
Page 13
PROPHOTONIX LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands)
Common Stock
Shares
Par
$0.001
Additional
Paid in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity (Deficit)
Balance December 31, 2012
Share based compensation, net
of forfeitures ................
Issuance of common stock to
settle liabilities ............
Issuance of warrants for
financings ....................
Translation adjustment ......
Net loss ..............................
76,059
$
76
$110,893
$
(110,521)
$
222
$
-
7,606
-
-
8
-
169
185
55
-
-
-
-
-
(1,153)
-
(368)
670
169
193
55
(368)
(1,153)
Balance December 31, 2013
83,665
$
84
$111,302
$
(111,674)
$
(146)
$
(434)
Share based compensation, net
of forfeitures ................
Translation adjustment ......
Net loss ..............................
-
-
-
-
280
-
-
(1,340)
-
958
-
280
958
(1,340)
Balance December 31, 2014
83,665
$
84
$111,583
$
(113,014)
$
812
$
(535)
See the notes to consolidated financial statements.
Values may not add due to rounding
Page 14
PROPHOTONIX LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31
2014
2013
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
$ (1,340) $ (1,153)
Stock-based compensation expense
Depreciation and amortization
Foreign exchange loss / (gain)
Amortization of debt discount and financing costs
Loss / (gain) on disposal of assets
Provision for inventories
Provision for bad debts
Other changes in assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued expenses
Other assets and liabilities
Net cash provided by (used in) operating activities
Investing
Purchase of property, plant and equipment
Net cash used in investing activities
Financing
Borrowings of revolving credit facilities, net
Proceeds from issuance of debt
Principal repayment of long-term debt
Debt issuance costs
Net cash provided by financing activities
Effect of exchange rate on cash
Net change in cash and equivalents
Cash and equivalents at beginning of period
Cash and equivalents at end of period
Supplemental cash flow information:
Cash paid for interest
Common stock issued in connection with financing
Warrants issued in connection with financing
280
258
1,066
186
4
55
5
169
332
(408)
96
(7)
120
(12)
(395)
38
23
100
(248)
(2)
(222)
(8)
20
(518)
171
(9)
30
(64)
(64)
144
175
(292)
-
27
(64)
(71)
402
$
$
$
$
331
303
-
-
(1,429)
(17)
(17)
438
800
(339)
(398)
501
69
(876)
1,278
$
$
$
$
402
263
193
55
See the notes to consolidated financial statements.
Page 15
PROPHOTONIX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
ProPhotonix Limited (also referred to in this document as “ProPhotonix”, “we”, or the “Company”)
operates in two segments: as an independent designer and manufacturer of LED systems through ProPhotonix
(IRL) Limited; and as a manufacturer of laser modules and a distributor of laser diodes through ProPhotonix
Limited, a U.K. subsidiary. The operating units are ProPhotonix (IRL) Limited based in Cork, Ireland,
ProPhotonix Limited, a U.K. subsidiary based near Stansted, United Kingdom and ProPhotonix Limited, based
in Salem, New Hampshire, U.S.A. The Company’s products serve a wide range of applications and industries
including machine vision and industrial inspection, biomedical, defense and security, and other commercial
applications.
ProPhotonix Limited was incorporated on March 27, 1951 in the Commonwealth of Massachusetts and
is currently incorporated in the state of Delaware. The common stock of the Company now trades on the OTC
Market in the U.S. under the trading symbol “STKR” and is also traded on the London Stock Exchange, plc
(AIM listing), under the trading symbols “PPIR” and “PPIX”.
The accompanying consolidated financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As
shown in the consolidated financial statements, during the years ended December 31, 2014 and 2013, the
Company recorded net losses of $1,340,000 and $1,153,000, respectively. Net cash flow from operating
activities for the same time periods were $30,000 and $(1,429,000), respectively. The consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary should the Company be unable
to continue as a going concern. The Company believes that it has adequate available working capital to
continue to trade for at least the next twelve months from the issuance of these financial statements.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are prepared in conformity with Generally Accepted
Accounting Principles (“U.S. GAAP”) and reflect the application of the Company’s most significant accounting
policies as described in this note and elsewhere in the accompanying consolidated financial statements and
notes.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company and its wholly
owned subsidiaries, ProPhotonix (IRL) Limited, StockerYale (UK) Ltd., which owns 100% of ProPhotonix
Limited, a U.K. subsidiary, and ProPhotonix Holdings, Inc., which holds all of the outstanding shares of
StockerYale Canada. All intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers cash equivalents to consist of highly liquid investments with original maturities of
three months or less when purchased.
Page 16
ACCOUNTS RECEIVABLE
The Company reviews the financial condition of new customers prior to granting credit. After completing
the credit review, the Company establishes a credit line for each customer. Periodically, the Company reviews
the credit line for major customers and adjusts the credit limit based upon an updated financial condition of the
customer, historical sales and payment information and expected future sales. The Company has a large number
of customers; therefore, material credit risk is limited.
The Company periodically reviews the collectability of its accounts receivable. Provisions are established
for accounts that are potentially uncollectible. The Company also has accounts receivables insurance at
ProPhotonix Limited, a U.K. subsidiary, which also covers most of the larger customers at the ProPhotonix
(IRL) Limited subsidiary, and allows the Company to submit a claim on overdue receivables in excess of 60
days past invoice due date. Determining adequate reserves for accounts receivable requires management’s
judgment. Conditions impacting the collectability of the Company’s receivables could change causing actual
write-offs to be materially different than the reserved balances.
Changes in the allowance for doubtful accounts were as follows:
Years Ended December 31
Balance at beginning of period ..................................................................
Charges (recoveries) to costs and expenses ..............................................
Account write-offs and other deductions ..................................................
Balance at end of period ............................................................................
2014
2013
In thousands
$
19 $
3
(2)
31
(10)
(2)
$
20 $
19
INVENTORY
The Company values inventories at the lower of cost or market using the first in, first-out (“FIFO”)
method. The Company periodically reviews the quantities of inventory on hand and compares these amounts to
the expected usage for each particular product or product line. The Company records as a charge to cost of sales
any amounts required to reduce the carrying value amount of the inventory to market. Actual results could be
different from management’s estimates and assumptions.
INTANGIBLE ASSETS
The Company’s intangible assets consist of goodwill, trademarks, acquired patents and patented
technologies, distributor and customer relationships and related contracts, technology design and programs,
non-compete agreements and other intangible assets which, except for goodwill, are being amortized over their
useful lives. Goodwill is tested for impairment on an annual basis, and between annual tests when indicators of
impairment are present, and written down when and if impaired. The Company has elected the end of the
fourth quarter to complete its annual goodwill impairment test.
