PART I
Item 1. Business.
General
LightPath Technologies, Inc. (“LightPath”, the
“Company”, “we”, “our”, or
“us”) was incorporated under Delaware law in 1992 as
the successor to LightPath Technologies Limited Partnership, a New
Mexico limited partnership formed in 1989, and its predecessor,
Integrated Solar Technologies Corporation, a New Mexico corporation
formed in 1985. We manufacture optical components and higher level
assemblies, including precision molded glass aspheric optics,
molded and diamond-turned infrared aspheric lenses and other
optical materials used to produce products that manipulate
light. We design, develop, manufacture and distribute
optical components and assemblies utilizing advanced optical
manufacturing processes. Our products are incorporated into a
variety of applications by our customers in many industries,
including defense products, medical devices, laser aided industrial
tools, automotive safety applications, barcode scanners, optical
data storage, hybrid fiber coax datacom, telecommunications,
machine vision and sensors, among others. All the products we
produce enable lasers and imaging devices to function more
effectively. For example:
|
●
|
Molded glass aspheres and assemblies
are
used in various high performance optical applications primarily
based on laser technology;
|
|
●
|
Infrared molded lenses, diamond turned, conventional ground and
polished and CNC ground lenses and assemblies
using
short (“SWIR”), mid (“MWIR”) and long
(“LWIR”) wave materials imaging are used in
applications for firefighting, predictive maintenance, homeland
security, surveillance, automotive, cell phone infrared cameras,
pharmaceutical research & development and defense;
and
|
|
●
|
Collimator assemblies
are
used in applications involving light detection and ranging
(“LIDAR”) technology for autonomous vehicles, such as
fork lifts and other automated warehouse
equipment.
|
In
November
2005,
we
formed
LightPath
Optical Instrumentation (Shanghai) Co., Ltd (“LPOI”), a
wholly-owned subsidiary, located in Jiading, People’s
Republic of China. The LPOI facility (the “Shanghai
Facility”) is primarily used for sales and support
functions.
In December 2013, we formed LightPath Optical Instrumentation
(Zhenjiang) Co., Ltd. (“LPOIZ”), a wholly-owned
subsidiary located in the New City district, of the Jiangsu
province, of the People’s Republic of China. LPOIZ’s
39,000 square foot manufacturing facility (the “Zhenjiang
Facility”) serves as our primary manufacturing facility in
China and provides a lower cost structure for production of larger
volumes of optical components and assemblies.
In December 2016, we acquired ISP Optics Corporation, a New York
corporation (“ISP”), and its wholly-owned subsidiary,
ISP Optics Latvia, SIA, a limited liability company founded in 1998
under the Laws of the Republic of Latvia (“ISP
Latvia”). ISP is a vertically integrated manufacturer
offering a full range of infrared products from custom infrared
optical elements to catalog and high-performance lens assemblies.
Historically, ISP’s Irvington, New York facility (the
“Irvington Facility”) functioned as its global
headquarters for operations, while also providing manufacturing
capabilities, optical coatings, and optical and mechanical design,
assembly, and testing. In July 2018, we announced plans to relocate
this manufacturing facility to our existing facilities in Orlando,
Florida and Riga, Latvia. We expect the relocation to occur in
phases through the end of fiscal 2019. ISP Latvia is a manufacturer
of high precision optics and offers a full range of infrared
products, including catalog and custom infrared optics. ISP
Latvia’s manufacturing facility is located in Riga, Latvia
(the “Riga Facility”). See Note
3,
Acquisition of
ISP Optics Corporation, to the Consolidated Financial Statements,
for additional information.
Product
Groups and Markets
Overview
In 2015, we organized our business based on five product groups:
low volume precision molded optics (“LVPMO”), high
volume precision molded optics (“HVPMO”), infrared
products, specialty products, and non-recurring engineering
(“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 lens
and assemblies and includes all of the products offered by ISP. Our
specialty product group is comprised of value-added products, such
as optical subsystems, assemblies and collimators. Our NRE product
group consists of those products we develop pursuant to product
development agreements that we enter into with customers.
Typically, customers approach us and request that we develop new
products or applications for our existing products to fit their
particular needs or specifications. The timing and extent of any
such product development is outside of our control. At the
beginning of fiscal 2019, we combined the LVPMO and HVPMO product
groups into a single precision molded optics (“PMO”)
product group. In addition, the NRE product group will now be added
to the specialty product group. Accordingly, beginning with our
Quarterly Report on Form 10-Q for the quarter ended September 30,
2018, we will present three product groups: PMO, infrared, and
specialty products.
We currently serve the following major markets: industrial,
commercial, defense, medical, and telecommunications. Within our
product groups, we have various applications that serve these major
markets. For example, our HVPMO lenses are typically used in
industrial tools, especially in China. Our infrared products can
also be used in various applications within our major markets.
Currently, sales of our infrared products are primarily for
customers in the industrial market that use thermal imaging
cameras. Our infrared products can also be used for 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.
Product Groups
The following further discusses the various products we offer and
certain growth opportunities we anticipate for each such
product.
LVPMO and HVPMO Product Groups.
Aspheric
lenses are known for their optimal performance. Aspheric lenses
simplify and shrink optical systems by replacing several
conventional lenses. However, aspheric lenses are difficult and
costly to machine. Our glass molding technology enables the
production of both low and high volumes of aspheric optics, while
still maintaining the highest quality at an affordable price.
Molding is the most consistent and economical way to produce
aspheres and we have perfected this method to offer the most
precise molded aspheric lenses
available.
In recent years, sales of both our LVPMOs and HVPMOs have
increased, but a slowdown in the telecommunications market caused a
decrease in revenue generated by our LVPMO and HVPMO product groups
for fiscal 2018, as compared to fiscal 2017. We continue to expect
growth for the next several years, as indications are that we have
reached what appears to be the trough of the downward cycle for the
telecommunications market. We believe we are nearing the beginning
of a multi-year growth cycle of the optical market. This multi-year
growth cycle is driven by four major trends: data centers; digital
video distribution; wireless broadband; and machine-to-machine
interface. Cloud computing has caused a shift in enterprise
technology with increased spending for software-as-a-service
(“SAAS”) and infrastructure-as-a-service
(“IAAS”) capital investments. Delivery of
applications and technology using SAAS or IAAS requires larger and
faster network bandwidth. The explosion of mobile devices,
which includes smartphones and tablet devices, is also requiring
the expansion of network bandwidth as users are receiving and
transferring larger amounts of data via their mobile devices.
By 2021, it is estimated that there will be 1.5 mobile
devices per capita. It is also expected that there will be
approximately 11.6 billion mobile-connected devices by 2021,
including machine-to-machine (“M2M”) modules, exceeding
the world’s projected population of 7.8 billion. Individuals
are also streaming more video on their mobile devices or through
their smart TVs. This type of video distribution, which is
estimated to be 80% of all network traffic by 2019, is creating a
huge demand for larger and faster bandwidth. Finally,
machine-to-machine connection technology allows wireless and wired
systems to communicate with other devices of the same type. This
type of networking often requires bandwidth in order for the
machines to communicate with each other. All of these trends
require the expansion of bandwidth, and thus, the growth of optical
communication networks. Our products, such as our precision molded
optical lenses, can be used as a component in optical communication
networks. We also anticipate growth in our precision molded
aspheres product revenues as we add new product lenses and
applications for a variety of markets and industries, including
laser tools, telecom transceivers, micro-projectors, scientific and
bench top lasers, range finders, medical devices, barcode scanners
and laser based spectrometers.
●
LVPMOs
. The
growth we experienced in our LVPMO business in previous years was
driven by a variety of market applications, such as medical
endoscopes, medical flow cytometers, scientific and bench-top
lasers, laser based spectrometers, military telecom, and telescopic
weapon sights. These products have precision specifications
and 100% testing to verify that our lenses conform to a higher
level of performance than most of the competition in these
markets.
●
HVPMOs.
The growth we
experienced in our HVPMO business in previous years was driven by
market applications supporting mostly the laser diode applications
for high volume markets in laser tools, range finders, laser gun
sights, barcode scanners, and micro-projectors. The same basic
tooling used for high precision in the LVPMO applications allows us
to realize a competitive advantage for high volume production that
benefits the end customer, while maintaining low price targets.
Markets for laser diode applications are expected to grow
substantially in the next few years as applications such as LIDAR,
which uses light and radar for distance tracking and speed
detection, headlights for automobiles, and many other related
disciplines begin to rely more and more on laser technology. There
are also indications that the telecommunications market will
recover, particularly as the access networks around the world are
being upgraded to accommodate the conversion to 5G applications,
which will provide us with opportunities for
growth.
Infrared Product Group
.
Advances
in chalcogenide materials have enabled compression molding for MWIR
and LWIR optics in a process similar to precision molded lenses.
Our molded infrared optics technology enables high performance,
cost-effective infrared aspheric lenses that do not rely on
traditional diamond turning or lengthy polishing methods. Utilizing
precision molded aspheric optics significantly reduces the number
of lenses required for typical thermal imaging systems and the cost
to manufacture these lenses. Molding is an excellent alternative to
traditional lens processing methods particularly where volume and
repeatability is required.
Through ISP, our wholly-owned subsidiary, we also offer germanium,
silicon or zinc selenide aspheres and spherical lenses which are
manufactured by diamond turning. This manufacturing technique
allows us to offer larger lens sizes and the ability to use other
optical materials which cannot be effectively molded. ISP gives us
the ability to meet complex optical challenges that demand more
exotic optical substrate materials that are
non-moldable.
Overall, we anticipate growth for infrared optics and increased
requirements for systems requiring aspheric optics. Infrared
systems, which include thermal imaging cameras, gas sensing
devices, spectrometers, night vision systems, automotive driver
awareness systems, such as blind spot detection, thermal weapon
sights, and infrared counter measure systems, represent a market
that is forecasted to grow from $4.8 billion in 2017 to $7.3
billion by 2023, at a compound annual growth rate of 7.18% during
the forecast period. As infrared imaging systems become widely
available, the cost of optical components needs to decrease before
the market demand will increase. Our aspheric molding process
is an enabling technology for the cost reduction and
commercialization of infrared imaging systems utilizing smaller
lenses because the aspheric shape of our lenses enables system
designers to reduce the lens element in a system and provide
similar performance at a lower cost. In addition, there is a trend
toward utilizing smaller size sensors in these devices which
require smaller size lenses and that fits well with our molding
technology.
Specialty Product Group
.
We
have a growing group of specialty products and assemblies that take
advantage of our unique technologies and capabilities. These
products include custom optical designs, mounted lenses, optical
assemblies, and collimator assemblies. We expect growth from
defense communications programs and commercial optical
sub-assemblies.
We design, build, and sell optical assemblies into markets for test
and measurement, medical devices, military, industrial, and
communications based on our proprietary technologies. Many of
our optical assemblies consist of several products that we
manufacture.
Growth Strategy
Our strategy is to leverage our technology, know-how, established
low cost manufacturing capability and partnerships to grow our
business. We plan to accomplish this growth through the
implementation of the following objectives:
●
Leverage our Leadership to Drive Organic Growth
. We
plan to continue to capitalize on our global operations network,
distribution infrastructure, and technology to pursue global
growth. We will focus our efforts on those geographic areas and end
products that we believe offer the most attractive growth and
long-term profit prospects.
●
Focus on Cash Flow Generation
. Our
goal is to focus on cash flow generation and return on invested
capital through the continuing optimization of our cost structure,
improvement in working capital and supply chain efficiencies, and a
disciplined approach to capital expenditures. We have a proven
track record of mitigating fixed cost inflation with cost saving
actions and productivity improvements. We intend to continue to
identify incremental cost saving opportunities based in large part
on benchmarks of industry-leading performance and productivity
improvements by utilizing our engineering and manufacturing
technology expertise and partnerships with low cost producers. Our
goal is to maintain a cost structure that positions us favorably to
compete and grow. We intend to continue to upgrade our customer and
product mix by adding products that move up the supply chain by
offering assemblies that use our lenses, thereby increasing our
sales of value-added, differentiated products, and achieving
premium pricing to improve margins and enhance cash
flow.
