General
Our Company
LightPath Technologies, Inc. (“LightPath”, the
“Company”, “we”, “our”, or
“us”) was incorporated under Delaware law 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. Today, LightPath is a global company with major
facilities in the United States, the People’s Republic of
China and the Republic of Latvia. Our capabilities include
precision molded optics, thermal imaging optics and custom designed
optics. These capabilities allow us to manufacture optical
components and higher-level assemblies, including precision molded
glass aspheric optics, molded and diamond-turned infrared aspheric
lenses and other optical materials used to produce products that
manipulate light. We design, develop, manufacture and
distribute optical components and assemblies utilizing advanced
optical manufacturing processes. We serve a wide and diverse number
of industries including defense and security, optical systems and
components, datacom/telecom, information technology, life sciences,
machine vision and production technology. Our products are
incorporated into a variety of applications by our broad and
diverse customer base. These applications include defense products,
medical devices, laser aided industrial tools, automotive safety
applications, barcode scanners, optical data storage, hybrid fiber
coax datacom, telecommunication optical networks, machine vision
and sensors, among others. All the products we produce enable
lasers and imaging devices to function more
effectively. For example:
●
Molded glass aspheres and
assemblies are used in various
high-performance optical applications primarily based on laser
technology;
●
Infrared molded lenses,
diamond turned, conventional and CNC ground and polished lenses and
assemblies using short
(“SWIR”), mid (“MWIR”) and long
(“LWIR”) wave transmitting materials are used in
applications for firefighting, predictive maintenance, homeland
security, surveillance, automotive, cell phone infrared cameras,
pharmaceutical research & development and defense;
and
●
Collimator assemblies
are used in applications involving
light detection and ranging (“LIDAR”) technology for
advanced driver assistance systems and autonomous vehicles, such as
fork lifts and other automated warehouse
equipment.
The Company has robust and innovative manufacturing technologies
and is vertically integrated from optical design through testing.
Manufacturing strengths include the ability to use multiple optical
glasses (visible and infrared spectrums), multiple lens fabrication
methods (precision molding, single point diamond turning, and both
conventional and CNC grind and polish), anti-reflective coatings,
wear resistant coatings (such as diamond-like carbon or
“DLC”), assembly and test.
Subsidiaries
In November 2005, we formed LightPath Optical Instrumentation (Shanghai) Co.,
Ltd (“LPOI”), a wholly-owned subsidiary, located in
Jiading, People’s Republic of China. The LPOI facility (the
“Shanghai Facility”) is primarily used for sales and
support functions.
In December 2013, we formed LightPath Optical Instrumentation
(Zhenjiang) Co., Ltd. (“LPOIZ”), a wholly-owned
subsidiary located in the New City district, of the Jiangsu
province, of the People’s Republic of China. LPOIZ’s
manufacturing facility (the “Zhenjiang Facility”)
serves as our primary manufacturing facility in China and provides
a lower cost structure for production of larger volumes of optical
components and assemblies. Late in fiscal 2019, this facility was
expanded from 39,000 to 55,000 square feet to add capacity for
polishing to support our growing infrared business.
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”). ISP is a vertically integrated manufacturer
offering a full range of infrared products from custom infrared
optical elements to catalog and high-performance lens assemblies.
Historically, ISP’s Irvington, New York facility (the
“Irvington Facility”) functioned as its global
headquarters for operations, while also providing manufacturing
capabilities, optical coatings, and optical and mechanical design,
assembly, and testing. In June 2019, we completed the relocation of
this manufacturing facility to our existing facilities in Orlando,
Florida and Riga, Latvia. ISP Latvia is a manufacturer of high
precision optics and offers a full range of infrared products,
including catalog and custom infrared optics. ISP Latvia’s
manufacturing facility is located in Riga, Latvia (the “Riga
Facility”).
Recent Organizational and Strategic Initiatives
To
ensure we fully leverage the expanded capabilities and manage the
broader product portfolio that we now have, we begun introducing
organizational changes in July 2019. The position of Chief
Operating Officer was created and filled. This position combines
all operations, engineering, sales and marketing functions under
one leader to ensure the closest possible ties between demand and
supply of our products. We believe this will ensure the best
coordination between technical and operational requirements. The
position is responsible for managing annual plan objectives,
i.e., revenues, gross
margin, controllable operating income and return on asset
objectives. We have also implemented a product management function,
with a product manager for each of our major product capabilities:
molded optics, thermal imaging optics and custom designed optics.
Product management is principally a portfolio management process
that analyzes products within the product capability areas as
defined above. This function will facilitate choosing investment
priorities and ensuring successful product life cycle management.
We have also defined, but not filled, the position of Senior Vice
President, Strategic Business Assessment. This person will be
responsible to strategically align LighPath’s competencies
with strategic industry revenue opportunities, and will manage the
product management function.
Product Groups and Markets
Overview
In fiscal 2019, we reorganized our business into three product
groups: precision molded optics (“PMO”), infrared
products and specialty products. These product groups are supported
by our major product capabilities: molded optics, thermal imaging
optics, and custom designed optics.
Our PMO product group consists of visible precision molded optics
with varying applications. Our infrared product group is comprised
of infrared optics, both molded and diamond-turned, and thermal
imaging assemblies. This product group also includes both
conventional and CNC ground and polished lenses. Between these two
product groups, we have the capability to manufacture lenses from
very small (with diameters of sub-millimeter) to over 300
millimeters, and with focal lengths from approximately 0.4mm to
over 2000mm. In addition, both product groups offer both catalog
and custom designed optics.
Our specialty product group is comprised of value-added products,
such as optical subsystems, assemblies, and collimators, and
non-recurring engineering (“NRE”) products, consisting
of those products we develop pursuant to product development
agreements that we enter into with customers. Typically, customers
approach us and request that we develop new products or
applications for our existing products to fit their particular
needs or specifications. The timing and extent of any such product
development is outside of our control.
We have also aligned our marketing efforts by our capabilities
(i.e., molded optics, thermal imaging optics, and custom
optics), and then by industry. We currently serve the following
major markets: defense and security, optical systems and
components, datacom/telecom, information technology, life sciences,
machine vision and production technology. Customers in each of
these markets may select the best optical technologies that suit
their needs from our entire suite of products, availing us to
cross-selling opportunities, particularly where we can leverage our
knowledge base against our expanding design library. Within our
product groups, we have various applications that serve our major
markets. For example, our infrared products can be used for gas
sensing devices, spectrometers, night vision systems, advanced
driver-assistance systems (“ADAS”), thermal weapon gun
sights, and infrared counter measure systems, among
others.
The photonics market drives our growth and is comprised of eight
application areas: information and communication technology,
display, lighting, photovoltaic, production technology, life
sciences, and measurement and automated vision. In 2018, the market
size for these applications at the system level was $556.4 billion.
LightPath has product applications in six of the eight application
areas, all except for displays and photovoltaic. According to the
latest Markets and Markets survey, these six application areas had
an estimated market value of $401 billion and are growing at a 7%
compound annual growth rate. Within the larger overall markets, we
believe there is a market of approximately $2.0 billion for our
current products and capabilities. We continue to believe our
products will provide significant growth opportunities over the
next several years and, therefore, we will continue to target
specific applications in each of these major markets. In addition
to these major markets, a large percentage of our revenues are
derived from sales to unaffiliated companies that purchase our
products to fulfill their customers’ orders, as well as
unaffiliated companies that offer our products for sale in their
catalogs. Our strategy is to leverage our technology, know-how,
established low-cost manufacturing capability and partnerships to
grow our business. Our product managers will focus on pursuing
customer growth opportunities where our differential advantages
coincide with key customer needs.
Product Groups
The following further discusses the various products we offer and
certain growth opportunities we anticipate for each such
product.
PMO Product Group. Aspheric
lenses are known for their optimal performance. Aspheric lenses
simplify and shrink optical systems by replacing several
conventional lenses. However, aspheric lenses can be difficult and
costly to machine. Our glass molding technology enables the
production of both low and high volumes of aspheric optics, while
still maintaining the highest quality at an affordable price.
Molding is the most consistent and economical way to produce
aspheres and we have perfected this method to offer the most
precise molded aspheric lenses available.
Infrared Product Group. Our infrared product group is
comprised of both molded and turned infrared lenses and assemblies
using a variety of infrared glass materials. Advances in chalcogenide materials have enabled
compression molding for MWIR and LWIR optics in a process similar
to precision molded lenses. Our molded infrared optics technology
enables high performance, cost-effective infrared aspheric lenses
that do not rely on traditional diamond turning or lengthy
polishing methods. Utilizing precision molded aspheric optics
significantly reduces the number of lenses required for typical
thermal imaging systems and the cost to manufacture these lenses.
Molding is an excellent alternative to traditional lens processing
methods particularly where volume and repeatability is
required.
Through ISP, our wholly-owned subsidiary, we also offer germanium,
silicon or zinc selenide aspheres and spherical lenses, which are
manufactured by diamond turning. This manufacturing technique
allows us to offer larger lens sizes and the ability to use other
optical materials that cannot be effectively molded. The
capabilities we have from ISP give us the ability to meet complex
optical challenges that demand more exotic optical substrate
materials that are non-moldable, as well as larger size
optics.
Near
the end of fiscal 2018, we announced comprehensive production
capabilities and global availability for a new line of infrared
lenses made from chalcogenide glass. We developed this glass and
melt it internally to produce our Black Diamond glass, which has
been trademarked, and is marketed as BD6. Currently, the majority
of our thermal imaging products are germanium-based, which is
subject to market pricing and availability. BD6 offers a lower-cost
alternative to germanium, which we expect will benefit the cost
structure of some of our current infrared products and allow us to
expand our product offerings in response to the markets’
increasing requirement for low-cost infrared optics
applications.
Overall, we anticipate growth for infrared optics and increased
requirements for systems requiring aspheric optics. Infrared
systems, which include thermal imaging cameras, gas sensing
devices, spectrometers, night vision systems, automotive driver
awareness systems, such as blind spot detection, thermal weapon
sights, and infrared counter measure systems, represent a market
that is growing rapidly and are applications into which we are
selling. As infrared imaging systems become widely available, the
cost of optical components needs to decrease before the market
demand will increase. Our aspheric molding process is an
enabling technology for the cost reduction and commercialization of
infrared imaging systems utilizing smaller lenses because the
aspheric shape of our lenses enables system designers to reduce the
lens element in a system and provide similar performance at a lower
cost. In addition, there is a trend toward utilizing smaller size
sensors in these devices which require smaller size lenses and that
fits well with our molding technology.
Specialty Product Group. We have a growing group of custom specialty optics
products and assemblies that take advantage of our unique
technologies and capabilities. These products include custom
optical designs, mounted lenses, optical assemblies, and collimator
assemblies. We expect growth from defense communications programs
and commercial optical sub-assemblies.
We design, build, and sell optical assemblies into markets for test
and measurement, medical devices, military, industrial, and
communications based on our proprietary technologies. Many of
our optical assemblies consist of several products that we
manufacture.
Growth Strategy
Our strategy is to leverage our technology, know-how, established
low cost manufacturing capability and partnerships to grow our
business. We plan to accomplish this growth through the
implementation of the following objectives:
●
Leverage
our Leadership to Drive Organic Growth. We plan to continue to capitalize on our global
operations network, distribution infrastructure, and technology to
pursue global growth. We will focus our efforts on those geographic
areas and end products that we believe offer the most attractive
growth and long-term profit prospects.
●
Focus on
Cash Flow Generation. Our goal
is to focus on cash flow generation and return on invested capital
through the continuing optimization of our cost structure,
improvement in working capital and supply chain efficiencies, a
disciplined approach to capital expenditures, and profitable
revenue growth. We have a proven track record of mitigating fixed
cost inflation with cost saving actions and productivity
improvements. We intend to continue to identify incremental cost
saving opportunities based in large part on benchmarks of
industry-leading performance and productivity improvements by
utilizing our engineering and manufacturing technology expertise
and partnerships with low cost producers. Our goal is to maintain a
cost structure that positions us favorably to compete and grow. In
particular, we view our BD6 material manufacturing capability as a
key differential advantage to drive growth in our infrared product
group. We intend to continue to upgrade our customer and product
mix by adding products that move up the supply chain by offering
assemblies that use our lenses, thereby increasing our sales of
value-added, differentiated products, and achieving premium pricing
to improve margins and enhance cash flow.
●
Increase
Customer Base and Continue to Develop New Products.
A key component of our strategy is to
produce innovative, high-performance products that offer enhanced
value propositions to our customers at competitive prices. Our goal
is to continually work closely with our customers to provide
solutions and productions that optimize their products. This
market-driven product development enables us to offer a
high-quality product portfolio to our customers and provide our
business with the ability to respond quickly and efficiently to
changes in market demands.
●
Deepen Our
Presence in Emerging Markets.
Emerging markets are a strategic priority for our business. We are
well positioned not only to leverage our strong market positions in
mature but highly sophisticated markets in North America and
Europe, but also to participate in the expected growth of emerging
markets in Asia and Eastern Europe. We believe that improving
living standards and growth in GDP across emerging markets are
combining to create increased demand for our products. We expect to
capitalize on this growth opportunity by expanding our customer
base and local capabilities in order to increase our market share
across emerging markets, especially in China. To accelerate our
penetration of these markets and maintain our competitive cost
position, we may develop relationships with leading local partners,
especially in businesses where participation in the fast-growing
Chinese market is particularly important for long-term sustainable
growth. For example, we are well positioned to leverage our strong
production technology in the Chinese market as a result of an
increasing percentage of aerospace, automotive, semiconductor,
electronics, and telecommunications manufacturing transitioning to
China.
●
Continue to
Drive Operational Excellence and Asset
Efficiency. Operational
excellence, which includes a commitment to safety, environmental
stewardship, and improved reliability, is key to our future
success. We continually evaluate our business to identify
opportunities to increase operational efficiency throughout our
production facilities, with a focus on maintaining operational
excellence, reducing costs, and maximizing asset efficiency. We
intend to continue focusing on increasing manufacturing
efficiencies through selected capital projects, process
improvements, and best practices in order to lower unit costs. We
will also carefully manage our portfolio and take appropriate
actions to address product lines that face challenging market
conditions and do not generate returns on invested capital that we
believe are sufficient to create long-term shareholder
value.
●
Drive
Organizational Alignment. We
believe that maintaining alignment of the efforts of our employees
with our overall business strategy and operational excellence goals
is critical to our success. We have outstanding people and assets
and, with the commitment to values of safety, customer
appreciation, simplicity, collective entrepreneurship, and
integrity, we believe that we can maintain our competitiveness and
help achieve our operational excellence and asset efficiency
strategic objectives.
Sales and Marketing
Marketing. Extensive product
diversity and varying levels of product maturity characterize the
optics industry. Product markets range from consumer (e.g., cameras
and copiers) to industrial (e.g., lasers, data storage, and
infrared imaging), from products where the lenses are the central
feature (e.g., telescopes, microscopes, and lens systems) to
products incorporating lens components (e.g., robotics and
semiconductor production equipment) and communications (e.g.,
various optics are required for bandwidth expansion and improved
data transfer for the optical network). As a result, we market our
products across a wide variety of customer groups, including laser
systems manufacturers, laser OEMs, infrared-imaging systems
vendors, industrial laser tool manufacturers, telecommunications
equipment manufacturers, medical and industrial measurement
equipment manufacturers, government defense agencies, and research
institutions worldwide.
Technical Sales Model. To align
the organization for specific goals and accountability, we created
the position of Chief Operating Officer with the responsibility for
all operations, engineering, and sales and marketing. This
organizational structure enables the close coordination of supply
with demand. We have also created a product management function to
manage the portfolio of products and define the best growth
opportunities for LightPath. Our Sales and Marketing organization
will be led by the Vice President of Global Sales and
Marketing.
Sales Team & Channel. We have expanded our inside sales and
application engineering organization to better support our regional
sales forces that market and sell our products directly to
customers in North America, Europe and China. We also have a
master distributor in Europe. We have formalized relationships with
15 industrial, laser, and optoelectronics distributors and channel
partners located in the United States (“U.S.”) and
various foreign countries to assist in the distribution of our
products in highly specific target markets. We also have reseller
arrangements with the top three product catalog companies in the
optics and opto-electronics market. In addition, we also
maintain our own product catalog and internet websites
(www.lightpath.com
and www.ispoptics.com)
as vehicles for broader promotion of our products. We make use of
print media advertisements in various trade magazines and
participate in appropriate domestic and foreign trade
shows.
