Notes
to Financial Statements
1.
Basis of Presentation
References
in this document to “the Company,” “LightPath,” “we,” “us,” or “our”
are intended to mean LightPath Technologies, Inc., individually, or as the context requires, collectively with its subsidiaries
on a consolidated basis.
The
accompanying unaudited consolidated financial statements have been prepared in accordance with the requirements of Article 8 of
Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended, and, therefore, do not include all information
and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with
accounting principles generally accepted in the United States of America. These consolidated financial statements should be read
in conjunction with our consolidated financial statements and related notes, included in our Annual Report on Form 10-K, as amended,
for the fiscal year ended June 30, 2016, filed with the Securities and Exchange Commission (the “SEC”). Unless otherwise
stated, references to particular years or quarters refer to our fiscal years ended June 30 and the associated quarters of those
fiscal years.
These
consolidated financial statements are unaudited, but include all adjustments, including normal recurring adjustments, which, in
the opinion of management, are necessary to present fairly our financial position, results of operations and cash flows for the
interim periods presented. Results of operations for interim periods are not necessarily indicative of the results that may be
expected for the year as a whole.
History
:
We
were incorporated in Delaware in 1992 as the successor to LightPath Technologies Limited Partnership, a New Mexico
limited partnership, formed in 1989, and its predecessor, Integrated Solar Technologies Corporation, a New Mexico
corporation, formed in 1985. We completed our initial public offering (“IPO”) during fiscal 1996. On April 14,
2000, we acquired Horizon Photonics, Inc. (“Horizon”). On September 20, 2000, we acquired Geltech, Inc.
(“Geltech”). In November 2005, we formed LightPath Optical Instrumentation (Shanghai) Co., Ltd
(“LPOI”), a wholly-owned subsidiary located in Jiading, People’s Republic of China. In December 2013, we
formed LightPath Optical Instrumentation (Zhenjiang) Co., Ltd (“LPOIZ”), a wholly-owned subsidiary located in
Zhenjiang, Jiangsu Province, People’s Republic of China. In December 2016, we acquired ISP Optics Corporation, a New
York corporation (“ISP”), and its wholly-owned subsidiary, ISP Optics Latvia, SIA, a limited liability company
founded in 1998 under the Laws of the Republic of Latvia (“ISP Latvia”). See Note 3, Acquisition of
ISP Optics Corporation, to these consolidated financial statements, for additional information.
We
are 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. We design, develop, manufacture and distribute
optical components and assemblies utilizing the latest optical processes and advanced manufacturing technologies. We also engage
in research and development for optical solutions for the traditional optics markets and communications markets.
2.
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 Chinese and Latvian based accounts. Accounts receivable are customer obligations due under normal
trade terms. We perform continuing credit evaluations of our customers’ financial condition. If our actual collection experience
changes, revisions to our 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.
Goodwill
and Intangible Assets
are tested for impairment on an annual basis and during the period between annual tests in certain circumstances,
and written down when impaired. The annual evaluation for impairment of goodwill is based on valuation models that incorporate
assumptions and internal projections of expected future cash flows and operating plans. Intangible assets acquired in a business
combination are recognized at fair value using generally accepted valuation methods appropriate for the type of intangible asset
and reported separately from goodwill. Purchased intangible assets other than goodwill are amortized over their useful lives unless
these lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization
is computed over the estimated useful lives of the respective assets, generally two to fifteen years. The Company periodically
re-assesses the useful lives of its intangible assets when events or circumstances indicate that useful lives have significantly
changed from the previous estimate. Definite-lived intangible assets consist primarily of customer relationships, know-how/trade
secrets and trademarks. They are generally valued as the present value of estimated cash flows expected to be generated
from the asset using a risk-adjusted discount rate. When determining the fair value of our intangible assets, estimates and
assumptions about future expected revenue and remaining useful lives are used.
Intangible assets acquired in a business combination
are recognized at fair value using generally accepted valuation methods appropriate for the type of intangible asset and reported
separately from goodwill. Intangible assets that are subject to amortization are amortized on a straight-line basis over their
useful lives. The Company periodically re-assesses the useful lives of its intangible assets when events or circumstances indicate
that useful lives have significantly changed from the previous estimate. Definite-lived intangible assets consist primarily of
customer relationships, know-how/trade secrets and trademarks. They are generally valued as the present value of estimated
cash flows expected to be generated from the asset using a risk-adjusted discount rate. When determining the fair value of
our intangible assets, estimates and assumptions about future expected revenue and remaining useful lives are used.
Deferred
rent
relates to certain of our 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. We have 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.
We
have 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, we would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties
in operating expenses.
We
file U.S. Federal income tax returns, and various states and foreign jurisdictions. Our 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 and cash equivalents totaled approximately $5.7 million at December 31, 2016. Of this amount, approximately 51% was
held by our foreign subsidiaries in China and Latvia. These foreign funds were generated in China and Latvia as a result of foreign
earnings. With respect to the funds generated by our foreign subsidiaries in China, the retained earnings in China must equal
at least 150% of the registered capital before any funds can be repatriated. As of December 31, 2016, we have retained earnings
in China of approximately $2.3 million and we need to have approximately $11.3 million before repatriation will be allowed.
We
currently intend to permanently invest earnings generated from our foreign Chinese and Latvian operations, and, therefore, we
have not previously provided for United States taxes on related earnings. However, if in the future we change such intention we
would provide for and pay additional United States taxes at that time.
