Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders
LightPath
Technologies, Inc.
We
have audited the accompanying consolidated balance sheet of LightPath Technologies, Inc., and its subsidiaries (the “Company”)
as of June 30, 2016 and 2015, and the related consolidated statements of comprehensive income (loss), stockholders’ equity,
and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing
our audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of June 30, 2016 and 2015, and the results of their operations and their cash flows for each of the years then
ended in conformity with accounting principles generally accepted in the United States of America.
/s/
BDO USA, LLP
|
|
|
|
Orlando,
Florida
|
|
September
15, 2016
|
|
LIGHTPATH
TECHNOLOGIES, INC.
Consolidated
Balance Sheets
Assets
|
|
June
30,
2016
|
|
June
30,
2015
|
Current
assets:
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,908,024
|
|
|
$
|
1,643,920
|
|
Trade
accounts receivable, net of allowance of $4,598 and $6,282
|
|
|
3,545,871
|
|
|
|
3,048,754
|
|
Inventories,
net
|
|
|
3,836,809
|
|
|
|
3,181,377
|
|
Other
receivables
|
|
|
209,172
|
|
|
|
253,880
|
|
Prepaid
expenses and other assets
|
|
|
652,308
|
|
|
|
244,075
|
|
Total
current assets
|
|
|
11,152,184
|
|
|
|
8,372,006
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
4,370,045
|
|
|
|
4,275,552
|
|
Other
assets
|
|
|
66,964
|
|
|
|
66,964
|
|
Total
assets
|
|
$
|
15,589,193
|
|
|
$
|
12,714,522
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,361,914
|
|
|
$
|
1,551,885
|
|
Accrued
liabilities
|
|
|
328,144
|
|
|
|
84,039
|
|
Accrued
payroll and benefits
|
|
|
1,356,255
|
|
|
|
842,506
|
|
Loan
payable, current portion
|
|
|
—
|
|
|
|
51,585
|
|
Capital
lease obligation, current portion
|
|
|
166,454
|
|
|
|
166,454
|
|
Total
current liabilities
|
|
|
3,212,767
|
|
|
|
2,696,469
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligation, less current portion
|
|
|
178,919
|
|
|
|
310,260
|
|
Deferred
rent
|
|
|
548,202
|
|
|
|
512,679
|
|
Warrant
liability
|
|
|
717,393
|
|
|
|
1,195,470
|
|
Total
liabilities
|
|
|
4,657,281
|
|
|
|
4,714,878
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 11 and 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock: Series D, $.01 par value, voting; 100,000 shares authorized; none issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common
stock: Class A, $.01 par value, voting; 34,500,000 shares authorized; 15,590,945 and 15,235,073 shares issued and outstanding
|
|
|
155,909
|
|
|
|
152,351
|
|
Additional
paid-in capital
|
|
|
214,661,617
|
|
|
|
213,222,950
|
|
Accumulated
other comprehensive income
|
|
|
126,108
|
|
|
|
50,680
|
|
Accumulated
deficit
|
|
|
(204,011,722
|
)
|
|
|
(205,426,337
|
)
|
Total
stockholders’ equity
|
|
|
10,931,912
|
|
|
|
7,999,644
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
15,589,193
|
|
|
$
|
12,714,522
|
|
The
accompanying notes are an integral part of these consolidated statements.
LIGHTPATH
TECHNOLOGIES, INC.
Consolidated
Statements of Comprehensive Income (Loss)
|
|
Year ended
|
|
|
2016
|
|
2015
|
Sales, net
|
|
$
|
17,272,238
|
|
|
$
|
13,661,569
|
|
Cost of sales
|
|
|
7,967,728
|
|
|
|
7,682,194
|
|
Gross margin
|
|
|
9,304,510
|
|
|
|
5,979,375
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
6,581,218
|
|
|
|
5,130,414
|
|
New product development
|
|
|
668,840
|
|
|
|
1,109,095
|
|
(Gain) Loss on disposal of equipment
|
|
|
45,037
|
|
|
|
(1,482
|
)
|
Total costs and expenses
|
|
|
7,295,095
|
|
|
|
6,238,027
|
|
Operating income (loss)
|
|
|
2,009,415
|
|
|
|
(258,652
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(37,627
|
)
|
|
|
(18,279
|
)
|
Interest expense - debt costs
|
|
|
—
|
|
|
|
(13,270
|
)
|
Change in fair value of warrant liability
|
|
|
(52,454
|
)
|
|
|
(464,039
|
)
|
Other income (expense)
|
|
|
(305,444
|
)
|
|
|
41,276
|
|
Net income (loss) before taxes
|
|
|
1,613,890
|
|
|
|
(712,964
|
)
|
Income taxes
|
|
|
199,275
|
|
|
|
2,316
|
|
Net income (loss)
|
|
$
|
1,414,615
|
|
|
$
|
(715,280
|
)
|
Income (loss) per share - basic
|
|
$
|
0.09
|
|
|
$
|
(0.05
|
)
|
Number of shares used in per share calculation- basic
|
|
|
15,401,893
|
|
|
|
14,711,586
|
|
Income (loss) per common share - diluted
|
|
|
0.08
|
|
|
|
(0.05
|
)
|
Number of shares used in per share calculation- diluted
|
|
|
16,875,383
|
|
|
|
14,711,586
|
|
Foreign currency translation adjustment
|
|
|
75,428
|
|
|
|
(1,001
|
)
|
Comprehensive income (loss)
|
|
$
|
1,490,043
|
|
|
$
|
(716,281
|
)
|
The
accompanying notes are an integral part of these consolidated statements.
LIGHTPATH
TECHNOLOGIES, INC.
Consolidated
Statement of Stockholders’ Equity
Years
ended June 30, 2016 and 2015
|
|
Class
A
Common
Stock
Shares
|
|
Amount
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other
Comphrehensive
Income
|
|
Accumulated
Deficit
|
|
Total
Stockholders’
Equity
|
Balances
at June 30, 2014
|
|
|
14,293,305
|
|
|
$
|
142,933
|
|
|
$
|
211,812,134
|
|
|
$
|
51,681
|
|
|
$
|
(204,711,057
|
)
|
|
|
7,295,691
|
|
Issuance
of common stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Stock Purchase Plan
|
|
|
10,978
|
|
|
|
110
|
|
|
|
13,120
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,230
|
|
Private
placement of common stock
|
|
|
930,790
|
|
|
|
9,308
|
|
|
|
1,112,746
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,122,054
|
|
Stock
based compensation on stock options & RSU
|
|
|
—
|
|
|
|
—
|
|
|
|
284,950
|
|
|
|
—
|
|
|
|
—
|
|
|
|
284,950
|
|
Foreign
currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,001
|
)
|
|
|
—
|
|
|
|
(1,001
|
)
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(715,280
|
)
|
|
|
(715,280
|
)
|
Balances
at June 30, 2015
|
|
|
15,235,073
|
|
|
$
|
152,351
|
|
|
$
|
213,222,950
|
|
|
$
|
50,680
|
|
|
$
|
(205,426,337
|
)
|
|
$
|
7,999,644
|
|
Issuance
of common stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of warrants
|
|
|
313,081
|
|
|
|
3,130
|
|
|
|
388,221
|
|
|
|
—
|
|
|
|
—
|
|
|
|
391,351
|
|
Employee
Stock Purchase Plan
|
|
|
9,906
|
|
|
|
99
|
|
|
|
22,804
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,903
|
|
Exercise
of RSU or options
|
|
|
6,077
|
|
|
|
61
|
|
|
|
6,369
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,430
|
|
Cashless
exercise of warrants
|
|
|
26,808
|
|
|
|
268
|
|
|
|
(536
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(268
|
)
|
Settlement
for Class E shares
|
|
|
—
|
|
|
|
—
|
|
|
|
(582
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(582
|
)
|
Reclassification
of warrant liability upon exercise
|
|
|
—
|
|
|
|
—
|
|
|
|
530,531
|
|
|
|
—
|
|
|
|
—
|
|
|
|
530,531
|
|
Stock
based compensation on stock options & RSU
|
|
|
—
|
|
|
|
—
|
|
|
|
491,860
|
|
|
|
—
|
|
|
|
—
|
|
|
|
491,860
|
|
Foreign
currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,428
|
|
|
|
—
|
|
|
|
75,428
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,414,615
|
|
|
|
1,414,615
|
|
Balances
at June 30, 2016
|
|
|
15,590,945
|
|
|
$
|
155,909
|
|
|
$
|
214,661,617
|
|
|
$
|
126,108
|
|
|
$
|
(204,011,722
|
)
|
|
$
|
10,931,912
|
|
The
accompanying notes are an integral part of these unaudited consolidated statements.
LIGHTPATH
TECHNOLOGIES, INC.
Consolidated
Statements of Cash Flows
|
|
Year
Ended
June 30,
|
|
|
2016
|
|
2015
|
Cash
flows from operating activities
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,414,615
|
|
|
$
|
(715,280
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
847,990
|
|
|
|
537,143
|
|
Interest
from amortization of debt costs
|
|
|
—
|
|
|
|
13,270
|
|
Loss
on disposal of property and equipment
|
|
|
45,037
|
|
|
|
(1,482
|
)
|
Stock
based compensation
|
|
|
348,735
|
|
|
|
284,950
|
|
Provision
for doubtful accounts receivable
|
|
|
(289
|
)
|
|
|
(15,745
|
)
|
Change
in fair value of warrant liability
|
|
|
52,454
|
|
|
|
464,039
|
|
Deferred
rent
|
|
|
35,523
|
|
|
|
16,175
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
accounts receivables
|
|
|
(650,753
|
)
|
|
|
(560,810
|
)
|
Other
receivables
|
|
|
40,597
|
|
|
|
(53,838
|
)
|
Inventories
|
|
|
(916,899
|
)
|
|
|
22,130
|
|
Prepaid
expenses and other assets
|
|
|
(415,444
|
)
|
|
|
1,556
|
|
Accounts
payable and accrued liabilities
|
|
|
724,147
|
|
|
|
90,074
|
|
Net
cash provided by operating activities
|
|
|
1,525,713
|
|
|
|
82,182
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(1,131,098
|
)
|
|
|
(688,798
|
)
|
Proceeds
from sale of equipment
|
|
|
5,916
|
|
|
|
—
|
|
Net
cash used in investing activities
|
|
|
(1,125,182
|
)
|
|
|
(688,798
|
)
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
6,430
|
|
|
|
—
|
|
Proceeds
from sale of common stock, net of costs of $181,052
|
|
|
—
|
|
|
|
1,122,054
|
|
Proceeds
from sale of common stock from employee stock purchase plan
|
|
|
22,903
|
|
|
|
13,230
|
|
Settlement
for Class E Shares
|
|
|
(582
|
)
|
|
|
—
|
|
Proceeds
from exercise of warrants, net of costs
|
|
|
391,083
|
|
|
|
—
|
|
Net
payments on loan payable
|
|
|
(51,585
|
)
|
|
|
(113,472
|
)
|
Payments
on capital lease obligations
|
|
|
(131,341
|
)
|
|
|
(59,412
|
)
|
Net
cash provided by financing activities
|
|
|
236,908
|
|
|
|
962,400
|
|
Effect
of exchange rate on cash and cash equivalents
|
|
|
626,665
|
|
|
|
91,056
|
|
Change
in cash and cash equivalents
|
|
|
1,264,104
|
|
|
|
446,840
|
|
Cash
and cash equivalents, beginning of period
|
|
|
1,643,920
|
|
|
|
1,197,080
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,908,024
|
|
|
$
|
1,643,920
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid in cash
|
|
$
|
37,627
|
|
|
$
|
18,280
|
|
Income
taxes paid
|
|
$
|
4,296
|
|
|
$
|
2,316
|
|
Supplemental
disclosure of non-cash investing & financing activities:
|
|
|
|
|
|
|
|
|
Landlord
credits for leasehold improvements
|
|
|
—
|
|
|
$
|
420,014
|
|
Purchase
of equipment through capital lease arrangements
|
|
|
—
|
|
|
$
|
523,660
|
|
Derecognition
of liability associated with stock option grants
|
|
$
|
143,125
|
|
|
|
—
|
|
The
accompanying notes are an integral part of these unaudited consolidated statements.
1.
|
Organization
and History
|
LightPath
Technologies, Inc. (“LightPath”, the “Company”, “we”, “us” or “our”)
was incorporated in Delaware in 1992. It was the successor to LightPath Technologies Limited Partnership formed in 1989, and its
predecessor, Integrated Solar Technologies Corporation formed in 1985. On April 14, 2000, the Company acquired Horizon Photonics,
Inc. (“Horizon”). On September 20, 2000, the Company acquired Geltech, Inc. (“Geltech”). The Company completed
its initial public offering during fiscal 1996. In November 2005, we formed LightPath Optical Instrumentation (Shanghai) Co.,
Ltd (“LPOI”), a wholly-owned subsidiary located in Jiading, People’s Republic of China. In December 2013, we
formed LightPath Optical Instrumentation (Zhenjiang) Co., Ltd (“LPOIZ”), a wholly-owned subsidiary located in Zhenjiang,
Jiangsu Province, People’s Republic of China.
LightPath
is a manufacturer and integrator of families of precision molded aspheric optics, high-performance fiber-optic collimator, GRADIUM
glass lenses and other optical materials used to produce products that manipulate light. LightPath designs, develops, manufactures
and distributes optical components and assemblies utilizing the latest optical processes and advanced manufacturing technologies.
LightPath also performs research and development for optical solutions for the traditional optics markets and communications markets.
As used herein, the terms “LightPath,” the “Company,” “we,” “us” or “our,”
refer to LightPath individually or, as the context requires, collectively with its subsidiaries on a consolidated basis.
2.
|
Summary
of Significant Accounting Policies
|
Consolidated
financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Cash
and cash equivalents
consist of cash in the bank and temporary investments with maturities of 90 days or less when purchased.
Allowance
for accounts receivable
, is calculated by taking 100% of the total of invoices that are over 90 days past due from the due
date and 10% of the total of invoices that are over 60 days past due from the due date for U.S. based accounts and 100% of invoices
that are over 120 days past due for China based accounts. Accounts receivable are customer obligations due under normal trade
terms. The Company performs continuing credit evaluations of its customers’ financial condition. If the Company’s
actual collection experience changes, revisions to its allowance may be required. After all attempts to collect a receivable have
failed, the receivable is written off against the allowance.
Inventories
, which consist principally of raw materials, tooling, work-in-process and finished lenses, collimators and assemblies are stated
at the lower of cost or market, on a first-in, first-out basis. Inventory costs include materials, labor and manufacturing overhead.