LONG-LIVED ASSETS
The Company reviews the recoverability of its long-lived assets including property, plant and equipment
and amortizing intangible assets when events or changes in circumstances occur that indicate that the carrying
value of the assets may not be recoverable. This review is based on the Company’s ability to recover the
carrying value of the assets from expected undiscounted future cash flows. If impairment is indicated, the
Page 17
Company measures the loss based on the difference between the carrying value and fair value of the asset using
various valuation techniques including discounted cash flows. If the asset is determined not to be recoverable,,
the amount of the loss will be recorded in the consolidated statements of operations. It is possible that future
events or circumstances could cause these estimates to change.
LOSS PER SHARE
The Company calculates basic and diluted net loss per common share by dividing the net loss applicable to
common stockholders by the weighted average number of common shares outstanding.
As of December 31, 2014, 22,365,040 shares underlying options and 8,577,567 shares underlying warrants
were excluded from the calculation of diluted shares, as their effects were anti-dilutive.
As of December 31, 2013, 12,615,690 shares underlying options and 8,582,567 shares underlying warrants
were excluded from the calculation of diluted shares, as their effects were anti-dilutive.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment and when persuasive
evidence of an arrangement exists, performance of our obligation is complete, the price to the buyer is fixed or
determinable, and collectability is reasonably assured. Custom products are designed and supplied to original
equipment manufacturers and produced in accordance with a customer-approved design. Custom product
revenue is recognized when the criteria for acceptance has been met. Title to the product generally passes upon
shipment, as products are generally shipped free on board at shipping point. In certain limited situations,
distributors may have the right to return products. Such rights of return may preclude the Company from
recognizing revenue until the return period has ended.
Revenues from funded research and development and product development are recognized based on
contractual arrangements, which may be based on cost reimbursement or fixed fee-for-service models. Revenue
from reimbursement contracts is recognized as services are performed. On fixed-price contracts, revenue is
generally recognized on a percentage of completion basis based on proportion of costs incurred to the total
estimated costs of the contract. Over the course of a fixed-price contract, the Company routinely evaluates
whether revenue and profitability should be recognized in the current period. The Company estimates the
proportional performance on their fixed-price contracts on a monthly basis utilizing hours incurred to date as a
percentage of total estimated hours to complete the project. If the Company does not have a sufficient basis to
measure progress toward completion, revenue is recognized upon completion of performance, subject to any
project management assessments as to the status of work performed. When the current estimates of total
contract revenue and contract costs indicate a loss, a provision for the entire loss on the contract is recorded.
For those arrangements that include multiple deliverables, the Company first determines whether each
service or deliverable meets the separation criteria of FASB ASC 605-25, Revenue Recognition—Multiple-
Element Arrangements. In general, a deliverable (or a group of deliverables) meets the separation criteria if the
deliverable has stand-alone value to the customer and, if the arrangement includes a general right of return
related to the delivered item, that delivery or performance of the undelivered item(s) is considered probable and
is substantially in control of the Company. Each deliverable that meets the separation criteria is considered a
separate ‘‘unit of accounting”. After the arrangement consideration has been allocated to each unit of
accounting, the Company applies the appropriate revenue recognition method for each unit of accounting based
on the nature of the arrangement and the services included in each unit of accounting. All deliverables that do
not meet the separation criteria of FASB ASC 605-25 are combined into one unit of accounting, and the most
appropriate revenue recognition method is applied.
Page 18
WARRANTY
The Company provides standard warranties for most products for periods up to one year. The warranty is
limited to the cost of the product and the Company will repair or replace the product as required. The Company
monitors the actual warranty repair costs and trends in relation to the reserve as a percent of sales. The
Company adjusts annually the warranty provision based on actual experience and for any particular known
instances.
Warranty Reserves:
Balance at beginning of period ....................................................
Charges (recoveries) to costs and expenses .................................
Account write-offs and other deductions .....................................
$
$
In thousands
146
36
(36)
Balance at end of period ......................................................
$
146
$
164
(4)
(14)
146
Years Ended December 31,
2014
2013
The Company expenses advertising costs as incurred. Advertising expenses for the years ended 2014 and
2013 were approximately $82,000 and $181,000, respectively.
ADVERTISING EXPENSE
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are valued at the lower of cost or estimated carrying values. The Company
provides for depreciation on a straight-line basis over the assets estimated useful lives or capital lease terms, if
shorter. The following table summarizes the estimated useful lives by asset classification:
Asset Classification
Building and building improvements ................................... Term of the lease or 10-40 years
Computer equipment ............................................................
Machinery and equipment ....................................................
Furniture and fixtures ...........................................................
3 to 5 years
5 to 10 years
3 to 10 years
Estimated Useful Life
Maintenance and repairs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method. Under this method the
Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that
have been recognized in the financial statements or tax returns. Deferred tax assets and liabilities are determined
based on the difference between the financial reporting and tax basis of the assets and liabilities using tax rates
expected to be in place when the differences reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount that is more likely than not to be realized. The Company recognizes
the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The
determination as to whether the tax benefit will more likely than not be realized is based upon the technical
Page 19
merits of the tax position as well as consideration of the available facts and circumstances. With respect to any
uncertain tax positions, the Company records interest and penalties, if any, as a component of income tax
expense. It did not have any interest and penalties related to uncertain tax positions during the years ended
December 31, 2014 or 2013.
STOCK-BASED COMPENSATION
the grant of a variety of awards with various
The Company has stock-based compensation plans for its employees, officers, and directors. The plans
permit
the
Remuneration Committee of the Company’s Board of Directors. Generally the grants vest over terms of one to
four years and are priced at fair market value, or in certain circumstances 110% of the fair market value, of the
common stock on the date of the grant. The options are generally exercisable after the period or periods
specified in the option agreement, but no option may be exercised after 10 years from the date of grant.
terms and prices as determined by
Additionally, in the case of incentive stock options, the exercise price may not be less than 100% of the
fair market value of the Company’s common stock on the date of grant, except in the case of a grant to an
employee who owns or controls more than 10% of the combined voting power of all classes of the Company’s
stock or the stock of any parent or subsidiary. In that case, the exercise price shall not be less than 110% of the
fair market value on the date of grant. In the case of non-qualified stock options, the exercise price shall not be
less than 85% of the fair market value of the Company’s common stock on the date of grant, except in the case
of a grant to an independent director; in which case the exercise price shall be equal to fair market value
determined by reference to market quotations on the date of grant.
