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.
Capabilities
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 fever detection, 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
forklifts 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”).
Product Groups and Markets
Overview
Our business is organized 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, published in 2019, 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 capitalize on optics as an enabling technology
across many industries and markets, by leveraging our key
differentiators, including our deep design and manufacturing
expertise, our technology, and our established low-cost vertically
integrated manufacturing capabilities. In addition, we intend for
our product managers and sales force to work together to focus on
pursuing customer growth opportunities where our differential
advantages coincide with key customer needs.
Product Groups
Beginning in late 2019, we 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 has begun to
facilitate choosing investment priorities to help strategically
align our competencies with strategic industry revenue
opportunities. Over the longer term, this function will also help
ensure successful product life cycle management. 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. Historically, the
majority of our thermal imaging products have been 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, particularly as
BD6 continues to be adopted into new applications and new designs.
Infrared systems, which include thermal imaging cameras,
temperature sensing, gas sensing devices, spectrometers, night
vision systems, automotive driver awareness systems, such as blind
spot detection, thermal weapon sights, and infrared counter measure
systems, is an area that is growing rapidly and we are selling
products that are utilized in a number of these applications. As
infrared imaging systems become widely available, market demand
will increase as the cost of components decreases. 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 offer a 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. Collimator assemblies for applications involving light
detection and ranging LIDAR technology for advanced driver
assistance systems and autonomous vehicles, such as forklifts and
other automated warehouse equipment. This continues to be an
emerging market with long-term growth potential for us. We also
expect growth from medical 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
Over the last few months, through an intensive discovery and
analysis process, our leadership has worked to develop and
re-define our strategic direction.
As a component company with its roots deep in optics manufacturing
technology, we are known for our innovative products and solutions,
which we have leveraged over the years to focus on the
delivery of "best in class" and cost leading optical
components. Initially, we focused on standard glass PMO
products, and later, through the acquisition of ISP, as well as
internal research and development, we began to shift our focus to
products specific to the infrared market.
As is typical with a company with origins in component
manufacturing, over the years, we have focused on our products and
technology, and became a leader in molded optical glass
components. We then leveraged that experience and know-how
into infrared optics. However, during the 30 years since we began
delivering our innovative molded optics, the uses of optical
technology have grown exponentially.
With the expansion of optical applications into many industries,
technologies and products, customers' needs have changed, and
customers now often seek a partner that can complement their
capabilities and support their implementation of optics into their
products. We
are well positioned to become the partner of choice for OEM
customers integrating optics into their products because of our
optical technologies expertise, design of optical systems,
and manufacturing of the individual components, as well as
assemblies.
To execute on this strategic direction, we intend to focus on the
following strategic priorities:
1. Capitalize on the
Opportunity. We recognize that the opportunity
for optics and optical assemblies has changed over the past several
years. Optics (or more generally photonics) and optical
technologies are increasingly pervasive across numerous industries
and markets. Optics is not an industry vertical in itself, but an
enabling technology that spans industries well beyond
telecommunications. Optics has become a key technology in
industries such as automotive, defense, medical, surveillance,
industrial equipment, and many other industries. As such, we
have an enormous market opportunity for our products globally, and
the opportunity is diversified across many industries and end
markets.
2. Prioritize Key
Differentiators. We will prioritize the key
differentors that we bring to the photonics market and what we can
provide to our customers. Namely, we believe that these key
differentiators are our deep design and manufacturing expertise
coupled with key optical technologies, as well as a global presence
of market penetration and low-cost manufacturing.
3. Continue to Drive Operational
Excellence. We acknowledge the importance of
continuous improvement and will intensify our focus on operational
excellence. This will encompass both short- and long-term
initiatives throughout the organization and be supported by a
culture that values results and accountability.
4. Create Solutions for Our
Customers. We will leverage our unique
capabilities using our expertise in optical design and
manufacturing to create solutions for our customers rather than
simply components. Over time, we believe this will promote a richer
business model supported by longer term partnerships with our
customers.
5. Invest in Our People. We
will invest in world class optical design and engineering talent
and a strong sales force that can focus and prioritize customer
opportunities that align with our strategic
goals.
We will work to change the operations
and execution culture to be "best in class." We will remain
focused on identifying and investing in the opportunities best
suited to deliver on our strategy. We believe that this new
strategic focus will put us on a path to provide even more value to
our customers, greater opportunities to our employees, and better
financial returns to our
stockholders.
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
have made a number of organizational changes designed to ensure we
continue to leverage the expanded capabilities and manage our
broader product portfolio. First, our organizational structure now
enables the close coordination of supply with demand. We created a
product management function to manage the portfolio of products and
identify our best growth opportunities. Finally, in June
2020, we hired a Vice President of Global Sales and Marketing to
lead our Sales and Marketing organization.
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. Generally, we
display our product line additions and enhancements at one or more
trade shows each year. As a result of COVID-19, however,
several of these trade shows were either cancelled or modified into
virtual trade shows. Prior to
COVID-19, we participated in several U.S.-based shows including
Society of Photographic Instrumentation Engineers
(“SPIE”) Photonics West in February 2020. In addition, we participated,
virtually, in the Optical Society of America (“OSA”)
Industry Development Associates (“OIDA”) Showcase in
August 2020, and intend to exhibit at the China International
Optoelectronic Expo (“CIOE”) in September 2020.
This strategy underscores our strategic directive of broadening our
base of innovative optical components and assemblies. These trade
shows, even as virtual events, 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 other 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 Ltd. (a subsidiary of MKS Instruments, Inc.), 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 proprietary BD6
(chalcogenide material), a lower cost replacement for Germanium,
gives us a competitive advantage as it can be diamond turned or
molded depending upon customer requirements. In addition, our
low-cost, high volume lens molding technology combined with our
lens fabrication capabilities in China and Latvia, which are
low-cost regions, enables us to compete with the other
manufacturers of 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 a number of Asian and European manufacturers. 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.
