Notes
to Unaudited Consolidated 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 for the
fiscal year ended June 30, 2017, 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. The Consolidated Balance Sheet as of June 30, 2017 has been derived from the audited financial
statements at that date but does not include all of the information and notes required by generally accepted accounting principles
for complete financial statements.
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 unaudited Consolidated Financial Statements, for additional information.
We
are a manufacturer and integrator of families of precision molded aspheric optics, diamond turned, ground and polished infrared
optics, high-performance fiber-optic collimators, 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 perform 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 cash equivalents 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 Latvia-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 would no longer be depreciated.
Goodwill
and 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. 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.
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 tax returns in various states and foreign jurisdictions. Our open tax years subject
to examination by the Internal Revenue Service generally remain open for three years from the filing date. Our tax years subject
to examination by the state jurisdictions generally remain open for up to four years from the filing date. In Latvia, tax years
subject to examination remain open for up to five years from the filing date and in China, tax years subject to examination remain
open for up to ten years from the filing date.
Our
cash and cash equivalents totaled approximately $7.7 million at December 31, 2017. 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, 2017, we have retained earnings
in China of approximately $1.4 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 and foreign taxes, if any, 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.
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, as amended
(the “Omnibus 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, 2017.
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 in the aggregate principal amount
of $5 million (the “Term Loan”) payable to Avidbank Corporate Finance, a division of Avidbank (“Avidbank”)
approximates their carrying values based upon current rates available to us. Loans payable also includes a note payable to the
sellers of ISP, in the aggregate principal amount of $6 million (the “Sellers Note”). The carrying value of the Sellers
Note includes a fair value premium based on a risk-adjusted discount rate, a Level 2 fair value measurement. See Note 13, Loans
Payable, to these unaudited Consolidated Financial Statements for additional information. Subsequent to the quarter ended December
31, 2017, we satisfied the Sellers Note and Term Loan in full, and entered into a new acquisition term loan payable to Avidbank.
See Note 16, Subsequent Event, to these unaudited Consolidated Financial Statements for additional information.
We
value our warrant liabilities based on open-form option pricing models, which are 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 a third-party market
participant would pay to transfer the liability and incorporate 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 Note 10, Derivative Financial Instruments (Warrant Liability), to these unaudited Consolidated Financial Statements
for additional information.
We
do not have any other financial or non-financial instruments that would be characterized as Level 1, Level 2, or Level 3.
Debt
issuance costs
are recorded as a reduction to the carrying value of the related notes payable, by the same amount, and are
amortized ratably over the term of the note.
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
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 were originally set to be 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 early adoption of the new revenue standard, 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.
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. We are currently working through the assessment phase of implementing this
guidance. The effective date for us 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 No. 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 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. 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. Our current operating lease portfolio is primarily comprised of real estate leases. Upon adoption
of this standard, we expect our balance sheet to include a right of use asset and liability related to substantially all operating
lease arrangements. The effective date for us will be the first quarter of our fiscal year ending June 30, 2020.
In
October 2016, the FASB issued ASU 2016-16, “Income Taxes” (Topic 740) (“ASU 2016-16”). ASU 2016-16 will
require an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when
the transfer occurs. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements have
not been issued or made available for issuance. ASU 2016-16 is effective for us in the first quarter of fiscal 2019. We are currently
evaluating the adoption date and the impact, if any, adoption will have on our financial position and results of operations.
In
May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation” (Topic 718): Scope of Modification Accounting
(“ASU 2017-09”). The new guidance clarifies when a change to the terms or conditions of a share-based payment award
must be accounted for as a modification. ASU 2017-09 is effective for fiscal years, and interim periods within those annual periods,
beginning after December 15, 2017, with early adoption permitted. ASU 2017-09 is effective for us in the first quarter of fiscal
2019. We are currently evaluating the adoption date and the impact, if any, adoption will have on our financial position and results
of operations.
3.
Acquisition of ISP Optics Corporation
On
December 21, 2016 (the “Acquisition Date”), we acquired 100% of the issued and outstanding shares of common stock
of ISP (the “Acquisition”) pursuant to the Stock Purchase Agreement, dated as of August 3, 2016 (the “Purchase
Agreement”). Our Consolidated Financial Statements reflect the financial results of ISP’s operations beginning on
the Acquisition Date.
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. We believed acquiring ISP would
provide an excellent complementary fit with our business that would meet our requirement of profitable growth in a market space
we are investing in, and saw the Acquisition as an opportunity to accelerate our growth, and expand our capabilities and our global
reach.
We
financed a portion of the Acquisition through a public offering of 8,000,000 shares of our Class A common stock, raising net proceeds
of approximately $8.7 million. The public offering closed simultaneously with the closing of the Acquisition. For additional information,
see Note 15, Public Offering of Class A Common Stock, to these unaudited Consolidated Financial Statements. We also closed a $5
million Term Loan with AvidBank. For additional information, see Note 13, Loans Payable, and Note 16, Subsequent Event, to these
unaudited Consolidated Financial Statements.