Acquisition of goods from our vendors has a purchase burden added to cover customs, shipping and handling costs. Fixed costs related
to excess manufacturing capacity have been expensed. We look at the following criteria for parts to consider for the inventory
reserve: items that have not been sold in two years or that have not been purchased in two years or of which we have more than
a two-year supply. These items as identified are reserved at 100%, as well as reserving 50% for other items deemed to be slow
moving within the last twelve months and reserving 25% for items deemed to have low material usage within the last six months.
The parts identified are adjusted for recent order and quote activity to determine the final inventory reserve.
Property
and equipment
are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related
assets ranging from one to ten years. Leasehold improvements are amortized over the shorter of the lease term or the estimated
useful lives of the related assets using the straight-line method. Construction in process represents the accumulated costs of
assets not yet placed in service and primarily relates to manufacturing equipment.
Long-lived
assets
, such as property, plant, and equipment and purchased intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows,
an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or
fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
Deferred
rent
relates to certain of the Company’s operating leases containing predetermined fixed increases of the base rental
rate during the lease term being recognized as rental expense on a straight-line basis over the lease term, as well as applicable
leasehold improvement incentives provided by the landlord. The Company has recorded the difference between the amounts charged
to operations and amounts payable under the leases as deferred rent in the accompanying consolidated balance sheets.
Income
taxes
are accounted for under the asset and liability method. Deferred income tax assets and liabilities are computed on the
basis of differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible
amounts in the future based upon enacted tax laws and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances have been established to reduce deferred tax assets to the amount expected to be realized.
The
Company has not recognized a liability for uncertain tax positions. A reconciliation of the beginning and ending amount of unrecognized
tax benefits or penalties has not been provided since there has been no unrecognized benefit or penalty. If there were an unrecognized
tax benefit or penalty, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense
and penalties in operating expenses.
The
Company files U.S. Federal income tax returns, and returns in various states and foreign jurisdictions. The Company’s open
tax years subject to examination by the Internal Revenue Service and the Florida Department of Revenue generally remain open for
three years from the date of filing.
Our
cash, cash equivalents totaled $2.91million at June 30, 2016. Of this amount, approximately 50% was held by our foreign subsidiaries
in China. These foreign funds were generated in China as a result of foreign earnings. Before any funds can be repatriated, the
retained earnings in China must equal at least 150% of the registered capital. As of June 30, 2016, we have retained earnings
of $2.26 million and we need to have $11.3 million before repatriation will be allowed. We currently do not anticipate that we
will need funds generated from foreign operations to fund our domestic operations. In the event that funds from foreign operations
are needed to fund operations in the United States, if United States taxes have not been previously provided on the related earnings,
we would provide for and pay additional United States taxes at the time we change our intention with regard to the reinvestment
of those earnings.
Revenue
is recognized from product sales when products are shipped to the customer, provided that the Company has received a valid
purchase order, the price is fixed, title has transferred, collection of the associated receivable is reasonably assured, and
there are no remaining significant obligations. Product development agreements are generally short term in nature with revenue
recognized upon shipment to the customer for products, reports or designs. Invoiced amounts for sales for value-added taxes (“VAT”)
are posted to the balance sheet and not included in revenue. Revenue recognized from equipment leasing is recognized over the
lease term based on straight-lining of total lease payments. Equipment leasing revenue was approximately $11,500 for the year
ended June 30, 2016, and was included in sales on the accompanying consolidated statement of comprehensive income (loss). Equipment
under lease of $55,210, was included in property and equipment, net as of June 30, 2016, on the accompanying consolidated balance
sheet.
Value
added tax
is computed on the gross sales price on all sales of the Company’s products sold in the People’s Republic
of China. The VAT rates range up to 17%, depending on the type of products sold. The VAT may be offset by VAT paid by the Company
on raw materials and other materials included in the cost of producing or acquiring its finished products. The Company recorded
a VAT receivable net of payments in the accompanying financial statements.
New
product development
costs are expensed as incurred.
Stock-based
compensation
is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employee’s
requisite service period. We estimate the fair value of each restricted stock unit or stock option as of the date of grant using
the Black-Scholes-Merton pricing model. Most awards granted under our Amended and Restated Omnibus Incentive Plan (the “Plan”)
vest ratably over two to four years and generally have four to ten-year contract lives. The volatility rate is based on historical
trends in common stock closing prices and the expected term was determined based primarily on historical experience of previously
outstanding awards. The interest rate used is the U.S. Treasury interest rate for constant maturities. The likelihood of meeting
targets for option grants that are performance based are evaluated each quarter. If it is determined that meeting the targets
is probable then the compensation expense will be amortized over the remaining vesting period.
Management
estimates.
Management makes estimates and assumptions during the preparation of the Company’s consolidated financial
statements that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could
change in the future as more information becomes available, which in turn could impact the amounts reported and disclosed herein.
Fair
value of financial instruments.
The Company accounts for financial instruments in accordance with the Financial Accounting
Standard Board’s Accounting Standards Codification Topic 820 – Fair Value Measurements and Disclosures (“ASC
820”) , which provides a framework for measuring fair value and expands required disclosure about fair value measurements
of assets and liabilities. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes
three levels of inputs that may be used to measure fair value:
Level
1 - Quoted prices in active markets for identical assets or liabilities.
Level
2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.
Level
3 - Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions
about the assumptions that market participants would use in pricing.
Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as
of June 30, 2016.
The
respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments
which include cash, receivables, accounts payable and accrued liabilities. Fair values were assumed to approximate carrying values
for these financial instruments since they are short term in nature and their carrying amounts approximate fair values or they
are receivable or payable on demand. The fair value of the Company’s loan payable approximates its carrying value based
upon current rates available to the Company.
The
Company values its warrant liabilities based on open-form option pricing models which, based on the relevant inputs, render the
fair value measurement at Level 3. The Company bases its estimates of fair value for warrant liabilities on the amount it would
pay a third-party market participant to transfer the liability and incorporates inputs such as equity prices, historical and implied
volatilities, dividend rates and prices of convertible securities issued by comparable companies maximizing the use of observable
inputs when available. See further discussion at Note 15.
The
Company does not have any other financial or non-financial assets or liabilities that would be characterized as Level 2 or Level
3 instruments.
Derivative
financial instruments.
The Company accounts for derivative instruments in accordance with Financial Accounting
Standard Board’s Accounting Standards Codification Topic 815 – Derivatives and Hedging (“ASC 815”), which
requires additional disclosures about the Company’s objectives and strategies for using derivative instruments, how the
derivative instruments and related hedged items are accounted for, and how the derivative instruments and related hedging items
affect the financial statements.
The
Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible
debt instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under
ASC 815 to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value
of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value
recorded in current period operating results. The fair value of the June 2012 warrants is estimated using the Lattice option-pricing
model.
Freestanding
warrants issued by the Company in connection with the issuance or sale of debt and equity instruments are considered to be derivative
instruments. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value
of warrants issued is required to be classified as equity or as a derivative liability.
Comprehensive
income (loss)
of the Company is defined as the change in equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. Comprehensive income (loss) has two components, net income
(loss) and other comprehensive income (loss), and is included on the statement of operations and comprehensive income (loss).
Our other comprehensive income (loss) consists of foreign currency translation adjustments made for financial reporting purposes.
Business
segments
are required to be reported by the Company. As the Company only operates in principally one business segment, no
additional reporting is required.
Recent
accounting pronouncements.
There are new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”)
that are not yet effective. Management does not believe any of these accounting pronouncements will have a material impact on
our financial position or operating results.
In
July 2015, the FASB issued No. 2015-11, Inventory - Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU
2015-11 provides additional guidance regarding the subsequent measurement of inventory by requiring inventory to be measured at
the lower of cost and net realizable value. This guidance is effective for fiscal years and interim periods beginning after December
15, 2016. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated
financial position, results of operations or cash flows.
In
April 2015, the FASB issued ASU No. 2015-03, Interest -Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs (“ASU 2015-03”). The amendments in ASU 2015-03 require that debt issuance costs related to
a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts and the accounting for debt issue costs under the International Financial Reporting Standards.
The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. Given the
absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, in August
2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30), which clarifies ASU 2015-03 by stating
that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing
the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any
outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 was effective for the annual period ending after December
15, 2015, and interim periods within those fiscal years. Early adoption of the amendments in ASU 2015-03 was permitted for financial
statements that have not been previously issued. The adoption of this guidance did not have a material impact on our consolidated
financial position, results of operations or cash flows.
In
May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”),
which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize
revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an
entity expects to be entitled for those goods or services.
ASU
2014-09 provides that an entity should apply a five-step approach for recognizing revenue, including (1) identifying the contract
with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating
the transaction price to the performance obligations in the contract; and (5) recognizing revenue when, or as, the entity satisfies
a performance obligation. Also, the entity must provide various disclosures concerning the nature, amount and timing of revenue
and cash flows arising from contracts with customers. The effective date will be the first quarter of our fiscal year ending June
30, 2019, using one of two retrospective application methods. We are currently analyzing the impact of this new accounting guidance.
In
February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This guidance requires an entity to recognize
lease liabilities and a right-of-use asset for all leases on the balance sheet and to disclose key information about the entity’s
leasing arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim
periods within that reporting period, with earlier adoption permitted. ASU 2016-02 must be adopted using a modified retrospective
approach for all leases existing at, or entered into after the date of initial adoption, with an option to elect to use certain
transition relief. We are evaluating the impact of this new standard on our financial position, results of operations, cash flows
and related disclosures.
The
components of inventories include the following:
|
|
June
30, 2016
|
|
June
30, 2015
|
|
|
|
|
|
Raw
materials
|
|
$
|
1,791,791
|
|
|
$
|
1,730,153
|
|
Work
in process
|
|
|
1,269,539
|
|
|
|
919,444
|
|
Finished
goods
|
|
|
1,171,343
|
|
|
|
812,643
|
|
Reserve
for obsolescence
|
|
|
(395,864
|
)
|
|
|
(280,863
|
)
|
|
|
$
|
3,836,809
|
|
|
$
|
3,181,377
|
|
During
fiscal 2016 and 2015, the Company evaluated all reserved items and disposed of $24,590 and $85,261, respectively, of inventory
parts and wrote them off against the reserve for obsolescence.
The
value of tooling in raw materials was approximately $1.16 million at June 30, 2016 and approximately $1.06 million at June 30,
2015.
4.
|
Property
and Equipment – net
|
Property
and equipment consist of the following:
|
|
Estimated
Life (Years)
|
|
June
30,
2016
|
|
June
30,
2015
|
Manufacturing
equipment
|
|
|
5
- 10
|
|
|
$
|
6,818,382
|
|
|
$
|
5,796,912
|
|
Computer
equipment and software
|
|
|
3
- 5
|
|
|
|
339,723
|
|
|
|
327,920
|
|
Furniture
and fixtures
|
|
|
5
|
|
|
|
92,705
|
|
|
|
105,402
|
|
Leasehold
improvements
|
|
|
5
- 7
|
|
|
|
1,225,099
|
|
|
|
1,711,018
|
|
Construction
in progress
|
|
|
|
|
|
|
597,452
|
|
|
|
886,624
|
|
Total
property and equipment
|
|
|
|
|
|
|
9,073,361
|
|
|
|
8,827,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
|
|
|
|
4,703,316
|
|
|
|
4,552,325
|
|
Total
property and equipment, net
|
|
|
|
|
|
$
|
4,370,045
|
|
|
$
|
4,275,551
|
|
During
fiscal 2015, we extended our Orlando lease term and received a tenant improvement allowance from the landlord of $420,014. This
allowance was used to construct improvements and was recorded as leasehold improvements and deferred rent liability. It is being
amortized over the corresponding lease term.
The
accounts payable balance includes $69,250 and $56,500 representing earned but unpaid board of directors’ fees as of June
30, 2016 and 2015, respectively.
The
Company’s authorized capital stock consists of 45,000,000 shares, divided into 40,000,000 shares of common stock, par value
$0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share.
Of
the 5,000,000 shares of preferred stock authorized, the board of directors has previously designated:
|
●
|
250
shares of preferred stock as Series A Preferred Stock, all previously outstanding shares of which have been previously redeemed
or converted into shares of our Class A common stock and may not be reissued;
|
|
|
|
|
●
|
300
shares of our preferred stock as Series B Preferred Stock, all previously outstanding shares of which have been previously redeemed
or converted into shares of our Class A common stock and may not be reissued;
|
|
|
|
|
●
|
500
shares of our preferred stock as Series C Preferred Stock, all previously outstanding shares of which have been previously redeemed
or converted into shares of our Class A common stock and may not be reissued;
|
|
|
|
|
●
|
100,000
shares of our preferred stock as Series D Preferred Stock, none of which have been issued; however in 1998, our board of directors
declared a dividend distribution as a right to purchase one share of Series D Preferred Stock for each outstanding share of Class
A common stock. The stockholders of Series D Preferred Stock are entitled to one vote for each share held; and
|
|
|
|
|
●
|
500
shares of our preferred stock as Series F Preferred Stock, all previously outstanding shares of which have been previously redeemed
or converted into shares of our Class A common stock and may not be reissued.
|
Of
the 40,000,000 shares of common stock authorized, the board of directors has previously designated 34,500,000 shares authorized
as Class A common. The stockholders of Class A common stock are entitled to one vote for each share held. The remaining 5,500,000
shares of authorized common stock were designated Class E-1 common stock, Class E-2 common stock, or Class E-3 common stock, all
previously outstanding shares of which have been previously redeemed or converted into shares of Class A common.
At
June 30, 2016, the Company had outstanding warrants to purchase up to 1,080,371 shares of Class A common stock at $1.26 per share
at any time through December 11, 2017 issued in connection with a private placement in fiscal 2012.
During
fiscal 2016, the Company received approximately $391,351 in net proceeds from the exercise of warrants. The Company issued 313,081
shares of Class A common stock in connection with these exercises. The exercise price was $1.26 per share of Class A common stock.
During fiscal 2016, warrants to purchase 101,549 shares of Class A common stock, at an exercise price of $2.48 per share, expired.
Due
to the Company’s previous losses from domestic operations, the Company had no provision for U.S. income taxes during
the years ended June 30, 2016 and 2015. All net loss carryforwards for both China locations are now exhausted and a provision
for taxes due in China of approximately $199,000 and $2,000 has been recorded for the years ending June 30, 2016 and 2015, respectively.
