Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31,
2018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ___________ to ____________
Commission file number 000-27548
LIGHTPATH TECHNOLOGIES, INC.
------------------------------------------------------------------------
(Exact name of registrant as specified in its
charter)
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DELAWARE
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86-0708398
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(State
or other jurisdiction of
incorporation or organization)
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(I.R.S.
Employer
Identification No.)
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http://www.lightpath.com
2603 Challenger Tech Ct. Suite 100
Orlando, Florida 32826
-----------------------------------------------------------
(Address of principal executive offices)
(ZIP Code)
(407) 382-4003
---------------------------------------------
(Registrant’s telephone number, including area
code)
N/A
----------------------------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed
since last report)
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (section 232.405 of this chapter) during the
preceding 12 months (or such shorter period that the registrant was
required to submit and post such files).
YES [ X ] NO [ ]
Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated
filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act. (Check one):
|
Large
accelerated filer ☐
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Accelerated filer
☐
|
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Non-accelerated
filer ☐ (Do not check if a smaller reporting
company)
|
Smaller reporting
company ☒
|
|
Emerging growth
company ☐
|
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act [
]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO
[X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the
number of shares outstanding of each of the issuer’s classes
of common stock, as of the latest practicable date:
25,731,544 shares of common stock, Class A, $.01 par
value, outstanding as of May 11, 2018.
LIGHTPATH TECHNOLOGIES, INC.
Form 10-Q
Index
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Item
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Page
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Part I
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Financial Information
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Item 1
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Financial
Statements
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3
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4
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5
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6
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7
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Item
2
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25
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27
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30
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35
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36
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36
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Item
4
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38
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Part II
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Other Information
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Item
1
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38
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Item
2
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38
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Item
3
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38
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Item
4
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38
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Item
5
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38
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Item
6
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38
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41
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Item 1. Financial Statements
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LIGHTPATH TECHNOLOGIES, INC.
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Consolidated Balance
Sheets
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Assets
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Current assets:
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Cash and cash equivalents
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$6,388,164
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$8,085,015
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Trade accounts receivable, net of allowance of $19,358 and
$7,356
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5,672,071
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5,890,113
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Inventories, net
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6,409,118
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5,074,576
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Other receivables
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59,375
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29,202
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Prepaid expenses and other assets
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1,043,603
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641,469
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Total current assets
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19,572,331
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19,720,375
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Property and equipment, net
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12,322,111
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10,324,558
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Intangible assets, net
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9,387,240
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10,375,053
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Goodwill
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5,854,905
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5,854,905
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Deferred tax assets, net
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285,000
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285,000
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Other assets
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137,084
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112,323
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Total assets
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$47,558,671
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$46,672,214
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Liabilities and Stockholders’ Equity
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Current liabilities:
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Accounts payable
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$2,039,090
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$1,536,121
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Accrued liabilities
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514,479
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966,929
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Accrued payroll and benefits
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1,113,840
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1,896,530
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Loans payable, current portion
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1,458,800
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1,111,500
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Capital lease obligation, current portion
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219,688
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239,332
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Total current liabilities
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5,345,897
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5,750,412
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Capital lease obligation, less current portion
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271,175
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142,101
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Deferred rent
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400,605
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458,839
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Deferred tax liabilities
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-
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182,349
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Warrant liability
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-
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490,500
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Loans payable, less current portion
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5,479,565
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9,926,844
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Total liabilities
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11,497,242
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16,951,045
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Stockholders’ equity:
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Preferred stock: Series D, $.01 par value, voting;
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500,000 shares authorized; none issued and outstanding
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—
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—
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Common stock: Class A, $.01 par value, voting;
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44,500,000 shares authorized; 25,730,544 and
24,215,733
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shares issued and outstanding
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257,305
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242,157
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Additional paid-in capital
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229,749,154
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225,492,252
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Accumulated other comprehensive income
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496,282
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295,396
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(194,441,312)
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(196,308,636)
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Total stockholders’ equity
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36,061,429
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29,721,169
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Total liabilities and stockholders’ equity
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$47,558,671
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$46,672,214
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The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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LIGHTPATH TECHNOLOGIES, INC.
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Consolidated Statements of Comprehensive Income
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Revenue, net
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$8,503,628
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$8,490,042
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24,437,094
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19,360,109
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Cost of sales
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5,211,602
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4,267,318
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14,344,015
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9,007,180
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Gross margin
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3,292,026
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4,222,724
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10,093,079
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10,352,929
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Operating expenses:
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Selling, general and administrative
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2,362,578
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2,329,762
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7,054,996
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6,190,705
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New product development
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384,380
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308,394
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1,178,849
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853,939
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Amortization of intangibles
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329,270
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304,809
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987,812
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304,809
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Loss on disposal of property and equipment
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—
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—
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3,315
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—
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Total operating costs and expenses
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3,076,228
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2,942,965
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9,224,972
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7,349,453
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Operating income
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215,798
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1,279,759
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868,107
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3,003,476
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Other income (expense):
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Interest expense
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(118,890)
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(154,639)
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(434,671)
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(167,832)
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Interest expense - debt costs
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461,686
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(38,338)
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382,459
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(38,338)
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Change in fair value of warrant liability
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-
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(748,169)
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(194,632)
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(457,784)
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Other income (expense), net
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484,531
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27,985
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927,383
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(228,935)
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Total other income (expense), net
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827,327
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(913,161)
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680,539
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(892,889)
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Income before income taxes
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1,043,125
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366,598
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1,548,646
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2,110,587
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Provision for income taxes
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(183,154)
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265,774
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(318,678)
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771,600
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Net income
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$1,226,279
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$100,824
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$1,867,324
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$1,338,987
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Foreign currency translation adjustment
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77,477
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38,636
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200,886
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113,818
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Comprehensive income
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$1,303,756
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$139,460
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$2,068,210
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$1,452,805
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Earnings per common share (basic)
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$0.05
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$0.00
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$0.08
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$0.07
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Number of shares used in per share calculation (basic)
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25,546,512
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23,818,136
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24,763,458
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18,621,072
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Earnings per common share (diluted)
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$0.04
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$0.00
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$0.07
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$0.07
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Number of shares used in per share calculation
(diluted)
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27,281,010
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25,628,703
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26,618,956
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20,145,976
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The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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LIGHTPATH TECHNOLOGIES, INC.
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Consolidated Statement of Stockholders' Equity
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Nine Months Ended March 31, 2018
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Balances at
June 30, 2017
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24,215,733
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$242,157
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$225,492,252
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$295,396
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$(196,308,636)
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$29,721,169
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Issuance of
common stock for:
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Exercise of
warrants
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433,810
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4,338
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529,980
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—
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—
|
534,318
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Employee Stock
Purchase Plan
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19,980
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200
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48,391
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—
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—
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48,591
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Exercise of
stock options
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93,813
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938
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193,212
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—
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—
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194,150
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Satisfaction
of Sellers Note
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967,208
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9,672
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2,237,392
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2,247,064
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Reclassification
of warrant liability upon exercise
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—
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—
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685,132
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—
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—
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685,132
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Stock-based
compensation on stock options and RSUs
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—
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—
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562,795
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—
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—
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562,795
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Foreign
currency translation adjustment
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—
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—
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—
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200,886
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—
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200,886
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Net
income
|
—
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—
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—
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—
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1,867,324
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1,867,324
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Balances at
March 31, 2018
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25,730,544
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$257,305
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$229,749,154
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$496,282
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$(194,441,312)
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$36,061,429
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The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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LIGHTPATH
TECHNOLOGIES, INC.
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Consolidated Statements of Cash Flows
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Cash flows from operating activities
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Net income
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$1,867,324
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$1,338,987
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation and
amortization
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2,492,003
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1,240,232
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Interest from
amortization of debt costs
|
13,704
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3,861
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Loss on disposal of
property and equipment
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3,315
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—
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Stock-based
compensation
|
279,397
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319,182
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Bad debt
expense
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(11,868)
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(29,551)
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Change in fair value of
warrant liability
|
194,632
|
457,784
|
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Change in fair value of
sellers note
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(396,163)
|
34,476
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Deferred rent
amortization
|
(58,234)
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(66,710)
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Inventory write-offs to
reserve
|
134,052
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47,895
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Deferred tax
expense
|
(205,884)
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(40,000)
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Changes in operating assets and liabilities:
|
|
|
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Trade accounts receivable
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312,026
|
(1,032,243)
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Other receivables
|
(29,018)
|
142,919
|
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Inventories
|
(1,013,201)
|
(253,179)
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Prepaid expenses and other
assets
|
(409,137)
|
171,753
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Accounts payable and accrued
liabilities
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(500,237)
|
595,624
|
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Net
cash provided by operating activities
|
2,672,711
|
2,931,030
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Cash flows from investing activities:
|
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Purchase of property and equipment
|
(2,481,715)
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(1,412,738)
|
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Acquisiton of ISP Optics, net of cash
acquired
|
—
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(11,777,336)
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Net
cash used in investing activities
|
(2,481,715)
|
(13,190,074)
|
|
|
|
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Cash flows from financing activities:
|
|
|
|
Proceeds from exercise of stock options
|
194,150
|
—
|
|
Proceeds from sale of common stock from employee stock purchase
plan
|
48,591
|
19,632
|
|
Loan costs
|
(60,453)
|
(72,224)
|
|
Borrowings on loan payable
|
2,942,583
|
5,000,000
|
|
Proceeds from issuance of common stock under public equity
placement
|
—
|
8,730,209
|
|
Proceeds from exercise of warrants, net of costs
|
534,318
|
584,679
|
|
Net payments on loan payable
|
(4,351,836)
|
—
|
|
Payments on capital lease
obligations
|
(196,790)
|
(141,874)
|
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Net
cash (used in) provided by financing activities
|
(889,437)
|
14,120,422
|
|
Effect of exchange rate on cash and cash equivalents
|
(998,410)
|
62,119
|
|
Change in cash and cash equivalents
|
(1,696,851)
|
3,923,497
|
|
Cash and cash equivalents, beginning of period
|
8,085,015
|
2,908,024
|
|
Cash and cash equivalents, end of period
|
$6,388,164
|
$6,831,521
|
|
|
|
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Supplemental disclosure of cash flow information:
|
|
|
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Interest paid in cash
|
$417,550
|
$91,525
|
|
Income taxes paid
|
$562,491
|
$344,820
|
|
Supplemental disclosure of non-cash investing & financing
activities:
|
|
|
|
Purchase of equipment through capital
lease arrangements
|
$306,220
|
$230,000
|
|
Reclassification of warrant liability
upon exercise
|
$685,132
|
$509,771
|
|
Derecognition of liability associated
with stock option grants
|
$283,399
|
$352,765
|
|
Sellers Note issued to acquire ISP
Optics, at fair value
|
—
|
$6,327,208
|
|
Conversion of Sellers Note to common
stock
|
$2,247,064
|
—
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
|
LIGHTPATH TECHNOLOGIES, INC.
Notes to Unaudited Consolidated
Financial Statements
1. Basis of Presentation
References in this
document to “the Company,” “LightPath,”
“we,” “us,” or “our” are
intended to mean LightPath Technologies, Inc., individually, or as
the context requires, collectively with its subsidiaries on a
consolidated basis.
The
accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with the requirements of Article 8 of
Regulation S-X promulgated under the Securities Exchange Act of
1934, as amended, and, therefore, do not include all information
and footnotes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with
accounting principles generally accepted in the United States of
America. These Consolidated Financial Statements should be read in
conjunction with our Consolidated Financial Statements and related
notes, included in our Annual Report on Form 10-K for the fiscal
year ended June 30, 2017, filed with the Securities and Exchange
Commission (the “SEC”). Unless otherwise stated,
references to particular years or quarters refer to our fiscal
years ended June 30 and the associated quarters of those fiscal
years.
These
Consolidated Financial Statements are unaudited, but include all
adjustments, including normal recurring adjustments, which, in the
opinion of management, are necessary to present fairly our
financial position, results of operations and cash flows for the
interim periods presented. Results of operations for interim
periods are not necessarily indicative of the results that may be
expected for the year as a whole. The Consolidated Balance Sheet as
of June 30, 2017 has been derived from the audited financial
statements at that date but does not include all of the information
and notes required by generally accepted accounting principles for
complete financial statements.
History:
We were incorporated in Delaware in 1992 as the successor to
LightPath Technologies Limited Partnership, a New Mexico limited
partnership, formed in 1989, and its predecessor, Integrated Solar
Technologies Corporation, a New Mexico corporation, formed in 1985.
We completed our initial public offering (“IPO”) during
fiscal 1996. On April 14, 2000, we acquired Horizon Photonics, Inc.
(“Horizon”). On September 20, 2000, we acquired
Geltech, Inc. (“Geltech”). In November 2005, we formed
LightPath Optical Instrumentation (Shanghai) Co., Ltd
(“LPOI”), a wholly-owned subsidiary located in Jiading,
People’s Republic of China. In December 2013, we formed
LightPath Optical Instrumentation (Zhenjiang) Co., Ltd
(“LPOIZ”), a wholly-owned subsidiary located in
Zhenjiang, Jiangsu Province, People’s Republic of China. In
December 2016, we acquired ISP Optics Corporation, a New York
corporation (“ISP”), and its wholly-owned subsidiary,
ISP Optics Latvia, SIA, a limited liability company founded in 1998
under the Laws of the Republic of Latvia (“ISP
Latvia”). See Note 3, Acquisition of ISP Optics Corporation,
to these unaudited Consolidated Financial Statements, for
additional information.
We are a manufacturer and integrator of families of precision
molded aspheric optics, diamond turned, ground and polished
infrared optics, high-performance fiber-optic collimators, GRADIUM
glass lenses and other optical materials used to produce products
that manipulate light. We design, develop, manufacture and
distribute optical components and assemblies utilizing the latest
optical processes and advanced manufacturing technologies. We also
perform research and development for optical solutions for the
traditional optics markets and communications markets.
2. Significant Accounting Policies
Consolidated Financial
Statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Cash and cash
equivalents consist of
cash in the bank and cash equivalents with maturities of 90 days or
less when purchased.
Allowance for accounts
receivable, is calculated
by taking 100% of the total of invoices that are over 90 days past
due from the due date and 10% of the total of invoices that are
over 60 days past due from the due date for United States ("U.S.")
based accounts and 100% of invoices that are over 120 days past due
for Chinese and Latvia-based accounts. Accounts receivable are
customer obligations due under normal trade terms. We perform
continuing credit evaluations of our customers’ financial
condition. If our actual collection experience changes, revisions
to our allowance may be required. After all attempts to collect a
receivable have failed, the receivable is written off against the
allowance.
Inventories,
which consist principally of raw
materials, tooling, work-in-process and finished lenses,
collimators and assemblies, are stated at the lower of cost or
market, on a first-in, first-out basis. Inventory costs include
materials, labor and manufacturing overhead. Acquisition of goods
from our vendors has a purchase burden added to cover customs,
shipping and handling costs. Fixed costs related to excess
manufacturing capacity have been expensed. We look at the following
criteria for parts to consider for the inventory reserve: (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 reserved
at 100%, as well as reserving 50% for other items deemed to be slow
moving within the last twelve months and reserving 25% for items
deemed to have low material usage within the last six months. The
parts identified are adjusted for recent order and quote activity
to determine the final inventory reserve.
Property and
equipment are stated at
cost and depreciated using the straight-line method over the
estimated useful lives of the related assets ranging from one to
ten years. Leasehold improvements are amortized over the shorter of
the lease term or the estimated useful lives of the related assets
using the straight-line method. Construction in process represents
the accumulated costs of assets not yet placed in service and
primarily relates to manufacturing equipment.
Long-lived
assets, such as property,
plant, and equipment and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an
asset to its estimated undiscounted future cash flows expected to
be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of would
be separately presented in our Consolidated Balance Sheets and
reported at the lower of the carrying amount or fair value, less
costs to sell, and would no longer be
depreciated.
Goodwill and intangible
assets acquired in a
business combination are recognized at fair value using generally
accepted valuation methods appropriate for the type of intangible
asset and reported separately from goodwill. Purchased intangible
assets other than goodwill are amortized over their useful lives
unless these lives are determined to be indefinite. Purchased
intangible assets are carried at cost, less accumulated
amortization. Amortization is computed over the estimated useful
lives of the respective assets, generally two to fifteen years. We
periodically re-assess the useful lives of its intangible assets
when events or circumstances indicate that useful lives have
significantly changed from the previous estimate. Definite-lived
intangible assets consist primarily of customer relationships,
know-how/trade secrets and trademarks. Goodwill and
intangible assets are tested for impairment on an annual basis and
during the period between annual tests in certain circumstances,
and written down when impaired.
Deferred rent
relates to certain of our
operating leases containing predetermined fixed increases of the
base rental rate during the lease term being recognized as rental
expense on a straight-line basis over the lease term, as well as
applicable leasehold improvement incentives provided by the
landlord. We have recorded the difference between the amounts
charged to operations and amounts payable under the leases as
deferred rent in the accompanying unaudited Consolidated Balance
Sheets.
