Annual Report
2016
About the pictures on the front cover (left to right):
Warehouse Robotics Laser Module
This custom infra-red laser module was designed in-house and manufactured for a global distribution and
logistics company. The module projects a perfectly straight horizontal laser line with uniform thickness, for the
most reliable obstacle detection. Leveraging our laser diode and optics supply chain, the Company supplied this
customer with the optimum solution including custom modulation electronics for integration with the robot’s
camera system.
COBRA Cure FX3 UV LED Curing System
The COBRA Cure FX3 is an innovative UV LED Curing system, delivering up to 16W/cm2 or
42J/cm2. It has been designed specifically for UV curing of inks, coatings and adhesives. Its innovative design
incorporates the many benefits of a LED curing systems as well as unique end-user focused features to
guarantee a consistent, reliable cure over the lifetime of the system.
Laser Module for Factory Alignment System
The Company supplies a green (520nm) laser module matching the specification of legacy 532nm lasers to
ensure backwards compatibility in the field. ProPhotonix improved the performance and greatly increase the
reliability of the customer’s system by using a direct diode laser rather than the competitor’s diode pumped
solid state laser. ProPhotonix’ production line flexibility ensures the customer can be supplied with several
variants of the laser with different beam profiles.
COBRA RGB LED Line Light
COBRA RGB LED line light delivers extremely bright, uniform, multispectral illumination in line scan
applications that can be configured with up to 3 different wavelengths. An example target application is the
print inspection market. High brightness, multi‐wavelength lights allows faster processing of print product
without the loss of inspection integrity.
Laser Module for Ground-penetrating Radar
A long-standing customer required a compact alignment laser module to fit into their handheld devices. Quality,
reliability and robustness are critical. ProPhotonix developed a compact, custom module with red and green
laser diode variants providing the customer with options for use under a wide range of light conditions in the
field.
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
13 Red Roof Lane
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.
Medical
The medical and dental market requires many different LED systems and laser modules for unique processses,
procedures, and applications. The Company provides a variety of products for medical and dental applications
to current customers including, a world leader in stationary imaging equipment, a portable x-ray equipment and
dental imaging manufacturer, and a surgical illumination device manufacturer. 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
2016 Annual Report to Shareholders
To the Shareholders of ProPhotonix Limited:
We entered 2016 with positive financial momentum and continued
making good financial progress; most notably, achieving a second year
of net income. In addition, the ProPhotonix team has been diligently
pursuing new customers, as well as new product and market initiatives
which help set the stage for the future. However, as with the
headwinds
there are many complexities and
uncertainties which may adversely affect ProPhotonix: economic
slowdown, Brexit uncertainty and an ever changing world-wide
political landscape. Our management does not dwell on these
uncontrollable matters, but remains acutely aware of the potential
impact and necessity for swift response and change if needed.
in early 2016,
Financial Progress:
Revenue Growth
Operating Income growth
Net Income growth
EU funded Grant
New UV LED products released
New Multi wavelength LED products released
13%
89%
348%
€360,000
Revenue increased by 13% in 2016, mainly due to a 44% increase in laser
module sales; while our gross margin rate improved from 41.4% to 45.4%,
resulting from this volume increase as well as a better product mix. Net
income increased 348%, due to the increase in operating income, reduced
financing costs and the benefit of a reversal of a contingent tax liability.
The balance sheet also continued to improve in 2016. Term debt declined
$1,100,000, ending the year with a balance of $400,000, the lowest level
in decades. During 2016, order bookings increased 6% to $16.7 million
from 2015, with the book-to-bill ratio continuing to be greater than one at
1.03 (2015: 1.09). Our backlog at December 31, 2016 remained flat from 2015 at $5.6 million.
Income from Operations
Gross Profit
Net Income
($000's)
GP%
Sales
2016
2015
$ 16,245
$ 14,411
7,383
5,970
45.4%
41.4%
1,492
790
$ 1,255
$ 280
Customer and Product Development Initiatives:
During the year, the ProPhotonix engineering team completed the development of several products and implemented a
number of new technology capabilities. Continuing with the strategy we announced last year relating to the Ultraviolet
(UV) LED market, the Company released the new COBRA CureTM FX2 and FX3 products. These products are ideally
suited to a range of UV curing applications including printing, adhesives and coatings. Our UV LED product
development plan includes variants of the FX lamp and additional UV light sources with higher power, configurable
interfaces and advanced sensing capabilities. The significant investments in UV product development occurred
throughout the year and will continue throughout 2017. These investments will have a short term depressing
effect on earnings in 2017 though are expected will set the stage for sustainable and profitable growth well
beyond 2017.
We introduced our new COBRATM RGB LED line light, a multi wavelength device which has applications in optical
sorting, inspection and printing applications. On January 19, 2017, we also announced our new MultiSpec product that
allows for discrete control of up to 12 different wavelengths allowing users to maximize contrast by selecting the
optimum color mix and varying the intensity of each wavelength to their specific application need, uniquely suited to
hyper-spectral imaging application.