All of our partners work diligently to expand opportunities in
emerging geographic markets and through alternate channels of
distribution. We believe that we provide a high level of support in
developing and maintaining our long-term relationships with our
customers. Customer service and support are provided through our
offices and those of our partners that are located throughout the
world.
Trade Shows. We display
our product line additions and enhancements at one or more trade
shows each year. For example, we participated in several U.S.-based
shows including Society of Photographic Instrumentation Engineers
(“SPIE”) Photonics West in February 2019 and SPIE Defense, Security and
Sensing in April 2019. In addition, we exhibit at the Laser World
of Photonics in Munich, Germany to maintain our European presence,
and intend to exhibit at the China International Optoelectronic
Expo (“CIOE”) in September 2019. This strategy
underscores our strategic directive of broadening our base of
innovative optical components and assemblies. These trade shows
also provide an opportunity to meet with and enhance existing
business relationships, meet and develop potential customers, and
to distribute information and samples regarding our
products.
Competition
The market for optical components generally is highly competitive
and highly fragmented. We compete with manufacturers of
conventional spherical lenses and optical components, providers of
aspheric lenses and optical components, and producers of optical
quality glass. To a lesser extent, we compete with developers of
specialty optical components and assemblies, particularly as
related to our custom products within the infrared product group.
Many of these competitors have greater financial, manufacturing,
marketing, and other resources than we do.
We believe our unique capabilities in optical design engineering,
our low-cost structure and our substantial presence in Europe and
Asia, provides us with a competitive edge and assists us in
securing business. Additionally, we believe that we offer value to
some customers as a primary or backup supply source in the U.S.
should they be unwilling to commit to purchase their supply of a
critical component from a foreign production source. We also have a
broad product offering to satisfy a variety of applications and
markets.
PMO Product Group. Our PMO products compete with conventional lenses
and optical components manufactured by companies such as Asia
Optical Co., Inc., Anteryon BV, Rochester Precision Optics, and
Sunny Optical Technology (Group) Company Limited. Aspheric lens
system manufacturers include Panasonic Corporation, Alps Electric
Co., Ltd., Hoya Corporation, as well as newer competitors from
China and Taiwan, such as E-Pin Optical Industry Co., Ltd., and
Kinik Company.
Our aspheric lenses compete with lens systems comprised of multiple
conventional lenses. Machined aspheric lenses compete with our
molded glass aspheric lenses. The use of aspheric surfaces provides
the optical designer with a powerful tool in correcting spherical
aberrations and enhancing performance in state-of-the-art optical
products. However, we believe that our optical design
expertise and our flexibility in providing custom high-performance
optical components at a low price are key competitive advantages
for us over these competitors.
Plastic molded aspheres and hybrid plastic/glass aspheric
optics, on the other hand, allow for high volume production, but
primarily are limited to low cost consumer products that do not
place a high demand on performance (such as plastic lenses in
disposable or mobile phone cameras). Molded plastic aspheres appear
in products that stress cost or weight as their measure of success
over performance and durability. Our low-cost structure allows
us to compete with these lenses based on higher performance and
durability from our glass lenses at only a small premium in
price.
Infrared Product Group. Our infrared aspheric optics compete with optical
products produced by Janos Technology LLC, Ophir Optronics
Solutions, Ernst Leitz Canada (ELCAN) Optical Technologies, Clear
Align and a variety of Eastern European and Asian
manufacturers. These traditional infrared lenses can either be
polished spherical or are diamond turned aspherical. Our
molded lenses compete with spherical lenses because like all
aspheres they can replace doublets or triplets based on the higher
performance of an aspheric lens. Our diamond turned aspheres
from germanium are more expensive to produce in high volumes and
time consuming to manufacture. We now also offer
diamond-turned BD6 (chalcogenide) at lower cost giving us a
competitive advantage. We believe our low cost, high volume lens
business technology combined with our recently added traditional
polishing and diamond turning capabilities enables us to compete
with the other manufacturers of traditional infrared lens by
offering the best technology fit at a competitive
price.
Our molded infrared optics competes with products manufactured by
Umicore N.V. (“Umicore”), Rochester Precision Optics,
and Yunnan KIRP-CH Photonics Co., Ltd. We believe that our optical
design expertise, our BD6-based product offerings, our diverse
manufacturing flexibility, and our manufacturing facilities located
in Asia, Europe and North America are key advantages over the
products manufactured by these competitors.
Manufacturing
Facilities. Our manufacturing
is largely performed in our combined 38,000 square feet of
production facilities in Orlando, Florida (the “Orlando
Facility”), in LPOIZ’s combined 55,000 square feet of
production facilities in Zhenjiang, China, and in ISP
Latvia’s 23,000 square feet of production facilities in Riga,
Latvia. LPOI sales and support functions occupy a 1,900 square foot
facility in Shanghai. ISP previously had an approximately 13,000
square foot facility in Irvington, New York that functioned as its
operations headquarters, providing manufacturing capabilities,
optical coatings, optical and mechanical design, assembly and
testing, as well as some engineering, administrative and sales
functions. During fiscal 2019, we added manufacturing space
near our existing Orlando Facility, and relocated the manufacturing
operations of ISP’s Irvington Facility to our existing
Orlando Facility and Riga Facility, which is expected to result in
substantial cost savings. Some of the manufacturing operations
previously performed in the Irvington Facility were transitioned to
our Zhenjiang Facility.
Our Orlando Facility and LPOIZ’s Zhenjiang Facility feature
areas for each step of the manufacturing process, including coating
work areas, preform manufacturing and a clean room for precision
glass molding and integrated assembly. The Orlando and Zhenjiang
Facilities include new product development laboratories and space
that includes development and metrology equipment. The Orlando and
Zhenjiang Facilities have anti-reflective and infrared coating
equipment to coat our lenses in-house. ISP Latvia’s Riga
Facility includes fully vertically integrated manufacturing
processes to produce high precision infrared lenses and infrared
lens assemblies, including crystal growth, CNC grinding,
conventional polishing, diamond turning, multilayer coatings,
assemblies and state of the art metrology.
We are
routinely adding additional production equipment at our Orlando,
Zhenjiang and Riga Facilities. During fiscal 2018, we added
additional space in both our Zhenjiang and Riga Facilities. In
fiscal 2019, we completed our expansion in Orlando and closed the
Irvington Facility, moving the manufacturing operations to the
Orlando Facility and the Riga Facility. We also completed an
expansion to our Zhenjiang operation increasing our preform
capacity. In addition to adding additional equipment or space at
our manufacturing facilities, we add additional work shifts, as
needed, to increase capacity and meet forecasted demand. We intend
to monitor the capacity at our facilities, and will increase such
space as needed. We believe our facilities are adequate to
accommodate our needs over the next year.
Production and Equipment. Our Orlando Facility contains glass melting
capability for BD6 chalcogenide glass, a manufacturing area for our
molded glass aspheres, multiple anti-reflective and wear resistant
coating chambers, diamond turning machines and accompanying
metrology equipment offering full scale diamond turning lens
capability, a tooling and machine shop to support new product
development, commercial production requirements for our machined
parts, the fabrication of proprietary precision glass molding
machines and mold equipment, and a clean room for our molding and
assembly workstations and related metrology equipment.
LPOIZ’s Zhenjiang Facility features precision glass molding
manufacturing area, clean room, machine shop, dicing area, and thin
film coating chambers for anti-reflective coatings on both visible
and infrared optics and related metrology
equipment.
ISP Latvia’s Riga Facility consists of crystal growth,
grinding, polishing, diamond turning, quality control departments
and a mechanical shop to provide the departments with the necessary
tooling. The crystal growth department is equipped with multiple
furnaces to grow water soluble crystals. The grind and polish
department has modern CNC equipment, lens centering and
conventional equipment to perform spindle, double sided and
continuous polishing operations. The diamond turning department has
numerous diamond turning machines accompanied with the latest
metrology tools. In connection with the relocation of the Irvington
Facility, we have increased the diamond turning capacity in this
facility. The quality control department contains numerous
inspection stations with various equipment to perform optical
testing of finished optics.
The Orlando, Zhenjiang, and Riga Facilities are ISO 9001:2015
certified. The Zhenjiang Facility is also ISO/TS 1649:2009
automotive certified for manufacturing of optical lenses and
accessories. The Orlando Facility is International Traffic in Arms
Regulations (“ITAR”) compliant and registered with the
U.S. Department of State. The Riga Facility has a DSP-5 ITAR
license and Technical Assistance Agreement in place that allows
this facility to manufacture items with ITAR
requirements.
For more information regarding our facilities, please see
Item 2.
Properties in this Annual
Report on Form 10-K.
Subcontractors and Strategic Alliances. We
believe that low-cost manufacturing is crucial to our long-term
success. In that regard, we generally use subcontractors in our
production process to accomplish certain processing steps requiring
specialized capabilities. For example, we presently use a number of
qualified subcontractors for fabricating, polishing, and coating
certain lenses, as necessary. We have taken steps to protect our
proprietary methods of repeatable high-quality manufacturing by
patent disclosures and internal trade secret
controls.
Suppliers.
We utilize a number of
glass compositions in manufacturing our molded glass aspheres and
lens array products. These glasses or equivalents are
available from a large number of suppliers, including CDGM Glass
Company Ltd., Ohara Corporation, and Sumita Optical Glass, Inc.
Base optical materials, used in both infrared glass and collimator
products, are manufactured and supplied by a number of optical and
glass manufacturers. ISP utilizes major infrared material suppliers
located around the globe for a broad spectrum of infrared crystal
and glass. The development of our manufacturing capability for BD6
glass provides a low-cost internal source for infrared glass. We
believe that a satisfactory supply of such production materials
will continue to be available, at reasonable or, in some cases,
increased prices, although there can be no assurance in this
regard.
We also rely on local and regional vendors for component materials
and services such as housings, fixtures, chemicals and inert gases,
specialty ceramics, UV and AR coatings, and other specialty
coatings. In addition, certain products require external
processing, such as anodizing and metallization. To date, we are
not dependent on any of these manufacturers and have found a
suitable number of qualified vendors and suppliers for these
materials and services.
We currently purchase a few key materials from single or limited
sources. We believe that a satisfactory supply of production
materials will continue to be available at competitive prices,
although there can be no assurance in this regard.
Intellectual Property
Our policy is to protect our technology by, among other things,
patents, trade secret protection, trademarks, and copyrights. We
primarily rely upon trade secrets and unpatented proprietary
know-how to protect certain process inventions, lens designs, and
innovations. We have taken security measures to protect our trade
secrets and proprietary know-how, to the extent that is
reasonable.
In addition to trade secrets and proprietary know-how, we have
three remaining patents that relate to the fusing of certain of our
lenses that are part of our specialty products group. These patents
expire at various times through 2023. We also are in the process of
applying for multiple new patents.
Our means of protecting our proprietary rights may not be adequate
and our competitors may independently develop technology or
products that are similar to ours or that compete with ours.
Patent, trademark, and trade secret laws afford only limited
protection for our technology and products. The laws of many
countries do not protect our proprietary rights to as great an
extent as do the laws of the U.S. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to obtain
and use information that we regard as proprietary. Third parties
may also design around our proprietary rights, which may render our
protected technology and products less valuable, if the design
around is favorably received in the marketplace. In addition, if
any of our products or technology is covered by third-party patents
or other intellectual property rights, we could be subject to
various legal actions. We cannot assure you that our technology
platform and products do not infringe patents held by others or
that they will not in the future. Litigation may be necessary to
enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement,
invalidity, misappropriation, or other claims.
We own several registered and unregistered service marks and
trademarks that are used in the marketing and sale of our products.
The following table sets forth our registered and unregistered
service marks and trademarks, if registered, the country in which
the mark is filed, and the renewal date for such mark.
|
Mark
|
Type
|
Registered
|
Country
|
Renewal
Date
|
|
LightPath®
|
Service mark
|
Yes
|
United States
|
October 22, 2022
|
|
GRADIUM™
|
Trademark
|
Yes
|
United States
|
April 29, 2027
|
|
Circulight
|
Trademark
|
No
|
-
|
-
|
|
BLACK DIAMOND
|
Trademark
|
No
|
-
|
-
|
|
GelTech
|
Trademark
|
No
|
-
|
-
|
|
Oasis
|
Trademark
|
No
|
-
|
-
|
|
LightPath®
|
Service mark
|
Yes
|
People’s Republic of China
|
September 13, 2025
|
|
ISP Optics®
|
Trademark
|
Yes
|
United States
|
August 12, 2020
|
Environmental and Governmental Regulation
Currently, emissions and waste from our manufacturing processes are
at such low levels that no special environmental permits or
licenses are required. In the future, we may need to obtain special
permits for disposal of increased waste by-products. The glass
materials we utilize contain some toxic elements in a stabilized
molecular form. However, the high temperature diffusion process
results in low-level emissions of such elements in gaseous form. If
production reaches a certain level, we believe that we will be able
to efficiently recycle certain of our raw material waste, thereby
reducing disposal levels. We believe that we are presently in
compliance with all material federal, state, and local laws and
regulations governing our operations and have obtained all material
licenses and permits necessary for the operation of our
business.
We also utilize certain chemicals, solvents, and adhesives in our
manufacturing process. We believe we maintain all necessary permits
and are in full compliance with all applicable
regulations.
To our knowledge, there are currently no U.S. federal, state, or
local regulations that restrict the manufacturing and distribution
of our products. Certain end-user applications require government
approval of the complete optical system, such as U.S. Food and Drug
Administration approval for use in endoscopy. In these cases, we
will generally be involved on a secondary level and our OEM
customer will be responsible for the license and approval
process.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
imposes disclosure requirements regarding the use of
“conflict minerals” mined from the Democratic Republic
of Congo and adjoining countries in products, whether or not these
products are manufactured by third parties. The conflict minerals
include tin, tantalum, tungsten, and gold, and their derivatives.
Pursuant to these requirements, we are required to report on Form
SD the procedures we employ to determine the sourcing of such
minerals and metals produced from those minerals. There are costs
associated with complying with these disclosure requirements,
including for diligence in regards to the sources of any conflict
minerals used in our products, in addition to the cost of
remediation and other changes to products, processes, or sources of
supply as a consequence of such verification activities. In
addition, the implementation of these rules could adversely affect
the sourcing, supply, and pricing of materials used in our
products. We strive to only use suppliers that source from
conflict-free smelters and refiners; however, in the future, we may
face difficulties in gathering information regarding our suppliers
and the source of any such conflict minerals.
New Product Development
In recent years, our new product development efforts have been
focused on the development of our capabilities in molded aspheric
lenses and infrared lenses. We incurred expenditures for new
product development during fiscal 2019 and 2018 of approximately
$2.0 million and $1.6 million, respectively. In fiscal 2019 and
2018, our efforts were concentrated on expanding our product
capabilities for molded optics and thermal imaging optics, to
continue increasing our product offerings, and lower costs within
our PMO and infrared product groups.
In fiscal 2020, we anticipate focusing our new product development
efforts on infrared optics products for imaging and sensing, fiber
lasers, spectrophotometry, defense, medical devices, industrial,
optical data storage, machine vision, sensors, and environmental
monitoring. We currently plan to expend approximately between 5%
and 6% of revenue for new product development during fiscal 2020,
which could vary depending upon revenue levels, customer
requirements, and perceived market opportunities.
For more difficult or customized products, we typically bill our
customers for engineering services as a non-recurring engineering
fee.
Concentration of Customer Risk
In fiscal 2019, we had sales to three customers that comprised an
aggregate of approximately 32% of our annual revenue with one
customer at 17% of our sales, another customer at 8% of our sales,
and the third customer at 7% of our sales. In fiscal 2018, we had
sales to three customers that comprised an aggregate of
approximately 28% of our annual revenue, with one customer at 16%
of our sales, another customer at 7% of our sales, and the third
customer at 5% of our sales. The loss of any of these customers, or
a significant reduction in sales to any such customer, would
adversely affect our revenues and profits. We continue to diversify
our business in order to minimize our sales concentration
risk.
In fiscal 2019, 62% of our net revenue was derived from sales
outside of the U.S., with 94% of our foreign sales derived from
customers in Europe and Asia. In fiscal 2018, 58% of our net
revenue was derived from sales outside of the U.S., with 84% of our
foreign sales derived from customers in Europe and
Asia.