●
Increase Customer Base and Continue to Develop New Products.
A key
component of our strategy is to produce innovative,
high-performance products that offer enhanced value propositions to
our customers at competitive prices. Our goal is to continually
work closely with our customers to provide solutions and
productions that optimize their products. This market-driven
product development enables us to offer a high-quality product
portfolio to our customers and provide our business with the
ability to respond quickly and efficiently to changes in market
demands.
●
Deepen Our Presence in Emerging Markets
.
Emerging markets are a strategic priority for our business. We are
well positioned not only to leverage our strong market positions in
mature but highly sophisticated markets in North America and
Europe, but also to participate in the expected growth of emerging
markets in Asia and Eastern Europe. We believe that improving
living standards and growth in GDP across emerging markets are
combining to create increased demand for our products. We expect to
capitalize on this growth opportunity by expanding our customer
base and local capabilities in order to increase our market share
across emerging markets, especially in China. To accelerate our
penetration of these markets and maintain our competitive cost
position, we may develop relationships with leading local partners,
especially in businesses where participation in the fast-growing
Chinese market is particularly important for long-term sustainable
growth. For example, we are well positioned to leverage our strong
production technology in the Chinese market as a result of an
increasing percentage of aerospace, automotive, semiconductor,
electronics, and telecommunications manufacturing transitioning to
China.
●
Continue to Drive Operational Excellence and Asset
Efficiency
.
Operational excellence, which includes a commitment to safety,
environmental stewardship, and improved reliability, is key to our
future success. We continually evaluate our business to identify
opportunities to increase operational efficiency throughout our
production facilities, with a focus on maintaining operational
excellence, reducing costs, and maximizing asset efficiency. We
intend to continue focusing on increasing manufacturing
efficiencies through selected capital projects, process
improvements, and best practices in order to lower unit costs. We
will also carefully manage our portfolio and take appropriate
actions to address product lines that face challenging market
conditions and do not generate returns on invested capital that we
believe are sufficient to create long-term shareholder
value.
●
Drive Organizational Alignment
. We
believe that maintaining alignment of the efforts of our employees
with our overall business strategy and operational excellence goals
is critical to our success. We have outstanding people and assets
and, with the commitment to values of safety, customer
appreciation, simplicity, collective entrepreneurship, and
integrity, we believe that we can maintain our competitiveness and
help achieve our operational excellence and asset efficiency
strategic objectives.
Sales and Marketing
Marketing
.
Extensive product diversity and varying levels of product maturity
characterize the optics industry. Product markets range from
consumer (e.g., cameras and copiers) to industrial (e.g., lasers,
data storage, and infrared imaging), from products where the lenses
are the central feature (e.g., telescopes, microscopes, and lens
systems) to products incorporating lens components (e.g., robotics
and semiconductor production equipment) and communications (e.g.,
various optics are required for bandwidth expansion and improved
data transfer for the optical network). As a result, we market our
products across a wide variety of customer groups, including laser
systems manufacturers, laser OEMs, infrared-imaging systems
vendors, industrial laser tool manufacturers, telecommunications
equipment manufacturers, medical and industrial measurement
equipment manufacturers, government defense agencies, and research
institutions worldwide.
Technical Sales Model.
To
align the organization for specific goals and accountability, we
created an executive structure with three direct reporting lines:
Operations, Sales and Marketing, and Finance. Our Sales and
Marketing organization is led by the Vice President of Corporate
Business Development, as well as our National Sales Manager. We
also combined the organizations supporting our aspheric visible
lens products and our infrared products.
Sales Team & Channel.
We
have regional sales forces that market and sell our products
directly to customers in North America, Europe and China. We
also have a master distributor in Europe. We have formalized
relationships with 15 industrial, laser, and optoelectronics
distributors and channel partners located in the United States
(“U.S.”) and various foreign countries to assist in the
distribution of our products in highly specific target markets. We
also have reseller arrangements with the top three product catalog
companies in the optics and opto-electronics market. In
addition, we also maintain our own product catalog and internet
websites (
www.lightpath.com
and
www.ispoptics.com
) as
vehicles for broader promotion of our products. We make use of
print media advertisements in various trade magazines and
participate in appropriate domestic and foreign trade
shows.
All of our partners work diligently to expand opportunities in
emerging geographic markets and through alternate channels of
distribution. We believe that we provide a high level of support in
developing and maintaining our long-term relationships with our
customers. Customer service and support are provided through our
offices and those of our partners that are located throughout the
world.
Trade Shows.
We
display our product line additions and enhancements at one or more
trade shows each year. For example, we participated in several
United States based shows including Society of Photographic
Instrumentation Engineers (“SPIE”) Photonics
West
in
January 2018 and SPIE Defense, Security and Sensing in April 2018.
In addition, we exhibit at the Laser World of Photonics in Munich,
Germany to maintain our European presence. This strategy
underscores our strategic directive of broadening our base of
innovative optical components and assemblies. These trade shows
also provide an opportunity to meet with and enhance existing
business relationships, meet and develop potential customers, and
to distribute information and samples regarding our
products.
Competition
The
market for optical components generally is highly competitive and
highly fragmented. We compete with manufacturers of conventional
spherical lenses and optical components, providers of aspheric
lenses and optical components, and producers of optical quality
glass.
To a
lesser extent, we compete with developers of specialty optical
components and assemblies,
particularly
as related to our specialty product group
.
Many of these competitors have greater financial, manufacturing,
marketing, and other resources than we
do.
We believe our unique capabilities in optical design engineering,
our low cost structure and our substantial presence in Europe and
Asia, particularly in China, provides us with a competitive edge
and assists us in securing business. Additionally, we believe that
we offer value to some customers as a second or backup supply
source in the United States should they be unwilling to commit to
purchase their entire supply of a critical component from a foreign
production source. We also have a broad product offering to satisfy
a variety of applications and markets.
LVPMOs and HVPMOs Product Groups
.
Our
LVPMO products compete with conventional lenses and optical
components manufactured by companies such as Asia Optical Co.,
Inc., Anteryon BV, Rochester Precision Optics, and Sunny Optical
Technology (Group) Company Limited.
Aspheric lenses compete with lens systems comprised of multiple
conventional lenses. Machined aspheric lenses compete with our
molded glass aspheric lenses, which are part of our HVPMO product
group. Aspheric lens system manufacturers include Panasonic
Corporation, Alps Electric Co., Ltd., Hoya Corporation, as well as
newer competitors from China and Taiwan, such as E-Pin Optical
Industry Co., Ltd., and Kinik Company. The use of aspheric surfaces
provides the optical designer with a powerful tool in correcting
spherical aberrations and enhancing performance in state-of-the-art
optical products. However, we believe that our optical design
expertise and our flexibility in providing custom high performance
optical components at a low price are key competitive advantages
for us over these competitors.
Plastic molded aspheres and hybrid plastic/glass aspheric
optics, on the other hand, allow for high volume production, but
primarily are limited to low cost consumer products that do not
place a high demand on performance (such as plastic lenses in
disposable or mobile phone cameras). Molded plastic aspheres appear
in products that stress cost or weight as their measure of success
over performance and durability. Our low cost structure allows
us to compete with these lenses based on higher performance and
durability from our glass lenses at only a small premium in price
over plastic or plastic/glass hybrid lenses.
Infrared Product Group
.
Our
infrared aspheric optics compete with optical products produced by
Janos Technology LLC, Ophir Optronics Solutions, Ernst Leitz Canada
(ELCAN) Optical Technologies, Clear Align and a variety of Eastern
European and Asian manufacturers. These traditional infrared
lenses can either be polished spherical or are diamond turned
aspherical. Our molded lenses compete with spherical lenses
because like all aspheres they can replace doublets or triplets
based on the higher performance of an aspheric lens. Our
diamond turned aspheres from germanium are more expensive to
produce in high volumes and time consuming to manufacture. We
believe our low cost, high volume lens business technology combined
with our recently added traditional polishing and diamond turning
capabilities enables us to compete with the other manufacturers of
traditional infrared lens by offering the best technology fit at a
competitive price.
Our molded infrared optics competes with products manufactured by
Umicore N.V. (“Umicore”), Rochester Precision Optics,
and Yunnan KIRP-CH Photonics Co., Ltd.. We believe that our optical
design expertise, our diverse manufacturing flexibility and our
manufacturing facilities located in Asia, Europe and North America
are key advantages over the products manufactured by these
competitors. A specific advantage over Umicore, a foreign
company, is that the infrared market is highly dependent on the
United States defense industry, which prefers to purchase from
United States based companies such as
LightPath.
Manufacturing
Facilities
. Our
manufacturing is largely performed in our 26,000 square foot
production facility in Orlando, Florida (the “Orlando
Facility”), in LPOIZ’s 39,000 square foot production
facility in Zhenjiang, China and in ISP Latvia’s 23,000
square foot production facility in Riga, Latvia. LPOI sales and
support functions occupy a 1,900 square foot facility in Shanghai.
ISP also has an approximately 13,000 square foot facility in
Irvington, New York that functions as its operations headquarters,
providing manufacturing capabilities, optical coatings, optical and
mechanical design, assembly and testing, as well as some
engineering, administrative and sales functions.
We are in
the process of adding approximately 12,000 square feet of
additional manufacturing space near our existing Orlando Facility,
which we expect to complete during the second quarter of fiscal
2019. We will be relocating the manufacturing operations of
ISP’s Irvington Facility to our existing Orlando Facility and
Riga Facility. The additional space being added in Orlando will
accommodate this relocation. The relocation is expected to be
completed in phases through the end of fiscal 2019. Some of the
manufacturing operations currently performed in the Irvington
Facility will transition to our Zhenjiang
Facility.
Our Orlando Facility and LPOI’s Zhenjiang Facility feature
areas for each step of the manufacturing process, including coating
work areas, preform manufacturing and a clean room for pressing and
integrated assembly. The Orlando and Zhenjiang Facilities include
new product development laboratories and space that includes
development and metrology equipment. The Zhenjiang Facility has
anti-reflective and infrared coating equipment to coat our lenses
in-house. ISP’s Irvington Facility and ISP Latvia’s
Riga Facility include fully vertically integrated manufacturing
processes to produce high precision infrared lenses and infrared
lens assemblies, including crystal growth, CNC grinding,
conventional polishing, diamond turning, multilayer coatings,
assemblies and state of the art metrology.
We are routinely adding additional production equipment at our
Orlando, Zhenjiang and Riga Facilities. During fiscal 2018, we
added additional space in both our Zhenjiang and Riga Facilities.
In fiscal 2019, we will complete the additional space in Orlando
and the relocation of the Irvington Facility’s manufacturing
operations. In addition to adding additional equipment or space at
our manufacturing facilities, we add additional work shifts, as
needed, to increase capacity and meet forecasted demand. We intend
to monitor the capacity at our facilities, and will increase such
space as needed. We believe our facilities are adequate to
accommodate our needs over the next year.
Production and Equipment
.
Our
Orlando Facility contains glass melting capability for infrared
glass, a manufacturing area for our molded glass aspheres, a
tooling and machine shop to support new product development,
commercial production requirements for our machined parts, the
fabrication of proprietary press work stations and mold equipment,
and a clean room for our molding and assembly workstations and
related metrology equipment. Most recently, in connection with the
relocation of the Irvington Facility, we have added a chamber for
diamond-like carbon (“DLC”) coating in Orlando.
LPOIZ’s Zhenjiang Facility features a molded glass aspheres
manufacturing area, clean room, machine shop, dicing area, and
chambers for coating, including anti-reflective and infrared
coatings and related metrology
equipment.