In
lieu of cash paid,
we also financed a portion
of the Acquisition through the issuance of the Sellers Note in the aggregate principal amount of $6 million to Joseph Menaker
and Mark Lifshotz (the “Sellers”). For additional information, see Note 13, Loans Payable, and Note 16, Subsequent
Event, to these unaudited Consolidated Financial Statements.
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
|
|
|
(200,477
|
)
|
Fair value of Sellers’ Note
|
|
|
6,327,208
|
|
Working capital adjustment
|
|
|
(315,003
|
)
|
Total purchase price
|
|
$
|
19,054,944
|
|
Sellers Note issued
at fair value
|
|
|
(6,327,208
|
)
|
Preliminary working
capital adjustment
|
|
|
(760,822
|
)
|
Adjustment to beginning
cash
|
|
|
(163,878
|
)
|
Adjustment to beginning
assumed debt
|
|
|
(25,700
|
)
|
Cash paid at Acquisition
Date
|
|
$
|
11,777,336
|
|
Subsequently,
in March 2017, a portion of the working capital adjustment, in the amount of $292,816, was applied to the Sellers Note as a payment,
thereby decreasing the outstanding principal amount due under the Sellers Note, as reflected in these unaudited Consolidated Financial
Statements.
The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date:
Cash
|
|
$
|
1,243,216
|
|
Accounts receivable
|
|
|
1,108,980
|
|
Inventory
|
|
|
1,134,628
|
|
Other current assets
|
|
|
153,450
|
|
Property and equipment
|
|
|
4,666,634
|
|
Security deposit and
other assets
|
|
|
45,359
|
|
Identifiable intangibles
|
|
|
11,069,000
|
|
Total identifiable
assets acquired
|
|
$
|
19,421,267
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
(554,050
|
)
|
Accrued expenses and
other payables
|
|
|
(133,974
|
)
|
Other payables
|
|
|
(146,324
|
)
|
Deferred tax liability
|
|
|
(5,386,880
|
)
|
Total liabilities assumed
|
|
$
|
(6,221,228
|
)
|
Net identifiable assets
acquired
|
|
|
13,200,039
|
|
Goodwill
|
|
|
5,854,905
|
|
Net assets acquired
|
|
$
|
19,054,944
|
|
As
part of the valuation analysis, we 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 $3,590,000, $366,000, $3,272,000, $3,814,000, and $27,000, 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 $2,744,262 adjustment to increase the basis of the acquired property, plant and equipment to reflect fair value of
the assets at the Acquisition Date. The estimated useful lives range from 3 years to 10 years. Depreciation and amortization of
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 and a $230,407 adjustment to decrease the
basis of the acquired deferred revenue to reflect the fair value of the deferred revenue at the Acquisition Date. The tax effects
of these fair value adjustments resulted in a net deferred tax liability of approximately $5.4 million.
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.
Our
unaudited Consolidated Financial Statements reflect the financial results of ISP’s operations for the six months ended December
31, 2017. The following represents unaudited pro forma consolidated information as if ISP had been included in our consolidated
results for the six months ended December 31, 2016:
|
|
Six
months ended
December 31, 2016
|
|
Revenue
|
|
$
|
17,001,233
|
|
Net
income
|
|
$
|
1,431,529
|
|
These
amounts have been calculated after applying our 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, 2016, together with the consequential
tax effects. For the six months ended December 31, 2016, pro forma net income reflects adjustments of approximately $659,000 for
amortization of intangibles and approximately $214,000 in additional interest, and excludes approximately $608,000 in Acquisition
expenses and approximately $522,000 of non-recurring fees incurred by ISP.
Prior
to the Acquisition, we had a preexisting relationship with ISP. We ordered anti-reflective coating services from ISP on an arms’
length basis. We 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, we had
amounts payable to ISP of $8,000 for services provided prior to the Acquisition, and ISP had payables of $24,500 due to us.
4.
Inventories
The
components of inventories include the following:
|
|
December
31, 2017
|
|
|
June
30, 2017
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
2,452,337
|
|
|
$
|
2,282,880
|
|
Work in process
|
|
|
1,996,277
|
|
|
|
1,654,653
|
|
Finished goods
|
|
|
2,189,238
|
|
|
|
1,904,497
|
|
Reserve
for obsolescence
|
|
|
(823,494
|
)
|
|
|
(767,454
|
)
|
|
|
$
|
5,814,358
|
|
|
$
|
5,074,576
|
|
The
value of tooling in raw materials was approximately $1.6 million at both December 31, 2017 and June 30, 2017.
5.
Property and Equipment
Property
and equipment are summarized as follows:
|
|
Estimated
|
|
|
December
31,
|
|
|
June
30,
|
|
|
|
Life
(Years)
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
equipment
|
|
|
5
- 10
|
|
|
$
|
15,955,557
|
|
|
$
|
13,804,964
|
|
Computer equipment
and software
|
|
|
3
- 5
|
|
|
|
446,443
|
|
|
|
375,775
|
|
Furniture and fixtures
|
|
|
5
|
|
|
|
164,961
|
|
|
|
112,307
|
|
Leasehold improvements
|
|
|
5
- 7
|
|
|
|
1,240,377
|
|
|
|
1,228,797
|
|
Construction
in progress
|
|
|
|
|
|
|
828,330
|
|
|
|
709,571
|
|
Total
property and equipment
|
|
|
|
|
|
|
18,635,668
|
|
|
|
16,231,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
|
|
|
|
6,802,367
|
|
|
|
5,906,856
|
|
Total
property and equipment, net
|
|
|
|
|
|
$
|
11,833,301
|
|
|
$
|
10,324,558
|
|
6.