Revenue
is recognized from product sales when products are shipped to the customer, provided that the Company has received a valid
purchase order, the price is fixed, title has transferred, collection of the associated receivable is reasonably assured, and
there are no remaining significant obligations. Product development agreements are generally short term in nature with revenue
recognized upon shipment to the customer for products, reports or designs. Invoiced amounts for sales for value-added taxes (“VAT”)
are posted to the balance sheet and 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 $33,996 for the six months
ended December 31, 2016, and was included in revenues on the accompanying consolidated statement of comprehensive income. Equipment
under lease of $55,210 was included in property and equipment, net as of December 31, 2016, on the accompanying consolidated balance
sheet.
Deferred
revenue
represents fees that have been received by the Company from the European government for the purchase of equipment
in Latvia and are being recognized into revenue over the life of the equipment from seven to ten years.
VAT
is computed on the gross sales price on all sales of our products sold in the People’s Republic of China and Latvia.
The VAT rates range up to 21%, depending on the type of products sold. The VAT may be offset by VAT paid by us on raw materials
and other materials included in the cost of producing or acquiring our finished products. We recorded a VAT receivable net of
payments, which is included in other receivables 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 our 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.
We account for financial instruments in accordance with the Financial Accounting Standard
Board’s (“FASB”) Accounting Standards Codification (“ASC”) 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
that 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 December 31, 2016.
The
respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These
financial instruments include receivables, accounts payable and accrued liabilities. Fair values were assumed to
approximate carrying values for these financial instruments since they are short term in nature and their carrying amounts
approximate fair values or they are receivable or payable on demand. The fair value of our capital lease obligations and
acquisition term loan (the “Loan”) payable to Avidbank Corporate Finance, a division of Avidbank
(“Avidbank”) approximates their carrying values based upon current rates available to us.
We
value our warrant liabilities based on open-form option pricing models which, based on the relevant inputs and render
the fair value measurement at Level 3. We base our 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 9, Derivative Financial Instruments (Warrant
Liability) to these consolidated financial statements.
We
do not have any other financial or non-financial instruments that would be characterized as Level 1, Level 2 or Level 3.
Derivative
financial instruments.
We account for derivative instruments in accordance with FASB’s ASC Topic 815 –
Derivatives and Hedging (“ASC 815”), which requires additional disclosures about our 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.
We
do 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.
Freestanding
warrants issued by us in connection with the issuance or sale of debt and equity instruments are considered to be derivative instruments. Pursuant
to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued
is required to be classified as equity or as a derivative liability.
Comprehensive
income
is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting
from investments by owners and distributions to owners. Comprehensive income has two components, net income and other
comprehensive income, and is included on the statement of comprehensive income. Our other comprehensive income consists of foreign
currency translation adjustments made for financial reporting purposes.
Business
segments
are required to be reported by us. As we only operate in principally one business segment, no additional reporting
is required.
Recent
accounting pronouncements.
There are new accounting pronouncements issued by the FASB that are not yet effective.
In
November 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-17, “Income Taxes (Topic 740): Balance
Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The standard requires that deferred tax assets and
liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. ASU 2015-17
is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted
and the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. 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
March 2016, the FASB issued ASU No. 2016-09, “Compensation — Stock Compensation (Topic 718) — Improvements to
Employee Share-Based Payment Accounting.” ASU No. 2016-09 includes provisions to simplify certain aspects related to the
accounting for share-based awards and the related financial statement presentation. This ASU includes a requirement that the tax
effect related to the settlement of share-based awards be recorded in income tax benefit or expense in the statements of earnings.
This change is required to be adopted prospectively in the period of adoption. In addition, the ASU modifies the classification
of certain share-based payment activities within the statements of cash flows and these changes are required to be applied retrospectively
to all periods presented, or in certain cases prospectively, beginning in the period of adoption. ASU No. 2016-09 is effective
for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early
adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have on its financial
statements.
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 or 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
May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue
recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU is based
on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional
disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including
significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The
amendments in the ASU must be applied using one of two retrospective methods and are effective for annual and interim periods
beginning after December 15, 2016. On July 9, 2015, the FASB modified ASU 2014-09 to be effective for annual reporting periods
beginning after December 15, 2017, including interim periods within that reporting period. As modified, the FASB permits the adoption
of the new revenue standard early, but not before the annual periods beginning after December 15, 2017. A public organization
would apply the new revenue standard to all interim reporting periods within the year of adoption. The Company will evaluate the
effects, if any, that adoption of this guidance will have on its financial statements and plans the adoption of this new standard
starting in fiscal year 2018.
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.
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 standard on our financial position, results of operations, cash flows
and related disclosures.
3.
Acquisition of ISP Optics Corporation
In
the ordinary course of business, our Board and senior management regularly review and assess various strategic alternatives
available to us that may enhance stockholder value. A part of our growth strategy is to identify appropriate opportunities
that would enhance our profitable growth through acquisition. As we developed our molded infrared capability and learned more
about the infrared market, we became aware of larger business opportunities in this market that might be available with a
broader range of product capability. When we thought about the possibility of acquiring ISP we saw an excellent complementary
fit with our business that met our requirement of profitable growth in a market space we are investing in and saw it as an
opportunity to accelerate our growth and expand our capabilities. We believe that the acquisition of 100% of the issued and
outstanding shares of common stock of ISP (the “Acquisition”) will combine our high-volume molding technology
with ISP’s high value diamond turning, coating, and polishing capabilities to establish a global, leading-edge
industrial technology company. We expect the Acquisition to allow us to expand significantly and increase our scope of
products and capabilities. Due to the location of ISP Latvia’s manufacturing facility, we also expect the Acquisition
to increase our global customer base in Europe and generate synergies due to cross-selling of products, expanded distribution
channels, and increased revenue through expanded product offerings. Finally, we expect improved production and assembly
capabilities, as well as material processing capabilities as a result of the Acquisition.
