Annual Report
2019
ProPhotonix Partnership Approach
At ProPhotonix, our process always begins with the customer requirements. We recognize the importance of understanding
every aspect of a customer’s application and its impact on the illumination specification. Our engineering team will
collaborate directly with your engineers and project managers to ensure the correct specification is developed. ProPhotonix
then configures the optimum illumination from its established platforms or leverages the more than 350 combined years’
experience of the multidisciplinary engineering experts to develop a product concept for your application. We work closely
with our supply chain partners and manufacture many critical parts to ensure reliable supply and a quick turnaround at
each stage of the development process. ISO-certified production facilities offer the flexibility to produce a full range of
illumination products, from relatively simple laser collimators or LED arrays through to complex powerful systems in both
low and high volume for our customers across the globe.
Front Cover Images - From left to to right, top to bottom
SpecBright Spotlight - A compact, high intensity light ideal for applications from machine vision and spectroscopy to life
sciences applications.
Customized IR LED Light based on the SpecBright - Platform designed for use in mobile and fixed number plate recognition
systems. High optical performance, lifetime and reliability requirements were addressed with this design.
Photon Laser Module Range - A range of compact and self-contained laser modules. Available in a wide range of optical
outputs, wavelengths and power levels this range provides an ideal platform for a broad range of applications.
Range of Photon Modules Customized
405nm 5mW Photon configured for launching into fibre optic cable for use in Particle detection application
450nm Photon module with customer adjustable focus.
660nm 3.5mW laser module with integrated mounting reference.
Solutions for LEDs
ProPhotonix Limited (IRE)
3020 Euro Business Park
Little Island
Cork, T45 X211, 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,
Suite 200,
Salem, NH 03079
+1-603-893-8778
TABLE OF CONTENTS
BUSINESS ACTIVITIES:...................................................................................................................................... 4
2019 ANNUAL REPORT TO SHAREHOLDERS ............................................................................................... 5
REPORT OF DIRECTORS .................................................................................................................................... 6
AUDITOR............................................................................................................................................................... 7
CORPORATE GOVERNANCE REPORT FOR THE YEAR ENDED DECEMBER 31, 2019 .......................... 7
AUDIT COMMITTEE REPORT ......................................................................................................................... 16
GOVERNANCE, NOMINATIONS AND REMUNERATIONS COMMITTEE REPORT ............................... 17
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BUSINESS ACTIVITIES:
ProPhotonix and its subsidiaries (ProPhotonix and Company) 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 (machine vision illumination and
UV curing), 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. Ultraviolet (“UV”) curing is an emerging market for both LED and laser technology.
The primary market is curing of material (inks, adhesives, coatings) but also luminescence in biomedical and
fluorescing applications.
Medical
The medical and dental market requires many different LED systems and laser modules for unique processes,
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, and a portable x-ray equipment and
dental imaging manufacturer. The Company views the medical field a strategic market 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 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.
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2019 ANNUAL REPORT TO SHAREHOLDERS
To the Shareholders of ProPhotonix Limited:
Though challenging, 2019 ended the year very strong in the second half. The year represents the tale of two halves. Revenue
in the second half increased 8.9% over the first half with bookings increasing 30% over the same period. Cost reductions
initiated in the first half carried through the second half contributing to the overall improved profit for 2019. The
commitment to investments continues with the award of two patents in early 2020 and we intend to continue making such
applications in the future where and when appropriate. During the year, ProPhotonix was awarded a European Union
Horizon 2020 Innovation grant to develop innovative reactor solutions for disinfection of water. The expected benefit to
the Company from the project is the further development of deep UV (UVC) capability and knowledge for development of
future products. We continue to make the necessary investments to achieve our business objectives.
Financial Summary:
As compared to 2018, sales decreased 9% to $14.9 million from a variety of shifts in business specific to each customer.
Many of our top accounts reflect increases but offset by decreases, a net decrease. No single factor or loss of account is
attributed to the net decline in revenue. Gross profit decreased due to the lower sales volume; and in 2018 the Company
reports an operating profit of $1.1 million compared to an operating loss of $1.0 million in 2018. Operating losses, excluding
the benefit/expense of stock option compensation in each respective year, were $114,000 for 2019 and $106,000 for 2018.
The balance sheet remains consistent with the prior year with cash at year-end of $1.5 million (2018: $1.9 million) and a
current ratio of 1.7 (2018: 1.7).
Strategy:
The first part of our strategy relates to our existing customers and relationships. We consider these relationships vitally
important and continue to work with customers to provide solutions to achieve their continued market success. Their success
fuels our success and provides us the opportunity to develop new products and market solutions for other customers and
applications. The second part of the Company’s strategy remains established in its OEM heritage as well as the development
of products directed at specific markets. ProPhotonix has made and will continue to make investments in commercially
attractive OEM opportunities and product development including UV, multi-wavelength devices and laser technology
advances, in the fulfillment of our strategies. We continue to concentrate our engineering capacity in defined projects and
areas that we believe are poised for fast market expansion.
In conclusion, we thank you; co-workers, customers, suppliers, service providers and investors for your continued support.
Respectfully submitted,
Tim Losik
President and Chief Executive Officer
Ray Oglethorpe
Non-Executive Chairman
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REPORT OF DIRECTORS
FOR THE YEAR ENDED DECEMBER 31, 2019
The Directors present their report for ProPhotonix and its subsidiaries (the “Company”) together with the financial
statements for the year December 31, 2019. The financial statements are prepared under United States Generally Accepted
Accounting Principles (“US GAAP”).
DIRECTORS’ RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS
The Directors are responsible for preparing the Report of the Directors and the financial statements in accordance with
applicable requirements. The Directors have prepared the Company financial statements in accordance with United States
Generally Accepted Accounting Principles (“US GAAP”). The Directors will not approve the financial statements unless
they are satisfied that they give a true and fair view of the state of affairs and of the profit or loss of the Company for that
year.
In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether the applicable US GAAP have been followed, subject to any material departures disclosed and
explained in the Company’s financial statements;
• assess the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern; and
• use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations,
or, have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the financial position of the Company. They are also
responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities. They are responsible for such internal control as they determine is necessary to
enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and
have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and
to prevent and detect fraud and other irregularities.
The Directors confirm that:
• so far as each Director is aware, there is no relevant audit information of which the Company’s Auditor is unaware;
and
• the Directors have taken all steps that they ought to have taken as Directors to make themselves aware of any
relevant audit information and to establish that the Auditor is aware of that information.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the
Company’s website.
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AUDITOR
A resolution, approved by the Directors, to reappoint KPMG LLP as the Company’s Auditor will be proposed at the
forthcoming Annual General Meeting. In accordance with normal practice, the Directors will be authorized to determine
the Auditor’s remuneration. The Auditor’s total remuneration for all services during 2019 was $214 thousand of which $107
thousand was not related to audit fees.
CORPORATE GOVERNANCE REPORT FOR THE YEAR ENDED DECEMBER 31, 2019
EFFECTIVE AND EFFICIENT GOVERNANCE
CHAIRMAN’S INTRODUCTION AND SUMMARY
It is the responsibility of the Chairman to oversee the Company’s adoption, delivery and communication of appropriate
corporate governance arrangements and to check that those arrangements are effective and efficient through regular review.
The Directors have adopted the principles of the Quoted Companies Alliance Corporate Governance Code for Small and
Mid-Sized Companies (the “QCA Code”) to the extent that the Directors consider it appropriate, and having regard to the
Company’s size, board structure, stage of development and resources. The QCA Code, sets out ten principles to be followed
for companies to deliver growth in long term shareholder value, encompassing an efficient, effective and dynamic
management framework accompanied by good communication to promote confidence and trust.
The ten principles of the QCA Code and the relevant section in this Annual Report that explains the Company’s application
of these principles are shown below:
1. A strategy and business model which promotes long-term value creation for shareholders.
Business Activities (page 4)
Letter to Shareholders (page 5)
2. Understand and meet shareholder needs and expectations.
Investor Relations (page 8)
3. Take into account wider stakeholder needs and social responsibilities and their implications for long-term
success.
Corporate Culture, Stakeholder and Social Responsibilities (page 9)
4. Embedded and effective risk management considering both opportunities and threats, throughout the
organization.
Control Environment (page 9)
Internal Control and Assessment of Business Risk (page 10-12)
5. A well-functioning and balanced Board.
Board Overview (pages 13-14)
Board of Directors (pages 15-16)
6. Board experience, skills and capabilities.
Board Overview (pages 13-14)
Board of Directors (pages 15-16)
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CORPORATE GOVERNANCE REPORT 2019 (cont.)
7. Performance of the Board and continuous improvement.
Board Overview (pages 13-14)
8. Corporate culture based on ethical values and behaviors.
Corporate Culture and Social Responsibility (page 9)
9. Effective governance structures which support good decision making.
Chairman’s Introduction and Summary – Corporate Governance Report (page 7)
Board Overview (pages 13-14)
Board Committees (page 15)
10. Communication of Company governance and performance.
Chairman’s Introduction and Summary (page 7)
Audit Committee Report (page 16)
Governance, Nominations and Remunerations Committee Report (page 17-19)
INVESTOR RELATIONS
ProPhotonix seeks to maintain a regular dialogue with both existing and potential shareholders in order to
communicate its strategy and progress and to understand the needs and expectations of shareholders.
Beyond the Annual General Meeting, the Chief Executive Officer and, where appropriate, other members of the
senior management team meet with investors and equity research analysts to provide them with updates on the
business and to obtain feedback regarding the market’s expectations of ProPhotonix.
ProPhotonix’s investor relations activities encompass dialogue with both institutional and private investors.
The Board also endeavors to maintain a dialogue and keep shareholders informed through its public
announcements and Company website (https://www.prophotonix.com/). ProPhotonix’s website provides not
only information specifically relevant to investors (such as the Company’s annual report and accounts, investor
presentations, regulatory announcements and share price information) but also regarding the nature of the business
itself, the technology, key products and background to ProPhotonix’s target markets and non-regulatory press
releases.
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CORPORATE GOVERNANCE REPORT 2019 (cont.)
CORPORATE CULTURE, STAKEHOLDER AND SOCIAL RESPONSIBILITIES
The Board places a high priority on regular communications with its various stakeholder groups and aims to ensure that all
communications concerning the Company’s activities are clear, fair and accurate. ProPhotonix’s website is regularly
updated and announcements or details of presentations and events are posted onto the website.