Goodwill and Intangible Assets
There
were no changes in the net carrying value of goodwill during the six months ended December 31, 2017.
Intangible
assets, as a result of the Acquisition of ISP, were comprised of:
|
|
Useful
Life (Yrs)
|
|
|
Gross
|
|
|
Amortization
through December 31, 2017
|
|
|
Net
|
|
Customer
relationships
|
|
|
15
|
|
|
$
|
3,590,000
|
|
|
$
|
245,767
|
|
|
$
|
3,344,233
|
|
Backlog
|
|
|
2
|
|
|
|
366,000
|
|
|
|
187,919
|
|
|
|
178,081
|
|
Trade
secrets
|
|
|
8
|
|
|
|
3,272,000
|
|
|
|
419,995
|
|
|
|
2,852,005
|
|
Trademarks
|
|
|
8
|
|
|
|
3,814,000
|
|
|
|
489,566
|
|
|
|
3,324,434
|
|
Non-compete
agreement
|
|
|
3
|
|
|
|
27,000
|
|
|
|
9,242
|
|
|
|
17,758
|
|
|
|
|
|
|
|
$
|
11,069,000
|
|
|
$
|
1,352,489
|
|
|
$
|
9,716,511
|
|
Future
amortization of intangibles is as follows:
Fiscal
year ending:
|
|
|
|
June
30, 2018
|
|
$
|
658,541
|
|
June
30, 2019
|
|
|
1,220,664
|
|
June
30, 2020
|
|
|
1,129,342
|
|
June
30, 2021
|
|
|
1,125,083
|
|
June
30, 2022
|
|
|
1,125,083
|
|
June
30, 2023 and later
|
|
|
4,457,798
|
|
|
|
$
|
9,716,511
|
|
7.
Accounts Payable
The
accounts payable balance as of December 31, 2017 and June 30, 2017 both include approximately $73,000 of earned but unpaid board
of directors’ fees.
8.
Income Taxes
A
summary of our total income tax expense and effective income tax rate for the three and six months ended December 31, 2017 and
2016 is as follows:
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Income before income taxes
|
|
$
|
229,842
|
|
|
$
|
1,338,293
|
|
|
$
|
505,522
|
|
|
$
|
1,743,989
|
|
Income tax expense (benefit)
|
|
$
|
(193,508
|
)
|
|
$
|
240,626
|
|
|
$
|
(135,524
|
)
|
|
$
|
505,826
|
|
Effective income tax rate
|
|
|
-84
|
%
|
|
|
18
|
%
|
|
|
-27
|
%
|
|
|
29
|
%
|
The
difference between our effective tax rates in the periods presented above and the federal statutory rate is primarily due to a
tax benefit from our domestic losses being recorded with a full valuation allowance, as well as the effect of foreign earnings
taxed at rates differing from the federal statutory rate. As of December 31, 2017, our Latvia operations are subject to a statutory
income tax rate of 15%, and our China operations are subject to statutory income tax rates of 15% and 25% for LPOIZ and LPOI,
respectively. During the three months ended December 31, 2017, the statutory tax rate applicable to LPOIZ was lowered from 25%
to 15% in accordance with an incentive program for technology companies. The lower rate applies to LPOIZ’s 2017 tax year,
beginning January 1, 2017. Accordingly, we recorded a tax benefit during the three months ended December 31, 2017 related to this
retroactive rate change.
We
record net deferred tax assets to the extent we believe it is more likely than not that these assets will be realized. Based on
the level of historical taxable income, we have provided a full valuation allowance against our net deferred tax assets as of
December 31, 2017 and June 30, 2017. The net deferred tax asset results from federal and state tax credits with indefinite carryover
periods that management expects to utilize in a future period.
Tax
Cuts and Jobs Act
In
December 2017, the United States (“U.S.”) enacted the Tax Cuts and Jobs Act (the “2017 Act”), which changes
existing U.S. tax law and includes various provisions that are expected to affect companies. Among other things, the 2017 Act
(i) changes U.S. corporate tax rates, (ii) generally reduces a company’s ability to utilize accumulated net operating losses,
and (iii) requires the calculation of a one-time transition tax on certain foreign earnings and profits (“E&P”)
that had not been previously repatriated. In addition, the 2017 Act impacts a company’s estimates of its deferred tax assets
and liabilities.
Pursuant
to U.S. GAAP, changes in tax rates and tax laws are accounted for in the period of enactment, and the resulting effects are
recorded as discrete components of the income tax provision related to continuing operations in the same period. We continue
to evaluate the impact of the 2017 Act on our financial statements. Based on our initial assessments to date, we expect the
one-time transition tax on certain foreign E&P to have a minimal impact on us as we anticipate that we will be able to
utilize our existing net operating losses to substantially offset any taxes payable on foreign E&P. Additionally, we
expect significant adjustments to our gross deferred tax assets and liabilities; however, we also expect to record a
corresponding offset to our estimated full valuation allowance against our net deferred tax assets, which should result in
minimal net effect to our provision for income taxes.