On
December 21, 2016 (the “Acquisition Date”), LightPath acquired 100% of the issued and outstanding shares of common
stock of ISP pursuant to the Stock Purchase Agreement, dated as of August 3, 2016 (the “Purchase
Agreement”). The Company’s consolidated financial statements reflect the financial results of ISP’s operations
beginning on the Acquisition Date.
For
the purposes of financing the acquisition, simultaneous with the closing, the Company sold 8,000,000 shares of its Class A common
stock, raising net proceeds of approximately $8.75 million. For additional information, please see Note 13 to these Consolidated
Financial Statements. The Company also closed a $5 million acquisition term loan with AvidBank. For additional information, see
Note 12, Loans Payable, to these consolidated financial statements.
In
lieu of cash paid,
the Company financed a
portion of the Acquisition through the issuance of a promissory note in the aggregate principal amount of $6 million to the
sellers of ISP (the “Sellers Note”).
Pursuant
to the Sellers Note, during the period commencing on the Acquisition Date and continuing until the fifteen month anniversary of
the Acquisition Date (the “Initial Period”), interest will accrue on only the principal amount of the Sellers 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 Sellers Note from time to time outstanding, at an interest rate equal to ten percent
(10%) per annum. Interest is payable semi-annually in arrears beginning in June 2017. The term of the Sellers Note is five years,
and any unpaid interest and principal, together with any other amounts payable under the Sellers Note, is due and payable on the
maturity date of December 21, 2021. The Company may prepay the Sellers 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 (12%) per annum from the date of such non-payment until the Company pays such
amount in full.
The
Acquisition Date fair value of the consideration transferred totaled approximately $19.1 million, which consisted of the following:
Cash Purchase Price
|
|
$
|
12,000,000
|
|
Cash acquired
|
|
|
1,243,216
|
|
Tax payable assumed debt
|
|
|
(215,847
|
)
|
Fair value of Sellers’ Note
|
|
|
6,455,559
|
|
Working capital adjustment
|
|
|
(422,269
|
)
|
Total
purchase price
|
|
$
|
19,060,659
|
|
Sellers Note issued at fair value
|
|
|
(6,455,559
|
)
|
Preliminary working capital adjustment
|
|
|
(653,556
|
)
|
Adjustment to beginning cash
|
|
$
|
(163,878
|
)
|
Adjustment to beginning assumed debt
|
|
|
(10,330
|
)
|
Cash paid at Acquisition Date
|
|
|
11,777,336
|
|
The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date. The
Company is in the process of obtaining third-party valuations of certain intangible assets and finalizing the working capital
adjustment with the sellers; thus, the provisional measurements of intangible assets, goodwill and deferred income tax assets
are subject to change.
Cash
|
|
$
|
1,243,216
|
|
Accounts receivable
|
|
|
1,069,369
|
|
Inventory
|
|
|
1,135,946
|
|
Other Current assets
|
|
|
105,806
|
|
Property and equipment
|
|
|
4,546,402
|
|
Security deposit and other assets
|
|
|
45,359
|
|
Identifiable intangibles
|
|
|
10,759,000
|
|
Total
identifiable assets acquired
|
|
$
|
18,905,098
|
|
|
|
|
|
|
Accounts payable
|
|
|
(553,747
|
)
|
Accrued expenses and other payables
|
|
|
(34,147
|
)
|
Other payables
|
|
|
(484,297
|
)
|
Total liabilities assumed
|
|
$
|
(1,072,191
|
)
|
Net
identifiable assets acquired
|
|
|
17,832,907
|
|
Goodwill
|
|
|
1,227,752
|
|
Net assets acquired
|
|
$
|
19,060,659
|
|
As part of the preliminary valuation
analysis, the Company identified intangible assets, including customer relationships, customer backlog, trade secrets, trademarks
and non-compete agreements. The customer relationships, customer backlog, trade secrets, trademarks and non-compete agreements
were determined to have estimated values of $5,633,000, $261,000, $2,546,000, $2,290,000 and $29,000, respectively, and estimated
useful lives of 15, 2, 8, 8, and 3 years, respectively. The estimated fair value of identifiable intangible assets is determined
primarily using the "income approach", which requires a forecast of all future cash flows. This also reflects a $2,532,824
adjustment to increase the basis of the acquired property, plant and equipment to reflect fair value of the assets at acquisition
date. The estimated useful lives range from 3 years to 7 years. Depreciation and amortization on intangible assets and property,
plant and equipment is calculated on a straight-line basis. This also reflects a $153,132 adjustment to increase the basis of the
acquired inventory to reflect fair value of the inventory at the Acquisition date.
The
goodwill recognized is attributable primarily to expected synergies and the assembled workforce of ISP. None of the goodwill is
expected to be deductible for income tax purposes. As of December 31, 2016, there were no changes in the recognized amounts of
goodwill resulting from the Acquisition.