ISP’s Irvington Facility contains a manufacturing area for
diamond turning, coating, lens assembly, and quality control. The
facility is equipped with numerous diamond turning machines and
accompanying metrology equipment, offering full scale diamond
turning capabilities. The facility is also equipped with multiple
chambers for various multi-layer coatings and a chamber for DLC
coating. A cleaning room and metrology laboratory are also part of
the coating area. The lens assembly area is equipped with
modulation transfer function (“MTF”) stations, lens
assembly stations and the latest lens design
software.
ISP Latvia’s Riga Facility consists of crystal growth,
grinding, polishing, diamond turning, quality control departments
and a mechanical shop to provide the grinding and polishing
departments with the necessary tools. The crystal growth department
is equipped with multiple furnaces to grow water soluble crystals.
The grinding and polishing departments have numerous modern CNC
equipment, lens centering and conventional equipment to perform
spindle, double sided and continuous polishing operations. The
diamond turning department has numerous diamond turning machines
accompanied with the latest metrology tools. In connection with the
relocation of the Irvington Facility, we have increased the diamond
turning capacity in this facility. The quality control department
contains numerous inspection stations with various equipment to
perform optical testing of finished optics.
The Orlando, Zhenjiang, and Irvington Facilities are ISO 9001:2015
certified. The Riga Facility is ISO 9001:2008 certified. The
Zhenjiang Facility is also ISO/TS 1649:2009 certified for
manufacturing of optical lenses and accessories used in
automobiles. The Orlando, Irvington, and Riga Facilities are also
International Traffic in Arms and Regulation (“ITAR”)
compliant.
For
more information regarding our facilities, please see
Item 2. Properties
in
this Annual Report on Form 10-K.
Subcontractors and Strategic Alliances
.
We
believe that low-cost manufacturing is crucial to our long-term
success. In that regard, we generally use subcontractors in our
production process to accomplish certain processing steps requiring
specialized capabilities. For example, we presently use a number of
qualified subcontractors for fabricating, polishing, and coating
certain lenses, as necessary. We have taken steps to protect our
proprietary methods of repeatable high quality manufacturing by
patent disclosures and internal trade secret
controls.
Suppliers
.
We
utilize a number of glass compositions in manufacturing our molded
glass aspheres and lens array products. These glasses or
equivalents are available from a large number of suppliers,
including CDGM Glass Company Ltd., Ohara Corporation, and Sumita
Optical Glass, Inc. Base optical materials, used in both infrared
glass and collimator products, are manufactured and supplied by a
number of optical and glass manufacturers. ISP utilizes major
infrared material suppliers located around the globe for a broad
spectrum of infrared crystal and glass. We believe that a
satisfactory supply of such production materials will continue to
be available, at reasonable or, in some cases, increased prices,
although there can be no assurance in this
regard.
We also rely on local and regional vendors for component materials
and services such as housings, fixtures, magnets, chemicals and
inert gases, specialty ceramics, UV and AR coatings, and other
specialty coatings. In addition, certain products require external
processing, such as anodizing and metallization. To date, we are
not dependent on any of these manufacturers and have found a
suitable number of qualified vendors and suppliers for these
materials and services.
We currently purchase a few key materials from single or limited
sources. We believe that a satisfactory supply of production
materials will continue to be available at competitive prices,
although there can be no assurance in this
regard.
Intellectual Property
Our policy is to protect our technology by, among other things,
patents, trade secret protection, trademarks, and copyrights. We
primarily rely upon trade secrets and unpatented proprietary
know-how to protect certain process inventions, lens designs, and
innovations. We have taken security measures to protect our trade
secrets and proprietary know-how, to the extent
possible.
In addition to trade secrets and proprietary know-how, we have
three remaining patents that relate to the fusing of certain of our
lenses that are part of our specialty products group. These patents
expire at various times through 2023.
Our means of protecting our proprietary rights may not be adequate
and our competitors may independently develop technology or
products that are similar to ours or that compete with ours.
Patent, trademark, and trade secret laws afford only limited
protection for our technology and products. The laws of many
countries do not protect our proprietary rights to as great an
extent as do the laws of the United States. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to
obtain and use information that we regard as proprietary. Third
parties may also design around our proprietary rights, which may
render our protected technology and products less valuable, if the
design around is favorably received in the marketplace. In
addition, if any of our products or technology is covered by
third-party patents or other intellectual property rights, we could
be subject to various legal actions. We cannot assure you that our
technology platform and products do not infringe patents held by
others or that they will not in the future. Litigation may be
necessary to enforce our intellectual property rights, to protect
our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of
infringement, invalidity, misappropriation, or other
claims.
We own several registered and unregistered service marks and
trademarks that are used in the marketing and sale of our products.
The following table sets forth our registered and unregistered
service marks and trademarks, if registered, the country in which
the mark is filed, and the renewal date for such
mark.
Mark
|
Type
|
Registered
|
Country
|
Renewal
Date
|
LightPath
®
|
service mark
|
Yes
|
United States
|
October 22, 2022
|
GRADIUM
™
|
Trademark
|
Yes
|
United States
|
April 29, 2027
|
Circulight
|
Trademark
|
No
|
-
|
-
|
BLACK DIAMOND
|
Trademark
|
No
|
-
|
-
|
GelTech
|
Trademark
|
No
|
-
|
-
|
Oasis
|
Trademark
|
No
|
-
|
-
|
LightPath
®
|
service mark
|
Yes
|
People’s Republic of China
|
September 13, 2025
|
ISP Optics®
|
Trademark
|
Yes
|
United States
|
August 12, 2020
|
Environmental and Governmental Regulation
Currently, emissions and waste from our manufacturing processes are
at such low levels that no special environmental permits or
licenses are required. In the future, we may need to obtain special
permits for disposal of increased waste by-products. The glass
materials we utilize contain some toxic elements in a stabilized
molecular form. However, the high temperature diffusion process
results in low-level emissions of such elements in gaseous form. If
production reaches a certain level, we believe that we will be able
to efficiently recycle certain of our raw material waste, thereby
reducing disposal levels. We believe that we are presently in
compliance with all material federal, state, and local laws and
regulations governing our operations and have obtained all material
licenses and permits necessary for the operation of our
business.
We also utilize certain chemicals, solvents, and adhesives in our
manufacturing process. We believe we maintain all necessary permits
and are in full compliance with all applicable
regulations.
To our knowledge, there are currently no United States federal,
state, or local regulations that restrict the manufacturing and
distribution of our products. Certain end-user applications require
government approval of the complete optical system, such as United
States Food and Drug Administration approval for use in endoscopy.
In these cases, we will generally be involved on a secondary level
and our OEM customer will be responsible for the license and
approval process.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
imposes disclosure requirements regarding the use of
“conflict minerals” mined from the Democratic Republic
of Congo and adjoining countries in products, whether or not these
products are manufactured by third parties. The conflict minerals
include tin, tantalum, tungsten, and gold, and their derivatives.
Pursuant to these requirements, we are required to report on Form
SD the procedures we employ to determine the sourcing of such
minerals and metals produced from those minerals. There are costs
associated with complying with these disclosure requirements,
including for diligence in regards to the sources of any conflict
minerals used in our products, in addition to the cost of
remediation and other changes to products, processes, or sources of
supply as a consequence of such verification activities. In
addition, the implementation of these rules could adversely affect
the sourcing, supply, and pricing of materials used in our
products. We strive to only use suppliers that source from
conflict-free smelters and refiners; however, in the future, we may
face difficulties in gathering information regarding our suppliers
and the source of any such conflict minerals.
New Product Development
In recent years, our new product development efforts have been
focused on the development of our capabilities in molded aspheric
lenses and infrared lenses. We incurred expenditures for new
product development during fiscal 2018 and 2017 of approximately
$1.6 million and $1.2 million, respectively. In fiscal 2018 and
2017, we concentrated our efforts to support existing and new
customers in the design and manufacture of items in three of our
product lines: HVPMO lenses, LVPMO lenses and infrared products,
with emphasis on infrared products in fiscal
2018.
In fiscal 2019, we anticipate focusing our new product development
efforts on infrared optics products for imaging and sensing, fiber
lasers, spectrophotometry, defense, medical devices, industrial,
optical data storage, machine vision, sensors, and environmental
monitoring. In addition, we plan on continuing to invest in
designing and developing the next generation of our proprietary
precision glass molding machines. We currently plan to expend
approximately $1.9 million for new product development during
fiscal 2019, which could vary depending upon revenue levels,
customer requirements, and perceived market
opportunities.
For more difficult or customized products, we bill our customers
for engineering services as a non-recurring engineering
fee.
Concentration of Customer Risk
In fiscal 2018, we had sales to three customers that comprised an
aggregate of approximately 28% of our annual revenue with one
customer at 16% of our sales, another customer at 7% of our sales
and the third customer at 5% of our sales. In fiscal 2017, we had
sales to three customers that comprised an aggregate of
approximately 26% of our annual revenue with one customer at 10% of
our sales, another customer at 9% of our sales and the third
customer at 7% of our sales. The loss of any of these customers, or
a significant reduction in sales to any such customer, would
adversely affect our revenues. We continue to diversify our
business in order to minimize our sales concentration
risk.
In fiscal 2018, 58% of our net revenue was derived from sales
outside of the United States, with 84% of our foreign sales derived
from customers in Europe and Asia. In fiscal 2017, 61% of our net
revenue was derived from sales outside of the United States, with
88% of our foreign sales derived from customers in Europe and
Asia.
Employees
As of June 30, 2018, we had 342 employees, of which 331 were
full-time equivalent employees, with 85 located in Orlando,
Florida, 33 located in Irvington, New York, 87 located in Riga,
Latvia, and 126 located in Jiading and Zhenjiang, China. Of our 331
full-time equivalent employees, we have 41 employees engaged in
management, administrative, and clerical functions, 21 employees in
new product development, 19 employees in sales and marketing, and
250 employees in production and quality control functions. In
connection with the relocation of our Irvington Facility into our
existing Orlando and Riga Facilities, which we expect will occur in
phases throughout fiscal 2019, we anticipate that current Irvington
employees will either be relocated to our Orlando or Riga
Facilities or that we will hire additional employees at these
facilities. Any other employee additions or terminations over the
next twelve months will be dependent upon the actual sales levels
realized during fiscal 2019. We have used and will continue
utilizing part-time help, including interns, temporary employment
agencies, and outside consultants, where appropriate, to qualify
prospective employees and to ramp up production as required from
time to time. None of our employees are represented by a labor
union.
Item 1A. Risk Factors.
The following is a discussion of the primary factors that may
affect the operations and/or financial performance of our business.
Refer to the section entitled
Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
of this Annual Report on Form 10-K
for an additional discussion of these and other related factors
that affect our operations and/or financial
performance.
Risks Related to Our Business and Financial
Results
We have a history of losses.
We achieved net income of $1.1
million for fiscal 2018 and $7.7 million for fiscal 2017; however,
we have a history of losses in previous periods. As of June 30,
2018, we had an accumulated deficit of approximately $195 million.
We may incur losses in the future if we do not achieve sufficient
revenue to maintain profitability. We expect revenue to grow
generating additional sales through promotion of our infrared
products and cost reduction efforts of our precision molded
products, but we cannot guarantee such improvement or
growth.
Factors which could adversely affect our future profitability,
include, but are not limited to, a decline in revenue either due to
lower sales unit volumes or decreasing selling prices or both, our
ability to order supplies from vendors, which, in turn, affects our
ability to manufacture our products, and slow payments from our
customers on accounts receivable.
Any failure to maintain profitability would have a materially
adverse effect on our ability to implement our business plan, our
results and operations, and our financial condition, and could
cause the value of our Class A common stock to
decline.
We are dependent on a few key customers, and the loss of any key
customer could cause a significant decline in our revenues.
In fiscal 2018,
we had
sales to three customers that comprised an aggregate of
approximately 28% of our annual revenue with one customer at 16% of
our sales, another customer at 7% of our sales, and the third
customer at 5% of our sales.