Employees
As of June 30, 2019, we had 350 employees, of which 339 were
full-time equivalent employees, with 97 in the U.S., including 93
located in Orlando, Florida and 4 working remotely from various
locations, 98 located in Riga, Latvia, and 144 located in Jiading
and Zhenjiang, China. Of our 339 full-time equivalent employees, we
have 40 employees engaged in management, administrative, and
clerical functions, 29 employees in new product development, 17
employees in sales and marketing, and 253 employees in production
and quality control functions. Any employee additions or
terminations over the next twelve months will be dependent upon the
actual sales levels realized during fiscal 2020. We have used and
will continue utilizing part-time help, including interns,
temporary employment agencies, and outside consultants, where
appropriate, to qualify prospective employees and to ramp up
production as required from time to time. None of our employees are
represented by a labor union.
The
following is a discussion of the primary factors that may affect
the operations and/or financial performance of our business. Refer
to the section entitled Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations of this Annual Report on Form 10-K
for an additional discussion of these and other related factors
that affect our operations and/or financial
performance.
Risks Related to Our Business and Financial Results
We have a history of losses. We incurred a net loss of $2.7
million for fiscal 2019 and although we reported net income of $1.1
million and $7.7 million for fiscal 2018 and 2017, respectively, we
have a history of losses prior to fiscal 2016. As of June 30, 2019,
we had an accumulated deficit of approximately $197.9 million. We
may incur losses in the future if we do not achieve sufficient
revenue to return to profitability, or if we continue to incur
unusual costs. We expect revenue to grow by generating additional
sales through promotion of our infrared products and cost reduction
efforts for our precision molded products, and we expect to achieve
significant cost savings as a result of closing the Irvington
Facility, but we cannot guarantee such improvement or
growth.
Factors
which could adversely affect our future profitability, include, but
are not limited to, a decline in revenue either due to lower sales
unit volumes or decreasing selling prices, or both, our ability to
order supplies from vendors, which, in turn, affects our ability to
manufacture our products, and slow payments from our customers on
accounts receivable.
Any
failure to maintain profitability would have a materially adverse
effect on our ability to implement our business plan, our results
and operations, and our financial condition, and could cause the
value of our Class A common stock to decline.
We are dependent on a few key customers, and the loss of any key
customer could cause a significant decline in our revenues.
In fiscal 2019, we had sales to three
customers that comprised an aggregate of approximately 32% of our
annual revenue, with one customer at 17% of our sales, another
customer at 8% of our sales, and the third customer at 7% of our
sales. In fiscal 2018, we had
sales to three customers that comprised an aggregate of
approximately 28% of our annual revenue, with one customer at 16%
of our sales, another customer at 7% of our sales, and the third
customer at 5% of our sales. In both fiscal 2019 and 2018, these
top three customers include a distributor, which actually
represents sales to numerous customers. Our current strategy is to
leverage our broader portfolio of products to expand our customer
base using the capabilities gained as a result of the ISP
acquisition. However, we continue to diversify our business
in order to minimize our sales concentration risk. The loss of any
of these customers, or a significant reduction in sales to any such
customer, would adversely affect our revenues.
We may be affected by political and other risks as a result of our
sales to international customers and/or our sourcing of materials
from international suppliers. In fiscal 2019, 62% of our net revenue was derived
from sales outside of the U.S., with 94% of our foreign sales
derived from customers in Europe and Asia. In fiscal 2018, 58% of
our net revenue was derived from sales outside of the U.S., with
84% of our foreign sales derived from customers in Europe and
Asia. Our international sales will be limited, and may even
decline, if we cannot establish relationships with new
international distributors, maintain relationships with our
existing international distributions, maintain and expand our
foreign operations, expand international sales, and develop
relationships with international service providers. Additionally,
our international sales may be adversely affected if international
economies weaken. We are subject to the following risks, among
others:
●
greater difficulty
in accounts receivable collection and longer collection
periods;
●
potentially
different pricing environments and longer sales
cycles;
●
the impact of
recessions in economies outside the U.S.;
●
unexpected changes
in foreign regulatory requirements;
●
the burdens of
complying with a wide variety of foreign laws and different legal
standards;
●
certification
requirements;
●
reduced protection
for intellectual property rights in some countries;
●
difficulties in
managing the staffing of international operations, including labor
unrest and current and changing regulatory
environments;
●
potentially adverse
tax consequences, including the complexities of foreign value-added
tax systems, restrictions on the repatriation of earnings, and
changes in tax rates;
●
price controls and
exchange controls;
●
government
embargoes or foreign trade restrictions;
●
imposition of
duties and tariffs and other trade barriers;
●
import and export
controls;
●
transportation
delays and interruptions;
●
terrorist attacks
and security concerns in general; and
●
political, social,
economic instability and disruptions.
As a U.S. corporation with international operations, we are subject
to the U.S. Foreign Corrupt Practices Act and other similar foreign
anti-corruption laws, as well as other laws governing our
operations. If we fail to comply with these laws, we could be
subject to civil or criminal penalties, other remedial measures,
and legal expenses, which could adversely affect our business,
financial condition, and results of operations. Our operations are subject to anti-corruption
laws, including the U.S. Foreign Corrupt Practices Act
(“FCPA”), and other foreign anti-corruption laws that
apply in countries where we do business. The FCPA and these other
laws generally prohibit us and our employees and intermediaries
from offering, promising, authorizing or making payments to
government officials or other persons to obtain or retain business
or gain some other business advantage. In addition, we cannot
predict the nature, scope, or effect of future regulatory
requirements to which our international operations might be subject
or the manner in which existing laws might be administered or
interpreted. Operations outside of the U.S. may be affected
by changes in trade production laws, policies, and measures, and
other regulatory requirements affecting trade and
investment.
We are also subject to other laws and regulations governing our
international operations, including regulations administered by the
U.S. Department of Commerce’s Bureau of Industry and
Security, the U.S. Department of Treasury’s Office of Foreign
Asset Control, and various non-U.S. government entities, including
applicable export control regulations, economic sanctions on
countries and persons, customs, requirements, currency exchange
regulations, and transfer pricing regulations (collectively, the
“Trade Control Laws”).
Despite our compliance programs, there can be no assurance that we
will be completely effective in ensuring our compliance with all
applicable anti-corruption laws, including the FCPA or other legal
requirements, or Trade Control Laws. If we are not in compliance
with the FCPA and other foreign anti-corruption laws or Trade
Control Laws, we may be subject to criminal and civil penalties,
disgorgement, and other sanctions and remedial measures, and legal
expenses, which could have an adverse impact on our business,
financial condition, results of operations and liquidity. Likewise,
any investigation of any potential violations of the FCPA, other
anti-corruption laws, or Trade Control Laws by the U.S. or foreign
authorities could also have an adverse impact on our reputation,
business, financial condition, and results of
operations.
International tariffs, including tariffs applied to goods traded
between the U.S. and China, could materially and adversely affect
our business and results of operations. The U.S. government has made statements and
taken certain actions that have led to, and may lead to, further
changes to U.S. and international trade policies, including
recently imposed tariffs affecting certain products exported by a
number of U.S. trading partners, including China. The institution
of trade tariffs both globally and between the U.S. and China
specifically carries the risk of negatively impacting China’s
overall economic condition, which could have negative repercussions
for us. Furthermore, imposition of tariffs could cause a decrease
in the sales of our products to customers located in China or other
customers selling to Chinese end users, which would directly impact
our business.
The current U.S. President, members of his Administration, and
other public officials, including members of the current United
States Congress, continue to signal that the U.S. may further alter
its trade policy, including taking certain actions that may further
impact U.S. trade policy, including new or increased tariffs on
certain goods imported into the U.S. Further, changes in U.S. trade
policy could trigger retaliatory actions by affected countries,
which could impose restrictions on our ability to do business in or
with affected countries or prohibit, reduce, or discourage
purchases of our products by foreign customers, leading to
increased costs of products that contain our components, increased
costs of manufacturing our products, and higher prices of our
products in foreign markets. Changes in, and responses to, U.S.
trade policy could reduce the competitiveness of our products and
cause our sales and revenues to drop, which could materially and
adversely impact our business and results of
operations.
Tariffs have already begun to have a negative impact on our cost of
sales late in fiscal 2019. We are evaluating and implementing a
number of strategies to mitigate the current and future impact of
tariffs. However, given the uncertainty regarding the scope and
duration of the effective and proposed tariffs, as well as the
potential for additional trade actions by the U.S. or other
countries, the continued impact on our operations and financial
results is uncertain and could be more significant than we
experienced in fiscal 2019. We can provide no assurance that any
strategies we implement to mitigate the impact of such tariffs or
other trade actions will be successful. To the extent that our
supply chain, costs, sales, or profitability are negatively
affected by the tariffs or other trade actions, our business,
financial condition, and results of operations may be materially
adversely affected.
Our future growth is partially dependent on our market penetration
efforts. Our future growth is partially dependent on our
market penetration efforts, which include diversifying our sales to
high-volume, low-cost optical applications and other new market and
product opportunities in multiple industries. While we believe our
existing products are commercially viable, we anticipate the need
to educate the optical components markets in order to generate
market demand and market feedback may require us to further refine
these products. Expansion of our product lines and sales into new
markets will require significant investment in equipment,
facilities, and materials. There can be no assurance that any
proposed products will be successfully developed, demonstrate
desirable optical performance, be capable of being produced in
commercial quantities at reasonable costs, or be successfully
marketed.
We rely, in large part, on key business and sales relationships for
the successful commercialization of our products, which, if not
developed or maintained, will have an adverse impact on achieving
market awareness and acceptance and will result in a loss of
business opportunities. To achieve wide market awareness and
acceptance of our products and technologies, as part of our
business strategy, we will attempt to enter into a variety of
business relationships with other companies that will incorporate
our technologies into their products and/or market products based
on our technologies. The successful commercialization of our
products and technologies will depend in part on our ability to
meet obligations under contracts with respect to the products and
related development requirements. The failure of these business
relationships will limit the commercialization of our products and
technologies, which will have an adverse impact on our business
development and our ability to generate revenues.
If we do not expand our sales and marketing organization, our
revenues may not increase. The sale of our products requires
prolonged sales and marketing efforts targeted at several key
departments within our prospective customers’ organizations
and often involves our executives, personnel, and specialized
systems and applications engineers working together. Currently, our
direct sales and marketing organization is somewhat limited. We
believe we will need to continue to strengthen our sales and
marketing organization in order to increase market awareness and
sales of our products. There is significant competition for
qualified personnel, and we might not be able to hire the kind and
number of sales and marketing personnel and applications engineers
we need. If we are unable to expand our sales operations,
particularly in China, we may not be able to increase market
awareness or sales of our products, which would adversely affect
our revenues, results of operations, and financial
condition.
If we are unable to develop and successfully introduce new and
enhanced products that meet the needs of our customers, our
business may not be successful. Our future success depends,
in part, on our ability to anticipate our customers’ needs
and develop products that address those needs. Introduction of new
products and product enhancements will require that we effectively
transfer production processes from research and development to
manufacturing, and coordinate our efforts with the efforts of our
suppliers to rapidly achieve efficient volume production. If we
fail to effectively transfer production processes, develop product
enhancements, or introduce new products that meet the needs of our
customers as scheduled, our net revenues may decline, which would
adversely affect our results of operations and financial
condition.
If we are unable to effectively compete, our business and operating
results could be negatively affected. We face substantial
competition in the optical markets in which we operate. Many of our
competitors are large public and private companies that have longer
operating histories and significantly greater financial, technical,
marketing, and other resources than we have. As a result, these
competitors are able to devote greater resources than we can to the
development, promotion, sale, and support of their products. In
addition, the market capitalization and cash reserves of several of
our competitors are much larger than ours, and, as a result, these
competitors are better positioned than we are to exploit markets,
develop new technologies, and acquire other companies in order to
gain new technologies or products. We also compete with
manufacturers of conventional spherical lens products and
aspherical lens products, producers of optical quality glass, and
other developers of gradient lens technology, as well as
telecommunications product manufacturers. In both the optical lens
and communications markets, we are competing against, among others,
established international companies, especially in Asia. Many of
these companies also are primary customers for optical and
communication components, and, therefore, have significant control
over certain markets for our products. There can be no assurance
that existing or new competitors will not develop technologies that
are superior to or more commercially acceptable than our existing
and planned technologies and products or that competition in our
industry will not lead to reduced prices for our products. If we
are unable to successfully compete with existing companies and new
entrants to the markets we compete in, our business, results of
operations, and financial condition could be adversely
affected.
We anticipate further reductions in the average selling prices of
some of our products over time, and, therefore, must increase our
sales volumes, reduce our costs, and/or introduce higher margin
products to reach and maintain consistent profitable
results. We have experienced decreases in the average
selling prices of some of our products over the last ten years,
including most of our passive component products. We anticipate
that as certain products in the optical component and module market
become more commodity-like, the average selling prices of our
products will decrease in response to competitive pricing
pressures, new product introductions by us or our competitors, or
other factors. We attempt to offset anticipated decreases in our
average selling prices by increasing our sales volumes and/or
changing our product mix. If we are unable to offset anticipated
future decreases in our average selling prices by increasing our
sales volumes or changing our product mix, our net revenues and
gross margins will decline, increasing the projected cash needed to
fund operations. To address these pricing pressures, we must
develop and introduce new products and product enhancements that
will generate higher margins, continue to reduce costs, and/or
change our product mix in order to generate higher margins. If we
cannot maintain or improve our gross margins, our financial
position, and results of operations may be
harmed.
Because of our limited product offerings, our ability to generate
additional revenues may be limited without additional
growth. We organized our
business based on three product groups: PMOs, infrared products,
and specialty products. In fiscal 2019, sales of infrared products
represented approximately 51% of our net revenues. In the future,
we expect a larger percentage of our revenues to be generated from
sales of our infrared products. Continued and expanding market
acceptance of these products is critical to our future success.
There can be no assurance that our current or new products will
achieve market acceptance at the rate at which we expect, or at
all, which could adversely affect our results of operations and
financial condition.
We may need additional capital to sustain our operations in the
future, and may need to seek further financing, which we may not be
able to obtain on acceptable terms or at all, which could affect
our ability to implement our business strategies. We have
limited capital resources. Our operations have historically been
largely funded from the proceeds of equity financings with some
level of debt financing as well as cash flow from operations. In
recent years we have generated sufficient capital to fund our
operations and necessary investments. Accordingly, in future years,
we anticipate only requiring additional capital to support
acquisitions that would further expand our business and product
lines. We may not be able to obtain additional financing when we
need it on terms acceptable to us, or at all.
Our
future capital needs will depend on numerous factors including: (i)
profitability; (ii) the release of competitive products by our
competition; (iii) the level of our investment in research and
development; and (iv) the amount of our capital expenditures,
including equipment and acquisitions. We cannot assure you that we
will be able to obtain capital in the future to meet our needs. If
we are unable to raise capital when needed, our business, financial
condition, and results of operations would be materially adversely
affected, and we could be forced to reduce or discontinue our
operations.
Litigation may adversely affect our business, financial condition,
and results of operations. From time to time in the normal
course of business operations, we may become subject to litigation
that may result in liability material to our financial statements
as a whole or may negatively affect our operating results if
changes to our business operations are required. The cost to defend
such litigation may be significant and is subject to inherent
uncertainties. Insurance may not be available at all or in
sufficient amounts to cover any liabilities with respect to these
or other matters. There also may be adverse publicity with
litigation that could negatively affect customer perception of our
business, regardless of whether the allegations are valid or
whether we are ultimately found liable. An adverse result in any
such matter could adversely impact our operating results or
financial condition. Additionally, any litigation to which we are
subject could also require significant involvement of our senior
management and may divert management’s attention from our
business and operations.
We are exposed to fluctuations in currency exchange rates that
could negatively impact our financial results and cash
flows. We execute all foreign sales from our U.S.-based
facilities and inter-company transactions in U.S. dollars in order
to partially mitigate the impact of foreign currency fluctuations.
However, a portion of our international revenues and expenses are
denominated in foreign currencies. Accordingly, we experience the
risks of fluctuating currencies and corresponding exchange rates.
In fiscal years 2019 and 2018, we
recognized a net loss of approximately $436,000 and a net gain of
$141,000 on foreign currency transactions, respectively. Any
such fluctuations that result in a less favorable exchange rate
could adversely affect a portion of our revenues and expenses,
which could negatively impact our results of operations and
financial condition.