The Company engages regularly with various stakeholder groups, including shareholders, customers, suppliers and other
market participants thereby ensuring that it remains up to date with key resources and relationships both out-with and within
the business.
The Board seeks to maintain the highest standards of integrity and probity in the conduct of the Company’s operations.
These values are enshrined in the written policies and working practices adopted by all employees in the Company. An open
culture is encouraged within the Company, with regular communications to staff regarding progress and staff feedback
regularly sought. Senior management regularly monitors the Company’s cultural environment and seeks to address any
concerns than may arise, escalating these to Board level as necessary.
ProPhotonix is committed to providing a safe environment for its staff and all other parties for which the Company has a
legal or moral responsibility in this area.
CONTROL ENVIRONMENT
The Company has established operating procedures appropriate to its size and structure for reporting both
financial and non-financial information to the Board. These include, but are not limited to:
• operating guidelines and procedures with approval limits;
• accounting policies, controls and procedures;
• performance monitoring systems updated monthly for review at Board meetings; and
• regulatory and legal changes that may materially impact on the business.
INTERNAL CONTROL AND ASSESSMENT OF BUSINESS RISK
The systems for internal control and risk management processes are designed to manage and mitigate risks that
may impact achievement of the Company’s strategic objectives. Such systems can only provide a reasonable but
not absolute level of assurance against material misstatement or loss. The Company’s overall risk assessment
process is facilitated by the CEO, who runs monthly operational progress meetings and holds and appraises the
Corporate Risk Register (CRR) at least once a year. Once the review has concluded the revised CRR is forwarded
to the Board, which assesses the updated register and confirms the key risks.
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CORPORATE GOVERNANCE REPORT 2019 (cont.)
PRINCIPAL RISKS AND UNCERTAINTIES
The Board regularly considers those risks that might impact performance of the Company, including at least
annually in preparing this Annual Report, and will monitor mitigating actions being taken.
The key business and financial risks for the Company are set out below:
General
Notice of Risk
As part of the process for admission to AIM, the Company reviewed and updated its
principal risks and uncertainties as discussed in the Company's Admission Document.
Business risks were considered again by the Board in preparing this Annual Report and
those considered most important are set out below and should be considered with those
risks described in the Admission Document. As part of the Company’s structured risk
management process, the Board will regularly consider those risks that might impact
performance of the Company and will monitor mitigating actions being taken.
RISK AREA
RISK/MITIGATION
Strategic
Customer concentration. At times, the Company is exposed to concentration of revenue in
its customer base. This was the case where one customer represented approximately 14% of
total revenue in 2019. While customer concentration will change during any financial period,
the loss of any of the key client, or the disruption in business of any key client, could have a
material impact on the Company’s financial results. The Company is reliant on the long-term
commercial success of its clients. A decline in business of any of the Company’s key clients
could have a material adverse effect on the Company’s business, operations, revenues or
prospects. The Company looks to mitigate such risks through having strong relationships
with its current customers and by attracting new clients.
Competition. The businesses of the Company operate in highly fragmented industries
where there are not only many competitors but also dominant market leaders. The Company
seeks to mitigate such risks through superior technology, flexibility and speed with which to
conduct business, and close working relationships with its customers.
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CORPORATE GOVERNANCE REPORT 2019 (cont.)
PRINCIPAL RISKS AND UNCERTAINTIES (cont.)
RISK AREA
RISK/MITIGATION
Financial
Going Concern. While the Company has been in existence for more than 60 years, there
have been periods where it has incurred losses for several years at a time. The Company
historically operated with thin profit margins. The Company mitigates this risk in several
ways: Access to capital via its relationship with SQN Capital - a lender to the Company,
and relationships with equity investors. If the Company is unable to secure financing when
needed it could have a material adverse impact on the financial condition of the business.
Cash Flow. Risk of the loss of revenue/cash flow became evident in the first quarter 2020
emphasized by the COVID-19 virus outbreak. The Company is dependent upon sustained
operations and shipments to generate revenue and cash flow. In the event of a government
or self-imposed shutdown causing the cessation of shipments for a period, a shortfall of
cash flow could occur. The Company accesses capital as mentioned above to mitigate this
risk but there can be no assurance there will be sufficient capital to sustain a period of no
shipments/revenue/cashflow.
Operational
Ability to recruit and retain skilled personnel. The Company’s operational and
financial performance is dependent upon its ability to attract and retain effective
personnel. The Directors believe that the Company has in place the appropriate
remuneration and other incentivization structures and processes to attract and retain the
caliber of employees necessary to ensure the efficient management and development of
the Company. However, any difficulties encountered in hiring and retaining appropriate
employees and the failure to do so may have a detrimental effect upon the trading
performance of the Company. The ability to attract and retain employees with the
appropriate expertise and skills cannot be guaranteed. This risk may be exacerbated by the
uncertainty surrounding Brexit.
Management Infrastructure. Due to the size of the Company, there are several
individuals/functions that are single points of management. As such, the departure of a
particular employee may cause disruption or dislocation to the business. Where possible,
the Company seeks to create a matrix of skills between various individuals to provide
overlapping cover while it seeks to replace a departing employee.
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CORPORATE GOVERNANCE REPORT 2019 (cont.)
PRINCIPAL RISKS AND UNCERTAINTIES (cont.)
RISK AREA
RISK/MITIGATION
Operational
(Cont.)
Brexit. One of the two operating subsidiaries operates in the United Kingdom (UK).
Whilst the timing of the departure by the UK from the European Union is fixed and
determined, the outcome remains uncertain in regards trade and tariff agreements,
immigration agreements, value added tax (VAT) agreements, logistics impact, foreign
exchange rate risk, availability and cost of certain materials, and among others taxation
agreements. A review of inbound and outbound goods tariffs associated with the UK and
Irish entities reflects that tariffs, under the WTO, will not materially affect our business.
Whilst the full business implications of Brexit remain uncertain, and will do for some time,
the Board believes the Company is well positioned to react to the potential challenges and
opportunities ahead
Supply Chain. Risks in the supply chain became evident in the first quarter 2020
emphasized by the world-wide COVID-19 virus outbreak. The Company is dependent
upon many components supplied from China and other COVID -19 impacted areas of the
world and any disruption, including seemingly minor components, could have a material
impact on the short-term aspects of the business. Such a scenario highlights the
dependence on certain geographies for various supply chain requirements. Attempts are
made to mitigate this risk by qualifying dual sourcing for critical components and
assemblies. However, there can be no assurance that circumstances could occur where
supply chain disruptions negatively impact the business
Business Systems. The operations of the Company utilize multiple manufacturing and
financial systems to routinely operate the business. These systems are beyond their
supported life by the system designers. The risk to the Company is that one or more of
these systems may cease to function or may operate ineffectively in the future. The
Company mitigates this risk using third-party support services knowledgeable with the
operating systems. There can be no assurance that continued service and support by third
parties will be available in the future.
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CORPORATE GOVERNANCE REPORT 2019 (cont.)
BOARD OVERVIEW
The Board is responsible for the long-term growth and profitability of ProPhotonix Limited. Among its responsibilities it
works with management to set corporate values and to develop strategy, including deciding its risk management policy and
financial objectives.
A schedule of matters reserved for the Board’s resolution details key aspects of the Company’s affairs that are not delegated
beyond the Board (including, among other things, approval of business plans and budgets, material expenditure and
alterations to share capital).
The matters reserved for the attention of the Board include:
• Overall business strategy;
• Review of key operational and commercial matters;
• Review of key finance matters, including approval of financial budgets, changes to capital structure,
acquisitions and disposals of businesses, material capital expenditure and dividends;
• Governance: Board membership and powers including the appointment and removal of Board members,
the set-up and delegation of matters to appropriate Committees, and the reviewing of reporting back thereof;
• Approval of financial statements, both interim and year end;
• Stock exchange related issues including the approval of communications to the stock exchange and
communications with shareholders in conjunction with any financial public relations firm;
• Subsidiary board appointments, as the 100% shareholder, and review of key decisions at their board
meetings;
• Approval of acquisitions, disposals, borrowing facilities, premises and matters proposed by the corporate
lawyer and nominated advisor and broker;
• Appointment and performance review of key advisors; and
• Approval of letters of recommendation for the Employee Benefit Trust in respect of the operation of share
option schemes.
The Board seeks to meet regularly during the year and the entire Board is invited to attend all meetings. In the financial year
to December 31, 2019 the Board met on 17 occasions. The Board usually has two meetings a year with extended time
allowed where the focus is predominantly on core strategic issues.
The Chairman and the Company CEO plan the agenda for each Board meeting in consultation with all other Directors.
The agenda is issued with supporting papers ahead of the Board meetings, along with appropriate information required to
enable the Board to discharge its duties.
Matters referred to the Board are considered by the Board as a whole and no one individual has unrestricted powers of
decision.
Where Directors have concerns, which cannot be resolved in connection with the running of the Company or a proposed
action, their concerns would be recorded in the Board minutes. This course of action has not been required to date. The
Directors can obtain independent professional advice at the Company’s own expense in performance of their duties as
Directors.
The composition of the Board of Directors is shown on page 14. The Board of ProPhotonix is currently comprised of three
Directors: the Non-Executive Chairman, a further Non-Executive Director and the Chief Executive Officer. As per the
individual biographies, the Directors have a range of experience and provide a balance of skills, experience and knowledge
to the Board.
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CORPORATE GOVERNANCE REPORT 2019 (cont.)
BOARD OVERVIEW (cont.)
The Board, led by the Chairman, periodically reviews the overall performance of the Board and makes adjustments to ensure
the structure and focus of the Board meet the evolving requirements of the Company. The Board currently does not practice
an annual review of each Board member and will continue to evaluate this aspect of the QCA.
All Directors are subject to election at the first Annual General Meeting following their appointment and to re-election
annually thereafter.
The Chairman and Chief Executive have distinct roles; the principle responsibility of the Chairman is the effective operation
of the Board of Directors, whilst the Chief Executive is responsible for the operation of the Company to deliver on its
strategic objectives.
The role of the Company Secretary is to ensure reliable and regular information flows to the Board and its Committees and
to ensure applicable rules and regulations are followed. The Company Secretary is available to all Directors to provide
advice and assistance and is responsible for providing governance advice to the Board.