Our Orlando Facility and LPOIZ’s Zhenjiang Facility feature
areas for each step of the manufacturing process, including coating
work areas, diamond turning, 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®
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Service mark
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Yes
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People’s Republic of China
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September 13, 2025
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ISP Optics®
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Trademark
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Yes
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United States
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August 12, 2022
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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 2020 and 2019 of approximately
$1.7 million and $2.0 million, respectively. In fiscal 2020 and
2019, our efforts were concentrated on expanding our product
capabilities for molded optics and thermal imaging optics, to
continue increasing our product offerings, lower costs and increase
capacity in response to demand for both our PMO and infrared
products.
In line with our new strategic priorities we anticipate continuing
to invest in new product development with a stronger focus on
providing complete customer-specific solutions as well as
continuing to develop new core technologies that will allow us to
differentiate ourselves in the marketplace and create solutions for
our customers. Our spending on new product development may begin to
increase as we review implementation of our strategic plan and
align our capabilities and new product development to that
plan.
For more difficult or customized products, we typically bill our
customers for engineering services as a NRE fee.
Concentration of Customer Risk
In fiscal 2020, we had sales to three customers that comprised an
aggregate of approximately 31% of our annual revenue with one
customer at 15% of our sales, another customer at 10% of our sales,
and the third customer at 6% of our sales. 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. 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 2020, 66% of our net revenue was derived from sales
outside of the U.S., with 96% of our foreign sales derived from
customers in Europe and Asia. 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.
Employees
As of June 30, 2020, we had 372 employees, of which 363 were
full-time equivalent employees, with 106 in the U.S., including 102
located in Orlando, Florida and 4 working remotely from various
locations, 96 located in Riga, Latvia, and 170 located in Jiading
and Zhenjiang, China. Of our 363 full-time equivalent employees, we
have 40 employees engaged in management, administrative, and
clerical functions, 27 employees in new product development, 19
employees in sales and marketing, and 286 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 2021. 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
Our business, results of operations, financial condition, cash
flows, and the stock price of our Class A common stock can be
adversely affected by pandemics, epidemics, or other public health
emergencies, such as the recent outbreak of COVID-19. Our
business, results of operations financial condition, cash flows,
and the stock price of our Class A common stock can be adversely
affected by pandemics, epidemics, or other public health
emergencies, such as the recent outbreak of COVID-19, which has
spread from China to many other countries across the world,
including the United States. In March 2020, the World Health
Organization (the “WHO”) declared COVID-19 as a
pandemic. The COVID-19 pandemic has resulted in governments around
the world implementing increasingly stringent measures to help
control the spread of the virus, including “stay at
home” orders, travel restrictions, business curtailments,
school closures, and other measures.
We are
considered an “essential business,” as a critical
supplier to both the medical and defense industries. To date, we
have continued to operate our manufacturing facilities consistent
with government guidelines and state and local orders; however, the
outbreak of COVID-19 and any preventive or protective actions taken
by governmental authorities may have a material adverse effect on
our operations, supply chain, customers, and transportation
networks, including business shutdown or disruptions. The extent to
which COVID-19 may adversely impact our business depends on future
developments, which are highly uncertain and unpredictable, depends
upon the severity and duration of the outbreak and the
effectiveness of actions taken globally to contain or mitigate its
effect. Any resulting financial impact cannot be estimated
reasonably at this time, but may materially adversely affect our
business, results of operations, financial condition, and cash
flows. Even after the COVID-19 pandemic has subsided, we may
experience materially adverse impacts to our business due to any
resulting economic recession or depression. Additionally, concerns
over the economic impact of COVID-19 have caused extreme volatility
in financial and other capital markets, which has and may continue
to adversely impact our stock price and our ability to access
capital markets. To the extent the COVID-19 pandemic may adversely
affect our business and financial results, it may also have the
effect of heightening many of the other risks described in this
Annual Report on Form 10-K.
We have a history of losses. Although we reported net income
of $0.9 million for fiscal 2020, we incurred a net loss of $2.7
million for fiscal 2019. Prior to fiscal 2019, we reported net
income of $1.1 million and $7.7 million for fiscal 2018 and 2017,
respectively, but we have a history of losses prior to fiscal 2016.
As of June 30, 2020, we had an accumulated deficit of approximately
$197.1 million. We may incur losses in the future if we do not
achieve sufficient revenue to maintain 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 continued cost reduction efforts across all product
groups, 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 2020, we had sales to three
customers that comprised an aggregate of approximately 31% of our
annual revenue with one customer at 15% of our sales, another
customer at 10% of our sales, and the third customer at 6% of our
sales. 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 both fiscal 2020 and 2019, 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. 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 2020, 66% of our net revenue
was derived from sales outside of the U.S., with 96% of our foreign
sales derived from customers in Europe and Asia. 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. 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 had negative impact on our cost of sales beginning late in
fiscal 2019. As a result, we implemented a number of strategies to
mitigate the current and, hopefully, future impact of tariffs.
These strategies mitigated the impact of tariffs beginning in the
second quarter of fiscal 2020. 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, any future impact on our operations
and financial results is uncertain and these impacts could be more
significant than those we experienced in fiscal 2020. Further, we
can provide no assurance that the strategies we implemented to
mitigate the impact of such tariffs or other trade actions will
continue to 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 continue to expand our sales
operations globally, we may not be able to continue 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 2020, sales of PMO products
represented approximately 42% of our net revenues, sales of
infrared products represented approximately 52% of our net
revenues, and sales of specialty products represented 6% of our
revenues. In the future, we expect growth in both our PMO and
infrared product groups. Continued and expanding market acceptance
of these products, particularly our BD6-based infrared 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 2020 and 2019, we
recognized net losses of approximately $214,000 and $436,000 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. If the Euro or
Renminbi currencies were to trend unfavorably against the U.S.
dollar on a long-term basis, then the Company would seek to
rebalance its strategic materials sourcing.