We also
source certain raw materials from outside the U.S. Some of those
materials, priced in non-dollar currencies, fluctuate in price due
to the value of the U.S. dollar against non-dollar-pegged
currencies, especially the Euro and Renminbi. As the dollar
strengthens, this increases our margins and helps with our ability
to reach positive cash flow and profitability. If the strength of
the U.S. dollar decreases, the cost of foreign sourced materials
could increase, which would adversely affect our financial
condition and results of operations.
A significant portion of our cash is generated and held outside of
the U.S. The risks of maintaining significant cash abroad could
adversely affect our cash flows and financial results.
During fiscal 2019, greater than 50%
of our cash was held abroad. We generally consider unremitted
earnings of our subsidiaries operating outside of the U.S. to be
indefinitely reinvested and it is not our current intent to change
this position. Cash held outside of the U.S. is primarily used for
the ongoing operations of the business in the locations in which
the cash is held. Certain countries, such as China, have monetary
laws that limit our ability to utilize cash resources in China for
operations in other countries. Before any funds can be repatriated,
the retained earnings in China must equal at least 150% of the
registered capital. As of June 30, 2019, we had retained earnings
in China of $3.3 million and we need to have retained earnings of
$11.3 million before repatriation will be allowed. This limitation
may affect our ability to fully utilize our cash resources for
needs in the U.S. or other countries and may adversely affect our
liquidity. Further, since repatriation of such cash is subject to
limitations and may be subject to significant taxation, we cannot
be certain that we will be able to repatriate such cash on
favorable terms or in a timely manner. If we incur operating losses
and/or require cash that is held in international accounts for use
in our operations based in the U.S., a failure to repatriate such
cash in a timely and cost-effective manner could adversely affect
our business and financial results.
Our business may be materially affected by changes to fiscal and
tax policies. Potentially negative or unexpected tax consequences
of these policies, or the uncertainty surrounding their potential
effects, could adversely affect our results of operations and the
price of our Class A common stock. The U.S. Tax Cuts and Jobs Act of 2017 (the
“TCJA”) was approved by the U.S. Congress on December
20, 2017 and signed into law on December 22, 2017. This legislation
makes significant changes to the U.S. Internal Revenue Code of
1986, as amended (the “IRC”). Such changes include a
reduction in the corporate tax rate from 35% to 21%,
limitation
on the deductibility of interest expense and performance based
incentive compensation, and implementation of a modified
territorial tax system, including a provision that requires
companies to include their
global
intangible low-taxed income (GILTI) and its effect on our U.S.
taxable income (effectively, non-U.S. income in excess of a deemed
return on tangible assets of non-U.S.
corporations), among other
changes.
In addition, the TCJA requires complex computations to be performed
that were not previously required in U.S. tax law, significant
judgments to be made in interpretation of the provisions of the
TCJA and significant estimates in calculations, and the preparation
and analysis of information not previously relevant or regularly
produced.
Implementation of the TCJA required us to calculate a one-time
transition tax on certain foreign earnings and profits
(“foreign E&P”) that had not been previously
repatriated. During fiscal 2018, we provisionally determined our
foreign E&P inclusion, and anticipated that we would not owe
any one-time transition tax due to the utilization of U.S. net
operating loss (“NOL”) carryforward benefits against
these earnings. During fiscal 2019, we completed our analysis of
the TCJA, and although we did not owe any one-time transition tax,
the deferred tax asset related to our NOL carryforwards was
impacted by approximately $202,000. This amount is offset by our
valuation allowance for a net impact of zero to our income tax
provision.
The TCJA may also impact our repatriation strategies in the future.
Foreign governments may enact tax laws in response to the TCJA that
could result in further changes to global taxation and materially
affect our financial position and results of operations. The
uncertainty surrounding the effect of the reforms on our financial
results and business could also weaken confidence among investors
in our financial condition. This could, in turn, have a materially
adverse effect on the price of our Class A common
stock.
Further, our worldwide operations subject us to the jurisdiction of
a number of taxing authorities. The income earned in these various
jurisdictions is taxed on differing basis, including net income
actually earned, net income deemed earned, and revenue-based tax
withholding. The final determination of our income tax liabilities
involves the interpretation of local tax laws, tax treaties, and
related authorities in each jurisdiction, as well as the use of
estimates and assumptions regarding the scope of future operations
and results achieved and the timing and nature of income earned and
expenditures incurred. Changes in or interpretations of tax law and
currency/repatriation control could impact the determination of our
income tax liabilities for a tax year, which, in turn, could have a
materially adverse effect on our financial condition and results of
operations.
Our future success depends on our key executive officers and our
ability to attract, retain, and motivate qualified
personnel. Our future success largely depends upon the
continued services of our key executive officers, management team,
and other engineering, sales, marketing, manufacturing, and support
personnel. If one or more of our key employees are unable or
unwilling to continue in their present positions, we may not be
able to replace them readily, if at all. Additionally, we may incur
additional expenses to recruit and retain new key employees. If any
of our key employees joins a competitor or forms a competing
company, we may lose some or a significant portion of our
customers. Because of these factors, the loss of the services of
any of these key employees could adversely affect our business,
financial condition, and results of operations.
Our
continuing ability to attract and retain highly qualified personnel
will also be critical to our success because we will need to hire
and retain additional personnel to support our business strategy.
We expect to continue to hire selectively in the manufacturing,
engineering, sales and marketing, and administrative functions to
the extent consistent with our business levels and to further our
business strategy. We face significant competition for skilled
personnel in our industry. This competition may make it more
difficult and expensive to attract, hire, and retain qualified
managers and employees. Because of these factors, we may not be
able to effectively manage or grow our business, which could
adversely affect our financial condition or business.
We depend on single or limited source suppliers for some of the key
materials or process steps in our products, making us susceptible
to supply shortages, poor performance, or price
fluctuations. We currently purchase several key materials,
or have outside vendors perform process steps, such as lens
coatings, used in or during the manufacture of our products from
single or limited source suppliers. We may fail to obtain required
materials or services in a timely manner in the future, or could
experience delays as a result of evaluating and testing the
products or services of potential alternative suppliers. The
decline in demand in the telecommunications equipment industry may
have adversely impacted the financial condition of certain of our
suppliers, some of whom have limited financial resources. We have
in the past, and may in the future, be required to provide advance
payments in order to secure key materials from financially limited
suppliers. Financial or other difficulties faced by these suppliers
could limit the availability of key components or materials. For
example, increasing labor costs in China has increased the risk of
bankruptcy for suppliers with operations in China, and has led to
higher manufacturing costs for us and the need to identify
alternate suppliers. Additionally, financial difficulties could
impair our ability to recover advances made to these suppliers. Any
interruption or delay in the supply of any of these materials or
services, or the inability to obtain these materials or services
from alternate sources at acceptable prices and within a reasonable
amount of time, would impair our ability to meet scheduled product
deliveries to our customers and could cause customers to cancel
orders, thereby negatively affecting our business, financial
condition, and results of operation.
We face product liability risks, which could adversely affect our
business. The sale of our
optical products involves the inherent risk of product liability
claims by others. We do not currently maintain product liability
insurance coverage. Product liability insurance is expensive,
subject to various coverage exclusions, and may not be obtainable
on terms acceptable to us if we decide to procure such insurance in
the future. Moreover, the amount and scope of any coverage may be
inadequate to protect us in the event that a product liability
claim is successfully asserted. If a claim is asserted and
successfully litigated by an adverse party, our financial position
and results of operations could be adversely affected.
Business interruptions could adversely affect our
business. We manufacture our
products at manufacturing facilities located in Orlando, Florida,
Riga, Latvia, and Zhenjiang, China. Our revenues are dependent upon
the continued operation of these facilities. The Orlando Facility
is subject to two leases, one that expires in April 2022 and the
other in November 2022. The Riga Facility is subject to a lease
that expires in December 2022, and the Zhenjiang Facility is
subject to three leases that expire in December 2021, March 2022,
and June 2022. Our operations are vulnerable to interruption by
fire, hurricane winds and rain, earthquakes, electric power loss,
telecommunications failure, and other events beyond our control. We
do not have detailed disaster recovery plans for our facilities and
we do not have a backup facility, other than our other facilities,
or contractual arrangements with any other manufacturers in the
event of a casualty to or destruction of any facility or if any
facility ceases to be available to us for any other reason. If we
are required to rebuild or relocate either of our manufacturing
facilities, a substantial investment in improvements and equipment
would be necessary. We carry only a limited amount of business
interruption insurance, which may not sufficiently compensate us
for losses that may occur.
Our
facilities may be subject to electrical blackouts as a consequence
of a shortage of available electrical power. We currently do not
have backup generators or alternate sources of power in the event
of a blackout. If blackouts interrupt our power supply, we would be
temporarily unable to continue operations at such
facility.
Any
losses or damages incurred by us as a result of blackouts,
rebuilding, relocation, or other business interruptions, could
result in a significant delay or reduction in manufacturing and
production capabilities, impair our reputation, harm our ability to
retain existing customers and to obtain new customers, and could
result in reduced sales, lost revenue, increased costs and/or loss
of market share, any of which could substantially harm our business
and our results of operations.
Our failure to accurately forecast material requirements could
cause us to incur additional costs, have excess inventories, or
have insufficient materials to manufacture our products. Our
material requirements forecasts are based on actual or anticipated
product orders. It is very important that we accurately predict
both the demand for our products and the lead times required to
obtain the necessary materials. Lead times for materials that we
order vary significantly and depend on factors, such as specific
supplier requirements, the size of the order, contract terms, and
the market demand for the materials at any given time. If we
overestimate our material requirements, we may have excess
inventory, which would increase our costs. If we underestimate our
material requirements, we may have inadequate inventory, which
could interrupt our manufacturing and delay delivery of our
products to our customers. Any of these occurrences would
negatively impact our results of operations. Additionally, in order
to avoid excess material inventories, we may incur cancellation
charges associated with modifying existing purchase orders with our
vendors, which, depending on the magnitude of such cancellation
charges, may adversely affect our results of
operations.
If we do not achieve acceptable manufacturing yields our operating
results could suffer. The manufacture of our products
involves complex and precise processes. Our manufacturing costs for
several products are relatively fixed, and, thus, manufacturing
yields are critical to the success of our business and our results
of operations. Changes in our manufacturing processes or those of
our suppliers could significantly reduce our manufacturing yields.
In addition, we may experience manufacturing delays and reduced
manufacturing yields upon introducing new products to our
manufacturing lines. The occurrence of unacceptable manufacturing
yields or product yields could adversely affect our financial
condition and results of operations.
If our customers do not qualify our manufacturing lines for volume
shipments, our operating results could suffer. Our manufacturing
lines have passed our qualification standards, as well as our
technical standards. However, our customers may also require that
our manufacturing lines pass their specific qualification
standards, and that we be registered under international quality
standards, beyond our ISO 9001:2015 certification. This customer
qualification process determines whether our manufacturing lines
meet the customers’ quality, performance, and reliability
standards. Generally, customers do not purchase our products, other
than limited numbers of evaluation units, prior to qualification of
the manufacturing line for volume production. We may be unable to
obtain customer qualification of our manufacturing lines or we may
experience delays in obtaining customer qualification of our
manufacturing lines. If there are delays in the qualification of
our products or manufacturing lines, our customers may drop the
product from a long-term supply program, which would result in
significant lost revenue opportunity over the term of each such
customer’s supply program, or our customers may purchase from
other manufacturers. The inability to obtain customer qualification
of our manufacturing lines, or the delay in obtaining such
qualification, could adversely affect our financial condition and
results of operations.
Our business could suffer as a result of the United Kingdom’s
decision to end its membership in the European Union. The
decision of the United Kingdom to exit from the European Union
(generally referred to as “BREXIT”) could cause
disruptions to and create uncertainty surrounding our business,
including affecting our relationships with existing and potential
customers, suppliers, and employees. The effects of BREXIT will
depend on any agreements the United Kingdom makes to retain access
to European Union markets either during a transitional period or
more permanently. The measures could potentially disrupt some of
our target markets and jurisdictions in which we operate, and
adversely change tax benefits or liabilities in these or other
jurisdictions. In addition, BREXIT could lead to legal uncertainty
and potentially divergent national laws and regulations as the
United Kingdom determines which European Union laws to replace or
replicate. BREXIT also may create global economic uncertainty,
which may cause our customers and potential customers to monitor
their costs and reduce their budgets for either our products or
other products that incorporate our products. Any of these effects
of BREXIT, among others, could materially adversely affect our
business, business opportunities, results of operations, financial
condition, and cash flows.
If we fail to meet all applicable Nasdaq Capital Market
(“NCM”) requirements and the Nasdaq Stock Market, LLC
(“Nasdaq”) determines to delist our Class A common
stock, the delisting could adversely affect the market liquidity of
our Class A common stock, and, impair the value of your
investment. Our Class A common stock is listed on the NCM. In
order to maintain that listing, we must satisfy minimum financial
and other requirements. On July 15, 2019, we received a notice from
the Listing Qualifications Department of Nasdaq stating that, for
the last 30 consecutive business days, the closing bid price for
our Class A common stock had been below the minimum $1.00 per share
requirement for continued listing on the NCM as set forth in Nasdaq
Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule
5810(c)(3)(A), we have been provided 180 calendar days, or until
January 13, 2020, to regain compliance with the minimum bid price
requirement. The July 15, 2019 notification letter has no effect at
this time on the listing of our common stock on the NCM or trading
of our Class A common stock. We may achieve compliance during
this additional 180-day period if the closing bid price
of our Class A common stock is at least $1.00 per share for a
minimum of 10 consecutive business days by January 13, 2020. If we
fail to regain compliance on or prior to January 13, 2020, our
Class A common stock will be subject to delisting by Nasdaq
if Nasdaq does not approve an
additional 180-day compliance period, during which time we may have
to effect a reverse stock split.
If we fail to meet all applicable NCM requirements in the future
and Nasdaq determines to delist our Class A common stock, the
delisting could adversely affect the market liquidity of our Class
A common stock and adversely affect our ability to obtain financing
for the continuation of our operations. This delisting could also
impair the value of your investment.
Risks Related To Our Intellectual Property
If we are unable to protect and enforce our intellectual property
rights, we may be unable to compete effectively. We believe
that our intellectual property rights are important to our success
and our competitive position, and we rely on a combination of
patent, copyright, trademark, and trade secret laws and
restrictions on disclosure to protect our intellectual property
rights. Although we have devoted substantial resources to the
establishment and protection of our intellectual property rights,
the actions taken by us may be inadequate to prevent imitation or
improper use of our products by others or to prevent others from
claiming violations of their intellectual property rights by
us.
In
addition, we cannot assure that, in the future, our patent
applications will be approved, that any patents that may be issued
will protect our intellectual property, or that third parties will
not challenge any issued patents. Other parties may independently
develop similar or competing technology or design around any
patents that may be issued to us. We also rely on confidentiality
procedures and contractual provisions with our employees,
consultants, and corporate partners to protect our proprietary
rights, but we cannot assure the compliance by such parties with
their confidentiality obligations, which could be very time
consuming, expensive, and difficult to enforce.
It may
be necessary to litigate to enforce our patents, copyrights, and
other intellectual property rights, to protect our trade secrets,
to determine the validity of and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity.
Such litigation can be time consuming, distracting to management,
expensive, and difficult to predict. Our failure to protect or
enforce our intellectual property could have an adverse effect on
our business, financial condition, prospects, and results of
operation.
We do not have patent protection for our formulas and processes,
and a loss of ownership of any of our formulas and processes would
negatively impact our business. We believe that we own our
formulas and processes. However, we have not sought, and do not
intend to seek, patent protection for all of our formulas and
processes. Instead, we rely on the complexity of our formulas and
processes, trade secrecy laws, and employee confidentiality
agreements. However, we cannot assure you that other companies will
not acquire our confidential information or trade secrets or will
not independently develop equivalent or superior products or
technology and obtain patent or similar rights. Although we believe
that our formulas and processes have been independently developed
and do not infringe the patents or rights of others, a variety of
components of our processes could infringe existing or future
patents, in which event we may be required to modify our processes
or obtain a license. We cannot assure you that we will be able to
do so in a timely manner or upon acceptable terms and conditions
and the failure to do either of the foregoing would negatively
affect our business, results of operations, financial condition,
and cash flows.
We may become involved in intellectual property disputes and
litigation, which could adversely affect our
business. We anticipate, based
on the size and sophistication of our competitors and the history
of rapid technological advances in our industry that several
competitors may have patent applications in progress in the U.S. or
in foreign countries that, if issued, could relate to products
similar to ours. If such patents were to be issued, the patent
holders or licensees may assert infringement claims against us or
claim that we have violated other intellectual property rights.