Page 4
In addition, the Company also signed a services agreement with a Fortune 50 company to develop a lighting solution for
their medical product application. The initial project value was $40,000 and since, additional projects were added which
has grown to a value total of $532,000 for engineering services. Future development projects are anticipated from this
customer along with production of various products currently being developed. Lastly, the Company entered into an EU
funded Fast Track to Innovation program to partner with other participants, including the end customer, in the
development of a high power digital laser for a railway industry inspection system. The grant estimate is up to €360,000
with completion of the entire development project on June 1, 2018.
As 2016 concluded, we made a significant investment on our European sales team to increase our European sales
coverage and customer support. As with all investments, returns come with time and with our expanded customer
coverage we expect future revenue growth from the European region; with expected further expansion in 2017.
Strategy:
In last year’s Statement to the Shareholders in the annual report, the Company’s longer term strategy continues to be one
of strategic repositioning to include a market(s) directed product portfolio complementing our robust OEM centered
business. ProPhotonix has and will continue to make such investments in fulfillment of our strategy.
As noted last year, we have identified two promising opportunities and we are concentrating our engineering talents in
defined market areas that we believe are poised for fast market expansion. The first of these is the UV LED and laser
market for various applications including: printing, curing, bonding, 3D printing, bio-luminescence, medical microscopy
and other applications. As noted above, the Company continued its progress in this area with the follow-on COBRA
CureTM product releases. We plan to continue to launch new higher power products while continuously evolving our
current product lines to serve this market in 2017 and beyond.
Our remaining focus is on the continuing market requirement for multi-wavelength devices and systems, both laser and
LED solutions. Increasingly, customers are seeking multi-wavelength solutions requiring innovative optics, complex
electronics, on-board sensing capabilities and sophisticated software control. We see opportunities which include a broad
range of applications in printing, microscopy, industrial inspection and sorting, embedded camera and sensor calibration,
solar simulation and security markets. As noted, the Company has introduced two new products addressing this market
(RGB and Multispec). We intend to enhance and expand this offering as market demand dictates.
I am pleased with our improved financial performance and business accomplishments, and believe we will continue
improvement in 2017 and beyond. We are positioned for success more readily than any other time in the recent history of
the Company with the resources, talent and opportunities we cultivated during 2016.
In conclusion, I thank you, my co-workers, our customers, suppliers, service providers and investors for your continued
support!
Respectfully submitted,
Tim Losik
President and Chief Executive Officer
Page 5
Director Remuneration Report
For the year ended December 31, 2016
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
2016 ($)
Total All
Compensation
2015 ($)
Tim Losik
300,750
150,000
6,000
-
456,750
51,864
51,864
508,614
359,041
Total Executive
Compensation
Non-Executive Director
300,750
150,000
6,000
-
456,750
51,864
51,864
508,614
359,041
Ray Oglethorpe
Timothy Steel
-
-
-
-
-
-
25,000
25,000
6,485
6,485
31,485
27,968
25,000
25,000
6,485
6,485
31,485
27,968
Vincent Thompson
-
-
-
25,000
25,000
6,485
6,485
31,485
27,968
Mark Weidman
-
-
-
25,000
25,000
6,485
6,485
31,485
27,968
Total Non-Executive
Compensation
Director Share Options:
-
-
-
100,000
100,000
25,940
25,940
125,940
111,872
Director
Options @
12/31/15
Options
Granted
Options
Forfeited
Options @
12/31/16
Tim Losik
4,900,000
-
-
4,900,000
Ray Oglethorpe
1,959,006
150,000
-
2,109,006
Timothy Steel
1,445,433
150,000
-
1,595,433
Vincent Thompson
1,445,433
150,000
-
1,595,433
Mark Weidman
1,000,000
150,000
-
1,150,000
Total All Directors
10,749,872
600,000
-
11,349,872
(1) Other compensation for non-executive directors represents cash payments expensed in the current year.
Page 6
ProPhotonix Limited
Consolidated Financial Statements
Years Ended December 31, 2016 and 2015
Page 7
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Page 8
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item
Page
Independent Auditor’s Report .......................................................................................................................
10
Consolidated Balance Sheets as of December 31, 2016 and 2015 ...............................................................
12
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31,
2016 and 2015 ...........................................................................................................................................
13
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016 and 2015 ......
14
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015 .....................
15
Notes to Consolidated Financial Statements………………………………………………………………. 16
Page 9
FINANCIAL STATEMENTS
PROPHOTONIX LIMITED
CONSOLIDATED BALANCE SHEETS
($ in thousands except share and per share data)
December 31
2016
2015
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowances of $30 in 2016 and $21 in 2015
Inventories
Prepaid expenses and other current assets
Total current assets
Net property, plant and equipment
Goodwill
Other long-term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Revolving credit facility
Current portion of long-term debt
Accounts payable
Accrued payroll, benefits and incentive compensation
Customer advances
Deferred revenue
Accrued warranty expenses
All other accrued expenses
Capital lease obligations
Total current liabilities
Long-term debt, net of current portion
Long term capital lease obligations, net of current portion
Other long-term liabilities
Total liabilities
Stockholders’ Equity:
Common stock, par value $0.001; shares authorized 250,000,000 at December 31, 2016 and at
December 31, 2015; 83,665,402 shares issued and outstanding at December 31, 2016 and at
December 31, 2015
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
911
2,302
2,155
298
5,666
342
372
74
434
2,751
1,550
140
4,875
132
385
81
$ 6,454
$ 5,473
$
$
1,049
402
1,454
641
416
213
149
404
68
4,796
-
52
-
4,848
1,334
966
1,260
380
52
65
134
404
-
4,595
508
-
178
5,281
84
112,038
(111,479)
963
84
111,860
(112,734)
982
1,606
192
$
6,454
$
5,473
See the notes to consolidated financial statements.