In fiscal 2017, we had sales to
three customers that comprised approximately 26% of our annual
revenue, with one customer at 10% of our sales, another customer at
9% of our sales, and the third customer at 7% of our sales. Part of
our continuing strategy has been to gain key customer relationships
of more significance and impact to generate higher revenues at
lower costs. This strategy has met with some success; however, we
believe our operating results will continue to be notably dependent
on sales to a relatively small number of significant customers.
However, we continue to diversify our business in order to minimize
our sales concentration risk. The loss of any of these customers,
or a significant reduction in sales to any such customer, would
adversely affect our revenues.
We may be affected by political and other risks as a result of our
sales to international customers and/or our sourcing of materials
from international suppliers.
In
fiscal 2018, 58% of our net revenue was derived from sales outside
of the United States, with 84% of our foreign sales derived from
customers in Europe and Asia.
In fiscal 2017, approximately
61% of our net revenues were from sales to international customers,
with 88% of foreign sales derived from customers in Europe and
Asia. Our international sales will be limited, and may even
decline, if we cannot establish relationships with new
international distributors, maintain relationships with our
existing international distributions, maintain and expand our
foreign operations, expand international sales, and develop
relationships with international service providers. Additionally,
our international sales may be adversely affected if international
economies weaken. We are subject to the following risks, among
others:
●
greater
difficulty in accounts receivable collection and longer collection
periods;
●
potentially
different pricing environments and longer sales
cycles;
●
the
impact of recessions in economies outside the United
States;
●
unexpected
changes in foreign regulatory requirements;
●
the
burdens of complying with a wide variety of foreign laws and
different legal standards;
●
certification
requirements;
●
reduced
protection for intellectual property rights in some
countries;
●
difficulties in managing the staffing of international operations,
including labor unrest and current and changing regulatory
environments;
●
potentially adverse tax consequences, including the complexities of
foreign value-added tax systems, restrictions on the repatriation
of earnings, and changes in tax rates;
●
price
controls and exchange controls;
●
government
embargoes or foreign trade restrictions;
●
imposition
of duties and tariffs and other trade barriers;
●
import
and export controls;
●
transportation
delays and interruptions;
●
terrorist
attacks and security concerns in general; and
●
political,
social, economic instability and
disruptions.
As a U.S. corporation with international operations, we are subject
to the U.S. Foreign Corrupt Practices Act and other similar foreign
anti-corruption laws, as well as other laws governing our
operations. If we fail to comply with these laws, we could be
subject to civil or criminal penalties, other remedial measures,
and legal expenses, which could adversely affect our business,
financial condition, and results of operations.
Our
operations are subject to anti-corruption laws, including the U.S.
Foreign Corrupt Practices Act (“FCPA”), and other
foreign anti-corruption laws that apply in countries where we do
business. The FCPA and these other laws generally prohibit us and
our employees and intermediaries from offering, promising,
authorizing or making payments to government officials or other
persons to obtain or retain business or gain some other business
advantage. In addition, we cannot predict the nature, scope, or
effect of future regulatory requirements to which our international
operations might be subject or the manner in which existing laws
might be administered or interpreted.
Operations outside of
the U.S. may be affected by changes in trade production laws,
policies, and measures, and other regulatory requirements affecting
trade and investment.
We are also subject to other laws and regulations governing our
international operations, including regulations administered by the
U.S. Department of Commerce’s Bureau of Industry and
Security, the U.S. Department of Treasury’s Office of Foreign
Asset Control, and various non-U.S. government entities, including
applicable export control regulations, economic sanctions on
countries and persons, customs, requirements, currency exchange
regulations, and transfer pricing regulations (collectively, the
“Trade Control Laws”).
Despite our compliance programs, there can be no assurance that we
will be completely effective in ensuring our compliance with all
applicable anti-corruption laws, including the FCPA or other legal
requirements, or Trade Control Laws. If we are not in compliance
with the FCPA and other foreign anti-corruption laws or Trade
Control Laws, we may be subject to criminal and civil penalties,
disgorgement, and other sanctions and remedial measures, and legal
expenses, which could have an adverse impact on our business,
financial condition, results of operations and liquidity. Likewise,
any investigation of any potential violations of the FCPA, other
anti-corruption laws, or Trade Control Laws by the U.S. or foreign
authorities could also have an adverse impact on our reputation,
business, financial condition, and results of
operations.
Rising threats of international tariffs, including tariffs applied
to goods traded between the United States and China, could
materially and adversely affect our business and results of
operations
.
Since the beginning of 2018, there has been increasing discussion,
in some cases coupled with legislative or executive action, from
several United States and foreign leaders regarding the possibility
of instituting tariffs against foreign imports of certain
materials. More specifically, in March and April of 2018, the
United States and China have applied tariffs to certain of each
other’s exports. The institution of trade tariffs both
globally and between the United States and China specifically
carries the risk of negatively impacting China’s overall
economic condition, which could have negative repercussions on us.
Furthermore, imposition of tariffs could cause a decrease in the
sales of our products to customers located in China or other
customers selling to Chinese end users, which would directly impact
our business.
The current United States President, members of his Administration,
and other public officials, including members of the current United
States Congress, have made public statements indicating possible
significant changes in United States trade policy and have taken
certain actions that may impact United States trade policy,
including new or increased tariffs on certain goods imported into
the United States. Further, changes in United States trade policy
could trigger retaliatory actions by affected countries, which
could impose restrictions on our ability to do business in or with
affected countries or prohibit, reduce, or discourage purchases of
our products by foreign customers, leading to increased costs of
products that contain our components, increased costs of
manufacturing our products, and higher prices of our products in
foreign markets. Changes in, and responses to, United States trade
policy could reduce the competitiveness of our products and cause
our sales and revenues to drop, which could materially and
adversely impact our business and results of
operations.
Our future growth is partially dependent on our market penetration
efforts.
Our future growth is partially dependent on our
market penetration efforts, which include diversifying our sales to
high-volume, low-cost optical applications and other new market and
product opportunities in multiple industries. While we believe our
existing products are commercially viable, we anticipate the need
to educate the optical components markets in order to generate
market demand and market feedback may require us to further refine
these products. Expansion of our product lines and sales into new
markets will require significant investment in equipment,
facilities, and materials. There can be no assurance that any
proposed products will be successfully developed, demonstrate
desirable optical performance, be capable of being produced in
commercial quantities at reasonable costs, or be successfully
marketed.
We rely, in large part, on key business and sales relationships for
the successful commercialization of our products, which if not
developed or maintained, will have an adverse impact on achieving
market awareness and acceptance and will result in a loss of
business opportunities.
To achieve wide market awareness and
acceptance of our products and technologies, as part of our
business strategy, we will attempt to enter into a variety of
business relationships with other companies that will incorporate
our technologies into their products and/or market products based
on our technologies. The successful commercialization of our
products and technologies will depend in part on our ability to
meet obligations under contracts with respect to the products and
related development requirements. The failure of these business
relationships will limit the commercialization of our products and
technologies, which will have an adverse impact on our business
development and our ability to generate
revenues.
If we do not expand our sales and marketing organization, our
revenues may not increase.
The sale of our products requires
prolonged sales and marketing efforts targeted at several key
departments within our prospective customers’ organizations
and often time involves our executives, personnel, and specialized
systems and applications engineers working together. Currently, our
direct sales and marketing organization is somewhat limited. We
believe we will need to continue to strengthen our sales force in
order to increase market awareness and sales of our products. There
is significant competition for qualified personnel, and we might
not be able to hire the kind and number of sales and marketing
personnel and applications engineers we need. If we are unable to
expand our sales operations, particularly in China, we may not be
able to increase market awareness or sales of our products, which
would adversely affect our revenues, results of operations, and
financial condition.
If we are unable to develop and successfully introduce new and
enhanced products that meet the needs of our customers, our
business may not be successful.
Our future success depends,
in part, on our ability to anticipate our customers’ needs
and develop products that address those needs. Introduction of new
products and product enhancements will require that we effectively
transfer production processes from research and development to
manufacturing, and coordinate our efforts with the efforts of our
suppliers to rapidly achieve efficient volume production. If we
fail to effectively transfer production processes, develop product
enhancements, or introduce new products that meet the needs of our
customers as scheduled, our net revenues may decline, which would
adversely affect our results of operations and financial
condition.
If we are unable to effectively compete, our business and operating
results could be negatively affected.
We face substantial
competition in the optical markets in which we operate. Many of our
competitors are large public and private companies that have longer
operating histories and significantly greater financial, technical,
marketing, and other resources than we have. As a result, these
competitors are able to devote greater resources than we can to the
development, promotion, sale, and support of their products. In
addition, the market capitalization and cash reserves of several of
our competitors are much larger than ours, and, as a result, these
competitors are much better positioned than we are to exploit
markets, develop new technologies, and acquire other companies in
order to gain new technologies or products. We also compete with
manufacturers of conventional spherical lens products and
aspherical lens products, producers of optical quality glass, and
other developers of gradient lens technology, as well as
telecommunications product manufacturers. In both the optical lens
and communications markets, we are competing against, among others,
established international companies, especially in Asia. Many of
these companies also are primary customers for optical and
communication components, and, therefore, have significant control
over certain markets for our products. There can be no assurance
that existing or new competitors will not develop technologies that
are superior to or more commercially acceptable than our existing
and planned technologies and products or that competition in our
industry will not lead to reduced prices for our products. If we
are unable to successfully compete with existing companies and new
entrants to the markets we compete in, our business, results of
operations, and financial condition could be adversely
affected.
We anticipate further reductions in the average selling prices of
some of our products over time, and, therefore, must increase our
sales volumes, reduce our costs, and/or introduce higher margin
products to reach and maintain financial stability.
We have
experienced decreases in the average selling prices of some of our
products over the last ten years, including most of our passive
component products. We anticipate that as products in the optical
component and module market become more commodity-like, the average
selling prices of our products will decrease in response to
competitive pricing pressures, new product introductions by us or
our competitors, or other factors. We attempt to offset anticipated
decreases in our average selling prices by increasing our sales
volumes and/or changing our product mix. If we are unable to offset
anticipated future decreases in our average selling prices by
increasing our sales volumes or changing our product mix, our net
revenues and gross margins will decline, increasing the projected
cash needed to fund operations. To address these pricing pressures,
we must develop and introduce new products and product enhancements
that will generate higher margins or change our product mix in
order to generate higher margins. If we cannot maintain or improve
our gross margins, our financial position, and results of
operations may be harmed.
Because of our limited product offerings, our ability to generate
additional revenues may be limited without additional
growth
.
We organized our business based on five product groups: LVPMOs,
HVPMOs, infrared products, specialty products, and NREs. In fiscal
2018, sales of infrared products represented approximately 50% of
our net revenues. In the future, we expect a larger percentage of
our revenues to be generated from sales of our infrared products,
particularly sales of ISP’s infrared products. Demand for
products in the optical market has declined materially in recent
years. Continued and expanding market acceptance of these products
is critical to our future success. There can be no assurance that
our current or new products will achieve market acceptance at the
rate at which we expect, or at all, which could adversely affect
our results of operations and financial
condition.
We may need additional capital to sustain our operations in the
future, and may need to seek further financing, which we may not be
able to obtain on acceptable terms or at all, which could affect
our ability to implement our business strategies.
We have
limited capital resources. Our operations have historically been
largely funded from the proceeds of equity financings with some
level of debt financing. In recent years we have generated
sufficient capital to fund our operations and necessary
investments. Accordingly, in future years, we anticipate only
requiring additional capital to support acquisitions that would
further expand our business and product lines. We may not be able
to obtain additional financing when we need it on terms acceptable
to us, or at all.
