TIDMPPIX
RNS Number : 2585X
ProPhotonix Limited
27 August 2020
The information contained within this announcement is deemed by
the Company to constitute inside information as stipulated under
the Market Abuse Regulations (EU) No. 596/2014. Upon the
publication of this announcement via a Regulatory Information
Service ("RIS"), this inside information is now considered to be in
the public domain.
August 27, 2020
ProPhotonix Limited
("ProPhotonix" or the "Company")
RESULTS FOR THE YEARED DECEMBER 31, 2019 and
NOTICE OF POSTING 2019 ANNUAL REPORT
ProPhotonix Limited (London Stock Exchange - AIM: PPIX, OTC:
STKR), a leading technology designer and manufacturer of LED
illumination systems and laser diode modules, today announces its
2019 financial results and notice of availability on the Company's
web site.
2019 Summary Results
Revenue for 2019 was $14.98 million (2018: $16.40 million).
Operating profit was $1.1 million (2018: loss $1.0 million) mainly
due to a stock compensation benefit from the lack of attainment of
the vesting criteria on stock options ($1.2 million) versus the
expense to the Income Statement in 2018 of $1.1 million. Excluding
the effect of stock compensation benefit/expense, the net loss in
FY19 was $0.157 million (2018: loss $0.242 million). Cash and cash
equivalents at December 31, 2019 was $1.5 million (2018: $1.9
million). Detailed financial results and notes follow.
Shareholders are advised that the Auditors Opinion, while
unqualified, contains a material uncertainty as to going concern,
due to the matters disclosed in note 1 to the financial statements.
The details of the Auditors Opinion are contained the Annual Report
and Accounts which will be available on the Company's website.
Posting of Results
The Company will publish and post its final audited results for
the year ended 31 December 2019 on or before September 30, 2020.
The Annual Report and Accounts will be available on the Company's
website on or before September 3, 2020, at www.prophotonix.com
.
For further information:
ProPhotonix Limited
Tim Losik President and CEO
Tel: +1 603 893 8778
Email: ir@prophotonix.xom
WH Ireland Limited
Katy Mitchell Nominated Adviser and Broker
Matthew Chan Tel: +44 (0) 20 7220 1666
Cautionary Statement
This press release contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All statements
other than statements of historical fact, including without
limitation, those with respect to ProPhotonix's goals, plans and
strategies set forth herein are forward-looking statements. The
following important factors and uncertainties, among others, could
cause actual results to differ materially from those described in
these forward-looking statements: uncertainty that cash balances
may not be sufficient to allow ProPhotonix to meet all of its
business goals; uncertainty that ProPhotonix's new products will
gain market acceptance; the risk that delays and unanticipated
expenses in developing new products could delay the commercial
release of those products and affect revenue estimates; the risk
that one of our competitors could develop and bring to market a
technology that is superior to those products that we are currently
developing; and ProPhotonix's ability to capitalize on its
significant research and development efforts by successfully
marketing those products that the Company develops. Forward-looking
statements represent management's current expectations and are
inherently uncertain. All Company, brand, and product names are
trademarks or registered trademarks of their respective holders.
ProPhotonix undertakes no duty to update any of these
forward-looking statements.
Business Activities :
ProPhotonix and its subsidiaries (ProPhotonix and Company)
consists of two business units: an LED systems manufacturing
business based in Ireland (Cork), and a laser modules production
and laser diode distribution business located in the United Kingdom
(Hatfield Broad Oak). Corporate headquarters and the North American
sales activities are based in Salem, New Hampshire, USA. The
fundamental strategy of the Company is growth in revenue through
its existing customers, new customer activity, and new product and
market expansion.
ProPhotonix Limited sells its products principally into three
markets: industrial (machine vision illumination and UV curing ),
medical, and homeland security and defense. The Company foresees
growth opportunities in all three markets it serves which are
briefly described below:
Industrial (Machine Vision)
Within the industrial market, machine vision is the term used to
describe computerized analysis for controlling manufacturing
processes, for example automated inspection. In terms of quality
and speed, lighting is often a critical component in machine vision
and the Company manufactures both LED systems and lasers designed
specifically for this market. Ultraviolet ("UV") curing is an
emerging market for both LED and laser technology. The primary
market is curing of material (inks, adhesives, coatings) but also
luminescence in biomedical and fluorescing applications.
Medical
The medical and dental market requires many different LED
systems and laser modules for unique processes, procedures, and
applications. The Company provides a variety of products for
medical and dental applications to current customers including, a
world leader in stationary imaging equipment, and a portable x-ray
equipment and dental imaging manufacturer. The Company views the
medical field a strategic market since it offers significant
long-term revenue growth opportunities.
Homeland Security & Defence
LED systems, laser modules and laser diodes are used in a wide
variety of applications in the security and defence fields. The
Company currently supplies defence sighting manufacturers in the US
and Europe, as well as leading manufacturers of Auto Number Plate
Recognition systems. This market offers significant growth
opportunities for ProPhotonix over the next several years and the
Company is currently marketing its laser and LED capabilities to
additional security and Optical Character Recognition systems
companies in this market space.
Chief Executive Officer and Non-Executive Chairman
Statement:
Though challenging, 2019 ended the year very strong in the
second half. The year represents the tale of two halves. Revenue in
the second half increased 8.9% over the first half with bookings
increasing 30% over the same period. Cost reductions initiated in
the first half carried through the second half contributing to the
overall improved profit for 2019. The commitment to investments
continues with the award of two patents in early 2020 and we intend
to continue making such applications in the future where and when
appropriate. During the year, ProPhotonix was awarded a European
Union Horizon 2020 Innovation grant to develop innovative reactor
solutions for disinfection of water. The expected benefit to the
Company from the project is the further development of deep UV
(UVC) capability and knowledge for development of future products.
We continue to make the necessary investments to achieve our
business objectives.
Financial Summary:
As compared to 2018, sales decreased 9% to $14.9 million from a
variety of shifts in business specific to each customer. Many of
our top accounts reflect increases but offset by decreases, a net
decrease. No single factor or loss of account is attributed to the
net decline in revenue. Gross profit decreased due to the lower
sales volume; and in 2018 the Company reports an operating profit
of $1.1 million compared to an operating loss of $1.0 million in
2018. Operating losses, excluding the benefit/expense of stock
option compensation in each respective year, were $114,000 for 2019
and $106,000 for 2018.
The balance sheet remains strong with cash at year-end of $1.5
million (2018: $1.9 million) and a current ratio of 1.7 (2018:
1.7).
Strategy:
The first part of our strategy relates to our existing customers
and relationships. We consider these relationships vitally
important and continue to work with customers to provide solutions
to achieve their continued market success. Their success fuels our
success and provides us the opportunity to develop new products and
market solutions for other customers and applications. The second
part of the Company's strategy remains established in its OEM
heritage as well as the development of products directed at
specific markets. ProPhotonix has made and will continue to make
investments in commercially attractive OEM opportunities and
product development including UV, multi-wavelength devices and
laser technology advances, in the fulfilment of our strategies. We
continue to concentrate our engineering capacity in defined
projects and areas that we believe are poised for fast market
expansion.
In conclusion, we thank you; co-workers, customers, suppliers,
service providers and investors for your continued support.