9.
Compensatory Equity Incentive Plan and Other Equity Incentives
Share-Based
Compensation Arrangements.
The Omnibus Plan provides several available forms of stock compensation, including incentive stock
options and restricted stock unit (“RSU”) 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
Omnibus 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 $1,915 and $943 for the six months ended December 31, 2017 and 2016, 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.
These
plans are summarized below:
|
|
Award Shares
|
|
|
Award Shares Outstanding
at December 31,
|
|
|
Available for
Issuance
at December 31,
|
|
Equity Compensation Arrangement
|
|
Authorized
|
|
|
2017
|
|
|
2017
|
|
Omnibus Plan
|
|
|
5,115,625
|
|
|
|
2,724,388
|
|
|
|
1,664,870
|
|
2014 ESPP
|
|
|
400,000
|
|
|
|
—
|
|
|
|
370,895
|
|
|
|
|
5,515,625
|
|
|
|
2,724,388
|
|
|
|
2,035,765
|
|
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 under the Omnibus Plan in the six month periods ended December 31, 2017 and 2016, we estimated the fair
value of each stock option as of the date of grant using the following assumptions:
|
Six months ended December 31,
|
|
2017
|
2016
|
Weighted average expected volatility
|
63% - 75%
|
80% - 82%
|
Dividend yields
|
0%
|
0%
|
Weighted average risk-free interest rate
|
1.28% - 1.80%
|
1.185% - 1.19%
|
Weighted average expected term, in years
|
7.25
|
7.49
|
Most
options granted under the Omnibus 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 RSU grants was 0%, and the assumed forfeiture rates used in calculating
the fair value of options for performance and service conditions were 20% for each of the six months ended December 31, 2017 and
2016. 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 under the
Omnibus Plan in the six months ended December 31, 2017 is presented below:
|
|
|
Stock Options
|
|
|
|
Restricted
Stock Units (RSUs)
|
|
|
|
|
Shares
|
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
Weighted-
Average
Remaining
Contract
|
|
|
|
Shares
|
|
|
|
Weighted-
Average
Remaining
Contract
|
|
June 30, 2017
|
|
|
1,096,186
|
|
|
$
|
1.68
|
|
|
|
6.3
|
|
|
|
1,508,782
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
48,849
|
|
|
$
|
4.24
|
|
|
|
—
|
|
|
|
140,571
|
|
|
|
—
|
|
Exercised
|
|
|
(46,250
|
)
|
|
$
|
2.24
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled/Forfeited
|
|
|
(23,750
|
)
|
|
$
|
3.10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
December 31, 2017
|
|
|
1,075,035
|
|
|
$
|
1.74
|
|
|
|
6.4
|
|
|
|
1,649,353
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards exercisable/vested as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
860,491
|
|
|
$
|
1.62
|
|
|
|
5.8
|
|
|
|
1,287,370
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards unexercisable/unvested as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
214,544
|
|
|
$
|
2.22
|
|
|
|
8.7
|
|
|
|
361,983
|
|
|
|
0.9
|
|
|
|
|
1,075,035
|
|
|
|
|
|
|
|
|
|
|
|
1,649,353
|
|
|
|
|
|
The
total intrinsic value of options outstanding and exercisable at December 31, 2017 and 2016 was approximately $574,000 and $95,000,
respectively.
No
RSUs were exercised during the six months ended December 31, 2017 and 2016.
The
total intrinsic value of RSUs outstanding and exercisable at December 31, 2017 and 2016 was approximately $2.9 million and $1.7
million, respectively.
The
total fair value of RSUs vested during the six months ended December 31, 2017 and 2016 was approximately $320,000 and $333,000,
respectively.
The
total fair value of option shares vested during the six months ended December 31, 2017 and 2016 was approximately $89,000 and
$306,000 respectively.
As
of December 31, 2017, there was approximately $749,296 of total unrecognized compensation cost related to non-vested share-based
compensation arrangements (including share options and RSUs) granted under the Omnibus Plan. We expect to recognize the compensation
cost as follows:
|
|
Stock
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
RSUs
|
|
|
Total
|
|
Six months ending June 30, 2018
|
|
|
29,982
|
|
|
|
249,946
|
|
|
|
279,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending June 30, 2019
|
|
|
18,083
|
|
|
|
264,982
|
|
|
|
283,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending June 30, 2020
|
|
|
4,276
|
|
|
|
149,944
|
|
|
|
154,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending June 30, 2021
|
|
|
2,105
|
|
|
|
29,978
|
|
|
|
32,083
|
|
|
|
$
|
54,446
|
|
|
$
|
694,850
|
|
|
$
|
749,296
|
|
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, 2017 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, 2017
|
|
|
244,511
|
|
|
|
438,912
|
|
|
|
683,423
|
|
|
$
|
1.39
|
|
Granted
|
|
|
48,849
|
|
|
|
140,571
|
|
|
|
189,420
|
|
|
$
|
3.69
|
|
Vested
|
|
|
(75,066
|
)
|
|
|
(217,500
|
)
|
|
|
(292,566
|
)
|
|
$
|
1.40
|
|
Cancelled/Forfeited
|
|
|
(3,750
|
)
|
|
|
—
|
|
|
|
(3,750
|
)
|
|
$
|
1.39
|
|
December 31, 2017
|
|
|
214,544
|
|
|
|
361,983
|
|
|
|
576,527
|
|
|
$
|
1.52
|
|
Financial
Statement Effects and Presentation.