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred
tax liabilities are as follows at June 30:
|
|
2016
|
|
2015
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
Net
operating loss and credit carryforwards
|
|
$
|
32,440,000
|
|
|
$
|
33,279,000
|
|
Intangible
assets
|
|
|
—
|
|
|
|
6,000
|
|
Stock-based
compensation
|
|
|
813,000
|
|
|
|
—
|
|
Capital
loss and R&D credits
|
|
|
1,517,000
|
|
|
|
1,500,000
|
|
Research
development expenses
|
|
|
576,000
|
|
|
|
657,000
|
|
Inventory
|
|
|
177,000
|
|
|
|
135,000
|
|
Accrued
expenses and other
|
|
|
492,000
|
|
|
|
306,000
|
|
|
|
|
|
|
|
|
|
|
Gross
deferred tax assets
|
|
|
36,015,000
|
|
|
|
35,883,000
|
|
Valuation
allowance for deferred tax assets
|
|
|
(35,971,000
|
)
|
|
|
(35,789,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
44
,000
|
|
|
|
94,000
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
and other
|
|
|
(44,000
|
)
|
|
|
(94,000
|
)
|
Total
deferred tax liabilities
|
|
|
(44,000
|
)
|
|
|
(94,000
|
)
|
Net
deferred tax liability
|
|
$
|
—
|
|
|
$
|
—
|
|
The
reconciliation of income tax attributable to operations computed at the United States federal statutory tax rates and the actual
tax provision of zero results primarily from the change in the valuation allowance.
In
assessing the potential future recognition of deferred tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income
of approximately $86.2 million prior to the expiration of net operating loss carry-forwards from 2019 through 2035. Based on the
level of historical taxable income, management has provided for a valuation adjustment against the deferred tax assets of $35,971,000
at June 30, 2016, a decrease of approximately $182,000 over June 30, 2015.
At
June 30, 2016, in addition to net operating loss carry forwards, the Company also has research and development credit carry forwards
of approximately $1,500,000, of which $38,505 will expire in fiscal 2019 and the remainder will expiration from 2020 through 2036.
A portion of the net operating loss carry forwards may be subject to certain limitations of the Internal Revenue Code Sections
382 and 383 which would restrict the annual utilization in future periods due principally to changes in ownership in prior periods.
The
Company utilized all net operating loss carry forwards in China during fiscal 2016. We are now accruing income taxes in
China. The Company’s Chinese subsidiaries are governed by the Income Tax Law of the People’s Republic of China
concerning the privately run and foreign invested enterprises, which are generally subject to tax at a statutory rate of 25%
on income reported in the statutory financial statements after appropriate tax adjustments. No deferred tax provision has
been recorded for China as the effect is deemed de minimis.
8.
|
Compensatory
Equity Incentive Plan and Other Equity Incentives
|
Share-based
payment arrangements—
The Plan included several available forms of stock compensation of which incentive stock options,
non-qualified stock options and restricted stock units have been granted to date.
These
plans are summarized below:
Equity
Compensation Arrangement
|
|
Award
Shares
Authorized
|
|
Award
Shares
Outstanding
at June
30,
2016
|
|
Available for
Issuance
at June
30,
2016
|
Amended
and Restated Omnibus Incentive Plan
|
|
|
3,915,625
|
|
|
|
2,131,055
|
|
|
|
1,139,429
|
|
Employee
Stock Purchase Plan
|
|
|
400,000
|
|
|
|
—
|
|
|
|
390,094
|
|
|
|
|
4,315,625
|
|
|
|
2,131,055
|
|
|
|
1,529,523
|
|
The
2004 Employee Stock Purchase Plan (“ESPP”) permitted employees to purchase common stock through payroll deductions,
not to exceed 15% of an employee’s compensation, at a price not less than 85% of the market value of the stock on specified
dates (June 30 and December 31). In no event could any participant purchase more than $25,000 worth of shares of Class A
common stock in any calendar year and an employee could purchase no more than 4,000 shares on any purchase date within an offering
period of 12 months and 2,000 shares on any purchase date within an offering period of six months. The ESPP expired on December
6, 2014, and was replaced by the LightPath Technologies, Inc. Employee Stock Purchase Plan (“2014 ESPP”), which was
adopted by the Company’s Board of Directors on October 30, 2014 and approved by the Company’s stockholders on January
29, 2015. The 2014 ESPP permits employees to purchase common stock through payroll deductions, which may not exceed 15% of an
employee’s compensation, at a price not less than 85% of the market value of the stock on specified dates (June 30 and December 31).
In no event can any participant purchase more than $25,000 worth of shares of Class A common stock in any calendar year and an
employee cannot purchase more than 8,000 shares on any purchase date within an offering period of 12 months and 4,000 shares on
any purchase date within an offering period of six months. This discount of $2,303 and $1,356 for fiscal 2016 and 2015, respectively,
is included in the selling, general and administrative expense in the accompanying consolidated statements comprehensive income
(loss).
Grant
Date Fair Values and Underlying Assumptions; Contractual Terms—
The Company estimates the fair value of each stock option
as of the date of grant. The Company uses the Black-Scholes-Merton pricing model. The ESPP or the 2014 ESPP fair value is the
market value of the Company’s stock when issued, as described above.
For
stock options and restricted stock units (“RSUs”) granted in the years ended June 30, 2016 and 2015, the Company estimated
the fair value of each stock award as of the date of grant using the following assumptions:
|
Year
ended
June 30, 2016
|
|
Year
ended
June 30, 2015
|
Expected
volatility
|
68%
- 103
|
%
|
|
103%
- 104
|
%
|
Weighted
average expected volatility
|
68%
- 103
|
%
|
|
103%
- 104
|
%
|
Dividend
yields
|
0
|
%
|
|
0
|
%
|
Risk-free
interest rate
|
0.37%
- 1.49
|
%
|
|
1.64%
- 1.77
|
%
|
Expected
term, in years
|
4.29
- 7.50
|
|
|
7.49
|
|
Most
options granted under the Plan vest ratably over two to four years and are generally exercisable for ten years. The assumed forfeiture
rates used in calculating the fair value of options and restricted stock unit grants with both performance and service conditions
were 20% for each of the years ended June 30, 2016 and 2015. The volatility rate and expected term are based on seven-year historical
trends in Class A common stock closing prices and actual forfeitures. The interest rate used is the U.S. Treasury interest rate
for constant maturities.
Information
Regarding Current Share Based Payment Awards—
A summary of the activity for share-based payment awards in the years ended
June 30, 2016 and 2015 is presented below:
|
|
Stock
Options
|
|
Restricted
Stock Units (RSUs)
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
(per share)
|
|
Weighted
Average
Remaining
Contract
Life (YRS)
|
|
Shares
|
|
Weighted
Average
Remaining
Contract
Life (YRS)
|
June
30, 2014
|
|
|
654,158
|
|
|
$
|
2.25
|
|
|
|
5.5
|
|
|
|
856,300
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
103,000
|
|
|
$
|
1.35
|
|
|
|
9.4
|
|
|
|
219,000
|
|
|
|
2.3
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled/Forfeited
|
|
|
(34,675
|
)
|
|
$
|
3.06
|
|
|
|
2.9
|
|
|
|
—
|
|
|
|
—
|
|
June
30, 2015
|
|
|
722,483
|
|
|
$
|
2.08
|
|
|
|
5.3
|
|
|
|
1,075,300
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
155,592
|
|
|
$
|
1.49
|
|
|
|
9.4
|
|
|
|
236,495
|
|
|
|
2.3
|
|
Exercised
|
|
|
(6,077
|
)
|
|
$
|
1.07
|
|
|
|
3.7
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled/Forfeited
|
|
|
(52,738
|
)
|
|
$
|
3.26
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
June
30, 2016
|
|
|
819,260
|
|
|
$
|
1.90
|
|
|
|
5.6
|
|
|
|
1,311,795
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
exercisable/vested as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2016
|
|
|
637,010
|
|
|
$
|
2.06
|
|
|
|
4.8
|
|
|
|
870,196
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
unexercisable/unvested as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2016
|
|
|
182,250
|
|
|
$
|
1.35
|
|
|
|
8.2
|
|
|
|
441,599
|
|
|
|
0.9
|
|
|
|
|
819,260
|
|
|
|
|
|
|
|
|
|
|
|
1,311,795
|
|
|
|
|
|
The
total intrinsic value of share options exercised for years ended June 30, 2016 and 2015 was $9,919 and $0, respectively.
The
total intrinsic value of shares options outstanding and exercisable at both June 30, 2016 and 2015 was $148,000 and $86,000, respectively.
The
total fair value of shares options vested during the years ended June 30, 2016 and 2015 was $234,000 and $122,000, respectively.
The
total intrinsic value of RSUs exercised was $0 during both years ended June 30, 2016 and 2015.
The
total intrinsic value of RSUs outstanding and exercisable at June 30, 2016 and 2015 was $1.51 million and $1.18 million, respectively.
The
total fair value of RSUs vested during the years ended June 30, 2016 and 2015 was $389,000 and $200,000, respectively.
As
of June 30, 2016 there was $494,555 of total unrecognized compensation cost related to non-vested share-based compensation arrangements
(including share options and restricted stock units) granted under the Plan. The cost expected to be recognized as follows:
|
|
Stock
Options
|
|
Restricted
Stock
Share/
Units
|
|
Total
|
|
|
|
|
|
|
|
Year
ended June 30, 2017
|
|
|
42,434
|
|
|
|
237,187
|
|
|
|
279,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2018
|
|
|
28,667
|
|
|
|
141,580
|
|
|
|
170,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2019
|
|
|
12,929
|
|
|
|
29,153
|
|
|
|
42,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2020
|
|
|
2,605
|
|
|
|
—
|
|
|
|
2,605
|
|
|
|
$
|
86,635
|
|
|
$
|
407,920
|
|
|
$
|
494,555
|
|
The
table above does not include shares under the Company’s 2014 ESPP, which has purchase settlement dates in the second and
fourth fiscal quarters. The Company’s 2014 ESPP is not administered with a look back option provision and, as a result,
there is not a population of outstanding option grants during the employee contribution period.
RSU
awards vest immediately or from two to four years from the grant date.
The
Company issues new shares of common stock upon the exercise of stock options. The following table is a summary of the number and
weighted average grant date fair values regarding our unexercisable/unvested awards as of June 30, 2016 and 2015 and changes
during the two years then ended:
Unexercisable/unvested
awards
|
|
Stock
Options
Shares
|
|
RSU
Shares
|
|
Total
Shares
|
|
|
Weighted-
Average
Grant Date
Fair Values
(per share)
|
|
June
30, 2014
|
|
|
193,000
|
|
|
|
354,303
|
|
|
|
547,303
|
|
|
$
|
1.18
|
|
Granted
|
|
|
103,000
|
|
|
|
219,000
|
|
|
|
322,000
|
|
|
$
|
1.30
|
|
Vested
|
|
|
(71,500
|
)
|
|
|
(169,433
|
)
|
|
|
(240,933
|
)
|
|
$
|
1.28
|
|
Cancelled/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
June
30, 2015
|
|
|
224,500
|
|
|
|
403,870
|
|
|
|
628,370
|
|
|
$
|
1.10
|
|
Granted
|
|
|
155,592
|
|
|
|
236,495
|
|
|
|
392,087
|
|
|
$
|
1.39
|
|
Vested
|
|
|
(197,842
|
)
|
|
|
(198,766
|
)
|
|
|
(396,608
|
)
|
|
$
|
1.21
|
|
Cancelled/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
June
30, 2016
|
|
|
182,250
|
|
|
|
441,599
|
|
|
|
623,849
|
|
|
$
|
1.35
|
|
Acceleration
of Vesting—
The Company does not generally accelerate the vesting of any stock options.
Financial
Statement Effects and Presentation—
The following table shows total stock-based compensation expense for the years ended
June 30, 2016 and 2015 included in the Consolidated Statement of Comprehensive Income (Loss):
|
|
Year
ended
June
30, 2016
|
|
Year
ended
June
30, 2015
|
|
|
|
|
|
Stock
options
|
|
$
|
49,293
|
|
|
$
|
53,584
|
|
RSU
|
|
|
299,442
|
|
|
|
231,367
|
|
Total
|
|
$
|
348,735
|
|
|
$
|
284,951
|
|
|
|
|
|
|
|
|
|
|
The
amounts above were included in:
|
|
|
|
|
|
|
|
|
Selling,
general & administrative
|
|
$
|
347,206
|
|
|
$
|
283,962
|
|
Cost
of sales
|
|
|
316
|
|
|
|
158
|
|
New
product development
|
|
|
1,213
|
|
|
|
831
|
|
|
|
$
|
348,735
|
|
|
$
|
284,951
|
|
Basic
earnings per share is computed by dividing net income by the weighted-average number of shares of Class A common stock outstanding,
during each period presented. Diluted earnings per share is computed similarly to basic earnings per share except that it reflects
the potential dilution that could occur if dilutive securities or other obligations to issue shares of Class A common stock were
exercised or converted into shares of Class A common stock. The computations for basic and diluted earnings per share are described
in the following table:
|
|
Year
ended
June 30,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,414,615
|
|
|
$
|
(715,280
|
)
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,401,893
|
|
|
|
14,711,586
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Options
to purchase common stock
|
|
|
71,859
|
|
|
|
—
|
|
Restricted
stock units
|
|
|
944,274
|
|
|
|
—
|
|
Common
stock warrants
|
|
|
457,357
|
|
|
|
—
|
|
Diluted
|
|
|
16,875,383
|
|
|
|
14,711,586
|
|
|
|
|
|
|
|
|
|
|
Earnings
(Loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
|
$
|
(0.05
|
)
|
Diluted
|
|
$
|
0.08
|
|
|
$
|
(0.05
|
)
|
Excluded
from computation:
|
|
|
|
|
|
|
|
|
Options
to purchase common stock
|
|
|
718,684
|
|
|
|
703,721
|
|
Restricted
stock units
|
|
|
289,982
|
|
|
|
1,002,700
|
|
Common
stock warrants
|
|
|
848,927
|
|
|
|
1,916,671
|
|
|
|
|
1,857,593
|
|
|
|
3,623,092
|
|
10.
|
Defined
Contribution Plan
|
The
Company discontinued its profit sharing plan that permitted participants to make contributions by salary reduction pursuant to
Section 401(k) of the Internal Revenue Code of 1986, as amended, in January 2009. Effective January 1, 2009, the Company
transferred all plan assets to the ADP Total Source 401(k) plan. The ADP plan is a defined 401(k) contribution plan which all
employees, over the age of 21, are eligible to participate in after three months of employment. The Company matched 25% of the
first 6% of employee contributions until February 27, 2009, when the match was eliminated. Currently, there are 24 employees who
are enrolled in this program. The 401(k) contribution plan is administered by a third party. Annual discretionary contributions,
if any, are made by the Company to match a portion of the funds employees contribute. The Company made no matching contributions
during the years ended June 30, 2016 and 2015.
The
Company has operating leases for office space. At June 30, 2015, the Company has a lease agreement for its manufacturing and office
facility in Orlando, Florida (the “Orlando Lease”). The Orlando Lease, which is for a seven-year original term with
renewal options, expires April 2022 and expanded our space to 25,847 square feet, including space added in July 2014. Minimum
rental rates for the extension term were established based on annual increases of two and one half percent starting in the third
year of the extension period. Additionally, there are two 3-year extension options exercisable by the Company. The minimum rental
rates for such additional extension options will be determined at the time an option is exercised and will be based on a “fair
market rental rate” as determined in accordance with the sixth lease amendment.