During 2014, the Company recognized approximately $280,000 of stock-based compensation related to
options, all of which was charged to general and administrative expense. During 2013, the Company recognized
approximately $169,000 of stock-based compensation related to options, all of which was charged to general
and administrative expense.
Stock Option Awards—The fair value of each option grant is estimated using the Black-Scholes option
pricing model. The fair value is then expensed ratably over the requisite service periods of the awards, which is
generally the vesting period. Use of a valuation model requires management to make certain assumptions with
respect to selected model inputs. Expected volatility is calculated based on the historical volatility of the
Company’s stock at the time of the award. The average expected option term is based on historical trends. The
risk-free interest rate is based on U.S. Treasury zero-coupon issues assumed at the date of grant and generally
no dividends are assumed in the calculation. The compensation expense recognized for all equity-based awards
is net of estimated forfeitures. Forfeitures are estimated based on the historical trends.
During 2014, the Company implemented the 2014 stock incentive plan, which is described in Note 11.
TRANSLATION OF FOREIGN CURRENCIES
The Company’s operating results are affected by fluctuations in the value of the U.S. dollar as compared to
currencies in foreign countries, as a result of our transactions in these foreign markets. For foreign subsidiaries,
whose functional currency is not the U.S. dollar, assets and liabilities are translated using the foreign exchange
rates prevailing at the balance sheet date, and income and expense accounts using average exchange rates for
the period. Cumulative transaction gains or losses from the translation into the Company’s reporting currency
are included as a separate component of stockholder’s deficit (accumulated other comprehensive income) in the
accompanying consolidated balance sheets.
Page 20
Management determined the functional currency of ProPhotonix Limited, a U.K. subsidiary, and
ProPhotonix (IRL) Limited is the euro, while the functional currency of ProPhotonix Limited U.S.A. is the U.S.
dollar.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company’s financial instruments consist mainly of cash and cash equivalents, accounts receivable,
revolving credit facility, accounts payable and long-term debt. The estimated fair value of these financial
instruments, with the exception of fixed rate long-term debt, approximates their carrying value due to the short-
term maturity of certain instruments and the variable interest rates associated with certain instruments, which
have the effect of re-pricing such instruments regularly.
At December 31, 2014, the Company estimated the fair value of long term fixed rate debt to be
approximately $3,300,000 compared to its carrying value of $3,100,000.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist
principally of trade receivables. The risk is limited due to the relatively large number of customers composing
the Company’s customer base and their dispersion across many industries and geographic areas within the
United States, Canada, United Kingdom, Europe and Asia. The Company performs ongoing credit evaluations
of existing customers’ financial condition. The Company believes that its concentrated credit risk is limited to
only a small number of customers. The Company had no customer accounting for 10% or more of consolidated
revenues in either 2014 or 2013. The Company had one customer that accounted for 10% of the outstanding
accounts receivable balance at December 31, 2014 and 2013. The Company maintains its cash and cash
equivalents in bank deposit accounts, which at times may exceed insured limits. At December 31, 2014, the
amount in excess of governmental insurance protection was approximately $0.2 million, measured across all
entities and jurisdictions. At December 31, 2013, the amount in excess of governmental insurance protection
was approximately $0.3 million. The Company believes it is not exposed to any significant credit risk on cash
and cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the
reported amounts of income and expenses during the reporting periods. Actual results in the future could vary
from the amounts derived from management’s estimates and assumptions.
Page 21
(3) RECENT ACCOUNTING PRONOUNCEMENTS
The Company has reviewed recently issued accounting pronouncements to determine the impact that these
pronouncements are expected to have on the financial statements when adopted in future periods.
In August 2014, the FASB updated the Accounting Standards Codification and amended Subtopic 205-
40, Presentation of Financial Statement – Going Concern. This amended guidance requires that in connection
with preparing financial statements for each annual and interim reporting period, an entity’s management
should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt
about the entity’s ability to continue as a going concern within one year after the date that the financial
statements are issued (or within one year after the date that the financial statements are available to be issued
when applicable).
Management’s evaluation should be based on relevant conditions and events that are known and reasonably
knowable at the date that the financial statements are issued (or at the date that the financial statements are
available to be issued when applicable).
Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and
events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its
obligations as they become due within one year after the date that the financial statements are issued (or
available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies.
When management identifies conditions or events that raise substantial doubt about an entity’s ability to
continue as a going concern, management should consider whether its plans that are intended to mitigate those
relevant conditions or events will alleviate the substantial doubt. The mitigating effect of the management’s
plans should be considered only to the extent that (1) it is probable that the plans will be effectively
implemented and, if so (2) it is probable that the plans will mitigate the conditions or events that raise
substantial doubt about the entity’s ability to continue as a going concern.
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the
substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose
information that enables users of the financial statements to understand all of the following:
a. Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a
going concern (before consideration of management’s plans)
b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s
ability to meet its obligations
c. Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going
concern.
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and
substantial doubt is not alleviated after consideration of management’s plans, an entity should include a
statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a
going concern within one year after the date that the financial statements are issued (or available to be issued).
Additionally, the entity should disclose information that enables users of the financial statements to understand
all of the following:
a. Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a
going concern
b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s
ability to meet its obligations
Page 22
c. Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt
about the entity’s ability to continue as a going concern.
The amendments are effective for the annual period ending after December 15, 2016, and for annual periods
and interim periods thereafter. Early application is permitted. The Company will evaluate this reporting
requirement and adopt with the year beginning January 1, 2016. However the adoption of these requirements is
not expected to have a significant impact on the Company’s financial statements.
In June, 2014, the FASB updated the Accounting Standards Codification and amended Topic 718,
Compensation – Stock Compensation. This amended guidance requires that a performance based target that
affects vesting and that could be achieved after the requisite service period be treated as a performance
condition. The reporting entity should apply existing guidance, in Topic 718, as it relates to awards with
performance conditions that affect vesting to account for such awards. As such, the target should not be
reflected in the estimating the grant-date fair value of the award. Compensation cost should be recognized in
the period in which it becomes probable that the performance target will be achieved and should represent the
compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the
performance target becomes probable of being achieved before the end of the requisite service period, the
remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite
service period. The total amount of compensation cost recognized during and after the requisite service period
should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that
ultimately vest. The requisite service period ends when the employee can cease rendering service and still be
eligible to vest in the award if the performance target is achieved. The adoption of this guidance did not have an
impact on our consolidated financial position, results of operation or cash flows.