Respectfully submitted,
Tim Losik Ray Oglethorpe
President and Chief Executive Officer Non-Executive Chairman
CONSOLIDATED FINANCIAL STATEMENTS
PROPHOTONIX LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
December 31 2019 2018
Assets
Current assets:
Cash and cash equivalents $ 1,477 $ 1,939
Accounts receivable, less allowances of $10 in 2019 and
$49 in 2018 (Note 2) 2,801 2,872
Inventories, less allowances of $782 in 2019 and $615 in
2018 (Note 4) 2,584 2,399
Prepaid expenses and other current assets 678 289
Total current assets 7,540 7,499
Net property, plant and equipment (Note 5) 573 646
Operating lease right-of-use asset 312 -
Deferred tax assets (Note 9) - 454
Goodwill (Note 6) 397 405
Intangible assets, net (Note 7) 377 295
Other long-term assets 166 128
Total assets $ 9,365 $ 9,427
Liabilities and Stockholders' Equity
Current liabilities:
Revolving credit facility (Note 8) $ 912 $ 1,075
Current portion of long-term debt (Note 8) 220 188
Accounts payable 1,941 1,791
Accrued payroll, benefits and incentive compensation 283 399
Deferred revenue (Note 16) 553 498
Accrued warranty expenses (Note 2) 164 170
Operating lease liabilities, current 119 -
Other accrued expenses 276 291
Current portion of finance lease obligations 58 63
Total current liabilities 4,526 4,475
Deferred revenue, noncurrent 227 -
Operating lease liabilities, noncurrent 193 -
Long term debt obligations, net of current portion (Note
8) 387 581
Long term finance lease obligations, net of current
portion 40 94
Total liabilities 5,373 5,150
Stockholders' Equity:
Common stock, par value $0.001; shares authorized
250,000,000 at December 31, 2019 and at
December 31, 2019; 93,150,402 shares issued and
outstanding at December 31, 2019 and 93,000,402
shares issued and outstanding at December 31, 2018 93 93
Additional paid-in capital 112,838 114,067
Deferred compensation (2) (19 )
Accumulated deficit (109,750) (110,746 )
Accumulated other comprehensive income 813 882
Total stockholders' equity 3,992 4,277
Total liabilities and stockholders' equity $ 9,365 $ 9,427
See the notes to consolidated financial statements.
PROPHOTONIX LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands except share and per share data)
Years Ended
December 31
-----------------------------------------
2019 2018
-------------------- -------------------
Revenue $ 14,976 $ 16,401
Cost of Revenue (8,969) (10,057)
-------------------- -------------------
Gross Profit 6,007 6,344
-------------------- -------------------
Research & Development Expenses (1,226) (1,011)
Selling, General & Administrative Expenses (3,686) (6,327)
Operating Income (Loss) 1,095 (994)
Other Income, net 53 20
Foreign Currency Exchange Gains (Losses) 25 (232)
Warrant & Debt Acquisition Expense (14) (11)
Interest Expense (106) (91)
-------------------- -------------------
Income (Loss) Before Taxes 1,053 (1,308)
Income Tax Expense (57) -
-------------------- -------------------
Net Income (Loss) $ 996 $ (1,308)
Other Comprehensive Income:
Foreign currency translation (69) (132)
-------------------- -------------------
Total Comprehensive Income (Loss) $ 927 $ (1,440)
==================== ===================
Net Income (Loss) Per Share:
Basic and diluted:
Basic net income (loss) per share $0.011 $(0.014)
Diluted net income (loss) per share $0.011 $(0.014)
-------------------- ------------------
Shares used in per share calculations - Basic 93,150,402 92,782,902
-------------------- ------------------
Shares used in per share calculations - Diluted 93,150,402 92,782,902
------------------------------------------------ -------------------- ------------------
See the notes to consolidated financial statements.
PROPHOTONIX LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Common Stock
--------------------------------
Accumulated
Other Total
Paid in Deferred Accumulated Comprehensive Stockholders'
Shares Par $0.001 Capital Compensation Deficit Income Equity
-------------------- ---------- ----------- ------------ ----------- ------------- -------------
Balance December
31, 2017 92,565 $93 $112,987 ($18) ($109,438) $1,014 $4,638
Net loss - - - - (1,308) - (1,308)
Translation
adjustment - - - - - (132) (132)
Exercise of
options 135 - 4 - - - 4
Deferred
compensation 300 - 49 (49) - - -
Share based
compensation - - 1,027 48 - - 1,075
Balance December
31, 2018 93,000 93 114,067 (19) (110,746) 882 4,277
Net income - - - - 996 - 996
Translation
adjustment - - - - - (69) (69)
Deferred
compensation 150 - (17) 17 - - -
Share based
compensation - - (1,212) - - - (1,212)
Balance December
31, 2019 93,150 $93 $112,838 ($2) ($109,750) $813 $3,992
======= ========== =========== ============ =========== ============= =============
See the notes to consolidated financial statements.
PROPHOTONIX LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31 2019 2018
Cash flows from operating activities
Net income (loss) $ 996 $ (1,308)
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation (income) / expense (1,229) 1,075
Depreciation 189 169
Foreign exchange loss 214 77
Amortization of debt discount and financing costs 7 10
Allowance for inventories 180 5
Allowance for bad debt 9 37
Other changes in assets and liabilities:
Accounts receivable (23) 68
Inventories (471) (235)
Prepaid expenses and other current assets (447) (62)
Intangible assets, net (82) (229)
Deferred tax asset 454 -
Accounts payable 211 233
Accrued expenses 237 (389)
Other assets and liabilities (42) 46
Net cash provided by (used in) operating activities 203 (503)
Investing
Purchase of property, plant and equipment (175) (200 )
Net cash used in investing activities (175 ) (200 )
Financing
Proceeds from exercise of options and warrants - 4
Net proceeds from issuance of debt - 875
Borrowings of revolving credit facilities, net (163) (151)
Payments for finance leases (56) (138)
Principal repayment of long-term debt (93) (88)
Net cash (used in) provided by financing activities (312) 502
Effect of exchange rate on cash (178) (10)
Net change in cash and equivalents (462) (211)
Cash and equivalents at beginning of period 1,939 2,150
Cash and equivalents at end of period $ 1,477 $ 1,939
Supplemental cash flow information:
Cash paid for interest $ 106 $ 91
See the
notes to
consolidated
financial
statements .
PROPHOTONIX LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
ProPhotonix Limited (Parent Company) and its subsidiaries
(referenced in this document collectively as "ProPhotonix", "we",
or the "Company") operates in two segments: as an independent
designer and manufacturer of LED systems through ProPhotonix (IRL)
Limited; and as a manufacturer of laser modules and a distributor
of laser diodes through ProPhotonix Limited, a U.K. subsidiary. The
operating units are ProPhotonix (IRL) Limited based in Cork,
Ireland, ProPhotonix Limited, a U.K. subsidiary based near
Stansted, United Kingdom and ProPhotonix Limited, based in Salem,
New Hampshire, U.S.A. The Company's products serve a wide range of
applications and industries including machine vision and industrial
inspection, biomedical, defense and security, and other commercial
applications.
ProPhotonix Limited was incorporated on March 27, 1951 in the
Commonwealth of Massachusetts and is currently incorporated in the
state of Delaware. The Company's common stock, $.001 par value per
share (the "Common Stock"), now trades on the OTC Market in the
U.S. under the trading symbol "STKR" and is also traded on the
London Stock Exchange, plc (AIM listing), under the trading symbol
"PPIX".
The accompanying consolidated financial statements have been
prepared on a going concern basis which the directors consider to
be appropriate for the following reasons. As shown in the
consolidated financial statements, during the years ended December
31, 2019 and 2018, the Group recorded net income of $1.0 million in
2019 and a net loss of ($1.3 million) in 2018. Operating losses,
excluding the benefit/expense of stock option compensation in each
respective year, were $114,000 for 2019 and $106,000 for 2018. Net
cash provided by and used in operating activities for the same time
periods were $0.2 million and ($0.5 million), respectively.
In assessing the going concern position of the Group, the
directors have prepared a cash flow forecast which covers a period
of 12 months from the date of approval of these financial
statements. These forecasts take into consideration the anticipated
impact of COVID-19 on the cash flow and liquidity of the Group,
over the next 12 months. The current economic conditions resulting
from the COVID-19 pandemic have had an impact on the Group's
activities from March 2020 onwards. The Group is subject to
financial covenants in relation to its loan facilities, being the
historic annual debt service cover ratio should not be less than
1.30:1. The covenants are tested annually for the 12 months
financial statements. The Group complied with its covenant in 2019
and for the first two quarters of 2020. At December 31, 2019 the
Group cash position was $1,477,000 and the loan outstanding at this
date was $607,000 out of a total original balance of $865,000. At
July 31, 2020 the Group cash position was $2,071,000 and the loan
outstanding was $550,000.