Page 12
PROPHOTONIX LIMITED
Consolidated Statements of Income and Comprehensive Income
($ in thousands except share and per share data)
Revenue
Cost of Revenue
Gross Profit
Research & Development Expenses
Selling, General & Administrative Expenses
Operating Income
Other Income, net (including release of historic tax contingency see
Note 9)
Foreign Currency Exchange Losses
Warrant & Debt Acquisition Expense
Interest Expense
Income Before Taxes
Income Taxes
Net Income
Other Comprehensive Income:
Foreign currency translation
Total Comprehensive Income
Net Income Per Share:
Basic and diluted:
Basic net income per share
Diluted net income per share
Shares used in per share calculations - Basic
Shares used in per share calculations - Diluted
Years Ended
December 31,
2016
2015
$ 16,245
(8,862)
$ 14,411
(8,441)
7,383
(814)
(5,077)
1,492
344
(360)
(88)
(133)
1,255
-
5,970
(654)
(4,526)
790
131
(259)
(158)
(224)
280
-
$ 1,255
$ 280
(19)
$ 1,236
170
$ 450
$0.015
$0.014
83,665,402
90,740,402
$0.003
$0.003
83,665,402
83,665,402
See the notes to consolidated financial statements.
Page 13
PROPHOTONIX LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
Common Stock
Shares
Par
$0.001
Additional
Paid in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity (Deficit)
83,665
$
84
$111,583
$
(113,014)
$
812
$
(535)
-
-
-
-
-
-
277
-
-
-
-
280
-
170
-
Balance December 31, 2014
Share based compensation, net
of forfeitures ................
Translation adjustment .....
Net Income .......................
Balance December 31, 2015
83,665
$
84
$111,860
$
(112,734)
$
982
$
Share based compensation, net
of forfeitures ................
Translation adjustment .....
Net Income .......................
-
-
-
-
-
-
178
-
-
-
-
1,255
-
(19)
-
Balance December 31, 2016
83,665
$
84
$112,038
$
(111,479)
$
963
$
See the notes to consolidated financial statements.
277
170
280
192
178
(19)
1,255
1,606
Page 14
PROPHOTONIX LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31
2016
2015
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Stock-based compensation expense
Depreciation and amortization
Foreign exchange (gain)
Amortization of debt discount and financing costs
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 operating activities
Investing
Purchase of property, plant and equipment
Net cash used in investing activities
Financing
Borrowings of revolving credit facilities, net
Capital lease
Principal repayment of long-term debt
Net cash used in financing activities
Effect of exchange rate on cash
Net change in cash and equivalents
Cash and equivalents at beginning of period
$ 1,255
$ 280
178
75
74
60
120
9
277
101
(51)
130
95
4
360
(809)
(168)
246
836
6
(362)
(127)
22
(58)
136
(47)
2,242
(121)
(121)
400
(77)
(77)
(237)
(66)
(1,100)
312
-
(750)
(1,403)
(241)
(438)
218
477
434
103
331
Cash and equivalents at end of period
$ 911
$ 434
Supplemental cash flow information:
Cash paid for interest
$ 133
$ 224
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 symbol “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, 2016 and 2015, the
Company recorded net income of approximately $1,255,000 and $280,000, respectively. Net cash inflow from
operating activities for the same time periods were approximately $2,242,000 and $400,000, 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 U.S. 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
Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on
trade receivables are included in net cash provided by operating activities in the consolidated statements of cash
flows. 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. Allowance for doubtful
accounts 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. The Company has not made any claims in either 2016 or
2015. Determining adequate allowances for accounts receivable requires management’s judgment in
combination with Company policies and procedures. Management’s assessment includes customer payment
trends, as well as discussions with customers over past due amounts. 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 to costs and expenses ..................................................................
Account write-offs and other deductions ..................................................
Balance at end of period ...........................................................................
2016
2015
In thousands
$
21 $
10
(1)
$
30 $
20
6
(5)
21
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.
Page 17
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
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.
INCOME PER SHARE
The Company calculates basic and diluted net income per common share by dividing the net income
applicable to common stockholders by the weighted average number of common shares outstanding.