Income taxes
are accounted for under the
asset and liability method. Deferred income tax assets and
liabilities are computed on the basis of differences between the
financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based
upon enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation
allowances have been established to reduce deferred tax assets to
the amount expected to be realized.
We have not recognized a liability for uncertain tax positions. A
reconciliation of the beginning and ending amount of unrecognized
tax benefits or penalties has not been provided since there has
been no unrecognized benefit or penalty. If there were an
unrecognized tax benefit or penalty, we would recognize interest
accrued related to unrecognized tax benefits in interest expense
and penalties in operating expenses.
We file U.S. Federal income tax returns, and tax returns in various
states and foreign jurisdictions. Our open tax years subject to
examination by the Internal Revenue Service generally remain open
for three years from the filing date. Our tax years subject to
examination by the state jurisdictions generally remain open for up
to four years from the filing date. In Latvia, tax years subject to
examination remain open for up to five years from the filing date
and in China, tax years subject to examination remain open for up
to ten years from the filing date.
Our cash and cash equivalents totaled approximately $6.4 million at
March 31, 2018. Of this amount, approximately 56% was held by our
foreign subsidiaries in China and Latvia. These foreign funds were
generated in China and Latvia as a result of foreign earnings. With
respect to the funds generated by our foreign subsidiaries in
China, the retained earnings in China must equal at least 150% of
the registered capital before any funds can be repatriated. As of
March 31, 2018, we have retained earnings in China of approximately
$1.9 million and we need to have approximately $11.3 million before
repatriation will be allowed.
We currently intend to permanently invest earnings generated from
our foreign Chinese operations, and, therefore, we have not
previously provided for future Chinese withholding taxes
on such related earnings. However, if, in the future, we change
such intention, we would provide for and pay
additional foreign taxes, if any, at that time.
Revenue
is recognized from product sales
when products are shipped to the customer; provided, that we have
received a valid purchase order, the price is fixed, title has
transferred, collection of the associated receivable is reasonably
assured, and there are no remaining significant obligations.
Product development agreements are generally short term in nature
with revenue recognized upon shipment to the customer for products,
reports or designs. Invoiced amounts for sales and value-added
taxes (“VAT”) are posted to the the
accompanying unaudited Consolidated Balance Sheets and
not included in revenue.
VAT is computed on the gross sales price on all
sales of our products sold in the People’s Republic of China
and Latvia. The VAT rates range up to 21%, depending on the type of
products sold. The VAT may be offset by VAT paid by us on raw
materials and other materials included in the cost of producing or
acquiring our finished products. We recorded a VAT receivable, net
of payments, which is included in other receivables in the
accompanying unaudited 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. Most awards granted under our
Amended and Restated Omnibus Incentive Plan, as amended (the
“Omnibus Plan”) vest ratably over two to four years and
generally have four to ten-year contract lives. The
volatility rate is based on historical trends in common stock
closing prices, and the expected term was determined based
primarily on historical experience of previously outstanding
awards. The interest rate used is the U.S. Treasury
interest rate for constant maturities. The likelihood of meeting
targets for option grants that are performance based are evaluated
each quarter. If it is determined that meeting the targets is
probable, then the compensation expense will be amortized over the
remaining vesting period.
Management
estimates. Management
makes estimates and assumptions during the preparation of our
Consolidated Financial Statements that affect amounts reported in
the 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.
Fair value of financial
instruments. We account
for financial instruments in accordance with the Financial
Accounting Standard Board’s (“FASB”) Accounting
Standards Codification (“ASC”) Topic 820, “Fair
Value Measurements and Disclosures” (“ASC 820”),
which provides a framework for measuring fair value and expands
required disclosure about fair value measurements of assets and
liabilities. ASC 820 defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also establishes a
fair value hierarchy that requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs
that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or
liabilities.
Level 2 - Inputs other than quoted prices included within Level 1
that are either directly or indirectly observable.
Level 3 - Unobservable inputs that are supported by little or no
market activity, therefore, requiring an entity to develop its own
assumptions about the assumptions that market participants would
use in pricing.
Fair value estimates discussed herein are based upon certain market
assumptions and pertinent information available to management as of
March 31, 2018.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These
financial instruments include receivables, accounts payable and
accrued liabilities. Fair values were assumed to
approximate carrying values for these financial instruments since
they are short term in nature and their carrying amounts
approximate fair values or they are receivable or payable on
demand. The fair value of our capital lease obligations and
acquisition term loan payable to Avidbank Corporate Finance, a
division of Avidbank (“Avidbank”) approximates their
carrying values based upon current rates available to us. Loans
payable as of June 30, 2017 also included a note payable to the
sellers of ISP, in the aggregate principal amount of $6 million
(the “Sellers Note”). The carrying value of the Sellers
Note included a fair value premium based on a risk-adjusted
discount rate, a Level 2 fair value measurement. On January 16,
2018, the Sellers Note was satisfied in full and, therefore, is not
included in loans payable as of March 31, 2018. See Note 13, Loans
Payable, to these unaudited Consolidated Financial Statements for
additional information.
We valued our warrant liabilities based on open-form option pricing
models, which were based on the relevant inputs and rendered the
fair value measurement at Level 3. We based our estimates of fair
value for warrant liabilities on the amount a third-party market
participant would pay to transfer the liability and incorporated
inputs, such as equity prices, historical and implied volatilities,
dividend rates and prices of convertible securities issued by
comparable companies maximizing the use of observable inputs when
available. See Note 10, Derivative Financial Instruments (Warrant
Liability), to these unaudited Consolidated Financial Statements
for additional information.
We do not have any other financial or non-financial instruments
that would be characterized as Level 1, Level 2, or Level
3.
Debt issuance
costs are recorded as a
reduction to the carrying value of the related notes payable, by
the same amount, and are amortized ratably over the term of the
note.
Derivative financial
instruments.
We account for derivative
instruments in accordance with FASB’s ASC Topic 815,
“Derivatives and Hedging” (“ASC 815”),
which requires additional disclosures about our objectives and
strategies for using derivative instruments, how the derivative
instruments and related hedged items are accounted for, and how the
derivative instruments and related hedging items affect these
Consolidated Financial Statements.
We do not use derivative instruments to hedge exposures to cash
flow, market or foreign currency risk. We review the terms of
convertible debt instruments to determine whether they contain
embedded derivative instruments that are required under ASC 815 to
be accounted for separately from the host contract, and recorded on
the accompanying unaudited Consolidated Balance Sheets at fair
value. The fair value of derivative liabilities, if any, must
be revalued at each reporting date, with the corresponding changes
in fair value recorded in current-period operating
results.
Freestanding warrants issued by us in connection with the issuance
or sale of debt and equity instruments are considered to be
derivative instruments. Pursuant to ASC 815, an evaluation of
specifically identified conditions is made to determine whether the
fair value of warrants issued is required to be classified as
equity or as a derivative liability.
Comprehensive
income is defined as the
change in equity (net assets) of a business enterprise during a
period from transactions and other events and circumstances from
non-owner sources. It includes all changes in equity
during a period, except those resulting from investments by owners
and distributions to owners. Comprehensive income has
two components, net income and other comprehensive income, and is
included in the accompanying unaudited Consolidated Statements
of Comprehensive Income. Our other comprehensive income consists of
foreign currency translation adjustments made for financial
reporting purposes.
Business segments.
As we only operate in
principally one business segment, no additional reporting is
required.
Recent accounting pronouncements. There
are new accounting pronouncements issued by the FASB that are not
yet effective.
Revenue from Contracts
with Customers – In May 2014, FASB issued ASU No.
2014-09, “Revenue from Contracts with Customers” (Topic
606) (“ASU 2014-09”), which supersedes the revenue
recognition requirements in ASC Topic 605, “Revenue
Recognition,” and most industry-specific guidance. ASU
2014-09 is based on the principle that revenue is recognized to
depict the transfer of goods or services to customers in an amount
that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. ASU 2014-09 also
requires additional disclosure about the nature, amount, timing and
uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in
judgments, and assets recognized from costs incurred to obtain or
fulfill a contract. ASU 2014-09 must be applied using one of two
retrospective methods and were originally set to be effective for
annual and interim periods beginning after December 15, 2016. On
July 9, 2015, the FASB modified ASU 2014-09 to be effective for
annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period. As
modified, the FASB permits the early adoption of the new revenue
standard, but not before the annual periods beginning after
December 15, 2017. A public organization would apply the new
revenue standard to all interim reporting periods within the year
of adoption.
ASU 2014-09 provides that an entity should apply a five-step
approach for recognizing revenue, including (1) identifying the
contract with a customer; (2) identifying the performance
obligations in the contract; (3) determining the transaction price;
(4) allocating the transaction price to the performance obligations
in the contract; and (5) recognizing revenue when, or as, the
entity satisfies a performance obligation. Also, the entity must
provide various disclosures concerning the nature, amount and
timing of revenue and cash flows arising from contracts with
customers.
Based on our current assessment, which is not yet final, we
currently believe the most significant impact will be related to
the timing of the recognition of non-recurring engineering
(“NRE”) revenue. We also cannot determine whether to
adopt a full retrospective or modified retrospective application
method until our assessment of ASU 2014-09 is final. We
will continue to evaluate the future impact and method of
adoption of ASU 2014-09 and related amendments on our Consolidated
Financial Statements and related disclosures, and will subsequently
disclose future identified material impacts, if any, and the method
of adoption in our annual report on Form 10-K for the year ended
June 30, 2018. ASU 2014-09 is effective for us in
the first quarter of our fiscal year ending June 30,
2019.
Leases – In
February 2016, the FASB issued ASU No. 2016-02,
“Leases” (“ASU 2016-02”). This guidance
requires an entity to recognize lease liabilities and a
right-of-use asset for all leases on the balance sheet and to
disclose key information about the entity’s leasing
arrangements. ASU 2016-02 must be adopted using a modified
retrospective approach for all leases existing at, or entered into
after the date of initial adoption, with an option to elect to use
certain transition relief. ASU 2016-02 is effective for annual
reporting periods beginning after December 15, 2018, including
interim periods within that reporting period, with earlier adoption
permitted. Our current operating lease portfolio is primarily
comprised of real estate leases. Upon adoption of this standard, we
expect our Consolidated Balance Sheet to include a
right-of-use asset and liability related to substantially all
operating lease arrangements. ASU 2016-02 is effective for us in
the first quarter of our fiscal year ending June 30,
2020.
Income Taxes
– In October 2016, the FASB issued ASU 2016-16, “Income
Taxes” (Topic 740) (“ASU 2016-16”). ASU 2016-16
will require an entity to recognize the income tax consequences of
an intra-entity transfer of an asset, other than inventory, when
the transfer occurs. ASU 2016-16 is effective for fiscal years
beginning after December 15, 2017, and interim periods within those
fiscal years. Early adoption is permitted as of the beginning of an
annual reporting period for which financial statements have not
been issued or made available for issuance. ASU 2016-16 is
effective for us in the first quarter of fiscal 2019. We are
currently evaluating the adoption date and the impact, if any,
adoption will have on our financial position and results of
operations.
Compensation
– Stock Compensation – In May 2017, the FASB issued ASU
2017-09, “Compensation - Stock Compensation” (Topic
718): Scope of Modification Accounting (“ASU 2017-09”).
The new guidance clarifies when a change to the terms or conditions
of a share-based payment award must be accounted for as a
modification. ASU 2017-09 is effective for fiscal years, and
interim periods within those annual periods, beginning after
December 15, 2017, with early adoption permitted. ASU 2017-09 is
effective for us in the first quarter of fiscal 2019. We are
currently evaluating the adoption date and the impact, if any,
adoption will have on our financial position and results of
operations.
3. Acquisition of ISP Optics Corporation
On
December 21, 2016 (the “Acquisition Date”), we acquired
100% of the issued and outstanding shares of common stock of ISP
(the “Acquisition”) pursuant to the Stock Purchase
Agreement, dated as of August 3, 2016 (the “Purchase
Agreement”). Our Consolidated Financial Statements reflect
the financial results of ISP’s operations beginning on the
Acquisition Date.
Part of our growth strategy is to identify appropriate
opportunities that would enhance our profitable growth through
acquisition. As we developed our molded infrared capability and
learned more about the infrared market, we became aware of larger
business opportunities in this market that might be available with
a broader range of product capability. We believed acquiring ISP
would provide an excellent complementary fit with our business that
would meet our requirement of profitable growth in a market space
we are investing in, and saw the Acquisition as an opportunity to
accelerate our growth, and expand our capabilities and our global
reach.
We
financed a portion of the Acquisition through a public offering of
8,000,000 shares of our Class A common stock, raising net proceeds
of approximately $8.7 million. The public offering closed
simultaneously with the closing of the Acquisition. For additional
information, see Note 15, Public Offering of Class A Common Stock,
to these unaudited Consolidated Financial Statements. We also
closed an acquisition term loan in the aggregate principal amount
of $5 million (the “Term Loan”) with AvidBank. For
additional information, see Note 13, Loans Payable, to these
unaudited Consolidated Financial Statements.
In lieu of cash paid, we also financed a portion of the Acquisition
through the issuance of the Sellers Note in the aggregate principal
amount of $6 million to Joseph Menaker and Mark Lifshotz (the
“Sellers”). For additional information, see Note 13,
Loans Payable, to these unaudited Consolidated Financial
Statements.
The
Acquisition Date fair value of the consideration transferred
totaled approximately $19.1 million, which consisted of the
following:
|
Cash Purchase Price
|
$12,000,000
|
|
Cash acquired
|
1,243,216
|
|
Tax payable assumed debt
|
(200,477)
|
|
Fair value of Sellers Note
|
6,327,208
|
|
Working capital adjustment
|
(315,003)
|
|
Total purchase price
|
19,054,944
|
|
Sellers Note issued at fair value
|
(6,327,208)
|
|
Preliminary working capital adjustment
|
(760,822)
|
|
Adjustment to beginning cash
|
(163,878)
|
|
Adjustment to beginning assumed debt
|
(25,700)
|
|
Cash paid at Acquisition Date
|
$11,777,336
|
Subsequently, in
March 2017, a portion of the working capital adjustment, in the
amount of $292,816, was applied to the Sellers Note as a payment,
thereby decreasing the outstanding principal amount due under the
Sellers Note.
The
following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the Acquisition
Date:
|
Cash
|
$1,243,216
|
|
Accounts receivable
|
1,108,980
|
|
Inventory
|
1,134,628
|
|
Other current assets
|
153,450
|
|
Property and equipment
|
4,666,634
|
|
Security deposit and other assets
|
45,359
|
|
Identifiable intangibles
|
11,069,000
|
|
Total identifiable assets acquired
|
$19,421,267
|
|
|
|
|
Accounts payable
|
$(554,050)
|
|
Accrued expenses and other payables
|
(133,974)
|
|
Other payables
|
(146,324)
|
|
Deferred tax liability
|
(5,386,880)
|
|
Total liabilities assumed
|
$(6,221,228)
|
|
Net identifiable assets
acquired
|
13,200,039
|
|
Goodwill
|
5,854,905
|
|
Net assets acquired
|
$19,054,944
|
As part of the valuation analysis, we identified intangible assets,
including customer relationships, customer backlog, trade secrets,
trademarks, and non-compete agreements. The customer relationships,
customer backlog, trade secrets, trademarks, and non-compete
agreements were determined to have estimated values of $3,590,000,
$366,000, $3,272,000, $3,814,000, and $27,000, respectively, and
estimated useful lives of 15, 2, 8, 8, and 3 years, respectively.
The estimated fair value of identifiable intangible assets is
determined primarily using the “income approach”, which
requires a forecast of all future cash flows. This also reflects a
$2,744,262 adjustment to increase the basis of the acquired
property, plant and equipment to reflect the fair value of the
assets at the Acquisition Date. The estimated useful lives of
acquired property, plant and equipment range from 3 years to 10
years. Depreciation and amortization of intangible assets and
property, plant and equipment is calculated on a straight-line
basis. This also reflects a $153,132 adjustment to increase the
basis of the acquired inventory to reflect fair value of the
inventory and a $230,407 adjustment to decrease the basis of the
acquired deferred revenue to reflect the fair value of the deferred
revenue at the Acquisition Date. The tax effects of these fair
value adjustments resulted in a net deferred tax liability of
approximately $5.4 million.
The
goodwill recognized is attributable primarily to expected synergies
and the assembled workforce of ISP. None of the goodwill is
expected to be deductible for income tax purposes.