The Board considers both Non-Executive Directors (the Non-Executive Chairman and the three Non-Executive Directors)
to be independent in terms of their ability to make unencumbered decisions for the long-term success of the Company. The
Director biographies as at December 31, 2019 are below:
Timothy “Tim” Paul Losik
President and Chief Executive Officer (CEO)
Mr. Losik was appointed as President and CEO of ProPhotonix in 2013 and has been a member of the board since 2010.
From 2008, Mr. Losik held the positions of COO and CFO of ProPhotonix with responsibility for all day-to-day operations
across the Company’s worldwide operating units and to head its financial organization. Prior to joining the Company, Mr.
Losik held senior operating and/or financial executive positions for various publicly listed and private enterprises (primarily
in the technology sector).
Raymond “Ray” Joseph Oglethorpe
Non-Executive Chairman
Mr. Oglethorpe is currently President of Oglethorpe Holdings, LLC, a private investment company, and has served as a
board director on numerous public and private companies. Mr. Oglethorpe served as President of America Online, Inc. from
2000 until his retirement in 2002. Prior to that time, Mr. Oglethorpe was a senior vice president responsible for directing
the technologies and member services organizations of America Online, Inc. Mr. Oglethorpe has been a member of the
Board since 2000 and is a member of both the Governance, Nominations and Remuneration committee and Audit
committee.
Gerald Vincent “Vincent” Bodenham Thompson
Non-Executive Director
Mr. Thompson has over 30 years of experience in corporate finance. He spent the majority of his career with Morgan
Grenfell & Co. Limited and Hambros Bank Limited (later Société Générale, following the takeover of Hambros Bank
Limited) and was a Director at both. From 2003 to 2006 he was a Director at MacArthur & Co. Limited and from 2007 to
2008, was an Associate of Corbett Keeling & Co, both corporate finance boutiques. In 2009, Mr. Thompson formed his
own corporate finance boutique, Easton Partners LLP. In June 2018, Mr. Thompson became a Non-Executive Director of
SANDAIRE Limited, a financial services company. He is chairman of the Audit committee and a member of the
Governance, Nominations and Remuneration committee.
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CORPORATE GOVERNANCE REPORT 2019 (cont.)
BOARD OVERVIEW (cont.)
A summary of Board and Committee meetings attended in the year ended December 31, 2019 is set out below:
Meetings
Board
Audit Committee
Governance,
Nomination,
Remuneration
Committee
17
4
3
BOARD COMMITTEES
Current
Member
Attendance
100%
100%
100%
Two committees of the Board provide oversight to support the proper governance of the Company:
The Audit Committee is responsible for providing formal and transparent reporting of the financial performance
of the Company for applying internal control principles and for maintaining an appropriate relationship with the
company’s auditors.
The Governance, Nominations and Remuneration Committee is responsible for oversight of corporate and
director governance, identifying, evaluating, recommending qualified director candidates to the Board, and
overseeing remuneration of the individual directors and management.
AUDIT COMMITTEE
The Audit Committee comprises only independent Non-Executive Directors and is supported by the Chief Financial Officer.
The Audit Committee determines the terms of engagement of the Company’s Auditor and, in consultation with the Auditor,
the scope of the audit. It will receive and review reports from management and the Auditor relating to the interim and annual
accounts as well as the accounting and internal control systems in use by the Company and the Group. The Audit Committee
has unrestricted access to the Company’s Auditor. The Audit Committee also reviews accounting and treasury policies,
financial reporting including key performance indicators and supporting key areas of management judgements, and
corporate governance standards. In the financial year to December 31, 2019 the Audit Committee met on four occasions,
and all four meetings were attended by the external Auditor (KPMG LLP).
GOVERNANCE, NOMINATIONS AND REMUNERATION COMMITTEE
The Governance, Nominations and Remuneration Committee comprises only independent Non-Executive Directors and is
supported by the Chief Executive Officer. The Committee reviews the scale and structure of the Non-Executive Directors’
and Executive Directors’ future remuneration and the terms of the service agreements with due regard to the interests of
shareholders. No Director is permitted to participate in discussions or decisions concerning their own remuneration. The
Remuneration Committee also approves annual salary review limits, bonus schemes and payment limits, in addition to
significant employee benefits, such as pensions, medical insurance and share option schemes. The Committee reviews the
constituents of the Board and its Committees to ensure appropriate balanced representation.
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CORPORATE GOVERNANCE REPORT 2019 (cont.)
SENIOR MANAGEMENT AND COMPANY FUNCTIONS
ProPhotonix’s senior management is involved in multiple functions within the Company. It is responsible for reviewing the
overall organizational structure of the Company, as well as refining and implementing the recruitment and retention program
in order to identify and hire the right candidates as required in addition to retaining existing staff members.
AUDIT COMMITTEE REPORT
The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) and in accordance with the QCA Code and consists of Messrs. Raymond J. Oglethorpe and
Vincent Thompson, each of whom have been determined by the Board of Directors to be an “independent director”, to
satisfy the heightened independence requirements of the Securities and Exchange Commission (the “SEC”) applicable to
all members of a registrant’s Audit Committee and to otherwise satisfy the applicable audit committee membership
requirements promulgated by the SEC and the QCA Code. In addition, each member of the Audit Committee satisfies the
independence requirements of the QCA Code. The Audit Committee acts pursuant to the Amended and Restated Audit
Committee Terms of Reference, a copy of which is available by clicking “Audit Committee” on the “Committee
Assignments” page of the Corporate Governance section of the Investors page of the Company’s website at
www.prophotonix.com. During the fiscal year ended December 31, 2019, the Audit Committee met four times.
The Audit Committee assists the Board of Directors in fulfilling its responsibilities to stockholders concerning the
Company’s financial reporting and internal controls, oversees the Company’s independent registered public accounting firm
and facilitates open communication among the Audit Committee, the Board of Directors, the Company’s independent
registered public accounting firm and management. The Committee considered, in conjunction with management and the
external auditor, the significant areas of estimation, judgement and possible error in preparing the financial statements and
disclosures, discussed how these were addressed and approved the conclusions of this work. The principal area of focus in
this regard was in relation to going concern including the appropriateness of preparing the financial statements on a going
concern basis and the appropriateness of the disclosures in the financial statements in relation to the risks associated with
going concern assumption. The Audit Committee discusses with management and the Company’s independent registered
public accounting firm the financial information developed by the Company, the Company’s systems of internal controls
and the Company’s audit process and various matters relating to the results of the annual audit of the Company. The Audit
Committee is directly responsible for appointing, evaluating, retaining, and, when necessary, terminating the engagement
of the independent registered public accounting firm who will conduct the annual audit of the financial statements of the
Company. Each year the Company assesses the auditor activities and if appropriate will retender as deemed appropriate.
The Audit Committee is also responsible for pre-approving all audit services, as well as all review, attest and non-audit
services to be provided to the Company by the Company’s independent registered public accounting firm. The Audit
Committee oversees investigations into complaints received by any member of the Board of Directors or employee of the
Company regarding accounting, internal accounting controls or auditing matters. The Audit Committee reviews all related
party transactions on an ongoing basis, and all such transactions must be approved by the Audit Committee. The Audit
Committee is authorized, without further action by the Board of Directors, to engage such independent legal, accounting
and other advisors as it deems necessary or appropriate to carry out its responsibilities.
ProPhotonix’s external Auditor is KPMG LLP, which has served the Company since September 2012. The external audit
function provides independent review and audit. It is the responsibility of the Audit Committee to review and monitor the
external Auditor’s independence, objectivity and the effectiveness of the audit process, taking into consideration relevant
professional and regulatory requirements as well as developing and implementing policy on the engagement of the external
Auditor to supply non-audit services. Non-audit services are assessed for auditor independence by the Audit Committee and
directed to other service providers as appropriate.
The Audit Committee monitors procedures to ensure the rotation of external audit partners every five years and audit
managers every seven years.
Page | 16
GOVERNANCE, NOMINATIONS AND REMUNERATIONS COMMITTEE REPORT
The GNR Committee consists of Messrs. Raymond J. Oglethorpe and Vincent Thompson each of whom have been
determined by the Board of Directors to be an “independent director”, and to otherwise meet the nominating and
compensation committee membership requirements promulgated by the SEC and the QCA Code. The GNR Committee
acts pursuant to the Governance, Nominations and Remuneration Committee Terms of Reference, a copy of which is
available on the “Committee Assignments” page of the Corporate Governance section of the Investors page of the
Company’s website at www.prophotonix.com. The GNR Committee met two times during the fiscal year ended December
31, 2019.
With respect to corporate governance matters, the GNR Committee is responsible for establishing and monitoring the
adequacy of, and the Company’s compliance with, policies and processes regarding principles of corporate governance,
monitoring and taking appropriate action with respect to corporate governance requirements of the SEC and the QCA Code,
and reviewing and recommending appropriate action to the Board with respect to all stockholder proposals submitted to the
Company.
With respect to director nomination matters, the GNR Committee is responsible for establishing qualifications to be
considered when evaluating candidates for nomination for election to the Board of Directors and appointment to the
committees thereof. In addition, the GNR Committee is responsible for identifying, evaluating and recommending qualified
director candidates to the Board of Directors and its committees for nomination or appointment, as the case may be,
evaluating the continued qualification of directors nominated for re-election, and annually reviewing the composition of the
Board to ensure that the directors, as a group, provide a significant breadth of experience, knowledge and abilities to the
Board.
Whilst the Board does not currently adopt a regular and formal appraisal process for each of the Directors, the Board does
monitor the Non-executive Directors’ status as independent to ensure a suitable balance of independent Non-executive and
Executive Directors remains in place. In addition, the Board considers on a regular basis, the adequacy of the composition
of the Board and at least annually, succession planning.
The GNR Committee generally assists the Board of Directors with respect to matters involving the compensation of the
Company’s directors and executive officers, oversight of corporate governance matters and identifying individuals qualified
to become members of the Board. The responsibilities of the GNR Committee with respect to director and executive officer
compensation include determining salaries and other forms of compensation for the Chief Executive Officer and the other
executive officers of the Company, reviewing and making recommendations to the Board with respect to director
compensation, periodically reviewing and making recommendations to the Board with respect to the design and operation
of incentive-compensation and equity-based plans and generally administering the Company’s equity-based incentive plans.