The following table shows total stock-based compensation expense for the six months ended
December 31, 2017 and 2016 included in the consolidated statements of comprehensive income:
|
|
Six Months Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
164,929
|
|
|
$
|
22,804
|
|
RSUs
|
|
|
21,280
|
|
|
|
188,197
|
|
Total
|
|
$
|
186,209
|
|
|
$
|
211,001
|
|
|
|
|
|
|
|
|
|
|
The amounts above were included in:
|
|
|
|
|
|
|
|
|
Selling, general & administrative
|
|
$
|
182,277
|
|
|
$
|
209,609
|
|
Cost of sales
|
|
|
3,206
|
|
|
|
796
|
|
New product development
|
|
|
726
|
|
|
|
596
|
|
|
|
$
|
186,209
|
|
|
$
|
211,001
|
|
10.
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 were exercisable for a period of
five years beginning on December 11, 2012 and expiring on December 11, 2017. 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 could be made to the exercise price of the June 2012 Warrants if we issued or sold shares of our Class
A common stock at a price that was less than the then-current warrant exercise price, the June 2012 Warrants were classified as
a liability, as opposed to equity, in accordance with ASC 815-10, as we determined that the June 2012 Warrants were not indexed
to our Class A common stock.
During
the term of the June 2012 Warrants, we re-measured the fair value of the outstanding June 2012 Warrants at the end of each reporting
period to reflect their fair market value at the end of the current reporting period. We also measured the fair value upon each
warrant exercise, to determine the fair value adjustment to the warrant liability related to the warrant exercise. We record the
change in fair value of the June 2012 Warrants in the statement of comprehensive income, which is estimated using the Lattice
option-pricing model using the following range of assumptions for the respective periods:
|
December 31,
|
|
June 30,
|
Inputs into Lattice model for warrants:
|
2017
|
|
2017
|
Equivalent volatility
|
21.06% - 162.92%
|
|
47.39% - 75.80%
|
Equivalent interest rate
|
0.95% - 1.14%
|
|
0.62% - 1.13%
|
Floor
|
$1.15
|
|
$1.15
|
Stock price
|
$2.56 - $2.60
|
|
$1.15 - $3.25
|
Probability price < strike price
|
0.00%
|
|
4.70%
|
Fair value of call
|
$1.13 - $2.79
|
|
$0.30 - $2.04
|
Probability of fundamental transaction occurring
|
0%
|
|
0%
|
During
the six months ended December 31, 2017, we issued 433,810 shares of our Class A common stock upon the exercise of the June 2012
Warrants, which included 329,195 that were subject to re-measurement. The June 2012 Warrants expired on December 11, 2017; therefore,
we reduced the warrant liability to zero as of December 31, 2017.
The
warrant liabilities were considered recurring Level 3 financial instruments. The following table summarizes the activity of Level
3 instruments measured on a recurring basis for the six months ended December 31, 2017:
|
|
Warrant Liability
|
|
Fair value, June 30, 2017
|
|
$
|
490,500
|
|
Exercise of common stock warrants
|
|
|
(685,132
|
)
|
Change in fair value of warrant liability
|
|
|
194,632
|
|
Fair value, December 31, 2017
|
|
$
|
—
|
|
11.
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:
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
423,350
|
|
|
$
|
1,097,667
|
|
|
$
|
641,046
|
|
|
$
|
1,238,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic number of shares
|
|
|
24,525,839
|
|
|
|
16,541,205
|
|
|
|
24,380,448
|
|
|
|
16,079,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
408,493
|
|
|
|
51,433
|
|
|
|
385,424
|
|
|
|
71,605
|
|
RSUs
|
|
|
1,397,866
|
|
|
|
1,132,359
|
|
|
|
1,376,887
|
|
|
|
1,115,887
|
|
Common stock warrants
|
|
|
105,160
|
|
|
|
177,715
|
|
|
|
184,000
|
|
|
|
257,213
|
|
Diluted number of shares
|
|
|
26,437,359
|
|
|
|
17,902,712
|
|
|
|
26,326,759
|
|
|
|
17,523,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
|
$
|
0.08
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
The
following potential dilutive shares were not included in the computation of diluted earnings per share as their effects would
be anti-dilutive:
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Options to purchase common stock
|
|
|
696,811
|
|
|
|
935,899
|
|
|
|
714,710
|
|
|
|
824,218
|
|
RSUs
|
|
|
213,288
|
|
|
|
344,990
|
|
|
|
183,081
|
|
|
|
278,685
|
|
Common stock warrants
|
|
|
83,589
|
|
|
|
826,709
|
|
|
|
154,590
|
|
|
|
774,455
|
|
|
|
|
993,688
|
|
|
|
2,107,598
|
|
|
|
1,052,381
|
|
|
|
1,877,358
|
|
12.