As of December 31, 2016, 22,965,040 shares underlying options and 4,456,067 shares underlying warrants
could potentially have been included in the calculation of diluted shares. However, as the exercise price at
December 31, 2016 was $0.062 per share, only 5,175,000 exercisable options and 1,900,000 warrants were
included in the calculation of earnings per share. All other options and warrants exercise price exceeded the
market price.
As of December 31, 2015, 22,965,040 shares underlying options and 8,026,067 shares underlying warrants
would have been included in the calculation of diluted shares. However, as the exercise price exceeded the
market price on December 31, 2015, none of these have been included in the calculation of earnings per share.
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 upon completion of performance, subject to any project management assessments as to the
status of work performed.
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
Page 18
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.
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:
Years Ended December 31,
2016
2015
Balance at beginning of period ....................................................
Charges to costs and expenses .....................................................
Account write-offs and other deductions .....................................
$
$
In thousands
134
121
(106)
146
109
(121)
Balance at end of period ......................................................
$
149
$
134
The Company expenses advertising costs as incurred. Advertising expenses for the years ended 2016 and
2015 were approximately $87,000 and $81,000, respectively.
ADVERTISING EXPENSE
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The Company provides for depreciation on a straight-line
basis over the assets estimated useful lives. Plant and equipment held under capital lease are amortized on a
straight-line basis over the shorter of the lease term or estimated useful life of the asset. Capital leases are
stated at the present value of minimum lease payments. 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 measured
Page 19
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. 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 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, 2016 or 2015.
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 2016, the Company recognized approximately $178,000 of stock-based compensation related to
options, all of which was charged to general and administrative expense. During 2015, the Company recognized
approximately $277,000 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.
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
Page 20
are included as a separate component of stockholder’s equity (deficit) (accumulated other comprehensive
income) in the accompanying consolidated balance sheets.
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, 2016, the Company estimated the fair value of long term fixed rate debt to be
approximately $507,000 compared to its carrying value of $475,000 (2015: fair value of approximately
$1,849,000 compared to its carrying value of $1,783,000).
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 one customer accounting for 10% or more of consolidated
revenues in 2016 and no customer accounting for 10% or more of consolidated revenues in 2015. The
Company had no customer that accounted for 10% or more of the outstanding accounts receivable balance at
December 31, 2016 or at December 31, 2015. The Company maintains its cash and cash equivalents in bank
deposit accounts, which at times may exceed insured limits. At December 31, 2016, the amount in excess of
governmental insurance protection was approximately $0.7 million, measured across all entities and
jurisdictions. At December 31, 2015, 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.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
Revenue Recognition. In May 2014, the Financial Accounting Standards Board (FASB) issued new
revenue recognition guidance to provide a single, comprehensive revenue recognition model for all contracts
with customers. Under the new guidance, an entity will recognize revenue to depict the transfer of promised
goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods
or services. A five step model has been introduced for an entity to apply when recognizing revenue. The new
Page 21
guidance also includes enhanced disclosure requirements, and is effective January 1, 2018, with early adoption
permitted for January 1, 2017. Entities have the option to apply the new guidance under a retrospective
approach to each prior reporting period presented, or a modified retrospective approach with the cumulative
effect of initially applying the new guidance recognized at the date of initial application within the Consolidated
Statement of Changes in Stockholders' Equity. We plan to adopt the new guidance effective January 1, 2018.
At this time we have not identified any impacts to our financial statements that we believe will be material in
the year of adoption. Based on the current estimated impact to our financial statements, we plan to adopt the
new guidance under the modified retrospective approach.
Measurement of Inventory. In July 2015, the FASB issued final guidance that simplifies the subsequent
measurement of inventories by replacing today’s lower of cost or market test with a lower of cost and net
realizable value test. This guidance applies only to inventories for which cost is determined by methods other
than last-in first out (LIFO) and the retail inventory method (RIM). Entities that use LIFO or RIM will continue
to use existing impairment model. The guidance is effective for public entities for fiscal years beginning after
15 December 2015, and interim periods within those fiscal years. This guidance had no impact to our financial
statements.
Business combinations – Measurement period adjustments. In September 2015, the FASB issued new
guidance that eliminates the requirement that an acquirer in a business combination account for measurement-
period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during
the period in which it determines the amount of the adjustment. The guidance is effective for public entities for
fiscal years beginning after 15 December 2015, and interim periods within those fiscal years. This guidance
had no impact to our financial statements.
Financial Instruments - Classification and Measurement. In January 2016, the FASB issued changes to
the accounting for financial instruments that primarily affect equity investments, financial liabilities under the
fair value option, and the presentation and disclosure requirements. This standard is effective for us beginning
in the first quarter of 2018; certain provisions allow for early adoption and we are evaluating whether we will
do so. The new standard should be applied by means of a cumulative-effect adjustment to the balance sheet as
of the beginning of the fiscal year of adoption, with certain exceptions. We have not yet determined the impact
of the new standard on our consolidated condensed financial statements.
Leases. In February 2016, the FASB issued a new lease accounting standard requiring that we recognize
lease assets and liabilities on the balance sheet. This standard is effective for us beginning in the first quarter of
2019; early adoption is permitted and we are evaluating whether we will do so. The new standard must be
adopted using a modified retrospective transition which includes certain practical expedients. We have not yet
determined the impact of the new standard on our consolidated condensed financial statements.