Director compensation is described in Footnote 11 to the Financial Statements on page 45. The GNR Committee may form,
and delegate authority to, one or more subcommittees as it deems appropriate under the circumstances. In addition, to the
extent permitted by applicable law and the provisions of a given equity-based incentive plan, the GNR Committee may
delegate to one or more executive officers of the Company the power to grant options or other stock awards pursuant to
such plan to employees of the Company or any subsidiary of the Company who are not directors or executive officers of
the Company. Historically, the Chief Executive Officer and Chief Financial Officer, in consultation with the GNR
Committee and within certain per-person and per-year limits established by the GNR Committee, have been authorized to
make limited stock option grants to non-executive officers of the Company.
Page | 17
GOVERNANCE, NOMINATIONS AND REMUNERATIONS COMMITTEE REPORT (cont.)
The Company’s Chief Executive Officer generally makes recommendations to the GNR Committee regarding the
compensation of other executive officers. In addition, the Chief Executive Officer is often invited to attend GNR Committee
meetings and participates in discussions regarding the compensation of other executive officers, but the GNR Committee
ultimately approves the compensation of all executive officers. Other than making recommendations and participating in
discussions regarding the compensation of other executive officers, the Company’s Chief Executive Officer generally does
not play a role in determining the amount or form of executive compensation. Except for the participation by the Chief
Executive Officer in meetings regarding the compensation of other executive officers, the GNR Committee meets without
the presence of executive officers when approving or deliberating on executive officer compensation.
Director Compensation for the year ended December 31, 2019 and 2018 (audited):
Executive Director
Tim Losik
Total Executive Director
Compensation (2)
Non-Executive Director
Ray Oglethorpe
Vincent Thompson
Mark Weidman (3)
Timothy Steel (3)
Total Non-Executive
Compensation
Director Share Options:
Director
Tim Losik
Ray Oglethorpe
Vincent Thompson
Total All Directors
Salary
Pension
Other (1)
$
325,750
$
6,250
Total Cash
Compensation
$
332,000
Options
$
-
Total
Compensation -
2019
$
332,000
$
325,750
$
6,250
$
-
$
332,000
$
-
$
332,000
-
$
-
-
-
-
$
-
-
-
$
$
33,600
33,600
12,500
12,500
$
33,600
33,600
12,500
12,500
-
$
-
-
-
$
33,600
33,600
12,500
12,500
$
-
$
-
$
92,200
$
92,200
$
-
$
92,200
Options @
12/31/18
6,550,000
2,029,296
1,595,433
10,174,729
Optons
Granted
-
-
-
-
Options
Forfeited
5,350,000
79,710
-
5,429,710
Options
Exercised
-
-
-
-
Options @
12/31/19
1,200,000
1,949,586
1,595,433
4,745,019
(1) Other compensation for non-executive directors represents cash payments in the current year plus the value of fully
vested shares issued in May 2019. See footnote 11 to the Financial Statements for a description of non-executive director
compensation.
(2) Executive director compensation is reviewed by the non-executive directors.
(3) Served as directors until May 2019. Option information shown only for active directors at December 31, 2019.
Page | 18
GOVERNANCE, NOMINATIONS AND REMUNERATIONS COMMITTEE REPORT (cont.)
Executive Director
Tim Losik
Total Executive Director
Compensation (2)
Non-Executive Director
Ray Oglethorpe
Vincent Thompson
Mark Weidman
Timothy Steel
Total Non-Executive
Compensaation
Director Share Options:
Director
Tim Losik
Ray Oglethorpe
Vincent Thompson
Mark Weidman
Timothy Steel
Total All Directors
Salary
Pension
Other (1)
$
325,750
$
6,125
$
-
Total Cash
Compensation
$
331,875
Total
Compensation -
2018
Options
$
387,755
$
719,630
$
325,750
$
6,125
$
-
$
331,875
$
387,755
$
719,630
$
-
-
-
-
$
-
-
-
-
$
41,972
41,972
41,972
41,972
$
41,972
41,972
41,972
41,972
$
-
-
-
-
$
41,972
41,972
41,972
41,972
$
-
$
-
$
167,888
$
167,888
$
-
$
167,888
Options @
12/31/17
6,650,000
2,109,006
1,595,433
450,000
1,595,433
12,399,872
Optons
Granted
-
-
-
-
-
-
Options
Forfeited
100,000
79,710
-
-
-
179,710
Options
Exercised
-
-
-
-
-
-
Options @
12/31/18
6,550,000
2,029,296
1,595,433
450,000
1,595,433
12,220,162
(1) Other compensation for non-executive directors represents cash payments in the current year plus the value of fully
vested shares issued in May 2018. See footnote 11 to the Financial Statements for a description of non-executive director
compensation.
(2) Executive director compensation is reviewed by the non-executive directors.
Page | 19
ProPhotonix Limited
Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
Page | 20
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item
Page
Independent Auditor’s Report to the Directors of ProPhotonix Limited and Subsidiaries ..........................
22
Consolidated Balance Sheets as of December 31, 2019 and 2018 ...............................................................
27
Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31,
2019 and 2018 ...........................................................................................................................................
28
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2019 and 2018 ......
29
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019 and 2018 .....................
30
Notes to Consolidated Financial Statements………………………………………………………………. 31
Page | 21
Independent
auditor’s report
to the directors of ProPhotonix Limited
1. Our opinion is unmodified
We have audited the consolidated financial
statements of ProPhotonix Limited (“the Company”)
for the year ended 31 December 2019 which
comprise the consolidated balance sheets, the
consolidated statements of operations and
comprehensive income, the consolidated statements
of stockholders’ equity and the consolidated
statements of cash flows and the related notes,
including the accounting policies in notes 1 and 2.
In our opinion the consolidated financial statements:
— give a true and fair view of the state of the
Group’s affairs as at 31 December 2019 and of
the Group’s profit for the year then ended; and
— have been properly prepared in accordance with
U.S. generally accepted accounting principles
(GAAP).
Basis for opinion
We conducted our audit in accordance with
International Standards on Auditing (UK) (“ISAs (UK)”)
and applicable law. Our responsibilities are described
below. We have fulfilled our ethical responsibilities
under, and are independent of the Group in
accordance with, UK ethical requirements including
FRC Ethical Standard as applied to listed entities. We
believe that the audit evidence we have obtained is a
sufficient and appropriate basis for our opinion.
Overview
Materiality:
group financial
statements as a
whole
Coverage
$74,800 (2018: $75,000)
0.5% (2018: 0.5%) of total
revenues
100% (2018:100%) of group
profit before tax
Key audit matters
vs 2018
Event driven
New: Going concern
(cid:376)
Recurring risk
(cid:379)(cid:377)
The impact of
uncertainties due to
the UK exiting the
European Union on our
audit
Page 22
2 . Material uncertainty related to going concern
The risk
Our response
Going concern
Disclosure quality
We draw attention to note 1 to the
financial statements which
indicates that the ability of the
group to continue as a going
concern is dependent on the
external lender not calling in the
debt owing to it should the group,
in a severe but plausible downside
scenario, breach its loan
covenants. These events and
conditions, along with the other
matters explained in note 1,
constitute a material uncertainty
that may cast significant doubt on
the Group’s ability to continue as a
going concern.
Our opinion is not modified in
respect of this matter.
— The financial statements explain
how the Board has formed a
judgement that it is appropriate to
adopt the going concern basis of
preparation for the Group.
— That judgement is based on an
evaluation of the inherent risks to the
Group’s business model, including the
impact of Brexit, and how those risks
might affect the Group’s financial
resources or ability to continue
operations over a period of at least a
year from the date of approval of the
financial statements.
— The risk for our audit is whether or
not those risks are such that they
amount to a material uncertainty that
may cast significant doubt about the
ability to continue as a going concern. If
so, that fact is required to be disclosed
(as has been done) and, along with a
description of the circumstances, is a
key financial statement disclosure.
Our procedures included:
Historical comparisons:
We assessed the historical accuracy of the
directors’ forecasts by comparing past forecasts
to actual results.
Benchmarking assumptions:
We challenged and critically assessed the
forecasts prepared by the directors by
benchmarking the key assumptions to external
data, where available, and assessing whether
those assumptions are consistent with our
knowledge of the business gained during our
audit and the current economic environment.
Funding assessment:
We obtained direct confirmation from the
lender of the Group’s debt facilities and related
covenants.
Sensitivity analysis:
We considered sensitivities over the level of
available financial resources indicated by the
Group’s financial forecasts taking account of
reasonably possible (but not unrealistic) adverse
effects that could arise from these risks
individually and collectively;
We sensitised the directors’ forecasts, taking
into consideration various severe, but plausible
downside scenarios (for example, declining
revenue and margins and the deterioration in
customer collections). We also challenged the
mitigating actions identified by directors and
included in the forecasts by critically assessing
these in the context of the business, assessing
whether they are wholly within the directors’
control and assessing the ability of the directors
to implement these mitigating actions within
the required timeframe.
Evaluating Directors’ intent:
We evaluated the achievability of the actions
the Directors consider they would take to
improve the position should the risks
materialise. This was done by critically
assessing the mitigating actions available to the
directors to understand the longer-term
implications on the Group should the mitigation
action be required.
Assessing transparency:
We assessed the completeness and accuracy
of the matters covered in the going concern
disclosure by comparing it to our knowledge
obtained during the audit.
Page 23
3. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial
statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by
us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and
directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Going
concern is a significant key audit matter and is described in section 2 of our report. In arriving at our audit opinion above, the
other key audit matters, were as follows:
The risk
Our response
The impact of uncertainties due
to the UK exiting the European
Union on our audit
Refer to page 12 (principal
risks).
Unprecedented levels of uncertainty
All audits assess and challenge the
reasonableness of estimates, in
particular the appropriateness of the
going concern basis of preparation of
the financial statements above. All of
these depend on assessments of the
future economic environment and the
Group’s future prospects and
performance.
Brexit is one of the most significant
economic events for the UK and its
effects are subject to unprecedented
levels of uncertainty of consequences,
with the full range of possible effects
unknown.
We developed a standardised firm-wide
approach to the consideration of the
uncertainties arising from Brexit in planning and
performing our audits.