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 2020, 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. During fiscal 2020, we began declaring
intercompany dividends to remit a portion of the earnings of our
foreign subsidiaries to us. Remaining 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 of the legal entity
must equal at least 50% of its registered capital. Based on
retained earnings as of December 31, 2019, the end of our last
statutory tax year, LPOIZ had approximately $4.8 million available
for repatriation and LPOI did not have any earnings available for
repatriation. 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
made 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 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.
On March 27, 2020, the President signed into law the Coronavirus
Aid, Relief, and Economic Security Act (the “CARES
Act”), which, among other things, is intended to provide
emergency assistance to qualifying businesses and individuals. The
CARES Act also suspends the limitation on the deduction of NOLs
arising in taxable years beginning before January 1, 2021, permits
a five-year carryback of NOLs arising in taxable years beginning
after December 31, 2017 and before January 1, 2021, and generally
modifies the limitation on the deduction for net interest expense
to 50% of adjusted taxable income for taxable years beginning in
2019 and 2020. During fiscal 2020, as a result of the CARES Act,
the Company was able to accelerate the recovery of an income tax
receivable related to previously paid alternative minimum tax. The
receivable amount of approximately $107,000 as of June 30, 2020 was
collected in July 2020. In addition, the Company elected to utilize
the payroll tax deferral under the CARES Act, resulting in cash
savings of approximately $100,000, accrued as of June 30, 2020 and
deferred until at least December 31, 2021. While we may receive
further financial, tax, or other relief and other benefits under
and as a result of the CARES Act, it is not possible to estimate at
this time the availability, extent, or impact of any such
relief.
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, April 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.
In
January 2020, the United Kingdom and the European Union entered
into a withdrawal agreement pursuant to which the United Kingdom
formally withdrew from the European Union on January 31, 2020
(generally referred to as “BREXIT”). Following such
withdrawal, the United Kingdom entered into a transition period
scheduled to end on December 31, 2020. During the transition
period, the United Kingdom will remain subject to European Union
law and maintain access to the European Union single market and to
the global trade deals negotiated by the European Union on behalf
of its members. There remains substantial uncertainty surrounding
the ultimate impact of BREXIT and any associated transition
period.
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.
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. We also have a sales, marketing,
and administrative office in Shanghai, China. The following
schedule presents the approximate square footage of our offices and
facilities as of June 30, 2020:
|
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 (lease expired on August 31,
2020)
|
|
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 office suite used for sales, marketing and administrative
offices
|
|
Riga, Latvia
|
23,000
|
Leased; 2 office 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.
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.
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, generally 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. The Company did not have any restricted
cash as of June 30, 2020 or 2019.
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. The Company did not record any
impairment of long-lived assets during the fiscal years ended June
30, 2020 and 2019. 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. The Company did not record any goodwill
impairment during the fiscal years ended June 30, 2020 or
2019.
Leases. During the first quarter of fiscal 2020, the Company
adopted ASU No. 2016-02, Leases
(Topic 842) (“ASC Topic 842”). This guidance
requires an entity to recognize lease liabilities and a
right-of-use asset for all leases on the balance sheet and to
disclose key information about the entity’s leasing
arrangements. The Company adopted this standard as of July 1, 2019,
using the modified retrospective transition method by applying the
new standard to all leases existing at the date of initial
application and not restating comparative periods. The Company
elected the package of practical expedients permitted under the
transition guidance, which allowed the Company to carryforward
historical lease classification, and not reassess (i) whether a
contract was or contained a lease, and (ii) initial direct costs
for any leases that existed prior to July 1, 2019. The Company also
elected to combine lease and non-lease components and not to record
leases with an initial term of 12 months or less on the
Consolidated Balance Sheet. As a result of adopting ASC Topic 842
on July 1, 2019, the Company recognized operating lease
right-of-use assets of $1.7 million and corresponding operating
lease liabilities of $2.3 million from existing leases on the
Company's Consolidated Balance Sheet. Operating lease liabilities
include amounts previously classified as “Deferred
Rent” in the Consolidated Balance Sheet as of June 30, 2019.
See Note 13, Leases, for
further details. The adoption of ASC Topic 842 had no impact on the
Company’s Consolidated Statement of Comprehensive Income
(Loss) or Consolidated Statement of Cash Flows.
Deferred rent related to certain of the Company’s operating
leases, prior to the adoption of ASC Topic 842. Rent expense for
operating leases containing predetermined fixed increases of the
base rental rate during the lease term was being recognized on a
straight-line basis over the lease term, as well as applicable
leasehold improvement incentives provided by the landlord. Through
June 30, 2019, the Company recorded the difference between the
amounts charged to operations and amounts payable under the leases
as deferred rent in the accompanying Consolidated Balance Sheet as
of June 30, 2019.
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 approximately $5.4 million at
June 30, 2020. Of this amount, greater than 50% 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.
Historically, we considered unremitted earnings held by our foreign
subsidiaries to be permanently reinvested. However, during fiscal
2020, we began declaring intercompany dividends to remit a portion
of the earnings of our foreign subsidiaries to the U.S. parent
company. It is still our intent to reinvest a significant portion
of earnings generated by our foreign subsidiaries, however we also
plan to repatriate a portion of their earnings.
With respect to the funds generated by our foreign subsidiaries in
China, the retained earnings of
the legal entity must equal at least 50% of the registered capital
before any funds can be repatriated. During fiscal 2020, we
repatriated approximately $2 million from LPOIZ. Based on retained
earnings as of December 31, 2019, the end of the prior statutory
tax year, LPOIZ had an additional $4.8 million available and LPOIZ
did not have any funds available for repatriation. Based on our
previous intent, we had not historically provided for future
Chinese withholding taxes on the related earnings. However, during
fiscal 2020 we began to accrue for these taxes on the portion of
earnings that we intend to repatriate.