This base case scenario includes the benefits of actions already
taken by management to mitigate the trading downsides brought by
COVID-19, including cost reduction exercises, property rent
deferrals, loan repayment deferrals and participating in the
government's job retention scheme and taking advantage of other
government support measures. The base case scenario forecasts a
positive cash position throughout the forecast period with no
covenant breaches. Notwithstanding this however, there remains a
risk that there is a continued down-turn in the economy as a result
of COVID-19 and there are uncertainties associated with future
potential lockdowns and/or a second wave of infection. In certain
severe but plausible downside scenarios such as further revenue
reductions above those included in the base case, decrease in gross
margins and increase in debtor days, there is risk that the Group
will breach its loan covenant and therefore there becomes
uncertainty in relation to the future funding of the Group.
(1) ORGANIZATION AND BASIS OF PRESENTATION (cont.)
Based on the above, the directors believe it remains appropriate
to prepare the financial statements on a going concern basis.
However, these circumstances represent a material uncertainty that
may cast significant doubt upon the Group's ability to continue as
a going concern and, therefore, to continue realizing its assets
and discharging its liabilities in the normal course of business.
The financial statements do not include any adjustments that would
result from the basis of preparation being inappropriate.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are prepared
in conformity with U.S. Generally Accepted Accounting Principles
("U.S. GAAP") and reflect the application of the Company's most
significant accounting policies as described in this note and
elsewhere in the accompanying consolidated financial statements and
notes. In preparing these consolidated financial statements,
management has made judgments, estimates, and assumptions that
affect the reported amounts of assets, liabilities, income, and
expenses. Actual results may differ from those estimates. Estimates
and underlying assumptions are reviewed on an on-going basis for
items such as revenue recognition where long term contracts are
entered into, recognition of deferred tax assets, inventory
allowances, warranty provisions and accruals. Revisions to
estimates are recognized prospectively.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries,
ProPhotonix (IRL) Limited, StockerYale (UK) Ltd., which owns 100%
of ProPhotonix Limited, a U.K. subsidiary, and ProPhotonix
Holdings, Inc., which holds all of the outstanding shares of
StockerYale Canada. All intercompany balances and transactions have
been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a
maturity of original three months or less when purchased to be cash
equivalents .
ACCOUNTS RECEIVABLE
Accounts receivable are recorded at the invoiced amount and do
not bear interest. Amounts collected on trade receivables are
included in net cash provided by operating activities in the
consolidated statements of cash flows. The Company reviews the
financial condition of new customers prior to granting credit.
After completing the credit review, the Company establishes a
credit line for each customer. Periodically, the Company reviews
the credit line for major customers and adjusts the credit limit
based upon an updated financial condition of the customer,
historical sales and payment information and expected future sales.
The Company has a large number of customers; therefore, material
credit risk is limited.
The Company periodically reviews the collectability of its
accounts receivable. Allowance for doubtful accounts are
established for accounts that are potentially uncollectible. The
Company also has accounts receivables insurance at ProPhotonix
Limited, a U.K. subsidiary, which also covers most of the larger
customers at the ProPhotonix (IRL) Limited subsidiary, and allows
the Company to submit a claim on overdue accounts receivables in
excess of 60 days past invoice due date. The Company has not made
any claims in either 2019 or 2018. Determining adequate allowances
for accounts receivable requires management's judgment in
combination with Company policies and procedures. Management's
assessment includes customer payment trends, as well as discussions
with customers over past due amounts. Conditions impacting the
collectability of the Company's receivables could change causing
actual write-offs to be materially different than the reserved
balances .
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Changes in the allowance for doubtful accounts were as
follows:
Years Ended December 31 2019 2018
In thousands
Balance at beginning of
period................................................................... $ 49 $ 14
Benefits from or charges to costs and expenses......................................... (38) 37
Account write-offs and other deductions................................................... (1) (2)
Balance at end of
period............................................................................ $ 10 $ 49
INVENTORY
The Company values inventories at the lower of cost or net
realizable value using the first in, first-out ("FIFO") method. The
Company periodically reviews the quantities of inventory on hand
and compares these amounts to the expected usage for each
particular product or product line. The Company records as a charge
to cost of sales any amounts required to reduce the carrying value
amount of the inventory to net realizable value. Actual results
could be different from management's estimates and assumptions.
CAPITALIZATION OF SOFTWARE DEVELOPMENT FOR SALE
The Company's capitalizes software development for sale in
accordance with ASC 350-40. All costs associated with establishing
technical feasibility are expensed. Once technical feasibility has
been established, the costs of coding the software are capitalized
and amortized over the expected life of the product. Once the
product is release to production, all future software de-bug costs
are expensed in the period.
INTANGIBLE ASSETS
The Company's intangible assets consist of capitalized software
development costs and goodwill. Capitalized software development
costs are being amortized over their useful lives and are assessed
for impairment when triggering events occur. Goodwill is tested for
impairment on an annual basis, and between annual tests when
indicators of impairment are present and written down when and if
impaired. The Company has elected the end of the fourth quarter to
complete its annual goodwill impairment test.
LONG-LIVED ASSETS
The Company reviews the recoverability of its long-lived assets
including property, plant and equipment and amortizing intangible
assets when events or changes in circumstances occur that indicate
that the carrying value of the assets may not be recoverable. This
review is based on the Company's ability to recover the carrying
value of the assets from expected undiscounted future cash flows.
If impairment is indicated, the Company measures the loss based on
the difference between the carrying value and fair value of the
asset using various valuation techniques including discounted cash
flows. If the asset is determined not to be recoverable, the amount
of the loss will be recorded in the consolidated statements of
operations. It is possible that future events or circumstances
could cause these estimates to change.
INCOME (LOSS) PER SHARE
The Company calculates basic and diluted net income (loss) per
common share by dividing the net income (loss) applicable to common
stockholders by the weighted average number of common shares
outstanding.
As of December 31, 2019, 17,350,044 shares underlying options
could potentially have been included in the calculation of diluted
shares. However, the exercise price for all of the underlying
options and warrants exceeded the market price or were unvested,
thus none of those shares were included in the calculation of
earnings per share.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
As of December 31, 2018, 30,064,867 shares underlying options
and 500,000 shares underlying warrants could potentially have been
included in the calculation of diluted shares. However, as the
exercise price at December 31, 2019 was $0.06 per share, only
8,105,000 exercisable options were included in the calculation of
earnings per share. All other options and warrants exercise price
exceeded the market price or were unvested.
REVENUE RECOGNITION
The Company only has revenue from customers. The Company
recognizes revenue when it satisfies performance obligations under
the terms of its contracts, and control of its products is
transferred to its customers in an amount that reflects the
consideration the Company expects to receive from its customers in
exchange for those products. This process involves identifying the
customer contract, determining the performance obligations in the
contract, determining the contract price, allocating the contract
price to the distinct performance obligations in the contract, and
recognizing revenue when the performance obligations have been
satisfied. A performance obligation is considered distinct from
other obligations in a contract when it (a) provides a benefit to
the customer either on its own or together with other resources
that are readily available to the customer and (b) is separately
identified in the contract. The Company considers a performance
obligation satisfied once it has transferred control of a good or
product to a customer, meaning the customer has the ability to use
and obtain the benefit of the product.
WARRANTY
The Company provides standard warranties for most products for
periods up to one year. The warranty is limited to the cost of the
product and the Company will repair or replace the product as
required. The Company monitors the actual warranty repair costs and
trends in relation to the reserve as a percent of sales. The
Company adjusts annually the warranty provision based on actual
experience and for any particular known instances.