Share-Based Compensation. In March 2016, the FASB issued an accounting standard update aimed at
simplifying the accounting for share-based payment transactions. Included in the update are modifications to the
accounting for income taxes upon vesting or settlement of awards, employer tax withholding on share-based
compensation, forfeitures, and financial statement presentation of excess tax benefits. This standard is effective
for us beginning in the first quarter of 2017 and we will adopt it at that time. We do not believe this will have a
significant impact on our consolidated financial statements, as any employer tax will be relatively insignificant
for U.S. based employees and U.K. employees are covered under the EMI reporting scheme.
Income Taxes - Intra-Entity Asset Transfers. In October 2016, the FASB issued an accounting standard
update aimed at recognizing the income tax consequences of intra-entity transfers of assets other than inventory
Page 22
when they occur. This removes the exception to postpone recognition until the asset has been sold to an outside
party. This standard is effective for us beginning in the first quarter of 2018, and early adoption is permitted. It
is required to be applied on a modified retrospective basis through a cumulative-effect adjustment to the balance
sheet as of the beginning of the fiscal year of adoption. We have not yet determined the impact of the new
standard on our consolidated condensed financial statements.
Goodwill Impairment. In January 2017, the FASB issued new guidance that eliminates the requirement
to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to measure a
goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a
reporting unit’s carrying value over its fair value (i.e. measure the charge based on today’s Step 1). The
standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meet the
definition of an SEC filer. Early adoption is permitted for annual and interim goodwill impairment testing after
1 January, 2017. We have not yet determined the impact of the new standard on our consolidated condensed
financial statements.
(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 ......................................................................................
Gross inventories
Inventory reserves ...............................................................................
Net inventories ............................................................................
2016
2015
In thousands
$ 508
397
1,832
$ 2,737
(582)
$ 2,155
$ 369
252
1,433
$ 2,055
(505)
$ 1,550
Management performs quarterly reviews of inventory and either reserves or disposes of items not required
by their manufacturing plan, as well as 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
2016
2015
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
$
258
394
1,681
419
253
407
1,511
399
$ 2,752
(2,410)
$ 2,570
(2,438)
$ 342
$ 132
Page 23
Depreciation expense from operations was approximately $75,000 and $101,000 in the years ended
December 31, 2016 and 2015, respectively.
(6) GOODWILL
The Company uses a three-step approach to a goodwill impairment test. First, ASU 2011-08 allows
entities 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 unit’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 units and implied fair value of goodwill, the impairment
analysis is highly sensitive to actual versus forecast results. Finally, if the 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 impairment test of goodwill, performed at the end of the fourth quarter 2016,
and at the end of the fourth quarter 2015, the Company concluded that no impairment existed.
The changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015 were as
follows:
Beginning of the year ..................................................
Effect of exchange rate ...............................................
$ 385
(13)
$ 429
(44)
End of year ..................................................................
$ 372
$ 385
December 31, 2016
December 31, 2015
( In thousands)
The Company operates in two reporting units: LED’s (light emitting diode systems) and Laser &
Diodes. Goodwill as of December 31, 2016 and 2015 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 2016. 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, 2016 for each intangible asset class.
Page 24
Gross
Carrying
Amount
Accumulated
Amortization
(in thousands)
Net Balances
Acquired customer contracts and relationships .........................
Acquired technology design and programs................................
Other ..........................................................................................
Total ...................................................................................
1,543
261
85
$ 1,889 $
(1,543)
(261)
(85)
(1,889)
$
-
-
-
-
Gross carrying amounts and accumulated amortization of intangible assets were as follows as of
December 31, 2015 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 ...................................................................................
1,850
313
102
$ 2,265
(1,850)
(313)
(102)
(2,265)
$
$
-
-
-
-
Page 25
Years Ended December 31
(8) DEBT
Senior Fixed Rate Secured Bond (“PPI Bond”) to a private
investor, maturing on June 30, 2017 with an interest rate of 8%,
at December 31, 2016 and at December 31, 2015.
Principal Amount
Senior Fixed Rate Secured Bond to a private investor, maturing
on June 30, 2017, with an interest rate of 12.25%, at December
31, 2016 and at December 31, 2015.
Senior Fixed Rate Secured Bond to a private investor, maturing
on June 30, 2017, with an interest rate of 12.25%, at December
31, 2016 and at December 31, 2015
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, 2016 and at December 31, 2015 (3.0%
as of December 31, 2016 and at December 31, 2015).