Beginning in fiscal 2019, earnings from the Company’s
non-U.S. subsidiaries were subject to the global intangible
low-taxed income (“GILTI”) inclusion pursuant to U.S.
income tax rules. See Note 9, Income Taxes, to these Consolidated
Financial Statements for additional
information.
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
(“FASB”) 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 accounts receivable, 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 finance lease
obligations and loans payable approximate their carrying values,
based upon current rates available to us. See Note 17, Loans Payable, to these Consolidated
Financial Statements for additional information. Management
considers these fair value estimates to be level 2 fair value
measurements.
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.
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.
Reclassifications. The classification of certain prior-year
amounts have been adjusted in our Consolidated Financial Statements
to conform to current year classifications. An accrual of $467,000
related to the lease for ISP Optics Corporation’s
(“ISP”) Irvington, New York facility (the
“Irvington Facility”) was reclassified from
“Deferred rent, current portion” to “Accrued
liabilities” in the Consolidated Balance Sheet as of June 30,
2019. See Note 13, Leases,
and Note 18, Restructuring,
for further information. In addition, upon adoption of ASC Topic
842, amounts previously included in the line items “Capital
lease obligation, current portion” and “Capital lease
obligation, less current portion” are now included in the
line items “Finance lease obligation, current portion”
and “Finance lease obligation, less current portion”,
respectively, in the Consolidated Balance Sheet as of June 30,
2019.
Recent accounting pronouncements. There
are new accounting pronouncements issued by the FASB that are not
yet effective for the Company for the year ended June 30,
2020.
In
December 2019, the FASB issued Accounting Standards Update
(“ASU”) 2019-12, “Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes.” The amendments
in this update simplify the accounting for income taxes by removing
certain exceptions to the general principles in Topic 740. The
amendments also improve consistent application of and simplify U.S.
GAAP for other areas of Topic 740 by clarifying and amending
existing guidance. For public business entities, the amendments in
this update are effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2020. This
ASU will be effective for the Company in the first quarter of
fiscal year 2022. Early adoption is permitted. The Company is
currently evaluating the impact of the adoption of this update on
its Consolidated Financial Statements.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value
Measurement (Topic 820), Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement.” This ASU
is intended to improve the effectiveness of disclosures in the
notes to the financial statements, including (1) the development of
a framework that promotes consistent decisions by the FASB about
disclosure requirements and (2) the appropriate exercise of
discretion by reporting entities. The amendment modifies the
disclosure requirements on transferring between level 1 and level 2
and valuation processes of level 3 fair value measurements. The
amendments in this update are effective for all entities for fiscal
years, and interim periods within those fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2019. This ASU is effective for the Company in the first quarter of
fiscal year 2021. The Company has assessed the preliminary impact
from the adoption of this guidance and expects no impact on its
Consolidated Financial Statements.
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, 2020 and 2019.
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, 2020 and 2019 was as
follows:
|
|
|
|
|
|
|
|
PMO
|
$14,639,687
|
$14,098,157
|
|
Infrared
Products
|
18,052,856
|
17,271,590
|
|
Specialty
Products
|
2,275,420
|
2,379,341
|
|
Total
revenue
|
$34,967,963
|
$33,749,088
|
The
components of inventories include the following:
|
|
|
|
|
Raw
materials
|
$3,876,955
|
$3,467,105
|
|
Work in
process
|
2,989,070
|
2,288,226
|
|
Finished
goods
|
3,134,800
|
2,704,471
|
Allowance for
obsolescence
|
(1,016,343)
|
(775,275)
|
|
|
$8,984,482
|
$7,684,527
|
During
fiscal 2020 and 2019, the Company evaluated all allowed items and
disposed of approximately $128,000 and $125,000, respectively, of
inventory parts and wrote them off against the allowance for
obsolescence.
The value of tooling in raw materials, net of the related allowance
for obsolescence, was approximately $2.3 million and $2.1 million
at June 30, 2020 and 2019, respectively.
5.
Property
and Equipment, net
Property
and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
equipment
|
5 - 10
|
$18,444,448
|
$17,412,136
|
|
Computer equipment
and software
|
3 - 5
|
801,625
|
706,840
|
|
Furniture and
fixtures
|
5
|
321,418
|
293,582
|
|
Leasehold
improvements
|
5 - 7
|
2,171,388
|
2,074,069
|
|
Construction in
progress
|
|
1,274,880
|
697,126
|
|
Total property and
equipment
|
|
23,013,759
|
21,183,753
|
|
Less accumulated
depreciation and amortization
|
|
(11,214,698)
|
(9,452,669)
|
|
Total property and
equipment, net
|
|
$11,799,061
|
$11,731,084
|
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 initially recorded as
leasehold improvements and deferred rent liability. The balances
are being amortized over the corresponding lease terms, and are
included in leasehold improvements and operating lease liabilities
as of June 30, 2020.
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, 2020 and 2019, 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
|
|
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
|
|
10,703,000
|
10,703,000
|
|
Less
accumulated amortization
|
|
(3,995,036)
|
(2,865,694)
|
|
Total
intangible assets, net
|
|
$6,707,964
|
$7,837,306
|
Future
amortization of identifiable intangibles is as
follows:
|
Fiscal
year ending:
|
|
|
June
30, 2021
|
$1,125,083
|
|
June
30, 2022
|
1,125,083
|
|
June
30, 2023
|
1,125,083
|
|
June
30, 2024
|
1,125,083
|
|
June
30, 2025 and later
|
2,207,632
|
|
|
$6,707,964
|
7. Accounts Payable
The
accounts payable balances as of June 30, 2020 and 2019 both include
earned but unpaid Board of Directors’ fees of approximately
$91,000.