In May 2014, the FASB amended the Accounting Standards Codification and created a new Topic 606,
Revenue from Contracts with Customers. The new guidance establishes a single comprehensive contract-based
model for entities to use in accounting for revenue arising from contracts with customers. The new model
significantly changes existing GAAP, requires substantial judgment in its application, and will generally require
companies to make more disclosures about revenue. The core principle of the amendment is that an entity
recognizes revenue to depict the transfer of promised 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. In applying
the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance
obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s
performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
The new standard provides for two alternative implementation methods. The first is to apply the new standard
retrospectively to each prior reporting period presented. This method does allow the use of certain practical
expedients. The second method is to apply the new standard retrospectively in the year of initial adoption and
record a cumulative effect adjustment for the impact of adjusting contracts open at the date of adoption. Under
this transition method, we would apply this guidance retrospectively only to contracts that are not completed
contracts at the date of initial application. We would then recognize the cumulative effect of initially applying
the standard as an adjustment to the opening balance of retained earnings. This method also requires us to
disclose comparative information for the year of adoption. We will adopt the FASB’s amended guidance for our
year beginning January 1, 2016; early adoption is not permitted. We are currently evaluating the new guidance
and have not determined the impact this standard may have on our financial statements nor have we decided
upon the method of adoption.
Page 23
(4) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or market when applicable and include
materials, labor and overhead. Inventories are as follows:
Years Ended December 31
Finished goods......................................................................................
Work in-process ...................................................................................
Raw materials .......................................................................................
Net inventories .............................................................................
2014
2013
In thousands
$ 327
226
1,133
$ 1,686
$ 403
218
1,382
$ 2,003
Management performs quarterly reviews of inventory and disposes of items not required by their
manufacturing plan and reduces the carrying cost of inventory to the lower of cost or market.
(5) PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment were as follows:
Years Ended December 31
2014
2013
Buildings and building improvements ...........................................
Computer equipment ......................................................................
Machinery and equipment ..............................................................
Furniture and fixtures .....................................................................
Property, plant and equipment................................................
Less accumulated depreciation .......................................................
Net property, plant and equipment .........................................
$
In thousands
$
276
413
1,668
410
301
437
1,843
523
$ 2,767
(2,583)
$ 3,104
(2,801)
$ 184
$ 303
Depreciation expense from operations was approximately $158,000 and $212,000 in the years ended
December 31, 2014 and 2013, respectively.
(6) GOODWILL
The Company uses a three-step approach to a goodwill impairment test. First, ASU 2011-08 allows
entities with the option to first use an assessment of qualitative factors to determine whether the existence of
events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If a conclusion is reached that reporting unit fair value is not more likely
than not below carrying value, no further impairment testing is necessary. If further testing is necessary, the
second step is to estimate the fair value of its reporting units by using forecasts of discounted cash flows and
compare that value to the carrying value which requires that certain assumptions and estimates be made
regarding industry economic factors and future profitability of reporting units to assess the need for an
impairment charge. The methodology the Company uses to allocate certain corporate expenses is based on each
segment’s use of services and/or direct benefit to its employees. While the Company believes it has made
reasonable estimates and assumptions to calculate the fair value of the reporting segments and implied fair value
of goodwill, the impairment analysis is highly sensitive to actual versus forecast results. Finally, if the
Page 24
estimated value is less than the carrying value, an impairment loss is recognized for any excess of the carrying
amount of the reporting unit’s goodwill over the implied fair value of that goodwill.
In connection with the annual fair value test of goodwill, performed at the end of the fourth quarter 2014,
and at the end of the fourth quarter 2013, the Company concluded that no impairment existed.
The changes in the carrying amount of goodwill for the years ended December 31, 2014 and 2013 were as
follows:
Beginning of the year ..................................................
Effect of exchange rate ...............................................
$ 486
(57)
$ 467
19
End of year ..................................................................
$ 429
$ 486
December 31, 2014
December 31, 2013
( In thousands)
Goodwill as of December 31, 2014 and 2013 relates to the LED reporting unit.
(7) INTANGIBLE ASSETS
Intangible assets consist of distributor and customer relationships and related contracts, technology design
and programs, and other intangible assets. There are no intangible assets with indefinite lives. There were no
intangible assets acquired in 2014. Intangible assets and their respective useful lives are as follows:
Acquired customer contracts and relationships
Acquired technology design and programs
Other
Useful Life
5 – 8 Years
8 Years
3 – 7 Years
Gross carrying amounts and accumulated amortization of intangible assets were as follows as of
December 31, 2014 for each intangible asset class.
Gross
Carrying
Amount
Accumulated
Amortization
(in thousands)
Net Balances
Acquired customer contracts and relationships .........................
Acquired technology design and programs................................
Other ..........................................................................................
Total ...................................................................................
1,942
329
107
$ 2,378 $
(1,942)
(329)
(107)
(2,378)
$
-
-
-
-
Gross carrying amounts and accumulated amortization of intangible assets were as follows as of
December 31, 2013 for each intangible asset class.
Page 25
Gross
Carrying
Amount
Accumulated
Amortization
(in thousands)
Net Balances
Acquired customer contracts and relationships .........................
Acquired technology design and programs ...............................
Other ..........................................................................................
Total ...................................................................................
2,062
349
114
$ 2,525 $
(2,011)
(298)
(114)
(2,423)
$
51
51
-
102
Actual Expense
2013
2014
In thousands
Amortization expense of
intangible assets ................... $ 118
$ 100
(8) DEBT
Years Ended December 31
Senior Fixed Rate Secured Bond (“PPI Bond”) to a private
investor, maturing on June 30, 2017 with an interest rate
of 8%, net of unamortized debt discount of $26,000 at
December 31, 2014 and $45,000 at December 31, 2013,
with an interest rate of 8%.
Senior Fixed Rate Secured Bond to a private investor, maturing
on June 20, 2017, with an interest rate of 12.25%, at
December 31, 2014 and at December 31, 2013.
Senior Fixed Rate Secured Bond to a private investor, maturing
on June 20, 2017, with an interest rate of 12.25%, at
December 31, 2014 and at December 31, 2013
2014(1)
2013
In thousands
$ 1,408
$ 1,750
334
320
669
640
Borrowings under Revolving Credit facility with Barclays Bank Sales
Financing with an interest rate of 2.50% above Barclay’s base rate at
December 31, 2014 and at December 31, 2013 (3.0% as of December 31,
2014 and at December 31, 2013).
Sub-total debt
Less – revolving credit facility
Less—Current portion of long-term debt
Total long-term debt
1,140
3,551
(1,140)
(770)
1,127
3,837
(1,127)
(265)
$ 1,641
$ 2,445
(1) As of December 31, 2014, the Company had approximately $ 1,872,000 available under the various
borrowing facilities.