Our
unaudited Consolidated Financial Statements reflect the financial
results of ISP’s operations for the nine months ended March
31, 2018. The following represents unaudited pro forma consolidated
information as if ISP had been included in our consolidated results
for the nine months ended March 31, 2017:
|
|
Nine months ended
March 31, 2017
|
|
Revenue
|
$25,491,276
|
|
Net income
|
$1,532,353
|
These
amounts have been calculated after applying our accounting policies
and adjusting the results for Acquisition expenses and to reflect
the additional interest expense and depreciation and amortization
that would have been charged assuming the fair value adjustments to
property, plant and equipment and intangible assets had been
applied on July 1, 2016, together with the consequential tax
effects. For the nine months ended March 31, 2017, pro forma net
income reflects adjustments of approximately $659,000 for
amortization of intangibles and approximately $214,000 in
additional interest, and excludes approximately $608,000 in
Acquisition expenses and approximately $522,000 of nonrecurring
fees incurred by ISP.
Prior
to the Acquisition, we had a pre-existing relationship with ISP. We
ordered anti-reflective coating services from ISP on an arms’
length basis. We had also partnered with ISP to develop and sell
molded optics as part of a multiple lens assembly sold to a third
party and had provided certain standard molded optics for resale
through ISP’s catalog. At the Acquisition Date, we had
amounts payable to ISP of $8,000 for services provided prior to the
Acquisition, and ISP had payables of $24,500 due to
us.
4. Inventories
The
components of inventories include the following:
|
|
|
|
|
|
|
|
|
Raw materials
|
$2,635,595
|
$2,282,880
|
|
Work in process
|
2,313,766
|
1,654,653
|
|
Finished goods
|
2,159,475
|
1,904,497
|
|
Reserve for obsolescence
|
(699,718)
|
(767,454)
|
|
|
$6,409,118
|
$5,074,576
|
The
value of tooling in raw materials was approximately $1.7 million
and $1.6 million at March 31, 2018 and June 30, 2017,
respectively.
5. Property and Equipment
Property and
equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing equipment
|
5 - 10
|
$16,647,004
|
$13,804,964
|
|
Computer equipment and software
|
3 - 5
|
454,158
|
375,775
|
|
Furniture and fixtures
|
5
|
196,864
|
112,307
|
|
Leasehold improvements
|
5 - 7
|
1,260,415
|
1,228,797
|
|
Construction in progress
|
|
1,111,909
|
709,571
|
|
Total property and
equipment
|
|
19,670,350
|
16,231,414
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
7,348,239
|
5,906,856
|
|
Total
property and equipment, net
|
|
$12,322,111
|
$10,324,558
|
6. Goodwill and Intangible Assets
There were no changes in the net carrying value of goodwill during
the nine months ended March 31, 2018.
Identifiable intangible assets, as a result of the Acquisition of
ISP, were comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
15
|
$3,590,000
|
$305,600
|
$3,284,400
|
|
Backlog
|
2
|
366,000
|
233,670
|
132,330
|
|
Trade secrets
|
8
|
3,272,000
|
522,245
|
2,749,755
|
|
Trademarks
|
8
|
3,814,000
|
608,753
|
3,205,247
|
|
Non-compete agreement
|
3
|
27,000
|
11,492
|
15,508
|
|
|
|
$11,069,000
|
$1,681,760
|
$9,387,240
|
Future amortization of intangibles is as follows:
|
Fiscal year ending:
|
|
|
June 30, 2018
|
$329,270
|
|
June 30, 2019
|
1,220,664
|
|
June 30, 2020
|
1,129,342
|
|
June 30, 2021
|
1,125,083
|
|
June 30, 2022
|
1,125,083
|
|
June 30, 2023 and later
|
4,457,798
|
|
|
$9,387,240
|
7. Accounts Payable
The
accounts payable balance as of March 31, 2018 and June 30, 2017
both include approximately $73,000 of earned but unpaid Board of
Directors’ fees.
8. Income Taxes
A
summary of our total income tax expense and effective income tax
rate for the three and nine months ended March 31, 2018 and 2017 is
as follows:
|
|
Three Months Ended March 31,
|
Nine Months Ended March 31,
|
|
|
|
|
|
|
|
Income before income taxes
|
$1,043,125
|
$366,598
|
$1,548,646
|
$2,110,587
|
|
Income tax expense (benefit)
|
$(183,154)
|
$265,774
|
$(318,678)
|
$771,600
|
|
Effective income tax rate
|
-18%
|
72%
|
-21%
|
37%
|
The
difference between our effective tax rates in the periods presented
above and the federal statutory rate is primarily due to a tax
benefit from our domestic losses being recorded with a full
valuation allowance, as well as the effect of foreign earnings
taxed at rates differing from the U.S. federal statutory
rate.
As of
March 31, 2018, LPOIZ and LPOI were subject to statutory
income tax rates of 15% and 25%, respectively. During the three
months ended December 31, 2017, the statutory tax rate applicable
to LPOIZ was lowered from 25% to 15% in accordance with an
incentive program for technology companies in China. The lower rate
applies to LPOIZ’s 2017 tax year, beginning January 1, 2017.
Accordingly, we recorded a tax benefit of approximately $160,000
during the three months ended December 31, 2017 related to this
retroactive rate change. For the three months ended March 31, 2018,
income taxes were accrued at the applicable rates.
Through 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 rate of tax was changed to
20%, however, distribution amounts are first divided by 0.8 to
arrive at the profit before tax amount, resulting in an effective
tax rate of 25%. Our intent is to distribute profits from ISP
Latvia to ISP, its parent company in the U.S.;
therefore, we will accrue distribution taxes as profits are
generated. With this change, the concept of taxable income and tax
basis in assets and liabilities has been eliminated and is no
longer relevant for purposes of determining income taxes;
therefore, the previously recorded net deferred tax liability
related to ISP Latvia was adjusted to zero during the three months
ended March 31, 2018, resulting in a tax benefit of approximately
$206,000.
We
record net deferred tax assets to the extent we believe it is more
likely than not that these assets will be realized. Based on the
level of historical taxable income, we have provided a full
valuation allowance against our net deferred tax assets as of March
31, 2018 and June 30, 2017, except for items with indefinite
carryover periods. The net deferred tax asset results from federal
and state tax credits with indefinite carryover periods that
management expects to utilize in a future period.
Tax Cuts and Jobs Act
In
December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the
“2017 Act”), which changes existing U.S. tax law and
includes various provisions that are expected to affect companies.
Among other things, the 2017 Act: (i) changes U.S. corporate tax
rates, (ii) generally reduces a company’s ability to utilize
accumulated net operating losses, and (iii) requires the
calculation of a one-time transition tax on certain foreign
earnings and profits (“E&P”) that had not been
previously repatriated. In addition, the 2017 Act impacts a
company’s estimates of its deferred tax assets and
liabilities.
Pursuant to U.S.
GAAP, changes in tax rates and tax laws are accounted for in the
period of enactment, and the resulting effects are recorded as
discrete components of the income tax provision related to
continuing operations in the same period. We continue to evaluate
the impact of the 2017 Act on our financial statements. Based on
our initial assessments to date, we expect the one-time transition
tax on certain foreign E&P to have a minimal impact on us
because we anticipate that we will be able to utilize our existing
net operating losses to substantially offset any taxes payable on
foreign E&P. Additionally, we expect significant adjustments to
our gross deferred tax assets and liabilities; however, we also
expect to record a corresponding offset to our estimated full
valuation allowance against our net deferred tax assets, which
should result in minimal net effect to our provision for income
taxes.
9. Compensatory Equity Incentive Plan and Other Equity
Incentives
Share-Based Compensation Arrangements.
The Omnibus Plan provides several available forms
of stock compensation, including incentive stock options and
restricted stock unit (“RSU”) awards. Stock-based
compensation is measured at grant date, based on the fair value of
the award, and is recognized as an expense over the
employee’s requisite service period. We estimate the fair
value of each stock option as of the date of grant using the
Black-Scholes-Merton pricing model. Most options granted under the
Omnibus Plan vest ratably over two to four years and generally have
ten-year contract lives. The volatility rate is based on four-year
historical trends in common stock closing prices and the expected
term was determined based primarily on historical experience of
previously outstanding options. The interest rate used is the U.S.
Treasury interest rate for constant maturities. The likelihood of
meeting targets for option grants that are performance based are
evaluated each quarter. If it is determined that meeting the
targets is probable, then the compensation expense will be
amortized over the remaining vesting period.
The LightPath Technologies, Inc. Employee Stock Purchase Plan
(“2014 ESPP”) was adopted by our Board of Directors on
October 30, 2014 and approved by our stockholders on January 29,
2015. The 2014 ESPP permits employees to purchase shares of our
Class A common stock through payroll deductions, which may not
exceed 15% of an employee’s compensation, at a price not less
than 85% of the market value of our Class A common stock on
specified dates (June 30 and December 31). In no event can any
participant purchase more than $25,000 worth of shares of Class A
common stock in any calendar year and an employee cannot purchase
more than 8,000 shares on any purchase date within an offering
period of 12 months and 4,000 shares on any purchase date within an
offering period of six months. A discount of $4,879 and $1,927 for
the nine months ended March 31, 2018 and 2017, respectively, is
included in the selling, general and administrative expense in the
accompanying unaudited Consolidated Statements of Comprehensive
Income, which represents the value of the 10% discount given to the
employees purchasing stock under the 2014 ESPP.
These
plans are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Arrangement
|
|
|
|
|
Omnibus Plan
|
5,115,625
|
2,678,482
|
1,665,776
|
|
2014 ESPP
|
400,000
|
—
|
358,008
|
|
|
5,515,625
|
2,678,482
|
2,023,784
|
Grant Date Fair Values
and Underlying Assumptions; Contractual Terms. We estimate the fair value of each stock
option as of the date of grant. We use the Black-Scholes-Merton
pricing model. The 2014 ESPP fair value is the amount of the
discount the employee obtains at the date of the purchase
transaction.
For stock options granted under the Omnibus Plan in the nine month
periods ended March 31, 2018 and 2017, we estimated the fair value
of each stock option as of the date of grant using the following
assumptions:
|
|
Nine months ended March 31,
|
|
|
2018
|
2017
|
|
Weighted-average expected volatility
|
63% - 75%
|
77% - 83%
|
|
Dividend yields
|
0%
|
0%
|
|
Weighted-average risk-free interest rate
|
1.28% - 1.80%
|
1.18% - 1.90%
|
|
Weighted-average expected term, in years
|
7.25
|
7.49
|
Most options granted under the Omnibus Plan vest ratably over two
to four years and are generally exercisable for ten years. The
assumed forfeiture rates used in calculating the fair value of RSU
grants was 0%, and the assumed forfeiture rates used in calculating
the fair value of options for performance and service conditions
were 20% for each of the nine months ended March 31, 2018 and 2017.
The volatility rate and expected term are based on seven-year
historical trends in Class A common stock closing prices and actual
forfeitures. The interest rate used is the U.S. Treasury interest
rate for constant maturities.
Information Regarding
Current Share-Based Compensation Awards. A summary of the activity for share-based
compensation awards under the Omnibus Plan in the nine months ended
March 31, 2018 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
1,096,186
|
$1.68
|
6.3
|
1,508,782
|
0.9
|
|
|
|
|
|
|
|
|
Granted
|
58,849
|
$4.24
|
—
|
140,571
|
—
|
|
Exercised
|
(93,813)
|
$2.10
|
—
|
—
|
—
|
|
Cancelled/Forfeited
|
(32,093)
|
$2.62
|
—
|
—
|
—
|
|
March 31, 2018
|
1,029,129
|
$1.74
|
6.4
|
1,649,353
|
0.9
|
|
|
|
|
|
|
|
|
Awards exercisable/
|
|
|
|
|
|
|
vested as of
|
|
|
|
|
|
|
March 31, 2018
|
818,960
|
$1.60
|
5.9
|
1,287,370
|
—
|
|
|
|
|
|
|
|
|
Awards unexercisable/
|
|
|
|
|
|
|
unvested as of
|
|
|
|
|
|
|
March 31, 2018
|
210,169
|
$2.27
|
8.6
|
361,983
|
0.9
|
|
|
1,029,129
|
|
|
1,649,353
|
|
The total intrinsic value of options outstanding and exercisable at
March 31, 2018 and 2017 was approximately $639,000 and $900,135,
respectively.
The total fair value of option shares vested during the nine months
ended March 31, 2018 and 2017 was approximately $550,000 and
$406,000 respectively.
No RSUs were exercised during the nine months ended March 31, 2018.
The total intrinsic value of RSUs exercised during the nine months
ended March 31, 2017 was approximately $79,000.
The total intrinsic value of RSUs outstanding and exercisable at
March 31, 2018 and 2017 was approximately $2.8 million and $2.9
million, respectively.
The total fair value of RSUs vested during the nine months ended
March 31, 2018 and 2017 was approximately $519,000 and $333,000,
respectively.
As of March 31, 2018, there was approximately $569,000 of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements (including share options and RSUs)
granted under the Omnibus Plan. We expect to recognize the
compensation cost as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ending June 30, 2018
|
8,938
|
85,036
|
93,974
|
|
|
|
|
|
|
Year ending June 30, 2019
|
19,747
|
264,982
|
284,729
|
|
|
|
|
|
|
Year ending June 30, 2020
|
6,720
|
149,944
|
156,664
|
|
|
|
|
|
|
Year ending June 30, 2021
|
3,733
|
29,978
|
33,711
|
|
|
$39,138
|
$529,940
|
$569,078
|
RSU awards vest immediately or from two to four years from the date
of grant.
We issue new shares of Class A common stock upon the exercise of
stock options. The following table is a summary of the number and
weighted average grant date fair values regarding our
unexercisable/unvested awards as of March 31, 2018 and changes
during the nine months then ended:
|
Unexercisable/unvested awards
|
Stock Options Shares
|
|
RSU Shares
|
|
Total Shares
|
|
|
Weighted-Average
|
|
|
|
|
Grant Date Fair Values
|
|
|
|
|
(per share)
|
|
June 30, 2017
|
244,511
|
|
438,912
|
|
683,423
|
|
|
$ 1.39
|
|
Granted
|
58,849
|
|
140,571
|
|
199,420
|
|
|
$ 3.69
|
|
Vested
|
(83,441)
|
|
(217,500)
|
|
(300,941)
|
|
|
$ 3.79
|
|
Cancelled/Forfeited
|
(9,750)
|
|
—
|
|
(9,750)
|
|
|
$ 0.97
|
|
March 31, 2018
|
210,169
|
|
361,983
|
|
572,152
|
|
|
$ 1.51
|
Financial Statement
Effects and Presentation. The following table shows total stock-based
compensation expense for the nine months ended March 31, 2018 and
2017 included in the accompanying unaudited Consolidated Statements
of Comprehensive Income:
|
|
Nine Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
Stock options
|
$249,946
|
$34,882
|
|
RSUs
|
29,450
|
284,300
|
|
Total
|
$279,396
|
$319,182
|
|
|
|
|
|
The amounts above were included in:
|
|
|
|
Selling, general & administrative
|
$274,004
|
$315,429
|
|
Cost of sales
|
4,388
|
2,792
|
|
New product development
|
1,004
|
961
|
|
|
$279,396
|
$319,182
|
10. Derivative Financial Instruments (Warrant
Liability)
In June 2012, we executed a Securities Purchase Agreement with
respect to a private placement of an aggregate of 1,943,852 shares
of our Class A common stock at $1.02 per share and warrants to
purchase up to 1,457,892 shares of our Class A common stock at an
initial exercise price of $1.32 per share, which was subsequently
reduced to $1.26 and then to $1.22 on December 21, 2016 as a result
of our public offering (the “June 2012 Warrants”). The
June 2012 Warrants were exercisable for a five-year period
from December 11, 2012 to December 11, 2017. We accounted for
the June 2012 Warrants in accordance with ASC 815-10. ASC 815-10
provides guidance for determining whether an equity-linked
financial instrument (or embedded feature) is indexed to an
entity’s own stock. This applies to any freestanding
financial instrument or embedded feature that has all the
characteristics of a derivative under ASC 815-10, including any
freestanding financial instrument that is potentially settled in an
entity’s own stock.
Due to certain adjustments that could be made to the exercise price
of the June 2012 Warrants if we issued or sold shares of our Class
A common stock at a price that was less than the then-current
warrant exercise price, the June 2012 Warrants were classified as a
liability, as opposed to equity, in accordance with ASC 815-10, as
we determined that the June 2012 Warrants were not indexed to our
Class A common stock.
During the term of the June 2012 Warrants, we re-measured the fair
value of the outstanding June 2012 Warrants at the end of each
reporting period to reflect their then-current fair market value.