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.
For
financial reporting purposes, income before income taxes includes
the following components:
|
|
|
|
|
|
|
|
Pretax income (loss):
|
|
|
|
United
States
|
$(3,739,527)
|
$(4,649,593)
|
|
Foreign
|
5,370,454
|
2,424,476
|
|
Income
(loss) before income taxes
|
$1,630,927
|
$(2,225,117)
|
The
components of the provision for income taxes are as
follows:
|
|
|
|
|
|
|
|
Current:
|
|
|
|
Federal
tax
|
$-
|
$(9,352)
|
|
State
|
3,047
|
23,423
|
|
Foreign
|
767,951
|
469,135
|
|
Total
current
|
770,998
|
483,206
|
|
|
|
|
|
Deferred:
|
|
|
|
Federal
tax
|
4,931
|
21,803
|
|
State
|
(11,931)
|
(49,803)
|
|
Foreign
|
-
|
-
|
|
Total
deferred
|
(7,000)
|
(28,000)
|
|
|
|
|
|
Total
income tax provision
|
$763,998
|
$455,206
|
The
reconciliation of income tax computed at the U.S. federal statutory
rates to the total income tax provision is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
federal statutory tax rate
|
21.0%
|
21.0%
|
|
|
|
|
|
Income tax provision reconciliation:
|
|
|
|
Tax
at statutory rate:
|
$342,495
|
$(467,275)
|
|
Net
foreign income subject to lower tax rate
|
(497,959)
|
(303,288)
|
|
State
income taxes, net of federal benefit
|
(75,415)
|
(26,380)
|
|
Valuation
allowance
|
344,793
|
652,262
|
|
IRC
965 repatriation
|
(206,807)
|
202,026
|
|
GILTI
|
835,101
|
251,869
|
|
Federal
research and development and other credits
|
(71,962)
|
(84,440)
|
|
Stock-based
compensation
|
-
|
3,034
|
|
Other
permanent differences
|
(183,367)
|
74,099
|
|
Other,
net
|
277,119
|
153,299
|
|
|
$763,998
|
$455,206
|
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.
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. 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. 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.
On
March 27, 2020, the President signed into law the Coronavirus Aid,
Relief, and Economic Security Act (the “CARES Act”),
which, among other things, is intended to provide emergency
assistance to qualifying businesses and individuals. The CARES Act
also suspends the limitation on the deduction of NOLs arising in
taxable years beginning before January 1, 2021, permits a five-year
carryback of NOLs arising in taxable years beginning after December
31, 2017 and before January 1, 2021, and generally modifies the
limitation on the deduction for net interest expense to 50% of
adjusted taxable income for taxable years beginning in 2019 and
2020. During fiscal 2020, as a result of the CARES Act, the Company
was able to accelerate the recovery of an income tax receivable
related to previously paid alternative minimum tax. The receivable
amount of approximately $107,000 as of June 30, 2020 was collected
in July 2020. In addition, the Company elected to utilize the
payroll tax deferral under the CARES Act, resulting in cash savings
of approximately $100,000, accrued as of June 30, 2020 and deferred
until at least December 31, 2021.
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. For both the years ended June 30, 2020
and 2019, the tax rate for LPOIZ was 15%, in accordance with an
incentive program for technology companies. No deferred tax
provision has been recorded for China, as the effect is deemed de
minimis.
In
December 2019, the Company declared an intercompany dividend of $2
million from LPOIZ, payable to the Company as its parent company.
Accordingly, the Company accrued and paid Chinese withholding taxes
of $200,000 associated with the dividend. During fiscal 2020, LPOIZ
paid to the Company $1.8 million, after the withholding taxes.
Other than these withholding taxes, this intercompany dividend has
no impact on the Consolidated Financial Statements. Subsequent to
fiscal 2020, in July 2020 the Company declared an intercompany
dividend of $3 million from LPOIZ, payable to the Company as its
parent company. This dividend will be paid in installments during
fiscal 2021, and the Company will incur Chinese withholding taxes
totaling $300,000 on this dividend.
Historically, the Company considered unremitted earnings held by
its foreign subsidiaries to be permanently reinvested. However,
during fiscal 2020, the Company began declaring intercompany
dividends to remit a portion of the historical earnings of its
foreign subsidiaries to the U.S. parent company. It is still the
Company’s intent to reinvest a significant portion of the
more recent earnings generated by its foreign subsidiaries, however
the Company also plans to repatriate a portion of the historical
earnings of its subsidiaries. Based on its previous intent, the
Company had not historically provided for future Chinese
withholding taxes on the related earnings. However, during fiscal
2020 the Company began to accrue for these taxes on the portion of
historical earnings that it intends to repatriate.
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 if
declared prior to December 31, 2019. ISP Latvia has declared an
intercompany dividend to be paid to ISP, its U.S. parent company,
for the full amount of earnings accumulated prior to January 1,
2018. Distributions of this dividend 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.
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
|
$16,039,000
|
$16,044,000
|
|
Stock-based
compensation
|
868,000
|
822,000
|
|
R&D and other
credits
|
2,108,000
|
2,014,000
|
|
Capitalized R&D
expenses
|
487,000
|
476,000
|
|
Inventories
|
218,000
|
156,000
|
|
Accrued expenses
and other
|
99,000
|
111,000
|
|
Gross deferred tax
assets
|
19,819,000
|
19,623,000
|
|
Valuation allowance
for deferred tax assets
|
(17,044,000)
|
(16,725,000)
|
|
Total deferred tax
assets
|
2,775,000
|
2,898,000
|
|
Deferred tax
liabilities:
|
|
|
|
Depreciation and
other
|
(390,000)
|
(277,000)
|
|
Intangible
assets
|
(1,726,000)
|
(1,969,000)
|
|
Total deferred tax
liabilities
|
(2,116,000)
|
(2,246,000)
|
|
Net deferred tax
asset
|
$659,000
|
$652,000
|
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. During fiscal
2020, approximately $107,000 of this receivable was collected, and
the balance was reclassified to other receivables, current, and
subsequently collected in July 2020.