Page 26
Photonic Products Ltd.
BORROWING AGREEMENTS
StockerYale (UK) Ltd., a wholly owned subsidiary of the Company, issued bonds to each of the former
stockholders of Photonic Products Ltd. with an aggregate initial principal amount equal to $2,400,000 (Photonic
Bonds). During the term of the Photonic Bonds, the Company and the bond holders entered into various
amendments and Deeds of Variation. The bonds were paid in full on April 30, 2013.
Private Investor Notes and Bond
ProPhotonix (IRL) Limited Senior Fixed Rate Secured Bond
On July 24, 2008, ProPhotonix (IRL) Limited issued a three-year 12% Senior Fixed Rate Secured Bond
(“PPI Bond”), as amended at various times, to a bondholder in the original principal amount of €935,000
($1,472,905 at July 24, 2008) secured by all of the assets of ProPhotonix (IRL) Limited.
On June 20, 2013 the bondholder entered into an amendment and waiver agreement with the Company
waiving all events of default from inception of the bond through the date of the amendment. In addition, the
bondholder also agreed to amend the terms of the bond as follows:
(a) Convert € 144,324 ($193,132) of the balance of the bond into common stock of the Company with a
subsequent transfer of such common stock to the Term Loan holder, described below as part of the Term
Loan provided to the Company
(b) Issue 1,900,000 warrants over common stock of the Company exercisable at a price of $0.03 per share
through June 20, 2023 as described in Note 10. The fair value of these warrants of $55,185 was
deducted from the carrying value of the bond and is being amortized over the remaining term of the PPI
Bond
(c) Principal as of June 20, 2013:
€ 1,426,540 ($1,909,281)
(d) Interest Rate:
8% per annum
(e) Interest payments only:
June 30, 2013 through June 30, 2014
(f) Principal Repayment:
€15,000 per month plus interest July 1, 2014 through June 30,
2015, thereafter principal and interest monthly €56,378 ($75,456) from July 1, 2015 through June 30,
2017*
(g) One-time fee of €31,413 ($42,043) payable on June 30, 2017. This fee is being accrued ratably over the
life of the loan, payable in June, 2017. In addition, the Company recorded debt acquisition costs of
$134,484 which is being amortized over the life of the amended term note.
(cid:13)
In addition to the terms above, the bondholder will be entitled to accelerated principal payments, on a
quarterly basis, equal to 30% of Free Cash Flow (defined as earnings before interest, taxes, depreciation,
and amortization (EBITDA) minus debt repaid and interest paid, minus capital expenditures not
financed, and minus taxes paid, each during such calendar quarter). Such payments have been made
within 45 days of the end of such calendar quarter, or as agreed to by the lender.
At December 31, 2014, $1,433,877 remained outstanding under the note, which has been classified as
$420,992 current portion of long term debt and $1,012,885 long term debt and reported net of $25,648 of
unamortized debt discount, which has been reported as $16,190 as short-term and $9,458 as long-term.
Page 27
At December 31, 2013, $1,794,702 remained outstanding under the note, which has been classified as
$123,912 current portion of long term debt and $1,670,790 long term debt and reported net of $44,857 of
unamortized debt discount, which has been reported as $19,209 as short-term and $25,648 as long-term.
Term Notes:
PPI Bond Holder
On June 20, 2013, the Company entered into a Term Loan agreement with the PPI Bond holder to provide
up to $1.0 million of loan availability subject to certain terms as follows:
(a) Available Loan (subject to (b) below):
(b) 50% of each advance shall be used to repay amounts owed under the PPI Bond
$1.0 million
(c) Interest Rate:
(d) Interest payments only:
(e) Principal Repayment term:
12.25% per annum
June 30, 2013 through June 30, 2014
36 months (July 1, 2014 through June 20, 2017)
The Company recorded debt acquisition costs of $70,437 which is being amortized over the life of the term
note. In addition, the Company is accruing a back-end fee of $15,000 ratably over the life of the loan, payable
in June, 2017.
At December 31, 2014, $334,486 remained outstanding under the note, which has been classified as
$121,711 current portion of long-term debt and $212,775 as long term debt. As of December 31, 2014, the
Company had net available funding of $305,000.
At December 31, 2013, $320,000 remained outstanding under the note, which has been classified as
$53,415 current portion of long-term debt and $266,585 as long term debt. As of December 31, 2013, the
Company had net available funding of $340,000.
Tiger Investments 1 LLC
On June 20, 2013, the Company entered into a Term Loan agreement with a Lender, which is owned
and controlled by the wife of Tim Losik, Patricia Losik. As Mr. Losik is a director and the Chief Executive of
the Company, the entry into the Loan Facility constitutes a “related party transaction” for the purposes of AIM
Rule 13.
The Term Loan provides availability to the Company of up to $2.0 million during the term of the Loan,
as follows, subject to certain restrictions:
(a) Available Loan:
(b) Interest Rate:
$2.0 million
12.25% per annum
(c) Interest payments only:
(d) Principal Repayment term:
June 30, 2013 through June 30, 2014
36 months (July 1, 2014 through June 20, 2017)
The Company recorded debt acquisition costs of $165,817 which is being amortized over the life of the
term note. In addition, the Company is accruing a back-end fee of $60,000 over the life of the loan, payable in
June, 2017.
Page 28
At December 31, 2014, $668,973 remained outstanding under the note, which has been classified as
$243,422 current portion of long-term debt and $425,551 as long term debt. As of December 31, 2014, the
Company had $1,220,000 available under this borrowing facility.
At December 31, 2013, $640,000 remained outstanding under the note, which has been classified as
$106,830 current portion of long-term debt and $533,170 as long term debt. As of December 31, 2013, the
Company had $1,360,000 available under this borrowing facility.
Barclays Bank, PLC
On February 6, 2008, ProPhotonix Limited, a U.K. subsidiary, entered into a Confidential Invoice
Discounting Agreement, as amended at various times, with Barclays Bank Sales Financing (“Barclays”). Under
the Discounting Agreement, a three-year revolving line of credit was established. The Discounting Agreement
originally provided for a revolving line of credit not to exceed an aggregate principal amount of £700,000
($1,087,000), later reduced to £650,000 ($1,010,000), and grants a security interest in and lien upon all of
ProPhotonix Limited, a U.K. subsidiary, trade receivables in favor of Barclays. The Company originally could
borrow a total amount at any given time up to ₤700,000, limited to qualifying receivables as defined. The
facility requires the maintenance of certain financial covenants including a minimum tangible net worth.