We also measured the fair value upon each warrant exercise, to
determine the fair value adjustment to the warrant liability
related to the warrant exercise. We recorded the change in fair
value of the June 2012 Warrants in the accompanying unaudited
Consolidated Statements of Comprehensive Income, which is estimated
using the Lattice option-pricing model using the following range of
assumptions for the respective periods:
|
|
December 31,
|
June 30,
|
|
Inputs into Lattice model for warrants:
|
2017
|
2017
|
|
Equivalent volatility
|
21.06% - 162.92%
|
47.39% - 75.80%
|
|
Equivalent interest rate
|
0.95% - 1.14%
|
0.62% - 1.13%
|
|
Floor
|
$1.15
|
$1.15
|
|
Stock price
|
$2.56 - $2.60
|
$1.15 - $3.25
|
|
Probability price < strike price
|
0.00%
|
4.70%
|
|
Fair value of call
|
$1.13 - $2.79
|
$0.30 - $2.04
|
|
Probability of fundamental transaction occurring
|
0%
|
0%
|
During the six months ended December 31, 2017, we issued 433,810
shares of our Class A common stock upon the exercise of the June
2012 Warrants, which included 329,195 that were subject to
re-measurement. The June 2012 Warrants expired on December 11,
2017; therefore, we reduced the warrant liability to zero as of
December 31, 2017.
The warrant liabilities were considered
recurring Level 3 financial instruments. The following table summarizes the activity
of Level 3 instruments measured on a recurring basis for the nine
months ended March 31, 2018:
|
|
|
|
Fair value, June 30, 2017
|
$490,500
|
|
Exercise of common stock warrants
|
(685,132)
|
|
Change in fair value of warrant liability
|
194,632
|
|
Fair value, March 31, 2018
|
$-
|
11. Earnings Per Share
Basic earnings per share is computed by dividing the
weighted-average number of shares of Class A common stock
outstanding, during each period presented. Diluted earnings per
share is computed similarly to basic earnings per share, except
that it reflects the potential dilution that could occur if
dilutive securities or other obligations to issue shares of Class A
common stock were exercised or converted into shares of Class A
common stock. The computations for basic and diluted earnings per
share are described in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$1,226,279
|
$100,824
|
$1,867,324
|
$1,338,987
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
Basic number of shares
|
25,546,512
|
23,818,136
|
24,763,458
|
18,621,072
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Options to purchase common stock
|
295,055
|
208,429
|
355,858
|
92,094
|
|
RSUs
|
1,439,443
|
1,267,572
|
1,381,190
|
1,139,142
|
|
Common stock warrants
|
-
|
334,566
|
118,450
|
293,668
|
|
Diluted number of shares
|
27,281,010
|
25,628,703
|
26,618,956
|
20,145,976
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
Basic
|
$0.05
|
$0.00
|
$0.08
|
$0.07
|
|
Diluted
|
$0.04
|
$0.00
|
$0.07
|
$0.07
|
The following potential dilutive shares were not included in the
computation of diluted earnings per share, as their effects would
be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
748,326
|
833,701
|
732,350
|
868,209
|
|
RSUs
|
209,911
|
262,983
|
208,138
|
300,096
|
|
Common stock warrants
|
-
|
531,925
|
108,924
|
683,744
|
|
|
958,237
|
1,628,609
|
1,049,412
|
1,852,049
|
12. Lease Commitments
We have operating leases for office space. At March 31, 2018, we
have a lease agreement for our manufacturing and office facility in
Orlando, Florida (the “Orlando Lease”). The Orlando
Lease, which is for a seven-year original term with renewal
options, expires in April 2022 and expanded our space to 25,847
square feet, including space added in July 2014. Minimum rental
rates for the extension term were established based on annual
increases of two-and-one-half percent starting in the third year of
the extension period. Additionally, there is one five-year
extension option exercisable by us. The minimum rental rates for
such additional extension options will be determined at the time an
option is exercised and will be based on a “fair market
rental rate,” as determined in accordance with the Orlando
Lease, as amended.
We received approximately $420,000 in a leasehold improvement
allowance in fiscal 2015. The improvements were recorded as
property and equipment and deferred rent on the accompanying
unaudited Consolidated Balance Sheets. Amortization of leasehold
improvements was approximately $172,000 as of March 31, 2018. The
deferred rent is being amortized as a reduction in lease expense
over the term of the Orlando Lease.
Subsequent to March 31, 2018, we entered into a lease agreement for
an additional 12,378 square feet in Orlando, Florida (the
“Orlando Lease II”). The Orlando Lease II will provide
additional manufacturing and office space near our corporate
headquarters. The anticipated commencement date of the Orlando
Lease II is August 1, 2018, with a four-year original term
with one renewal option for a five-year term. The Orlando Lease II
provides for a tenant improvement allowance of up to
$309,450.
At March 31, 2018, we, through our wholly-owned subsidiary, LPOI,
have a lease agreement for an office facility in Shanghai, China
(the “Shanghai Lease”) for 1,900 square feet. The
Shanghai Lease commenced in October 2015 and was set to expire in
October 2017. During the nine months ended March 31, 2018, the
Shanghai Lease was renewed for an additional one-year term, and now
expires in October 2018.
At March 31, 2018, we, through our wholly-owned subsidiary, LPOIZ,
have two lease agreements for a manufacturing and office facility
in Zhenjiang, China (collectively, the “Zhenjiang
Leases”) for 39,000 square feet. The first Zhenjiang Lease is
for 26,000 square feet, has a five-year original term with renewal
options, and expires in March 2019. During the nine months ended
March 31, 2018, another lease was executed for 13,000 additional
square feet in this same facility. This new lease has a 54-month
term, and expires in December 2021.
At March 31, 2018, we, through our wholly-owned subsidiary ISP,
have a lease agreement for a manufacturing and office facility in
Irvington, New York (the “ISP Lease”) for 13,000 square
feet. The ISP Lease, which is for a five-year original term with
renewal options, expires in September 2020.
At March 31, 2018, we, through ISP’s wholly-owned subsidiary
ISP Latvia, have two lease agreements for a manufacturing and
office facility in Riga, Latvia (collectively, the “Riga
Leases”) for an aggregate of 23,000 square feet. The Riga
Leases, each of which is for a five-year original term with renewal
options, expire in December 2019.
Rent expense totaled approximately $779,000 and $530,000 during the
nine months ended March 31, 2018 and 2017,
respectively.
We currently have obligations under four capital lease agreements,
entered into during fiscal years 2015, 2016, and 2017, with terms
ranging from three to five years. The leases are for computer and
manufacturing equipment, which are included as part of property and
equipment. Assets under capital lease include approximately $1.0
million in manufacturing equipment, with accumulated amortization
of approximately $541,000 as of March 31, 2018. Amortization
related to capital lease assets is included in depreciation and
amortization expense.
The approximate future minimum lease payments under capital and
operating leases at March 31, 2018 were as follows:
|
Fiscal year ending June 30,
|
|
|
|
|
|
|
|
2018
|
$84,838
|
$226,000
|
|
2019
|
212,435
|
769,000
|
|
2020
|
161,302
|
693,000
|
|
2021
|
86,657
|
446,000
|
|
2022
|
—
|
285,000
|
|
Total minimum payments
|
545,232
|
$2,419,000
|
|
Less imputed interest
|
(54,369)
|
|
|
Present value of minimum lease payments included in capital lease
obligations
|
490,863
|
|
|
Less current portion
|
219,688
|
|
|
Non-current portion
|
$271,175
|
|
13. Loans Payable
AvidBank Note
Amended LSA and Term
Loan
On December 21, 2016, we executed the Second Amended and Restated
Loan and Security Agreement (the “Amended LSA”) with
AvidBank for the Term Loan in the aggregate principal amount of $5
million and a working capital revolving line of credit (the
“Revolving Line”). The Amended LSA amends and restates
that certain Loan and Security Agreement between AvidBank and us
dated September 30, 2013, as amended and restated pursuant to that
certain Amended and Restated Loan and Security Agreement dated as
of December 23, 2014, and as further amended pursuant to that
certain First Amendment to Amended and Restated Loan and Security
Agreement dated as of December 23, 2015.
The Term Loan was for a five-year term. Pursuant to the Amended
LSA, interest on the Term Loan began accruing on December 21, 2016
and was paid monthly for the first six months of the term of the
Term Loan. Thereafter, both principal and interest was due and
payable in fifty-four (54) monthly installments. The Term Loan bore
interest at a per annum rate equal to two percent (2.0%) above the
Prime Rate, or 6.5% at December 31, 2017; provided, however, that
at no time was the applicable rate permitted to be less than five
and one-half percent (5.50%) per annum. Prepayment was permitted;
however, in order to prepay the Term Loan, certain prepayment fees
applied.
Pursuant to the Amended LSA, AvidBank will, in its discretion, make
loan advances under the Revolving Line to us up to a maximum
aggregate principal amount outstanding not to exceed the lesser of
(i) One Million Dollars ($1,000,000) or (ii) eighty percent (80%)
(the “Maximum Advance Rate”) of the aggregate balance
of our eligible accounts receivable, as determined by AvidBank in
accordance with the Amended LSA. Upon the occurrence and during the
continuance of an event of default, AvidBank may, in its
discretion, cease making advances and terminate the Amended LSA;
provided, that at the time of termination, no obligations remain
outstanding and AvidBank has no obligation to make advances under
the Amended LSA. AvidBank also has the discretion to determine that
certain accounts are not eligible accounts.
Amounts borrowed under the Revolving Line may be repaid and
re-borrowed at any time prior to December 21, 2018, at which time
all amounts shall be immediately due and payable. The advances
under the Revolving Line bear interest, on the outstanding daily
balance, at a per annum rate equal to one percent (1%) above the
Prime Rate; provided, however, that at no time shall the applicable
rate be less than four and one-half percent (4.5%) per annum.
Interest payments are due and payable on the last business day of
each month. Payments received with respect to accounts upon which
advances are made will be applied to the amounts outstanding under
the Amended LSA. There were no borrowings under the Revolving Line
during the period. As of March 31, 2018, there was no
outstanding balance under the Revolving Line.
Our obligations under the Amended LSA are collateralized by a first
priority security interest (subject to permitted liens) in cash,
U.S. inventory and accounts receivable. In addition, our
wholly-owned subsidiary, Geltech, has guaranteed our obligations
under the Amended LSA.
The Amended LSA contains customary covenants, including, but not
limited to: (i) limitations on the disposition of property; (ii)
limitations on changing our business or permitting a change in
control; (iii) limitations on additional indebtedness or
encumbrances; (iv) restrictions on distributions; and (v)
limitations on certain investments. Additionally, the Amended LSA
requires us to maintain a fixed charge coverage ratio (as defined
in the Amended LSA) of at least 1.15 to 1.00 and an asset coverage
ratio (as defined in the Amended LSA) of at least 1.50 to 1.00. As
of March 31, 2018, we were not in compliance with the fixed charge
coverage ratio; however, AvidBank provided a waiver of
compliance pursuant to that certain Third Amendment to the Amended
LSA, dated May 11, 2018, entered into between us and AvidBank (the
"Third Amendment"), as discussed below.
Late payments are subject to a late fee equal to the lesser of five
percent (5%) of the unpaid amount or the maximum amount permitted
to be charged under applicable law. Amounts outstanding during an
event of default accrue interest at a rate of five percent (5%)
above the interest rate applicable immediately prior to the
occurrence of the event of default. The Amended LSA contains other
customary provisions with respect to events of default, expense
reimbursement, and confidentiality.
First Amendment to the Amended
LSA
On
December 20, 2017, we executed the First Amendment to the
Amended LSA (the "First Amendment"). The First Amendment amended,
among other items, the maturity date of the Revolving Line from
December 20, 2017 to March 21, 2018, increased the maximum
amoutn of indebtedness secured by permitted liens from $600,000 to
$800,000 in the aggregate, and increased the aggregate amount we
may maintain in accounts with financial institutions in Riga,
Latvia to $1,000,000.
Second Amendment to the Amended LSA
and Term II Loan
On
January 16, 2018, we entered into a Second Amendment to the Amended
LSA (the “Second Amendment”) relating to the Term Loan.
Pursuant to the Second Amendment, Avidbank paid a single cash
advance to us in an original principal amount of $7,294,000 (the
“Term II Loan”). The proceeds of the Term II Loan were
used to repay all amounts owing with respect to the Term Loan, with
the remainder used to repay the amounts owing under the Sellers
Note. As of January 16, 2018, the Term Loan was deemed satisfied in
full and terminated. The Term II Loan is for a five-year term.
Pursuant to the Second Amendment, interest on the Term II Loan
accrues starting on January 16, 2018 and both principal and
interest is due and payable in sixty (60) monthly installments
beginning on the tenth day of the first month following the date of
the Second Amendment (or February 10, 2018), and continuing on the
same day of each month thereafter for so long as the Term II Loan
is outstanding. The Term II Loan bears interest at a per annum rate
equal to two percent (2.0%) above the Prime Rate; provided,
however, that at no time shall the applicable rate be less than
five-and-one-half percent (5.50%) per annum. Prepayment by us is
permitted; however, we must pay a prepayment fee in an amount equal
to (i) 0.75% of the Excess Prepayment Amount if prepayment occurs
on or prior to January 16, 2019, or (ii) 0.5% of the Excess
Prepayment Amount if prepayment occurs after January 16, 2019 but
on or before January 16, 2020, or (iii) 0.25% of the Excess
Prepayment Amount if prepayment occurs after January 16, 2020 but
on or prior to January 16, 2021, or (iv) 0.10% of the Excess
Prepayment Amount if such prepayment occurs after January 16, 2021
but on or prior to January 16, 2022. For purposes of the Second
Amendment, the “Excess Prepayment Amount” equals the
amount of the Term II Loan being prepaid in excess of
$2,850,000.
The
Second Amendment amended, among other items, (1) certain
definitions related to the fixed charge coverage ratio, and (2) the
maturity date of the Revolving Line from March 21, 2018 to December
21, 2018.
Costs incurred of approximately $72,000 were recorded as a discount
on debt and will be amortized over the five-year term of the Term
Loan. Additional costs of approximately $60,000 were incurred in
conjunction with the Second Amendment and were also recorded as a
discount on debt, and the combined costs will be amortized over the
five-year term of the Term II Loan. Amortization of approximately
$13,700 is included in interest expense for the nine months ended
March 31, 2018.
Third Amendment to the Amended
LSA
Subsequent to the quarter ending March 31, 2018,
we entered into the Third Amendment. The Third Amendment (i) amends
the definition of "Permitted Indebtedness" and (ii) amends Section
6.8(a) of the Amended LSA to require that we, and each of our
domestic subsidiaries, maintain all of our domestic depository and
operating accounts with AvidBank begining on June 1, 2018 and to
prohibit us from maintaining a domestic account balance outside of
AvidBank that exceeds Ten Thousand Dollars ($10,000) during
the transition period. The Third Amendment also amends Section
6.9(a) of the Amended LSA to require that we maintain a fixed
charge coverage ratio, as measured on the June 30, 2018, of at
least 1.10 to 1.00, and thereafter, begining with the quarter
ending on September 30, 2018, to maintian a fixed charge coverage
ratio of at least 1.15 to 1.00. Additionally, pursuant to the Third
Amendment, AvidBank granted us a waiver of default arising prior to
the Third Amendment from our failure to comply with the fixed
charge coverage ratio measured on March 31, 2018. Based on the
waiver, we are no longer in default of the Term II Loan or
Revolving Line.
Sellers Note
On December 21, 2016, we also entered into the Sellers Note in the
aggregate principal amount of $6 million. The Sellers Note was
fully satisfied on January 16, 2018, as discussed in Note 14, Note
Satisfaction and Securities Purchase Agreement, to these unaudited
Consolidated Financial Statements.
Pursuant to the Sellers Note, during the period commencing on
December 21, 2016 (the “Issue Date”) and continuing
until the fifteen-month anniversary of the Issue Date (the
“Initial Period”), interest accrued on only the
principal amount of the Sellers Note in excess of $2.7 million at
an interest rate equal to ten percent (10%) per annum. After the
Initial Period, interest would have accrued on the entire unpaid
principal amount of the Sellers Note from time to time outstanding,
at an interest rate equal to ten percent (10%) per annum. Given
that the Sellers Note was satisfied in full in January 2018, we
paid interest semi-annually in arrears solely during the Initial
Period. The Sellers Note originally had a five-year term. We had
the right to prepay the Sellers Note in whole or in part without
penalty or premium.
The Sellers Note was valued based on the present value of expected
cash flows. The fair value of the Sellers Note was determined to be
approximately $6,327,200 based on the present value of expected
future cash flows, using a risk-adjusted discount rate of 7.5%. The
Sellers Note is included in loans payable, less current portion on
the acconmpanying unaudited Consolidated Balance Sheet. As of
January 16, 2018, the date the note was satisfied in full, the fair
value adjustment liability was approximately $467,000. Upon
satisfaction of the Sellers Note, this amount was reduced to zero
and the resulting gain is in the accompanying unaudited
Consolidated Statements of Comprehensive Income in the line item
entitled “Interest expense – debt
costs.”
There were no payment defaults or other events of default prior to
the Sellers Note being paid in full on January 16, 2018. If a
payment default, or any other “event of default,” such
as a bankruptcy event or a change of control of the Company had
occurred, the entire unpaid and outstanding principal balance of
the Sellers Note, together with all accrued and unpaid interest and
any and all other amounts payable under the Sellers Note, would
have been immediately be due and payable.