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 2021 through 2034. Based on the level of
historical taxable income, management has provided for a valuation
adjustment against the deferred tax assets of $17,044,000 at June
30, 2020, an increase of approximately $319,000 as compared to June
30, 2019. 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 $659,000 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, 2020, in addition to net operating loss carry forwards, the
Company also has research and development credit carry forwards of
approximately $2,108,000, 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 $2,500 and $3,900 for
fiscal 2020 and 2019, 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,
2020
|
Available for
Issuance at June 30,
2020
|
|
SICP (or Omnibus
Plan)
|
5,115,625
|
3,262,426
|
930,326
|
|
2014
ESPP
|
400,000
|
—
|
306,600
|
|
|
5,515,625
|
3,262,426
|
1,236,926
|
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, 2020 and
2019, the Company estimated the fair value of each stock award as
of the date of grant using the following assumptions:
|
|
|
|
|
|
|
|
Weighted-average
expected volatility
|
64.4%
|
69.5%
|
|
Dividend
yields
|
0%
|
0%
|
|
Weighted-average
risk-free interest rate
|
1.53%
|
3.00%
|
|
Weighted-average
expected term, in years
|
6.93
|
7.50
|
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,
2020 and 2019. 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, 2020 and 2019 is presented
below:
|
|
|
Restricted Stock
Units (RSUs)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
Granted
|
314,817
|
$1.60
|
9.6
|
484,000
|
2.4
|
|
Exercised
|
(29,356)
|
$1.35
|
|
(17,204)
|
|
|
Cancelled/Forfeited
|
(322,811)
|
$2.08
|
|
(11,471)
|
|
|
June
30, 2020
|
942,575
|
$1.65
|
6.5
|
2,319,851
|
0.9
|
|
|
|
|
|
|
|
|
Awards
exercisable/
|
|
|
|
|
|
|
vested as
of
|
|
|
|
|
|
|
June
30, 2020
|
676,293
|
$1.63
|
5.3
|
1,650,325
|
—
|
|
|
|
|
|
|
|
|
Awards
unexercisable/
|
|
|
|
|
|
|
unvested as
of
|
|
|
|
|
|
|
June
30, 2020
|
266,282
|
$1.70
|
9.6
|
669,526
|
0.9
|
|
|
942,575
|
|
|
2,319,851
|
|
The
total intrinsic value of stock options exercised for the years
ended June 30, 2020 and 2019 was approximately $35,000 and $580,
respectively.
The
total intrinsic value of stock options outstanding and exercisable
at June 30, 2020 and 2019 was approximately $1.2 million and $320,
respectively.
The
total fair value of stock options vested during the years ended
June 30, 2020 and 2019 was approximately $94,000 and $170,000,
respectively.
The
total intrinsic value of RSUs exercised during the years ended June
30, 2020 and 2019 was approximately $12,000 and $26,000,
respectively.
The
total intrinsic value of RSUs outstanding and exercisable at June
30, 2020 and 2019 was approximately $5.5 million and $1.3 million,
respectively.
The
total fair value of RSUs vested during the years ended June 30,
2020 and 2019 was approximately $443,000 and $393,000,
respectively.
As of
June 30, 2020, there was approximately $754,000 of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements, including share options and RSUs,
granted under the Omnibus Plan, through October 2018 and after that
date, the SICP. The expected compensation cost to be recognized is
as follows:
|
|
|
|
|
|
Fiscal
Year Ending:
|
|
|
|
|
June 30,
2021
|
$59,572
|
$271,867
|
$331,439
|
|
June 30,
2022
|
55,654
|
148,543
|
204,197
|
|
June 30,
2023
|
62,517
|
68,704
|
131,221
|
|
June 30,
2024
|
46,945
|
40,539
|
87,484
|
|
|
$224,688
|
$529,653
|
$754,341
|
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, estimated using the
Black-Scholes-Merton pricing mode, regarding the Company's
unexercisable/unvested awards as of June 30, 2020 and 2019 and
changes during the two years then ended:
Unexercisable/Unvested
Awards
|
|
|
|
Weighted-Average
Grant Date Fair Values
(per
share)
|
|
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
|
|
Granted
|
314,817
|
484,000
|
798,817
|
$0.79
|
|
Vested
|
(99,151)
|
(203,147)
|
(302,298)
|
$1.78
|
|
Cancelled/Forfeited
|
(60,079)
|
(11,471)
|
(71,550)
|
$2.70
|
|
June 30,
2020
|
266,282
|
669,526
|
935,808
|
$1.10
|
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, 2020 and 2019 included in the
accompanying Consolidated Statements of Comprehensive Income
(Loss):
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
$(59,019)
|
$36,461
|
|
RSUs
|
309,757
|
358,329
|
|
Total
|
$250,738
|
$394,790
|
|
|
|
|
|
The
amounts above were included in:
|
|
|
|
Selling, general
& administrative
|
$250,738
|
$393,352
|
|
Cost of
sales
|
-
|
1,620
|
|
New product
development
|
-
|
(182)
|
|
|
$250,738
|
$394,790
|
During
the year ended June 30, 2020, an unusually large number of grants
were forfeited unvested due to the departure of several
executives.