Our future capital needs will depend on numerous factors including:
(i) profitability; (ii) the release of competitive products by our
competition; (iii) the level of our investment in research and
development; and (iv) the amount of our capital expenditures,
including equipment and acquisitions. We cannot assure you that we
will be able to obtain capital in the future to meet our needs. If
we are unable to raise capital when needed, our business, financial
condition, and results of operations would be materially adversely
affected, and we could be forced to reduce or discontinue our
operations.
Litigation may adversely affect our business, financial condition,
and results of operations.
From time to time in the normal
course of business operations, we may become subject to litigation
that may result in liability material to our financial statements
as a whole or may negatively affect our operating results if
changes to our business operations are required. The cost to defend
such litigation may be significant and is subject to inherent
uncertainties. Insurance may not be available at all or in
sufficient amounts to cover any liabilities with respect to these
or other matters. There also may be adverse publicity with
litigation that could negatively affect customer perception of our
business, regardless of whether the allegations are valid or
whether we are ultimately found liable. An adverse result in any
such matter could adversely impact our operating results or
financial condition. Additionally, any litigation to which we are
subject could also require significant involvement of our senior
management and may divert management’s attention from our
business and operations.
We are exposed to fluctuations in currency exchange rates that
could negatively impact our financial results and cash
flows.
We execute all foreign sales from our U.S.-based
facilities and inter-company transactions in United States dollars
in order to partially mitigate the impact of foreign currency
fluctuations. However, a portion of our international revenues and
expenses are denominated in foreign currencies. Accordingly, we
experience the risks of fluctuating currencies and corresponding
exchange rates. In fiscal years 2018 and 2017,
we
recognized gains of approximately $141,000 and $78,000 on foreign
currency transactions, respectively.
Any such fluctuations
that result in a less favorable exchange rate could adversely
affect a portion of our revenues and expenses, which could
negatively impact our results of operations and financial
condition.
We also source certain raw materials from outside the United
States. Some of those materials, priced in non-dollar currencies,
fluctuate in price due to the value of the United States dollar
against non-dollar-pegged currencies, especially the Euro and
Renminbi. As the dollar strengthens, this increases our margins and
helps with our ability to reach positive cash flow and
profitability. If the strength of the United States dollar
decreases, the cost of foreign sourced materials could increase,
which would adversely affect our financial condition and results of
operations.
A significant portion of our cash is generated and held outside of
the United States. The risks of maintaining significant cash abroad
could adversely affect our cash flows and financial results.
During
fiscal 2018, approximately 50% of our cash was held abroad. We
generally consider unremitted earnings of our subsidiaries
operating outside of the United States to be indefinitely
reinvested and it is not our current intent to change this
position. Cash held outside of the United States is primarily used
for the ongoing operations of the business in the locations in
which the cash is held. Certain countries, such as China, have
monetary laws that limit our ability to utilize cash resources in
China for operations in other countries. Before any funds can be
repatriated, the retained earnings in China must equal at least
150% of the registered capital. As of June 30, 2018, we had
retained earnings in China of $1.9 million and we need to have
retained earnings of $11.3 million before repatriation will be
allowed. This limitation may affect our ability to fully utilize
our cash resources for needs in the U.S. or other countries and may
adversely affect our liquidity. Further, since repatriation of such
cash is subject to limitations and may be subject to significant
taxation, we cannot be certain that we will be able to repatriate
such cash on favorable terms or in a timely manner. If we incur
operating losses and/or require cash that is held in international
accounts for use in our operations based in the United States, a
failure to repatriate such cash in a timely and cost-effective
manner could adversely affect our business and financial
results.
Our business may be materially affected by changes to fiscal and
tax policies. Potentially negative or unexpected tax consequents of
these policies, or the uncertainty surrounding their potential
effects, could adversely affect our results of operations and the
price of our Class A common stock.
The
U.S. Tax Cuts and Jobs Act of 2017 (the “TCJA”) was
approved by the United States Congress on December 20, 2017 and
signed into law on December 22, 2017. This legislation makes
significant changes to the United States Internal Revenue Code of
1986, as amended (the “IRC”). Such changes include a
reduction in the corporate tax rate from 35% to 21% and limitations
on certain corporate deductions and credits, among other changes.
In addition, the TCJA requires complex computations to be performed
that were not previously required in U.S. tax law, significant
judgments to be made in interpretation of the provisions of the
TCJA and significant estimates in calculations, and the preparation
and analysis of information not previously relevant or regularly
produced.
While we have provided for the effect of the TCJA in our
consolidated financial statements, the final impacts of the TCJA
could be materially different from our expectations. For example,
adverse changes in the underlying profitability and financial
outlook of our operations or changes in tax law could lead to
changes in our valuation allowances against deferred tax assets on
our consolidated balance sheets, which could materially affect our
results of operations. The U.S. Treasury Department, the Internal
Revenue Service (the “IRS”), and other standard-setting
bodies could interpret or issue guidance on how provisions of the
TCJA will be applied or otherwise administered that is different
from our interpretation. The TCJA may also impact our repatriation
strategies in the future. Finally, foreign governments may enact
tax laws in response to the TCJA that could result in further
changes to global taxation and materially affect our financial
position and results of operations. The uncertainty surrounding the
effect of the reforms on our financial results and business could
also weaken confidence among investors in our financial condition.
This could, in turn, have a materially adverse effect on the price
of our Class A common stock.
Further, our worldwide operations subject us to the jurisdiction of
a number of taxing authorities. The income earned in these various
jurisdictions is taxed on differing basis, including net income
actually earned, net income deemed earned, and revenue-based tax
withholding. The final determination of our income tax liabilities
involves the interpretation of local tax laws, tax treaties, and
related authorities in each jurisdiction, as well as the use of
estimates and assumptions regarding the scope of future operations
and results achieved and the timing and nature of income earned and
expenditures incurred. Changes in or interpretations of tax law and
currency/repatriation control could impact the determination of our
income tax liabilities for a tax year, which, in turn, could have a
materially adverse effect on our financial condition and results of
operations.
Our future success depends on our key executive officers and our
ability to attract, retain, and motivate qualified
personnel.
Our future success largely depends upon the
continued services of our key executive officers, management team,
and other engineering, sales, marketing, manufacturing, and support
personnel. If one or more of our key employees are unable or
unwilling to continue in their present positions, we may not be
able to replace them readily, if at all. Additionally, we may incur
additional expenses to recruit and retain new key employees. If any
of our key employees joins a competitor or forms a competing
company, we may lose some or all of our customers. Because of these
factors, the loss of the services of any of these key employees
could adversely affect our business, financial condition, and
results of operations.
Our continuing ability to attract and retain highly qualified
personnel will also be critical to our success because we will need
to hire and retain additional personnel to support our business
strategy. We expect to continue to hire selectively in the
manufacturing, engineering, sales and marketing, and administrative
functions to the extent consistent with our business levels and to
further our business strategy. We face significant competition for
skilled personnel in our industry. This competition may make it
more difficult and expensive to attract, hire, and retain qualified
managers and employees. Because of these factors, we may not be
able to effectively manage or grow our business, which could
adversely affect our financial condition or
business.
We depend on single or limited source suppliers for some of the key
materials or process steps in our products, making us susceptible
to supply shortages, poor performance, or price
fluctuations.
We currently purchase several key materials,
or have outside vendors perform process steps, such as lens
coatings, used in or during the manufacture of our products from
single or limited source suppliers. We may fail to obtain required
materials or services in a timely manner in the future, or could
experience delays as a result of evaluating and testing the
products or services of these potential alternative suppliers. The
decline in demand in the telecommunications equipment industry may
have adversely impacted the financial condition of certain of our
suppliers, some of whom have limited financial resources. We have
in the past, and may in the future, be required to provide advance
payments in order to secure key materials from financially limited
suppliers. Financial or other difficulties faced by these suppliers
could limit the availability of key components or materials. For
example, increasing labor costs in China has increased the risk of
bankruptcy for suppliers with operations in China, and has led to
higher manufacturing costs for us and the need to identify
alternate suppliers. Additionally, financial difficulties could
impair our ability to recover advances made to these suppliers. Any
interruption or delay in the supply of any of these materials or
services, or the inability to obtain these materials or services
from alternate sources at acceptable prices and within a reasonable
amount of time, would impair our ability to meet scheduled product
deliveries to our customers and could cause customers to cancel
orders, thereby negatively affecting our business, financial
condition, and results of operation.
We face product liability risks, which could adversely affect our
business
.
The sale of our optical products involves the inherent risk of
product liability claims by others. We do not currently maintain
product liability insurance coverage. Product liability insurance
is expensive, subject to various coverage exclusions, and may not
be obtainable on terms acceptable to us if we decide to procure
such insurance in the future. Moreover, the amount and scope of any
coverage may be inadequate to protect us in the event that a
product liability claim is successfully asserted. If a claim is
asserted and successfully litigated by an adverse party, our
financial position and results of operations could be adversely
affected.
Business interruptions could adversely affect our
business
.
We manufacture our products at manufacturing facilities located in
Orlando, Florida, Irvington, New York, Riga, Latvia, and Zhenjiang,
China. Our revenues are dependent upon the continued operation of
these facilities. The Orlando Facility is subject to two leases,
one that expires in April 2022 and the other in July 2022, the
Irvington Facility is subject to a lease that expires in September
2020, the Riga Facility is subject to a lease that expires in
December 2019, and the Zhenjiang Facility is subject to two leases
that expire in March 2019 and December 2021. Our operations are
vulnerable to interruption by fire, hurricane winds and rain,
earthquakes, electric power loss, telecommunications failure, and
other events beyond our control. We do not have detailed disaster
recovery plans for our facilities and we do not have a backup
facility, other than our other facilities, or contractual
arrangements with any other manufacturers in the event of a
casualty to or destruction of any facility or if any facility
ceases to be available to us for any other reason. If we are
required to rebuild or relocate either of our manufacturing
facilities, a substantial investment in improvements and equipment
would be necessary. We carry only a limited amount of business
interruption insurance, which may not sufficiently compensate us
for losses that may occur.
Our facilities may be subject to electrical blackouts as a
consequence of a shortage of available electrical power. We
currently do not have backup generators or alternate sources of
power in the event of a blackout. If blackouts interrupt our power
supply, we would be temporarily unable to continue operations at
such facility.
Any losses or damages incurred by us as a result of blackouts,
rebuilding, relocation, or other business interruptions, could
result in a significant delay or reduction in manufacturing and
production capabilities, impair our reputation, harm our ability to
retain existing customers and to obtain new customers, and could
result in reduced sales, lost revenue, and/or loss of market share,
any of which could substantially harm our business and our results
of operations.
Our failure to accurately forecast material requirements could
cause us to incur additional costs, have excess inventories, or
have insufficient materials to manufacture our products.
Our
material requirements forecasts are based on actual or anticipated
product orders. It is very important that we accurately predict
both the demand for our products and the lead times required to
obtain the necessary materials. Lead times for materials that we
order vary significantly and depend on factors, such as specific
supplier requirements, the size of the order, contract terms, and
the market demand for the materials at any given time. If we
overestimate our material requirements, we may have excess
inventory, which would increase our costs. If we underestimate our
material requirements, we may have inadequate inventory, which
could interrupt our manufacturing and delay delivery of our
products to our customers. Any of these occurrences would
negatively impact our results of operations. Additionally, in order
to avoid excess material inventories, we may incur cancellation
charges associated with modifying existing purchase orders with our
vendors, which, depending on the magnitude of such cancellation
charges, may adversely affect our results of
operations.
If we do not achieve acceptable manufacturing yields our operating
results could suffer.
The manufacture of our products
involves complex and precise processes. Our manufacturing costs for
several products are relatively fixed, and, thus, manufacturing
yields are critical to the success of our business and our results
of operations. Changes in our manufacturing processes or those of
our suppliers could significantly reduce our manufacturing yields.
In addition, we may experience manufacturing delays and reduced
manufacturing yields upon introducing new products to our
manufacturing lines. The occurrence of unacceptable manufacturing
yields or product yields could adversely affect our financial
condition and results of operations.