The
Company recognized approximately $125,000 of Acquisition related costs that were expensed in the current period and
approximately $609,000 for the six months ended December 31, 2016. These costs are included in the consolidated statements of
comprehensive income (loss) in the line item entitled “Selling, general and administrative.” The Company
recognized Acquisition related expenses of approximately $209,000 in fiscal 2016. The Company also recognized approximately
$950,000 in expenses associated with the public offering of shares of Class A common stock, the net proceeds of which were
used to provide funds to pay for a portion of the purchase price of the Acquisition. These expenses were deducted from the
gross proceeds received as a result of the public offering of Class A common stock, as reflected in
stockholders’ equity. For additional information on this public offering, see Note 13, Public Offering of Class A
Common Stock, in these consolidated financial statements.
The
amounts of revenue and net income of ISP included in the Company’s consolidated statements of comprehensive income (loss)
from the Acquisition Date to the period ending December 31, 2016 are as follows:
Revenue
|
|
$
|
533,569
|
|
Net income
|
|
$
|
20,592
|
|
The
following represents unaudited pro forma consolidated information as if ISP had been included in the consolidated results of the
Company for the six months ending December 31, 2016 and 2015:
|
|
Six months ended
|
|
|
Six months ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Revenue
|
|
$
|
17,001,233
|
|
|
$
|
14,403,914
|
|
Net income
|
|
$
|
2,150,254
|
|
|
$
|
616,610
|
|
These
amounts have been calculated after applying the Company’s accounting policies and adjusting the results for Acquisition
expenses and to reflect the additional interest expense and depreciation and amortization that would have been charged assuming
the fair value adjustments to property, plant and equipment and intangible assets had been applied on July 1, 2015, together with
the consequential tax effects.
Prior
to the Acquisition, the Company had a preexisting relationship with ISP. The Company ordered anti-reflective coating
services from ISP on an arms’ length basis. The Company had also partnered with ISP to develop and sell molded optics
as part of a multiple lens assembly sold to a third party and had provided certain standard molded optics for resale through
ISP’s catalog. At the Acquisition Date, the Company had amounts payable to ISP of $8,000 for services provided prior to
the acquisition, and ISP had payables of $24,500 due to the Company.
4.
Inventories
The
components of inventories include the following:
|
|
December
31, 2016
|
|
|
June
30, 2016
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,072,961
|
|
|
$
|
1,791,791
|
|
Work
in process
|
|
|
1,840,805
|
|
|
|
1,269,539
|
|
Finished
goods
|
|
|
1,866,306
|
|
|
|
1,171,343
|
|
Reserve
for obsolescence
|
|
|
(775,115
|
)
|
|
|
(395,864
|
)
|
|
|
$
|
5,004,957
|
|
|
$
|
3,836,809
|
|
The
value of tooling in raw materials was approximately $1.37 million at December 31, 2016 and approximately $1.16 million at June
30, 2016.
5.
Property and Equipment
Property
and equipment are summarized as follows:
|
|
Estimated
|
|
|
December
31,
|
|
|
June
30,
|
|
|
|
Life
(Years)
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
Manufacturing
equipment
|
|
5 - 10
|
|
|
$
|
12,730,842
|
|
|
$
|
6,818,382
|
|
Computer
equipment and software
|
|
3 - 5
|
|
|
|
352,163
|
|
|
|
339,723
|
|
Furniture
and fixtures
|
|
5
|
|
|
|
91,364
|
|
|
|
92,705
|
|
Leasehold
improvements
|
|
5 - 7
|
|
|
|
1,211,023
|
|
|
|
1,225,099
|
|
Construction
in progress
|
|
|
|
|
|
233,209
|
|
|
|
597,452
|
|
Total
property and equipment
|
|
|
|
|
|
14,618,601
|
|
|
|
9,073,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
|
|
|
5,108,549
|
|
|
|
4,703,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
property and equipment, net
|
|
|
|
|
$
|
9,510,052
|
|
|
$
|
4,370,045
|
|
6.
Accounts Payable
The
accounts payable balance as of December 31, 2016 and June 30, 2016 includes approximately $83,500 and $69,250, respectively, which
represents earned but unpaid board of directors’ fees.
7.
Compensatory Equity Incentive Plan and Other Equity Incentives
Share-Based
Compensation Arrangements —
The Plan includes several available forms of stock compensation of which incentive stock
options and restricted stock awards. Stock based compensation is measured at grant date, based on the fair value of the award,
and is recognized as an expense over the employee’s requisite service period. We estimate the fair value of each stock option
as of the date of grant using the Black-Scholes-Merton pricing model. Most options granted under the Plan vest ratably over two
to four years and generally have ten-year contract lives. The volatility rate is based on four-year historical trends in common
stock closing prices and the expected term was determined based primarily on historical experience of previously outstanding options.
The interest rate used is the U.S. Treasury interest rate for constant maturities. The likelihood of meeting targets for option
grants that are performance based are evaluated each quarter. If it is determined that meeting the targets is probable then the
compensation expense will be amortized over the remaining vesting period.
The
LightPath Technologies, Inc. Employee Stock Purchase Plan (“2014 ESPP”) was adopted by our board of directors on October
30, 2014 and approved by our stockholders on January 29, 2015.
The
2014 ESPP permits employees to purchase shares of our Class A common stock through payroll deductions, which may not exceed 15%
of an employee’s compensation, at a price not less than 85% of the market value of our Class A common stock on specified
dates (June 30 and December 31). In no event can any participant purchase more than $25,000 worth of shares of Class A common
stock in any calendar year and an employee cannot purchase more than 8,000 shares on any purchase date within an offering period
of 12 months and 4,000 shares on any purchase date within an offering period of six months. A discount of $943 and $846 for the
six months ended December 31, 2016 and 2015, respectively, is included in the selling, general and administrative expense in the
accompanying consolidated statements of comprehensive income, which represents the value of the 10% discount given to the employees
purchasing stock under the 2014 ESPP Plan.