Lease Commitments
We
have operating leases for office space. At December 31, 2017, 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 in 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 Orlando Lease, as amended.
We
received approximately $420,000 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 approximately $157,000
as of December 31, 2017. The deferred rent is being amortized as a reduction in lease expense over the term of the Orlando Lease.
At
December 31, 2017, we, through our wholly-owned subsidiary, LPOI, have a lease agreement for an office facility in Shanghai, China
(the “Shanghai Lease”) for 1,900 square feet. The Shanghai Lease commenced in October 2015 and was set to expire in
October 2017. During the six months ended December 31, 2017, the Shanghai Lease was renewed for an additional one-year term, and
now expires in October 2018.
At
December 31, 2017, we, through our wholly-owned subsidiary, LPOIZ, have a lease agreement for a manufacturing and office facility
in Zhenjiang, China (the “Zhenjiang Lease”) for 26,000 square feet. The Zhenjiang Lease, which is for a five-year
original term with renewal options, expires March 2019. During the three months ended December 31, 2017, another lease was executed
for 13,000 additional square feet in this same facility. This new lease has a 54-month term, and expires in December 2021.
At
December 31, 2017, we, through our wholly-owned subsidiary ISP, have a lease agreement for a manufacturing and office facility
in Irvington, New York (the “ISP Lease”) for 13,000 square feet. The ISP Lease, which is for a five-year original
term with renewal options, expires in September 2020.
At
December 31, 2017, we, through ISP’s wholly-owned subsidiary ISP Latvia, have two lease agreements for a manufacturing and
office facility in Riga, Latvia (collectively, the “Riga Leases”) for 23,000 square feet. The Riga Leases, each of
which is for a five-year original term with renewal options, expires in December 2019.
Rent
expense totaled approximately $522,000 and $287,000 during the six months ended December 31, 2017 and 2016, respectively.
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. In November 2017, we entered into an additional
capital lease agreement with a three and a half year term for manufacturing equipment, which is included as part of property and
equipment. Assets under capital lease include approximately $1.0 million in manufacturing equipment, with accumulated amortization
of approximately $461,000 as of December 31, 2017. Amortization related to capital lease assets is included in depreciation and
amortization expense.
The
approximate future minimum lease payments under capital and operating leases at December 31, 2017 were as follows:
Fiscal year ending June 30,
|
|
Capital Leases
|
|
|
Operating Leases
|
|
2018
|
|
$
|
169,676
|
|
|
$
|
420,000
|
|
2019
|
|
|
212,435
|
|
|
|
765,000
|
|
2020
|
|
|
161,302
|
|
|
|
692,000
|
|
2021
|
|
|
86,657
|
|
|
|
445,000
|
|
2022
|
|
|
—
|
|
|
|
285,000
|
|
Total minimum payments
|
|
|
630,070
|
|
|
$
|
2,607,000
|
|
Less imputed interest
|
|
|
(61,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments included in capital lease obligations
|
|
|
568,229
|
|
|
|
|
|
Less current portion
|
|
|
320,057
|
|
|
|
|
|
Non-current portion
|
|
$
|
248,172
|
|
|
|
|
|
13.
Loans Payable
On
December 21, 2016, we executed the Second Amended and Restated Loan and Security Agreement (the “Amended LSA”) with
AvidBank for the Term Loan in the aggregate principal amount of $5 million and a working capital revolving line of credit (the
“Revolving Line”). The Amended LSA amends and restates that certain Loan and Security Agreement between AvidBank and
us 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.
On
December 20, 2017, we executed the First Amendment to the Amended LSA (the “First Amendment”). The First Amendment
amended, among other items, the maturity date of the Revolving Line from December 21, 2017 to March 21, 2018, increased the maximum
amount of indebtedness secured by permitted liens from $600,000 to $800,000 in the aggregate, and increased the aggregate amount
we may maintain in accounts with foreign financial institutions to $1,000,000. On January 16, 2018, the maturity date on the Revolving
Line was extended further to December 21, 2018, as disclosed in Note 16, Subsequent Event, to these unaudited Consolidated Financial
Statements.
The
Term Loan was for a five-year term. Pursuant to the Amended LSA, interest on the Term Loan began accruing on December 21, 2016
and was paid monthly for the first six months of the term of the Term Loan. Thereafter, both principal and interest was due and
payable in fifty-four (54) monthly installments. The Term Loan bore interest at a per annum rate equal to two percent (2.0%) above
the Prime Rate, or 6.5% at December 31, 2017; provided, however, that at no time was the applicable rate permitted to be less
than five and one-half percent (5.50%) per annum. Prepayment was permitted; however, we must pay a prepayment fee in an amount
equal to (i) 1% of the principal amount of the Term Loan if prepayment occurs on or prior to December 21, 2017, or (ii) 0.75%
of the principal amount of the Term 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 Term 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 Term Loan if such prepayment occurs after December 21, 2019 but on or prior
to December 21, 2020.