These claims and any resulting lawsuits, if successful, could
subject us to significant liability for damages and invalidate our
proprietary rights. The lawsuits, regardless of their merits, could
be time-consuming and expensive to resolve and would divert
management time and attention. Any potential intellectual property
litigation could also force us to do one or more of the following,
any of which could harm our business and adversely affect our
financial condition and results of operations:
●
stop selling,
incorporating or using our products that use the disputed
intellectual property;
●
obtain from third
parties a license to sell or use the disputed technology, which
license may not be available on reasonable terms, or at all;
or
●
redesign our
products that use the disputed intellectual property.
Our
properties consist primarily of leased office and manufacturing
facilities. Our corporate headquarters are located in Orlando,
Florida and our manufacturing facilities are primarily located in
Zhenjiang, China and Riga, Latvia. The following schedule presents
the approximate square footage of our facilities as of June 30,
2019:
|
Location
|
Square Feet
|
Commitment and Use
|
|
Orlando, Florida
|
38,000
|
Leased; 3 suites used for corporate headquarters offices,
manufacturing, and research and development
|
|
Irvington, New York
|
13,000
|
Leased; ceased use as of June 30, 2019
|
|
Zhenjiang, China
|
55,000
|
Leased; 1 building used for manufacturing, and 1 floor of 1
building used for manufacturing
|
|
Shanghai, China
|
1,900
|
Leased; 1 suite used for sales, marketing and administrative
offices
|
|
Riga, Latvia
|
23,000
|
Leased; 2 suites used for administrative offices, manufacturing and
crystal growing
|
|
|
|
|
Our
territorial sales personnel maintain an office from their homes to
serve their geographical territories.
For additional information regarding our facilities, please
see Item 1.
Business in this Annual Report
on Form 10-K. For additional information regarding leases,
see Note 13, Lease Commitments, to the Notes to the Consolidated
Financial Statements to this Annual Report on Form
10-K.
Item
3. Legal Proceedings.
From
time to time, we are involved in various legal actions arising in
the normal course of business. We currently have no legal
proceeding to which we are a party to or to which our property is
subject to and, to the best of our knowledge, no adverse legal
activity is anticipated or threatened.
Notes
to Consolidated Financial Statements
1.
Organization
and History
LightPath
Technologies, Inc. (“LightPath”, the
“Company”, “we”, “us” or
“our”) was incorporated in Delaware in 1992. It was the
successor to LightPath Technologies Limited Partnership formed in
1989, and its predecessor, Integrated Solar Technologies
Corporation formed in 1985. On April 14, 2000, the Company acquired
Horizon Photonics, Inc. (“Horizon”). On September 20,
2000, the Company acquired Geltech, Inc. (“Geltech”).
The Company completed its initial public offering during fiscal
1996. In November 2005, we formed LightPath Optical Instrumentation
(Shanghai) Co., Ltd (“LPOI”), a wholly-owned subsidiary
located in Jiading, People’s Republic of China. In December
2013, we formed LightPath Optical Instrumentation (Zhenjiang) Co.,
Ltd (“LPOIZ”), a wholly-owned subsidiary located in
Zhenjiang, Jiangsu Province, People’s Republic of China. 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”).
LightPath
is a manufacturer of optical components and higher-level
assemblies, including precision molded glass aspheric optics,
molded and diamond-turned infrared aspheric lenses, and other
optical components used to produce products that manipulate light.
LightPath designs, develops, manufactures, and distributes optical
components and assemblies utilizing advanced optical manufacturing
processes. LightPath products are incorporated into a variety of
applications by customers in many industries, including defense
products, medical devices, laser aided industrial tools, automotive
safety applications, barcode scanners, optical data storage, hybrid
fiber coax datacom, telecommunications, machine vision and sensors,
among others.
As used
herein, the terms “LightPath,” the
“Company,” “we,” “us” or
“our,” refer to LightPath individually or, as the
context requires, collectively with its subsidiaries on a
consolidated basis.
2.
Summary
of Significant Accounting Policies
Consolidated Financial Statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in
consolidation.
Reclassifications. The
classification of certain prior-year amounts have been adjusted in
our Consolidated Financial Statements to conform to current-year
classifications. Reclassifications include the addition of the line
item “Deferred rent, current portion” to the
Consolidated Balance Sheet, to classify as current the amount of
the liability expected to be relieved within a one-year
period.
Management estimates. Management makes estimates and assumptions during
the preparation of the Company’s Consolidated Financial
Statements that affect amounts reported in the Consolidated
Financial Statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes
available, which, in turn, could impact the amounts reported and
disclosed herein.
Cash and cash equivalents consist of cash in the bank and cash equivalents
with maturities of 90 days or less when purchased. The Company
maintains its cash accounts in various institutions with high
credit ratings. The Company’s domestic cash accounts are
maintained in one financial institution, and balances may exceed
federal insured limits at times. The Company’s foreign cash
accounts are not insured.
Restricted cash consists of
amounts held in restricted accounts as collateral associated with
our debt covenants. See Note 18, Loans Payable, to these
Consolidated Financial Statements for additional information. Our
restricted cash was invested in a money market account. During
fiscal year 2018, the Company adopted ASU 2016-18, “Statement
of Cash Flows (Topic 320): Restricted Cash” (“ASU
2016-18”), which provides guidance on the presentation of
restricted cash and restricted cash equivalents in the statement of
cash flows. Cash and cash equivalents and restricted cash presented
in the Consolidated Balance Sheet as of June 30, 2018 are combined
in the Consolidated Statements of Cash Flows for the years ended
June 30, 2019 and 2018.
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.- and Latvia-based accounts and 100% of invoices
that are over 120 days past due for Chinese-based accounts.
Accounts receivable are customer obligations due under normal trade
terms. The Company performs continuing credit evaluations of its
customers’ financial condition. If the Company’s actual
collection experience changes, revisions to its allowance may be
required. After all attempts to collect a receivable have failed,
the receivable is written off against the
allowance.
Inventories, which consist
principally of raw materials, tooling, work-in-process and finished
lenses, collimators and assemblies are stated at the lower of cost
or net realizable value, 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 are expensed when incurred. The
Company looks at the following criteria for parts to consider for
the inventory allowance: (i) items that have not been sold in two
years, (ii) items that have not been purchased in two years, or
(iii) items of which we have more than a two-year
supply. These items, as identified, are allowed for at
100%, as well as allowing 50% for other items deemed to be slow
moving within the last twelve months and allowing 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 allowance.
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 Consolidated Balance Sheet and
reported at the lower of the carrying amount or fair value less
costs to sell, and would no longer be 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 Consolidated Balance Sheet.
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 reassesses 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. Goodwill and intangible assets are tested for
impairment on an annual basis and during the period between annual
tests if events or changes in circumstances indicate that the
carrying value of goodwill may not be recoverable.
The
Company will assess the qualitative factors to determine whether it
is more likely than not that the fair value of its reporting unit
is less than its carrying amount as a basis for determining whether
it is necessary to perform the goodwill impairment analysis. If the
Company determines that it is more likely than not that its fair
value is less than its carrying amount, then the goodwill
impairment test is performed. The first step, identifying a
potential impairment, compares the fair value of the reporting unit
with its carrying amount. If the carrying amount exceeds its fair
value, the second step would need to be performed; otherwise, no
further steps are required. The second step, measuring the
impairment loss, compares the implied fair value of the goodwill
with the carrying amount of the goodwill. Any excess of the
goodwill carrying amount over the implied fair value is recognized
as an impairment loss, and the carrying value of goodwill is
written down to fair value. During fiscal year 2018, the Company
adopted ASU 2017-4, “Intangibles – Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment”
(“ASU 2017-4”), which amends the goodwill impairment
test to compare the fair value of a reporting unit with its
carrying amount and recognize an impairment charge for the amount
by which the carrying amount exceeds the reporting unit’s
fair value, up to the total amount of goodwill allocated to that
reporting unit. The Company did not record any goodwill impairment
during the fiscal years ended June 30, 2019 or 2018.
Deferred rent relates to
certain of the Company’s operating leases containing
predetermined fixed increases of the base rental rate during the
lease term being recognized as rental expense on a straight-line
basis over the lease term, as well as applicable leasehold
improvement incentives provided by the landlord. The Company has
recorded the difference between the amounts charged to operations
and amounts payable under the leases as deferred rent in the
accompanying Consolidated Balance Sheets.
Income taxes are accounted for
under the asset and liability method. Deferred income tax assets
and liabilities are computed on the basis of differences between
the financial statement and tax basis of assets and liabilities
that will result in taxable or deductible amounts in the future
based upon enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income.
Valuation allowances have been established to reduce deferred tax
assets to the amount expected to be realized.
The Company has not recognized a liability for uncertain tax
positions. A reconciliation of the beginning and ending amount of
unrecognized tax benefits or penalties has not been provided since
there has been no unrecognized benefit or penalty. If there were an
unrecognized tax benefit or penalty, the Company would recognize
interest accrued related to unrecognized tax benefits in interest
expense and penalties in operating expenses.
The Company files United States (“U.S.”) Federal income
tax returns, as well as tax returns in various states and foreign
jurisdictions. Open tax years subject to examination by the
Internal Revenue Service generally remain open for three years from
the filing date. 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, cash equivalents totaled $4.6 million at June 30,
2019. Of this amount, approximately 71% 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 June 30, 2019, we have retained
earnings in China of approximately $3.3 million and we need to have
$11.3 million before repatriation will be
allowed.
Accumulated earnings from the Company’s non-U.S. subsidiaries
were subject to inclusion in the Company’s current period
U.S. and state income tax returns as a result of the impact of the
U.S. tax law changes. However, no income tax was due on the
inclusion of these earnings due to utilization of net operating
losses. See Note 9, Income Taxes, to these Consolidated
Financial Statements for additional information.
The Company currently intends to permanently invest earnings
generated from its foreign Chinese operations and, therefore, has
not previously provided for future Chinese withholding taxes on
such related earnings. However, if in the future the Company
changes such intention, the Company would provide for and pay
additional foreign taxes, if any, at that time.
Revenue recognition – See
Note 3, Revenue, to these Consolidated Financial Statements for
additional information.
VAT is computed on the gross
sales price on all sales of the Company’s 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 the Company on raw materials and other
materials included in the cost of producing or acquiring its
finished products. The Company recorded a VAT receivable, net of
payables, in the accompanying Consolidated 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. Our directors, officers, and
key employees were granted stock-based compensation through our
Amended and Restated Omnibus Incentive Plan, as amended (the
“Omnibus Plan”), through October 2018 and after that
date, the 2018 Stock and Incentive Compensation Plan (the
“SICP”). Most options granted under the Omnibus Plan
and the SICP 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.
Fair value of financial instruments. The Company accounts for financial instruments in
accordance with the Financial Accounting Standards Board’s
Accounting Standards Codification Topic 820, “Fair Value
Measurements and Disclosures” (“ASC 820”), which
provides a framework for measuring fair value and expands required
disclosure about fair value measurements of assets and
liabilities. ASC 820 defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also establishes a
fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs
when measuring fair value. The standard describes three levels of
inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or
liabilities.
Level 2 - Inputs other than quoted prices included within Level 1
that are either directly or indirectly observable.
Level 3 - Unobservable inputs that are supported by little or no
market activity, therefore requiring an entity to develop its own
assumptions about the assumptions that market participants would
use in pricing.
Fair value estimates discussed herein are based upon certain market
assumptions and pertinent information available to
management.
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 the Company’s capital lease
obligations and loans payable approximate their carrying values,
based upon current rates available to us. On January 16, 2018, the
Company satisfied in full a note payable to the sellers of ISP, in
the aggregate original principal amount of $6 million (the
“Sellers Note”). Therefore, the Sellers Note was not
included in loans payable as of June 30, 2018. The carrying value
of the Sellers Note included a fair value premium based on a
risk-adjusted discount rate, a Level 2 fair value measurement. Upon
satisfaction of the Sellers Note, the fair value adjustment
liability was reversed and is included in interest expense, net, in
the Consolidated Statement of Operations for the year ended June
30, 2018. See Note 18, Loans Payable, to these Consolidated
Financial Statements for additional information.
The
Company valued its warrant liabilities based on open-form option
pricing models which, based on the relevant inputs, render the fair
value measurement at Level 3. The Company based its estimates of
fair value for warrant liabilities on the amount it would pay a
third-party market participant to transfer the liability and
incorporated 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 17, Derivative Financial
Instruments (Warrant Liability), to these Consolidated Financial
Statements for additional information.
The Company does not have any other financial or non-financial
assets or liabilities that would be characterized as Level 1, Level
2 or Level 3 instruments.
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 related
note.
Derivative financial instruments. The Company accounts for derivative instruments in
accordance with Financial Accounting Standards Board’s
Accounting Standards Codification Topic 815, “Derivatives and
Hedging” (“ASC 815”), which requires additional
disclosures about the Company’s objectives and strategies for
using derivative instruments, how the derivative instruments and
related hedged items are accounted for, and how the derivative
instruments and related hedging items affect the financial
statements.
The Company does not use derivative instruments to hedge exposures
to cash flow, market or foreign currency risk. Terms of
convertible debt instruments are reviewed to determine whether or
not they contain embedded derivative instruments that are required
under ASC 815 to be accounted for separately from the host
contract, and recorded on the balance sheet at fair value.
The fair value of derivative liabilities, if any, is required to be
revalued at each reporting date, with corresponding changes in fair
value recorded in current period operating results. The Company
issued warrants in connection with our June 2012 private placement
(the “June 2012 Warrants”). The fair value of the June
2012 Warrants was estimated using the Lattice option-pricing
model. See Note 17, Derivative Financial Instruments
(Warrant Liability), to these Consolidated Financial Statements for
additional information.
Freestanding warrants issued by the Company in connection with the
issuance or sale of debt and equity instruments are considered to
be derivative instruments. Pursuant to ASC 815, an evaluation
of specifically identified conditions is made to determine whether
the fair value of warrants issued is required to be classified as
equity or as a derivative liability.
Comprehensive income 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
Consolidated Statements of Comprehensive Income. Our other
comprehensive income consists of foreign currency translation
adjustments made for financial reporting
purposes.
Business segments. As the
Company only operates in principally one business segment, no
additional reporting is required.
Recent accounting pronouncements. There
are new accounting pronouncements issued by the Financial
Accounting Standards Board (“FASB”) that are not yet
effective for the Company for the year ended June 30,
2019.
Leases – In February 2016, the FASB issued a new lease
standard that supersedes existing lease guidance under GAAP. This
standard requires, among other things, the recognition of
right-of-use assets and liabilities on the balance sheet for most
lease arrangements and disclosure of certain information about
leasing arrangements. The new standard currently allows two
transition methods with certain practical expedients available.
Companies may elect to use the modified retrospective approach for
leases that exist or are entered into after the beginning of the
earliest comparative period in the financial statements or to
initially apply this standard at the adoption date and recognize a
cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. This standard is effective for
fiscal years, and interim reporting periods within those years,
beginning after December 15, 2018, which for the Company is its
fiscal 2020.
The
Company expects to adopt the new lease standard on July 1, 2019 by
applying the standard at the adoption date and recognizing a
cumulative-effect adjustment, if any, to the opening balance of
retained earnings. The Company also intends to elect the package of
practical expedients permitted by the standard, which, among other
things, allows it to carry forward the historical lease
classification. The Company’s current real estate lease
arrangements are classified as operating leases under existing GAAP
lease guidance, and the Company expects they will continue to be
classified as operating leases under the new standard. The
Company’s current capital lease arrangements are expected to
be classified as finance leases under the new standard. The Company
has made progress in executing its implementation plan, and it is
in the process of measuring the right-of-use assets and liabilities
for leases in effect at the adoption date. The adoption of this
guidance is expected to have a material impact on the Company's
consolidated balance sheets and disclosures in consolidated
financial statements. The Company does not expect that the adoption
of this standard will have a material impact on its results of
operations, cash flows, or debt covenant compliance.
No
other new accounting pronouncement recently issued or newly
effective had or is expected to have a material impact on the
Consolidated Financial Statements.
On July
1, 2018, the Company adopted ASU 2014-9 using the modified
retrospective method, which required a cumulative effect
adjustment, if any, to be recorded at the date of adoption. The
adoption did not have a material impact on the Company’s
Consolidated Financial Statements and, as a result, no changes were
made to prior reporting periods presented.