Warranty Reserves:
Years Ended December 31,
2019 2018
In thousands
Balance at beginning of period......................................... $ 170 $ 184
Charges to costs and expenses..................................... (3) 9
Account write-offs and other deductions.................... (3) (23 )
Balance at end of period.................................................. $ 164 $ 170
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The Company
provides for depreciation on a straight-line basis over the assets
estimated useful lives. Plant and equipment held under finance
leases are amortized on a straight-line basis over the shorter of
the lease term or estimated useful life of the asset. Finance
leases are initially stated at the present value of minimum lease
payments. The following table summarizes the estimated useful lives
by asset classification:
Asset Classification Estimated Useful Life
Building and building improvements............... Term of the lease or 10-40 years
Computer equipment....................................... 3 to 5 years
Machinery and equipment............................... 5 to 10 years
Furniture and fixtures...................................... 3 to 10 years
Maintenance and repairs are expensed as incurred.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. Advertising
expenses for the years ended 2019 and 2018 were $12,000 and
$75,000, respectively.
INCOME TAXES
The Company accounts for income taxes under the asset and
liability method. Under this method the Company recognizes deferred
tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the financial statements or
tax returns. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered
or settled. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount that is more likely than
not to be realized. The Company recognizes the tax benefit of tax
positions to the extent that the benefit will more likely than not
be realized. The determination as to whether the tax benefit will
more likely than not be realized is based upon the technical merits
of the tax position as well as consideration of the available facts
and circumstances. With respect to any uncertain tax positions, the
Company records interest and penalties, if any, as a component of
income tax expense. The Company did not have any interest and
penalties related to uncertain tax positions during the years ended
December 31, 2019 or 2018.
STOCK-BASED COMPENSATION
The Company has stock-based compensation plans for its
employees, officers, and directors. The plans permit the grant of a
variety of awards with various terms and prices as determined by
the Remuneration Committee of the Company's Board of Directors.
Generally, the grants vest over terms of one to four years and are
priced at fair market value, or in certain circumstances 110% of
the fair market value, of the Common Stock on the date of the
grant. The options are generally exercisable after the period or
periods specified in the option agreement, but no option may be
exercised after 10 years from the date of grant.
Additionally, in the case of incentive stock options, the
exercise price may not be less than 100% of the fair market value
of the Company's Common Stock on the date of grant, except in the
case of a grant to an employee who owns or controls more than 10%
of the combined voting power of all classes of the Company's stock
or the stock of any parent or subsidiary. In that case, the
exercise price shall not be less than 110% of the fair market value
on the date of grant. In the case of non-qualified stock options,
the exercise price shall not be less than 85% of the fair market
value of the Company's Common Stock on the date of grant, except in
the case of a grant to an independent director; in which case the
exercise price shall be equal to fair market value determined by
reference to market quotations on the date of grant.
During 2019 the Company reversed $1.2 million of stock
compensation expense to selling, general and administrative expense
related to the expiration of performance based stock options that
were cancelled due to non-achievement of the performance criteria.
During 2018 the Company recognized an expense of $1.1 million of
stock-based compensation related to the options and fully vested
shares issued to the directors and employees as compensation (See
Note 11), all of which were charged to selling, general and
administrative expense.
Stock Option Awards-The fair value of each option grant is
estimated using the Black-Scholes option pricing model. The fair
value is then expensed ratably over the requisite service periods
of the awards, which is generally the vesting period. Use of a
valuation model requires management to make certain assumptions
with respect to selected model inputs. Expected volatility is
calculated based on the historical volatility of the Company's
stock at the time of the award. The average expected option term is
based on historical trends. The risk-free interest rate is based on
U.S. Treasury zero-coupon issues assumed at the date of grant and
generally no dividends are assumed in the calculation. The
compensation expense recognized for all equity-based awards is net
of estimated forfeitures. Forfeitures are estimated based on the
historical trends .
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
TRANSLATION OF FOREIGN CURRENCIES
The Company's operating results are affected by fluctuations in
the value of the U.S. dollar as compared to currencies in foreign
countries, as a result of our transactions in these foreign
markets. For foreign subsidiaries, whose functional currency is not
the U.S. dollar, assets and liabilities are translated using the
foreign exchange rates prevailing at the balance sheet date, and
income and expense accounts using average exchange rates for the
period. Cumulative transaction gains or losses from the translation
into the Company's reporting currency are included as a separate
component of stockholders' equity (accumulated deficit)
(accumulated other comprehensive income) in the accompanying
consolidated balance sheets.
Management determined the functional currency of ProPhotonix
Limited, a U.K. subsidiary, and ProPhotonix (IRL) Limited is the
euro, while the functional currency of ProPhotonix Limited U.S.A.
is the U.S. dollar.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash and
cash equivalents, accounts receivable, revolving credit facility,
accounts payable and long-term debt. The estimated fair value of
these financial instruments, with the exception of fixed rate
long-term debt, approximates their carrying value due to the
short-term maturity of certain instruments and the variable
interest rates associated with certain instruments, which have the
effect of re-pricing such instruments regularly.
At December 31, 2019, the Company estimated the fair value of
long term fixed rate debt to be $0.9 million compared to its
carrying value of $0.7 million (2018: fair value of $1.3 million
compared to its carrying value of $1.0 million).
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade
receivables. The risk is limited due to the relatively large number
of customers composing the Company's customer base and their
dispersion across many industries and geographic areas within the
United States, Canada, United Kingdom, Europe and Asia. The Company
performs ongoing credit evaluations of existing customers'
financial condition. The Company believes that its concentrated
credit risk is limited to only a small number of customers. The
Company had one customer accounting for 10% or more of consolidated
revenues in 2019 and one customer accounting for 10% or more of
consolidated revenues in 2018. The Company had two customers that
accounted for 10% or more of the outstanding accounts receivable
balance at December 31, 2019 and no such customers at December 31,
2018. The Company maintains its cash and cash equivalents in bank
deposit accounts, which at times may exceed insured limits. At
December 31, 2019 and 2018, the amount in excess of governmental
insurance protection was $1.0 million and $1.7 million,
respectively. The Company believes it is not exposed to any
significant credit risk on cash and cash equivalents.
USE OF ESTIMATES
In preparing these consolidated financial statements in
accordance with generally accepted accounting policies, management
has made judgments, estimates, and assumptions that affect the
reported amounts of assets, liabilities, income, and expenses.
Actual results may differ from those estimates. Estimates and
underlying assumptions are reviewed on an on-going basis. Revisions
to estimates are recognized prospectively.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU 2016-02, Leases (Topic
842). The new standard supersedes the present U.S. GAAP standard on
leases and requires substantially all leases to be reported on the
balance sheet as right-of-use assets and lease obligations. ASU
2016-02 is effective for annual reporting periods beginning after
December 15, 2018, and interim reporting periods within those
annual reporting periods. Early adoption is permitted and in the
original guidance the modified retrospective application was
required, however, in July 2018 the FASB issued ASU 2018-11 which
permits entities with another transition method in which the
effective date would be the date of initial application of
transition. Under this optional transition method, the Company
would recognize a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption. The Company
adopted ASU 2016-02 as of January 1, 2019 using the modified
retrospective approach and the optional transition method. In
addition, the Company elected the package of practical expedients
permitted under the transition guidance within the new standard,
which among other things, allowed the Company to carry forward
historical lease classifications.
Adoption of the new standard resulted in the recording of
operating lease right-of-use assets and operating lease liabilities
on its consolidated balance sheets but did not have an impact on
the Company's beginning retained earnings, consolidated statement
of operations or statement of cash flows. The most significant
impact was the recognition of right-of-use assets and lease
liabilities for operating leases associated with two leases for
office space as described in Footnote 14, "Leases, commitments and
contingencies". The Company also reclassified amounts that were
recorded as "Current portion of capital lease obligations" and
"Long term capital lease obligations, net of current portion" as of
December 31, 2018 to "Current portion of finance lease obligations"
and "Long-term finance lease obligations, net of current portion,"
respectively, on January 1, 2019. As of January 1, 2019, total
right-of-use assets related to the Company's operating leases was
$0.4 million and current and non-current operating lease
liabilities were $0.1 million and $0.3 million, respectively. As of
December 31, 2019, total right-of-use assets related to the
Company's operating leases was $0.3 million and current and
non-current operating lease liabilities were $0.1 million and $0.2
million, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial Instruments - Credit Losses. In June 2016, the FASB
issued ASU 2016-13, Financial Instruments-Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments ("ASU
2016-13"). The guidance changes the impairment model for most
financial assets. The new model uses a forward-looking expected
loss method, which requires consideration of a broader range of
reasonable and supportable information to inform credit loss
estimates. ASU 2016-13 is effective for annual periods beginning
after December 15, 2019, and early adoption is permitted for annual
and interim periods beginning after December 15, 2018. The Company
is currently assessing the impact that this guidance will have on
its trade receivables and financial arrangements when adopted.