These
plans are summarized below:
Equity
Compensation Arrangement
|
|
Award Shares
Authorized
|
|
|
Award Shares
Outstanding
at December 31,
2016
|
|
|
Available for
Issuance
at December
31,
2016
|
|
Amended
and Restated Omnibus Incentive Plan
|
|
|
3,915,625
|
|
|
|
2,634,253
|
|
|
|
636,231
|
|
Employee
Stock Purchase Plan
|
|
|
400,000
|
|
|
|
—
|
|
|
|
384,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,315,625
|
|
|
|
2,634,253
|
|
|
|
1,020,777
|
|
Grant
Date Fair Values and Underlying Assumptions; Contractual Terms
— We estimate the fair value of each stock option as
of the date of grant. We use the Black-Scholes-Merton pricing model. The 2014 ESPP fair value is the amount of the discount the
employee obtains at the date of the purchase transaction.
For
stock options granted in the six month periods ended December 31, 2016 and 2015, we estimated the fair value of each stock option
as of the date of grant using the following assumptions:
|
|
Six
months
|
|
|
Six
months
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Weighted average expected
volatility
|
|
|
80%
- 82%
|
|
|
|
68%
- 103%
|
|
Dividend
yields
|
|
|
0%
|
|
|
|
0%
|
|
Weighted average risk-free
interest rate
|
|
|
1.185%
- 1.19%
|
|
|
|
0.37%
- 1.49%
|
|
Weighted
average expected term, in years
|
|
|
7.49
|
|
|
|
4.75
|
|
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 (“RSU”) grants with both performance
and service conditions were 20% for each of the six months ended December 31, 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 Compensation
Awards
— A summary of the activity for share-based compensation awards in the six months ended December 31, 2016 is presented
below:
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
|
Stock Options
|
|
|
Stock
Units (RSUs)
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Price
|
|
|
|
Contract
|
|
|
|
|
|
|
|
Contract
|
|
|
|
|
Shares
|
|
|
|
(per
share)
|
|
|
|
Life
(YRS)
|
|
|
|
Shares
|
|
|
|
Life
(YRS)
|
|
June
30, 2016
|
|
|
819,260
|
|
|
$
|
1.90
|
|
|
|
5.6
|
|
|
|
1,311,795
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
337,426
|
|
|
$
|
1.59
|
|
|
|
9.8
|
|
|
|
230,772
|
|
|
|
2.8
|
|
Exercised
|
|
|
—
|
|
|
$
|
0.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled/Forfeited
|
|
|
(65,000
|
)
|
|
$
|
4.26
|
|
|
|
0.6
|
|
|
|
—
|
|
|
|
—
|
|
December
31, 2016
|
|
|
1,091,686
|
|
|
$
|
1.67
|
|
|
|
6.8
|
|
|
|
1,542,567
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
exercisable/vested as of
December 31, 2016
|
|
|
839,925
|
|
|
$
|
1.71
|
|
|
|
6.2
|
|
|
|
1,103,655
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
unexercisable/unvested as of
December 31, 2016
|
|
|
251,761
|
|
|
$
|
1.53
|
|
|
|
9.0
|
|
|
|
438,912
|
|
|
|
1.1
|
|
|
|
|
1,091,686
|
|
|
|
|
|
|
|
|
|
|
|
1,542,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
RSU’s
|
|
|
All Awards
|
|
Weighted average fair value of share awards granted in period
|
|
|
$
|
1.15
|
|
|
$
|
1.56
|
|
|
$
|
1.31
|
|
The
total intrinsic value of options outstanding and exercisable at December 31, 2016 and 2015 was $95,020 and $590,174, respectively.
The
total intrinsic value of RSUs outstanding and exercisable at December 31, 2016 and 2015 was $1,699,929 and $2,273,979, respectively.
The
total fair value of RSUs vested during the six months ended December 31, 2016 and 2015 was $333,117 and $183,101, respectively.
The
total fair value of option shares vested during the six months ended December 31, 2016 and 2015 was $306,414 and $223,229, respectively.
As
of December 31, 2016, there was $663,326 of total unrecognized compensation cost related to non-vested share-based compensation
arrangements (including share options and restricted stock units) granted under the Plan. We expect to recognize the compensation
cost as follows:
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
Share/
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
Units
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2017
|
|
|
|
24,872
|
|
|
|
159,838
|
|
|
|
184,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2018
|
|
|
|
38,975
|
|
|
|
244,917
|
|
|
|
283,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2019
|
|
|
|
17,146
|
|
|
|
144,984
|
|
|
|
162,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2020
|
|
|
|
2,605
|
|
|
|
29,989
|
|
|
|
32,594
|
|
|
|
|
|
$
|
83,598
|
|
|
$
|
579,728
|
|
|
$
|
663,326
|
|
RSU
awards vest immediately or from two to four years from the date of grant.