The
Company received $420,014 in a leasehold improvement allowance in fiscal 2015. This amount is included in the property and equipment
and deferred rent on the consolidated balance sheets. Amortization of leasehold improvements was $60,720 as of June 30, 2016.
As
of June 30, 2016, the Company, through its wholly-owned subsidiary, LPOI, has a lease agreement for an office facility in Shanghai,
China (the “China Lease”). The China Lease expires October 2017.
As
of June 30, 2016, the Company, through its wholly-owned subsidiary, LPOIZ, has a lease agreement for a manufacturing and office
facility in Zhenjiang, China (the “Zhenjiang Lease”). The Zhenjiang Lease, which is for a five-year original term
with renewal options, expires March 2019.
During
fiscal 2014 and 2015, the Company entered into four capital lease agreements, with three to five year terms, for computer and
manufacturing equipment, which are included as part of Property and Equipment. Assets under capital lease include approximately
$547,000 in computer equipment and software and manufacturing equipment, with accumulated amortization of approximately $202,000
as of June 30, 2016. Amortization related to capital leases is included in depreciation expense.
Rent
expense totaled $529,341 and $581,679 during the years ended June 30, 2016 and 2015, respectively.
The
approximate future minimum lease payments under capital and operating leases at June 30, 2016 were as follows:
Fiscal
year ending June 30,
|
|
Capital
Leases
|
|
Operating
Lease
|
|
|
|
|
|
2017
|
|
$
|
169,322
|
|
|
$
|
378,000
|
|
2018
|
|
|
167,335
|
|
|
|
376,000
|
|
2019
|
|
|
39,000
|
|
|
|
370,000
|
|
2020
|
|
|
6,825
|
|
|
|
357,000
|
|
2021
|
|
|
—
|
|
|
|
365,000
|
|
2022
and beyond
|
|
|
—
|
|
|
|
311,000
|
|
Total
minimum payments
|
|
|
382,482
|
|
|
$
|
2,157,000
|
|
|
|
|
|
|
|
|
|
|
Less
imputed interest
|
|
|
(37,109
|
)
|
|
|
|
|
Present
value of minimum lease payments included in capital lease obligations
|
|
|
345,373
|
|
|
|
|
|
Less
current portion
|
|
|
166,454
|
|
|
|
|
|
Non-current
portion
|
|
$
|
178,919
|
|
|
|
|
|
The
Company from time to time is involved in various legal actions arising in the normal course of business. Management, after reviewing
with legal counsel all of these actions and proceedings, believes that the aggregate losses, if any, will not have a material
adverse effect on the Company’s financial position or results of operations.
Assets
and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the balance sheet date, and
revenues and expenses are translated at average rates of exchange for the period. Gains or losses on the translation of the financial
statements of a non-U.S. operation, where the functional currency is other than the U.S. dollar, are reflected as a separate component
of equity, which was a gain of $126,108 and $50,680 at June 30, 2016 and 2015, respectively. The Company as of June 30, 2016 had
approximately $11,311,000 in assets and $9,942,000 in net assets located in China. The Company as of June 30, 2015 had approximately
$8,862,000 in assets and $7,305,000 in net assets located in China.
14.
|
Significant
Suppliers and Customers
|
We
utilize a number of glass compositions for the manufacture of our molded glass aspheres and lens array products. We purchase glass
from Hikari, Ohara, CDGM and other suppliers.
Base
optical materials, used in both GRADIUM and collimator products, are manufactured and supplied by a number of major optical and
glass manufacturers. Optical fiber and collimator housings are manufactured and supplied by a number of major manufacturers.
In
fiscal 2016, sales to three customers comprised an aggregate of approximately 25% of our annual sales. The loss of any of these
customers, or a significant reduction in sales to any such customer, would adversely affect our revenues.
In
fiscal 2015, sales to three customers comprised an aggregate of approximately 27% of our annual sales. The loss of any of these
customers, or a significant reduction in sales to any such customer, would adversely affect our revenues.
15.
|
Derivative
Financial Instruments (Warrant Liability)
|
On
June 11, 2012, we executed a Securities Purchase Agreement with respect to a private placement of an aggregate of 1,943,852 shares
of our Class A common stock at $1.02 per share and warrants to purchase up to 1,457,892 shares of our Class A common stock at
an initial exercise price of $1.32 per share, which was subsequently reduced to $1.26 (the “June 2012 Warrants”).
The June 2012 Warrants are exercisable for a period of five years beginning on December 11, 2012. The Company accounted for the
June 2012 Warrants issued to investors in accordance with ASC 815-10. ASC 815-10 provides guidance for determining whether an
equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. This applies to any freestanding
financial instrument or embedded feature that has all the characteristics of a derivative under ASC 815-10, including any freestanding
financial instrument that is potentially settled in an entity’s own stock.
Due
to certain adjustments that may be made to the exercise price of the June 2012 Warrants if the Company issues or sell shares of
its Class A common stock at a price that is less than the then-current warrant exercise price, the June 2012 Warrants have been
classified as a liability, as opposed to equity, in accordance with ASC 815-10 as it was determined that the June 2012 Warrants
were not indexed to the Company’s Class A common stock.
The
fair value of the outstanding June 2012 Warrants was re-measured on June 30, 2016 to reflect their fair market value at the end
of the current reporting period. The June 2012 Warrants will be re-measured at each subsequent financial reporting period until
the warrants are either fully exercised or expire. The change in fair value of the June 2012 Warrants is recorded in the statement
of operations and comprehensive loss and is estimated using the Lattice option-pricing model using the following assumptions:
Inputs
into Lattice model for warrants:
|
|
June
30, 2016
|
Equivalent
volatility
|
|
|
75.50
|
%
|
Equivalent
interest rate
|
|
|
0.50
|
%
|
Floor
|
|
$
|
1.1500
|
|
Greater
of estimated stock price or floor
|
|
$
|
1.1500
|
|
Probability
price < strike price
|
|
|
55.90
|
%
|
Fair
value of call
|
|
$
|
0.7900
|
|
Probability
of fundamental transaction occuring
|
|
|
5
|
%
|
All
warrants issued by the Company other than the above noted June 2012 Warrants are classified as equity.
The
warrant liabilities are considered a recurring Level 3 fair value measurement, with a fair value of approximately $717,000 at
June 30, 2016.
The
following table summarizes the activity of Level 3 financial instruments measured on a recurring basis for the year ended June
30, 2016:
|
|
Warrant Liability
|
Fair
value, June 30, 2015
|
|
$
|
1,195,470
|
|
Exercise
of common stock warrants
|
|
|
(530,531
|
)
|
Change
in fair value of warrant liability
|
|
|
52,454
|
|
Fair
value, June 30, 2016
|
|
$
|
717,393
|
|
On
September 30, 2013, we entered into a Loan and Security Agreement (the “LSA”) with AvidBank Corporate Finance, a division
of AvidBank (“AvidBank”). Pursuant to the LSA, AvidBank agreed to lend us under a revolving credit facility (the “Revolving
Line”) an aggregate principal outstanding amount not to exceed the lesser of (i) One Million Dollars ($1,000,000) or (ii)
an amount equal to eighty percent (80%) of eligible accounts, as determined by AvidBank in accordance with the LSA. We could have
borrowed amounts under the Revolving Line at any time prior to December 30, 2014, at which time all outstanding amounts would
have been immediately due and payable.
Pursuant
to the LSA, AvidBank also agreed to make equipment advances to us, each in a minimum amount of $100,000, and in an aggregate principal
amount not to exceed One Million Dollars ($1,000,000). Equipment advances during any particular three-month draw period were due
and repayable in thirty-six (36) equal monthly payments. All amounts due under outstanding equipment advances made during any
particular draw period were due on the tenth (10th) day following the end of such draw period, and in any event, no later than
September 30, 2017.
On
December 23, 2014, we entered into an Amended and Restated Loan and Security Agreement (the “Amended LSA”) with AvidBank
for an invoice-based working capital revolving line of credit (the “Invoiced Based Line”). The Amended LSA amended
and restated the LSA. Pursuant to the Amended LSA, AvidBank will, in its discretion, make loan advances to us up to a maximum
aggregate principal amount outstanding not to exceed the lesser of (i) One Million Dollars ($1,000,000) or (ii) eighty percent
(80%) (the “Maximum Advance Rate”) of the aggregate balance of our eligible accounts receivable, as determined by
AvidBank in accordance with the Amended LSA. On December 23, 2015, we executed the First Amendment to the Amended LSA to extend
the term of the Amended LSA to December 23, 2016.
Avid
Bank may, in its discretion, elect to not make a requested advance, determine that certain accounts are not eligible accounts,
change the Maximum Advance Rate or apply a lower advance rate to particular accounts and terminate the Amended LSA. As of June
30, 2016 and 2015, the principal outstanding on the Invoiced Based Line was $0 and $51,585, respectively.
Amounts
borrowed under the Invoiced Based Line may be repaid and re-borrowed at any time prior to December 23, 2016, at which time all
amounts shall be immediately due and payable. The advances under the Invoiced Based Line bear interest, on the outstanding daily
balance, at a per annum rate equal to three percent (3%) above the Prime Rate (6.50% at June 30, 2016). Interest payments are
due and payable on the last business day of each month. Payments received with respect to accounts upon which advances are made
will be applied to the amounts outstanding under the Amended LSA.
Our
obligations under the Amended LSA are secured by a first priority security interest (subject to permitted liens) in cash, U.S.
inventory and accounts receivable. In addition, our wholly-owned subsidiary, Geltech, has guaranteed our obligations under the
Amended LSA.
The
Amended LSA contains customary covenants, including, but not limited to: (i) limitations on the disposition of property; (ii)
limitations on changing our business or permitting a change in control; (iii) limitations on additional indebtedness or encumbrances;
(iv) restrictions on distributions; and (v) limitations on certain investments.
Late
payments are subject to a late fee equal to the lesser of five percent (5%) of the unpaid amount or the maximum amount permitted
to be charged under applicable law. Amounts outstanding during an event of default accrue interest at a rate of five percent (5%)
above the interest rate applicable immediately prior to the occurrence of the event of default. The Amended LSA contains other
customary provisions with respect to events of default, expense reimbursement, and confidentiality.
17.
|
Pudong
Private Placement
|
On
January 20, 2015, we issued and sold securities to Pudong Science & Technology Investment (Cayman) Co. Ltd. (“Pudong
Investment”) in accordance with that certain Securities Purchase Agreement with Pudong Science & Technology (Cayman)
Co., Ltd. (“Pudong”). Prior to the closing, the Securities Purchase Agreement was amended (as amended, the “SPA”)
and assigned by Pudong to its affiliate, Pudong Investment.
In
connection with the closing, we sold to Pudong Investment 930,790 shares of Class A common stock at a price of $1.40 per share,
which was adjusted from the initial per share purchase price of $1.62 pursuant to the terms of the SPA. We received gross cash
proceeds from the issuance of the Class A common stock in the amount of approximately $1,303,000 and incurred costs of $180,946.
We used the sale proceeds of the sale to provide working capital in support of its continued growth, particularly new product
development, sales and marketing of its infrared product line, and capital expenditures related to the acquisition of new equipment.
Immediately
following the issuance of the shares of Class A common stock pursuant to the SPA, Pudong Investment beneficially owned 14.9% of
our outstanding shares of Class A common stock.
The
shares of Class A common stock issued were exempt from the registration requirements of the Securities Act of 1933, as amended
(the “Act”). The shares of Class A common stock are restricted securities that have not been registered under the
Act and may not be offered or sold absent registration or applicable exemption from the registration requirements.
18.
|
Technology
Transfer and License Agreement
|
On
April 28, 2015, we entered into a Technology Transfer and License Agreement (“License Agreement”) with one of our
specialty products customers (the “Customer”) regarding the granting of an irrevocable license of certain technology,
to be used by the Customer to manufacture specific fiber collimator assemblies used by the Customer. As we no longer intend to
produce such assemblies in the future for the Customer, we have agreed to provide to the Customer process work instructions, training,
inventory and access to intellectual property specifically related to the manufacturing process of that Customer’s fiber
collimator assemblies. Pursuant to the License Agreement, the Customer paid to us an aggregate of $200,000 in fees, in consideration
of our disclosure of the technology and the granting of a license to the Customer to use the technology to manufacture such fiber
collimator assemblies. The first installment of $100,000 was received in May 2015 and the second installment of $100,000 was received
in August 2015. Pursuant to the License Agreement, the Customer also agreed to order and purchase from us a certain number of
fiber collimator assemblies during the transition process. Costs associated with the License Agreement were approximately $33,000.
The license fees and sales generated as a result of the License Agreement have been recognized as revenue over the duration of
the training period. Revenue of approximately $76,000, which includes the amortization of the license fee, was included in sales
on the accompanying consolidated statement of comprehensive income (loss) for the year ended June 30, 2016. The License Agreement
has been fully recognized as revenue.
19.
|
Subsequent
Events – ISP Optics Corporation Acquisition
|
On
August 3, 2016, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with ISP Optics
Corporation (“ISP”) and Joseph Menaker and Mark Lifshotz (the “ISP Stockholders”), pursuant to which the
Company will acquire (the “Acquisition”) all of the outstanding common stock of ISP (the “Purchased Shares”)
from the ISP Stockholders. Following the closing of the Acquisition, ISP will become a wholly-owned subsidiary of the Company.
The
Company will acquire the Purchased Shares for $18,000,000 (the “Purchase Price”), to be paid in a combination of
cash (the “Cash Amount”) and a promissory note (the “Note”). The Cash Amount, subject to a net
working capital adjustment, debt adjustment, and cash adjustment as provided in the Stock Purchase Agreement, will not be
less than $12,000,000. The aggregate original principal amount of the Note will equal the Purchase Price less the Cash
Amount, as adjusted pursuant to the Stock Purchase Agreement, but in no event less than $3,000,000.
During
the period commencing on the date that the Note is issued (the “Issue Date”) and continuing until the
fifteen month anniversary of the Issue Date (the “Initial Period”), interest will accrue on only the unpaid
principal amount of the Note in excess of $2,700,000 at an interest rate equal to ten percent (10%) per annum. After the Initial
Period, interest will accrue on the entire unpaid principal amount of the Note from time to time outstanding, at an interest
rate equal to ten percent (10%) per annum. Interest is payable semi-annually in arrears. The term of the Note is five years,
and any unpaid interest and principal, together with any other amounts payable under the Note, is due and payable on the
maturity date. The Company may prepay the Note in whole or in part without penalty or premium. If the Company does not pay
any amount payable when due, whether at the maturity date, by acceleration, or otherwise, such overdue amount will bear
interest at a rate equal to twelve percent (12%) per annum from the date of such non-payment until the Company pays such
amount in full.