On November 29, 2013, the Company entered into an amendment to the revolving credit facility to (i)
increase the line from £650,000 to £1,400,000; (ii) to reduce the discount rate from 2.65% plus Barclays base
rate to 2.50% plus Barclays base rate and service charges and extended the minimum period of this amendment
to 24 months through November 29, 2015. The Company recorded debt acquisition costs of $27,172 which is
being amortized over the two year amendment period.
The amount outstanding under the facility was $1,140,000 as of December 31, 2014 and $1,127,000 as
of December 31, 2013, all of which was classified as a short term debt under revolving credit facility. As of
December 31, 2014, the Company had approximately $347,000 available under this facility.
(9) TAXES
The Company had deferred tax assets, before considering the full valuation allowance, totaling
approximately $27.1 million as of December 31, 2014 and approximately $27.3 million as of December 31,
2013. Realization of the deferred tax assets is dependent upon the Company’s ability to generate sufficient
future taxable income and, if necessary, execution of tax planning strategies.
The Company’s historical operating losses raise considerable doubt as to when, if ever, any of the deferred
tax assets will be realized. As a result, management has provided a valuation allowance for the net deferred tax
assets. In the event management determines that sufficient future taxable income may be generated in
subsequent periods and the previously recorded valuation allowance is no longer needed, the Company will
decrease the valuation allowance by providing an income tax benefit in the period that such a determination is
made. Because of its historical operating losses, the Company has not been subject to income taxes since 1996.
The Company is subject to taxation in the U.S., Canada, the United Kingdom, Ireland and various states
and local jurisdictions. As a result of the Company’s tax loss position, the tax years 2000 through 2013 remain
open to examination by the federal and most state tax authorities. In addition, the tax years 2007 through 2013
are open to examination in foreign jurisdictions. During 2014, the Company’s 2012 tax return was audited by
the Internal Revenue Service. As of December 31, 2014, this audit is complete, with no effective change in our
‘as filed’ 2012 return.
Page 29
The following is a reconciliation of the federal income tax provision calculated at the statutory rate of
34% to the recorded amount:
Years Ended December 31,
Loss before taxes ...............................................................................
Reconciliation
Applicable statutory federal income tax benefit ................................
Foreign tax rate differential ...............................................................
Non deductible items .........................................................................
Valuation allowance ..........................................................................
2014
2013
In thousands
$ (1,340) $ (1,226)
(456)
292
38
126
(417)
230
84
30
Net income tax provision ...........................................................
$
-
$
(73)
The significant items comprising the deferred tax asset and liability at December 31, 2014 and 2013 are as
follows:
Years Ended December 31,
2014
2013
In Thousands
Net operating loss carry forwards ...............................................
Foreign net operating loss carry forwards ...................................
R&D tax credit ............................................................................
Other ............................................................................................
Valuation allowance ....................................................................
Total .......................................................................................
$ 25,160
1,602
525
278
(27,565)
$ -
$ 25,010
1,611
525
124
(27,270)
$ -
As of December 31, 2014, the Company had United States federal net operating loss carry forwards
(NOLs) of approximately $62.2 million (2013: $62.5 million) available to offset future taxable income, if any.
These carry forwards expire through 2034 and are subject to review and possible adjustment by the Internal
Revenue Service. The Company may be subject to limitations under Section 382 of the Internal Revenue
Service Code as a result of changes in ownership. The Company’s historical operating losses raise considerable
doubt as to when, if ever, any of the deferred tax assets will be realized. As a result, management has provided a
full valuation allowance for the net deferred tax assets. At December 31, 2014, the Company also has Canadian
federal NOLs of approximately $1.5 million (2013: $1.5 million) available to offset future taxable income, if
any. These carry forwards expire through 2031 and are subject to review and possible adjustment by the
Canadian Revenue Agency. The Company may be subject to limitations of the use of the Canadian NOLs as a
result of changes in ownership. At December 31, 2014, the Company also has a United Kingdom NOL of
approximately $4.6 million (2013: $4.6 million) for which management has provided a full valuation allowance
against. At December 31, 2014, the Company also has an Ireland NOL of approximately $2.6 million (2013:
$2.3 million) for which management has provided a full valuation allowance against. The total valuation
allowance against deferred tax assets increased by $0.3 million (2013: decreased by $0.4 million).
Page 30
The Company must determine whether it is more-likely-than-not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation processes, based on the technical merits of
the position. A tax position that meets the more-likely-than-not threshold is then measured to determine the
amount of benefit to recognize in the financial statements. As of December 31, 2014 and 2013, the Company
has cumulatively recorded long-term liabilities of $178,000 and $178,000 respectively, relative to the sale of its
North American operations to Coherent, Inc. This represents the only significant uncertain tax position of the
Company.
(10) UNREGISTERED SALES OF EQUITY SECURITIES AND WARRANTS
On June 20, 2013, €144,324 ($193,132) of the PPI Bond (Note 8) was converted in exchange for
7,605,946 shares of common stock of the Company; such shares were issued to the Term Loan holder in partial
consideration relating to securing the Term Loan. Also on June 20, 2013, the Company issued a Warrant in
partial consideration for the Term Loan issued by the PPI Bond holder, described in Note 8. The Warrant for
1,900,000 shares of common stock of the Company is exercisable at a price of $0.03 per share through June 20,
2023.
Warrants
As of December 31, 2014, there were 8,577,567 common shares outstanding warrants with the following
exercise prices and expiration dates:
Number of Common Shares
Warrants
551,500
3,570,000
1,150,000
906,067
500,000
1,900,000
8,577,567
Exercise Price
Expiration Date
$0.32 –$1.44
$1.15 –$3.12
$0.80 –$1.72
$0.45 –$0.60
$0.10 –$0.10
$0.03
2015
2016
2017
2018
2019
2023
On June 9, 2014, the Company implemented the creation of a 2014 stock incentive plan.
(11) STOCK OPTION PLANS
New remuneration policy for senior management
Summary
In order to incentivize the achievement of its objectives, the Company has implemented a new remuneration
policy for its senior management with the following elements:
(cid:120) A one-off substantial performance based option grant to key senior management at market value
(cid:120) No further grants intended to said senior management through the end of the three-year measurement period
(cid:120) Cliff vesting on December 31, 2016 at different levels dependent on achievement against the performance
target (zero below 50% up to 100% vesting at 90% attainment)
(cid:120) 10 year option term
Page 31
Performance measure - The performance measure is the driving factor behind the new policy. Broadly, the
target is EBITDA equal to 90% of the term debt and lease principal payments, and all interest payments, which
are due during the performance period. Such payments would, on the basis of current obligations, amount to
approximately $3.0 million in total. Achievement of this objective will result in full vesting. The committee
and board believe that achievement of the objective will result in the creation of significant stockholder value.