Our procedures included:
-
-
-
Our Brexit knowledge: We considered the
directors’ assessment of Brexit-related
sources of risk for the Group’s business and
financial resources compared with our own
understanding of the risks. We considered the
directors’ plans to take action to mitigate the
risks.
Sensitivity analysis: When addressing going
concern and other areas that depend on
forecasts, we compared the directors’
analysis to our assessment of the full range of
reasonably possible scenarios resulting from
Brexit uncertainty and, where forecast cash
flows are required to be discounted,
considered adjustments to discount rates for
the level of remaining uncertainty.
Assessing transparency: As well as
assessing individual disclosures as part of our
procedures on going concern we considered
all of the Brexit related disclosures together,
including those in the Report of the Directors,
comparing the overall picture against our
understanding of the risks.
However, no audit should be expected to
predict the unknowable factors or all possible
future implications for a company and this is
particularly the case in relation to Brexit.
Page 24
4. Our application of materiality and an
overview of the scope of our audit
Total revenue
$15m (2018: $16.4m)
Group Materiality
$74.8k (2018: $75k)
Materiality for the group financial statements as a
whole was set at $74,800 (2018 : $75,000),
determined with reference to a benchmark of
Group total revenue of $15.0m (2018: $16.4m) of
which it represents 0.5% (2018: 0.5%). We
consider total revenue to be the most appropriate
benchmark as it provides a more stable measure
year on year than Group profit before tax.
We agreed to report to the Audit Committee any
corrected or uncorrected identified
misstatements exceeding $3,740 (2018:
$3,750), in addition to other identified
misstatements that warranted reporting on
qualitative grounds.
Of the Group’s 2 (2018: 2) reporting
components, we subjected 2 (2018: 2) to full
scope audits for group purposes.
The components within the scope of our work
accounted for the percentages illustrated
opposite.
The component materialities, ranged from
$37,000 to $56,000 (2018: $39,000 to $40,000),
having regard to the mix of size and risk profile
of the Group across the components. The work
on all of the components (2018: all of the
components) was performed by Group team.
$74.8k
Whole financial
statements materiality
(2018: $75k)
$56k
Range of materiality at 2
components
($37k-
$56k) (2018: $39k to
$40k)
Group revenue
Group materiality
$3.7k
Misstatements reported to the
audit committee (2018: $3.75k)
Group revenue
Group loss before tax
100%
(2018: 100%)
100%
(2018:100)
100
100
100
100
Group total assets
100%
(2018: 100%)
100
100
Full scope for group audit purposes 2019
Full scope for group audit purposes 2018
Page 25
5. We have nothing to report on the other information in
the Annual Report
The directors are responsible for the other information
presented in the Annual Report together with the financial
statements. Our opinion on the financial statements does
not cover the other information and, accordingly, we do not
express an audit opinion or, except as explicitly stated
below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in
doing so, consider whether, based on our financial
statements audit work, the information therein is materially
misstated or inconsistent with the financial statements or
our audit knowledge. Based solely on that work we have
not identified material misstatements in the other
information.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and
to issue our opinion in an auditor’s report. Reasonable
assurance is a high level of assurance, but does not
guarantee that an audit conducted in accordance with ISAs
(UK) will always detect a material misstatement when it
exists. Misstatements can arise from fraud or error and are
considered material if, individually or in aggregate, they
could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial
statements.
A fuller description of our responsibilities is provided on the
FRC’s website at www.frc.org.uk/auditorsresponsibilities.
6. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page
6, the directors are responsible for: the preparation of the
financial statements including being satisfied that they give
a true and fair view; such internal control as they determine
is necessary to enable the preparation of financial
statements that are free from material misstatement,
whether due to fraud or error; assessing the Group’s ability
to continue as a going concern, disclosing, as applicable,
matters related to going concern; and using the going
concern basis of accounting unless they either intend to
liquidate the Group or to cease operations, or have no
realistic alternative but to do so.
KPMG LLP, Statutory Auditor
Chartered Accountants
The Pinnacle
170 Midsummer Boulevard
Milton Keynes
MK9 1DF
26 August 2020
Page 26
CONSOLIDATED FINANCIAL STATEMENTS
PROPHOTONIX LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
December 31
2019
2018
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowances of $10 in 2019 and $49 in 2018 (Note 2)
Inventories, less allowances of $782 in 2019 and $615 in 2018 (Note 4)
Prepaid expenses and other current assets
Total current assets
Net property, plant and equipment (Note 5)
Operating lease right-of-use asset
Deferred tax assets (Note 9)
Goodwill (Note 6)
Intangible assets, net (Note 7)
Other long-term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Revolving credit facility (Note 8)
Current portion of long-term debt (Note 8)
Accounts payable
Accrued payroll, benefits and incentive compensation
Deferred revenue (Note 16)
Accrued warranty expenses (Note 2)
Operating lease liabilities, current
Other accrued expenses
Current portion of finance lease obligations
Total current liabilities
Deferred revenue, noncurrent
Operating lease liabilities, noncurrent
Long term debt obligations, net of current portion (Note 8)
Long term finance lease obligations, net of current portion
Total liabilities
Stockholders’ Equity:
Common stock, par value $0.001; shares authorized 250,000,000 at December 31, 2019 and at December 31,
2019; 93,150,402 shares issued and outstanding at December 31, 2019 and 93,000,402 shares issued and
outstanding at December 31, 2018
Additional paid-in capital
Deferred compensation
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
1,477
2,801
2,584
678
1,939
2,872
2,399
289
7,540
573
312
—
397
377
166
7,499
646
—
454
405
295
128
$ 9,365
$ 9,427
$
912
220
1,941
283
553
164
119
276
58
4,526
227
193
387
40
$
1,075
188
1,791
399
498
170
—
291
63
4,475
—
—
581
94
5,373
5,150
93
112,838
(2)
(109,750)
813
93
114,067
(19)
(110,746)
882
3,992
4,277
$
9,365
$
9,427
See the notes to consolidated financial statements.
Page | 27
PROPHOTONIX LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS 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 (Loss)
Other Income, net
Foreign Currency Exchange Gains (Losses)
Warrant & Debt Acquisition Expense
Interest Expense
Income (Loss) Before Taxes
Income Tax Expense
Net Income (Loss)
Other Comprehensive Income:
Foreign currency translation
Total Comprehensive Income (Loss)
Net Income (Loss) Per Share:
Basic and diluted:
Basic net income (loss) per share
Diluted net income (loss) per share
Shares used in per share calculations - Basic
Shares used in per share calculations - Diluted
Years Ended
December 31
2019
2018
$ 14,976
$ 16,401
(8,969)
6,007
(1,226)
(3,686)
1,095
53
25
(14)
(106)
1,053
(57)
(10,057)
6,344
(1,011)
(6,327)
(994)
20
(232)
(11)
(91)
(1,308)
-
$ 996
$ (1,308)
(69)
$ 927
$0.011
$0.011
93,150,402
93,150,402
(132)
$ (1,440)
$(0.014)
$(0.014)
92,782,902
92,782,902
See the notes to consolidated financial statements.
Page | 28
PROPHOTONIX LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Common Stock
Par
Shares
$0.001
Paid in
Capital
Deferred
Compensation
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
Stockholders'
Equity
Balance December 31, 2017
92,565
$93
$112,987
($18)
($109,438)
Net loss
Translation adjustment
Exercise of options
Deferred compensation
Share based compensation
-
-
135
300
-
-
-
-
-
-
-
-
4
49
1,027
Balance December 31, 2018
93,000
93
114,067
Net income
Translation adjustment
Deferred compensation
Share based compensation
-
-
150
-
-
-
-
-
-
-
(17)
(1,212)
-
-
-
(49)
48
(19)
-
-
17
-
(1,308)
-
-
-
-
(110,746)
996
-
-
-
$1,014
-
(132)
-
-
-
882
-
(69)
-
-
$4,638
(1,308)
(132)
4
-
1,075
4,277
996
(69)
-
(1,212)
Balance December 31, 2019
93,150
$93
$112,838
($2)
($109,750)
$813
$3,992
See the notes to consolidated financial statements.
Page | 29
PROPHOTONIX LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31
2019
2018
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income to net cash provided
by operating activities:
Stock-based compensation (income) / expense
Depreciation
Foreign exchange loss
Amortization of debt discount and financing costs
Allowance for inventories
Allowance for bad debt
Other changes in assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Intangible assets, net
Deferred tax asset
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
Proceeds from exercise of options and warrants
Net proceeds from issuance of debt
Borrowings of revolving credit facilities, net
Payments for finance leases
Principal repayment of long-term debt
Net cash (used in) provided by financing activities
Effect of exchange rate on cash
Net change in cash and equivalents
Cash and equivalents at beginning of period
$ 996
$ (1,308)
(1,229)
189
214
7
180
9
1,075
169
77
10
5
37
(23)
(471)
(447)
(82)
454
211
237
(42)
68
(235)
(62)
(229)
-
233
(389)
46
203
(175)
(175)
(503)
(200)
(200)
-
-
(163)
(56)
(93)
(312)
(178)
4
875
(151)
(138)
(88)
502
(10)
(462)
1,939
(211)
2,150
Cash and equivalents at end of period
$ 1,477
$ 1,939
Supplemental cash flow information:
Cash paid for interest
$ 106
$ 91
See the notes to consolidated financial statements.
Page | 30
PROPHOTONIX LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
ProPhotonix Limited (Parent Company) and its subsidiaries (referenced in this document collectively 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 Company’s common stock, $.001 par value per share (the “Common Stock”),
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 the directors
consider to be appropriate for the following reasons. As shown in the consolidated financial statements, during the years
ended December 31, 2019 and 2018, the Group recorded net income of $1.0 million in 2019 and a net loss of ($1.3 million)
in 2018. Operating losses, excluding the benefit/expense of stock option compensation in each respective year, were
$114,000 for 2019 and $106,000 for 2018. Net cash provided by and used in operating activities for the same time periods
were $0.2 million and ($0.5 million), respectively.
In assessing the going concern position of the Group, the directors have prepared a cash flow forecast which covers a
period of 12 months from the date of approval of these financial statements. These forecasts take into consideration the
anticipated impact of COVID-19 on the cash flow and liquidity of the Group, over the next 12 months. The current economic
conditions resulting from the COVID-19 pandemic have had an impact on the Group’s activities from March 2020 onwards.