In
addition, upon the occurrence of a payment default, or any other “event of default,” such as a bankruptcy event or
a change of control of the Company, the entire unpaid and outstanding principal balance of the Note, together with all accrued
and unpaid interest and any and all other amounts payable under the Note, will immediately be due and payable.
Completion
of the Acquisition is subject to the satisfaction or waiver of certain conditions. In addition to customary closing conditions,
our obligation to complete the Acquisition is conditioned on receipt by us of financing we need to purchase the Purchased Shares
and obtaining the requisite approval of our stockholders related to the financing and the Acquisition, as applicable, as required
by applicable NASDAQ rules and other applicable law.
The
closing of the Acquisition will occur on a date and time mutually agreed upon by the ISP Stockholders and us, no later than five
(5) business days following the satisfaction or waiver of the closing conditions. Currently, we anticipate the Acquisition closing
in the fourth quarter of calendar year 2016; however, there can be no assurance that the Acquisition will close in the fourth
quarter of calendar year 2016, or at all.
End
of Consolidated Financial Statements
ISP
Optics Corporation
Consolidated Balance
Sheets (Unaudited)
Period Ended
|
|
June
30,
2016
|
|
December 31, 2015
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
814,267
|
|
|
$
|
934,893
|
|
Accounts receivable
|
|
|
1,584,134
|
|
|
|
1,473,989
|
|
Inventories, net
|
|
|
927,557
|
|
|
|
1,035,924
|
|
Other current assets
|
|
|
135,895
|
|
|
|
90,131
|
|
Total current assets
|
|
|
3,461,853
|
|
|
|
3,534,937
|
|
Property and equipment, net
|
|
|
2,243,941
|
|
|
|
2,026,545
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
50,000
|
|
|
|
62,500
|
|
Related party notes receivable
|
|
|
110,000
|
|
|
|
110,000
|
|
Deposits
|
|
|
44,999
|
|
|
|
47,601
|
|
Deferred tax asset, net
|
|
|
44,675
|
|
|
|
—
|
|
Total noncurrent assets
|
|
|
2,493,615
|
|
|
|
2,246,646
|
|
Total assets
|
|
$
|
5,955,468
|
|
|
$
|
5,781,583
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
478,142
|
|
|
$
|
494,031
|
|
Accrued expenses
|
|
|
385,161
|
|
|
|
663,667
|
|
Other liabilities, current portion
|
|
|
—
|
|
|
|
90,653
|
|
Income taxes payable
|
|
|
78,902
|
|
|
|
88,896
|
|
Notes payable, current portion
|
|
|
559,404
|
|
|
|
661,454
|
|
Total current liabilities
|
|
|
1,501,609
|
|
|
|
1,998,701
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Other liabilities, less current portion
|
|
|
317,192
|
|
|
|
271,742
|
|
Deferred tax liability, net
|
|
|
—
|
|
|
|
28,800
|
|
Notes payable, less current portion
|
|
|
624,107
|
|
|
|
784,249
|
|
Total noncurrent liabilities
|
|
|
941,299
|
|
|
|
1,084,791
|
|
Total liabilities
|
|
|
2,442,908
|
|
|
|
3,083,492
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 2, 8 and 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Common stock – no par, 200 shares authorized, 20 shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
—
|
|
|
|
—
|
|
Retained earnings
|
|
|
3,639,553
|
|
|
|
2,814,524
|
|
Accumulated other comprehensive loss
|
|
|
(126,993
|
)
|
|
|
(116,433
|
)
|
Total stockholders’ equity
|
|
|
3,512,560
|
|
|
|
2,698,091
|
|
Total liabilities and stockholders’ equity
|
|
$
|
5,955,468
|
|
|
$
|
5,781,583
|
|
See
accompanying notes to consolidated financial statements.
ISP
Optics Corporation
Consolidated Statements
of Comprehensive Income (Unaudited)
Six Months Ending June 30,
|
|
2016
|
|
2015
|
|
|
|
|
|
Sales,
net
|
|
$
|
6,389,915
|
|
|
$
|
6,130,735
|
|
Cost of goods sold
|
|
|
3,991,019
|
|
|
|
3,468,982
|
|
Gross profit
|
|
|
2,398,896
|
|
|
|
2,661,753
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
885,336
|
|
|
|
775,373
|
|
Rent and occupancy
|
|
|
94,642
|
|
|
|
106,578
|
|
Office expense and supplies
|
|
|
60,307
|
|
|
|
55,105
|
|
Professional fees and commissions
|
|
|
226,748
|
|
|
|
133,189
|
|
Travel and entertainment
|
|
|
94,087
|
|
|
|
64,042
|
|
Financial expenses
|
|
|
33,806
|
|
|
|
24,039
|
|
Advertising and subscriptions
|
|
|
73,216
|
|
|
|
71,706
|
|
General expenses
|
|
|
49,854
|
|
|
|
33,744
|
|
Postage and freight
|
|
|
46,991
|
|
|
|
39,341
|
|
Depreciation and amortization
|
|
|
31,137
|
|
|
|
17,401
|
|
Total selling, general and administrative expenses
|
|
|
1,596,124
|
|
|
|
1,320,518
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
802,772
|
|
|
|
1,341,235
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(31,047
|
)
|
|
|
(30,397
|
)
|
Other income
|
|
|
57,316
|
|
|
|
18,369
|
|
Total other income
(expense),
net
|
|
|
26,269
|
|
|
|
(12,028
|
)
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
829,041
|
|
|
|
1,329,207
|
|
Income tax expense
|
|
|
4,012
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
Net income before noncontrolling interest
|
|
|
825,029
|
|
|
|
1,329,070
|
|
Net income attributable to the noncontrolling interest
|
|
|
—
|
|
|
|
11,921
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ISP Optics Corporation
|
|
|
825,029
|
|
|
|
1,317,149
|
|
Foreign currency translation adjustment
|
|
|
(10,560
|
)
|
|
|
16,948
|
|
Comprehensive income attributable to ISP Optics Corporation
|
|
$
|
814,469
|
|
|
$
|
1,334,097
|
|
See
accompanying notes to consolidated financial statements.
ISP
Optics Corporation
Consolidated
Statement of Stockholders’ Equity (Unaudited)
|
|
Class
A
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Retained
|
|
Accumulated Other Comprehensive
|
|
Total
Stockholders’
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Loss
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2015
|
|
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,814,524
|
|
|
$
|
(116,433
|
)
|
|
$
|
2,698,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,560
|
)
|
|
|
(10,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
825,029
|
|
|
|
—
|
|
|
|
825,029
|
|
Balance,
June 30, 2016
|
|
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,639,553
|
|
|
$
|
(126,993
|
)
|
|
$
|
3,512,560
|
|
See
accompanying notes to consolidated financial statements.
ISP
Optics Corporation
Consolidated Statements
of Cash Flows (Unaudited)
Six Months Ending
|
|
June 30, 2016
|
|
June 30, 2015
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
Net income
|
|
$
|
825,029
|
|
|
$
|
1,329,070
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization on property and equipment
|
|
|
242,387
|
|
|
|
170,175
|
|
Amortization of intangible assets
|
|
|
12,500
|
|
|
|
12,500
|
|
Deferred taxes
|
|
|
(73,475
|
)
|
|
|
(4,006
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(110,145
|
)
|
|
|
(244,122
|
)
|
Inventories
|
|
|
108,367
|
|
|
|
(187,502
|
)
|
Other current assets
|
|
|
(45,763
|
)
|
|
|
(285,547
|
)
|
Accounts payable
|
|
|
(15,889
|
)
|
|
|
(370,292
|
)
|
Accrued expenses
|
|
|
(278,508
|
)
|
|
|
149,719
|
|
Income taxes payable
|
|
|
(9,994
|
)
|
|
|
(7,793
|
)
|
Net cash provided by operating activities
|
|
|
654,509
|
|
|
|
562,202
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Decrease in deposits
|
|
|
2,602
|
|
|
|
—
|
|
Increase (decrease) in other liabilities
|
|
|
(45,203
|
)
|
|
|
(17,960
|
)
|
Purchase of property and equipment
|
|
|
(455,804
|
)
|
|
|
(76,264
|
)
|
Net cash used for investing activities
|
|
|
(498,405
|
)
|
|
|
(94,224
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings under notes payable
|
|
|
—
|
|
|
|
206,124
|
|
Payments under notes payable
|
|
|
(224,304
|
)
|
|
|
(205,485
|
)
|
Net cash provided by (used for) financing activities
|
|
|
(224,304
|
)
|
|
|
639
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(52,426
|
)
|
|
|
(77,285
|
)
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(120,626
|
)
|
|
|
391,332
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents,
beginning of year
|
|
|
934,893
|
|
|
|
51,224
|
|
Cash
and cash equivalents,
end of year
|
|
$
|
814,267
|
|
|
$
|
442,556
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
31,047
|
|
|
$
|
30,397
|
|
See
accompanying notes to consolidated financial statements.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements (Unaudited)
1. Organization
and Business Activity
ISP
Optics Corporation was incorporated in the State of New York in April, 1993. The Company’s principal business activity is
the manufacturing of optical materials, high precision optical components and infrared lens assemblies. ISP Optics Corporation
also operates under the registered trademark “ISP Optics.”
2. Summary
of Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America and include the accounts of ISP Optics Corporation and its subsidiary, ISP Optics Latvia (collectively, the
“Company”).
The
Company records equity interests held by others in ISP Optics Latvia as a noncontrolling interest. Earnings of the noncontrolling
interest are charged against the income of the Company and losses are recognized to the extent of prior earnings and capital contributions.
During
the year ended December 31, 2014 and through December 17, 2015, ISP Optics Corporation owned approximately 98% of ISP Optics Latvia.
Effective December 18, 2015, ISP Optics Corporation purchased the remaining noncontrolling interest of ISP Optics Latvia at a
purchase price of $44,695, at which time ISP Optics Latvia became a wholly-owned subsidiary. The excess of the purchase price
over the balance in the noncontrolling interest account at the date of purchase was recorded as a reduction of additional paid-in
capital until fully derecognized with the remainder recorded as a reduction in retained earnings. All intercompany transactions
and balances have been eliminated upon consolidation.
Foreign
Currency Translation
Assets
and liabilities of the Company’s foreign subsidiary are translated at period end exchange rates and related revenues and
expenses are translated at average exchange rates in effect during the reporting periods. Resulting translation adjustments are
recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Foreign currency transaction
gains and losses are recorded in other income (expense) on the consolidated statements of comprehensive income.
Revenue
Revenue
is recognized from product sales when products are shipped to the customer and title has changed hands, provided that the Company
has received a valid purchase order, the price is fixed, title has transferred, collection of the associated receivable is reasonably
assured, and there are no remaining significant obligations. Revenues are presented net of discounts.
Cash
and Cash Equivalents
Cash
and cash equivalents consist of cash and highly liquid investments with maturities of three months or less from date of purchase.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements (Unaudited)
Accounts
Receivable
Accounts
receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its customers’
financial condition. If the Company’s actual collection experience changes, and management deems any portion of accounts
receivable as uncollectible, establishment and subsequent revisions to an allowance for doubtful accounts may be required. There
was no allowance for doubtful accounts recorded by the Company for the periods ended June 30, 2016 and December 31, 2015.
Inventories
Inventories
which consist principally of raw materials, work-in-process and finished lenses are stated at the lower of cost or market, on
a first-in, first-out basis. Inventory costs include materials, labor and manufacturing overhead. The Company considers the following
criteria for their inventory reserve: items that are deemed to have low material usage over the previous two years are reserved
at 50%; items that have had no movement during the past twelve months are reserved at 100%.
Property
and Equipment
Property
and equipment, including leasehold improvements, are recorded at cost. Depreciation and amortization is computed over the estimated
useful life or the term of the lease. Maintenance and repair expense is charged to operations as incurred. Major leasehold improvements
are capitalized. All property and equipment of the Company are pledged as collateral for their notes payable.
Long-Lived
Assets
Long-lived
assets such as property, plant, and equipment, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to its estimated discounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which
the carrying amount of the asset exceeds the fair value of the asset. No impairment charges were recorded for the six months ending
June 30, 2016 and 2015.
Intangible
Assets
Customer
relationships and product formulations were established as a result of a business combination consummated in fiscal year 2008.
They are being amortized on a straight-line basis over the estimated economic life of the assets, or 10 years and were originally
valued at $250,000. The Company assesses the recoverability of finite-lived intangible assets in the same manner as for long-lived
assets, as described above. The Company did not recognize impairment of intangible assets during the six months ending June 30,
2016 and 2015. Amortization expense recognized on intangible assets was $12,500 for each of the six months ending June 30, 2016
and 2015.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements (Unaudited)
Future
amortization expense on intangible assets is estimated to be $12,500 for the remainder of fiscal 2016 and $25,000 in the year
ending December 31, 2017, and $12,500 in the year ending December 31, 2018.
Income
taxes
Income
taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are computed on the basis
of differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible
amounts in the future based upon enacted tax laws and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances have been established to reduce deferred tax assets to the amount expected to be realized.
The
Company has not recognized a liability for uncertain tax positions. A reconciliation of the beginning and ending amount of unrecognized
tax benefits or penalties has not been provided since there has been no unrecognized benefit or penalty. If there were an unrecognized
tax benefit or penalty, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense
and penalties in operating expenses.
The
Company files U.S. Federal income tax returns, and various states and foreign jurisdictions. The Company’s open tax years
subject to examination by the Internal Revenue Service and the New York Department of Revenue generally remain open for three
years from the date of filing.
The
Company’s cash and cash equivalents totaled approximately $814,000 at June 30, 2016. Of this amount, approximately 24% was
held by the Company’s foreign subsidiary in Latvia.
Management
Estimates
Management
uses estimates and assumptions during the preparation of the Company’s consolidated financial statements that affect amounts
reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions could affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.
Actual results could differ from these estimates.
Fair
Value of Financial Instruments
The
Company accounts for financial instruments in accordance with ASC 820, which provides a framework for measuring fair value and
expands required disclosure about fair value measurements of assets and liabilities. ASC 820 defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also
establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level
1
- Quoted prices in active markets for identical assets or liabilities.
Level
2
- Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.
Level
3
- Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own
assumptions about the assumptions that market participants would use in pricing.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements (Unaudited)
Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as
of June 30, 2016.
The
respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments
include cash and cash equivalents, receivables, accounts payable and accrued liabilities. Fair values were assumed to approximate
carrying values for these financial instruments since they are short term in nature and their carrying amounts approximate fair
values or they are receivable or payable on demand. The fair value of the Company’s notes payable approximate their carrying
value based upon current rates available to the Company.