Under the Company’s 2014 Stock Incentive Plan (the 2014 Plan), the Company may issue options,
restricted stock, restricted stock units and other stock-based awards to its employees, officers, directors,
consultants and advisors. An aggregate of 10,200,000 shares of the Company’s common stock were initially
reserved for issuance under the 2014 Plan. In addition, there is an annual increase to the number of shares
reserved for issuance under the 2014 Plan equal to the lesser of (i) 2,000,000 shares of common stock, (ii) 5%
of the outstanding shares of common stock of the Company, or (iii) an amount determined by the Board of
Directors of the Company.
As of December 31, 2014, there were 2,000,000 shares available to be issued from this plan.
In May, 2014, the Board of Directors approved the Seventh Amended and Restated Policy Regarding
Compensation of Independent Directors, (i) cash compensation is $25,000 per annum paid in arrears each
quarter in installments of $6,250; and (ii) options to purchase 150,000 shares of the Company’s common stock,
$.001 par value per share (the “Common Stock”), such that each Independent Director who is serving as
director of the Company on the date of each annual meeting of stockholders (or special meeting in lieu thereof)
beginning with the 2014 annual meeting, shall automatically be granted on such day an option (the “Option
Award”) entitling the recipient to acquire 150,000 shares of Common Stock, pursuant to the Company’s 2007
Stock Incentive Plan (the “Plan”).
In May 2007, the Company adopted the 2007 Stock Option and Incentive Plan (the 2007 Option Plan) for
the purpose of issuing both Incentive Options and Nonqualified Options to officers, employees and directors of
the company. No further grants are allowed under this plan.
In May 2004, the Company adopted the 2004 Stock Option and Incentive Plan (the 2004 Option Plan) for
the purpose of issuing both Incentive Options and Nonqualified Options to officers, employees and directors of
the company. No further grants are allowed under this plan.
In May 2000, the Company adopted the 2000 Stock Option and Incentive Plan for the purpose of issuing
both Incentive Options and Nonqualified Options to officers, employees and directors of the Company. No
further grants are allowed under this plan.
The following table summarizes information about the stock options outstanding as of December 31, 2014.
The intrinsic value on the options outstanding, and exercisable, at December 31, 2014 is approximately $8,000.
There is no intrinsic value on the options outstanding, and exercisable, at December 31, 2013.
Page 32
During 2014 and 2013, the Remuneration Committee approved various qualified and non-qualified stock option
awards to purchase shares of the Company’s common stock to various officers, directors and employees. There
were 10,500,000 options granted during the year ended December 31, 2014 and 3,500,000 options were granted
during the year ended December 31, 2013. These options vest over a one year, two year or a four year
anniversary of the grant date, provided that the recipient continues to serve the Company in that capacity until
each such vesting. The weighted average assumptions for grants during the years ended December 31, 2014
and December 31, 2013 used in the Black-Scholes option pricing model were as follows:
Twelve months Ended
December 31,
2014
Twelve months Ended
December 31,
2013
Volatility………………………………………..
Expected option life……………………………
Interest rate (risk free)………………………….
Dividends……………………………………….
Weighted average grant date fair value………...
237.58%
5.1 years
1.71%
$0
$0.0366
224.1%
4.5 years
1.19%
$0
$0.02
Balance at December 31, 2012 .........................
Granted .....................................................
Exercised ..................................................
Cancelled ..................................................
Balance at December 31, 2013 .........................
Weighted
Average
Remaining
Contractual
Term
(in Years)
6.70
Weighted
Average
Exercise Price
per Share ($)
0.19
0.02
-
0.92
0.13
7.63
Options
Outstanding
9,355,890
3,500,000
-
( 240,200)
12,615,690
Vested and Exercisable at December 31, 2013
5,519,840
0.20
6.24
Balance at December 31, 2013 .........................
Granted .....................................................
Exercised ..................................................
Cancelled ..................................................
Balance at December 31, 2014 .........................
Vested and Exercisable at December 31, 2014
12,615,690
10,500,000
-
( 750,650)
22,365,040
8,175,238
0.13
0.04
-
0.56
0.07
0.11
7.63
7.97
6.32
Vested and Expected to Vest at December
31, 2014 ..................................................
21,827,405
0.07
7.91
Page 33
Range of
Exercise Prices
$ 0.02 – 0.99
Options
Outstanding
22,365,040
Weighted
Average
Contractual
Life (years)
8.0
Weighted
Average
Exercise
Price
Options
Exercisable
Weighted
Average
Exercise
Price
$
0.07
8,175,238 $
0.11
At December 31, 2014, there was approximately $419,000 of total unrecognized compensation cost related to
stock options granted. The cost is expected to be recognized over the next 1.38 years. Total stock option
expense recorded in 2014 and 2013 was approximately $280,000 and $169,000, respectively. There were no
options exercised during 2014 and 2013.
(12) EMPLOYEE STOCK PURCHASE PLAN
In May 2000, the Company adopted the 2000 Employee Stock Purchase Plan (the Stock Purchase Plan),
which permits the eligible employees of the Company and its subsidiaries to purchase shares of the Company’s
common stock, at a discount, through regular monthly payroll deductions of up to 10% of their pre-tax gross
salary. Subject to adjustment for stock splits, stock dividends and similar events, a maximum of 300,000 shares
of common stock may be issued under the Stock Purchase Plan. During the years ended December 31, 2014 and
2013, there were no shares issued under the Stock Purchase Plan.
(13) EMPLOYEE DEFINED CONTRIBUTION PLANS
On January 17, 1994, the Company established the ProPhotonix Limited (formerly StockerYale, Inc.)
401(k) Plan (the Plan). Under the Plan, employees are allowed to make pre-tax retirement contributions. In
addition, the Company may make matching contributions, not to exceed 100% of the employee contributions,
and profit sharing contributions at its discretion. The Company made matching contributions of $27,000 in the
year ended December 31, 2014 and $33,000 in the year ended December 31, 2013. The Company incurred costs
of approximately $1,200 in 2014 and approximately $1,100 in 2013 to administer the Plan.
The Company also has voluntary contribution pension schemes in Ireland and in the United Kingdom. In
the United Kingdom, the Company contributes a maximum of 3% of the participating employee salaries, with
one exception, where the maximum contribution is 10%. The plan is voluntary, with plan administration costs
coming out of the plan itself. The Company made contributions of approximately $46,000 and $44,000 in the
years ended December 31, 2014 and 2013, respectively. In Ireland, the Company also has a voluntary plan that
matches contributions for those participating employees with minimum of 6 months of service. After two years
of service, the Company will match up to a maximum of 5% of salary. The Company made contributions of
approximately $32,000 and $20,000 in the years ended December 31, 2014 and 2013, respectively. Plan
administration costs come out of the plan itself.