Goodwill Impairment. In January 2017, the FASB issued ASU
2017-04, Intangibles - Goodwill and Other (Topic 350) ("ASU
2017-04") related to measurements of goodwill. ASU 2017-04
eliminates the requirement to calculate the implied fair value of
goodwill (i.e., Step 2 of today's goodwill impairment test) to
measure a goodwill impairment charge. Instead, entities will record
an impairment charge based on the excess of a reporting unit's
carrying value over its fair value (i.e. measure the charge based
on today's Step 1). The standard has tiered effective dates,
starting in 2020 for calendar-year public business entities that
meet the definition of an SEC filer. Early adoption is permitted
for annual and interim goodwill impairment testing after January 1,
2017. The Company does not believe there will be any impact from
the new standard on its consolidated financial statements.
(3) RECENT ACCOUNTING PRONOUNCEMENTS (cont.)
Fair Value of Financial Instruments. In August 2018, the FASB
issued ASU 2018-13, Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement, which aims to
improve the effectiveness of fair value measurement disclosures.
The amendments in this ASU modify the disclosure requirements on
fair value measurements based on the concepts in FASB Concepts
Statement, Conceptual Framework for Financial Reporting - Chapter
8: Notes to Financial Statements, including the consideration of
costs and benefits. This ASU becomes effective for the Company in
the year ending December 31, 2020 and early adoption is permitted.
The Company has not yet adopted this ASU and is currently assessing
the impact that this ASU will have on its consolidated financial
statements.
(4) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
basis) or net realizable value when applicable and include
materials, labor and overhead. Inventories are as follows:
Years Ended December 31 2019 2018
In thousands
Finished
goods.......................................................................... $ 722 $ 602
Work
in-process........................................................................ 456 339
Raw
materials...........................................................................
. 2,188 2,073
Gross inventories $ 3,366 $ 3,014
Inventory
reserves..................................................................... (782) (615)
Net
inventories.................................................................
. $ 2,584 $ 2,399
Management performs quarterly reviews of inventory and either
reserves or disposes of items not required by their manufacturing
plan, as well as reduces the carrying cost of inventory to the
lower of cost or net realizable value.
(5) PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment were as
follows:
Years Ended December 31 2019 2018
In thousands
Buildings and building improvements............................ $ 249 $ 284
Computer
equipment................................................................
....... 477 464
Machinery and
equipment............................................................... 2,257 2,220
Furniture and
fixtures.................................................................
..... 488 488
Property, plant and
equipment................................................. $ 3,471 $ 3,456
Less accumulated
depreciation........................................................ (2,898) (2,810)
Net property, plant and
equipment.......................................... $ 573 $ 646
Depreciation expense from operations was $0.2 million for each
of the years ended December 31, 2019 and 2018.
(6) GOODWILL
The Company uses a three-step approach to a goodwill impairment
test. First, ASU 2011-08 allows entities the option to first use an
assessment of qualitative factors to determine whether the
existence of events or circumstances leads to a determination that
it is more likely than not that the fair value of a reporting unit
is less than its carrying amount. If a conclusion is reached that
reporting unit fair value is not more likely than not below
carrying value, no further impairment testing is necessary. If
further testing is necessary, the second step is to estimate the
fair value of its reporting units by using forecasts of discounted
cash flows and compare that value to the carrying value which
requires that certain assumptions and estimates be made regarding
industry economic factors and future profitability of reporting
units to assess the need for an impairment charge. The methodology
the Company uses to allocate certain corporate expenses is based on
each unit's use of services and/or direct benefit to its employees.
While the Company believes it has made reasonable estimates and
assumptions to calculate the fair value of the reporting units and
implied fair value of goodwill, the impairment analysis is highly
sensitive to actual versus forecast results. Finally, if the
estimated value is less than the carrying value, an impairment loss
is recognized for any excess of the carrying amount of the
reporting unit's goodwill over the implied fair value of that
goodwill.
In connection with the annual impairment test of goodwill,
performed at the end of the fourth quarter 2019, and at the end of
the fourth quarter 2018, the Company concluded that no impairment
existed. The conclusion resulted from a combination of the
projected discounted cash flows under normal forecasted cash flow
projections, as well as from discounted cash flows with a
sensitivity analysis showing no growth in revenues.
The changes in the carrying amount of goodwill for the years
ended December 31, 2019 and 2018 were as follows:
December 31, 2019 December 31, 2018
In thousands
Beginning of the year.................................. $ 405 $ 424
Effect of exchange rate............................... (8) (19)
End of year................................................. $ 397 $ 405
The Company operates in two reporting units: LED's (light
emitting diode systems) and Laser & Diodes. Goodwill as of
December 31, 2019 and 2018 relates to the LED reporting unit.
(7) INTANGIBLE ASSETS
Intangible assets consists of capitalized software development
costs. The Company capitalizes these costs in accordance with FRS
102; all costs associated with establishing technical feasibility
are expensed. Once technical feasibility has been established, the
costs of coding the software are capitalized and amortized over the
expected life of the product. Once the product is released to
production, all future software de-bug costs are expensed in the
period incurred. There are no intangible assets with indefinite
lives. Intangible assets and their respective useful lives are as
follows:
Useful Life
Capitalized software development costs 5 Years
(7) INTANGIBLE ASSETS (cont.)
Gross carrying amounts and accumulated amortization of
intangible assets were as follows as of December 31, 2019 and 2018.
The gross carrying values and the accumulated amortization values
are impacted by the foreign currency translation adjustment.
Years ended December 31: 2019 2018
In thousands
Gross carrying amount of capitalized software
development
costs..............................................................................
........ 439 314
Accumulated amortization......................................................... (62) (19)
Net
balance....................................................................
... $ 377 $ 295
(8) DEBT
Years Ended December 31: 2019(1) 2018(1)
-------- ---------
In thousands
Senior Fixed Rate Secured Term
Note to SQN ("SQN Note"), maturing Total debt less
on June 13, 2022 with an interest unamortized debt
rate of 10%, at December 31, 2019. issuance costs $607 $769
Borrowings under Revolving Credit
facility with Barclays Bank Sales
Financing with an interest rate
of 2.0% above Barclay's base rate
at December 31, 2019 and at December
31, 2018 (2.25% as of December
31, 2019 and at December 31, 2018). Principal Amount $912 $1,075
-------- ---------
Total All Debt $1,519 $1,844
-------- ---------
Less: Revolving
Credit Facility $(912) $(1,075)
-------- ---------
Less: current
portion of long
term debt $(220) $(188)
-------- ---------
Long-term debt
less unamortized
discount and
debt issuance
costs $387 $581
-------- ---------
(1) As of both December 31, 2019 and 2018, the Company had $0.2
million available under the various borrowing facilities.
The Company made $0.1 in interest payments during 2019 and is
expected to make $0.1 million in interest payments during the year
ended December 31, 2020. Scheduled future maturities of debt,
excluding interest payments, for the next five years are as
follows:
Due by period 2020 2021 2022 2023 2024+ Total
In thousands
Debt obligations............. $912 $ - $ 607 $ - $ - $ 1,519
(8) DEBT (cont.)