The
Company does not have any financial or non-financial assets or liabilities that would be characterized as Level 2 or Level 3 instruments.
Recent
Accounting Pronouncements
There
are new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”). Management does not
believe any of these accounting pronouncements will have a material impact on the Company’s financial position or operating
results, except as noted below.
Inventory
In
July 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-11,
Inventory - Simplifying the Measurement
of Inventory
(“ASU 2015-11”). ASU 2015-11 provides additional guidance regarding the subsequent measurement of
inventory by requiring inventory to be measured at the lower of cost and net realizable value. This guidance is effective for
fiscal years and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the
adoption of this guidance will have a material impact on its consolidated financial position, results of operations or cash flows.
Revenue
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which supersedes
nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when
promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects
to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing
so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements (Unaudited)
The
standard is effective for annual periods beginning after December 15, 2018, using either of the following transition methods:
(i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to
elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09
recognized at the date of adoption (which includes additional footnote disclosures). The new standard allows for early adoption
for annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of its pending adoption of
ASU 2014-09 on its financial statements and has not yet determined the method by which it will adopt the standard.
Leases
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(“ASU 2016-02”). ASU 2016-02 establishes a right-of-use
model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
recognition in the income statement.
ASU
2016-02 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered
into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients
available. The Company is currently evaluating the impact of its pending adoption of this new standard on its consolidated financial
statements.
Deferred
Taxes
In
November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”),
which will eliminate the guidance in Topic 740,
Income Taxes
, that required an entity to separate deferred tax liabilities
and assets between current and noncurrent amounts in a classified balance sheet. Rather, deferred taxes will be presented as noncurrent
under the new standard. ASU 2015-17 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted.
The Company has adopted the amendments under ASU 2015-17 for the year ended December 31, 2015 and has applied the effects of the
amendments retrospectively to the periods presented in the accompanying consolidated financial statements.
3. Concentrations
of Credit Risk
The
Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents
and accounts receivable. Cash and cash equivalents are maintained at financial institution and, at times, balances may exceed
federally insured limits. The Company places its funds with high credit quality financial institution and does not believe it
is exposed to any significant credit risk on cash and cash equivalents.
For
the six months ending June 30, 2016, sales to one customer comprised approximately 25% of the Company’s sales to date. For
the six months ending June 30, 2015, sales to one customer comprised approximately 23% of the Company’s sales. The loss
of these customers, or a significant reduction in sales to any such customer, could adversely affect the Company’s revenues.
The
Company purchased an aggregate of approximately 80% of its raw materials from 4 foreign suppliers for each of the six month periods
ending June 30, 2016 and 2015.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements (Unaudited)
4. Related
Party Notes Receivable
During
2012 and 2013, the Company entered into three individual Promissory Notes (“Notes”) aggregating to $110,000 to a company
related through common ownership. The Notes bear interest at 3% per annum, with principal and interest payable from time to time,
but in no event later than five years from the effective dates of the Notes. No principal has been repaid on the Notes through
June 30, 2016, and the principal is being presented as noncurrent on the accompanying consolidated balance sheets.
5. Inventories,
net
The
components of inventories include the following:
Period Ended
|
|
June
30,
2016
|
|
December 31, 2015
|
|
|
|
|
|
Raw materials
|
|
$
|
81,336
|
|
|
$
|
152,014
|
|
Work in process
|
|
|
612,624
|
|
|
|
449,886
|
|
Finished goods
|
|
|
488,670
|
|
|
|
689,097
|
|
Reserve for obsolescence
|
|
|
(255,073
|
)
|
|
|
(255,073
|
)
|
|
|
$
|
927,557
|
|
|
$
|
1,035,924
|
|
6. Property
and Equipment, net
Property
and equipment consist of the following:
Period Ended
|
|
Estimated Life
|
|
June
30,
2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Manufacturing equipment
|
|
5 years
|
|
$
|
5,753,477
|
|
|
$
|
5,282,565
|
|
Computer equipment and software
|
|
5-7 years
|
|
|
220,994
|
|
|
|
193,385
|
|
Furniture and fixtures
|
|
5 years
|
|
|
192,031
|
|
|
|
194,552
|
|
Leasehold improvements
|
|
15 years
|
|
|
511,903
|
|
|
|
340,754
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
|
|
6,678,405
|
|
|
|
6,011,256
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
(4,434,464
|
)
|
|
|
(3,984,711
|
)
|
Total property and equipment, net
|
|
|
|
$
|
2,243,941
|
|
|
$
|
2,026,545
|
|
Depreciation
and amortization expense related to property and equipment totaled approximately $302,000 and $182,000 for the six months ending
June 30, 2016 and 2015, respectively. These amounts are included in cost of goods sold and selling, general and administrative
expenses on the accompanying consolidated statements of comprehensive income.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements (Unaudited)
7. Defined
Contribution Plan
The
Company has a 401(k) defined contribution plan (the Plan). Participation in the Plan is available to all employees meeting certain
eligibility requirements. The Plan allows employees to contribute the maximum amount allowable under IRS regulations. The Company
made contributions to the Plan totaling approximately $36,000 and $28,000 during the six months ending June 30, 2016 and 2015,
respectively.
8. Lease
Commitments
The
Company has operating leases for office space. The Company has entered into a ten year lease agreement for its 13,250 square foot
manufacturing and office facility in Irvington, New York (the “NY Lease”). The NY Lease expires June 2020. Monthly
rent is approximately $28,700 and is adjusted annually based on the Consumer Price Index.
The
Company, through its wholly-owned subsidiary, ISP Optics Latvia, has a lease agreement for its 18,870 square foot manufacturing
and office facility in Riga, Latvia (the “Latvia Lease”). The Latvia Lease expires December 2019. Monthly rent is
approximately $6,800. There is one three-year extension option exercisable by the Company.
Rent
expense totaled approximately $271,000 and $277,000 during the six months ending June 30, 2016 and 2015, respectively.
The
approximate future minimum lease payments under operating leases at June 30, 2016 were as follows:
Fiscal Year Ending December 31,
|
|
|
|
|
|
2016 (remaining six months)
|
|
$
|
178,000
|
|
2017
|
|
|
356,000
|
|
2018
|
|
|
356,000
|
|
2019
|
|
|
356,000
|
|
2020
|
|
|
204,000
|
|
Total minimum payments
|
|
$
|
1,450,000
|
|
ISP
Optics Corporation
Notes
to Consolidated Financial Statements (Unaudited)
9. Notes
Payable
Notes
payable is summarized as follows:
Period Ended
|
|
June
30,
2016
|
|
December 31, 2015
|
|
|
|
|
|
4.82% revolving note payable to Chase Bank dated February, 2012 in the amount of $497,000. Monthly payments are currently $9,354 which includes interest and principal, payable until maturity date in September, 2017.
|
|
$
|
127,020
|
|
|
$
|
179,281
|
|
|
|
|
|
|
|
|
|
|
4.90% installment note payable to Webster Bank dated August, 2012 in the amount of $466,000. Monthly payments are $8,496 which includes interest and principal, payable until maturity date in August, 2017.
|
|
|
115,642
|
|
|
|
163,161
|
|
|
|
|
|
|
|
|
|
|
4.11% installment note payable to Chase Bank dated October, 2012 in the amount of $300,000. Monthly payments are $5,548 which includes interest and principal, payable until maturity date in October, 2017.
|
|
|
86,195
|
|
|
|
117,301
|
|
|
|
|
|
|
|
|
|
|
Prime Rate + 1.75% (5.25% at June 30, 2016) line of credit to Chase Bank dated October, 2012 in the amount of $650,000. Interest payable monthly, principal payable from time to time, or on demand.
|
|
|
150,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
4.25% installment note payable to Chase Bank dated January, 2014 in the amount of $228,000. Monthly payments are $4,231 which includes interest and principal, payable until maturity date in January, 2019.
|
|
|
123,722
|
|
|
|
146,150
|
|
|
|
|
|
|
|
|
|
|
4.94% installment note payable to Chase Bank dated September, 2015 in the amount of $191,045. Monthly payments are $3,607 which includes interest and principal, payable until maturity date in June, 2020.
|
|
|
162,442
|
|
|
|
179,748
|
|
|
|
|
|
|
|
|
|
|
5.44% installment note payable to Chase Bank dated December, 2015 in the amount of $170,000. Monthly payments are $3,243 which includes interest and principal, payable until maturity date in December, 2020.
|
|
|
154,956
|
|
|
|
170,000
|
|
|
|
|
|
|
|
|
|
|
Several notes payable to certain entities in Riga, Latvia for the financing of equipment by ISP Optics Latvia. The loans were originally for amounts ranging from $18,675 to $358,000. Interest accrues at rates ranging from EURIBOR 3 month + 3.50% to EURIBOR 3 month + 4.70% (3.62% to 4.82% at December 31, 2015). Maturity dates range from January 2016 to August 2020.
|
|
|
263,534
|
|
|
|
490,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,183,511
|
|
|
|
1,445,703
|
|
Less current maturities
|
|
|
(559,404
|
)
|
|
|
(661,454
|
)
|
|
|
$
|
624,107
|
|
|
$
|
784,249
|
|
ISP
Optics Corporation
Notes
to Consolidated Financial Statements (Unaudited)
As
of June 30, 2016, the approximate aggregate maturities of notes payable over future fiscal years ended December 31 are as follows:
Year
|
|
|
|
|
|
2016
|
|
$
|
421,000
|
|
2017
|
|
|
372,000
|
|
2018
|
|
|
180,000
|
|
2019
|
|
|
132,000
|
|
2020
|
|
|
79,000
|
|
|
|
$
|
1,184,000
|
|
10. Other
Liabilities
ISP
Latvia Noncontrolling Shares Purchases
During
fiscal 2013, the majority stockholders of the Company purchased a 5.01% additional equity interest in the Company from one of
its noncontrolling stockholders at a purchase price of $111,690, in conjunction with a Share Purchase Agreement (“2013 SPA”).
Per the 2013 SPA, the purchase price is to be paid, without interest, over ten years in monthly installments of $933, commencing
in October 2013.
During
fiscal 2015, the majority stockholders of the Company purchased the remaining 2.01% equity interest in the Company from its noncontrolling
stockholder at a purchase price of $44,695, in conjunction with a Share Purchase Agreement (“2015 SPA”). Per the 2015
SPA, the purchase price is to be paid in full no later than July 1, 2016, without interest. No payments were made on the 2015
SPA prior to December 31, 2015, however, the balance was paid in full in May 2016.
The
aggregate outstanding payable balance on the 2013 SPA and the 2015 SPA was $72,104 and $122,397 at June 30, 2016 and December
31, 2015, respectively, and are included in other liabilities on the accompanying consolidated balance sheets.
The
outstanding liability balance is payable as follows: $5,598 for the remainder of 2016, $11,196 for each of the years 2017 through
2021, and $10,526 in 2022.
Deferred
Income – Latvia
Local
European Union (“EU”) regulations in Latvia allow the Company’s foreign subsidiary, ISP Optics Latvia (“ISP
Latvia”), to finance the purchase of certain equipment through contributions made by the EU. Per EU regulations, ISP Latvia
cannot recognize income associated with these contributions immediately, but rather must recognize the income over the same period
and utilizing the same methodologies as ISP Latvia utilizes to recognition depreciation on the equipment purchased with the contributions
(ten years).
At
June 30, 2016 and December 31, 2015, ISP Latvia had total deferred income of approximately $245,000 and $275,000, respectively,
of which approximately $35,000 are classified as other liabilities, current portion, respectively, on the accompanying consolidated
balance sheets.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements (Unaudited)
11. Accumulated
Other Comprehensive Loss
Assets
and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the balance sheet date, and
revenues and expenses are translated at average rates of exchange for the period. Gains or losses on the translation of the financial
statements of a non-U.S. operation, where the functional currency is other than the U.S. dollar, are reflected as a separate component
of equity, which was a loss position of approximately $127,000 and $116,400 at June 30, 2016 and December 31, 2015, respectively.
The Company, as of June 30, 2016, had approximately $3,871,000 in assets and $2,591,000 in net assets located in Latvia. The Company,
as of December 31, 2015, had approximately $3,200,000 in assets and $1,800,000 in net assets located in Latvia.
12. Contingencies
The
Company from time to time is involved in various legal actions arising in the normal course of business. Management, after reviewing
with legal counsel all of these actions and proceedings, believes that the aggregate losses, if any, will not have a material
adverse effect on the Company’s financial position or results of operations.
13. Subsequent
Events
The
Company has evaluated events and transactions occurring subsequent to June 30, 2016, as of September 9, 2016, which is the date
the financial statements were available to be issued. Subsequent events occurring after September 9, 2016 have not been evaluated
by management.
|
Tel:
|
407-841-6930
|
201 South Orange Ave., Suite 800
|
Fax:
|
407-841-6347
|
Orlando, FL 32801
|
www.bdo.com
|
|
Independent
Auditor’s Report
Management
ISP
Optics Corporation
Irvington,
New York
We
have audited the accompanying consolidated financial statements of ISP Optics Corporation and its subsidiary, which comprise the
consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of comprehensive income,
changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial
statements.
Management’s
Responsibility for the Financial Statements
Management
is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal
control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s
Responsibility
Our
responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial
statements of the foreign subsidiary, which statements reflect total assets of $3,191,309 and $2,390,651 at December 31, 2015
and 2014, respectively, and total revenues (net of intercompany revenues) of $2,428,300 and $1,571,769 for the years then ended.
Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates
to the amounts included for such subsidiary, is based solely on the report of the other auditors. We conducted our audits in accordance
with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An
audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements
in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements.
We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
BDO
USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee,
and forms part of the international BDO network of independent member firms.
BDO
is the brand name for the BDO network and for each of the BDO Member Firms.
Opinion
In
our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ISP Optics Corporation and its subsidiary as of December 31,
2015 and 2014, and the results of their operations and their cash flows for the years then ended in accordance with accounting
principles generally accepted in the United States of America.