Product Revenue
The
Company manufactures optical components and higher-level
assemblies, including precision molded glass aspheric optics,
molded and diamond-turned infrared aspheric lenses, and other
optical components used to produce products that manipulate light.
The Company designs, develops, manufactures, and distributes
optical components and assemblies utilizing advanced optical
manufacturing processes. The Company also performs research and
development for optical solutions for a wide range of optics
markets. Revenue is derived primarily from the sale of optical
components and assemblies.
Revenue Recognition
Revenue
is generally recognized upon transfer of control, including the
risks and rewards of ownership, of products or services to
customers in an amount that reflects the consideration the Company
expects to receive in exchange for those products or services. The
Company generally bears all costs, risk of loss, or damage and
retains title to the goods up to the point of transfer of control
of products to customers. Shipping and handling costs are included
in the cost of goods sold. Revenue is presented net of sales taxes
and any similar assessments.
Customary
payment terms are granted to customers, based on credit
evaluations. The Company does not have any contracts where revenue
is recognized, but the customer payment is contingent on a future
event. Deferred revenue is recorded when cash payments are received
or due in advance of the Company’s performance. Deferred
revenue was immaterial as of June 30, 2019 and 2018.
Nature of Products
Revenue
from the sale of optical components and assemblies is recognized
upon transfer of control, including the risks and rewards of
ownership, to the customer. The performance obligations for the
sale of optical components and assemblies are satisfied at a point
in time. Product development agreements are generally short term in
nature, with revenue recognized upon satisfaction of the
performance obligation, and transfer of control of the agreed-upon
deliverable. The Company has organized its products in three
groups: precision molded optics (“PMO”), infrared, and
specialty products. Revenues from product development agreements
are included in specialty products. The Company’s revenue by
product group for the years ended June 30, 2019 and 2018 was as
follows:
|
|
|
|
|
|
|
|
PMO
|
$14,098,157
|
$13,522,458
|
|
Infrared
Products
|
17,271,590
|
15,979,888
|
|
Specialty
Products
|
2,379,341
|
3,023,125
|
|
Total
revenue
|
$33,749,088
|
$32,525,471
|
The
components of inventories include the following:
|
|
|
|
|
Raw
materials
|
$3,467,105
|
$2,309,454
|
|
Work in
process
|
2,288,226
|
2,506,891
|
|
Finished
goods
|
2,704,471
|
2,263,121
|
|
Allowance for
obsolescence
|
(775,275)
|
(674,725)
|
|
|
$7,684,527
|
$6,404,741
|
During
fiscal 2019 and 2018, the Company evaluated all allowed items and
disposed of approximately $125,000 and $188,000, respectively, of
inventory parts and wrote them off against the allowance for
obsolescence.
The value of tooling in raw materials was approximately $2.2
million and $1.6 million at June 30, 2019 and 2018,
respectively.
5.
Property
and Equipment, net
Property
and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
equipment
|
5 - 10
|
$17,412,136
|
$16,534,124
|
|
Computer equipment
and software
|
3 - 5
|
706,840
|
513,681
|
|
Furniture and
fixtures
|
5
|
293,582
|
199,872
|
|
Leasehold
improvements
|
5 - 7
|
2,074,069
|
1,350,482
|
|
Construction in
progress
|
|
697,126
|
954,317
|
|
Total
property and equipment
|
|
21,183,753
|
19,552,476
|
|
|
|
|
|
|
Less accumulated
depreciation and amortization
|
|
(9,452,669)
|
(7,743,235)
|
|
Total
property and equipment, net
|
|
$11,731,084
|
$11,809,241
|
During
fiscal 2015, the Company extended the term of its Orlando lease and
received a tenant improvement allowance from the landlord of
$420,014. During fiscal 2019, the Company received a tenant
improvement allowance from the landlord related to the new portion
of the Orlando facility in the amount of $309,450. These allowances
were used to construct improvements and were recorded as leasehold
improvements and deferred rent liability. The balances are being
amortized over the corresponding lease terms.
6. Goodwill and Intangible Assets
In
connection with the December 2016 acquisition of ISP, the Company
identified intangible assets, which were recorded at fair value and
are being amortized on a straight-line basis over their useful
lives. The excess purchase price over the fair values of all
identified assets and liabilities was recorded as goodwill,
attributable primarily to expected synergies and the assembled
workforce of ISP.
There
were no changes in the net carrying value of goodwill during the
years ended June 30, 2019 and 2018, and there have been no events
or changes in circumstances that indicate the carrying value of
goodwill may not be recoverable.
Identifiable
intangible assets were comprised of:
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
15
|
$3,590,000
|
$3,590,000
|
|
Backlog
|
2
|
366,000
|
366,000
|
|
Trade
secrets
|
8
|
3,272,000
|
3,272,000
|
|
Trademarks
|
8
|
3,814,000
|
3,814,000
|
|
Non-compete
agreement
|
3
|
27,000
|
27,000
|
|
Total
intangible assets
|
|
11,069,000
|
11,069,000
|
Less accumulated amortization
|
(3,231,694)
|
(2,011,030)
|
|
Total
intangible assets, net
|
|
$7,837,306
|
$9,057,970
|
Future
amortization of identifiable intangibles is as
follows:
|
Fiscal
year ending:
|
|
|
June
30, 2020
|
$1,129,342
|
|
June
30, 2021
|
1,125,083
|
|
June
30, 2022
|
1,125,083
|
|
June
30, 2023
|
1,125,083
|
|
June
30, 2024 and later
|
3,332,715
|
|
|
$7,837,306
|
7. Accounts Payable
The
accounts payable balance includes $91,000 and $82,000 of earned but
unpaid board of directors’ fees, as of June 30, 2019 and
2018, respectively.
8. Stockholders’ Equity
The
Company’s authorized capital stock consists of 55,000,000
shares, comprised of 50,000,000 shares of common stock, par value
$0.01 per share, and 5,000,000 shares of preferred stock, par value
$0.01 per share.
Of the
5,000,000 shares of preferred stock authorized, the board of
directors has previously designated:
●
250 shares of
preferred stock as Series A Preferred Stock, all previously
outstanding shares of which have been previously redeemed or
converted into shares of our Class A common stock and may not be
reissued;
●
300 shares of
preferred stock as Series B Preferred Stock, all previously
outstanding shares of which have been previously redeemed or
converted into shares of our Class A common stock and may not be
reissued;
●
500 shares of
preferred stock as Series C Preferred Stock, all previously
outstanding shares of which have been previously redeemed or
converted into shares of our Class A common stock and may not be
reissued;
●
500,000 shares of
preferred stock as Series D Preferred Stock, none of which have
been issued; however, in 1998, the board of directors declared a
dividend distribution as a right to purchase one share of Series D
Preferred Stock for each outstanding share of Class A common stock
upon occurrence of certain events. The rights will be exercisable
only if a person or group acquires twenty percent (20%) or more of
the Class A common stock or announces a tender offer, the
consummation of which would result in ownership by a person or
group of twenty percent (20%) or more of the Class A common stock.
As of the date of the filing of this Annual Report on Form 10-K, no
such triggering event has occurred. If, in the future, any shares
of Series D Preferred Stock are issued, the stockholders of Series
D Preferred Stock are entitled to one vote for each share held;
and
●
500 shares of our
preferred stock as Series F Preferred Stock, all previously
outstanding shares of which have been previously redeemed or
converted into shares of our Class A common stock and may not be
reissued.
Of the
50,000,000 shares of common stock authorized, the board of
directors has previously designated 44,500,000 shares authorized as
Class A common stock. The stockholders of Class A common stock are
entitled to one vote for each share held. The remaining 5,500,000
shares of authorized common stock were designated as Class E-1
common stock, Class E-2 common stock, or Class E-3 common stock,
all previously outstanding shares of which have been previously
redeemed or converted into shares of Class A common
stock.
During fiscal 2018, the Company received approximately $534,000 in
net proceeds from the exercise of the June 2012 Warrants. The
Company issued 433,810 shares of Class A common stock during fiscal
2018, in connection with these exercises. The June 2012
Warrants expired on December 11, 2017. There were no oustanding
warrants as of June 30, 2019 or 2018.
For
financial reporting purposes, income before income taxes includes
the following components:
|
|
|
|
|
|
|
|
Pretax income:
|
|
|
|
United
States
|
$(4,649,593)
|
$359,027
|
|
Foreign
|
2,424,476
|
(126,000)
|
|
Income
before income taxes
|
$(2,225,117)
|
$233,027
|
The
components of the provision for income taxes are as
follows:
|
|
|
|
|
|
|
|
Current:
|
|
|
|
Federal
tax
|
$(9,352)
|
$57,315
|
|
State
|
23,423
|
-
|
|
Foreign
|
469,135
|
(117,852)
|
|
Total
current
|
483,206
|
(60,537)
|
|
|
|
|
|
Deferred:
|
|
|
|
Federal
tax
|
21,803
|
(510,125)
|
|
State
|
(49,803)
|
(72,875)
|
|
Foreign
|
-
|
(183,540)
|
|
Total
deferred
|
(28,000)
|
(766,540)
|
|
|
|
|
|
Total
income tax (benefit)
|
$455,206
|
$(827,077)
|
The
reconciliation of income tax computed at the U.S. federal statutory
rates to income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
federal statutory tax rate
|
21.0%
|
27.5%
|
|
|
|
|
|
Income tax provision reconciliation:
|
|
|
|
Tax
at statutory rate:
|
$(467,275)
|
$64,082
|
|
Net
foreign income subject to lower tax rate
|
(303,288)
|
25,927
|
|
State
income taxes, net of federal benefit
|
(26,380)
|
(107,997)
|
|
Valuation
allowance
|
652,262
|
(11,763,000)
|
|
Changes
in statutory income tax rates
|
-
|
9,114,886
|
|
IRC
965 repatriation
|
202,026
|
1,809,603
|
|
GILTI
|
251,869
|
-
|
|
Federal
research and development and other credits
|
(84,440)
|
(163,165)
|
|
Stock-based
compensation
|
3,034
|
43,818
|
|
Change
in fair value of derivative warrants
|
-
|
53,524
|
|
Other
permanent differences
|
74,099
|
30,758
|
|
Other,
net
|
153,299
|
64,487
|
|
|
$455,206
|
$(827,077)
|
Tax Cuts and Jobs Act
In
December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the
“TCJA”), which changes existing U.S. tax law and
includes various provisions that are expected to affect companies.
Among other things, the TCJA: (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 (“foreign E&P”) that had not
been previously repatriated.
As of
June 30, 2018, the Company had not fully completed our accounting
for the income tax impact of enactment of the TCJA. In accordance
with SEC Staff Accounting Bulletin No.118, the Company recognized
provisional amounts for income tax effects of the TCJA that it was
able to reasonably estimate.
Implementation
of the TCJA required the Company to calculate a one-time transition
tax on certain foreign E&P that had not been previously
repatriated. During fiscal 2018, the Company provisionally
determined its foreign E&P inclusion, and anticipated that it
would not owe any one-time transition tax due to utilization of
U.S. net operating loss (“NOL”) carryforward benefits
against these earnings. During fiscal 2019, the Company completed
its analysis of the TCJA, and although the Company did not owe any
one-time transition tax, the deferred tax asset related to its NOL
carryforwards was impacted by approximately $202,000. This amount
is offset by a valuation allowance for a net impact of zero to its
provision for income taxes for the year ended June 30,
2019.
Income Tax Law of the People’s Republic of China
The
Company’s Chinese subsidiaries, LPOI and LPOIZ, are governed
by the Income Tax Law of the People’s Republic of China
concerning the privately run and foreign invested enterprises,
which are generally subject to tax at a statutory rate of 25% on
income reported in the statutory financial statements after
appropriate tax adjustments. 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, the Company
recorded a tax benefit of approximately $100,000 during the year
ended June 30, 2018 related to this retroactive rate change. For
the fiscal year ended June 30, 2019, income taxes were accrued at
the applicable rates. No deferred tax provision has been recorded
for China, as the effect is deemed de minimis.
The Company currently intends to permanently invest earnings
generated from its foreign Chinese operations and, therefore, has
not previously provided for future Chinese withholding taxes on
such related earnings. However, if in the future the Company
changes such intention, the Company would provide for and pay
additional foreign taxes, if any, at that time.
Law of Corporate Income Tax of Latvia
The
Company’s Latvian subsidiary, ISP Latvia, is governed by the
Law of Corporate Income Tax of Latvia. Until December 31, 2017, ISP
Latvia was subject to a statutory income tax rate of 15%. Effective
January 1, 2018, the Republic of Latvia enacted tax reform with the
following key provisions: (i) corporations are no longer subject to
income tax, but are instead subject to a distribution tax on
distributed profits (or deemed distributions, as defined), and (ii)
the tax rate was changed to 20%; however, distribution amounts are
first divided by 0.8 to arrive at the taxable amount of profit,
resulting in an effective tax rate of 25%. As a transitional
measure, distributions made from earnings prior to January 1, 2018,
distributed prior to December 31, 2019, are not subject to tax. As
such, any distributions of profits from ISP Latvia to ISP, its U.S.
parent company, will be from earnings prior to January 1, 2018 and,
therefore, will not be subject to tax. The Company currently does
not intend to distribute any current earnings generated after
January 1, 2018. If, in the future, the Company changes such
intention, distribution taxes, if any, will be accrued as profits
are generated. With this change, the concept of taxable income and
tax basis in assets and liabilities was eliminated and is no longer
relevant for determining income taxes; therefore, the previously
recorded net deferred tax liability related to ISP Latvia was
adjusted to zero during the fiscal year ended June 30, 2018,
resulting in a tax benefit of approximately $184,000.
The tax
effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as
follows at June 30:
|
|
|
|
|
Deferred tax
assets:
|
|
|
|
Net operating loss
and credit carryforwards
|
$16,044,000
|
$16,282,000
|
|
Stock-based
compensation
|
822,000
|
710,000
|
|
R&D and other
credits
|
2,014,000
|
1,899,000
|
|
Capitalized R&D
expenses
|
476,000
|
373,000
|
|
Inventory
|
156,000
|
143,000
|
|
Accrued expenses
and other
|
111,000
|
83,000
|
|
Gross deferred tax
assets
|
19,623,000
|
19,490,000
|
|
Valuation allowance
for deferred tax assets
|
(16,725,000)
|
(16,123,000)
|
|
Total deferred tax
assets
|
2,898,000
|
3,367,000
|
|
Deferred tax
liabilities:
|
|
|
|
Depreciation and
other
|
(277,000)
|
(563,000)
|
|
Intangible
assets
|
(1,969,000)
|
(2,180,000)
|
|
Total deferred tax
liabilities
|
(2,246,000)
|
(2,743,000)
|
|
Net deferred tax
asset
|
$652,000
|
$624,000
|
As of
June 30, 2019, the Company has also recorded a non-current income
tax receivable of $214,000 related to previously paid alternative
minimum tax that is expected to be recovered within the next five
years pursuant to certain provisions of the TCJA.
In
assessing the potential future recognition of deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. In order to fully realize the deferred tax asset, the
Company will need to generate future taxable income of
approximately $74 million prior to the expiration of NOL
carry-forwards from 2020 through 2035. Based on the level of
historical taxable income, management has provided for a valuation
adjustment against the deferred tax assets of $16,725,000 at June
30, 2019, an increase of approximately $602,000 as compared to June
30, 2018. The increase in the valuation allowance for deferred tax
assets as compared to the prior year is primarily the result of the
various movements in the current year deferred items. The net
deferred tax asset of $652,000 results from federal and state tax
credits with indefinite carryover periods, and approximately
$510,000 in federal NOL carryforwards that management expects to
utilize in a future period. State
income tax expense disclosed on the effective tax rate
reconciliation above includes state deferred taxes that are offset
by a full valuation allowance.
At June
30, 2019, in addition to net operating loss carry forwards, the
Company also has research and development credit carry forwards of
approximately $2,014,000, which will expire from 2022 through 2039.
A portion of the NOL carry forwards may be subject to certain
limitations of the Internal Revenue Code Sections 382 and 383,
which would restrict the annual utilization in future periods due
principally to changes in ownership in prior periods.
10. Compensatory Equity Incentive Plan and
Other Equity Incentives
Share-based payment arrangements — The Company’s
directors, officers, and key employees were granted stock-based
compensation through the Omnibus Plan, through October 2018 and
after that date, the SICP. The awards include incentive stock
options, non-qualified 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.