We
issue new shares of Class A common stock upon the exercise of stock options. The following table is a summary of the number and
weighted average grant date fair values regarding our unexercisable/unvested awards as of December 31, 2016 and changes during
the six months then ended:
Unexercisable/unvested
awards
|
|
Stock
Options Shares
|
|
|
RSU
Shares
|
|
|
Total
Shares
|
|
|
Weighted-Average
Grant Date Fair Values
(per share)
|
|
June
30, 2016
|
|
|
182,250
|
|
|
|
441,599
|
|
|
|
623,849
|
|
|
$
|
1.35
|
|
Granted
|
|
|
337,426
|
|
|
|
230,772
|
|
|
|
568,198
|
|
|
$
|
1.31
|
|
Vested
|
|
|
(264,165
|
)
|
|
|
(233,459
|
)
|
|
|
(497,624
|
)
|
|
$
|
1.31
|
|
Cancelled/Forfeited
|
|
|
(3,750
|
)
|
|
|
—
|
|
|
|
(3,750
|
)
|
|
$
|
1.08
|
|
December
31, 2016
|
|
|
251,761
|
|
|
|
438,912
|
|
|
|
690,673
|
|
|
$
|
1.34
|
|
Financial
Statement Effects and Presentation —
The following table shows total stock-based compensation expense for the six months
ended December 31, 2016 and 2015 included in the consolidated statements of comprehensive income:
|
|
Six
months ended
|
|
|
Six
months ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$
|
22,804
|
|
|
$
|
25,041
|
|
RSU
|
|
|
188,197
|
|
|
|
149,547
|
|
Total
|
|
$
|
211,001
|
|
|
$
|
174,588
|
|
|
|
|
|
|
|
|
|
|
The
amounts above were included in:
|
|
|
|
|
|
|
|
|
Selling,
general & administrative
|
|
$
|
209,609
|
|
|
$
|
173,663
|
|
Cost of sales
|
|
|
796
|
|
|
|
158
|
|
New
product development
|
|
|
596
|
|
|
|
767
|
|
|
|
$
|
211,001
|
|
|
$
|
174,588
|
|
8. Foreign Operations
Assets and liabilities
denominated in non-U.S. currencies are translated at rates of exchange prevailing on the balance sheet date, and revenues and expenses
are translated at average rates of exchange for the period. 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.
T
he foreign exchange translation adjustment reflects a net gain of approximately $75,000 for the six months ended December
31, 2016 and a gain of approximately $21,000 for the six months ended December 31, 2015.
As of
December 31, 2016, we had approximately $16,847,000 in assets and $15,401,000 in net assets located in China and Latvia. As of
June 30, 2016, we had approximately $11,311,000 in assets and $9,942,000 in net assets located in China.
9. 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 and then to $1.22 on December 21, 2016 as a result of our public
offering (the “June 2012 Warrants”). The June 2012 Warrants are exercisable for a period of five years beginning
on December 11, 2012. We 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 we issue or sell shares of our 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 our Class A common stock.
The fair value of the outstanding June 2012 Warrants
was re-measured on December 31, 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 comprehensive income and is estimated using
the Lattice option-pricing model using the following assumptions:
Inputs into Lattice model for warrants:
|
|
Exercise
12/8/2016
|
|
|
Before
Re-pricing 12/20/2016
|
|
|
After
Re-pricing 12/20/2016
|
|
|
12/31/2016
|
|
Equivalent volatility
|
|
|
56.11
|
%
|
|
|
56.54
|
%
|
|
|
56.54
|
%
|
|
|
47.39
|
%
|
Equivalent interest rate
|
|
|
0.89
|
%
|
|
|
0.85
|
%
|
|
|
0.85
|
%
|
|
|
0.85
|
%
|
Floor
|
|
$
|
1.1500
|
|
|
$
|
1.1500
|
|
|
$
|
1.1500
|
|
|
$
|
1.1500
|
|
Greater of estimated stock price or floor
|
|
$
|
1.1500
|
|
|
$
|
1.1500
|
|
|
$
|
1.1500
|
|
|
$
|
1.1500
|
|
Probability price < strike price
|
|
|
49.30
|
%
|
|
|
49.30
|
%
|
|
|
49.30
|
%
|
|
|
35.00
|
%
|
Fair value of call
|
|
$
|
0.4400
|
|
|
$
|
0.3000
|
|
|
$
|
0.3200
|
|
|
$
|
0.4500
|
|
Probability of fundamental transaction occuring
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
The warrant liabilities are considered recurring
Level 3 financial instruments, with a fair value of approximately $342,000 and $717,000 at December 31, 2016 and June 30, 2016,
respectively.
The following table summarizes the activity of
Level 3 instruments measured on a recurring basis for the six months ended December 31, 2016:
|
|
Warrant Liability
|
|
Fair value, June 30, 2016
|
|
$
|
717,393
|
|
Exercise of common stock warrants
|
|
|
(84,777
|
)
|
Change in fair value of warrant liability
|
|
|
(290,385
|
)
|
Fair value, June 30, 2016
|
|
$
|
342,231
|
|
10. Earnings Per Share
Basic earnings per share is computed by dividing
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
Three months ended
December 31,
|
|
Six months ended
December 31,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,097,667
|
|
$
|
(535,583
|
)
|
$
|
1,238,163
|
|
$
|
307,390
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,541,205
|
|
|
15,250,146
|
|
|
16,079,030
|
|
|
15,244,747
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
51,433
|
|
|
—
|
|
|
71,605
|
|
|
53,491
|
|
Restricted stock units
|
|
|
1,132,359
|
|
|
—
|
|
|
1,115,887
|
|
|
899,856
|
|
Common stock warrants
|
|
|
177,716
|
|
|
—
|
|
|
257,213
|
|
|
396,665
|
|
Diluted
|
|
|
17,902,712
|
|
|
15,250,146
|
|
|
17,523,734
|
|
|
16,594,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
$
|
(0.04
|
)
|
$
|
0.08
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.06
|
|
$
|
(0.04
|
)
|
$
|
0.07
|
|
$
|
0.02
|
|
Excluded from computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
935,899
|
|
|
803,348
|
|
|
824,218
|
|
|
707,889
|
|
Restricted stock units
|
|
|
344,990
|
|
|
1,239,821
|
|
|
278,685
|
|
|
257,701
|
|
Common stock warrants
|
|
|
826,709
|
|
|
1,438,415
|
|
|
774,455
|
|
|
1,095,044
|
|
|
|
|
2,107,598
|
|
|
3,481,584
|
|
|
1,877,358
|
|
|
2,060,634
|
|
11. Lease Commitments
We have operating leases for office space. At December
31, 2016, we have a lease agreement for our 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 is one 5-year extension option
exercisable by us. 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 lease agreement, as amended.