BORROWING AGREEMENTS
Term Notes:
ProPhotonix (IRL) Limited Senior Fixed Rate Term Note
On June 14, 2018, ProPhotonix (IRL) Limited was issued a
four-year 10% Senior Fixed Rate Term Note ("SQN Note"), from SQN
Secured Income Fund PLC ("SQN") in the original principal amount of
GBP0.7 million ($0.9 million at June 14, 2018) secured by certain
assets of ProPhotonix (IRL) Limited.
At December 31, 2018, the company breached a calculated debt
covenant ratio. Subsequent to year end the company has obtained a
waiver from SQN stating the debt will not be called, accordingly no
portion of long term debt obligations was reclassified to current
portion of long term debt.
Barclays Bank, PLC:
On February 6, 2008, ProPhotonix Limited, a U.K. subsidiary,
entered into a Confidential Invoice Discounting Agreement, as
amended at various times, with Barclays Bank Sales Financing
("Barclays"). Under the Discounting Agreement, a three-year
revolving line of credit was established. The facility requires the
maintenance of certain financial covenants including a minimum
tangible net worth.
The most recent amendment of February 10, 2016, included (i)
increased the line from GBP1.4 million to GBP1.5 million; (ii)
reduced service charges and the discount rate from 2.50% plus
Barclays base rate to 2.00% plus Barclays base rate (iii) increased
the early payment ceiling from 80% to 85% and extended the minimum
period of this amendment to 12 months through February 10, 2017
with a rolling evergreen provision which has been extended through
April 22, 2020.
The amount outstanding under the facility was $0.9 million as of
December 31, 2019 and $1.1 million as of December 31, 2018 reported
as a short-term debt under revolving credit facility. As of both
December 31, 2019 and 2018, the Company had $0.2 million available
under this facility. The Company did not renew the facility with
Barclays which expired on April 22, 2020, fully repaying the
balance.
(9) TAXES
The Company is required to determine whether its tax positions
are "more-likely-than-not" to be sustained upon examination by the
applicable taxing authority, based on the technical merits of the
position. Tax positions not deemed to meet a "more-likely-than-not"
threshold would be recorded as a tax expense in the current year.
Based on its analysis, the Company has determined that it has not
incurred any liability for unrecognized tax benefits as of December
31, 2019. The Company had deferred tax assets, before considering
the full valuation allowance, totaling $14.4 million and $14.9
million as of December 31, 2019 and 2018, respectively.
Realization of the deferred tax assets is dependent upon the
Company's ability to generate sufficient future taxable income and,
if necessary, execution of tax planning strategies.
Based on the size of the Company's historical operating losses,
there is doubt as to when, if ever, any of the deferred tax assets
related to its operations will be realized. As a result, management
has provided a valuation allowance for the net deferred tax assets.
In the event management determines that sufficient future taxable
income may be generated in subsequent periods and the previously
recorded valuation allowance is no longer needed, the Company will
decrease the valuation allowance by providing an income tax benefit
in the period that such a determination is made. As it relates to a
deferred tax impact relative to stock compensation, the Company
believes the deferred tax asset being disclosed in the footnote
table below reflects the book compensation previously recognized
and adjusted for reversals of compensation expense for grants
outstanding as of the end of the year (fully or partially vested)
times the appropriate tax rate. In 2018, the Company concluded that
its Ireland entity should recognize a deferred tax asset of $0.5
million based on forward looking forecast operating profits in
relation to its loss carryforwards. Because of its historical
operating losses, the Company has not been subject to income taxes
since 1996.
(9) TAXES (cont.)
The Company is subject to taxation in the U.S., Canada, the
United Kingdom, Ireland and various states and local jurisdictions.
As a result of the Company's tax loss position, the tax years 2001
through 2019 remain open to examination by the federal and most
state tax authorities in the U.S. In addition, the tax years 2012
through 2019 are open to examination in foreign jurisdictions.
For the years ended December 31, 2019 and 2018, income (loss)
from continuing operations before taxes consists of the
following:
2019 2018
In thousands
Years Ended December 31,
U.S.
operations.............................................................................. $ 1,405 $ 439
Foreign
operations......................................................................... (352) (1,747)
Net income (loss) before provision for income taxes............ $ 1,053 $ (1,308)
Income tax expense attributable to income from continuing
operations was $57,000 and $0 for the years ended December 31, 2019
and 2018, respectively, and differed from the amounts computed by
applying the statutory income tax rate of 21%, to pretax income
from continuing operations as a result of the following:
2019 2018
In thousands
Years Ended December 31,
Computed "expected" tax expense (benefit).............................. $ 222 $ (275)
Increase (reduction) in income taxes resulting from:
Change in valuation allowance................................................... (345) 208
Foreign tax rate
differential........................................................ 33 58
Non-deductible
items.................................................................. 33 9
Income tax
expense........................................................... $ (57) $ -
The significant items comprising the deferred tax asset and
liability at December 31, 2019 and 2018 are as follows:
Years Ended December 31:
2019 2018
In thousands
Domestic net operating loss carry forwards...................... $ 12,649 $ 12,543
Foreign net operating loss carry forwards......................... 1,194 1,197
R&D tax
credit................................................................. 525 525
Other......................................................................
.......... 589 690
Valuation allowance......................................................... (14,957) (14,501)
------------------ ------------------
Deferred tax
asset........................................................ $ - $ 454
================== ==================
As of December 31, 2019, the Company had United States federal
net operating loss carry forwards (NOLs) of $60.2 million (2018:
$62.6 million) available to offset future taxable income, if any.
These carry forwards expire through 2035 and are subject to review
and possible adjustment by the Internal Revenue Service. The
Company may be subject to limitations under Section 382 of the
Internal Revenue Service Code as a result of changes in
ownership.
(9) TAXES (cont.)
At December 31, 2019, the Company also has Canadian federal NOLs
of $1.1 million (2018: $1.1 million) available to offset future
taxable income, if any. The Canadian entities were dissolved in
April 2020 and accordingly no Canadian NOLs exist from that date.
At December 31, 2019, the Company has a United Kingdom NOL of $2.8
million (2018: $3.0 million). At December 31, 2019, the Company has
an Ireland NOL of $2.6 million (2018: $2.3 million).
The Company's historical operating losses raise considerable
doubt as to when, if ever, any of the deferred tax assets will be
realized for its operations, even though there have been limited
operating profits in each of the last three years. As a result,
management has provided a full valuation allowance for the net
deferred tax assets. The total valuation allowance against deferred
tax assets increased by $0.5 million for the year ended December
31, 2019 (2018: increased by $0.5 million).
(10) UNREGISTERED SALES OF EQUITY SECURITIES AND WARRANTS
OUTSTANDING
WARRANTS
There were no warrants exercised in 2019 or 2018. As of December
31, 2018, there were 500,000 common shares outstanding warrants
with the following exercise prices and expiration dates:
Number of
Common Shares
Warrants Exercise Price Expiration Date
500,000 $0.10 2019
As of December 31, 2019, there were no warrants outstanding.
(11) STOCK OPTION PLANS
On June 9, 2014, the Company implemented its 2014 Stock
Incentive Plan (the "2014 Plan"). Under the 2014 Plan, the Company
may issue options, restricted stock, restricted stock units and
other stock-based awards to its employees, officers, directors,
consultants and advisors. An aggregate of 10,200,000 shares of the
Company's Common Stock were initially reserved for issuance under
the 2014 Plan, which was increased to 24,200,000 on June 5, 2017.
In addition, from 2018 to 2025 there is an automatic annual
increase to the number of shares reserved for issuance under the
2014 Plan equal to the lesser of (i) 2,000,000 shares of Common
Stock, (ii) 5% of the outstanding shares of Common Stock of the
Company, or (iii) an amount determined by the Board of Directors of
the Company. On June 5, 2017, the Company amended the 2014 Stock
Plan to increase the pool of shares available for issuance and
granted new performance-based options.
Remuneration policy for senior management
Summary
In order to incentivize the achievement of its objectives, the
Company implemented a remuneration plan for its senior management
with the following elements:
-- A one-off substantial performance-based option grant to key
senior management at market value.