The Company estimates 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 and the SICP 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 the Company’s board
of directors on October 30, 2014 and approved by the
Company’s stockholders on January 29, 2015. The 2014 ESPP
permits employees to purchase 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
the 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. This discount of approximately $3,900 and $4,900 for
fiscal 2019 and 2018, respectively, is included in the selling,
general and administrative expense in the accompanying Consolidated
Statements Comprehensive Income (Loss), which represents the value
of the 10% discount given to the employees purchasing stock under
the 2014 ESPP.
These
plans are summarized below:
|
Equity
Compensation Arrangement
|
|
Outstanding at
June 30, 2019
|
Available for
Issuance at June 30, 2019
|
|
SICP (or Omnibus
Plan)
|
5,115,625
|
2,844,451
|
1,416,691
|
|
2014
ESPP
|
400,000
|
—
|
337,137
|
|
|
5,515,625
|
2,844,451
|
1,753,828
|
Grant Date Fair Values and Underlying Assumptions; Contractual
Terms—The Company estimates the fair value of each
equity option as of the date of grant. The Company uses 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 and RSUs granted in the years ended June 30, 2019 and
2018, the Company estimated the fair value of each stock award as
of the date of grant using the following assumptions:
|
|
Year Ended June
30,
|
|
|
2019
|
2018
|
|
Weighted-average
expected volatility
|
69.5%
|
63% -
75%
|
|
Dividend
yields
|
0%
|
0%
|
|
Weighted-average
risk-free interest rate
|
3.00%
|
1.28% -
2.82%
|
|
Weighted-average
expected term, in years
|
7.50
|
7.27
|
The
assumed forfeiture rates used in calculating the fair value of
options and restricted stock unit grants with both performance and
service conditions were 20% for each of the years ended June 30,
2019 and 2018. The volatility rate and expected term are based on
seven-year historical trends in Class A common stock closing prices
and actual forfeitures. The interest rate used is the U.S. Treasury
interest rate for constant maturities.
Information Regarding Current Share-Based Payment Awards
— A summary of the activity for share-based payment
awards in the years ended June 30, 2019 and 2018 is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2017
|
1,096,186
|
$1.68
|
6.3
|
1,508,782
|
0.9
|
|
|
|
|
|
|
|
|
Granted
|
68,849
|
$3.88
|
9.4
|
140,571
|
2.2
|
|
Exercised
|
(127,813)
|
$1.80
|
|
—
|
|
|
Cancelled/Forfeited
|
(32,093)
|
$2.62
|
|
—
|
|
|
June
30, 2018
|
1,005,129
|
$1.77
|
6.3
|
1,649,353
|
0.9
|
|
|
|
|
|
|
|
|
Granted
|
13,058
|
$2.10
|
9.4
|
229,509
|
2.4
|
|
Exercised
|
(17,610)
|
$1.08
|
|
(14,336)
|
|
|
Cancelled/Forfeited
|
(20,652)
|
$1.17
|
|
—
|
|
|
June
30, 2019
|
979,925
|
$1.80
|
5.5
|
1,864,526
|
0.9
|
|
|
|
|
|
|
|
|
Awards
exercisable/
|
|
|
|
|
|
|
vested as
of
|
|
|
|
|
|
|
June
30, 2019
|
869,230
|
$1.70
|
5.2
|
1,464,382
|
—
|
|
|
|
|
|
|
|
|
Awards
unexercisable/
|
|
|
|
|
|
|
unvested as
of
|
|
|
|
|
|
|
June
30, 2019
|
110,695
|
$2.56
|
7.7
|
400,144
|
0.9
|
|
|
979,925
|
|
|
1,864,526
|
|
The
total intrinsic value of stock options exercised for the years
ended June 30, 2019 and 2018 was approximately $580 and $1,000,
respectively.
The
total intrinsic value of stock options outstanding and exercisable
at June 30, 2019 and 2018 was approximately $320 and $573,000,
respectively.
The
total fair value of stock options vested during the years ended
June 30, 2019 and 2018 was approximately $170,000 and $103,000,
respectively.
The
total intrinsic value of RSUs exercised during the years ended June
30, 2019 and 2018 was approximately $26,000 and $0,
respectively.
The
total intrinsic value of RSUs outstanding and exercisable at June
30, 2019 and 2018 was approximately $1.3 million and $3.0 million,
respectively.
The
total fair value of RSUs vested during the years ended June 30,
2019 and 2018 was approximately $393,000 and $320,000,
respectively.
As of
June 30, 2019, there was approximately $523,000 of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements, including share options and RSUs,
granted under the Omnibus Plan. The expected compensation cost to
be recognized is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ending June
30, 2020
|
$8,926
|
$289,944
|
$298,870
|
|
|
|
|
|
|
Year ending June
30, 2021
|
5,939
|
169,978
|
175,917
|
|
|
|
|
|
|
Year ending June
30, 2022
|
2,021
|
46,654
|
48,675
|
|
|
$16,886
|
$506,576
|
$523,462
|
The
table above does not include shares under the Company’s 2014
ESPP, which has purchase settlement dates in the second and fourth
fiscal quarters.
RSU
awards vest immediately or from two to four years from the grant
date.
The
Company issues 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 June 30, 2019 and 2018 and
changes during the two years then ended:
|
Unexercisable/Unvested
Awards
|
|
|
|
Weighted-Average
Grant Date Fair Values
(per
share)
|
|
June 30,
2017
|
244,511
|
438,912
|
683,423
|
$1.39
|
|
Granted
|
68,849
|
140,571
|
209,420
|
$3.61
|
|
Vested
|
(85,191)
|
(217,500)
|
(302,691)
|
$3.78
|
|
Cancelled/Forfeited
|
(9,750)
|
-
|
(9,750)
|
$2.36
|
|
June 30,
2018
|
218,419
|
361,983
|
580,402
|
$1.53
|
|
Granted
|
13,058
|
229,509
|
242,567
|
$1.80
|
|
Vested
|
(118,282)
|
(191,348)
|
(309,630)
|
$1.79
|
|
Cancelled/Forfeited
|
(2,500)
|
-
|
(2,500)
|
$0.97
|
|
June 30,
2019
|
110,695
|
400,144
|
510,839
|
$2.09
|
Acceleration of Vesting — The Company does not
generally accelerate the vesting of any stock options.
Financial Statement Effects and Presentation — The
following table shows total stock-based compensation expense for
the years ended June 30, 2019 and 2018 included in the
accompanying Consolidated Statements of Comprehensive Income
(Loss):
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
$36,461
|
$38,572
|
|
RSUs
|
358,329
|
334,982
|
|
Total
|
$394,790
|
$373,554
|
|
|
|
|
The amounts above were included in:
|
|
|
Selling, general
& administrative
|
$393,352
|
$366,407
|
|
Cost of
sales
|
1,620
|
5,910
|
|
New product
development
|
(182)
|
1,237
|
|
|
$394,790
|
$373,554
|
11. Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares of Class A common stock
outstanding during each period presented. Diluted earnings per
share is computed similarly to basic earnings per share except that
it reflects the potential dilution that could occur if dilutive
securities or other obligations to issue shares of Class A common
stock were exercised or converted into shares of Class A common
stock. The computations for basic and diluted earnings (loss) per
common share are described in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
$(2,680,323)
|
$1,060,104
|
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
Basic
number of shares
|
25,794,669
|
25,006,467
|
|
|
|
|
|
Effect of dilutive
securities:
|
|
|
|
Options to purchase
common stock
|
-
|
331,985
|
|
RSUs
|
-
|
1,387,348
|
|
Common stock
warrants
|
-
|
85,668
|
|
Diluted
number of shares
|
25,794,669
|
26,811,468
|
|
|
|
|
|
Earnings
(loss) per common share:
|
|
|
|
Basic
|
$(0.10)
|
$0.04
|
|
Diluted
|
$(0.10)
|
$0.04
|
The
following weighted-average potential dilutive shares were not
included in the computation of diluted earnings (loss) per common
share, as their effects would be anti-dilutive:
|
|
|
|
|
|
|
|
Options to purchase
common stock
|
999,612
|
739,864
|
|
RSUs
|
1,755,893
|
216,946
|
|
Common stock
warrants
|
-
|
85,018
|
|
|
2,755,505
|
1,041,828
|
12.
Defined
Contribution Plan
The
Company provides retirement benefits to its U.S.-based employees
through a defined contribution retirement plan. Until April 12,
2018, these benefits were offered under the ADP Total Source 401(k)
plan (the “ADP Plan”). The ADP Plan was a defined
401(k) contribution plan, administered by a third party, that all
U.S. employees, over the age of 21, were eligible to participate in
after three months of employment. Under the ADP Plan, annual
discretionary contributions could be made by the Company to match a
portion of the funds contributed by employees. Effective April 12,
2018, all plan assets were transferred to the Insperity 401(k) plan
(the “Insperity Plan”). The Insperity Plan is a defined
401(k) contribution plan that all employees, over the age of 21,
are eligible to participate in after three months of employment.
Under the Insperity Plan, the Company matches 100% of the first 2%
of employee contributions. As of June 30, 2019, there were 55
employees who are enrolled in this plan. The Company made matching
contributions of approximately $107,000 and $34,000 during the
years ended June 30, 2019 and 2018, respectively.
The
Company has operating leases for its manufacturing and office
space. At June 30, 2019, the Company has two lease agreements for
its corporate headquarters and manufacturing facilities in Orlando,
Florida. The first lease (the “Orlando Lease”) is for
approximately 26,000 square feet, has a seven-year original term
with renewal options, and expires in April 2022. 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 five-year
extension option exercisable by the Company. The minimum rental
rates for such additional extension option 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.
On
April 20, 2018, the Company entered into a lease agreement for an
additional 12,378 square feet in Orlando, Florida (the
“Orlando Lease II”). The Orlando Lease II provides
additional manufacturing and office space near the Company’s
corporate headquarters. The commencement date of the Orlando Lease
II was November 1, 2018, and it has a four-year original term with
one renewal option for an additional five-year term.
The
Company received a $420,000 tenant improvement allowance in fiscal
2015 with respect to the Orlando Lease. In fiscal 2019, the Company
received a tenant improvement allowance of $309,450 with respect to
the Orlando Lease II. These amounts are included in the property
and equipment and deferred rent on the Consolidated Balance Sheets.
Amortization of tenant improvements was approximately $284,000 as
of June 30, 2019. The deferred rent is being amortized as a
reduction in lease expense over the terms of the respective
leases.
As of
June 30, 2019, the Company, through its wholly-owned subsidiary,
LPOI, has 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. During fiscal 2019, the
Shanghai Lease was renewed for an additional one-year term, and now
expires in October 2019.
As of
June 30, 2019, the Company, through its wholly-owned subsidiary,
LPOIZ, has three lease agreements for manufacturing and office
facilities in Zhenjiang, China for an aggregate of 55,000 square
feet. The initial lease (the “Zhenjiang Lease I”) is
for approximately 26,000 square feet, and had a five-year original
term with renewal options. In fiscal 2019, the Company renewed the
Zhenjiang Lease I and it now expires in June 2022. During fiscal
2018, another lease was executed for 13,000 additional square feet
in this same facility (the “Zhenjiang Lease II”). The
Zhenjiang Lease II has a 54-month term, and expires in December
2021. During fiscal 2019, LPOIZ entered into another lease
agreement for manufacturing space near the existing facility, for
an additional 16,000 square feet (the “Zhenjiang Lease
III”). The Zhenjiang Lease III has a three-year term and
expires in April 2022.
At June
30, 2019, the Company, through its wholly-owned subsidiary ISP, has
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. As of June 30, 2019,
the relocation of the operations formerly housed in this facility
is complete and we have ceased use of this facility. See Note 20,
Restructuring, to these Consolidated Financial Statements for
additional information.
At June
30, 2019, the Company, through ISP’s wholly-owned subsidiary
ISP Latvia, has two lease agreements for a manufacturing and office
facility in Riga, Latvia (the “Riga Leases”) for an
aggregate of 23,000 square feet. The Riga Leases, each of which was
for a five-year original term with renewal options, were set to
expire in December 2019. During fiscal 2019, the Riga Leases were
renewed, and now expire in December 2022.
As of
June 30, 2019, the Company has obligations under five capital lease
agreements, entered into during fiscal years 2016, 2017, 2018 and
2019, with terms ranging from three to five years. The leases are
for computer and manufacturing equipment, which are included as
part of property and equipment in the accompanying Consolidated
Balance Sheets. Assets under capital lease include approximately
$2.0 million and $1.5 million in manufacturing equipment, with
accumulated amortization of approximately $900,000 and $646,000 as
of June 30, 2019 and 2018, respectively. Amortization related to
assets under capital leases is included in depreciation
expense.
Rent
expense totaled $1.7 million and $1.0 million during the years
ended June 30, 2019 and 2018, respectively. For the year ended June
30, 2019, this includes an accrual of $467,000 in future lease
payments due pursuant to the ISP Lease, which facility the Company
ceased use of as of June 30, 2019. See Note 20, Restructuring, to
these Consolidated Financial Statements for additional
information.
The
approximate future minimum lease payments under capital and
operating leases at June 30, 2019, including the aforementioned
accrued but unpaid lease obligation for the ISP Lease, were as
follows:
|
|
|
|
|
Fiscal
year ending June 30,
|
|
|
|
2020
|
$482,598
|
$1,093,000
|
|
2021
|
407,954
|
907,000
|
|
2022
|
231,783
|
777,000
|
|
2023
|
59,647
|
157,000
|
|
Total minimum
payments
|
1,181,982
|
$2,934,000
|
|
Less
imputed interest
|
(137,274)
|
|
|
Present value of
minimum lease payments included in capital lease
obligations
|
1,044,708
|
|
|
Less current
portion
|
404,424
|
|
|
Non-current
portion
|
$640,284
|
|
The
Company from time to time is involved in various legal actions
arising in the normal course of business. Management, after
reviewing with legal counsel all of these actions and proceedings,
believes that the aggregate losses, if any, will not have a
material adverse effect on the Company’s financial position
or results of operations.
Assets
and liabilities denominated in non-U.S. currencies are translated
at rates of exchange prevailing on the balance sheet date, and
revenues and expenses are translated at average rates of exchange
for the period. Gains or losses on the translation of the financial
statements of a non-U.S. operation, where the functional currency
is other than the U.S. dollar, are reflected as a separate
component of equity, which was a cumulative gain of approximately
$809,000 and $474,000 as of June 30, 2019 and 2018, respectively.
During the years ended June 30, 2019 and 2018, we also recognized a
net foreign currency transaction loss of approximately $436,000 and
a net foreign currency transaction gain of approximately $141,000,
respectively, included in the Consolidated Statements of
Comprehensive Income (Loss) in the line item entitled “Other
income (expense), net.”
Assets
and net assets in foreign countries are as follows:
|
|
|
|
|
|
|
|
|
|
|
Assets
|
$16.9
million
|
$14.7
million
|
$8.2 million
|
$6.4 million
|
|
Net
assets
|
$14.5
million
|
$12.6
million
|
$7.8 million
|
$5.9 million
|
16.
Supplier
and Customer Concentrations
The
Company utilizes a number of glass compositions in manufacturing
its molded glass aspheres and lens array products. These glasses or
equivalents are available from a large number of suppliers,
including CDGM Glass Company Ltd.,
Ohara Corporation, and Sumita Optical Glass, Inc. Base
optical materials, used in certain of the Company’s specialty
products, are manufactured and supplied by a number of optical and
glass manufacturers. ISP utilizes major infrared material suppliers
located around the globe for a broad spectrum of infrared crystal
and glass. The Company believes that a satisfactory supply of such
production materials will continue to be available, at reasonable
prices or, in some cases, at increased prices, although there can
be no assurance in this regard.
In
fiscal 2019, sales to three customers comprised an aggregate of
approximately 32% of the Company’s annual revenue, and 40% of
accounts receivable as of June 30, 2019, with one customer at 17%
of sales, another customer at 8% of sales, and the third customer
at 7% of sales. In fiscal 2018, sales to three customers comprised
an aggregate of approximately 28% of the Company’s annual
revenue, and 28% of accounts receivable as of June 30, 2018, with
one customer at 16% of sales, another customer at 7% of sales, and
the third customer at 5% of sales. The loss of any of these
customers, or a significant reduction in sales to any such
customer, would adversely affect the Company’s
revenues.