We received $420,014 in a leasehold improvement
allowance in fiscal 2015. The improvements were recorded as property and equipment and deferred rent on the consolidated balance
sheets. Amortization of leasehold improvements was $101,208 as of December 31, 2016. The deferred rent is being amortized as a
reduction in lease expense over the term of the lease.
At December 31, 2016, we, through our wholly-owned
subsidiary, LPOI, have a lease agreement for an office facility in Shanghai, China (the “Shanghai Lease”). The Shanghai
Lease commenced in October 2015 and expires October 2017.
At December 31, 2016, we, through our wholly-owned
subsidiary, LPOIZ, have 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.
At December 31, 2016, we, through our wholly-owned
subsidiary ISP, have a lease agreement for a manufacturing and office facility in New York (the “ISP Lease”). The ISP
Lease, which is for a five-year original term with renewal options, expires September 2020.
At December 31, 2016, we, through ISP’s wholly-owned
subsidiary ISP Latvia, have two lease agreements for a manufacturing and office facility in Riga, Latvia (the “Riga Leases”).
The Riga Leases, each of which is for five-year original term with renewal options, expires December 2019.
During fiscal 2014, 2015 and 2016, we entered into
five capital lease agreements, with terms ranging from three to five years, for computer and manufacturing equipment, which are
included as part of property and equipment. Assets under capital lease include approximately $749,000 in computer equipment and
software and manufacturing equipment, with accumulated amortization of approximately $244,000 as of December 31, 2016. Amortization
related to capital lease assets is included in depreciation and amortization expense.
Rent expense totaled approximately $286,693 and
$296,398 during the six months ended December 31, 2016 and 2015, respectively.
The approximate future minimum lease payments under
capital and operating leases at December 31, 2016 were as follows:
Fiscal year ending June 30,
|
|
Capital Leases
|
|
Operating Lease
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
121,857
|
|
$
|
367,000
|
|
2018
|
|
|
241,726
|
|
|
757,000
|
|
2019
|
|
|
113,391
|
|
|
724,000
|
|
2020
|
|
|
62,258
|
|
|
670,000
|
|
2021
|
|
|
—
|
|
|
434,000
|
|
2022 and beyond
|
|
|
—
|
|
|
280,000
|
|
Total minimum payments
|
|
|
539,232
|
|
$
|
3,232,000
|
|
|
|
|
|
|
|
|
|
Less imputed interest
|
|
|
(53,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments included in capital lease obligations
|
|
|
485,296
|
|
|
|
|
Less current portion
|
|
|
240,629
|
|
|
|
|
Non-current portion
|
|
$
|
244,667
|
|
|
|
|
12. Loans Payable
On December 21, 2016, the Company executed
the Second Amended and Restated Loan and Security Agreement (the “LSA”) with Avidbank for the Loan in the
aggregate principal amount of $5 million and a working capital revolving line of credit (the “Revolving Line”).
The LSA amends and restates that certain Loan and Security Agreement between the Company and Avidbank dated September 30,
2013, as amended and restated pursuant to that certain Amended and Restated Loan and Security Agreement dated as of December
23, 2014, and as further amended pursuant to that certain First Amendment to Amended and Restated Loan and Security Agreement
dated as of December 23, 2015.
The Loan is for a five-year term. Pursuant to the
LSA, interest on the Loan began accruing on December 21, 2016 and is paid monthly for the first six months of the term of the Loan.
Thereafter, both principal and interest is due and payable in fifty-four (54) monthly installments. The Loan bears interest at
a per annum rate equal to two percent (2.0%) above the Prime Rate; provided, however, that at no time shall the applicable rate
be less than five and one-half percent (5.50%) per annum. Prepayment is permitted; however, the Company must pay a prepayment fee
in an amount equal to (i) 1% of the principal amount of the Loan if prepayment occurs on or prior to December 21, 2018, or (ii)
0.75% of the principal amount of the Loan if such prepayment occurs after December 21, 2017 but on or prior to December 21, 2018,
or (iii) 0.50% of the principal amount of the Loan if such prepayment occurs after December 21, 2018 but on or prior to December
21, 2019, or (iv) 0.25% of the principal amount of the Loan if such prepayment occurs after December 21, 2019 but on or prior to
December 21, 2020.
Costs incurred of $72,224 were recorded as a discount on debt and will be amortized
over the five year term of the Loan.
Pursuant to the LSA, Avidbank will, in its discretion,
make loan advances under the Revolving Line to the Company 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 the Company’s eligible accounts receivable, as determined by AvidBank in accordance with the LSA. AvidBank
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 LSA.