-- No further grants intended for senior management through the
end of the three-year measurement period.
-- Cliff vesting on December 31, 2019 at different levels
dependent on achievement against the performance target (zero below
10% up to 150% vesting at 135% attainment) 10-year option term.
(11) STOCK OPTION PLANS (cont.)
-- Performance measure - Performance plan has two vesting
components; (i) an Annual vesting component that allows the
participant to vest a maximum of 25% of the three year target at
100%, with a lesser amounts eligible to be vested where the annual
growth rate is less than a 25% growth over the previous years'
Adjusted EBITDA value (earnings before taxes, depreciation,
interest, stock compensation and amortization). Each annual vest is
earned outright by the individual regardless any prior or
subsequent year's Adjusted EBITDA performance and (ii) the
cumulative vesting component which is determined on the average
total growth over the base Adjusted EBITDA (Base year = 2016)
during the three years of 2017 to 2019. The cumulative vesting
component allows the individual to vest shares based on the
cumulative performance from 2017 to 2019. The maximum vesting under
the combined scheme, at the end of three years, is the greater of
(a) the sum of the shares vested annually or (b) vesting of shares
based on the cumulative three year period.
-- This performance plan expired on December 31, 2019. As of
that date none of the above performance criteria were met,
accordingly no options were awarded under this performance
plan.
As of December 31, 2019, there were 16,000,000 shares available
to be issued from this plan.
On December 16, 2016, but effective January 1, 2017, the Board
of Directors approved the Eighth Amended and Restated Policy
Regarding Compensation of Independent Directors, (i) cash
compensation is $30,000 per annum paid in arrears each quarter in
installments of $7,500; and (ii) a grant of 75,000 fully vested
shares of the Company's Common Stock, be automatically issued on
the day after the annual meeting to each Independent Director who
is serving as director of the Company immediately following the
date of each annual meeting of stockholders (or special meeting in
lieu thereof) beginning with the 2017 annual meeting. These shares
are pursuant to the 2014 Plan terms and conditions. During the
years ended December 31, 2019 and 2018 the Independent Directors
each received $30,000 per annum of fees. On May 16, 2019 and May
18, 2018 each Independent Director received a grant of 75,000 fully
vested shares of the Company's Common Stock with a total value of
$7,200 and $49,000, respectively. Total directors' compensation
including other benefits are disclosed on pages 18 and 19 of the
Company's Annual Report for the year ended December 31, 2019 and
that information forms part of the audited financial
statements.
In May 2007, the Company adopted the 2007 Stock Option and
Incentive Plan (the 2007 Option Plan) for the purpose of issuing
both Incentive Options and Nonqualified Options to officers,
employees and directors of the company. No further grants are
allowed under this plan.
The following table summarizes information about the stock
options outstanding as of December 31, 2019. There was no intrinsic
value of the options outstanding or exercisable as of December 31,
2019 since the fair market value was below the exercise price for
all options outstanding as of that date. There was an intrinsic
value on the options outstanding, and exercisable, at December 31,
2018 of $0.2 million and $0.2 million, respectively.
(11) STOCK OPTION PLANS (cont.)
There were no options granted during the year ended December 31,
2019. During 2018, the Remuneration Committee approved various
qualified and non-qualified stock option awards to purchase shares
of the Company's Common Stock to various officers, directors and
employees. There were 1,000,000 options granted during the year
ended December 31, 2018. These options vest over a one year, a
three year, or a four-year anniversary of the grant date or upon
achievement of certain performance objectives as noted above,
provided that the recipient continues to serve the company in that
capacity until each such vesting or achieves the performance
objectives. The weighted average assumptions for grants during the
year ended December 31, 2018 used in the Black-Scholes option
pricing model were as follows:
Twelve (12) months
Ended
December 31, 2018
-------------------
Volatility............................................... 207.74%
Expected option life................................. 7.8 years
Interest rate (risk free)............................... 2.77%
Dividends.............................................. $0
Weighted average grant date fair
value............ $0.122
The following table summarizes information related to the
outstanding and exercisable options during the years ended December
31, 2019 and 2018:
Weighted
Average Weighted
Exercise Average
Price Remaining
per Contractual
Options Share Term
Outstanding ($) (in Years)
Balance at December 31, 2017............................. 29,488,132 0.15 6.68
Granted......................................................... 1,000,000 0.12
Exercised...................................................... (135,000) 0.03
Cancelled...................................................... (660,173) 0.32
Balance at December 31, 2018............................. 30,064,867 0.14 5.92
Vested and Exercisable at December 31, 2018..... 16,712,367 0.07 3.88
Balance at December 31, 2018............................. 30,064,867 0.15 6.68
Granted......................................................... - -
Exercised...................................................... - -
Cancelled...................................................... (12,764,823) 0.22
Balance at December 31, 2019............................. 17,300,044 0.09 3.68
Vested and Exercisable at December 31, 2019..... 16,907,594 0.08 3.68
Vested and Expected to Vest at December 31,
2019.................................................................... 17,300,044 $0.09 3.68
Weighted Weighted Weighted
Average Average Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
$ 0.03 - 0.24 17,350,044 3.4 $ 0.09 16,940,894 $ 0.08
(11) STOCK OPTION PLANS (cont.)
At December 31, 2019, there was $41,000 of total unrecognized
compensation cost related to stock options granted. The cost will
be recognized in 2020. During 2019 the Company reversed $1.2
million of stock compensation expense to selling, general and
administrative expense related to the expiration of
performance-based stock options that were cancelled due to
non-achievement of the performance criteria. Total stock option
expense recorded in 2018 was $1.1 million. There were no options
exercised in 2019 and there were 135,000 options exercised in 2018
at an exercise price of $3,661, having a market value of
$18,900.
(12) EMPLOYEE STOCK PURCHASE PLAN
In May 2000, the Company adopted the 2000 Employee Stock
Purchase Plan (the Stock Purchase Plan). During the years ended
December 31, 2019 and 2018 there were no shares issued under the
Stock Purchase Plan. On April 4, 2019 the Board of Directors ended
this plan.
(13) EMPLOYEE DEFINED CONTRIBUTION PLANS
On January 17, 1994, the Company established the ProPhotonix
Limited 401(k) Plan (the Plan). Under the Plan, employees are
allowed to make pre-tax retirement contributions. In addition, the
Company may make matching contributions, not to exceed 100% of the
employee contributions, and profit sharing contributions at its
discretion. The Company made matching contributions of $23,000 in
the year ended December 31, 2019 and $28,000 in the year ended
December 31, 2018. The Company incurred costs of $1,500 in 2019 and
$2,000 in 2018 to administer the Plan. The Company also has
voluntary contribution pension plans in Ireland and in the United
Kingdom. In the United Kingdom, the Company contributes a maximum
of 3% of the participating employee salaries, with one exception,
where the maximum contribution is 10%. The plan is voluntary, with
plan administration costs coming out of the plan itself. The
Company made contributions of $98,000 and $61,000 in the years
ended December 31, 2019 and 2018. In Ireland, the Company also has
a voluntary plan that matches contributions for those participating
employees with minimum of 6 months of service. After two years of
service, the Company will match up to a maximum of 5% of salary.
The Company made contributions of $45,000 and $49,000 in the years
ended December 31, 2019 and 2018, respectively. Plan administration
costs come out of the plan itself.
(14) LEASES, COMMITMENTS AND CONTINGENCIES
LEASES, OTHER OBLIGATIONS AND CONTINGENT LIABILITIES
On February 24, 2017, the Company signed a 61-month lease, with
an effective date of April 1, 2017, to lease 3,200 square feet in
an office building, in Salem, New Hampshire, with an average
monthly rate of $3,525 plus the tenant's share of expenses.
ProPhotonix (IRL) Limited rents approximately 10,000 square feet
for its operations in Cork, Ireland. The original five year lease
term ended on August 22, 2013 and the Company rents the space for
its operations on a month to month basis. Base rent is EUR72,000
per year.