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 per share
are described in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
$866,929
|
$(2,680,323)
|
|
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
|
Basic
number of shares
|
25,853,419
|
25,794,669
|
|
|
|
|
|
Effect of dilutive
securities:
|
|
|
|
Options to purchase
common stock
|
7,026
|
-
|
|
RSUs
|
1,609,400
|
-
|
|
Diluted
number of shares
|
27,469,845
|
25,794,669
|
|
|
|
|
|
Earnings
(loss) per common share:
|
|
|
|
Basic
|
$0.03
|
$(0.10)
|
|
Diluted
|
$0.03
|
$(0.10)
|
The
following weighted-average potential dilutive shares were not
included in the computation of diluted earnings per share, as their
effects would be anti-dilutive:
|
|
|
|
|
|
|
|
Options to purchase
common stock
|
918,951
|
999,612
|
|
RSUs
|
518,610
|
1,755,893
|
|
|
1,437,561
|
2,755,505
|
12.
Defined
Contribution Plan
The
Company provides retirement benefits to its U.S.-based employees
through a defined contribution retirement plan. These benefits are
offered under 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, 2020, there were 56
employees who are enrolled in this plan. The Company made matching
contributions of approximately $97,000 and $107,000 during the
years ended June 30, 2020 and 2019, respectively.
The
Company has operating leases for its manufacturing and office
space. As of June 30, 2020, the Company had 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. In April 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 December 1, 2018, and it has a four-year
original term with one renewal option for an additional five-year
term.
As of
June 30, 2020, the Company, through its wholly-owned subsidiary,
LPOI, had 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 2020, the
Shanghai Lease was renewed for an additional three-year term, and
now expires in October 2022.
As of
June 30, 2020, the Company, through its wholly-owned subsidiary,
LPOIZ, had 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 a third 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, 2020, the Company, through its wholly-owned subsidiary ISP, had
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 had a five-year original term with
renewal options, expired in August 2020. As of June 30, 2019, the
relocation of the operations formerly housed in this facility was
complete and we had ceased use of this facility. See Note 18,
Restructuring, to these
Consolidated Financial Statements for additional
information.
At June
30, 2020, the Company, through ISP’s wholly-owned subsidiary
ISP Latvia, had 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
discussed in Note 2, Significant Accounting Policies, to these
Consolidated Financial Statements, the Company adopted ASC Topic
842 effective July 1, 2019. The Company’s facility leases are
classified as operating leases, and the Company also has finance
leases related to certain equipment located in Orlando, Florida.
The operating leases for facilities are non-cancelable, expiring
through 2022. The Company includes options to renew (or terminate)
in the lease term, and as part of the right-of-use
(“ROU”) assets and lease liabilities, when it is
reasonably certain that the Company will exercise that option. The
Company currently has obligations under four finance lease
agreements, entered into during fiscal years 2018 and 2019, with
terms ranging from three to five years. The leases are for computer
and manufacturing equipment.
The
Company’s operating lease ROU assets and the related lease
liabilities are initially measured at the present value of future
lease payments over the lease term. Two of our operating leases
include renewal options, which were not included in the measurement
of the operating lease ROU assets and related lease liabilities. As
most of the Company’s leases do not provide an implicit rate,
the Company used its collateralized incremental borrowing rate
based on the information available at the commencement date in
determining the present value of future payments. Currently, none
of the Company’s leases include variable lease payments that
are dependent on an index or rate. The Company is responsible for
payment of certain real estate taxes, insurance and other expenses
on certain of its leases. These amounts are generally considered to
be variable and are not included in the measurement of the ROU
asset and lease liability. The Company generally accounts for
non-lease components, such as maintenance, separately from lease
components. The Company’s lease agreements do not contain any
material residual value guarantees or material restricted
covenants. Leases with a term of 12 months or less are not recorded
on the Consolidated Balance Sheet; the Company recognizes lease
expense for these leases on a straight-line basis over the lease
term.
The
Company received tenant improvement allowances for the Orlando
Lease and for Orlando Lease II. These allowances were used to
construct improvements and are included in leasehold improvements
and operating lease liabilities. The balances are being amortized
over the corresponding lease terms.
The
components of lease expense were as follows:
|
|
|
|
Operating
lease cost
|
$646,845
|
|
Finance
lease cost:
|
|
|
Depreciation
of lease assets
|
324,058
|
|
Interest
on lease liabilities
|
77,540
|
|
Total
finance lease cost
|
401,598
|
|
Total
lease cost
|
$1,048,443
|
Supplemental
balance sheet information related to leases was as
follows:
|
|
Classification
|
|
|
Assets:
|
|
|
|
Operating
lease assets
|
Operating
lease assets
|
$1,220,430
|
|
Finance
lease assets
|
Property and equipment, net(1)
|
666,519
|
|
Total
lease assets
|
|
$1,886,949
|
|
|
|
|
Liabilities:
|
|
|
|
Current:
|
|
|
|
Operating
leases
|
Operating
lease liabilities, current
|
$765,422
|
|
Short-term
leases
|
Accrued liabilities(2)
|
97,665
|
|
Finance
leases
|
Finance
lease liabilities, current
|
278,040
|
|
|
|
|
Noncurrent:
|
|
|
|
Operating
leases
|
Operating
lease liabilities, less current portion
|
887,766
|
|
Finance
leases
|
Finance
lease liabilities, less current portion
|
279,435
|
|
Total
lease liabilities
|
|
$2,308,328
|
(1)
Finance lease
assets are recorded net of accumulated depreciation of
approximately $1.0 million as of June 30, 2020.
(2)
Represents accrual
related to the ISP Lease, which we ceased use of as of June 30,
2019. All remaining lease payments were accrued as of that date,
through the ISP Lease expiration in August 2020. See Note 14,
Restructuring, to these
Consolidated Financial Statements for additional
information.