If our customers do not qualify our manufacturing lines for volume
shipments, our operating results could suffer
.
Our manufacturing lines have passed our qualification standards, as
well as our technical standards. However, our customers may also
require that our manufacturing lines pass their specific
qualification standards, and that we be registered under
international quality standards, such as ISO 9001:2015
certification. This customer qualification process determines
whether our manufacturing lines meet the customers’ quality,
performance, and reliability standards. Generally, customers do not
purchase our products, other than limited numbers of evaluation
units, prior to qualification of the manufacturing line for volume
production. We may be unable to obtain customer qualification of
our manufacturing lines or we may experience delays in obtaining
customer qualification of our manufacturing lines. If there are
delays in the qualification of our products or manufacturing lines,
our customers may drop the product from a long-term supply program,
which would result in significant lost revenue opportunity over the
term of each such customer’s supply program, or our customers
may purchase from other manufacturers. The inability to obtain
customer qualification of our manufacturing lines, or the delay in
obtaining such qualification, could adversely affect our financial
condition and results of operations.
Our business could suffer as a result of the United Kingdom’s
decision to end its membership in the European Union
. The
decision of the United Kingdom to exit from the European Union
(generally referred to as “BREXIT”) could cause
disruptions to and create uncertainty surrounding our business,
including affecting our relationships with existing and potential
customers, suppliers, and employees. The effects of BREXIT will
depend on any agreements the United Kingdom makes to retain access
to European Union markets either during a transitional period or
more permanently. The measures could potentially disrupt some of
our target markets and jurisdictions in which we operate, and
adversely change tax benefits or liabilities in these or other
jurisdictions. In addition, BREXIT could lead to legal uncertainty
and potentially divergent national laws and regulations as the
United Kingdom determines which European Union laws to replace or
replicate. BREXIT also may create global economic uncertainty,
which may cause our customers and potential customers to monitor
their costs and reduce their budgets for either our products or
other products that incorporate our products. Any of these effects
of BREXIT, among others, could materially adversely affect our
business, business opportunities, results of operations, financial
condition, and cash flows.
Risks Related To Our Intellectual Property
If we are unable to protect and enforce our intellectual property
rights, we may be unable to compete effectively.
We believe
that our intellectual property rights are important to our success
and our competitive position, and we rely on a combination of
patent, copyright, trademark, and trade secret laws and
restrictions on disclosure to protect our intellectual property
rights. Although we have devoted substantial resources to the
establishment and protection of our intellectual property rights,
the actions taken by us may be inadequate to prevent imitation or
improper use of our products by others or to prevent others from
claiming violations of their intellectual property rights by
us.
In addition, we cannot assure that, in the future, our patent
applications will be approved, that any patents that may be issued
will protect our intellectual property, or that third parties will
not challenge any issued patents. Other parties may independently
develop similar or competing technology or design around any
patents that may be issued to us. We also rely on confidentiality
procedures and contractual provisions with our employees,
consultants, and corporate partners to protect our proprietary
rights, but we cannot assure the compliance by such parties with
their confidentiality obligations, which could be very time
consuming and expensive to enforce.
It may be necessary to litigate to enforce our patents, copyrights,
and other intellectual property rights, to protect our trade
secrets, to determine the validity of and scope of the proprietary
rights of others, or to defend against claims of infringement or
invalidity. Such litigation can be time consuming, distracting to
management, expensive, and difficult to predict. Our failure to
protect or enforce our intellectual property could have an adverse
effect on our business, financial condition, prospects, and results
of operation.
We do not have patent protection for our formulas and processes,
and a loss of ownership of any of our formulas and processes would
negatively impact our business.
We believe that we own our
formulas and processes. However, we have not sought, and do not
intend to seek, patent protection for all of our formulas and
processes. Instead, we rely on the complexity of our formulas and
processes, trade secrecy laws, and employee confidentiality
agreements. However, we cannot assure you that other companies will
not acquire our confidential information or trade secrets or will
not independently develop equivalent or superior products or
technology and obtain patent or similar rights. Although we believe
that our formulas and processes have been independently developed
and do not infringe the patents or rights of others, a variety of
components of our processes could infringe existing or future
patents, in which event we may be required to modify our processes
or obtain a license. We cannot assure you that we will be able to
do so in a timely manner or upon acceptable terms and conditions
and the failure to do either of the foregoing would negatively
affect our business, results of operations, financial condition,
and cash flows.
We may become involved in intellectual property disputes and
litigation, which could adversely affect our
business
.
We anticipate, based on the size and sophistication of our
competitors and the history of rapid technological advances in our
industry that several competitors may have patent applications in
progress in the United States or in foreign countries that, if
issued, could relate to products similar to ours. If such patents
were to be issued, the patent holders or licensees may assert
infringement claims against us or claim that we have violated other
intellectual property rights. These claims and any resulting
lawsuits, if successful, could subject us to significant liability
for damages and invalidate our proprietary rights. The lawsuits,
regardless of their merits, could be time-consuming and expensive
to resolve and would divert management time and attention. Any
potential intellectual property litigation could also force us to
do one or more of the following, any of which could harm our
business and adversely affect our financial condition and results
of operations:
●
stop
selling, incorporating or using our products that use the disputed
intellectual property;
●
obtain from third parties a license to sell or use the disputed
technology, which license may not be available on reasonable terms,
or at all; or
●
redesign
our products that use the disputed intellectual
property.
Item 2. Properties.
Our properties consist primarily of leased office and manufacturing
facilities. Our corporate headquarters are located in Orlando,
Florida and our manufacturing facilities are primarily located in
Zhenjiang, China and Riga, Latvia. The following schedule presents
the approximate square footage of our facilities as of June 30,
2018:
Location
|
Square Feet
|
Commitment and Use
|
Orlando, Florida
|
38,000
|
Leased; 3 suites used for corporate headquarters offices,
manufacturing, and research and development
|
Irvington, New York
|
13,000
|
Leased; 1 floor of 1 building used for administrative offices and
manufacturing
|
Zhenjiang, China
|
39,000
|
Leased; 1 building used for manufacturing
|
Shanghai, China
|
1,900
|
Leased; 1 suite used for sales, marketing and administrative
offices
|
Riga, Latvia
|
23,000
|
Leased; 2 suites used for administrative offices, manufacturing and
crystal growing
|
Our
territorial sales personnel maintain an office from their homes to
serve their geographical
territories.
For
additional information regarding our facilities, please see
Item 1. Business
in
this Annual Report on Form 10-K.
For additional information
regarding leases, see Note
13
, Lease
Commitments, to the Notes to the Consolidated Financial Statements
to this Annual Report on Form 10-K.
Item 3. Legal Proceedings.
From time to time, we are involved in various legal actions arising
in the normal course of business. We currently have no legal
proceeding to which we are a party to or to which our property is
subject to and, to the best of our knowledge, no adverse legal
activity is anticipated or threatened.
Notes to Consolidated Financial Statements
1.
Organization and History
LightPath Technologies, Inc. (“LightPath”, the
“Company”, “we”, “us” or
“our”) was incorporated in Delaware in 1992. It was the
successor to LightPath Technologies Limited Partnership formed in
1989, and its predecessor, Integrated Solar Technologies
Corporation formed in 1985. On April 14, 2000, the Company acquired
Horizon Photonics, Inc. (“Horizon”). On September 20,
2000, the Company acquired Geltech, Inc. (“Geltech”).
The Company completed its initial public offering during fiscal
1996. In November 2005, we formed LightPath Optical Instrumentation
(Shanghai) Co., Ltd (“LPOI”), a wholly-owned subsidiary
located in Jiading, People’s Republic of China. In December
2013, we formed LightPath Optical Instrumentation (Zhenjiang) Co.,
Ltd (“LPOIZ”), a wholly-owned subsidiary located in
Zhenjiang, Jiangsu Province, People’s Republic of China. In
December 2016, we acquired ISP Optics Corporation, a New York
corporation (“ISP”), and its wholly-owned subsidiary,
ISP Optics Latvia, SIA, a limited liability company founded in 1998
under the Laws of the Republic of Latvia (“ISP
Latvia”). See Note
3,
Acquisition of
ISP Optics Corporation, to these Consolidated Financial Statements
for additional information.
LightPath is a manufacturer of optical components and higher level
assemblies, including precision molded glass aspheric optics,
molded and diamond-turned infrared aspheric lenses, and other
optical materials used to produce products that manipulate light.
LightPath designs, develops, manufactures, and distributes optical
components and assemblies utilizing advanced optical manufacturing
processes. LightPath products are incorporated into a variety of
applications by customers in many industries, including defense
products, medical devices, laser aided industrial tools, automotive
safety applications, barcode scanners, optical data storage, hybrid
fiber coax datacom, telecommunications, machine vision and sensors,
among others.
As used herein, the terms “LightPath,” the
“Company,” “we,” “us” or
“our,” refer to LightPath individually or, as the
context requires, collectively with its subsidiaries on a
consolidated basis.
2.
Summary of Significant Accounting Policies
Consolidated Financial Statements
include
the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Reclassifications.
The
classification of certain prior-year amounts have been adjusted in
our Consolidated Financial Statements to conform to current-year
classifications. Reclassifications include the line item
“Interest expense – debt costs” which is now
combined with the “Interest expense, net” line item in
our Consolidated Statements of Comprehensive
Income.
Management estimates.
Management
makes estimates and assumptions during the preparation of the
Company’s Consolidated Financial Statements that affect
amounts reported in the Consolidated Financial Statements and
accompanying notes. Such estimates and assumptions could change in
the future as more information becomes available, which, in turn,
could impact the amounts reported and disclosed
herein.
Cash and cash equivalents
consist
of cash in the bank and cash equivalents with maturities of 90 days
or less when purchased. The Company maintains its cash accounts in
various institutions with high credit ratings. The Company’s
domestic cash accounts are maintained in one financial institution,
and balances may exceed federal insured limits at times. The
Company’s foreign cash accounts are not
insured.
Restricted cash
consists of amounts held in restricted accounts as collateral
associated with our debt covenants. See Note 18, Loans Payable, to
these Consolidated Financial Statements for additional information.
Our restricted cash is invested in a money market account. During
fiscal year 2018, the Company adopted ASU 2016-18, “Statement
of Cash Flows (Topic 320): Restricted Cash” (“ASU
2016-18”), which provides guidance on the presentation of
restricted cash and restricted cash equivalents in the statement of
cash flows. Cash and cash equivalents and restricted cash presented
in the Consolidated Balance Sheet as of June 30, 2018 are combined
in the Consolidated Statement of Cash Flows for the year ended June
30, 2018.
Allowance for accounts receivable
is
calculated by taking 100% of the total of invoices that are over 90
days past due from the due date and 10% of the total of invoices
that are over 60 days past due from the due date for U.S.- and
Latvia-based accounts and 100% of invoices that are over 120 days
past due for Chinese-based accounts. Accounts receivable are
customer obligations due under normal trade terms. The Company
performs continuing credit evaluations of its customers’
financial condition. If the Company’s actual collection
experience changes, revisions to its allowance may be required.
After all attempts to collect a receivable have failed, the
receivable is written off against the
allowance.
Inventories,
which
consist principally of raw materials, tooling, work-in-process and
finished lenses, collimators and assemblies are stated at the lower
of cost or net realizable value, on a first-in, first-out basis.
Inventory costs include materials, labor and manufacturing
overhead. Acquisition of goods from our vendors has a purchase
burden added to cover customs, shipping and handling costs. Fixed
costs related to excess manufacturing capacity have been expensed.
The Company looks at the following criteria for parts to consider
for the inventory allowance: (i) items that have not been sold in
two years, (ii) items that have not been purchased in two years, or
(iii) items of which we have more than a two-year
supply. These items, as identified, are allowed for at
100%, as well as allowing 50% for other items deemed to be slow
moving within the last twelve months and allowing 25% for items
deemed to have low material usage within the last six months. The
parts identified are adjusted for recent order and quote activity
to determine the final inventory
allowance.