The Group is subject to financial covenants in relation to its loan facilities, being the historic annual debt service cover ratio
should not be less than 1.30:1. The covenants are tested annually for the 12 months financial statements. The Group
complied with its covenant in 2019 and for the first two quarters of 2020. At December 31, 2019 the Group cash position
was $1,477,000 and the loan outstanding at this date was $607,000 out of a total original balance of $865,000. At July 31,
2020 the Group cash position was $2,071,000 and the loan outstanding was $550,000.
This base case scenario includes the benefits of actions already taken by management to mitigate the trading downsides
brought by COVID-19, including cost reduction exercises, property rent deferrals, loan repayment deferrals and
participating in the government’s job retention scheme and taking advantage of other government support measures. The
base case scenario forecasts a positive cash position throughout the forecast period with no covenant breaches.
Notwithstanding this however, there remains a risk that there is a continued down-turn in the economy as a result of COVID-
19 and there are uncertainties associated with future potential lockdowns and/or a second wave of infection. In certain
severe but plausible downside scenarios such as further revenue reductions above those included in the base case, decrease
in gross margins and increase in debtor days, there is risk that the Group will breach its loan covenant and therefore there
becomes uncertainty in relation to the future funding of the Group.
Based on the above, the directors believe it remains appropriate to prepare the financial statements on a going concern
basis. However, these circumstances represent a material uncertainty that may cast significant doubt upon the Group’s
ability to continue as a going concern and, therefore, to continue realizing its assets and discharging its liabilities in the
normal course of business. The financial statements do not include any adjustments that would result from the basis of
preparation being inappropriate.
Page | 31
(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. In preparing these
consolidated financial statements, management has made judgments, estimates, and assumptions that affect the reported
amounts of assets, liabilities, income, and expenses. Actual results may differ from those estimates. Estimates and
underlying assumptions are reviewed on an on-going basis for items such as revenue recognition where long term contracts
are entered into, recognition of deferred tax assets, inventory allowances, warranty provisions and accruals. Revisions to
estimates are recognized prospectively.
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 all highly liquid investments with a maturity of original three months or less when
purchased to be cash equivalents.
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 accounts receivables in excess of 60 days past invoice
due date. The Company has not made any claims in either 2019 or 2018. 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 ...........................................................................
Benefits from or charges to costs and expenses ..................................................
Account write-offs and other deductions ............................................................
2018
2019
In thousands
49 $
(38)
(1)
14
37
(2)
$
Balance at end of period ......................................................................................
$
10 $
49
Page | 32
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
INVENTORY
The Company values inventories at the lower of cost or net realizable value 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 net realizable value. Actual results could be different from
management’s estimates and assumptions.
CAPITALIZATION OF SOFTWARE DEVELOPMENT FOR SALE
The Company’s capitalizes software development for sale in accordance with ASC 350-40. All costs associated
with establishing technical feasibility are expensed. Once technical feasibility has been established, the costs of coding the
software are capitalized and amortized over the expected life of the product. Once the product is release to production, all
future software de-bug costs are expensed in the period.
INTANGIBLE ASSETS
The Company’s intangible assets consist of capitalized software development costs and goodwill. Capitalized
software development costs are being amortized over their useful lives and are assessed for impairment when triggering
events occur. 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 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 (LOSS) PER SHARE
The Company calculates basic and diluted net income (loss) per common share by dividing the net income (loss)
applicable to common stockholders by the weighted average number of common shares outstanding.
As of December 31, 2019, 17,350,044 shares underlying options could potentially have been included in the
calculation of diluted shares. However, the exercise price for all of the underlying options and warrants exceeded the market
price or were unvested, thus none of those shares were included in the calculation of earnings per share.
As of December 31, 2018, 30,064,867 shares underlying options and 500,000 shares underlying warrants could
potentially have been included in the calculation of diluted shares. However, as the exercise price at December 31, 2019
was $0.06 per share, only 8,105,000 exercisable options were included in the calculation of earnings per share. All other
options and warrants exercise price exceeded the market price or were unvested.
Page | 33
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
REVENUE RECOGNITION
The Company only has revenue from customers. The Company recognizes revenue when it satisfies performance
obligations under the terms of its contracts, and control of its products is transferred to its customers in an amount that
reflects the consideration the Company expects to receive from its customers in exchange for those products. This process
involves identifying the customer contract, determining the performance obligations in the contract, determining the contract
price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the
performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a
contract when it (a) provides a benefit to the customer either on its own or together with other resources that are readily
available to the customer and (b) is separately identified in the contract. The Company considers a performance obligation
satisfied once it has transferred control of a good or product to a customer, meaning the customer has the ability to use and
obtain the benefit of the product.
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 to costs and expenses ..........................................................
Account write-offs and other deductions .........................................
Balance at end of period........................................................................
ADVERTISING EXPENSE
Years Ended December 31,
2019
2018
In thousands
170
$
(3)
(3)
164
$
184
9
(23)
170
$
$
The Company expenses advertising costs as incurred. Advertising expenses for the years ended 2019 and 2018 were
$12,000 and $75,000, respectively.
Page | 34
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
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 finance leases are amortized on a straight-line basis over
the shorter of the lease term or estimated useful life of the asset. Finance leases are initially 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 ............................................
Computer equipment .....................................................................
Machinery and equipment .............................................................
Furniture and fixtures ....................................................................
Estimated Useful Life
Term of the lease or 10-40 years
3 to 5 years
5 to 10 years
3 to 10 years
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 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. The
Company did not have any interest and penalties related to uncertain tax positions during the years ended December 31,
2019 or 2018.
STOCK-BASED COMPENSATION
The Company has stock-based compensation plans for its employees, officers, and directors. The plans permit the
grant of a variety of awards with various terms and prices as determined by 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.
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.
Page | 35
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
During 2019 the Company reversed $1.2 million of stock compensation expense to selling, general and administrative
expense related to the expiration of performance based stock options that were cancelled due to non-achievement of the
performance criteria. During 2018 the Company recognized an expense of $1.1 million of stock-based compensation related
to the options and fully vested shares issued to the directors and employees as compensation (See Note 11), all of which
were charged to selling, 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 are included as a separate component of stockholders’
equity (accumulated 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, 2019, the Company estimated the fair value of long term fixed rate debt to be $0.9 million compared
to its carrying value of $0.7 million (2018: fair value of $1.3 million compared to its carrying value of $1.0 million).
Page | 36
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
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 2019 and one customer accounting for 10% or more of consolidated
revenues in 2018. The Company had two customers that accounted for 10% or more of the outstanding accounts receivable
balance at December 31, 2019 and no such customers at December 31, 2018. The Company maintains its cash and cash
equivalents in bank deposit accounts, which at times may exceed insured limits. At December 31, 2019 and 2018, the
amount in excess of governmental insurance protection was $1.0 million and $1.7 million, respectively. The Company
believes it is not exposed to any significant credit risk on cash and cash equivalents.
USE OF ESTIMATES
In preparing these consolidated financial statements in accordance with generally accepted accounting policies,
management has made judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, income,
and expenses. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an on-
going basis. Revisions to estimates are recognized prospectively.
Page | 37
(3) RECENT ACCOUNTING PRONOUNCEMENTS
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard supersedes the present
U.S. GAAP standard on leases and requires substantially all leases to be reported on the balance sheet as right-of-use assets
and lease obligations. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim
reporting periods within those annual reporting periods. Early adoption is permitted and in the original guidance the
modified retrospective application was required, however, in July 2018 the FASB issued ASU 2018-11 which permits
entities with another transition method in which the effective date would be the date of initial application of transition.
Under this optional transition method, the Company would recognize a cumulative-effect adjustment to the opening balance
of retained earnings in the period of adoption. The Company adopted ASU 2016-02 as of January 1, 2019 using the modified
retrospective approach and the optional transition method. In addition, the Company elected the package of practical
expedients permitted under the transition guidance within the new standard, which among other things, allowed the
Company to carry forward historical lease classifications.
Adoption of the new standard resulted in the recording of operating lease right-of-use assets and operating lease
liabilities on its consolidated balance sheets but did not have an impact on the Company's beginning retained earnings,
consolidated statement of operations or statement of cash flows. The most significant impact was the recognition of right-
of-use assets and lease liabilities for operating leases associated with two leases for office space as described in Footnote
14, “Leases, commitments and contingencies”. The Company also reclassified amounts that were recorded as “Current
portion of capital lease obligations” and “Long term capital lease obligations, net of current portion” as of December 31,
2018 to “Current portion of finance lease obligations” and “Long-term finance lease obligations, net of current portion,”
respectively, on January 1, 2019. As of January 1, 2019, total right-of-use assets related to the Company’s operating leases
was $0.4 million and current and non-current operating lease liabilities were $0.1 million and $0.3 million, respectively. As
of December 31, 2019, total right-of-use assets related to the Company’s operating leases was $0.3 million and current and
non-current operating lease liabilities were $0.1 million and $0.2 million, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The guidance
changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method,
which requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and early adoption is permitted for annual
and interim periods beginning after December 15, 2018. The Company is currently assessing the impact that this guidance
will have on its trade receivables and financial arrangements when adopted.
Goodwill Impairment. In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic
350) (“ASU 2017-04”) related to measurements of goodwill. ASU 2017-04 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 January 1, 2017. The Company does not believe there will be any impact from the new standard
on its consolidated financial statements.
Fair Value of Financial Instruments. In August 2018, the FASB issued ASU 2018-13, Disclosure Framework –
Changes to the Disclosure Requirements for Fair Value Measurement, which aims to improve the effectiveness of fair value
measurement disclosures. The amendments in this ASU modify the disclosure requirements on fair value measurements
based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting - Chapter 8: Notes to
Financial Statements, including the consideration of costs and benefits. This ASU becomes effective for the Company in
the year ending December 31, 2020 and early adoption is permitted. The Company has not yet adopted this ASU and is
currently assessing the impact that this ASU will have on its consolidated financial statements.
Page | 38
(4) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value 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 ......................................................................................
2019
2018
In thousands
$ 722
456
2,188
$ 3,366
(782)
$ 2,584
$ 602
339
2,073
$ 3,014
(615)
$ 2,399
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 net realizable value.
(5) PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment were as follows:
Years Ended December 31
2019
2018
Buildings and building improvements ....................................................
Computer equipment ...............................................................................
Machinery and equipment.......................................................................