Future maturities of loans payable are as follows:
|
|
|
|
|
|
Year ending June 30,
|
|
|
|
|
2018
|
$364,700
|
$(5,627)
|
$359,073
|
|
2019
|
1,458,800
|
(22,500)
|
1,436,300
|
|
2020
|
1,458,800
|
(22,500)
|
1,436,300
|
|
2021
|
1,458,800
|
(22,500)
|
1,436,300
|
|
2022
|
1,458,800
|
(22,500)
|
1,436,300
|
|
2023
|
850,967
|
(16,875)
|
834,092
|
|
Total payments
|
$7,050,867
|
$(112,502)
|
$6,938,365
|
|
Less current portion
|
|
|
(1,458,800)
|
|
Non-current portion
|
|
|
$5,479,565
|
14. Note Satisfaction and Securities Purchase
Agreement
Note Satisfation and Securities Purchase
Agreement
On January 16, 2018 (the “Satisfaction Date”), we
entered into a Note Satisfaction and Securities Purchase Agreement
(the “Note Satisfaction Agreement”) with the Sellers
with respect to the Sellers Note. At the closing of the Acquisition
of ISP, as partial consideration for the shares of ISP, we issued
the Sellers Note in the original principal amount of $6,000,000,
which principal payment amount was subsequently reduced to $5.7
million, after applying the approximately $293,000 working capital
adjustment, as discussed in Note 3, Acquisition of ISP Optics
Corporation, to these unaudited Consolidated Financial
Statements.
Pursuant to the Note Satisfaction Agreement, we and the Sellers
agreed to satisfy the Sellers Note in full by (i) converting 39.5%
of the outstanding principal amount of the Sellers Note into shares
of our Class A common stock, and (ii) paying the remaining 60.5% of
the outstanding principal amount of the Sellers Note, plus all
accrued but unpaid interest, in cash to the Sellers. As of the
Satisfaction Date, the outstanding principal amount of the Sellers
Note was $5,707,183, and there was $20,883 in accrued but unpaid
interest thereon (collectively, the “Note Satisfaction
Amount”). Accordingly, we paid approximately $3,453,582 plus
all accrued but unpaid interest on the Sellers Note, in cash (the
“Cash Payment”) and issued 967,208 shares of Class A
common stock (the “Shares”), which represents the
balance of the Note Satisfaction Amount divided by the Conversion
Price. The “Conversion Price” equaled $2.33,
representing the average closing bid price of the Class A common
stock, as reported by Bloomberg for the five (5) trading days
preceding the Satisfaction Date. The Cash Payment was paid using
approximately $600,000 of cash on hand and approximately $2.9
million in proceeds from the Term II Loan from Avidbank. As of the
Satisfaction Date, the Sellers Note was deemed satisfied in full
and terminated.
The Shares issued to the Sellers were exempt from the registration
requirements of the Securities Act of 1933, as amended (the
“Act”), pursuant to Section 4(a)(2) of the Act (in that
the Shares were issued by us in a transaction not involving any
public offering), and pursuant to Rule 506 of Regulation D as
promulgated by the SEC under the Act.
Registration Rights Agreement
In
connection with the Note Satisfaction Agreement, we and the Sellers
also entered into a Registration Rights Agreement dated January 16,
2018, pursuant to which we agreed to file with the SEC by February
15, 2018, and to cause to be declared effective, a registration
statement to register the resale of the Shares issued to partially
pay the Note Satisfaction Amount. The Registration Statement on
Form S-3 (File No. 333-223028) was declared effective by the SEC on
March 8, 2018.
15. Public Offering of Class A Common Stock
On December 16, 2016, we entered into an Underwriting Agreement
(the “Underwriting Agreement”) with Roth Capital
Partners, LLC (“Roth Capital”), as representative of
the several underwriters identified therein (collectively, the
“Underwriters”), relating to the firm commitment
offering of 7,000,000 shares of our Class A common stock, at a
public offering price of $1.21 per share. Under the terms of the
Underwriting Agreement, we also granted the Underwriters an option,
exercisable for 45 days, to purchase up to an additional 1,000,000
shares of Class A common stock to cover any
over-allotments.
On December 21, 2016, we completed our underwritten public offering
of 8,000,000 shares of Class A common stock, which included the
full exercise by the Underwriters of their option to purchase
1,000,000 shares of Class A common stock to cover over-allotments,
at a public offering price of $1.21 per share. We realized net
proceeds of approximately $8.7 million, after deducting
underwriting discounts and commissions and estimated offering
expenses. The net proceeds from the offering provided funds for a
portion of the purchase price of the Acquisition of ISP, as well as
provided funds for the payment of transaction expenses and other
costs incurred in connection with the Acquisition.
The offering of the shares of Class A common stock was made
pursuant to a Registration Statement on Form S-1, as amended
(Registration No. 333-213860), which the SEC declared effective on
December 15, 2016, and the final prospectus dated December 16,
2016.
16. Foreign Operations
Assets and liabilities denominated in non-U.S. currencies are
translated at rates of exchange prevailing on the balance sheet
date, and revenues and expenses are translated at average rates of
exchange for the period. During the nine months ended March 31,
2018 and 2017, we recognized a gain of approximately $859,000 and a
loss of $254,000 on foreign currency transactions, respectively,
included in the consolidated statements of comprehensive income in
the line item entitled “Other income (expense), net.”
Gains or losses on the translation of the financial statements of a
non-U.S. operation, where the functional currency is other than the
U.S. dollar, are reflected as a separate component of equity, which
was a gain of approximately $201,000 and $114,000 for the nine
months ended March 31, 2018 and 2017, respectively. As of March 31,
2018, we had approximately $14.7 million in assets and $12.6
million in net assets located in China, compared to approximately
$14.0 million in assets and $12.3 million in net assets located in
China as of June 30, 2017. As of March 31, 2018, we had
approximately $6.6 million in assets and $6.3 million in net assets
located in Latvia, compared to approximately $6.1 million in assets
and $6.0 in net assets located in Latvia as of June 30,
2017.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements made by us or on our
behalf. All statements in this “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” and elsewhere in this Quarterly Report on Form
10-Q for the quarter ended March 31, 2018 (the “Quarterly
Report”), other than statements of historical facts, which
address activities, events or developments that we expect or
anticipate will or may occur in the future, including such things
as future capital expenditures, growth, product development, sales,
business strategy and other similar matters are forward-looking
statements. These forward-looking statements are based largely on
our current expectations and assumptions and are subject to a
number of risks and uncertainties, many of which are beyond our
control. Actual results could differ materially from the
forward-looking statements set forth herein as a result of a number
of factors, including, but not limited to, limited cash resources
and the need for additional financing, our dependence on a few key
customers, our ability to transition our business into new markets,
our ability to increase sales and manage and control costs and
other risks described in our reports on file with the SEC. In light
of these risks and uncertainties, all of the forward-looking
statements made herein are qualified by these cautionary statements
and there can be no assurance that the actual results or
developments anticipated by us will be realized. We undertake no
obligation to update or revise any of the forward-looking
statements contained herein.
The discussions of our results as presented in this Quarterly
Report include use of the non-GAAP term “gross margin,”
as well as other non-GAAP measures discussed in more detail under
the heading “Non-GAAP Financial Measures.” Gross margin
is determined by deducting the cost of sales from operating
revenue. Cost of sales includes manufacturing direct and indirect
labor, materials, services, fixed costs for rent, utilities and
depreciation, and variable overhead. Gross margin should not be
considered an alternative to operating income or net income, which
are determined in accordance with GAAP. We believe that gross
margin, although a non-GAAP financial measure, is useful and
meaningful to investors as a basis for making investment decisions.
It provides investors with information that demonstrates our cost
structure and provides funds for our total costs and expenses. We
use gross margin in measuring the performance of our business and
have historically analyzed and reported gross margin information
publicly. Other companies may calculate gross margin in a different
manner.
Overview
Historical:
We are in the business of manufacturing optical components and
higher level assemblies, including precision molded glass aspheric
optics, diamond turned, ground and polished infrared optics,
proprietary high performance fiber optic collimators, GRADIUM glass
lenses and other optical materials used to produce products that
manipulate light. All the products we produce enable lasers and
imaging devices to function more effectively.
In November 2005, we formed LPOI, a wholly-owned subsidiary, located in
Jiading, People’s Republic of China. In December 2013, we
formed LPOIZ, a wholly-owned subsidiary located in the New City
district, of the Jiangsu province, of the People’s Republic
of China. LPOIZ’s 39,000 square foot manufacturing 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. The LPOI facility is primarily used for
sales and support functions.
In December 2016, we acquired ISP and its wholly-owned subsidiary,
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.
ISP’s New York facility functions as its global headquarters
for operations, while also providing manufacturing capabilities,
optical coatings, and optical and mechanical design, assembly, and
testing. ISP Latvia is located in Riga, Latvia. It is a
manufacturer of high precision optics and offers a full range of
infrared products, including catalog and custom infrared optics.
For additional information, see Note 3, Acquisition of ISP Optics
Corporation, to the unaudited Consolidated Financial Statements in
this Quarterly Report on Form 10-Q.
Product Groups and Markets:
We
organized our business based on five product groups: low volume
precision molded optics (“LVPMO”), high volume
precision molded optics (“HVPMO”), specialty products,
infrared products, and NRE. Our LVPMO product group consists of
precision molded optics with a sales price greater than $10 per
lens and is usually sold in smaller lot quantities. Our HVPMO
product group consists of precision molded optics with a sales
price of less than $10 per lens and is usually sold in larger lot
quantities. Our infrared product group is comprised of both molded
and turned lenses and assemblies and includes all ISP products. Our
specialty product group is comprised of value-added products, such
as optical subsystems, assemblies, GRADIUM lenses, and isolators.
Our NRE product group consists of those products we develop
pursuant to product development agreements 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 currently serve the following major markets: defense, medical,
telecommunications, public safety, mobility and auto safety, drones
and commercial infrared. Within our product groups, we have various
applications that serve these major markets. For example, our HVPMO
and LVPMO lenses are used in applications for the
telecommunications market, such as cloud computing, video
distribution via digital technology, wireless broadband, and
machine to machine connection, and the laser market, such as laser
tools, scientific and bench top lasers, and bar code scanners. Our
infrared products can also be used in various applications within
our major markets. Our infrared products can be used for thermal
imaging cameras, gas sensing devices, spectrometers, night vision
systems, automotive driver systems, thermal weapon gun sights, and
infrared counter measure systems, among others.
Within the larger overall markets, which are
estimated to be in the multi-billions of dollars, we believe there
is a market of approximately $1.7 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 customer’s orders, as
well as unaffiliated companies that offer our products for sale in
their catalogs. Our strategy is to leverage our technology,
know-how, established low cost manufacturing capability and
partnerships to grow our business.
Fiscal Third Quarter: Three months ended March 31, 2018, compared
to the three months ended March 31, 2017
Revenues:
Revenue
for the third quarters of fiscal 2018 and fiscal 2017 was
approximately $8.5 million. Revenues generated by infrared
products, primarily attributable to ISP, was approximately $4.2
million in the third quarter of fiscal 2018, an increase of
approximately $385,000, or 10%, compared to approximately $3.8
million in the third quarter of fiscal 2017. Industrial
applications, firefighting cameras and other public safety
applications are the primary drivers of the increased demand for
infrared products. Total revenues generated by precision molded
optics (“PMO”), including both LVPMO and HVPMO
products, was approximately $3.6 million for the third quarter of
fiscal 2018, as compared to $4.0 million in the third quarter of
fiscal 2017. Revenues from sales of LVPMO products increased by
approximately $231,000, or 13% in the third quarter of fiscal 2018,
as compared to the prior year period, primarily attributable to
higher sales to customers in the medical industry. These increases
were offset by an approximately $612,000, or 29%, decrease in sales
from HVPMO lenses during the third quarter of fiscal 2018, as
compared to the prior year period, primarily attributed to
continued soft demand from the telecommunications industry. Revenue
generated by our specialty products was approximately $628,000 in
the third quarter of fiscal 2018, an increase of approximately
$112,000, or 22%, compared to $516,000 in the third quarter of
fiscal 2017. This growth was led by demand from the defense
industry, automotive industry, and for collimators used in a
variety of end markets, including light distance and ranging
(“LIDAR”) sensing and auto safety. This is a relatively
new focus area for us, given that we expect these projects to
deliver a future stream of larger production
quantities.
Cost of Sales and Gross Margin:
Gross
margin in the third quarter of fiscal 2018 was approximately $3.3
million, a decrease of 22%, as compared to approximately $4.2
million in same quarter of the prior fiscal year. Gross margin as a
percentage of revenue was 39% for the third quarter of fiscal 2018,
compared to 50% for the third quarter of fiscal 2017. The change in
gross margin as a percentage of revenue is attributable to several
factors, including: (i) a shift in the sales mix within infrared
products, with a higher percentage of sales derived from contract
sales and a smaller percentage of sales derived from custom
products, (ii) fewer sales of higher margin HVPMO products to the
telecommunications industry, and (iii) an unfavorable shift in
foreign currency exchange rates for our offshore manufacturing
locations, while approximately 90% of our sales are transacted in
U.S. dollars. In addition to these factors, the cost of Germanium,
a key component in many of our infrared lenses, has increased by
28% over the last 12 months. While this cost increase has been
accounted for in the pricing of our custom products, it has raised
the costs of our products sold under a long-term contract. Total
cost of sales was approximately $5.2 million for the third quarter
of fiscal 2018, an increase of approximately $944,000, compared to
$4.3 million for the same period of the prior fiscal
year.
Selling, General and Administrative:
During the third quarter of fiscal 2018, selling, general and
administrative (“SG&A”) costs were approximately
$2.4 million, compared to approximately $2.3 million in the third
quarter of fiscal 2017, an increase of approximately $33,000.
Slight increases in wages and professional fees during the third
quarter of fiscal 2018 were offset by the absence of approximately
$45,000 in expenses related to the Acquisition of ISP incurred
during the third quarter of fiscal 2017. We expect future SG&A
costs to remain at similar levels during the remainder of fiscal
2018.
New Product Development:
New product development costs were approximately $384,000 in the
third quarter of fiscal 2018, an increase of approximately $76,000,
or 25%, as compared to the third quarter of fiscal 2017. This
increase was primarily due to an approximately $52,000 increase in
wages, and an approximately $24,000 increase in materials and other
expenses. We anticipate that these expenses will remain at current
levels for the remainder of fiscal 2018.
Other Income (Expense):
In
the third quarter of fiscal 2018, we recognized net interest income
of approximately $343,000, primarily due to the satisfaction of the
Sellers Note, in full, and the reversal of the related fair value
adjustment liability, which resulted in a gain of approximately
$467,000. Excluding the impact of this gain, interest expense was
approximately $124,000 in the third quarter of fiscal 2018,
compared to approximately $193,000 in the third quarter of fiscal
2017. This decrease is primarily due to the full satisfaction of
the Sellers Note during the third quarter of fiscal 2018. We expect
future interest expense to remain at similar levels during the
remainder of fiscal 2018, excluding the gain associated with the
satisfaction of the Sellers Note.
In the third quarter of fiscal 2018, we did not recognize any
non-cash income or expense related to the change in the fair value
of warrant liability in connection with our June 2012 Warrants. The
June 2012 Warrants expired on December 11, 2017; therefore, there
was no remaining warrant liability as of that date. We recognized
non-cash expense of approximately $748,000 in the same period last
year. The change in fair value of the June 2012 Warrants was not
impacted by our actual operations but was instead strongly tied to
the change in market value of our Class A common
stock.
Other income, net, was approximately $485,000 in the third quarter
of fiscal 2018, compared to approximately $28,000 in the third
quarter of fiscal 2017, primarily resulting from foreign exchange
gains and losses. We execute all foreign sales from our Orlando and
New York facilities and inter-company transactions in United States
dollars, mitigating the impact of foreign currency fluctuations.
Assets and liabilities denominated in non-United States currencies,
primarily the Chinese Yuan and Euro, 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 year.
During the third quarters of fiscal 2018 and 2017, we incurred a
gain of $446,000 and $18,000, respectively, on foreign currency
translation.
Income taxes:
During
the third quarter of fiscal 2018, we recorded an income tax benefit
of approximately $183,000, compared to income tax expense of
approximately $266,000 for the third quarter of fiscal 2017. The
decrease in our tax expenses and effective income tax rate were
primarily attributable to the mix of taxable income and losses
generated in our various tax jurisdictions. During the second
quarter of fiscal 2018, the statutory tax rate applicable to LPOIZ
decreased from 25% to 15% in accordance with an incentive program
for technology companies in China. Effective January 1, 2018, the
Republic of Latvia enacted tax reform, which resulted in the
recognition of a tax benefit, due to the reduction of the
previously recorded net deferred tax liability to zero during the
three months ended March 31, 2018.