Costs incurred of approximately $72,000 were recorded as a discount on debt
and will be amortized over the five-year term of the Term Loan. Amortization of approximately $7,700 is included in interest expense
for the six months ended December 31, 2017.
Pursuant
to the Amended LSA, Avidbank will, in its discretion, make loan advances under the Revolving Line 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. Upon the occurrence and during the continuance of an event of default, AvidBank may, in its discretion,
cease making advances and terminate the Amended LSA; provided, that at the time of termination, no obligations remain outstanding
and AvidBank has no obligation to make advances under the Amended LSA AvidBank also has the discretion to determine that certain
accounts are not eligible accounts.
Amounts
borrowed under the Revolving Line may be repaid and re-borrowed at any time prior to December 21, 2018, 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 Amended LSA. There were no borrowings under the Revolving Line during the period. As of December 31, 2017, there was no outstanding
balance under the Revolving Line.
Our
obligations under the Amended LSA are collateralized 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. Additionally, the Amended LSA requires us to maintain
a fixed charge coverage ratio (as defined in the Amended LSA) of at least 1.15 to 1.00 and an asset coverage ratio (as defined
in the Amended LSA) of at least 1.50 to 1.00. As of December 31, 2017, we were in compliance with all covenants.
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.
On
December 21, 2016, we also entered into the Sellers Note in the aggregate principal amount of $6 million. The Sellers Note was
fully satisfied on January 16, 2018, as discussed in Note 16, Subsequent Events, to these unaudited Consolidated Financial Statements.
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 $2.7 million 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. Given that the Sellers Note was satisfied in full in
January 2018 (as discussed in Note 16, Subsequent Events, to these unaudited Consolidated Financial Statements), we paid
interest semi-annually in arrears solely during the Initial Period. The Sellers Note was for a five-year term, and any unpaid
interest and principal, together with any other amounts payable under the Sellers Note, would have been due and payable on
December 21, 2021, the maturity date. We had the right to prepay the Sellers Note in whole or in part without penalty or
premium. If during the term of the Sellers Note, we did not pay any amount payable when due, whether at the maturity date, by
acceleration, or otherwise, such overdue amount would have bore interest at a rate equal to twelve (12%) per annum from the
date of such non-payment until such amount was paid in full. The Sellers Note was valued based on the present value of
expected cash flows, using a risk-adjusted discount rate of 7.5%. The fair value of the Sellers Note was determined to be
approximately $6,327,200 based on the present value of expected future cash flows, using a risk-adjusted discount rate of
7.5%. The Sellers Note is included in Loans payable, less current portion on the consolidated balance sheet. As of December
31, 2017 approximately $140,000 was added to the fair value premium and was amortized. As of December 31, 2017 the amount
outstanding under the Sellers Note was $5.7 million, after applying the approximately $293,000 working capital adjustment, as
discussed in Note 3, Acquisition of ISP Optics Corporation, to these unaudited Consolidated Financial Statements.
There
was no payment defaults or other events of defaults as of December 31, 2017, or prior to the Sellers Note being paid in full on
January 16, 2018. If a payment default, or any other “event of default,” such as a bankruptcy event or a change of
control of the Company had occurred, 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, would have been immediately be due and
payable.
Future
maturities of loans payable are as follows:
|
|
|
|
|
|
|
Sellers Note
|
|
|
|
|
|
|
|
|
|
Year ending June 30,
|
|
|
|
Avidbank Note
|
|
|
|
Principal
|
|
|
|
Fair Value Adjustment
|
|
|
|
Unamortized
Debt Costs
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
555,500
|
|
|
|
|
|
|
|
(6,648
|
)
|
|
|
(7,224
|
)
|
|
|
541,629
|
|
2019
|
|
|
|
1,111,000
|
|
|
|
|
|
|
|
123,452
|
|
|
|
(14,445
|
)
|
|
|
1,220,007
|
|
2020
|
|
|
|
1,111,000
|
|
|
|
|
|
|
|
132,751
|
|
|
|
(14,445
|
)
|
|
|
1,229,306
|
|
2021
|
|
|
|
1,111,000
|
|
|
|
|
|
|
|
142,749
|
|
|
|
(14,445
|
)
|
|
|
1,239,304
|
|
2022
|
|
|
|
555,500
|
|
|
|
5,707,184
|
|
|
|
75,364
|
|
|
|
(7,223
|
)
|
|
|
6,330,825
|
|
Total payments
|
|
|
$
|
4,444,000
|
|
|
$
|
5,707,184
|
|
|
$
|
467,668
|
|
|
$
|
(57,782
|
)
|
|
$
|
10,561,071
|
|
Less current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,111,500
|
|
Non-current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,449,571
|
|
14
. 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. During the six months ended December 31, 2017
and 2016, we recognized a gain of approximately $409,000 and a loss of $272,000 on foreign currency transactions, respectively,
included in the consolidated statements of comprehensive income in the line item entitled “Other income (expense), net.”