Other obligations and contingent liabilities
(14) COMMITMENTS AND CONTINGENCIES
The Company leases approximately 3,600 square feet for its corporate headquarters and sales office in
Salem, New Hampshire. The term of the lease requires monthly tenant at-will payments with a 90 day
termination notice. Base rent is $2,550 per month plus the tenant’s share of expenses.
Page 34
ProPhotonix (IRL) Limited leases approximately 10,000 square feet for its operations in Cork, Ireland. The
original five year lease term ended on August 22, 2013 with rent and service charges of €102,000 per year. The
lease is still under re-negotiation, however, the rent and service charges are now €72,000 per year.
ProPhotonix Limited, a U.K. subsidiary, leases approximately 13,000 square feet of space in Hatfield
Broad Oak, Hertfordshire, U.K. The original lease had a term of nine years ending September 29, 2013 at
£87,000 per year, at which time the Company renegotiated the lease for an additional 3 years. Rent charges are
£70,000 per year under the renegotiated terms of the lease.
The Company utilizes, or has assumed, capital leases to finance purchases of equipment or vehicles. At
December 31, 2014, these capital leases were paid in full. There was approximately $10,000 payable in
principal and interest under these leases at December 31, 2013. The Company records depreciation expense on
assets acquired under a capital lease in the consolidated statement of operations.
The net book value of assets acquired under capital leases at December 31, 2014 and December 31, 2013,
is as follows:
2014
Assets under capital lease ............................................... $ 594,000
Less—accumulated depreciation ....................................
(582,000)
2013
$ 631,000
(606,000)
Assets under capital lease, net ........................................ $ 12,000
$ 25,000
Scheduled future maturities of debt, and operating lease obligations for the next five years:
Due by period
2015
2016
2017
2019
2018
in thousands
Total
Debt obligations ..................... $ 770 $ 1,066 $ 576 $
Operating lease obligations ....
-
116
82
-
-
$ 886 $ 1,148 $ 576 $
-
-
$
-
$
-
$2,412
198
$2,610
The Company expensed approximately $241,000 and $269,000 in rent for the years ended December 31, 2014
and 2013, respectively.
(15) LEGAL PROCEEDINGS
The Company is party to various legal proceedings generally incidental to its business. Although the
disposition of any legal proceedings cannot be determined with certainty, it is the Company’s opinion that any
pending or threatened litigation will not have a material adverse effect on the Company’s results of operations,
cash flow or financial condition.
Page 35
(16) SEGMENT INFORMATION
Operating segments are identified as components of an enterprise about which separate discrete financial
information is available for evaluation by the chief decision-making group, in making decisions how to allocate
resources and assess performance. The Company’s chief decision-maker is the Chief Executive Officer. The
Company’s accounting policies and method of presentation for segments is consistent with that used throughout
the consolidated financial statements.
The Company operates in two segments: LED’s (light emitting diode systems) and Laser & Diodes. In
the LED segment, the Company designs and manufactures LED systems for the inspection, machine vision,
medical and military markets. The Laser & Diodes segment distributes laser diodes and designs and
manufactures custom laser diodes modules for industrial, commercial, defense and medical applications. The
policies relating to segments are the same as the Company’s corporate policies.
The Company evaluates performance and allocates resources based on revenues and operating income
(loss). The operating profit / (loss) for each segment includes selling, research and development and expenses
directly attributable to the segment. In addition, the operating profit / (loss) includes amortization of acquired
intangible assets, including any impairment of these assets and of goodwill. Certain of the Company’s indirect
overhead costs, which include corporate general and administrative expenses, are allocated between the
segments based upon an estimate of costs associated with each segment. Segment assets include accounts
receivable, inventory, machinery and equipment, goodwill and intangible assets directly associated with the
product line segment.
2014
2013
(In thousands)
Years Ended December 31
Revenues:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
$ 7,111
9,320
$ 6,599
9,000
Total revenues .............................................................................................
$
16,431
$
15,599
Gross profit:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
$ 3,288
3,137
$ 2,947
3,024
Total gross profit .........................................................................................
$
6,425
$
5,971
Operating profit (loss)
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
$ 126
(30)
$ (806)
(375)
Total operating profit / (loss) .......................................................................
$
96
$
(1,181)
Page 36
Years Ended December 31
Current assets:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
Corporate .....................................................................................................
Total current assets ......................................................................................
Property, plant & equipment:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
Corporate .....................................................................................................
Total property, plant & equipment ..............................................................
Intangible assets:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
Corporate .....................................................................................................
Total intangible assets .................................................................................
Goodwill:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
Corporate .....................................................................................................
Total goodwill .............................................................................................
Other assets:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
Corporate .....................................................................................................
Total other assets .........................................................................................
Years Ended December 31
Total assets:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
Corporate .....................................................................................................
Total assets ..................................................................................................
Revenues by geographic area:
United States ...............................................................................................
Canada, Mexico & So. America ..................................................................
Europe .........................................................................................................
Asia & the rest of the world ........................................................................
2014
2013
(In thousands)
2,201
2,222
380
4,803
64
116
4
184
—
—
—
—
429
—
—
429
30
—
176
206
$
$
$
$
$
$
$
$
$
$
1,984
2,737
463
5,184
179
120
4
303
—
102
—
102
486
—
—
486
28
—
326
354
2014
2013
(In thousands)
2,797
2,265
560
5,622
4,724
419
8,531
2,757
$
$
2,677
2,959
793
6,429
4,585
274
8,148
2,592
$
$
$
$
$
$
$
$
$
$
$
$
Total ......................................................................................................................
$
16,431
$
15,599
Page 37
The Company’s long-lived assets consist of property, plant and equipment, goodwill and intangible assets located in the
following geographic locations:
Years Ended December 31
Long-lived assets by geographic area:
United States and North America ................................................................
Europe ..........................................................................................................
UK ...............................................................................................................
Total ......................................................................................................................
$
$
4
546
64
614
$
$
4
666
222
892
2014
2013
(In thousands)
(17) SUBSEQUENT EVENTS
The Company has evaluated subsequent events through March 24, 2015, the date which the financial statements
were available to be issued, and there were no additional events that impacted these financial statements or
required additional disclosure to the financial statements.
Page 38
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Page 39
BR743465-0315-AR