Total All Debt
2016(1)
2015
In thousands
$902
$182
$ (3)
$ (33)
$179
$869
$75
$213
Less: Unamortized
discount and debt
issuance costs
Long-term debt less
unamortized discount and
debt issuance costs
Principal Amount
Less: Unamortized
discount and debt
issuance costs
Long-term debt less
unamortized discount and
debt issuance costs
Principal Amount
$ (1)
$ (10)
$74
$203
$151
$426
Less: Unamortized
discount and debt
issuance costs
Long-term debt less
unamortized discount and
debt issuance costs
Principal Amount
$ (2)
$ (24)
$149
$402
$1,049
$1,334
Principal Amount
Less: Unamortized
discount and debt
issuance costs
Long-term debt less
unamortized discount and
debt issuance costs
$1,457
$ (6)
$2.875
$ (67)
$1,451
$2,808
As of December 31, 2016, the Company had approximately $ 1,919,000 available under the various borrowing
facilities.
Scheduled future maturities of debt for the next five years:
Due by period
2017
2018
2019
2021
2020
in thousands
Total
Debt obligations ..................... $ 402 $
- $
- $
-
$
-
$ 402
Page 26
BORROWING AGREEMENTS
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 ($61,486) from July 1, 2015 through June 30,
2017*
(g) One-time fee of €31,413 ($34,259) 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 are due within 45
days of the end of such calendar quarter, or as agreed to by the lender.
At December 31, 2016, $181,692 remained outstanding under the note, which has been classified as
current portion of long term debt and reported net of $952 of unamortized debt discount, and reported net of
unamortized debt acquisition costs of $2,320.
At December 31, 2015, $901,876 remained outstanding under the note, which has been classified as
$589,189 current portion of long term debt and $312,687 long term debt and reported net of $9,458 of
unamortized debt discount, which has been reported as $8,506 short-term and $952 as long-term and reported
net of unamortized debt acquisition costs of $23,048, which have been reported as $20,729 short-term and
$2,320 as long-term.
Page 27
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, 2016, $75,288 remained outstanding under the note, which has been classified as
current portion of long-term debt and reported net of unamortized debt acquisition costs of $984. As of
December 31, 2016, the Company had net available funding of $305,000.
At December 31, 2015, $212,775 remained outstanding under the note, which has been classified as
$137,487 current portion of long-term debt and $75,288 as long term debt and reported net of unamortized debt
acquisition costs of $10,034, which have been reported as $9,051 short-term and $984 as long-term. As of
December 31, 2015, the Company had net available funding of $305,000.
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.
At December 31, 2016, $150,577 remained outstanding under the note, which has been classified as
current portion of long-term debt and reported net of unamortized debt acquisition costs of $2,316. As of
December 31, 2016, the Company had $1,220,000 available under this borrowing facility.
Page 28
At December 31, 2015, $425,551 remained outstanding under the note, which has been classified as
$274,974 current portion of long-term debt and $150,577 as long term debt and reported net of unamortized
debt acquisition costs of $23,622, which have been reported as $21,306 short-term and $2,316 as long-term.
As of December 31, 2015, the Company had $1,220,000 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 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 was
fully amortized over the two year amendment period to November, 2015.
On February 10, 2016, the Company entered into an amendment to the revolving credit facility to (i)
increase the line from £1,400,000 to £1,500,000; (ii) to reduce the discount rate from 2.50% plus Barclays base
rate to 2.00% plus Barclays base rate and service charges (iii) increase the early payment ceiling from 80% to
85% and extended the minimum period of this amendment to 12 months through February 10, 2017 with a
rolling evergreen provision.
The amount outstanding under the facility was $1,049,000 as of December 31, 2016 and $1,334,000 as
of December 31, 2015 reported as a short term debt under revolving credit facility. As of December 31, 2016,
the Company had approximately $394,000 available under this facility.
(9) TAXES
The Company had deferred tax assets, before considering the full valuation allowance, totaling
approximately $22.7 million as of December 31, 2016 and approximately $23.2 million as of December 31,
2015. 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 2001 through 2016 remain
open to examination by the federal and most state tax authorities. The Company completed an IRS compliance
audit for the 2012 tax year in 2015. In addition, the tax years 2010 through 2016 are open to examination in
foreign jurisdictions.
The following is a reconciliation of the federal income tax provision calculated at the statutory rate of 34%
to the recorded amount:
Page 29
Years Ended December 31,
Income (Loss) before taxes ................................................................
Reconciliation
Applicable statutory federal income tax benefit ................................
Foreign tax rate differential ...............................................................
Non deductible items .........................................................................
Valuation allowance ..........................................................................
2016
2015
In thousands
$ 1,255
$
280
427
(130)
28
(325)
95
(38)
33
(90)
-
Net income tax provision ...........................................................
$
-
$
The significant items comprising the deferred tax asset and liability at December 31, 2016 and 2015 are as
follows:
Years Ended December 31,
Domestic net operating loss carry forwards ................................
Foreign net operating loss carry forwards ...................................
R&D tax credit ............................................................................
Other ............................................................................................
Valuation allowance ....................................................................
Total .......................................................................................