Net Income:
Net
income was approximately $1.2 million, or $0.05 basic and $0.04
diluted earnings per share, during the third quarter of fiscal
2018, compared to the third quarter of fiscal 2017, in which we
reported net income of approximately $101,000, or $0.00 basic and
diluted earnings per share, respectively. The increase in net
income is primarily due to (i) the aforementioned changes in other
income, which were all favorable, (ii) the absence of $748,000 in
expenses associated with the change in fair value of the June 2012
Warrant liability, which did not impact the third quarter of 2018
because the June 2012 Warrants expired in December 2017, and (iii)
the aforementioned income tax benefit.
Weighted-average basic and diluted common shares outstanding
increased to 25,546,512 and 27,281,010, respectively, in the third
quarter of fiscal 2018, compared to 23,818,136 and 25,628,703,
respectively, in the third quarter of fiscal 2017. The increase was
primarily due to the 967,208 shares of Class A common stock issued
in conjunction with the satisfaction of the Sellers Note, and to a
lesser extent, shares of Class A common stock issued under the 2014
ESPP, and upon the exercises of stock options, and upon exercises
of the June 2012 Warrants.
Fiscal First Nine Months: Nine months ended March 31, 2018,
compared to the nine months ended March 31, 2017
Revenues:
Revenue for the first nine months of fiscal 2018 was approximately
$24.4 million, an increase of approximately $5.1 million, or 26%,
as compared to the same period of the prior fiscal year. The first
nine months of fiscal 2017 included the financial results of ISP
for approximately one full quarter. The increase from the first
nine months of the prior fiscal year is attributable to an
approximately $6.9 million increase, or 131%, in revenues generated
by infrared products, primarily attributable to ISP, partially
offset by: (i) an approximately $366,000 decrease, or 6%, in sales
of LVPMO lenses, primarily attributed to the telecommunications and
data communications industries, and (ii) an approximately $1.4
million decrease, or 24%, in sales of HVPMO lenses, primarily
attributed to applications for certain industrial tools and lower
sales to customers in the telecommunications industry.
Cost of Sales and Gross Margin:
Gross margin in the first nine months of fiscal 2018 was
approximately $10.1 million, a decrease of 3%, as compared to
approximately $10.4 million in the same period of the prior fiscal
year. Gross margin as a percentage of revenue was 41% for the first
nine months of fiscal 2018, compared to 53% for the first nine
months of fiscal 2017. The change in gross margin as a percentage
of revenue is primarily attributable to the inclusion of revenues
generated by ISP, and the associated cost of sales, which were not
included until the end of the second quarter of fiscal 2017. Gross
margin as a percentage of revenue with respect to ISP’s
products historically has been lower than our existing products. In
addition, we offered a pricing discount in connection with a large
contract in exchange for increased volume production orders from
the customer, which impacted our gross margin by approximately 4%
of revenue during the first nine months of fiscal 2018. Gross
margin for the first nine months of fiscal 2018 were also
unfavorably impacted by foreign currency fluctuations, and the
rising cost of Germanium, a key component in many of our infrared
lenses. Total cost of sales was approximately $14.3 million for the
first nine months of fiscal 2018, an increase of approximately $5.3
million, as compared to the same period of the prior fiscal year.
The increase in total cost of sales is primarily due to the
increase in volume of sales, particularly as a result of sales
attributable to ISP.
Selling, General and Administrative:
During the first nine months of fiscal 2018, SG&A costs were
approximately $7.1 million, compared to approximately $6.2 million
in the first nine months of fiscal 2017, an increase of
approximately $860,000, primarily attributable to the addition of
ISP’s SG&A costs, which were not included until the end
of the second quarter of fiscal 2017. The increase was primarily
due to an approximately $723,000 increase in wages, an
approximately $240,000 increase in IT services and consulting, an
approximately $270,000 increase in travel expenses, and an
approximately $280,000 increase in professional fees, offset by the
absence of approximately $653,000 in expenses related to the
Acquisition of ISP incurred during the first nine months of fiscal
2017. We expect future SG&A costs to remain at similar levels
during the remainder of fiscal 2018.
New Product Development:
New product development costs were approximately $1.2 million in
the first nine months of fiscal 2018, an increase of approximately
$325,000, or 38%, as compared to the first nine months of fiscal
2017. This increase was primarily due to an approximately $219,000
increase in wages, an approximately $49,000 increase in patent
expenses, and an approximately $57,000 increase in travel and other
expenses. We anticipate that these expenses will remain at current
levels for the remainder of fiscal 2018.
Other Income (Expense):
During
the first nine months of fiscal 2018, we recognized net interest
expense of approximately $52,000, primarily due to the satisfaction
of the Sellers Note, in full, and the reversal of the fair value
adjustment liability,which resulted in a gain of approximately
$467,000 during the third quarter of fiscal 2018. Excluding the
impact of this gain, interest expense was approximately $519,000
for the first nine months of fiscal 2018, compared to approximately
$206,000 in the first nine months of fiscal 2017. The increase is
due to the inclusion of the Term Loan and the Sellers Note, which
was only included for approximately three months of the first nine
months of fiscal 2017. The Sellers Note was fully satisfied in
January 2018, which decreased interest expense beginning in the
third quarter of fiscal 2018.
In the first nine months of fiscal 2018, we recognized non-cash
income of approximately $195,000 related to the change in the fair
value of warrant liability in connection with our June 2012
Warrants, compared to non-cash income of approximately $458,000 in
the same period of fiscal 2017. The change in fair value of the
June 2012 Warrants is not impacted by our actual operations but is
instead strongly tied to the change in market value of our Class A
common stock. The June 2012 Warrants expired on December 11, 2017;
therefore, there was no remaining warrant liability as of that
date.
Other income, net, was approximately $927,000 for the first nine
months of fiscal 2018, compared to other expense, net, of
approximately $229,000 during the first nine months of fiscal 2017,
primarily resulting from foreign exchange gains and losses. We
execute all foreign sales from our Orlando and New York facilities
and inter-company transactions in United States dollars, mitigating
the impact of foreign currency fluctuations. Assets and liabilities
denominated in non-United States currencies, primarily the Chinese
Yuan and Euro, 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 year. During the first nine
months of fiscal 2018 and 2017, we recognized a gain of $854,000
and a loss of $254,000, respectively, on foreign currency
translation.
Income taxes:
During
the first nine months of fiscal 2018, we recorded an income tax
benefit of approximately $319,000, compared to income tax expense
of approximately $772,000 for the first nine months of fiscal 2017.
The decrease in our tax expenses and effective income tax rate were
primarily attributable to the mix of taxable income and losses
generated in our various tax jurisdictions. During the second
quarter of fiscal 2017, the statutory tax rate applicable to LPOIZ
was decreased from 25% to 15% in accordance with an incentive
program for technology companies in China. The lower rate applies
to LPOIZ’s 2017 tax year, beginning January 1, 2017.
Accordingly, we recorded a tax benefit during the second quarter of
fiscal 2018 related to this retroactive rate change. Through
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, which resulted in the recognition of a tax
benefit, due to the reduction of the previously recorded net
deferred tax liability to zero during the nine months ended March
31, 2018.
Net Income:
Net
income was approximately $1.9 million, or $0.08 and $0.07 basic and
diluted earnings per share, respectively, during the first nine
months of fiscal 2018, compared to the first nine months of fiscal
2017, in which we reported net income of approximately $1.3
million, or $0.07 per basic and diluted earnings per share,
respectively. The increase in net income is primarily due to the
aforementioned changes in other income, which had a favorable
impact, as well as the aforementioned income tax benefit. Net
income for the first nine months of fiscal 2018 was also affected
by increases in the following: (i) amortization of intangibles,
(ii) SG&A expenses, (iii) interest expense, and (iv) new
product development costs as compared to the prior year period. All
of the amortization of intangibles and a portion of the increase in
SG&A expenses during the first nine months of fiscal 2018 were
related to the Acquisition of ISP. Due to the timing of the
Acquisition, the results of ISP were not included until late in the
second quarter of fiscal 2017.
Weighted-average basic and diluted common shares outstanding
increased to 24,763,458 and 26,618,956, respectively, in the first
nine months of fiscal 2018, compared to 18,621,072 and 20,145,976,
respectively, in the first nine months of fiscal 2017. The increase
was primarily due to 8 million shares of Class A common stock
issued in connection with the Acquisition of ISP, the 967,208
shares of Class A common stock issued in conjunction with the
satisfaction of the Sellers Note and to a lesser extent, shares of
Class A common stock issued under the 2014 ESPP, issued as a result
of the exercises of stock options, and issued upon the exercise of
the June 2012 Warrants.
Liquidity and Capital
Resources
At March 31, 2018, we had working capital of approximately $14.2
million and total cash and cash equivalents of approximately $6.4
million, of which approximately $3.6 million of total cash and cash
equivalents were held by our foreign subsidiaries.
Cash and cash equivalents held by our foreign subsidiaries were
generated in China and Latvia as a result of foreign earnings.
Before any funds can be repatriated from China, the retained
earnings in China must equal at least 150% of the registered
capital. As of March 31, 2018, we had retained earnings of $1.9
million and we need to have $11.3 million before repatriation will
be allowed. We currently intend to permanently invest earnings from
our foreign Chinese operations and, therefore, we have not
previously provided for future Chinese witholding taxes on the
related earnings. However, if, in the future, we change such
intention, we would provide for and pay additional additional
foreign taxes, if any, at that time.
On December 21, 2016, we executed the Amended LSA with AvidBank for
the Term Loan in the aggregate principal amount of $5 million and
the Revolving Line. The Amended LSA amends and restates that
certain Loan and Security Agreement between us and AvidBank dated
September 30, 2013, as amended and restated pursuant to that
certain Amended and Restated Loan and Security Agreement dated as
of December 23, 2014, and as further amended pursuant to that
certain First Amendment to Amended and Restated Loan and Security
Agreement dated as of December 23, 2015.
On
December 20, 2017, we executed the First Amendment. The First
Amendment amends, among other items, the maturity date of the
Revolving Line from December 21, 2017 to March 21, 2018. On the
Satisfaction Date, we executed the Second Amendment. Pursuant to
the Second Amendment, Avidbank advanced us the Term II Loan, in the
original principal amount of $7,294,000. The proceeds were used to
repay all amounts owed with respect to the Term Loan, with the
remainder used to repay the amounts owing under the Sellers Note.
As of the Satisfaction Date, the Term Loan and Sellers Note were
deemed satisfied in full. On May 11, 2018, we executed the Third
Amendment. For additional information on the terms of the Term
Loan, Sellers Note, Revolving Line, and Term II Loan, see Note 13,
Loans Payable, to the unaudited Consolidated Financial Statements
to this Quarterly Report on Form 10-Q.
As of March 31, 2018, the amount outstanding under the Term II Loan
was approximately $7.1 million and there was no amount outstanding
under the Revolving Line. Costs incurred of approximately $72,000
were recorded as a discount on debt and will be amortized over the
five-year term of the Term Loan. Additional costs of approximately
$60,000 were incurred in conjunction with the Second Amendment and
were also recorded as a discount on debt, and the combined costs
will be amortized over the five-year term of the Term II loan.
Amortization of approximately $13,700 is included in interest
expense for the nine months ended March 31, 2018.
We believe that we have adequate financial resources to sustain our
current operations in the coming year. We have established
milestones that will be tracked to ensure that as funds are
expended we are achieving results before additional funds are
committed. We anticipate sales growth during the remainder of
fiscal 2018 primarily from infrared products, as well as some
growth in specialty products. We structured our sales team to
enhance our incremental organic growth position for our core
aspheric lens business, prime our operations for the anticipated
high growth of our new infrared products, and allow for the
integration of strategic acquisitions. We are also benefiting from
a substantial increase in revenue-generating opportunities and
broader market applications as a result of our investments in
technologies that decreased our lens production costs and expanded
our production capacity. We believe we can further improve upon our
track record of growth – and do so far more
profitably.
We generally rely on cash from operations and equity and debt
offerings, to the extent available, to satisfy our liquidity needs
and to maintain our ability to repay the Term II Loan. There are a
number of factors that could result in the need to raise additional
funds, including a decline in revenue or a lack of anticipated
sales growth, increased material costs, increased labor costs,
planned production efficiency improvements not being realized,
increases in property, casualty, benefit and liability insurance
premiums, and increases in other discretionary spending,
particularly sales and marketing related. We will also continue
efforts to keep costs under control as we seek renewed sales
growth. Our efforts continue to be directed toward maintaining
positive cash flow and profitability. If our efforts are not
successful, we will need to raise additional capital. Should
capital not be available to us at reasonable terms, other actions
may become necessary in addition to cost control measures and
continued efforts to increase sales. These actions may include
exploring strategic options for the sale of the Company, the sale
of certain product lines, the creation of joint ventures or
strategic alliances under which we will pursue business
opportunities, the creation of licensing arrangements with respect
to our technology, or other alternatives.
Cash Flows – Financings:
Net cash used in financing activities was approximately $890,000 in
the first nine months of fiscal 2018, compared to net cash provided
of approximately $14.1 million in the first nine months of fiscal
2017. Cash used in financing activities for the first nine months
of fiscal 2018 reflects approximately $1.6 million in principal
payments on our loans and capital leases, net of borrowings, and
$777,000 in proceeds from: (i) the exercise of June 2012 Warrants;
(ii) proceeds from the sale of Class A common stock under the 2014
ESPP; and (iii) proceeds from the exercise of stock options. Cash
provided by financing activities for the first nine months of
fiscal 2017 consisted principally of the debt and equity financing
for the Acquisition of ISP.
Cash Flows – Operating and Investing:
Cash flow provided by operations was approximately $2.7 million for
the first nine months of fiscal 2018, compared to approximately
$2.9 million for the first nine months of fiscal 2017. We
anticipate improvement in our cash flows provided by operations in
future years due to sales growth, particularly as a result of the
Acquisition of ISP, and continued margin improvements based on
production efficiencies and reductions in product costs, offset by
marginal increases in selling, administrative, and new product
development expenditures.
During the first nine months of fiscal 2018, we expended
approximately $2.5 million in investments in capital equipment,
compared to approximately $1.4 million in the first nine months of
fiscal 2017. The majority of our capital expenditures during the
first nine months of both fiscal 2018 and fiscal 2017 were related
to the purchase of equipment used to enhance or expand our
production capacity, tooling for our precision molded products, and
equipment and facility improvements for LPOIZ’s facility in
Zhenjiang. Overall, we anticipate an increase in capital
expenditures during fiscal 2018, as compared to fiscal 2017,
however, the total amount expended will depend on opportunities and
circumstances.
How we operate:
We have continuing sales of two basic types: occasional sales via
ad-hoc purchase orders of mostly standard product configurations
(our “turns” business) and the more challenging and
potentially more rewarding business of customer product
development. In this latter type of business we work with customers
to help them determine optical specifications and even create
certain optical designs for them, including complex multi-component
designs that we call “engineered assemblies.” This is
followed by “sampling” small numbers of the product for
the customers’ test and evaluation. Thereafter, should a
customer conclude that our specification or design is the best
solution to their product need; we negotiate and “win”
a contract (sometimes called a “design win”) –
whether of a “blanket purchase order” type or a supply
agreement. The strategy is to create an annuity revenue stream that
makes the best use of our production capacity, as compared to the
turns business, which is unpredictable and uneven. This annuity
revenue stream can also generate low-cost, high-volume type orders.
A key business objective is to convert as much of our business to
the design win and annuity model as is possible. We face several
challenges in doing so:
●
Maintaining an optical design and new product sampling capability,
including a high-quality and responsive optical design engineering
staff;
●
The fact that as our customers take products of this nature into
higher volume, commercial production (for example, in the case of
molded optics, this may be volumes over one million pieces per
year) they begin to work seriously to reduce costs – which
often leads them to turn to larger or overseas producers, even if
sacrificing quality; and
●
Our small business mass means that we can only offer a moderate
amount of total productive capacity before we reach financial
constraints imposed by the need to make additional capital
expenditures – in other words, because of our limited cash
resources and cash flow, we may not be able to service every
opportunity that presents itself in our markets without arranging
for such additional capital expenditures.
Despite these challenges to winning more “annuity”
business, we nevertheless believe we can be successful in procuring
this business because of our unique capabilities in optical design
engineering that we make available on the merchant market, a market
that we believe is underserved in this area of service offering.
Additionally, we believe that we offer value to some customers as a
source of supply in the U.S. should they be unwilling to commit
their entire source of supply of a critical component to foreign
merchant production sources. We also continue to have the
proprietary GRADIUM lens glass technology to offer to certain laser
markets.
Our key
indicators:
Usually on a weekly basis, management reviews a number of
performance indicators. Some of these indicators are qualitative
and others are quantitative. These indicators change from time to
time as the opportunities and challenges in the business change.