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 approximately $123,000 and $75,000
for the six months ended December 31, 2017 and 2016, respectively. As of December 31, 2017, we had approximately $14.4 million
in assets and $12.4 million in net assets located in China, compared to approximately $14.0 million in assets and $12.3 million
in net assets located in China as of June 30, 2017. As of December 31, 2017, we had approximately $6.4 million in assets and $6.1
million in net assets located in Latvia, compared to approximately $6.1 million in assets and $6.0 in net assets located in Latvia
as of June 30, 2017.
15.
Public Offering of Class A Common Stock
On
December 16, 2016, we 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 our Class A common stock, at a public offering price of $1.21
per share. Under the terms of the Underwriting Agreement, we also granted the Underwriters an option, exercisable for 45 days,
to purchase up to an additional 1,000,000 shares of Class A common stock to cover any over-allotments.
On
December 21, 2016, we completed our 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. We realized net proceeds of approximately $8.7 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 for 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.
16.
Subsequent Event
Note
Satisfaction and Securities Purchase Agreement
On
January 16, 2018, we entered into a Note Satisfaction and Securities Purchase Agreement (the “Note Satisfaction Agreement”)
with the Sellers with respect to the Sellers Note. At the closing of the Acquisition of ISP, as partial consideration for the
shares of ISP, we issued the Sellers Note in the original principal amount of $6,000,000, which principal payment amount was subsequently
reduced to $5,704,439, as of March 21, 2017, by letter agreement between the Sellers and us.
Pursuant
to the Note Satisfaction Agreement, we and the Sellers agreed to satisfy the Sellers Note in full by (i) converting 39.5% of the
outstanding principal amount of the Sellers Note into shares of the Company’s Class A common stock, and (ii) paying the
remaining 60.5% of the outstanding principal amount of the Sellers Note, plus all accrued but unpaid interest, in cash to the
Sellers. As of January 16, 2018, the outstanding principal amount of the Sellers Note was $5,707,183, and there was $20,883 in
accrued but unpaid interest thereon (collectively, the “Note Satisfaction Amount”). Accordingly, we paid approximately
$3,453,582 plus all accrued but unpaid interest on the Sellers Note, in cash (the “Cash Payment”) and issued 967,208
shares of Class A common stock (the “Shares”), which represents the balance of the Note Satisfaction Amount divided
by the Conversion Price (as defined below). The “Conversion Price” equaled $2.33, representing the average closing
bid price of the Class A common stock, as reported by Bloomberg for the five (5) trading days preceding January 16, 2018. The
Cash Payment was paid using approximately $600,000 cash on hand and approximately $2.9 million in proceeds from an acquisition
term loan (as discussed below) from Avidbank. As of January 16, 2018, the Sellers Note was deemed satisfied in full and terminated.
The
Shares issued to the Sellers were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”),
pursuant to Section 4(a)(2) of the Act (in that the Shares were issued by the Company in a transaction not involving any public
offering), and pursuant to Rule 506 of Regulation D as promulgated by the SEC under the Act. The Shares 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.
Registration
Rights Agreement
In
connection with the Note Satisfaction Agreement, the Company and the Sellers also entered into a Registration Rights Agreement
dated January 16, 2018, pursuant to which we agreed to file with the SEC by February 15, 2018, and to cause to be declared effective,
a registration statement to register the resale of the Shares issued to partially pay the Note Satisfaction Amount.
Second
Amendment to Second Amended and Restated Loan and Security Agreement
On
January 16, 2018, we entered into a Second Amendment to the Amended LSA (the “Second Amendment”) relating to its Term
Loan.
Pursuant
to the Second Amendment, Avidbank paid a single cash advance to us in an original principal amount of $7,294,000 (the “Term
II Loan”). The proceeds of the Term II Loan were used to repay all amounts owing with respect to the Term Loan, with the
remainder used to repay the amounts owing under the Sellers Note. As of January 16, 2018, the Term Loan was deemed satisfied in
full and terminated. The Term II Loan is for a five-year term. Pursuant to the Second Amendment, interest on the Term II Loan
accrues starting on January 16, 2018 and both principal and interest is due and payable in sixty (60) monthly installments beginning
on the tenth day of the first month following the date of the Second Amendment (or February 10, 2018), and continuing on the same
day of each month thereafter for so long as the Term II Loan is outstanding. The Term II 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 by us is permitted; however, we must pay a prepayment fee in an amount equal
to (i) 0.75% of the Excess Prepayment Amount if prepayment occurs on or prior to January 16, 2019, or (ii) 0.5% of the Excess
Prepayment Amount if prepayment occurs after January 16, 2019 but on or before January 16, 2020, or (iii) 0.25% of the Excess
Prepayment Amount if prepayment occurs after January 16, 2020 but on or prior to January 16, 2021, or (iv) 0.10% of the Excess
Prepayment Amount if such prepayment occurs after January 16, 2021 but on or prior to January 16, 2022. For purposes of the Second
Amendment, the “Excess Prepayment Amount” equals the amount of the Term II Loan being prepaid in excess of $2,850,000.
The
Second Amendment amends, among other items, (1) certain definitions related to the fixed charge coverage ratio, and (2) the maturity
date of the Revolving Line from March 21, 2018 to December 21, 2018.