In
fiscal 2019, 62% of the Company’s net revenue was derived
from sales outside of the U.S., with 94% of foreign sales derived
from customers in Europe and Asia. In fiscal 2018, 58% of the
Company’s net revenue was derived from sales outside of the
U.S., with 84% of foreign sales derived from customers in Europe
and Asia.
17.
Derivative
Financial Instruments (Warrant Liability)
On June
11, 2012, the Company executed a Securities Purchase Agreement with
respect to a private placement of an aggregate of 1,943,852 shares
of its Class A common stock at $1.02 per share and the June 2012
Warrants to purchase up to 1,457,892 shares of its 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
were exercisable for a period of five years beginning on December
11, 2012. The Company accounted for the June 2012 Warrants issued
to investors in accordance with ASC 815-10. ASC 815-10 provides
guidance for determining whether an equity-linked financial
instrument (or embedded feature) is indexed to an entity’s
own stock. This applies to any freestanding financial instrument or
embedded feature that has all the characteristics of a derivative
under ASC 815-10, including any freestanding financial instrument
that is potentially settled in an entity’s own
stock.
Due to
certain adjustments that could be made to the exercise price of the
June 2012 Warrants if the Company issued or sold shares of its
Class A common stock at a price that was less than the then-current
warrant exercise price, the June 2012 Warrants have been classified
as a liability, as opposed to equity, in accordance with ASC
815-10, as it was determined that the June 2012 Warrants were not
indexed to the Company’s Class A common stock.
The
fair value of the outstanding June 2012 Warrants was re-measured at
the end of each reporting period to reflect the then-current fair
market value. The fair value was also re-measured upon each warrant
exercise, to determine the fair value adjustment to the warrant
liability related to the warrant exercise. The June 2012 Warrants
expired on December 11, 2017. All warrants that required fair value
re-measurement were exercised prior to expiration, and, as such,
the warrant liability was reduced to zero as of that date. The
change in fair value of the June 2012 Warrants is recorded in the
Consolidated Statements of Comprehensive Income (Loss), as
estimated using the Lattice option-pricing model using the
following range of assumptions for the year ended June 30,
2018:
|
|
Year Ended
|
|
|
June 30, 2018
|
|
|
|
|
Inputs into Lattice model for warrants:
|
|
Equivalent volatility
|
21.06% - 162.92%
|
|
Equivalent interest rate
|
0.95% - 1.14%
|
|
Floor
|
$1.15
|
|
Stock price
|
$2.56 - $2.60
|
|
Probability price < strike price
|
0.00%
|
|
Fair value of call
|
$1.13 - $2.79
|
|
Probability of fundamental transaction occurring
|
0%
|
The
warrant liabilities were considered recurring Level 3 financial
instruments. The following table summarizes the activity of Level 3
financial instruments measured on a recurring basis for the year
ended June 30, 2018:
|
|
|
|
Fair
value, June 30, 2017
|
490,500
|
|
Reclassification
of warrant liability upon exercise
|
(685,132)
|
|
Change
in fair value of warrant liability
|
194,632
|
|
Fair
value, June 30, 2018
|
$-
|
All
warrants issued by the Company other than the above noted June 2012
Warrants were classified as equity. There were no outstanding
warrants as of June 30, 2019 or 2018.
Avidbank Loan
Until
February 26, 2019, the Company was party to the Second Amended and
Restated Loan and Security Agreement (the “LSA”)
entered into on December 21, 2016 with Avidbank Corporate Finance,
a division of Avidbank (“Avidbank”), as amended by the
First Amendment to the LSA dated December 20, 2017 (the
“First Amendment”), the Second Amendment to the LSA
dated January 16, 2018 (the “Second Amendment”), the
Third Amendment to the LSA dated May 11, 2018 (the “Third
Amendment”), the Fourth Amendment to the LSA dated September
7, 2018 (the “Fourth Amendment”), and the Fifth
Amendment to the LSA dated October 30, 2018 (the “Fifth
Amendment” and, together with the LSA, First Amendment, the
Second Amendment, the Third Amendment, and the Fourth Amendment,
the “Amended LSA”). The Amended LSA provided for an
acquisition term loan in the original principal amount of
$5,000,000 (the “Term I Loan”). Pursuant to the Second
Amendment, Avidbank paid a single cash advance to the Company in an
original principal amount of $7,294,000 (the “Term II
Loan”), the proceeds of which were used to repay all amounts
owing with respect to the Term Loan, which was approximately $4.4
million, with the remaining $2.9 million in proceeds used to repay
the amounts owing under the note payable to the sellers (the
“Sellers”) of ISP (the “Sellers Note”). The
Term II Loan was for a five-year term, and bore interest at a per
annum rate equal to two percent (2.0%) above the Prime Rate;
provided, however, that at no time would the applicable rate be
less than five-and-one-half percent (5.50%) per annum.
The
Amended LSA also provided for a working capital revolving line of
credit (the “Revolving Line”). Pursuant to the Amended
LSA, Avidbank agreed to, 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 Amended LSA. Amounts borrowed under
the Revolving Line could be repaid and re-borrowed at any time
prior to the Revolving Maturity Date (as defined below), at which
time all amounts would be immediately due and payable. There were
no borrowings under the Revolving Line during the year ended June
30, 2019. As of February 26, 2019, the date on which the Company
terminated the Amended LSA, there was no outstanding balance under
the Revolving Line.
The
Company’s obligations under the Amended LSA were
collateralized by a first priority security interest (subject to
permitted liens) in cash, U.S. inventory, accounts receivable and
equipment. In addition, the Company’s wholly-owned
subsidiary, Geltech, Inc., guaranteed the Company’s
obligations under the Amended LSA.
The
Amended LSA contained customary covenants, including, but not
limited to: (i) limitations on the disposition of property; (ii)
limitations on changing the Company’s business or permitting
a change in control; (iii) limitations on additional indebtedness
or encumbrances; (iv) restrictions on distributions; (v)
limitations on certain investments; and (vi) limitations on the
amount of cash held in financial institutions in Latvia.
Additionally, the Amended LSA required the Company 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.
The
Third Amendment (i) amended the definition of “Permitted
Indebtedness” and (ii) amended Section 6.8(a) of the Amended
LSA to require that the Company, and each of its domestic
subsidiaries, maintain all of its domestic depository and operating
accounts with Avidbank beginning on June 1, 2018, and to prohibit
the Company from maintaining a domestic account balance outside of
Avidbank that exceeds Ten Thousand Dollars ($10,000) during the
transition period. The Third Amendment also amended Section 6.9(a)
of the Amended LSA to require that the Company maintain a fixed
charge coverage ratio, as measured on June 30, 2018, of at least
1.10 to 1.00 and, thereafter, beginning with the quarter ended
September 30, 2018, to maintain a fixed charge coverage ratio of at
least 1.15 to 1.00. Additionally, pursuant to the Third Amendment,
Avidbank granted the Company a waiver of default arising prior to
the Third Amendment from its failure to comply with the fixed
charge coverage ratio measured on March 31, 2018.
Pursuant
to the Fourth Amendment, Avidbank granted the Company a waiver of
default arising prior to the Fourth Amendment from its failure to
comply with the fixed charge coverage ratio covenant measured on
June 30, 2018. Based on the waiver, the Company was no longer in
default on the Term II Loan or the Revolving Line. The Fourth
Amendment also provided for the restriction of $1 million of the
Company’s cash, which would be released upon two consecutive
quarters of compliance with the fixed charge coverage ratio
covenant, and so long as no event of default has occurred that is
continuing on that date. The Fourth Amendment also provided that
during the restrictive period, the calculation of the fixed charge
coverage ratio would be determined as if the outstanding principal
amount of the Term II Loan was $1 million less than the actual
outstanding principal amount of the Term II Loan.
On
October 30, 2018, the Company entered into the Fifth Amendment,
which amended the definition of “Adjusted EBITDA” to
allow for the addback of certain one-time expenses for purposes of
determining the fixed charge coverage ratio and compliance with the
related covenant. The Fifth Amendment also extended the maturity
date of the Revolving Line from December 21, 2018 to March 21,
2019. As discussed in more detail below, on February 26, 2019, the
Company entered into the Loan Agreement (as defined below) with
BankUnited, N.A. (“BankUnited”), and used the proceeds
from the BankUnited Term Loan (as defined below) to pay in full,
all outstanding amounts owed pursuant to the Term II Loan.
Accordingly, as of June 30, 2019, there was no outstanding balance
under the Term II Loan.
BankUnited Loan
On
February 26, 2019, the Company entered into a Loan Agreement (the
“Loan Agreement”) with BankUnited for (i) a
revolving line of credit up to maximum amount of $2,000,000 (the
“BankUnited Revolving Line”), (ii) a term loan in the
amount of up to $5,813,500 (“BankUnited Term Loan”),
and (iii) a non-revolving guidance line of credit up to a maximum
amount of $10,000,000 (the “Guidance Line” and,
together with the BankUnited Revolving Line and BankUnited Term
Loan, the “BankUnited Loans”). Each of the BankUnited
Loans is evidenced by a promissory note in favor of BankUnited (the
“BankUnited Notes”).
On May
6, 2019, the Company entered into that certain First Amendment to
Loan Agreement, effective February 26, 2019, with BankUnited (the
“Amendment” and, together with the Loan Agreement, the
“Amended Loan Agreement”). The Amendment amended the
definition of the fixed charge coverage ratio to more accurately
reflect the parties’ understandings at the time the Loan
Agreement was executed.
BankUnited Revolving Line
Pursuant
to the Amended Loan Agreement, BankUnited will make loan advances
under the BankUnited Revolving Line to the Company up to a maximum
aggregate principal amount outstanding not to exceed $2,000,000,
which proceeds will be used for working capital and general
corporate purposes. Amounts borrowed under the BankUnited Revolving
Line may be repaid and re-borrowed at any time prior to February
26, 2022, at which time all amounts will be immediately due and
payable. The advances under the BankUnited Revolving Line
bear interest, on the outstanding daily balance, at a per annum
rate equal to 2.75% above the 30-day LIBOR. Interest payments
are due and payable, in arrears, on the first day of each month.
BankUnited Term Loan
Pursuant
to the Amended Loan Agreement, BankUnited advanced the Company
$5,813,500 to satisfy in full the amounts owed to Avidbank,
including the Term II Loan, and to pay the fees and expenses
incurred in connection with closing of the BankUnited Loans. The
BankUnited Term Loan is for a 5-year term, but co-terminus with the
BankUnited Revolving Line. The BankUnited Term Loan bears interest
at a per annum rate equal to 2.75% above the 30-day LIBOR. Equal
monthly principal payments of $48,445.83, plus accrued interest,
are due and payable, in arrears, on the first day of each month
during the term. Upon maturity, all principal and interest shall be
immediately due and payable. As of June 30, 2019, the applicable
interest rate was 5.19%.
Guidance Line
Pursuant
to the Amended Loan Agreement, BankUnited, in its sole discretion,
may make loan advances to the Company under the Guidance Line up to
a maximum aggregate principal amount outstanding not to exceed
$10,000,000, which proceeds will be used for capital expenditures
and approved business acquisitions. Such advances must be in
minimum amounts of $1,000,000 for acquisitions and $500,000 for
capital expenditures, and will be limited to 80% of cost or as
otherwise determined by BankUnited. Amounts borrowed under the
Guidance Line may not re-borrowed. The advances under the Guidance
Line bear interest, on the outstanding daily balance, at a per
annum rate equal to 2.75% above the 30-day LIBOR. Interest
payments are due and payable, in arrears, on the first day of each
month. On each anniversary of the Amended Loan Agreement, monthly
principal payments become payable, amortized based on a ten-year
term.
Security and Guarantees
The
Company’s obligations under the Amended Loan Agreement are
collateralized by a first priority security interest (subject to
permitted liens) in all of its assets and the assets of the
Company’s U.S. subsidiaries, GelTech, and ISP, pursuant to a
Security Agreement granted by GelTech, ISP, and the Company in
favor of BankUnited. The Company’s equity interests in, and
the assets of, its foreign subsidiaries are excluded from the
security interest. In addition, all of the Company’s
subsidiaries have guaranteed the Company’s obligations under
the Amended Loan Agreement and related documents, pursuant to
Guaranty Agreements executed by the Company and its subsidiaries in
favor of BankUnited.
General Terms
The
Amended Loan Agreement contains customary covenants, including, but
not limited to: (i) limitations on the disposition of property;
(ii) limitations on changing the Company’s business or
permitting a change in control; (iii) limitations on additional
indebtedness or encumbrances; (iv) restrictions on distributions;
and (v) limitations on certain investments. The Amended Loan
Agreement also contains certain financial covenants, including
obligations to maintain a fixed charge coverage ratio of 1.25 to
1.00 and a total leverage ratio of 4.00 to 1.00. As of June 30,
2019, the Company was in compliance with all required
covenants.
We may
prepay any or all of the BankUnited Loans in whole or in part at
any time, without penalty or premium. Late payments are subject to
a late fee equal to five percent (5%) of the unpaid amount. Amounts
outstanding during an event of default accrue interest at a rate of
five percent (5%) above the 30-day LIBOR applicable
immediately prior to the occurrence of the event of default.
The Amended Loan Agreement contains other customary
provisions with respect to events of default, expense
reimbursement, and confidentiality.
Financing
costs incurred were recorded as a discount on debt and will be
amortized over the term. Amortization of approximately $117,000 and
$13,700 is included in interest expense for the years ended June
30, 2019 and 2018, respectively. For the year ended June 30, 2019,
this includes approximately $94,000 of previously unamortized
financing costs related to the Term II Loan, which were expensed as
of February 26, 2019 when this note was paid in full.
Future
maturities of loans payable are as follows:
|
|
|
|
|
|
Fiscal
year ending:
|
|
|
|
|
June 30,
2020
|
$581,350
|
$(17,334)
|
$564,016
|
|
June 30,
2021
|
581,350
|
(17,334)
|
564,016
|
|
June 30,
2022
|
581,350
|
(17,334)
|
564,016
|
|
June 30,
2023
|
581,350
|
(17,334)
|
564,016
|
|
June 30,
2024
|
3,342,763
|
(17,334)
|
3,325,429
|
|
Total
payments
|
$5,668,163
|
$(86,670)
|
$5,581,493
|
|
Less current
portion
|
|
|
(581,350)
|
|
Non-current
portion
|
|
|
$5,000,143
|
19.
Note
Satisfaction and Securities Purchase Agreement
Note Satisfaction and Securities Purchase Agreement
On
January 16, 2018 (the “Satisfaction Date”), the Company
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, the Company
issued the Sellers Note in the original principal amount of
$6,000,000, which principal payment amount was subsequently reduced
to $5.7 million, after applying a working capital adjustment equal
to approximately $293,000.
Pursuant
to the Note Satisfaction Agreement, the Company 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 the Satisfaction Date, 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, the Company 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. 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 the
Satisfaction Date. The Cash Payment was paid using approximately
$600,000 of cash on hand and approximately $2.9 million in proceeds
from the Term II Loan from Avidbank. As of the Satisfaction Date,
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 us in a transaction not involving any
public offering), and pursuant to Rule 506 of Regulation D as
promulgated by the SEC under the Act.
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 the Company agreed to file with
the Securities and Exchange Commission 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. The Registration Statement on Form S-3 (File
No. 333-223028) was declared effective by the SEC on March 8,
2018.
20. Restructuring
In July
2018, we announced the relocation and consolidation of ISP’s
New York facility (the “Irvington Facility”) into our
existing facilities in Orlando, Florida and Riga, Latvia. We record
charges for restructuring and other exit activities related to the
closure or relocation of business activities at fair value, when
incurred. Such charges include termination benefits, contract
termination costs, and costs to consolidate facilities or relocate
employees. For the year ended June 30, 2019, we recorded
approximately $1.2 million in expenses related to the relocation of
the Irvington Facility. These charges are included as a component
of the “Selling, general and administrative” expenses
line item in our Consolidated Statement of Comprehensive Income
(Loss). These charges include approximately $467,000 for our
remaining obligation under the Irvington Lease until its expiration
in September 2020, as we have ceased use of this facility. Amounts
accrued and included in our Consolidated Balance Sheet as of June
30, 2019 related to this activity are comprised of the remaining
lease obligation of approximately $467,000, included in
“Deferred rent”, and approximately $246,000 of
termination benefits and other cost, included in “Accrued
payroll and benefits.”
End of
Consolidated Financial Statements