They are mostly non-financial indicators, such as units of
shippable output by product line, production yield rates by major
product line and the output and yield data from significant
intermediary manufacturing processes that support the production of
the finished shippable product. These indicators can be used to
calculate such other related indicators as fully yielded unit
production per-shift, which varies by the particular product and
our state of automation in production of that product at any given
time. Higher unit production per shift means lower unit cost and,
therefore, improved margins or improved ability to compete, where
desirable, for price sensitive customer applications. The data from
these reports is used to determine tactical operating actions and
changes. We believe that our non-financial production indicators,
such as those noted, are proprietary information.
Financial indicators that are usually reviewed at the same time
include the major elements of the micro-level business
cycle:
●
revenue dollars and units by product group;
●
accounts receivable levels and quality; and
These indicators are similarly used to determine tactical operating
actions and changes and are discussed in more detail
below.
Sales Backlog:
Sales growth has been and continues to be our best indicator of
success. Our best view into the efficacy of our sales efforts is in
our “order book.” Our order book equates to sales
“backlog.” It has a quantitative and a qualitative
aspect: quantitatively, our backlog’s prospective dollar
value and qualitatively, what percent of the backlog is scheduled
by the customer for date-certain delivery. We define our
“12-month backlog” as that which is requested by the
customer for delivery within one year and which is reasonably
likely to remain in the backlog and be converted into revenues.
This includes customer purchase orders and may include amounts
under supply contracts if they meet the aforementioned criteria.
Generally, a higher 12-month backlog is better for us.
Our 12-month backlog at March 31, 2018 was approximately $12.9
million, compared to $9.3 million as of June 30, 2017. Backlog
growth rates for the last five fiscal quarters are as
follows:
|
|
|
Change From Prior Year End
|
Change From Prior Quarter End
|
|
Q3
2017
|
$11,086
|
68%
|
-11%
|
|
Q4
2017
|
$9,322
|
41%
|
-16%
|
|
Q1
2018
|
$8,618
|
-8%
|
-8%
|
|
Q2
2018
|
$12,306
|
32%
|
43%
|
|
Q3
2018
|
$12,898
|
38%
|
5%
|
The increase in our 12-month backlog from the first quarter to the
second quarter of 2018 was largely due to the renewal of a large
annual contract during the second quarter, which we began shipping
against in the third quarter of fiscal 2018. Our 12-month backlog
continued to grow in the third quarter of fiscal 2018, with
continued order bookings growth from the industrial and medical
sectors
We continue to diversify our business by developing new
applications for our products in markets, including advanced driver
assistance systems (“ADAS”), LIDAR sensing,
spectrographic, and fiber delivery technologies. Many of these
products are being designed for higher margin applications within
the automotive electronics, healthcare and defense sectors. The
Acquisition of ISP has broadened our capabilities to include
additional glass types and the ability to make much larger lenses,
providing longer term opportunities for our technology roadmap and
market share expansion. Based on recent quote activity, we expect
increases in revenue from sales of our infrared products and
specialty products for the remainder of fiscal 2018.
Revenue Dollars and Units by Product Group:
The following table sets forth revenue dollars and units for our
five product groups for the three and nine month periods ended
March 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
LVPMO
|
$2,077,250
|
$1,845,799
|
13%
|
$5,778,470
|
$6,144,020
|
-6%
|
|
HVPMO
|
1,526,420
|
2,138,911
|
-29%
|
4,367,102
|
5,763,849
|
-24%
|
|
Infrared Products
|
4,226,233
|
3,843,335
|
10%
|
12,173,746
|
5,280,926
|
131%
|
|
Speciality Products
|
627,745
|
516,123
|
22%
|
1,720,238
|
1,826,278
|
-6%
|
|
NRE
|
45,980
|
145,875
|
-68%
|
397,538
|
345,036
|
15%
|
|
Total sales, net
|
$8,503,628
|
$8,490,043
|
0%
|
$24,437,094
|
$19,360,109
|
26%
|
|
|
|
|
|
|
|
|
Units
|
LVPMO
|
80,603
|
76,788
|
5%
|
224,478
|
274,006
|
-18%
|
|
HVPMO
|
492,627
|
488,069
|
1%
|
1,415,501
|
1,568,544
|
-10%
|
|
Infrared Products
|
41,192
|
42,411
|
-3%
|
107,311
|
64,451
|
67%
|
|
Speciality Products
|
9,698
|
23,857
|
-59%
|
52,290
|
72,404
|
-28%
|
|
NRE
|
5
|
27
|
-81%
|
24
|
55
|
-56%
|
|
|
624,125
|
631,152
|
-1%
|
1,799,604
|
1,979,460
|
-9%
|
Three months ended March 31, 2018
Our revenue was flat in the third quarter of fiscal 2018, as
compared to the prior year period, with increases in infrared and
specialty products, offset by a decrease in HVPMO.
Revenue from the LVPMO product group increased by 13% during the
third quarter of fiscal 2018, compared to the same period of the
prior fiscal year. The increase in revenue is primarily
attributable to higher sales to customers in the medical industry,
while sales to customers in the telecommunications industry were
flat. Unit shipment volume in LVPMO lenses increased by 5% in the
third quarter of fiscal 2018, as compared to the same period of the
prior fiscal year, and the average sales price increased by 7%,
comparatively, driven by the mix of products shipped.
The HVPMO product group decreased, with revenue decreasing by 29%
during the third quarter of fiscal 2018, as compared to the same
period of the prior fiscal year. Unit shipment volume was
essentially flat, and the average sales price decreased by 29% in
the third quarter of fiscal 2018, as compared to the same period of
the prior fiscal year, due to market conditions in the
telecommunications sector.
We had 10% growth in the infrared product group during the third
quarter of fiscal 2018, as compared to the same period of the prior
fiscal year, which primarily consisted of revenues generated by
ISP. The third quarter of 2017 was the first full quarter following
the Acquisition of ISP; therefore, the third quarter of 2018 is the
first full quarter-over-quarter comparison. During the third
quarter of fiscal 2018, sales of infrared units decreased by 3%, as
compared to the prior year period, and average selling prices
increased 13%, due to the mix of products shipped. Industrial
applications, firefighting cameras and other public safety
applications are the primary drivers of the increased demand for
infrared products.
In the third quarter of fiscal 2018, our specialty product revenue
increased by 22%, as compared to the same period of the prior
fiscal year, primarily as a result of additional orders from
customers in the defense sector.
Revenues generated by our NRE products group decreased by 68% in
the third quarter of fiscal 2018, as compared to the same period of
the prior fiscal year. NRE revenue is project based and timing of
any such projects is wholly dependent on our customers and their
project activity. Accordingly, management does not include NRE in
its projections or forecasts for purposes of developing its
operating plan and budget.
Nine months ended March 31, 2018
Our revenue increased by 26% in the first nine months of fiscal
2018, as compared to the prior year period, with growth driven
primarily from the infrared product group, which expanded
significantly with the Acquisition of ISP.
We had a 6% decrease in revenue generated by LVPMO sales for the
first nine months of fiscal 2018, compared to the same period of
the prior fiscal year. The decrease in revenue is primarily
attributed to a decrease in sales to customers in the
telecommunications industry, offset by an increase in sales to
customers in the medical industry. Although our unit shipment
volume in LVPMO lenses decreased by 18% in the first nine months of
fiscal 2018, as compared to the same period of the prior fiscal
year, the average sales price increased by 15%, comparatively,
driven by the mix of products shipped. The increases in the average
sales price was not large enough to offset the decrease in
volume.
Revenues generated by the HVPMO product group also decreased, with
revenue decreasing by 24% during the first nine months of fiscal
2018, as compared to the same period of the prior fiscal year,
primarily attributed to applications for position sensors,
including next generation products and industrial tools, as well as
sales to customers in the telecommunications industry. Unit
shipment volume decreased by 10%, and the average sales price
decreased by 16% in the first nine months of fiscal 2018, as
compared to the same period of the prior fiscal year, due to market
conditions in the telecommunications sector.
We had significant growth in the infrared product group, which
primarily consisted of revenues generated by ISP. During the first
nine months of fiscal 2018, sales of infrared units increased by
67%, as compared to the same period of the prior fiscal year,
resulting in infrared product revenue increasing by 131% in the
first nine months of fiscal 2018, as compared to the prior year
period. The increases in revenue and units sold was primarily
derived from sales to customers in the thermal market.
In the first nine months of fiscal 2018, our specialty product
revenue decreased by 6%, as compared to the same period of the
prior fiscal year, primarily as a result of fewer orders from
customers in the medical industry.
Revenues generated by our NRE products group increased by 15% in
the first nine months of fiscal 2018, as compared to the same
period of the prior fiscal year. NRE revenue is project based and
timing of any such projects is wholly dependent on our customers
and their project activity. Accordingly, management does not
include NRE in its projections or forecasts for purposes of
developing its operating plan and budget.
Inventory Levels:
We
manage our inventory levels to minimize investment in working
capital but still have the flexibility to meet customer demand to a
reasonable degree. Management constantly reviews our inventory
amounts, and, if such amount substantially increases or decreases,
management will further investigate the causes of any such
fluctuations. While the amount and mix of inventory is an important
factor, including adequate safety stocks of long lead-time
materials, another important aggregate measure of inventory in all
phases of production is the quarter’s ending inventory
expressed as a number of days’ worth of the quarter’s
cost of sales, also known as “days cost of sales in
inventory,” or “DCSI.” It is calculated by
dividing the quarter’s ending inventory by the
quarter’s cost of goods sold, multiplied by 365 and divided
by 4. Generally, a lower DCSI measure equates to a lesser
investment in inventory and, therefore, more efficient use of
capital. During the third quarters ended March 31, 2018 and 2017,
our DCSI was 112 and 109 respectively, compared to an average DCSI
of 139 for the year ended June 30, 2017. The third quarters ended
March 31, 2018 and 2017 include ISP for the full quarter, whereas
ISP is only included for approximately half of the year ended June
30, 2017. Our goal is to reduce our DCSI to 100 or
less.
Accounts Receivable Levels and Quality:
Similarly, we manage our accounts receivable to minimize investment
in working capital. We measure the quality of receivables by the
proportions of the total that are at various increments past due
from our normally extended terms, which are generally 30 days.
Management closely manages outstanding accounts receivable and
promptly takes action once amounts are outstanding more than 30
days. An important aggregate measure of accounts receivable is the
quarter’s ending balance of net accounts receivable expressed
as a number of days’ worth of the quarter’s net
revenues, also known as “days sales outstanding,” or
“DSO.” It is calculated by dividing the quarter’s
ending net accounts receivable by the quarter’s net revenues,
multiplied by 365 and divided by 4. Generally, a lower DSO measure
equates to a lesser investment in accounts receivable, and,
therefore, more efficient use of capital. For the third quarters
ended March 31, 2018 and 2017, our DSO was 61 and 62, respectively.
For the year ended June 30, 2017, our average DSO was 67. We strive
to have a DSO no higher than 65.
Other Key Indicators:
Other key indicators include various operating metrics, some of
which are qualitative and others are quantitative. These indicators
change from time to time as the opportunities and challenges in the
business change. They are mostly non-financial indicators, such as
on time delivery trends, units of shippable output by major product
line, production yield rates by major product line, and the output
and yield data from significant intermediary manufacturing
processes that support the production of the finished shippable
product. These indicators can be used to calculate such other
related indicators as fully-yielded unit production per-shift,
which varies by the particular product and our state of automation
in production of that product at any given time. Higher unit
production per shift means lower unit cost and, therefore, improved
margins or improved ability to compete, where desirable, for price
sensitive customer applications. The data from these reports is
used to determine tactical operating actions and changes.
Management also assesses business performance and makes business
decisions regarding our operations using certain non-GAAP measures.
These non-GAAP measures are described in more detail below under
the heading “Non-GAAP Financial Measures.”
Non-GAAP Financial
Measures
We report our historical results in accordance with GAAP; however,
our management also assesses business performance and makes
business decisions regarding our operations using certain non-GAAP
measures. We believe these non-GAAP financial measures provide
useful information to management and investors that is
supplementary to our financial condition and results of operations
computed in accordance with GAAP; however, we acknowledge that our
non-GAAP financial measures have a number of limitations. As such,
you should not view these disclosures as a substitute for results
determined in accordance with GAAP, and they are not necessarily
comparable to non-GAAP measures that other companies
use.
Adjusted Net Income:
We calculate adjusted net income by excluding the change in the
fair value of the June 2012 Warrants from net income. The fair
value of the June 2012 Warrants was re-measured each reporting
period until the warrants were exercised or expired on December 11,
2017. In each reporting period during the term of June 2012
Warrants, the change in the fair value of the June 2012 Warrants
was either recognized as non-cash expense or non-cash income. The
change in the fair value of the June 2012 Warrants was not impacted
by our actual operations but was instead strongly tied to the
change in the market value of our Class A common stock. Management
uses adjusted net income to evaluate our operating performance and
for planning and forecasting future business operations. We believe
the use of adjusted net income may be useful to investors as one
means of evaluating our operational performance. The following
table reconciles adjusted net income to net income for the three
and nine months ended March 31, 2018 and 2017:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$1,226,279
|
$100,824
|
$1,867,324
|
$1,338,987
|
|
Change in fair value of warrant liability
|
—
|
748,169
|
194,632
|
457,784
|
|
Adjusted net income
|
$1,226,279
|
$848,993
|
$2,061,956
|
$1,796,771
|
|
% of revenue
|
14%
|
10%
|
8%
|
9%
|
Our
adjusted net income for the three months ended March 31, 2018 was
approximately $1.2 million, as compared to adjusted net income of
approximately $849,000 for the three months ended March 31, 2017.
Since both periods include the results of ISP for the full period,
the difference in adjusted net income primarily consists of other
income recognized during the three months ended March 31, 2018,
including the fair value adjustment gain recognized upon full
satisfaction of the Sellers Note, and the foreign exchange gains.
These increases are offset by lower gross margins. We also did not
recognize any change in the fair value of the June 2012 Warrant
liability during the third quarter of fiscal 2018 because the June
2012 Warrants expired on December 11, 2017.
Our adjusted net income for the nine months ended March 31, 2018
was approximately $2.1 million, as compared to adjusted net income
of approximately $1.8 million for the nine months ended March 31,
2017. The difference in adjusted net income primarily consists of
other income recognized during the nine months ended March 31,
2018, including the fair value adjustment gain recognized upon
satisfaction of the Sellers Note, and the foreign exchange gains.
These increases are offset by lower gross margins.
EBITDA and Adjusted EBITDA:
EBITDA and adjusted EBITDA are non-GAAP financial measures used by
management, lenders, and certain investors as a supplemental
measure in the evaluation of some aspects of a corporation's
financial position and core operating performance. Investors
sometimes use EBITDA, as it allows for some level of comparability
of profitability trends between those businesses differing as to
capital structure and capital intensity by removing the impacts of
depreciation and amortization. EBITDA also does not include changes
in major working capital items, such as receivables, inventory and
payables, which can also indicate a significant need for, or source
of, cash. Since decisions regarding capital investment and
financing and changes in working capital components can have a
significant impact on cash flow, EBITDA is not a good indicator of
a business's cash flows. We use EBITDA for evaluating the relative
underlying performance of our core operations and for planning
purposes. We calculate EBITDA by adjusting net income to exclude
net interest expense, income tax expense or benefit, depreciation
and amortization, thus the term “Earnings Before Interest,
Taxes, Depreciation and Amortization” and the acronym
“EBITDA.”
We also calculate an adjusted EBITDA, which excludes the effect of
the non-cash income or expense associated with the mark-to-market
adjustments, related to our June 2012 Warrants. The fair value of
the June 2012 Warrants was re-measured each reporting period until
the warrants were either exercised or expired on December 11, 2017.
Each reporting period, the change in the fair value of the June
2012 Warrants was either recognized as a non-cash expense or
non-cash income. The change in the fair value of the June 2012
Warrants was not impacted by our actual operations but is instead
strongly tied to the change in the market value of our Class A
common stock. Management uses adjusted EBITDA to evaluate our
underlying operating performance and for planning and forecasting
future business operations. We believe this adjusted EBITDA is
helpful for investors to better understand our underlying business
operations. The following table reconciles EBITDA and adjusted
EBITDA to net income for the three and nine months ended March 31,
2018 and 2017:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$1,226,279
|
$100,824
|
$1,867,324
|
$1,338,987
|
|
Depreciation and amortization
|
866,329
|
721,636
|
2,492,003
|
1,240,232
|
|
Provision for income taxes
|
(183,154)
|
265,774
|
(318,678)
|
771,600
|
|
Interest expense
|
(342,796)
|
192,977
|
52,212
|
206,170
|
|
EBITDA
|
$1,566,658
|
$1,281,211
|
$4,092,861
|
$3,556,989
|
|
Change in fair value of warrant liability
|
—
|
748,169
|
194,632
|
457,784
|
|
Adjusted EBITDA
|
$1,566,658
|
$2,029,380
|
$4,287,493
|
$4,014,773
|
|
% of revenue
|
18%
|
24%
|
18%
|
21%
|
Our
adjusted EBITDA for the three months ended March 31, 2018 was
approximately $1.6 million, compared to approximately $2.0 million
for the three months ended March 31, 2017. The difference in
adjusted EBITDA was principally caused by lower gross margin,
offset by foreign currency gains. We also did not recognize any
change in the fair value of the June 2012 Warrant liability due to
the warrants expiring on December 11, 2017.