Property and equipment
are
stated at cost and depreciated using the straight-line method over
the estimated useful lives of the related assets ranging from one
to ten years. Leasehold improvements are amortized over the shorter
of the lease term or the estimated useful lives of the related
assets using the straight-line method. Construction in process
represents the accumulated costs of assets not yet placed in
service and primarily relates to manufacturing
equipment.
Long-lived assets
, such
as property, plant, and equipment and purchased intangibles subject
to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an
asset to its estimated undiscounted future cash flows expected to
be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of would
be separately presented in the Consolidated Balance Sheet and
reported at the lower of the carrying amount or fair value less
costs to sell, and would no longer be depreciated. The assets and
liabilities of a disposed group classified as held for sale would
be presented separately in the appropriate asset and liability
sections of the Consolidated Balance
Sheet.
Goodwill
and Intangible Assets
acquired in a business combination are
recognized at fair value using generally accepted valuation methods
appropriate for the type of intangible asset and reported
separately from goodwill. Purchased intangible assets other than
goodwill are amortized over their useful lives unless these lives
are determined to be indefinite. Purchased intangible assets are
carried at cost, less accumulated amortization. Amortization is
computed over the estimated useful lives of the respective assets,
generally two to fifteen years. The Company periodically reassesses
the useful lives of its intangible assets when events or
circumstances indicate that useful lives have significantly changed
from the previous estimate. Definite-lived intangible assets
consist primarily of customer relationships, know-how/trade secrets
and trademarks. They are generally valued as the present
value of estimated cash flows expected to be generated from the
asset using a risk-adjusted discount rate. When determining
the fair value of our intangible assets, estimates and assumptions
about future expected revenue and remaining useful lives are used.
Goodwill and intangible assets are tested for impairment on an
annual basis and during the period between annual tests if events
or changes in circumstances indicate that the carrying value of
goodwill may not be recoverable.
The Company will assess the qualitative factors to determine
whether it is more likely than not that the fair value of its
reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the goodwill
impairment analysis. If the Company determines that it is more
likely than not that its fair value is less than its carrying
amount, then the goodwill impairment test is performed. The first
step, identifying a potential impairment, compares the fair value
of the reporting unit with its carrying amount. If the carrying
amount exceeds its fair value, the second step would need to be
performed; otherwise, no further steps are required. The second
step, measuring the impairment loss, compares the implied fair
value of the goodwill with the carrying amount of the goodwill. Any
excess of the goodwill carrying amount over the implied fair value
is recognized as an impairment loss, and the carrying value of
goodwill is written down to fair value. During fiscal year 2018,
the Company adopted ASU 2017-4, “Intangibles – Goodwill
and Other (Topic 350): Simplifying the Test for Goodwill
Impairment” (“ASU 2017-4”), which amends the
goodwill impairment test to compare the fair value of a reporting
unit with its carrying amount and recognize an impairment charge
for the amount by which the carrying amount exceeds the reporting
unit’s fair value, up to the total amount of goodwill
allocated to that reporting unit. The Company did not record any
goodwill impairment during the fiscal years ended June 30, 2018 or
2017.
Deferred rent
relates
to certain of the Company’s operating leases containing
predetermined fixed increases of the base rental rate during the
lease term being recognized as rental expense on a straight-line
basis over the lease term, as well as applicable leasehold
improvement incentives provided by the landlord. The Company has
recorded the difference between the amounts charged to operations
and amounts payable under the leases as deferred rent in the
accompanying Consolidated Balance
Sheets.
Income taxes
are
accounted for under the asset and liability method. Deferred income
tax assets and liabilities are computed on the basis of differences
between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in
the future based upon enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation allowances have been established to reduce
deferred tax assets to the amount expected to be
realized.
The Company has not recognized a liability for uncertain tax
positions. A reconciliation of the beginning and ending amount of
unrecognized tax benefits or penalties has not been provided since
there has been no unrecognized benefit or penalty. If there were an
unrecognized tax benefit or penalty, the Company would recognize
interest accrued related to unrecognized tax benefits in interest
expense and penalties in operating expenses.
The Company files U.S. Federal income tax returns, as well as tax
returns in various states and foreign jurisdictions. Open tax years
subject to examination by the Internal Revenue Service generally
remain open for three years from the filing date. Tax years subject
to examination by the state jurisdictions generally remain open for
up to four years from the filing date. In Latvia, tax years subject
to examination remain open for up to five years from the filing
date, and in China, tax years subject to examination remain open
for up to ten years from the filing date.
Our
cash, cash equivalents and restricted cash totaled $6.5 million at
June 30, 2018. Of this amount, approximately 50% was held by
our foreign subsidiaries in China and Latvia. These foreign funds
were generated in China and Latvia as a result of foreign earnings.
With respect to the funds generated by our foreign subsidiaries in
China,
the
retained earnings in China must equal at least 150% of the
registered capital before any funds can be repatriated. As of June
30, 2018, we have retained earnings in China of approximately $1.9
million and we need to have $11.3 million before repatriation will
be allowed.
Accumulated
earnings from the Company’s non-U.S. subsidiaries were
subject to inclusion in the Company’s current period U.S. and
state income tax returns as a result of the impact of the U.S. tax
law changes. However, no income tax was due on the inclusion of
these earnings due to utilization of net operating losses. See Note
9, Income Taxes,
to these Consolidated Financial Statements
for additional information.
The Company intends to permanently invest earnings generated from
its foreign Chinese operations, and, therefore, has not previously
provided for future Chinese withholding taxes on such related
earnings. However, if, in the future, the Company changes such
intention, the Company would provide for and pay additional foreign
taxes, if any, at that time.
Revenue
is
recognized from product sales when products are shipped to the
customer, provided that the Company has received a valid purchase
order, the price is fixed, title has transferred, collection of the
associated receivable is reasonably assured, and there are no
remaining significant obligations. Product development agreements
are generally short term in nature with revenue recognized upon
shipment to the customer for products, reports or designs. Invoiced
amounts for sales for value-added taxes (“VAT”) are
posted to the balance sheet and are not included in
revenue.
VAT
is
computed on the gross sales price on all sales of the
Company’s products sold in the People’s Republic of
China and Latvia. The VAT rates range up to 21%, depending on the
type of products sold. The VAT may be offset by VAT paid by the
Company on raw materials and other materials included in the cost
of producing or acquiring its finished products. The Company
recorded a VAT receivable net of payables in the accompanying
Consolidated Financial Statements.
New product development
costs
are expensed as incurred.
Stock-based compensation
is
measured at grant date, based on the fair value of the award, and
is recognized as an expense over the employee’s requisite
service period. We estimate the fair value of each restricted
stock unit or stock option as of the date of grant using the
Black-Scholes-Merton pricing model.
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.
Fair value of financial instruments.
The
Company accounts for financial instruments in accordance with the
Financial Accounting Standards Board’s Accounting Standards
Codification Topic 820, “Fair Value Measurements and
Disclosures” (“ASC 820”), which provides a
framework for measuring fair value and expands required disclosure
about fair value measurements of assets and liabilities. ASC
820 defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. ASC 820 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value. The standard describes three levels of inputs that may be
used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or
liabilities.
Level 2 - Inputs other than quoted prices included within Level 1
that are either directly or indirectly
observable.
Level 3 - Unobservable inputs that are supported by little or no
market activity, therefore requiring an entity to develop its own
assumptions about the assumptions that market participants would
use in pricing.
Fair value estimates discussed herein are based upon certain market
assumptions and pertinent information available to
management.
The
respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These
financial instruments include receivables, accounts payable and
accrued liabilities. Fair values were assumed to
approximate carrying values for these financial instruments since
they are short term in nature and their carrying amounts
approximate fair values or they are receivable or payable on
demand.
The fair value of the Company’s capital lease
obligations and 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 June 30, 2018.
See Note
18
, Loans Payable,
to these Consolidated Financial Statements for additional
information.
The Company valued its warrant liabilities based on open-form
option pricing models which, based on the relevant inputs, render
the fair value measurement at Level 3. The Company based its
estimates of fair value for warrant liabilities on the amount it
would pay a third-party market participant to transfer the
liability and incorporates inputs such as equity prices, historical
and implied volatilities, dividend rates and prices of convertible
securities issued by comparable companies maximizing the use of
observable inputs when available. See Note
17
, Derivative
Financial Instruments (Warrant Liability), to these Consolidated
Financial Statements for additional
information.
The Company does not have any other financial or non-financial
assets or liabilities that would be characterized as Level 1, Level
2 or Level 3 instruments.
Debt
issuance costs
are recorded as a reduction to the carrying
value of the related notes payable, by the same amount, and are
amortized ratably over the term of the related
note.
Derivative financial instruments.
The
Company accounts for derivative instruments in accordance with
Financial Accounting Standards Board’s Accounting Standards
Codification Topic 815, “Derivatives and Hedging”
(“ASC 815”), which requires additional disclosures
about the Company’s objectives and strategies for using
derivative instruments, how the derivative instruments and related
hedged items are accounted for, and how the derivative instruments
and related hedging items affect the financial
statements.
The Company does not use derivative instruments to hedge exposures
to cash flow, market or foreign currency risk. Terms of
convertible debt instruments are reviewed to determine whether or
not they contain embedded derivative instruments that are required
under ASC 815 to be accounted for separately from the host
contract, and recorded on the balance sheet at fair value.
The fair value of derivative liabilities, if any, is required to be
revalued at each reporting date, with corresponding changes in fair
value recorded in current period operating results. The Company
issued warrants in connection with our June 2012 private placement
(the “June 2012 Warrants”). The fair value of the June
2012 Warrants was estimated using the Lattice option-pricing
model.
Freestanding warrants issued by the Company in connection with the
issuance or sale of debt and equity instruments are considered to
be derivative instruments. Pursuant to ASC 815, an evaluation
of specifically identified conditions is made to determine whether
the fair value of warrants issued is required to be classified as
equity or as a derivative liability.
Comprehensive income
is
defined as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all
changes in equity during a period, except those resulting from
investments by owners and distributions to
owners. Comprehensive income has two components, net
income, and other comprehensive income, and is included on the
Consolidated Statements of Comprehensive Income. Our other
comprehensive income consists of foreign currency translation
adjustments made for financial reporting
purposes.
Business segments.
As the
Company only operates in principally one business segment, no
additional reporting is required.
Recent accounting pronouncements.
There
are new accounting pronouncements issued by the Financial
Accounting Standards Board (“FASB”) that are not yet
effective for the Company for the year ended June 30,
2018.
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. The Company will adopt this standard in the first
quarter of its fiscal year ended June 30, 2019, using the modified
retrospective method. We have substantially completed our analysis,
and the adoption of this guidance will not have a material impact
on our Consolidated Financial Statements and our internal controls
over financial reporting.
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,
the Company expects its Consolidated Balance Sheet to include a
right-of-use asset and liability related to substantially all of
its operating lease arrangements. ASU 2016-02 will be effective for
the Company in the first quarter of its 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 requires 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 the Company in the first
quarter of its fiscal year ending June 30, 2019. The Company does
not expect this accounting standard to have a significant impact on
its financial results when adopted.
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 the Company in the first quarter of
its fiscal year ending June 30, 2019. The Company does not expect
this accounting standard to have a significant impact on its
financial results when adopted.
Comprehensive Income
- In February 2018, the FASB issued ASU
2018-02, “Income Statement - Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income” (“ASU
2018-02”). ASU 2018-02 allows entities to elect to reclassify
the income tax effects of the Tax Act on items within accumulated
other comprehensive income to retained earnings and requires
additional related disclosures. ASU 2018-02 is effective for the
Company in the first quarter of its fiscal year ending June 30,
2020. The Company is currently evaluating the impact that ASU
2018-02 will have on its Consolidated Financial
Statements.