2016
2015
In Thousands
$ 20,953
1,236
525
500
(23,214)
$ -
$ 21,348
1,504
525
313
(23,690)
$ -
As of December 31, 2016, the Company had United States federal net operating loss carry forwards
(NOLs) of approximately $61.5 million (2015: $62.1 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, 2016, the Company also has Canadian
federal NOLs of approximately $1.1 million (2015: $1.2 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, 2016, the Company also has a United Kingdom NOL of
approximately $3.4 million (2015: $4.4 million). At December 31, 2016, the Company also has an Ireland NOL
of approximately $2.0 million (2015: $2.3 million). The total valuation allowance against deferred tax assets
decreased by $0.4 million (2015: decreased by $0.2 million).
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, 2015, the Company had
recorded a long-term liability of $178,000, relative to the 2009 sale of its North American operations which
represented the only significant uncertain tax position of the Company. At December 31, 2016, management
Page 30
determined that this contingent liability no longer existed, as the audit period had lapsed, and reversed the
liability to other income.
(10) UNREGISTERED SALES OF EQUITY SECURITIES AND WARRANTS
Warrants
As of December 31, 2016, there were 4,456,067 common shares outstanding warrants with the following
exercise prices and expiration dates:
Number of Common Shares
Warrants
1,150,000
906,067
500,000
1,900,000
4,456,067
Exercise Price
Expiration Date
$0.80 –$1.72
$0.45 –$0.60
$0.10 –$0.10
$0.03
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
Performance measure - The performance measure is the driving factor behind the new policy. Broadly, the
target is EBITDA (defined as earnings before interest, taxes, depreciation, amortization, and stock-based
compensation) 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%
Page 31
of the outstanding shares of common stock of the Company, or (iii) an amount determined by the Board of
Directors of the Company.
Based on the Company’s performance in relation to the target EBITDA as noted above, management has
determined, and the Board of Directors has approved, that the performance achieved exceeds the 90% criteria,
resulting in all performance option awards made in 2014 to senior management to become 100% exercisable
and vested as of March 13, 2017. Total options vested under the EBITDA plan are 8,200,000.
As of December 31, 2016, there were 4,595,000 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 2014
Stock Incentive plan for 2015 & the 2007 Stock Incentive Plan (the “Plan”) for 2014.
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, 2016.
There is an intrinsic value on the options outstanding, and exercisable, at December 31, 2016 of $412,000 and
$179,000, respectively. There was no intrinsic value on the options outstanding, and exercisable, at December
31, 2015.
Page 32
During 2016 and 2015, 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 805,000 options granted during the year ended December 31, 2016 and there were 600,000 options
granted during the year ended December 31, 2015. These options vest over a one 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, 2016
and December 31, 2015 used in the Black-Scholes option pricing model were as follows:
Volatility………………………………………..
Expected option life……………………………
Interest rate (risk free)………………………….
Dividends……………………………………….
Weighted average grant date fair value………...
Twelve months
Ended
December 31,
2016
226.1%
7.8 years
1.69%
$0
$0.046
Twelve months
Ended
December 31,
2015
226.2%
7.75 years
2.01%
$0
$0.0314
Balance at December 31, 2014 ............................
Granted .......................................................
Exercised .....................................................
Cancelled ....................................................
Options
Outstanding
22,365,040
600,000
-
-
Balance at December 31, 2015 ............................
22,965,040
Vested and Exercisable at December 31, 2014 ...
12,045,040
Balance at December 31, 2015 ............................
Granted .......................................................
Exercised .....................................................
Cancelled ....................................................
Balance at December 31, 2016 ............................
22,965,040
805,000
-
(80,000)
23,690,040
Vested and Exercisable at December 31, 2016 ...
13,810,040
Vested and Expected to Vest at December 31,
Weighted
Average
Exercise Price
per Share ($)
0.07
0.03
-
-
0.07
0.09
0.07
0.05
-
0.13
0.07
0.09
Weighted
Average
Remaining
Contractual
Term
(in Years)
7.97
7.03
5.90
7.03
6.15
5.15
2016 .................................................................
23,305,042
0.07
6.11
Page 33
Range of
Exercise Prices
$ 0.02 – 0.99
Options
Outstanding
23,690,040
Weighted
Average
Contractual
Life (years)
Weighted
Average
Exercise
Price
Options
Exercisable
Weighted
Average
Exercise
Price
6.2
$
0.07
13,810,040 $
0.08
At December 31, 2016, there was approximately $20,000 of total unrecognized compensation cost related to
stock options granted (2015: $164,000). The cost is expected to be recognized over the next 1.30 years. Total
stock option expense recorded in 2016 and 2015 was approximately $178,000 and $277,000, respectively.
There were no options exercised during 2016 and 2015.
On January 10, 2017, there were 1,075,000 options exercised at an exercise price of $27,000, and having a
market value of $85,000.
(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, 2016 and
2015, 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 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 $28,000 in the year ended December 31, 2016 and
$27,000 in the year ended December 31, 2015. The Company incurred costs of approximately $2,000 in 2016
and approximately $2,000 in 2015 to administer the Plan. In 2015, approximately $15,000 of the $27,000
contributed by the Company was non cash, as the Company was allowed to offset these payments from the
forfeitures remaining in the account, and as allowed by 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 $47,000 and $46,000 in the
years ended December 31, 2016 and 2015. 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 $29,000 and $28,000 in the years ended December 31, 2016 and 2015, respectively. Plan
administration costs come out of the plan itself.