Lease
term and discount rate information related to leases was as
follows:
|
Lease Term and Discount Rate
|
|
|
Weighted
Average Remaining Lease Term (in years)
|
|
|
Operating
leases
|
2.1
|
|
Finance
leases
|
2.2
|
|
|
|
|
Weighted
Average Discount Rate
|
|
|
Operating
leases
|
4.9%
|
|
Finance
leases
|
7.9%
|
Supplemental
cash flow information:
|
|
|
|
Cash paid for amounts included in the measurement of lease
liabilities:
|
|
|
Operating
cash used for operating leases
|
$790,199
|
|
Operating
cash used for finance leases
|
$77,553
|
|
Financing
cash used for finance leases
|
$487,233
|
Future
maturities of lease liabilities, excluding amounts accrued for the
ISP Lease, were as follows as of June 30, 2020:
|
Fiscal
year ending:
|
|
|
|
June 30,
2021
|
$321,297
|
$844,636
|
|
June 30,
2022
|
231,783
|
787,062
|
|
June 30,
2023
|
59,647
|
162,829
|
|
June 30,
2024
|
11,811
|
─
|
|
Total future
minimum payments
|
624,538
|
1,794,527
|
|
Less
imputed interest
|
(67,063)
|
(141,339)
|
|
Present value of
lease liabilities
|
$557,475
|
$1,653,188
|
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.
The
Company’s business, results of operations financial
condition, cash flows, and the stock price of its Class A common
stock can be adversely affected by pandemics, epidemics, or other
public health emergencies, such as the recent outbreak of the
coronavirus ("COVID-19"), which has spread from China to many other
countries across the world, including the United States. In March
2020, the World Health Organization (the “WHO”)
declared COVID-19 as a pandemic. The COVID-19 pandemic has resulted
in governments around the world implementing increasingly stringent
measures to help control the spread of the virus, including
“stay at home” orders, travel restrictions, business
curtailments, school closures, and other measures.
To
date, the Company has not experienced any direct financial impact
of COVID-19 to its business. However, the COVID-19 pandemic
continues to impact economic conditions, which could impact the
short-term and long-term demand from customers and, therefore, has
the potential to negatively impact the Company’s results of
operations, cash flows, and financial position in the future.
Management is actively monitoring this situation and any impact on
our financial condition, liquidity, and results of operations.
However, given the daily evolution of the COVID-19 pandemic and the
global responses to curb its spread, we are not presently able to
estimate the effects of the COVID-19 pandemic on our future results
of operations, financial, or liquidity in fiscal year 2021 or
beyond.
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
$736,000 and $809,000 as of June 30, 2020 and 2019, respectively.
During the years ended June 30, 2020 and 2019, we also recognized
net foreign currency transaction losses of approximately $214,000
and $436,000, 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:
|
|
|
China
|
|
Latvia
|
|
|
|
June 30,
2020
|
|
June 30,
2019
|
|
June 30,
2020
|
|
June 30,
2019
|
|
Assets
|
|
$19.0
million
|
|
$16.9
million
|
|
$9.8
million
|
|
$8.2
million
|
|
Net
assets
|
|
$16.2
million
|
|
$14.5
million
|
|
$8.2
million
|
|
$7.8
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. The Company also 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 2020, the Company had sales to three customers that
comprised an aggregate of approximately 31% of its annual revenue,
and 30% of its accounts receivable. Sales to these customers as a
percentage of our fiscal 2020 revenue include one customer at 15%,
another customer at 10%, and the third customer at 6%. One of these
customers comprised 18% of accounts receivable, and the other two
customers were each less than 10% of accounts receivable as of June
30, 2020. In fiscal 2019, the Company had sales to three customers
that comprised an aggregate of approximately 32% of its annual
revenue, and 39% of its accounts receivable. Sales to these
customers as a percentage of our fiscal 2019 revenue include one
customer at 17%, another customer at 8%, and the third customer at
7%. One of these customers comprised 20% of accounts receivable, a
second customer comprised 11% of accounts receivable and the other
customer was less than 10% of accounts receivable as of June 30,
2019. In both fiscal 2020 and 2019, these top three customers
include a distributor, which actually represents sales to numerous
customers. 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 2020, 66% of the Company’s net revenue was derived
from sales outside of the U.S., with 96% of foreign sales derived
from customers in Europe and Asia. 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.
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. As
of June 30, 2020, the applicable interest rate was
2.92%.
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 should the BankUnited Revolving Line not
be renewed beyond February 26, 2022. Management expects the
BankUnited Revolving Line to be renewed. 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, 2020, the
applicable interest rate was 2.92%.
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. There were no amounts outstanding under the Guidance Line at
June 30, 2020.
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,
2020, 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 are being
amortized over the term. Amortization of approximately $19,000 and
$117,000 is included in interest expense for the years ended June
30, 2020 and 2019, respectively. For the year ended June 30, 2019,
this includes approximately $94,000 of previously unamortized
financing costs related to our previous term loan with Avidbank
Corporate Finance, a division of Avidbank, 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,
2021
|
$581,350
|
$400,000
|
$(18,572)
|
$962,778
|
|
June 30,
2022
|
581,350
|
-
|
(18,572)
|
562,778
|
|
June 30,
2023
|
581,350
|
-
|
(18,572)
|
562,778
|
|
June 30,
2024
|
3,342,762
|
-
|
(12,381)
|
3,330,381
|
|
Total
payments
|
$5,086,812
|
$400,000
|
$(68,097)
|
5,418,715
|
|
Less current
portion
|
|
|
|
(981,350)
|
|
Non-current
portion
|
|
|
|
$4,437,365
|
18. Restructuring
In July
2018, we announced the relocation and consolidation of 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 the accompanying
Consolidated Statement of Comprehensive Income (Loss). These
charges included approximately $467,000 for the Company’s
remaining obligation under the ISP Lease until its expiration in
September 2020, as we had 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
“Accrued liabilities”, and approximately $246,000 of
termination benefits and other cost, included in “Accrued
payroll and benefits.” As of June 30, 2020, the remaining
amounts accrued in the accompanying Consolidated Balance Sheet
include approximately $98,000 related to the lease
obligation.
End of
Consolidated Financial Statements