Furniture and fixtures ..............................................................................
$
249
477
2,257
488
284
464
2,220
488
In thousands
$
Property, plant and equipment .......................................................
Less accumulated depreciation ...............................................................
$ 3,471
(2,898)
$ 3,456
(2,810)
Net property, plant and equipment .................................................
$ 573
$ 646
Depreciation expense from operations was $0.2 million for each of the years ended December 31, 2019 and 2018.
Page | 39
(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 2019, and at the
end of the fourth quarter 2018, the Company concluded that no impairment existed. The conclusion resulted from a
combination of the projected discounted cash flows under normal forecasted cash flow projections, as well as from
discounted cash flows with a sensitivity analysis showing no growth in revenues.
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 were as follows:
Beginning of the year .........................................................
Effect of exchange rate ......................................................
$ 405
(8)
$ 424
(19)
End of year .........................................................................
$ 397
$ 405
December 31, 2019
December 31, 2018
In thousands
The Company operates in two reporting units: LED’s (light emitting diode systems) and Laser & Diodes. Goodwill
as of December 31, 2019 and 2018 relates to the LED reporting unit.
(7) INTANGIBLE ASSETS
Intangible assets consists of capitalized software development costs. The Company capitalizes these costs in
accordance with FRS 102; all costs associated with establishing technical feasibility are expensed. Once technical feasibility
has been established, the costs of coding the software are capitalized and amortized over the expected life of the product.
Once the product is released to production, all future software de-bug costs are expensed in the period incurred. There are
no intangible assets with indefinite lives. Intangible assets and their respective useful lives are as follows:
Capitalized software development costs
Useful Life
5 Years
Page | 40
(7) INTANGIBLE ASSETS (cont.)
Gross carrying amounts and accumulated amortization of intangible assets were as follows as of December 31, 2019
and 2018. The gross carrying values and the accumulated amortization values are impacted by the foreign currency
translation adjustment.
Years ended December 31:
2019
2018
In thousands
Gross carrying amount of capitalized software development costs ....
Accumulated amortization ..................................................................
439
(62)
Net balance .................................................................................
$
377
$
314
(19)
295
(8) DEBT
Years Ended December 31:
Senior Fixed Rate Secured Term Note to SQN (“SQN Note”),
maturing on June 13, 2022 with an interest rate of 10%, at
December 31, 2019.
Total debt less
unamortized debt issuance
costs
2019(1)
2018(1)
In thousands
$607
$769
Borrowings under Revolving Credit facility with Barclays Bank
Sales Financing with an interest rate of 2.0% above Barclay’s base
rate at December 31, 2019 and at December 31, 2018 (2.25% as of
December 31, 2019 and at December 31, 2018).
Total All Debt
Principal Amount
$912
$1,075
Less: Revolving Credit
Facility
Less: current portion of
long term debt
Long-term debt less
unamortized discount and
debt issuance costs
$1,519
$1,844
$(912)
$(1,075)
$(220)
$(188)
$387
$581
(1) As of both December 31, 2019 and 2018, the Company had $0.2 million available under the various borrowing
facilities.
The Company made $0.1 in interest payments during 2019 and is expected to make $0.1 million in interest payments
during the year ended December 31, 2020. Scheduled future maturities of debt, excluding interest payments, for the next
five years are as follows:
Due by period
2020
2021
2022
2023
2024+
Total
Debt obligations ......................... $
912 $
- $
607 $
-
$
-
$ 1,519
In thousands
Page | 41
(8) DEBT (cont.)
BORROWING AGREEMENTS
Term Notes:
ProPhotonix (IRL) Limited Senior Fixed Rate Term Note
On June 14, 2018, ProPhotonix (IRL) Limited was issued a four-year 10% Senior Fixed Rate Term Note (“SQN
Note”), from SQN Secured Income Fund PLC (“SQN”) in the original principal amount of £0.7 million ($0.9 million at
June 14, 2018) secured by certain assets of ProPhotonix (IRL) Limited.
At December 31, 2018, the company breached a calculated debt covenant ratio. Subsequent to year end the company has
obtained a waiver from SQN stating the debt will not be called, accordingly no portion of long term debt obligations was
reclassified to current portion of long term debt.
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.
The most recent amendment of February 10, 2016, included (i) increased the line from £1.4 million to £1.5 million;
(ii) reduced service charges and the discount rate from 2.50% plus Barclays base rate to 2.00% plus Barclays base rate (iii)
increased 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 which has been extended through April 22, 2020.
The amount outstanding under the facility was $0.9 million as of December 31, 2019 and $1.1 million as of
December 31, 2018 reported as a short-term debt under revolving credit facility. As of both December 31, 2019 and 2018,
the Company had $0.2 million available under this facility. The Company did not renew the facility with Barclays which
expired on April 22, 2020, fully repaying the balance.
(9) TAXES
The Company is required to determine whether its tax positions are “more-likely-than-not” to be sustained upon
examination by the applicable taxing authority, based on the technical merits of the position. Tax positions not deemed to
meet a “more-likely-than-not” threshold would be recorded as a tax expense in the current year. Based on its analysis, the
Company has determined that it has not incurred any liability for unrecognized tax benefits as of December 31, 2019. The
Company had deferred tax assets, before considering the full valuation allowance, totaling $14.4 million and $14.9 million
as of December 31, 2019 and 2018, respectively.
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.
Page | 42
(9) TAXES (cont.)
Based on the size of the Company’s historical operating losses, there is doubt as to when, if ever, any of the deferred
tax assets related to its operations 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. As it relates to a
deferred tax impact relative to stock compensation, the Company believes the deferred tax asset being disclosed in the
footnote table below reflects the book compensation previously recognized and adjusted for reversals of compensation
expense for grants outstanding as of the end of the year (fully or partially vested) times the appropriate tax rate. In 2018,
the Company concluded that its Ireland entity should recognize a deferred tax asset of $0.5 million based on forward looking
forecast operating profits in relation to its loss carryforwards. 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 2019 remain open to examination
by the federal and most state tax authorities in the U.S. In addition, the tax years 2012 through 2019 are open to examination
in foreign jurisdictions.
For the years ended December 31, 2019 and 2018, income (loss) from continuing operations before taxes consists of
the following:
Years Ended December 31,
U.S. operations ............................................................................................
Foreign operations .......................................................................................
2019
2018
In thousands
$
1,405
(352)
$
439
(1,747)
Net income (loss) before provision for income taxes .........................
$
1,053
$ (1,308)
Income tax expense attributable to income from continuing operations was $57,000 and $0 for the years ended
December 31, 2019 and 2018, respectively, and differed from the amounts computed by applying the statutory income tax
rate of 21%, to pretax income from continuing operations as a result of the following:
Years Ended December 31,
Computed “expected” tax expense (benefit) ...............................................
Increase (reduction) in income taxes resulting from:
Change in valuation allowance ...................................................................
Foreign tax rate differential .........................................................................
Non-deductible items ..................................................................................
Income tax expense ...........................................................................
2019
2018
In thousands
$
222 $
(275)
(345) 208
58
9
33
33
$
(57) $
-
Page | 43
(9) TAXES (cont.)
The significant items comprising the deferred tax asset and liability at December 31, 2019 and 2018 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 .............................................................................
Deferred tax asset ...........................................................................
2019
2018
In thousands
$ 12,649
1,194
525
589
(14,957)
$ -
$ 12,543
1,197
525
690
(14,501)
$ 454
As of December 31, 2019, the Company had United States federal net operating loss carry forwards (NOLs) of $60.2
million (2018: $62.6 million) available to offset future taxable income, if any. These carry forwards expire through 2035
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.
At December 31, 2019, the Company also has Canadian federal NOLs of $1.1 million (2018: $1.1 million) available
to offset future taxable income, if any. The Canadian entities were dissolved in April 2020 and accordingly no Canadian
NOLs exist from that date. At December 31, 2019, the Company has a United Kingdom NOL of $2.8 million (2018: $3.0
million). At December 31, 2019, the Company has an Ireland NOL of $2.6 million (2018: $2.3 million).
The Company’s historical operating losses raise considerable doubt as to when, if ever, any of the deferred tax assets
will be realized for its operations, even though there have been limited operating profits in each of the last three years. As a
result, management has provided a full valuation allowance for the net deferred tax assets. The total valuation allowance
against deferred tax assets increased by $0.5 million for the year ended December 31, 2019 (2018: increased by $0.5
million).
(10) UNREGISTERED SALES OF EQUITY SECURITIES AND WARRANTS OUTSTANDING
WARRANTS
There were no warrants exercised in 2019 or 2018. As of December 31, 2018, there were 500,000 common shares
outstanding warrants with the following exercise prices and expiration dates:
Number of
Common Shares
Warrants
500,000
Exercise Price
$0.10
Expiration Date
2019
As of December 31, 2019, there were no warrants outstanding.
Page | 44
(11) STOCK OPTION PLANS
On June 9, 2014, the Company implemented its 2014 Stock Incentive Plan (the “2014 Plan”). Under 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, which was increased to 24,200,000 on June 5, 2017. In addition, from
2018 to 2025 there is an automatic 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. On June 5, 2017, the Company amended the 2014
Stock Plan to increase the pool of shares available for issuance and granted new performance-based options.
Remuneration policy for senior management
Summary
In order to incentivize the achievement of its objectives, the Company implemented a remuneration plan for its senior
management with the following elements:
• A one-off substantial performance-based option grant to key senior management at market value.
• No further grants intended for senior management through the end of the three-year measurement period.
• Cliff vesting on December 31, 2019 at different levels dependent on achievement against the performance target (zero
below 10% up to 150% vesting at 135% attainment) 10-year option term.
• Performance measure - Performance plan has two vesting components; (i) an Annual vesting component that allows the
participant to vest a maximum of 25% of the three year target at 100%, with a lesser amounts eligible to be vested where
the annual growth rate is less than a 25% growth over the previous years’ Adjusted EBITDA value (earnings before
taxes, depreciation, interest, stock compensation and amortization). Each annual vest is earned outright by the
individual regardless any prior or subsequent year’s Adjusted EBITDA performance and (ii) the cumulative vesting
component which is determined on the average total growth over the base Adjusted EBITDA (Base year = 2016) during
the three years of 2017 to 2019. The cumulative vesting component allows the individual to vest shares based on the
cumulative performance from 2017 to 2019. The maximum vesting under the combined scheme, at the end of three
years, is the greater of (a) the sum of the shares vested annually or (b) vesting of shares based on the cumulative three
year period.