BDO
USA, LLP
June
28, 2016
ISP
Optics Corporation
Consolidated
Balance Sheets
December
31,
|
|
2015
|
|
2014
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
934,893
|
|
|
$
|
51,224
|
|
Accounts
receivable
|
|
|
1,473,989
|
|
|
|
897,831
|
|
Inventories,
net
|
|
|
1,035,924
|
|
|
|
1,091,011
|
|
Other
current assets
|
|
|
90,131
|
|
|
|
26,259
|
|
Total
current assets
|
|
|
3,534,937
|
|
|
|
2,066,325
|
|
Property
and equipment, net
|
|
|
2,026,545
|
|
|
|
1,793,907
|
|
|
|
|
|
|
|
|
|
|
Other
noncurrent assets:
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
62,500
|
|
|
|
87,500
|
|
Related
party notes receivable
|
|
|
110,000
|
|
|
|
110,000
|
|
Deposits
|
|
|
47,601
|
|
|
|
44,999
|
|
Deferred
tax asset, net
|
|
|
—
|
|
|
|
103,200
|
|
Total
noncurrent assets
|
|
|
2,246,646
|
|
|
|
2,139,606
|
|
Total
Assets
|
|
$
|
5,781,583
|
|
|
$
|
4,205,931
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
494,031
|
|
|
$
|
833,438
|
|
Accrued
expenses
|
|
|
663,667
|
|
|
|
268,544
|
|
Other
liabilities, current portion
|
|
|
90,653
|
|
|
|
24,412
|
|
Income
taxes payable
|
|
|
88,896
|
|
|
|
9,382
|
|
Notes
payable, current portion
|
|
|
661,454
|
|
|
|
731,275
|
|
Total
current liabilities
|
|
|
1,998,701
|
|
|
|
1,867,051
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
liabilities:
|
|
|
|
|
|
|
|
|
Other
liabilities, less current portion
|
|
|
271,742
|
|
|
|
226,857
|
|
Deferred
tax liability, net
|
|
|
28,800
|
|
|
|
—
|
|
Notes
payable, less current portion
|
|
|
784,249
|
|
|
|
760,944
|
|
Total
noncurrent liabilities
|
|
|
1,084,791
|
|
|
|
987,801
|
|
Total
liabilities
|
|
|
3,083,492
|
|
|
|
2,854,852
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
(Note 2, 8 and 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Common
stock – no par, 200 shares authorized, 20 shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Additional
paid-in capital
|
|
|
—
|
|
|
|
500
|
|
Retained
earnings
|
|
|
2,814,524
|
|
|
|
1,353,147
|
|
Accumulated
other comprehensive (loss)
|
|
|
(116,433
|
)
|
|
|
(14,793
|
)
|
|
|
|
|
|
|
|
|
|
Total
ISP Optics Corporation equity
|
|
|
2,698,091
|
|
|
|
1,338,854
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interest
|
|
|
—
|
|
|
|
12,225
|
|
Total
stockholders’ equity
|
|
|
2,698,091
|
|
|
|
1,351,079
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
5,781,583
|
|
|
$
|
4,205,931
|
|
See
accompanying notes to consolidated financial statements and independent auditor’s report.
ISP
Optics Corporation
Consolidated
Statements of Comprehensive Income
Year
Ended December 31,
|
|
2015
|
|
2014
|
|
|
|
|
|
Sales,
net
|
|
$
|
12,115,138
|
|
|
$
|
10,331,745
|
|
Cost
of goods sold
|
|
|
7,620,098
|
|
|
|
7,362,592
|
|
Gross
profit
|
|
|
4,495,040
|
|
|
|
2,969,153
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses:
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
1,696,493
|
|
|
|
1,643,484
|
|
Rent
and occupancy
|
|
|
199,804
|
|
|
|
202,380
|
|
Office
expense and supplies
|
|
|
91,721
|
|
|
|
59,364
|
|
Professional
fees and commissions
|
|
|
296,459
|
|
|
|
258,384
|
|
Travel
and entertainment
|
|
|
149,730
|
|
|
|
163,977
|
|
Financial
expenses
|
|
|
43,557
|
|
|
|
42,208
|
|
Advertising
and subscriptions
|
|
|
57,543
|
|
|
|
109,782
|
|
General
expenses
|
|
|
72,568
|
|
|
|
102,160
|
|
Postage
and freight
|
|
|
38,234
|
|
|
|
67,638
|
|
Depreciation
and amortization
|
|
|
65,642
|
|
|
|
71,132
|
|
Total
selling, general and administrative expenses
|
|
|
2,711,751
|
|
|
|
2,720,509
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,783,289
|
|
|
|
248,644
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(62,136
|
)
|
|
|
(78,084
|
)
|
Other
income
|
|
|
77,794
|
|
|
|
19,577
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense),
net
|
|
|
15,658
|
|
|
|
(58,507
|
)
|
|
|
|
|
|
|
|
|
|
Net
income before income taxes
|
|
|
1,798,947
|
|
|
|
190,137
|
|
Income
tax expense
|
|
|
305,600
|
|
|
|
(51,600
|
)
|
|
|
|
|
|
|
|
|
|
Net
income before noncontrolling interest
|
|
|
1,493,347
|
|
|
|
241,737
|
|
Net
income attributable to the noncontrolling interest
|
|
|
23,469
|
|
|
|
1,606
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to ISP Optics Corporation
|
|
|
1,469,878
|
|
|
|
240,131
|
|
Foreign
currency translation adjustment
|
|
|
(101,640
|
)
|
|
|
26,074
|
|
Comprehensive
income attributable to ISP Optics Corporation
|
|
$
|
1,368,238
|
|
|
$
|
266,205
|
|
See
accompanying notes to consolidated financial statements and independent auditor’s report.
ISP
Optics Corporation
Consolidated
Statements of Stockholders’ Equity
|
|
Class
A
Common Stock
|
|
Additional
Paid-In
|
|
Retained
|
|
Accumulated
Other Comprehensive
|
|
Noncontrolling
|
|
Total
Stockholders’
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Income
(Loss)
|
|
Interest
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2014
|
|
|
20
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
1,113,016
|
|
|
$
|
(40,867
|
)
|
|
$
|
10,619
|
|
|
$
|
1,083,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,074
|
|
|
|
—
|
|
|
|
26,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
240,131
|
|
|
|
—
|
|
|
|
1,606
|
|
|
|
241,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2014
|
|
|
20
|
|
|
|
—
|
|
|
|
500
|
|
|
|
1,353,147
|
|
|
|
(14,793
|
)
|
|
|
12,225
|
|
|
|
1,351,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(101,640
|
)
|
|
|
—
|
|
|
|
(101,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,469,878
|
|
|
|
—
|
|
|
|
23,469
|
|
|
|
1,493,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of noncontrolling interest in subsidiary
|
|
|
—
|
|
|
|
—
|
|
|
|
(500
|
)
|
|
|
(8,501
|
)
|
|
|
—
|
|
|
|
(35,694
|
)
|
|
|
(44,695
|
)
|
Balance,
December 31, 2015
|
|
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,814,524
|
|
|
$
|
(116,433
|
)
|
|
$
|
—
|
|
|
$
|
2,698,091
|
|
See
accompanying notes to consolidated financial statements and independent auditor’s report.
ISP
Optics Corporation
Consolidated
Statements of Cash Flows
Year
Ended December 31,
|
|
2015
|
|
2014
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
Net
income
|
|
$
|
1,493,347
|
|
|
$
|
241,737
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization on property and equipment
|
|
|
475,788
|
|
|
|
456,049
|
|
Amortization
of intangible assets
|
|
|
25,000
|
|
|
|
25,000
|
|
Deferred
taxes
|
|
|
132,000
|
|
|
|
(75,600
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(576,158
|
)
|
|
|
4,252
|
|
Inventories
|
|
|
55,087
|
|
|
|
(17,949
|
)
|
Other
current assets
|
|
|
(63,872
|
)
|
|
|
(24,259
|
)
|
Accounts
payable
|
|
|
(339,407
|
)
|
|
|
414,408
|
|
Accrued
expenses
|
|
|
395,123
|
|
|
|
(23,395
|
)
|
Income
taxes payable
|
|
|
79,514
|
|
|
|
9,382
|
|
Net
cash provided by operating activities
|
|
|
1,676,422
|
|
|
|
1,009,625
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Increase
in deposits
|
|
|
(2,602
|
)
|
|
|
(708
|
)
|
Increase
(decrease) in other liabilities
|
|
|
66,431
|
|
|
|
(207,859
|
)
|
Purchase
of property and equipment
|
|
|
(744,000
|
)
|
|
|
(602,967
|
)
|
Net
cash used for investing activities
|
|
|
(680,171
|
)
|
|
|
(811,534
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
under notes payable
|
|
|
719,045
|
|
|
|
228,024
|
|
Payments
under notes payable
|
|
|
(765,561
|
)
|
|
|
(509,208
|
)
|
Net
cash used for financing activities
|
|
|
(46,516
|
)
|
|
|
(281,184
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(66,066
|
)
|
|
|
14,601
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
883,669
|
|
|
|
(68,492
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents,
beginning of year
|
|
|
51,224
|
|
|
|
119,716
|
|
Cash
and cash equivalents, end of year
|
|
$
|
934,893
|
|
|
$
|
51,224
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
61,885
|
|
|
$
|
78,084
|
|
Income
taxes paid
|
|
$
|
107,100
|
|
|
$
|
23,183
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of noncontrolling interest in exchange for payable
|
|
$
|
44,695
|
|
|
$
|
—
|
|
See
accompanying notes to consolidated financial statements and independent auditor’s report.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements
1. Organization
and Business Activity
ISP
Optics Corporation was incorporated in the State of New York in April, 1993. The Company’s principal business activity is
the manufacturing of optical materials, high precision optical components and infrared lens assemblies. ISP Optics Corporation
also operates under the registered trademark “ISP Optics.”
2. Summary
of Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America and include the accounts of ISP Optics Corporation and its subsidiary, ISP Optics Latvia (collectively, the
“Company”).
The
Company records equity interests held by others in ISP Optics Latvia as a noncontrolling interest. Earnings of the noncontrolling
interest are charged against the income of the Company and losses are recognized to the extent of prior earnings and capital contributions.
During
the year ended December 31, 2014 and through December 17, 2015, ISP Optics Corporation owned approximately 98% of ISP Optics Latvia.
Effective December 18, 2015 ISP Optics Corporation purchased the remaining noncontrolling interest of ISP Optics Latvia at a purchase
price of $44,695, at which time ISP Optics Latvia became a wholly-owned subsidiary. The excess of the purchase price over the
balance in the noncontrolling interest account at the date of purchase was recorded as a reduction of additional paid-in capital
until fully derecognized with the remainder recorded as a reduction in retained earnings. All intercompany transactions and balances
have been eliminated upon consolidation.
Foreign
Currency Translation
Assets
and liabilities of the Company’s foreign subsidiary are translated at period end exchange rates and related revenues and
expenses are translated at average exchange rates in effect during the reporting periods. Resulting translation adjustments are
recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Foreign currency transaction
gains and losses are recorded in other income (expense) on the consolidated statements of comprehensive income.
Revenue
Revenue
is recognized from product sales when products are shipped to the customer and title has changed hands, provided that the Company
has received a valid purchase order, the price is fixed, title has transferred, collection of the associated receivable is reasonably
assured, and there are no remaining significant obligations. Revenues are presented net of returns and discounts.
Cash
and Cash Equivalents
Cash
and cash equivalents consist of cash and highly liquid investments with maturities of three months or less from date of purchase.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements
Accounts
Receivable
Accounts
receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its customers’
financial condition. If the Company’s actual collection experience changes, and management deems any portion of accounts
receivable as uncollectible, establishment and subsequent revisions to an allowance for doubtful accounts may be required. There
was no allowance for doubtful accounts recorded by the Company for the years ended December 31, 2014 and 2015.
Inventories
Inventories
which consist principally of raw materials, work-in-process and finished lenses are stated at the lower of cost or market, on
a first-in, first-out basis. Inventory costs include materials, labor and manufacturing overhead. The Company considers the following
criteria for their inventory reserve: items that are deemed to have low material usage over the previous two years are reserved
at 50%; items that have had no movement during the past twelve months are reserved at 100%.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation and amortization is computed over the estimated useful life or the term of the
lease. Maintenance and repair expense is charged to operations as incurred. Major improvements are capitalized. All property and
equipment of the Company are pledged as collateral for their notes payable.
Long-Lived
Assets
Long-lived
assets such as property, plant, and equipment, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to its estimated discounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which
the carrying amount of the asset exceeds the fair value of the asset. No impairment charges were recorded for the years ended
December 31, 2015 and 2014. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed
group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance
sheet.
Intangible
Assets
Customer
relationships and product formulations were established as a result of a business combination consummated in fiscal year 2008.
They are being amortized on a straight-line basis over the estimated economic life of the assets, or 10 years and were originally
valued at $250,000. The Company assesses the recoverability of finite-lived intangible assets in the same manner as for long-lived
assets, as described above. The Company did not recognize impairment of intangible assets during the years ended December 31,
2014 and 2015. Amortization expense recognized on intangible assets was $25,000 for each of the years ended December 31, 2015
and 2014.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements
Future
amortization expense on intangible assets is estimated to be $25,000 in each of the years ending December 31, 2016 and 2017, and
$12,500 in the year ending December 31, 2018.
Research
and Development
Research
and development costs are expensed as incurred.
Income
taxes
Income
taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are computed on the basis
of differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible
amounts in the future based upon enacted tax laws and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances have been established to reduce deferred tax assets to the amount expected to be realized.
The
Company has not recognized a liability for uncertain tax positions. A reconciliation of the beginning and ending amount of unrecognized
tax benefits or penalties has not been provided since there has been no unrecognized benefit or penalty. If there were an unrecognized
tax benefit or penalty, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense
and penalties in operating expenses.
The
Company files U.S. Federal income tax returns, and various states and foreign jurisdictions. The Company’s open tax years
subject to examination by the Internal Revenue Service and the New York Department of Revenue generally remain open for three
years from the date of filing.
The
Company’s cash and cash equivalents totaled approximately $935,000 at December 31, 2015. Of this amount, approximately 35%
was held by the Company’s foreign subsidiary in Latvia.
Management
Estimates
Management
uses estimates and assumptions during the preparation of the Company’s consolidated financial statements that affect amounts
reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions could affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.
Actual results could differ from these estimates.
Fair
Value of Financial Instruments
The
Company accounts for financial instruments in accordance with ASC 820, which provides a framework for measuring fair value and
expands required disclosure about fair value measurements of assets and liabilities. ASC 820 defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also
establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
ISP
Optics Corporation
Notes
to Consolidated Financial Statements
Level
1
- Quoted prices in active markets for identical assets or liabilities.
Level
2
- Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.
Level
3
- Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own
assumptions about the assumptions that market participants would use in pricing.
Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as
of December 31, 2015.
The
respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments
include cash and cash equivalents, receivables, accounts payable and accrued liabilities. Fair values were assumed to approximate
carrying values for these financial instruments since they are short term in nature and their carrying amounts approximate fair
values or they are receivable or payable on demand. The fair value of the Company’s notes payable approximate their carrying
value based upon current rates available to the Company.
The
Company does not have any other financial or non-financial assets or liabilities that would be characterized as Level 2 or Level
3 instruments.
Recent
Accounting Pronouncements
There
are new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”). Management does not
believe any of these accounting pronouncements will have a material impact on the Company’s financial position or operating
results, except as noted below.