ProPhotonix Limited, a U.K. subsidiary, leases approximately
13,000 square feet of space in Hatfield Broad Oak, Hertfordshire,
U.K. The original lease had a term of nine years ending September
29, 2013 at GBP87,000 per year, at which time the Company
renegotiated the lease for an additional 3 years, ending September
30, 2017 at GBP70,000 per year. The Company has since renegotiated
the lease for an additional 6 years at GBP75,000 per year. The
Company has the option to terminate the lease with six months'
notice after September 2017. The Company did not exercise this
option during 2019.
The Company accounts for the Salem, New Hampshire and
Hertfordshire, U.K. leases as operating leases. The Company
utilizes, or has assumed, finance leases to finance purchases of
equipment. The Company records depreciation expense on assets
acquired under a finance lease in the consolidated statement of
income.
(14) LEASES, COMMITMENTS AND CONTINGENCIES (cont.)
The components of lease expense were as follows (in
thousands):
December 31,
2019
-----------------------
Operating lease cost $ 78
Finance lease cost:
Amortization of right-of-use assets 92
Interest on lease liabilities 9
-----------------------
Total lease costs $ 179
===================
Other information related to leases was as follows:
December 31,
2019
---------------------
Cash paid for amounts included in the measurement of lease
liabilities (in thousands)
Weighted average remaining lease term (in years)
Operating leases 3.7
Finance leases 2.1
Weighted average discount rate
Future minimum payments for operating and finance lease
obligations and purchase commitments are as follows (in
thousands):
Finance
Leases Operating Leases
----------------
2020 $ 63 $ 142
2021 25 143
2022 12 89
2023 4 -
Thereafter - -
---------------------------------- ---------- -------------------
Total minimum
lease payments 104 374
Less amount
representing
interest (6) (62)
---------------------------------- -------------------
Present value of
lease
liabilities $ 98 $ 312
================ ================ ========== ===================
Accrued expenses
and other
current
liabilities $ 58 $ $ -
Operating lease
liabilities,
current - 119
Operating lease
liabilities,
noncurrent - 193
Other long-term
liabilities 40 -
---------------------------------- -------------------------------
Total lease
liabilities $ 98 $ 312
================ ================ ========== ===================
(15) LEGAL PROCEEDINGS
The Company is at times party to various legal proceedings
generally incidental to its business. Although the disposition of
any legal proceedings cannot be determined with certainty, it is
the Company's opinion that any pending or threatened litigation
will not have a material adverse effect on the Company's results of
operations, cash flow or financial condition.
(16) DEFERRED REVENUE
At December 31, 2019 and 2018, the Company had a total of $0.8
million and $0.1 million in deferred revenue, respectively.
Recognition of this revenue is subject to performance obligations
that exist under the customer contracts associated with this
deferred revenue balance. The Company expects to meet the
performance obligations and recognize the associated revenue over
the period from 2020 through 2022.
(17) SEGMENT INFORMATION
Operating segments are identified as components of an enterprise
about which separate discrete financial information is available
for evaluation by the chief decision-making group, in making
decisions how to allocate resources and assess performance. The
Company's chief decision-maker is the Chief Executive Officer. The
Company's accounting policies and method of presentation for
segments is consistent with that used throughout the consolidated
financial statements.
The Company operates in two segments: LED's (light emitting
diode systems) and Laser & Diodes. In the LED segment, the
Company designs and manufactures LED systems for the inspection,
machine vision, medical and military markets. The Laser &
Diodes segment distributes laser diodes and designs and
manufactures custom laser diodes modules for industrial,
commercial, defense and medical applications. The policies relating
to segments are the same as the Company's corporate policies.
The Company evaluates performance and allocates resources based
on revenues and operating income. The operating profit / (loss) for
each segment includes selling, research and development and
expenses directly attributable to the segment. Certain of the
Company's indirect overhead costs, which include corporate general
and administrative expenses, are allocated between the segments
based upon an estimate of costs associated with each segment.
Segment assets include accounts receivable, inventory, machinery
and equipment, goodwill and intangible assets directly associated
with the product line segment.
The Company had one customer account for $2.1 million, or 14%,
of its total consolidated revenues in 2019 and $1.7 million, or
10%, of its total consolidated revenues in 2018. All of this
customer's revenues were generated in the Company's Laser &
diodes segment.
2019 2018
In thousands
Years Ended December 31
Revenues:
LEDs.......................................................................
......... $ 7,699 $ 7,953
Laser &
diodes................................................................. 7,277 8,448
Total
revenues.................................................................. $ 14,976 $ 16,401
=============== ===============
Gross profit:
LEDs.......................................................................
......... $ 3,133 $ 3,405
Laser &
diodes................................................................. 2,874 2,939
Total gross
profit.............................................................. $ 6,007 $ 6,344
=============== ===============
Operating profit (loss):
LEDs.......................................................................
......... $ 594 $ (581)
Laser &
diodes................................................................. 501 (413)
Total operating profit (loss).............................................. $ 1,095 $ (994)
=============== ===============
(17) SEGMENT INFORMATION (cont.)
2019 2018
In thousands
Years Ended December 31
Current assets:
LEDs................................................................
.................. $ 2,358 $ 2,316
Laser &
diodes..............................................................
..... 3,581 3,159
Corporate...........................................................
................ 1,601 2,024
Total current
assets............................................................ $ 7,540 $ 7,499
Property, plant & equipment:
LEDs................................................................
.................. $ 289 $ 293
Laser &
diodes..............................................................
..... 271 331
Corporate...........................................................
................ 13 22
--------------- ----------------
Total property, plant &
equipment..................................... $ 573 $ 646
=============== ================
Goodwill:
LEDs................................................................
.................. $ 397 $ 405
Laser &
diodes..............................................................
..... - -
Corporate...........................................................
................ - -
--------------- ----------------
Total
goodwill............................................................
........ $ 397 $ 405
=============== ================
Other assets:
LEDs................................................................
.................. $ 457 $ 767
Laser &
diodes..............................................................
..... 307 103
Corporate...........................................................
................ 91 7
--------------- ----------------
Total other
assets..............................................................
. $ 855 $ 877
=============== ================
Total assets:
LEDs................................................................
.................. 3,501 3,781
Laser &
diodes..............................................................
..... 4,159 3,593
Corporate...........................................................
................ 1,705 2,053
--------------- ----------------
Total
assets..............................................................
.......... $ 9,365 $ 9,427
=============== ================
Years Ended December 31 In thousands
2019 2018
---------------------------------
Revenues by geographic area:
United
States..............................................................
........ $ 6,950 $ 5,550
Canada, Mexico & So. America......................................... 172 323
Europe..............................................................
................. 5,263 8,962
Asia & the rest of the
world............................................... 2,591 1,566
--------------- ----------------
Total.......................................................................
................... $ 14,976 $ 16,401
=============== ================
(17) SEGMENT INFORMATION (cont.)
The Company's long-lived assets consist of property, plant and
equipment, goodwill and intangible assets located in the following
geographic locations:
2019 2018
In thousands
Years Ended December 31
Long-lived assets by geographic area:
United States and North America............................................. $ 13 $ 22
Europe.......................................................................
.............. 686 698
UK...........................................................................
................ 271 331
Total................................................................................
................. $ 970 $ 1,051
(18) SUBSEQUENT EVENTS
The Company has evaluated subsequent events through August 21,
2020, the date which the financial statements were available to be
issued. Based upon this evaluation, it was determined that no
subsequent events occurred that require recognition or disclosure
in the financial statements. In the second quarter 2020, the
Company secured a PPP Loan from the Small Business Administration
(USA) and a Bounce Back Loan (UK) aggregating approximately
$150,000. The current global COVID-19 pandemic is expected to
negatively impact the Company in 2020 with a likely decrease in
revenue. However, measures have been taken to mitigate the cash
impact on the Company. There continues to be uncertainties in
relation to the ongoing impact of COVID-19 and further details of
the potential risks are detailed on pages 10-12 in the risk and
uncertainties section of the Company's Annual Report for the year
ended December 31, 2019.
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