Amounts borrowed under the Revolving Line may be
repaid and re-borrowed at any time prior to December 21. 2017, at which time all amounts shall be immediately due and payable.
The advances under the Revolving Line bear interest, on the outstanding daily balance, at a per annum rate equal to one percent
(1%) above the Prime Rate; provided, however, that at no time shall the applicable rate be less than four and one-half percent
(4.5%) per annum. Interest payments are due and payable on the last business day of each month. Payments received with respect
to accounts upon which advances are made will be applied to the amounts outstanding under the LSA.
The Company’s obligations under the LSA are
secured by a first priority secured by a first priority security interest (subject to permitted liens) in cash, U.S. inventory
and accounts receivable. In addition, the Company’s wholly-owned subsidiary, Geltech, has guaranteed our obligations under
the LSA.
The 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 LSA contains other customary provisions with respect to events of default,
expense reimbursement, and confidentiality.
On December 21, 2016, the Company also
entered into a five-year Sellers Note in the aggregate principal amount of $6 million. Pursuant to the Sellers Note, during
the period commencing on December 21, 2016 (the “Issue Date”) and continuing until the fifteen month anniversary
of the Issue Date (the “Initial Period”), interest will accrue on only the principal amount of the Sellers 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 Sellers Notes 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 Sellers Note is five years, and
any unpaid interest and principal, together with any other amounts payable under the Sellers Note, is due and payable on the
maturity date. The Company may prepay the Sellers 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 (12%) per annum from the date of such non-payment until the Company pays such amount
in full. The Sellers Note was valued based on the present value of expected future cash flows, using a risk-adjusted discount
rate of 7%. The fair value of the Sellers Note was determined to be $6,455,555. The Sellers Note is included in Loans
payable, less current portion on the consolidated balance sheet.
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 Sellers Note, together with all accrued and unpaid interest and any and all other amounts
payable under the Sellers Note, will immediately be due and payable.
Future maturities of loans payable are as follows:
Twelve months ending December 31,
|
|
Loans Payable
|
|
|
|
|
|
|
2017
|
|
$
|
555,556
|
|
2018
|
|
|
1,111,111
|
|
2019
|
|
|
1,111,111
|
|
2020
|
|
|
1,111,111
|
|
2021
|
|
|
1,111,111
|
|
2022 and beyond
|
|
|
6,383,335
|
|
Total payments
|
|
|
11,383,335
|
|
Less current portion
|
|
|
555,556
|
|
Non-current portion
|
|
$
|
10,827,779
|
|
13. Public Offering of Class A common stock
On December 16, 2016, the Company entered into
an Underwriting Agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC (“Roth Capital”),
as representative of the several underwriters identified therein (collectively, the “Underwriters”), relating to the
firm commitment offering of 7,000,000 shares of the Company’s Class A common stock, at a public offering price of $1.21 per
share. Under the terms of the Underwriting Agreement, the Company also granted the Underwriters an option, exercisable for 45 days,
to purchase up to an additional 1,000,000 shares of Common Stock to cover any over-allotments.
On December 21, 2016, the Company completed its
underwritten public offering of 8,000,000 shares of Class A common stock, which included the full exercise by the Underwriters
of their option to purchase 1,000,000 shares of Class A common stock to cover over-allotments, at a public offering price of $1.21
per share. The Company realized net proceeds of approximately $9.0 million, after deducting underwriting discounts and commissions
and estimated offering expenses. The net proceeds from the offering provided funds for a portion of the purchase price of the Acquisition
of ISP, as well as provided funds from the payment of transaction expenses and other costs incurred in connection with the Acquisition.
The offering of the shares of Class A Common Stock
was made pursuant to a Registration Statement on Form S-1, as amended (Registration No. 333-213860), which the SEC declared effective
on December 15, 2016, and the final prospectus dated December 16, 2016.
14. Goodwill and Intangible Assets
The change in the net carrying amount of goodwill was as follows:
Goodwill at June 30, 2016
|
|
|
—
|
|
Additions
|
|
|
1,227,752
|
|
Goodwill at December 31, 2016
|
|
$
|
1,227,752
|
|
The increase in goodwill during the first half of fiscal 2017 was
primarily due to the Acquisition of ISP. See Note 3, Acquisition of ISP Optics Corporation, to these
consolidated financial statements, for more information.
Intangible assets as a result of the ISP Acquisition were
comprised of:
Fair value of Ingangible assets
|
|
Useful life (yrs)
|
|
|
|
|
Customer relationships
|
|
15
|
|
$
|
5,633,000
|
|
Backlog
|
|
2
|
|
|
261,000
|
|
Trade secrets
|
|
8
|
|
|
2,546,000
|
|
Trademark
|
|
8
|
|
|
2,290,000
|
|
Non-compete agreement
|
|
3
|
|
|
29,000
|
|
|
|
|
|
$
|
10,759,000
|
|
Future amortization of intangibles is as follows:
Fiscal
year ended:
|
|
|
|
|
June 30, 2017
|
|
$
|
560,100
|
|
June 30, 2018
|
|
|
1,120,200
|
|
June 30, 2019
|
|
|
1,054,950
|
|
June 30, 2020
|
|
|
984,867
|
|
June 30, 2021
|
|
|
980,033
|
|
June 30, 2022 and later
|
|
|
6,058,850
|
|
|
|
$
|
10,759,000
|
|
20