Inventory
In
July 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-11,
Inventory - Simplifying the Measurement
of Inventory
(“ASU 2015-11”). ASU 2015-11 provides additional guidance regarding the subsequent measurement of
inventory by requiring inventory to be measured at the lower of cost and net realizable value. This guidance is effective for
fiscal years and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the
adoption of this guidance will have a material impact on its consolidated financial position, results of operations or cash flows.
Revenue
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which supersedes
nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when
promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects
to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing
so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements
The
standard is effective for annual periods beginning after December 15, 2018, using either of the following transition methods:
(i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to
elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09
recognized at the date of adoption (which includes additional footnote disclosures). The new standard allows for early adoption
for annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of its pending adoption of
ASU 2014-09 on its financial statements and has not yet determined the method by which it will adopt the standard.
Leases
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(“ASU 2016-02”). ASU 2016-02 establishes a right-of-use
model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
recognition in the income statement.
ASU
2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered
into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients
available. The Company is currently evaluating the impact of its pending adoption of this new standard on its consolidated financial
statements.
Deferred
Taxes
In
November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”),
which will eliminate the guidance in Topic 740,
Income Taxes
, that required an entity to separate deferred tax liabilities
and assets between current and noncurrent amounts in a classified balance sheet. Rather, deferred taxes will be presented as noncurrent
under the new standard. ASU 2015-17 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted.
The Company has adopted the amendments under ASU 2015-17 for the year ended December 31, 2015 and has applied the effects of the
amendments retrospectively to the periods presented in the accompanying consolidated financial statements.
3. Concentrations
of Credit Risk
The
Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. Cash and cash equivalents are maintained at financial institution and, at times, balances may exceed
federally insured limits. The Company places its funds with high credit quality financial institution and does not believe it
is exposed to any significant credit risk on cash and cash equivalents.
For
the year ending December 31, 2015, sales to one customer comprised approximately 23% of the Company’s annual sales. For
the year ending December 31, 2014, sales to one customer comprised approximately 18% of the Company’s annual sales. The
loss of these customers, or a significant reduction in sales to any such customer, could adversely affect the Company’s
revenues.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements
The
Company purchased an aggregate of approximately 76% and 69% of its raw materials from 4 foreign suppliers for the years ending
December 31, 2015 and 2014, respectively.
4. Related
Party Notes Receivable
During
2012 and 2013, the Company entered into three individual Promissory Notes (“Notes”) aggregating to $110,000 to a company
related through common ownership. The Notes bear interest at 3% per annum, with principal and interest payable from time to time,
but in no event later than five years from the effective dates of the Notes. No principal has been repaid on the Notes through
December 31, 2015, and the principal is being presented as noncurrent on the accompanying consolidated balance sheets.
5. Inventories,
net
The
components of inventories include the following:
December
31,
|
|
2015
|
|
2014
|
|
|
|
|
|
Raw
materials
|
|
$
|
152,014
|
|
|
$
|
221,147
|
|
Work
in process
|
|
|
449,886
|
|
|
|
449,528
|
|
Finished
goods
|
|
|
689,097
|
|
|
|
650,104
|
|
Reserve
for obsolescence
|
|
|
(255,073
|
)
|
|
|
(229,768
|
)
|
|
|
$
|
1,035,924
|
|
|
$
|
1,091,011
|
|
6. Property
and Equipment, net
Property
and equipment consist of the following:
December
31,
|
|
Estimated
Life
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
Manufacturing
equipment
|
|
5
years
|
|
$
|
5,282,565
|
|
|
$
|
5,735,070
|
|
Computer
equipment and software
|
|
5-7
years
|
|
|
193,385
|
|
|
|
157,771
|
|
Furniture
and fixtures
|
|
5
years
|
|
|
194,552
|
|
|
|
203,593
|
|
Leasehold
improvements
|
|
15
years
|
|
|
340,754
|
|
|
|
382,907
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
property and equipment
|
|
|
|
|
6,011,256
|
|
|
|
6,479,341
|
|
Less
accumulated depreciation and amortization
|
|
|
|
|
(3,984,711
|
)
|
|
|
(4,685,434
|
)
|
Total
property and equipment, net
|
|
|
|
$
|
2,026,545
|
|
|
$
|
1,793,907
|
|
Depreciation
and amortization expense related to property and equipment totaled approximately $476,000 and $456,000 for the years ended December
31, 2015 and 2014, respectively. These amounts are included in cost of goods sold and selling, general and administrative expenses
on the accompanying consolidated statements of comprehensive income.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements
7. Income
Taxes
Income
tax expense (benefit) consists of the following:
December
31,
|
|
2015
|
|
2014
|
|
|
|
|
|
Current:
|
|
|
|
|
Federal
|
|
$
|
87,400
|
|
|
$
|
24,000
|
|
Foreign
|
|
|
86,300
|
|
|
|
—
|
|
|
|
|
173,700
|
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
132,300
|
|
|
|
15,100
|
|
State
|
|
|
(13,100
|
)
|
|
|
(107,200
|
)
|
Foreign
|
|
|
12,700
|
|
|
|
16,500
|
|
|
|
|
131,900
|
|
|
|
(75,600
|
)
|
Total
income tax expense (benefit)
|
|
$
|
305,600
|
|
|
$
|
(51,600
|
)
|
Deferred
income taxes arise from temporary differences resulting from income and expense items reported for financial accounting and tax
purposes in different periods. Deferred tax assets are recorded to reflect deductible temporary differences and operating loss
carry forwards while deferred tax liabilities are recorded to reflect taxable temporary differences. The principal temporary differences
between financial statement net earnings and tax basis net earnings which result in deferred taxes are accelerated tax depreciation
and amortization, and reserves not currently deductible for income tax purposes.
The
utilization of tax credit carry forwards is dependent upon the Company’s ability to generate sufficient taxable income during
the carry forward period. The Company has not provided a valuation allowance as utilization of the deferred tax assets is expected
to be fully realized in the future.
The
tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities
are as follows at December 31:
December
31,
|
|
2015
|
|
2014
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
Intangible
assets
|
|
$
|
23,500
|
|
|
$
|
20,400
|
|
Inventory
|
|
|
96,000
|
|
|
|
86,500
|
|
Tax
credits
|
|
|
136,000
|
|
|
|
108,800
|
|
Total
deferred tax assets
|
|
|
255,500
|
|
|
|
215,700
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(284,300
|
)
|
|
|
(112,500
|
)
|
Net
deferred tax asset (liability)
|
|
$
|
(28,800
|
)
|
|
$
|
103,200
|
|
ISP
Optics Corporation
Notes
to Consolidated Financial Statements
In
assessing the potential future recognition of deferred tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment.
8. Defined
Contribution Plan
The
Company has a 401(k) defined contribution plan (the Plan). Participation in the Plan is available to all employees meeting certain
eligibility requirements. The Plan allows employees to contribute the maximum amount allowable under IRS regulations. The Company
made contributions to the Plan totaling approximately $55,000 and $53,000 during the years ended December 31, 2015 and 2014, respectively.
9. Lease
Commitments
The
Company has operating leases for office space. The Company has entered into a ten year lease agreement for its 13,250 square foot
manufacturing and office facility in Irvington, New York (the “NY Lease”). The NY Lease expires June 2020. Monthly
rent is approximately $28,700 and is adjusted annually based on the Consumer Price Index.
The
Company, through its wholly-owned subsidiary, ISP Optics Latvia, has a lease agreement for its 18,870 square foot manufacturing
and office facility in Riga, Latvia (the “Latvia Lease”). The Latvia Lease expires December 2019. Monthly rent is
approximately $6,800. There is one three-year extension option exercisable by the Company.
Rent
expense totaled approximately $200,000 and $202,000 during the years ended December 31, 2015 and 2014, respectively.
The
approximate future minimum lease payments under operating leases at December 31, 2015 were as follows:
Fiscal
Year Ending December 31,
|
|
|
|
|
|
2016
|
|
$
|
356,000
|
|
2017
|
|
|
356,000
|
|
2018
|
|
|
356,000
|
|
2019
|
|
|
356,000
|
|
2020
|
|
|
204,000
|
|
Total
minimum payments
|
|
$
|
1,628,000
|
|
ISP
Optics Corporation
Notes
to Consolidated Financial Statements
10. Notes
Payable
Notes
payable is summarized as follows:
December
31,
|
|
2015
|
|
2014
|
|
|
|
|
|
3.75%
draw loan to Chase Bank dated September, 2009 in the amount of $440,000. Monthly payments are $7,334 which includes interest
and principal, payable until maturity date in September, 2015.
|
|
$
|
—
|
|
|
$
|
64,532
|
|
|
|
|
|
|
|
|
|
|
4.82%
revolving note payable to Chase Bank dated February, 2012 in the amount of $497,000. Monthly payments are currently $9,354
which includes interest and principal, payable until maturity date in September, 2017.
|
|
|
179,281
|
|
|
|
280,080
|
|
|
|
|
|
|
|
|
|
|
4.90%
installment note payable to Webster Bank dated August, 2012 in the amount of $466,000. Monthly payments are $8,496 which includes
interest and principal, payable until maturity date in August, 2017.
|
|
|
163,161
|
|
|
|
254,873
|
|
|
|
|
|
|
|
|
|
|
4.11%
installment note payable to Chase Bank dated October, 2012 in the amount of $300,000. Monthly payments are $5,548 which includes
interest and principal, payable until maturity date in October, 2017.
|
|
|
117,301
|
|
|
|
177,617
|
|
|
|
|
|
|
|
|
|
|
Prime
Rate + 1.75% line of credit to Chase Bank dated October, 2012 in the amount of $50,000. Interest payable monthly, principal
payable from time to time, or on demand. Principal was paid in full during 2015 and the facility was terminated.
|
|
|
—
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
4.25%
installment note payable to Chase Bank dated January, 2014 in the amount of $228,000. Monthly payments are $4,231 which includes
interest and principal, payable until maturity date in January, 2019.
|
|
|
146,150
|
|
|
|
189,602
|
|
|
|
|
|
|
|
|
|
|
4.94%
installment note payable to Chase Bank dated September, 2015 in the amount of $191,045. Monthly payments are $3,607 which
includes interest and principal, payable until maturity date in June, 2020.
|
|
|
179,748
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
5.44%
installment note payable to Chase Bank dated December, 2015 in the amount of $170,000. Monthly payments are $3,243 which includes
interest and principal, payable until maturity date in December, 2020.
|
|
|
170,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Several
notes payable to certain entities in Riga, Latvia for the financing of equipment by ISP Optics Latvia. The loans were originally
for amounts ranging from $18,675 to $358,000. Interest accrues at rates ranging from EURIBOR 3 month + 3.50% to EURIBOR 3
month + 4.70% (3.62% to 4.82% at December 31, 2015). Maturity dates range from January 2016 to August 2020.
|
|
|
490,062
|
|
|
|
475,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,445,703
|
|
|
|
1,492,219
|
|
Less
current maturities
|
|
|
(661,454
|
)
|
|
|
(731,275
|
)
|
|
|
$
|
784,249
|
|
|
$
|
760,944
|
|
ISP
Optics Corporation
Notes
to Consolidated Financial Statements
The
aggregate maturities of notes payable over future fiscal years ended December 31 are as follows:
Year
|
|
|
|
|
|
2016
|
|
$
|
661,454
|
|
2017
|
|
|
371,954
|
|
2018
|
|
|
179,740
|
|
2019
|
|
|
131,500
|
|
2020
|
|
|
101,055
|
|
|
|
$
|
1,445,703
|
|
11. Other
Liabilities
ISP
Latvia Noncontrolling Shares Purchases
During
fiscal 2013, the majority stockholders of the Company purchased a 5.01% additional equity interest in the Company from one of
its noncontrolling stockholders at a purchase price of $111,690, in conjunction with a Share Purchase Agreement (“2013 SPA”).
Per the 2013 SPA, the purchase price is to be paid, without interest, over ten years in monthly installments of $933, commencing
in October 2013.
During
fiscal 2015, the majority stockholders of the Company purchased the remaining 2.01% equity interest in the Company from its noncontrolling
stockholder at a purchase price of $44,695, in conjunction with a Share Purchase Agreement (“2015 SPA”). Per the 2015
SPA, the purchase price is to be paid in full no later than July 1, 2016, without interest. No payments were made on the 2015
SPA prior to December 31, 2015, however, the balance was paid in full subsequent to December 31, 2015.
The
aggregate outstanding payable balance on the 2013 SPA and the 2015 SPA was $122,397 and $97,965 at December 31, 2015 and 2014,
respectively, and are included in other liabilities on the accompanying consolidated balance sheets.
ISP
Optics Corporation
Notes
to Consolidated Financial Statements
The
outstanding liability balance is payable as follows: $55,891 in 2016, $11,196 for each of the years 2017 through 2021, and $10,526
in 2022.
Deferred
Income – Latvia
Local
European Union (“EU”) regulations in Latvia allow the Company’s foreign subsidiary, ISP Optics Latvia (“ISP
Latvia”), to finance the purchase of certain equipment through contributions made by the EU. Per EU regulations, ISP Latvia
cannot recognize income associated with these contributions immediately, but rather must recognize the income over the same period
and utilizing the same methodologies as ISP Latvia utilizes to recognition depreciation on the equipment purchased with the contributions
(ten years).
At
December 31, 2015 and 2014, ISP Latvia had total deferred income of approximately $275,000 and $166,000, respectively, of which
approximately $35,000 and $13,000 are classified as other liabilities, current portion, respectively, on the accompanying consolidated
balance sheets.
12. Accumulated
Other Comprehensive Income
Assets
and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the balance sheet date, and
revenues and expenses are translated at average rates of exchange for the period. Gains or losses on the translation of the financial
statements of a non-U.S. operation, where the functional currency is other than the U.S. dollar, are reflected as a separate component
of equity, which was a loss position of approximately $116,400 and $14,800 at December 31, 2015 and 2014, respectively. The Company,
as of December 31, 2015, had approximately $3,200,000 in assets and $1,800,000 in net assets located in Latvia. The Company, as
of December 31, 2014, had approximately $2,400,000 in assets and $800,000 in net assets located in Latvia.
13. Contingencies
The
Company from time to time is involved in various legal actions arising in the normal course of business. Management, after reviewing
with legal counsel all of these actions and proceedings, believes that the aggregate losses, if any, will not have a material
adverse effect on the Company’s financial position or results of operations.
14. Subsequent
Events
The
Company has evaluated events and transactions occurring subsequent to December 31, 2015 as of June 28, 2016, which is the
date the financial statements were available to be issued. Subsequent events occurring after June 28, 2016 have not been evaluated
by management.
LIGHTPATH TECHNOLOGIES, INC.
__________
Shares
of Class A Common Stock
PROSPECTUS
____________________, 2016
Roth Capital Partners