Our adjusted EBITDA for the nine months ended March 31, 2018 was
approximately $4.3 million, compared to approximately $4.0 million
for the nine months ended March 31, 2017. The difference in
adjusted EBITDA principally caused by lower gross margin and higher
SG&A costs, due to the addition of ISP’s SG&A costs,
offset by foreign currency gains.
Off Balance Sheet
Arrangements
We do not engage in any activities involving variable interest
entities or off-balance sheet arrangements.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of income and expense
during the reporting periods presented. Our critical estimates
include the allowance for trade receivables, which is made up of
reserves for bad debts, inventory reserves for obsolescence,
valuation of compensation expense on stock-based awards and
accounting for income taxes. Although we believe that these
estimates are reasonable, actual results could differ from those
estimates given a change in conditions or assumptions that have
been consistently applied. We also have other policies that we
consider key accounting policies, such as our policy for revenue
recognition, however, the application of these policies does not
require us to make significant estimates or judgments that are
difficult or subjective.
Allowance for accounts
receivable is calculated
by taking 100% of the total of invoices that are over 90 days past
due from due date and 10% of the total of invoices that are over 60
days past due from the due date for U.S.-based accounts and 100% on
invoices that are over 120 days past due for China and Latvia-based
accounts without an agreed-upon payment plan. Accounts receivable
are customer obligations due under normal trade terms. We perform
continuing credit evaluations of our customers’ financial
condition. Recovery of bad debt amounts which were previously
written-off is recorded as a reduction of bad debt expense in the
period the payment is collected. If our actual collection
experience changes, revisions to our allowance may be required.
After attempts to collect a receivable have failed, the receivable
is written off against the allowance. To date, our actual results
have been materially consistent with our estimates, and we expect
such estimates to continue to be materially consistent in the
future.
Inventory obsolescence
reserve is calculated by
reserving 100% for items that have not been sold in two years,
items that have not been purchased in two years, or items for which
we have more than a two-year supply. These items as identified are
reserved at 100%, as well as reserving 50% for other items deemed
to be slow moving within the last twelve months and reserving 25%
for items deemed to have low material usage within the last six
months. The parts identified are adjusted for recent order and
quote activity to determine the final inventory reserve. To date,
our actual results have been materially consistent with our
estimates, and we expect such estimates to continue to be
materially consistent in the future.
Revenue
is recognized from product sales
when products are shipped to the customer, provided that we have
received a valid purchase order, the price is fixed, title has
transferred, collection of the associated receivable is reasonably
assured, and there are no remaining significant obligations.
Revenues from product development agreements are recognized as
milestones as completed in accordance with the terms of the
agreements and upon shipment of products, reports or designs to the
customer. Invoiced amounts for VAT related to sales are posted to
the balance sheet and not included in revenue.
Stock-based
compensation is measured
at grant date, based on the fair value of the award, and is
recognized as an expense over the employee’s requisite
service period. We estimate the fair value of each stock option as
of the date of grant using the Black-Scholes-Merton pricing model.
Most options granted under the Omnibus Plan vest ratably over two
to four years and generally have ten-year contract lives. The
volatility rate is based on four-year historical trends in common
stock closing prices and the expected term was determined based
primarily on historical experience of previously outstanding
options. The interest rate used is the U.S. Treasury interest rate
for constant maturities. The likelihood of meeting targets for
option grants that are performance based are evaluated each
quarter. If it is determined that meeting the targets is probable,
then the compensation expense will be amortized over the remaining
vesting period.
Accounting for income
taxes requires estimates
and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the
calculation of tax credits, benefits, and deductions, and in the
calculation of certain tax assets and liabilities, which arise from
differences in the timing of the recognition of revenue and expense
for tax and financial statement purposes. We assessed the
likelihood of the realization of deferred tax assets and concluded
that a valuation allowance is needed to reserve the amount of the
deferred tax assets that may not be realized due to the uncertainty
of the timing and amount of taxable income in certain
jurisdictions. In reaching our conclusion, we evaluated certain
relevant criteria, including the existence of deferred tax
liabilities that can be used to realize deferred tax assets, the
taxable income in prior carryback years in the impacted state
jurisdictions that can be used to absorb net operating losses and
taxable income in future years. Our judgments regarding future
profitability may change due to future market conditions, changes
in U.S. or international tax laws and other factors. These changes,
if any, may require material adjustments to these deferred tax
assets, resulting in a reduction in net income or an increase in
net loss in the period when such determinations are made, which, in
turn, may result in an increase or decrease to our tax provision in
a subsequent period.
In the ordinary course of global business, there are many
transactions and calculations where the ultimate tax outcome is
uncertain. Some of these uncertainties arise as a consequence of
cost reimbursement and royalty arrangements among related entities,
which could impact our income or loss in each jurisdiction we
operate in. Although we believe our estimates are reasonable, no
assurance can be given that the final tax outcome of these matters
will not be different than that which is reflected in our
historical income tax provisions and accruals. In the event our
assumptions are incorrect, the differences could have a material
impact on our income tax provision and operating results in the
period in which such determination is made. In addition to the
factors described above, our current and expected effective tax
rate is based on then-current tax law. Significant changes during
the year in enacted tax law could affect these
estimates.
Item 4. Controls and
Procedures
Under
the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial
Officer, we evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of March 31, 2018, the end of
the period covered by this report. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of March
31, 2018 in reporting on a timely basis information required to be
disclosed by us in the reports we file or submit under the Exchange
Act.
During the fiscal quarter ended March 31, 2018, there was no change
in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal
Proceedings
None
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
None
Item 3. Defaults Upon Senior
Securities
None
Item 4. Mine Safety
Disclosures
None
Item 5. Other
Information
Entry Into a Material Definitive Agreement
Creation of a Direct Financial Obligation or an Obligation Under an
Off-Balance Sheet Arrangement of Registrant
On May 11, 2018, we entered into the Third Amendment to the Amended
LSA, relating to our previously disclosed Term II Loan and
Revolving Line, with AvidBank. The Third Amendment (i) amends the
definition of “Permitted Indebtedness” and (ii) amends
Section 6.8(a) of the Amended LSA to require that we, and each of
our domestic subsidiaries, maintain all of our domestic depository
and operating accounts with AvidBank beginning on June 1, 2018 and
to prohibit us from maintaining a domestic account balance outside
of AvidBank that exceeds Ten Thousand Dollars ($10,000) during the
transition period. The Third Amendment also amends Section 6.9(a)
of the Amended LSA to require that we maintain a fixed charge
coverage ratio, as measured on June 30, 2018, of at least 1.10 to
1.00, and thereafter, beginning with the quarter ending on
September 30, 2018, to maintain a fixed charge coverage ratio of at
least 1.15 to 1.00. Additionally, pursuant to the Third Amendment,
AvidBank granted us a waiver of default arising prior to the Third
Amendment from our failure to comply with the fixed charge coverage
ratio measured on March 31, 2018. Based on the waiver, we are no
longer in default of the Term II Loan or Revolving
Line.
The foregoing descriptions of the Third Amendment are summaries
only, and are qualified in their entirety by reference to the
complete text of the Third Amendment filed herewith as Exhibit
10.7.
The following exhibits are filed herewith as a part of this
report.
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Exhibit Number
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Description
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3.1.1
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Certificate of Incorporation of LightPath Technologies, Inc., filed
June 15, 1992 with the Secretary of State of Delaware, which was
filed as an exhibit to our Registration Statement on Form SB-2
(File No: 33-80119) filed with the Securities and Exchange
Commission on December 7, 1995, and is incorporated herein by
reference thereto.
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|
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|
3.1.2
|
|
Certificate of Amendment to Certificate of Incorporation of
LightPath Technologies, Inc., filed October 2, 1995 with the
Secretary of State of Delaware, which was filed as an exhibit to
our Registration Statement on Form SB-2 (File No: 33-80119) filed
with the Securities and Exchange Commission on December 7, 1995,
and is incorporated herein by reference thereto.
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3.1.3
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|
Certificate of Designations of Class A common stock and Class E-1
common stock, Class E-2 common stock, and Class E-3 common stock of
LightPath Technologies, Inc., filed November 9, 1995 with the
Secretary of State of Delaware, which was filed as an exhibit to
our Registration Statement on Form SB-2 (File No: 33-80119) filed
with the Securities and Exchange Commission on December 7, 1995,
and is incorporated herein by reference thereto.
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|
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|
|
Certificate of Designation of Series A Preferred Stock of LightPath
Technologies, Inc., filed July 9, 1997 with the Secretary of State
of Delaware, which was filed as Exhibit 3.4 to our Annual Report on
Form 10-KSB40 filed with the Securities and Exchange Commission on
September 11, 1997, and is incorporated herein by reference
thereto.
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|
|
|
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|
Certificate of Designation of Series B Stock of LightPath
Technologies, Inc., filed October 2, 1997 with the Secretary of
State of Delaware, which was filed as Exhibit 3.2 to our Quarterly
Report on Form 10-QSB (File No. 000-27548) filed with the
Securities and Exchange Commission on November 14, 1997, and is
incorporated herein by reference thereto.
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|
|
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|
|
Certificate of Amendment of Certificate of Incorporation of
LightPath Technologies, Inc., filed November 12, 1997 with the
Secretary of State of Delaware, which was filed as Exhibit 3.1 to
our Quarterly Report on Form 10-QSB (File No. 000-27548) filed with
the Securities and Exchange Commission on November 14, 1997, and is
incorporated herein by reference thereto.
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|
|
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|
Certificate of Designation of Series C Preferred Stock of LightPath
Technologies, Inc., filed February 6, 1998 with the Secretary of
State of Delaware, which was filed as Exhibit 3.2 to our
Registration Statement on Form S-3 (File No. 333-47905) filed with
the Securities and Exchange Commission on March 13, 1998, and is
incorporated herein by reference thereto.
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|
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|
Certificate of Designation, Preferences and Rights of Series D
Participating Preferred Stock of LightPath Technologies, Inc. filed
April 29, 1998 with the Secretary of State of Delaware, which was
filed as Exhibit 1 to our Registration Statement on Form 8-A (File
No. 000-27548) filed with the Securities and Exchange Commission on
April 28, 1998, and is incorporated herein by reference
thereto.
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|
|
|
Certificate of Designation of Series F Preferred Stock of LightPath
Technologies, Inc., filed November 2, 1999 with the Secretary of
State of Delaware, which was filed as Exhibit 3.2 to our
Registration Statement on Form S-3 (File No: 333-94303) filed with
the Securities and Exchange Commission on January 10, 2000, and is
incorporated herein by reference thereto.
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|
Certificate of Amendment of Certificate of Incorporation of
LightPath Technologies, Inc., filed February 28, 2003 with the
Secretary of State of Delaware, which was filed as Appendix A to
our Proxy Statement (File No. 000-27548) filed with the Securities
and Exchange Commission on January 24, 2003, and is incorporated
herein by reference thereto.
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|
Certificate of Amendment of Certificate of Incorporation of
LightPath Technologies, Inc., filed March 1, 2016 with the
Secretary of State of Delaware, which was filed as Exhibit 3.1.11
to our Quarterly Report on Form 10-Q (File No: 000-27548) filed
with the Securities and Exchange Commission on November 14, 2016,
and is incorporated herein by reference thereto.
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|
Certificate of Amendment of Certificate of Incorporation of
LightPath Technologies, Inc., filed October 30, 2017 with the
Secretary of State of Delaware, which was filed as Exhibit 3.1 to
our Current Report on Form 8-K (File No: 000-27548) filed with the
Securities and Exchange Commission on October 31, 2017, and is
incorporated herein by reference thereto.
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|
Certificate of Amendment of Certificate of Designations of Class A
Common Stock and Class E-1 Common Stock, Class E-2 Common Stock,
and Class E-3 Common Stock of LightPath Technologies, Inc., filed
October 30, 2017 with the Secretary of State of Delaware, which was
filed as Exhibit 3.2 to our Current Report on Form 8-K (File No:
000-27548) filed with the Securities and Exchange Commission on
October 31, 2017, and is incorporated herein by reference
thereto.
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Certificate of Amendment of Certificate of Designation, Preferences
and Rights of Series D Participating Preferred Stock of LightPath
Technologies, Inc., filed January 30, 2018 with the Secretary of
State of Delaware, which was filed as Exhibit 3.1 to our Current
Report on Form 8-K (File No: 000-27548) filed with the Securities
and Exchange Commission on February 1, 2018, and is incorporated
herein by references thereto.
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Amended and Restated Bylaws of LightPath Technologies, Inc., which
was filed as Exhibit 3.1 to our Current Report on Form 8-K (File
No: 000-27548) filed with the Securities and Exchange Commission on
February 3, 2015, and is incorporated herein by reference
thereto.
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First Amendment to Amended and Restated Bylaws of LightPath
Technologies, Inc., which was filed as Exhibit 3.1 to our Current
Report on Form 8-K (File No: 000-27548) filed with the Securities
and Exchange Commission on September 21, 2017, and is incorporated
herein by reference thereto.
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Second Amendment to Rights Agreement dated January 30, 2018 between
us and Continental Stock Transfer & Trust Company, as Rights
Agent, which was filed as Exhibit 4.1 to our Current Report on Form
8-K (File No: 000-27548) filed with the Securities and Exchange
Commission on February 1, 2018, and is incorporated herein by
reference thereto.
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Note Satisfaction and Securities Purchase Agreement dated January
16, 2018, by and between LightPath Technologies, Inc., Joseph
Menaker, and Mark Lifshotz, which was filed as Exhibit 10.1 to our
Current Report on Form 8-K (File No: 000-27548) filed with the
Securities and Exchange Commission on January 17, 2018, and is
incorporated herein by reference thereto.
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Registration Rights Agreement dated January 16, 2018, by and
between LightPath Technologies, Inc., Joseph Menaker, and Mark
Lifshotz, which was filed as Exhibit 10.2 to our Current Report on
Form 8-K (File No: 000-27548) filed with the Securities and
Exchange Commission on January 17, 2018, and is incorporated herein
by reference thereto.
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Second Amendment to Second Amended and Restated Loan and Security
Agreement dated January 16, 2018, by and between LightPath
Technologies, Inc. and AvidBank, which was filed as Exhibit 10.3 to
our Current Report on Form 8-K (File No: 000-27548) filed with the
Securities and Exchange Commission on January 17, 2018, and is
incorporated herein by reference thereto.
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Affirmation of Guarantee of Geltech, Inc., which was filed as
Exhibit 10.4 to our Current Report on Form 8-K (File No: 000-27548)
filed with the Securities and Exchange Commission on January 17,
2018, and is incorporated herein by reference thereto.
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Amendment No. 8 to the Amended and Restated LightPath Technologies,
Inc. Omnibus Incentive Plan dated February 8, 2018, which was filed
as Exhibit 10.7 to our Quarterly Report on Form 10-Q (File No.
000-27548) filed with the Securities and Exchange Commission on
February 13, 2018.
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Lease dated April 20, 2018, by and between LightPath Technologies,
Inc. and CIO University Tech, LLC, which was filed as Exhibit 10.1
to our Current Report on Form 8-K (File No: 000-27548) filed with
the Securities and Exchange Commission on April 26, 2018, and is
incorporated herein by reference thereto.
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Third Amendment to Second Amended and Restated
Loan and Security Agreement dated May 11, 2018, by and between LightPath Technologies, Inc.
and AvidBank*
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Affirmation of
Guarantee of Geltech, Inc.*
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Certification of Chief Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934*
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|
Certification of Chief Financial Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934*
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|
|
Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350 of Chapter 63 of Title 18
of the United States Code*
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|
Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 of Chapter 63 of Title 18
of the United States Code*
|
101.INS XBRL Instance
Document*
101.SCH
XBRL Taxonomy Extension Schema
Document*
101.CAL XBRL Taxonomy Extension
Calculation Linkbase Document*
101.DEF
XBRL Taxonomy Extension
Definition Linkbase Document*
101.LAB XBRL Taxonomy Extension
Label Linkbase Document*
101.PRE XBRL Taxonomy
Presentation Linkbase Document*
*filed herewith
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly
authorized.
LIGHTPATH TECHNOLOGIES, INC.
Date: May 14,
2018
By: /s/ J. James
Gaynor
President and Chief Executive Officer
Date: May 14,
2018
By: /s/ Dorothy M.
Cipolla
Chief Financial Officer