Page 34
(14) COMPANY FACILITIES, COMMITMENTS AND CONTINGENCIES
Other obligations and contingent liabilities
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. On February 24, 2017,
the Company signed a sixty one month lease, with an effective date of April 1, 2017, to lease 3,200 square feet
in an office building, in Salem, New Hampshire, with an average monthly rate of $3,525 per month plus the
tenant’s share of expenses.
ProPhotonix (IRL) Limited rents approximately 10,000 square feet for its operations in Cork, Ireland. The
original five year lease term ended on August 22, 2013 and the Company rents the space for its operations on a
month to month basis. Base rent is €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, ending September
30, 2016 at £70,000 per year. The Company has since renegotiated the lease for an additional 6 years at
£75,000 per year. After September 2019, there is a rent review for the final 3 years of the lease. The Company
has the option to terminate the lease with six months notice after September, 2017. A £10,000 penalty applies if
this six month notice is prior to September 2019, but is penalty free after September 2019.
The Company utilizes, or has assumed, capital leases to finance purchases of equipment or vehicles. At
December 31, 2016, the outstanding balance of capital leases was approximately $119,000 (£96,469) and at
December 31, 2015, all capital leases were paid in full. The Company records depreciation expense on assets
acquired under a capital lease in the consolidated statement of income.
The net book value of assets acquired under capital leases at December 31, 2016 and December 31, 2015,
is as follows:
Assets under capital lease ................................... $ 612,000
Less—accumulated depreciation ........................
(465,000)
Assets under capital lease, net ............................ $ 147,000
2016
2015
$ 565,000
(559,000)
$ 6,000
Scheduled future minimum lease payments under non-cancelable operating leases and future capital lease
payments for the next five years:
Due by Period
2017
2018
2019
2020
2021
2022+
Total
Revolving Credit Facility
Capital lease obligations
Operating lease obligations
In thousands
$1,049
68
93
$1,210
$-
51
92
$143
$-
-
93
$93
$-
-
92
$92
$-
-
93
$93
$-
-
69
$69
$1,049
119
532
$1,700
Page 35
The Company expensed approximately $206,000 and $217,000 in rent for the years ended December 31, 2016
and 2015, 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.
(16) GOVERNMENT GRANTS
In June 2016, the Company entered into an EU funded Fast Track to Innovation program to partner with
other participants, including the end customer, in the development of a high power digital laser for a railway
industry inspection system. The grant estimate is up to €360,000 with completion of the entire development project on
June 1, 2018. During the year, the Company billed the EU program for a total of $42,000 of direct expenses for
reimbursement, as well as $11,000 of indirect expenses for a total of $53,000. These amounts are reflected in
the consolidated statement of income for 2016. In addition, the Company received advance funding totaling
$285,000, which is reflected on the consolidated balance sheet.
(17) 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.
The operating profit / (loss) for each segment includes selling, research and development and expenses directly
attributable to the segment. In addition, the operating profit 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.
Page 36
2016
2015
(In thousands)
Years Ended December 31
Revenues:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
$ 6,802
9,443
$ 6,578
7,833
Total revenues .............................................................................................
$
16,245
$
14,411
Gross profit:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
$ 3,276
4,107
$ 3,136
2,834
Total gross profit .........................................................................................
$
7,383
$
5,970
Operating profit:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
$ 190
1,302
$ 502
288
Total operating profit ...................................................................................
$
1,492
$
790
2016
2015
(In thousands)
Years Ended December 31
Current assets:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
Corporate .....................................................................................................
Total current assets ......................................................................................
Property, plant & equipment:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
Corporate .....................................................................................................
Total property, plant & equipment ..............................................................
Goodwill:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
Corporate .....................................................................................................
Total goodwill .............................................................................................
Other assets:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
Corporate .....................................................................................................
Total other assets .........................................................................................
$
$
$
$
$
$
$
$
2,060
2,641
965
5,666
39
298
5
342
372
—
—
372
69
—
5
74
$
$
$
$
$
$
$
$
Total assets:
LEDs ...........................................................................................................
Laser & diodes ............................................................................................
Corporate .....................................................................................................
2,540
2,939
975
Total assets ..................................................................................................
$
6,454
$
1,659
2,729
487
4,875
50
73
9
132
385
—
—
385
76
—
5
81
2,170
2,802
501
5,473
Page 37
Years Ended December 31
Revenues by geographic area:
United States ...............................................................................................
Canada, Mexico & So. America ..................................................................
Europe .........................................................................................................
Asia & the rest of the world ........................................................................
$
4,850
1,932
7,777
1,686
$
4,865
1,048
6,703
1,795
Total ......................................................................................................................
$
16,245
$
14,411
2016
2015
(In thousands)
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 ......................................................................................................................
$
$
5
411
297
713
$
$
9
435
72
516
2016
2015
(In thousands)
(18) SUBSEQUENT EVENTS
The Company has evaluated subsequent events through March 13, 2017, 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.
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