• This performance plan expired on December 31, 2019. As of that date none of the above performance criteria were met,
accordingly no options were awarded under this performance plan.
As of December 31, 2019, there were 16,000,000 shares available to be issued from this plan.
On December 16, 2016, but effective January 1, 2017, the Board of Directors approved the Eighth Amended and
Restated Policy Regarding Compensation of Independent Directors, (i) cash compensation is $30,000 per annum paid in
arrears each quarter in installments of $7,500; and (ii) a grant of 75,000 fully vested shares of the Company’s Common
Stock, be automatically issued on the day after the annual meeting to each Independent Director who is serving as director
of the Company immediately following the date of each annual meeting of stockholders (or special meeting in lieu thereof)
beginning with the 2017 annual meeting. These shares are pursuant to the 2014 Plan terms and conditions. During the years
ended December 31, 2019 and 2018 the Independent Directors each received $30,000 per annum of fees. On May 16, 2019
and May 18, 2018 each Independent Director received a grant of 75,000 fully vested shares of the Company’s Common
Stock with a total value of $7,200 and $49,000, respectively. Total directors’ compensation including other benefits are
disclosed on pages 18 and 19 of this Annual Report and that information forms part of the audited financial statements.
Page | 45
(11) STOCK OPTION PLANS (cont.)
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.
The following table summarizes information about the stock options outstanding as of December 31, 2019. There
was no intrinsic value of the options outstanding or exercisable as of December 31, 2019 since the fair market value was
below the exercise price for all options outstanding as of that date. There was an intrinsic value on the options outstanding,
and exercisable, at December 31, 2018 of $0.2 million and $0.2 million, respectively.
There were no options granted during the year ended December 31, 2019. During 2018, 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 1,000,000 options granted during the year ended December 31, 2018.
These options vest over a one year, a three year, or a four-year anniversary of the grant date or upon achievement of certain
performance objectives as noted above, provided that the recipient continues to serve the company in that capacity until
each such vesting or achieves the performance objectives. The weighted average assumptions for grants during the year
ended December 31, 2018 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 (12) months
Ended
December 31,
2018
207.74%
7.8 years
2.77%
$0
$0.122
Page | 46
(11) STOCK OPTION PLANS (cont.)
The following table summarizes information related to the outstanding and exercisable options during the years ended
December 31, 2019 and 2018:
Balance at December 31, 2017 ...................................
Granted ..............................................................
Exercised ............................................................
Cancelled ...........................................................
Balance at December 31, 2018 ...................................
Vested and Exercisable at December 31, 2018 ..........
Balance at December 31, 2018 ...................................
Granted ..............................................................
Exercised ............................................................
Cancelled ...........................................................
Balance at December 31, 2019 ...................................
Vested and Exercisable at December 31, 2019 ..........
Vested and Expected to Vest at December 31, 2019
Weighted
Average
Exercise Price
per Share ($)
0.15
0.12
0.03
0.32
0.14
0.07
0.15
-
-
0.22
0.09
0.08
$0.09
Weighted
Average
Exercise
Price
Options
Outstanding
29,488,132
1,000,000
(135,000)
(660,173)
30,064,867
16,712,367
30,064,867
-
-
(12,764,823)
17,300,044
16,907,594
17,300,044
Weighted
Average
Contractual
Life (years)
Weighted
Average
Remaining
Contractual
Term
(in Years)
6.68
5.92
3.88
6.68
3.68
3.68
3.68
Weighted
Average
Exercise
Price
16,940,894 $ 0.08
Options
Exercisable
Range of
Exercise Prices
$ 0.03 – 0.24
Options
Outstanding
17,350,044
3.4
$ 0.09
At December 31, 2019, there was $41,000 of total unrecognized compensation cost related to stock options granted.
The cost will be recognized in 2020. During 2019 the Company reversed $1.2 million of stock compensation expense to
selling, general and administrative expense related to the expiration of performance-based stock options that were cancelled
due to non-achievement of the performance criteria. Total stock option expense recorded in 2018 was $1.1 million. There
were no options exercised in 2019 and there were 135,000 options exercised in 2018 at an exercise price of $3,661, having
a market value of $18,900.
(12) EMPLOYEE STOCK PURCHASE PLAN
In May 2000, the Company adopted the 2000 Employee Stock Purchase Plan (the Stock Purchase Plan). During the
years ended December 31, 2019 and 2018 there were no shares issued under the Stock Purchase Plan. On April 4, 2019 the
Board of Directors ended this plan.
Page | 47
(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 $23,000 in the year ended December 31, 2019 and $28,000 in the year ended
December 31, 2018. The Company incurred costs of $1,500 in 2019 and $2,000 in 2018 to administer the Plan. The
Company also has voluntary contribution pension plans 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 $98,000 and $61,000 in the years ended December 31, 2019 and 2018. 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 $45,000 and $49,000 in the years ended December 31, 2019 and 2018, respectively. Plan administration costs come out
of the plan itself.
(14) LEASES, COMMITMENTS AND CONTINGENCIES
LEASES, OTHER OBLIGATIONS AND CONTINGENT LIABILITIES
On February 24, 2017, the Company signed a 61-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 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, 2017 at £70,000 per year. The
Company has since renegotiated the lease for an additional 6 years at £75,000 per year. The Company has the option to
terminate the lease with six months’ notice after September 2017. The Company did not exercise this option during 2019.
The Company accounts for the Salem, New Hampshire and Hertfordshire, U.K. leases as operating leases. The
Company utilizes, or has assumed, finance leases to finance purchases of equipment. The Company records depreciation
expense on assets acquired under a finance lease in the consolidated statement of income.
Page | 48
(14) LEASES, COMMITMENTS AND CONTINGENCIES (cont.)
The components of lease expense were as follows (in thousands):
Operating lease cost
Finance lease cost:
Amortization of right-of-use assets
Interest on lease liabilities
Total lease costs
Other information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities (in thousands)
Operating cash flows from operating leases
Operating cash flows form finance leases
Financing cash flows from finance leases
Weighted average remaining lease term (in years)
Operating leases
Finance leases
Weighted average discount rate
Operating leases
Finance leases
December 31,
2019
78
$
92
9
179
$
December 31,
2019
$
142
$ 60
$ 8
3.7
2.1
10.0%
6.5%
Future minimum payments for operating and finance lease obligations and purchase commitments are as follows
(in thousands):
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Less amount representing interest
Present value of lease liabilities
Accrued expenses and other current liabilities
Operating lease liabilities, current
Operating lease liabilities, noncurrent
Other long-term liabilities
Total lease liabilities
(15) LEGAL PROCEEDINGS
Finance Leases
$ 63
25
12
4
—
104
(6)
$ 98
Operating
Leases
142
$
143
89
—
—
374
(62)
312
$
$ 58
—
—
40
$ 98
$
—
119
193
—
312
$
The Company is at times 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 | 49
(16) DEFERRED REVENUE
At December 31, 2019 and 2018, the Company had a total of $0.8 million and $0.1 million in deferred revenue,
respectively. Recognition of this revenue is subject to performance obligations that exist under the customer contracts
associated with this deferred revenue balance. The Company expects to meet the performance obligations and recognize the
associated revenue over the period from 2020 through 2022.
(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. 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.
The Company had one customer account for $2.1 million, or 14%, of its total consolidated revenues in 2019 and
$1.7 million, or 10%, of its total consolidated revenues in 2018. All of this customer’s revenues were generated in the
Company’s Laser & diodes segment.
Years Ended December 31
Revenues:
LEDs .................................................................................................
Laser & diodes ..................................................................................
Total revenues ...................................................................................
Gross profit:
LEDs .................................................................................................
Laser & diodes ..................................................................................
Total gross profit ...............................................................................
Operating profit (loss):
LEDs .................................................................................................
Laser & diodes ..................................................................................
Total operating profit (loss) ...............................................................
2019
2018
In thousands
$ 7,699
7,277
$ 14,976
$ 3,133
2,874
$ 6,007
$ 594
501
$ 1,095
$ 7,953
8,448
$ 16,401
$ 3,405
2,939
$ 6,344
$ (581)
(413)
$
(994)
Page | 50
(17) SEGMENT INFORMATION (cont.)
Years Ended December 31
Current assets:
LEDs .................................................................................................
Laser & diodes ..................................................................................
Corporate ..........................................................................................
$
2,358
3,581
1,601
$
2,316
3,159
2,024
Total current assets ...........................................................................
$
7,540
$
7,499
2019
2018
In thousands
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 ..............................................................................
$
289
271
13
573
397
—
—
397
457
307
91
855
Total assets:
$
$
$
$
$
$
293
331
22
646
405
—
—
405
767
103
7
877
LEDs .................................................................................................
Laser & diodes ..................................................................................
Corporate ..........................................................................................
3,501
4,159
1,705
Total assets ........................................................................................
$
9,365
3,781
3,593
2,053
$
9,427
Years Ended December 31
Revenues by geographic area:
In thousands
2019 2018
United States .....................................................................................
Canada, Mexico & So. America .......................................................
Europe ...............................................................................................
Asia & the rest of the world ..............................................................
$
6,950
172
5,263
2,591
$
5,550
323
8,962
1,566
Total ...........................................................................................................
$ 14,976
$ 16,401
Page | 51
(17) SEGMENT INFORMATION (cont.)
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 ...........................................................................................................
$
$
13
686
271
970
$
22
698
331
$
1,051
2019
2018
In thousands
(18) SUBSEQUENT EVENTS
The Company has evaluated subsequent events through August 21, 2020, the date which the financial statements were
available to be issued. Based upon this evaluation, it was determined that no subsequent events occurred that require
recognition or disclosure in the financial statements. In the second quarter 2020, the Company secured a PPP Loan from
the Small Business Administration (USA) and a Bounce Back Loan (UK) aggregating approximately $150,000. The current
global COVID-19 pandemic is expected to negatively impact the Company in 2020 with a likely decrease in revenue.
However, measures have been taken to mitigate the cash impact on the Company. There continues to be uncertainties in
relation to the ongoing impact of COVID-19 and further details of the potential risks are detailed on page 11 in the risk and
uncertainties section.
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