No other new accounting pronouncement recently issued or newly
effective had or is expected to have a material impact on the
Consolidated Financial Statements.
3.
Acquisition of ISP Optics Corporation
On December 21, 2016 (the “Acquisition Date”), the
Company acquired 100% of the issued and outstanding shares of
common stock (the “Acquisition”) of ISP pursuant to the
Stock Purchase Agreement, dated as of August 3, 2016 (the
“Purchase Agreement”). The Company’s 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.
For the purposes of financing the Acquisition, simultaneous with
the closing, the Company sold 8,000,000 shares of its Class A
common stock, raising net proceeds of approximately $8.7 million.
See Note
20
, Public Offering
of Class A Common Stock, to these Consolidated Financial Statements
for additional information. The Company also closed a $5 million
Term Loan with Avidbank. See Note
18
, Loans Payable,
to these Consolidated Financial Statements for additional
information.
In
lieu of cash paid, the Company financed a portion of the
Acquisition through the issuance of the Sellers Note in the
aggregate prin
cipal amount of $6
million to Joseph Menaker and Mark Lifshotz (the
“Sellers”). For additional information, see Note 18,
Loans Payable, to these Consolidated Financial
Statements.
The Acquisition
Date fair value of the consideration transferred totaled
approximately $19.1 million, which consisted of the
following:
Cash Purchase Price
|
$
12,000,000
|
Cash acquired
|
1,243,216
|
Tax payable assumed debt
|
(200,477
)
|
Fair value of Sellers Note
|
6,327,208
|
Working capital adjustment
|
(315,003
)
|
Total purchase
price
|
19,054,944
|
Sellers Note issued at fair value
|
(6,327,208
)
|
Preliminary working capital adjustment
|
(760,822
)
|
Adjustment to beginning cash
|
(163,878
)
|
Adjustment to beginning assumed debt
|
(25,700
)
|
Cash paid at Acquisition Date
|
$
11,777,336
|
Subsequently in
March 2017, a portion of the working capital adjustment, in the
amount of $292,816, was applied to the Sellers Note as a payment,
thereby decreasing the outstanding principal amount due under the
Sellers Note, as reflected in these Consolidated Financial
Statements.
The following
table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the Acquisition
Date:
Cash
|
$
1,243,216
|
Accounts receivable
|
1,108,980
|
Inventory
|
1,134,628
|
Other current assets
|
153,450
|
Property and equipment
|
4,666,634
|
Security deposit and other assets
|
45,359
|
Identifiable intangibles
|
11,069,000
|
Total identifiable assets
acquired
|
$
19,421,267
|
|
|
Accounts payable
|
$
(554,050
)
|
Accrued expenses and other payables
|
(133,974
)
|
Other payables
|
(146,324
)
|
Deferred tax liability
|
(5,386,880
)
|
Total liabilities assumed
|
$
(6,221,228
)
|
Net identifiable assets
acquired
|
13,200,039
|
Goodwill
|
5,854,905
|
Net assets acquired
|
$
19,054,944
|
As part of the
valuation analysis, the Company 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. The estimated fair values of
assets acquired reflects a $2,744,262 adjustment to increase the
basis of the acquired property, plant and equipment to reflect fair
value of the assets at the Acquisition Date. The estimated useful
lives range from 3 years to 10 years. Depreciation and amortization
of intangible assets and property, plant and equipment is
calculated on a straight-line basis. The estimated fair values of
assets acquired and liabilities assumed 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.
The Company
recognized approximately $650,000 of Acquisition related costs that
were expensed during the year ended June 30, 2017. These costs are
included in the Consolidated Statements of Comprehensive Income in
the line item entitled “Selling, general and
administrative.” The Company also recognized approximately
$930,000 in expenses associated with the public offering of shares
of Class A common stock, the net proceeds of which were used to
provide funds to pay for a portion of the purchase price of the
Acquisition. These expenses were deducted from the gross proceeds
received as a result of the public offering of Class A common
stock, as reflected in stockholders’ equity. For additional
information on this public offering, see Note 20, Public Offering
of Class A Common Stock, to these Consolidated Financial
Statements.
The amounts of
revenue and net income of ISP included in the Company’s
Consolidated Statements of Comprehensive Income from the
Acquisition Date to the period ending June 30, 2017 are as
follows:
Revenue
|
$
8,009,349
|
Net income
|
$
981,125
|
Our Consolidated
Financial Statements include the financial results of ISP’s
operations for the year ended June 30, 2018. The following
represents unaudited pro forma consolidated information as if ISP
had been included in the consolidated results of the Company for
the year ended June 30, 2017:
|
|
Revenue – pro forma
|
$
34,498,656
|
Net income – pro forma
|
$
2,647,533
|
These amounts have
been calculated after applying the Company’s 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, 2015, together with the consequential
tax effects. For the year ended June 30, 2017, pro forma net income
reflects adjustments of approximately $600,000 for amortization of
intangibles and approximately $250,000 in additional interest, and
excludes approximately $5.4 million for deferred tax benefits,
approximately $650,000 in Acquisition expenses and approximately
$600,000 of non-recurring fees incurred by ISP.
Prior to the Acquisition, the Company had a preexisting
relationship with ISP. The Company ordered anti-reflective coating
services from ISP on an arms’ length basis. The Company 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, the Company had amounts payable
to ISP of $8,000 for services provided prior to the Acquisition and
ISP had payables of $24,500 due to the
Company.
The
components of inventories include the fol
lowing:
|
|
|
|
|
|
Raw
materials
|
$
2,309,454
|
$
2,282,880
|
Work in
process
|
2,506,891
|
1,654,653
|
Finished
goods
|
2,263,121
|
1,904,497
|
Allowance for
obsolescence
|
(674,725
)
|
(767,454
)
|
|
$
6,404,741
|
$
5,074,576
|
During fiscal 2018
and 2017, the Company evaluated all allowed items and disposed of
approximately $188,000 and $90,000, respectively, of inventory
parts and wrote them off against the allowance for
obsolescence.
The value of tooling in raw materials was approximately $1.6
million at both June 30, 2018 and 2017.
5.
Property and Equipment, net
Property and
equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
equipment
|
5
- 10
|
$
16,534,124
|
$
13,804,964
|
Computer equipment
and software
|
3
- 5
|
513,681
|
375,775
|
Furniture and
fixtures
|
5
|
199,872
|
112,307
|
Leasehold
improvements
|
5 -
7
|
1,350,482
|
1,228,797
|
Construction in
progress
|
|
954,317
|
709,571
|
Total
property and equipment
|
|
19,552,476
|
16,231,414
|
|
|
|
|
Less accumulated
depreciation and amortization
|
|
7,743,235
|
5,906,856
|
Total
property and equipment, net
|
|
$
11,809,241
|
$
10,324,558
|
During fiscal
2015, we extended the term of our Orlando lease and received a
tenant improvement allowance from the landlord of $420,014. This
allowance was used to construct improvements and was recorded as
leasehold improvements and deferred rent liability. It is being
amortized over the corresponding lease term.
6. Goodwill and Intangible Assets
The change in the
net carrying amount of goodwill for fiscal years 2018 and 2017 was
as follows:
Goodwill at June 30, 2016
|
$
-
|
Additions
|
5,854,905
|
Goodwill at June 30, 2017
|
5,854,905
|
Additions
|
-
|
Goodwill at June 30, 2018
|
$
5,854,905
|
The increase in
goodwill during the first half of fiscal 2017 was due to the
Acquisition of ISP. There were no changes to the carrying amount of
goodwill during the year ended June 30, 2018.
Identifiable
intangible assets as a result of the Acquisition of ISP were
comprised of:
|
|
|
|
|
|
|
|
Customer relationships
|
15
|
$
3,590,000
|
$
3,590,000
|
Backlog
|
2
|
366,000
|
366,000
|
Trade secrets
|
8
|
3,272,000
|
3,272,000
|
Trademarks
|
8
|
3,814,000
|
3,814,000
|
Non-compete agreement
|
3
|
27,000
|
27,000
|
Total intangible assets
|
|
11,069,000
|
11,069,000
|
Less accumulated amortization
|
(2,011,030
)
|
(693,947
)
|
Total intangible assets, net
|
$
9,057,970
|
$
10,375,053
|
Future
amortization of identifiable intangibles is as
follows:
Fiscal year ending:
|
|
June 30, 2019
|
$
1,220,664
|
June 30, 2020
|
1,129,342
|
June 30, 2021
|
1,125,083
|
June 30, 2022
|
1,125,083
|
|
4,457,798
|
|
$
9,057,970
|
7. Accounts Payable
The accounts
payable balance includes $82,000 and $73,000 of earned but unpaid
board of directors’ fees, as of June 30, 2018 and 2017,
respectively.
8. Stockholders’ Equity
The Company’s authorized capital stock consists of 55,000,000
shares, divided into 50,000,000 shares of common stock, par value
$0.01 per share, and 5,000,000 shares of preferred stock, par value
$0.01 per share.
Of the 5,000,000 shares of preferred stock authorized, the board of
directors has previously designated:
●
250 shares of preferred stock as Series A Preferred Stock, all
previously outstanding shares of which have been previously
redeemed or converted into shares of our Class A common stock and
may not be reissued;
●
300 shares of our preferred stock as Series B Preferred Stock, all
previously outstanding shares of which have been previously
redeemed or converted into shares of our Class A common stock and
may not be reissued;
●
500 shares of our preferred stock as Series C Preferred Stock, all
previously outstanding shares of which have been previously
redeemed or converted into shares of our Class A common stock and
may not be reissued;
●
500,000 shares of
our preferred stock as Series D Preferred Stock, none of which have
been issued; however, in 1998, our board of directors declared a
dividend distribution as a right to purchase one share of Series D
Preferred Stock for each outstanding share of Class A common stock
upon occurrence of certain events. The rights will be exercisable
only if a person or group acquires twenty percent (20%) or more of
our Class A common stock or announces a tender offer, the
consummation of which would result in ownership by a person or
group of twenty percent (20%) or more of our Class A common stock.
As of the date of the filing of this Annual Report on Form 10-K, no
such triggering event has occurred. If, in the future, any Series D
Preferred Stock are issued, the stockholders of Series D Preferred
Stock are entitled to one vote for each share held;
and
●
500 shares of our preferred stock as Series F Preferred Stock, all
previously outstanding shares of which have been previously
redeemed or converted into shares of our Class A common stock and
may not be reissued.
Of the 50,000,000 shares of common stock authorized, the board of
directors has previously designated 44,500,000 shares authorized as
Class A common. The stockholders of Class A common stock are
entitled to one vote for each share held. The remaining 5,500,000
shares of authorized common stock were designated Class E-1 common
stock, Class E-2 common stock, or Class E-3 common stock, all
previously outstanding shares of which have been previously
redeemed or converted into shares of Class A common
stock.
At June 30, 2017, the Company had outstanding warrants to purchase
up to 501,474 shares of Class A common stock at $1.22 per share, as
adjusted, at any time through December 11, 2017. The warrants were
issued in connection with a private placement in fiscal 2012.
During
fiscal 2018 and 2017, the Company received approximately $534,000
and $706,000, respectively, in net proceeds from the exercise of
the June 2012 warrants. The Company issued 433,810 and 578,897
shares of Class A common stock during fiscal 2018 and 2017,
respectively, in connection with these exercises.
The June
2012 Warrants expired on December 11, 2017. There were no
oustanding warrants as of June 30, 2018.
For
financial reporting purposes, income before income taxes includes
the following compon
ents:
|
|
|
|
|
Pretax income:
|
|
|
United States
|
$
359,027
|
$
(485,966
)
|
Foreign
|
(126,000
)
|
3,847,752
|
Income before income taxes
|
$
233,027
|
$
3,361,786
|
The components of
the provision for income taxes are as follows:
|
|
|
|
|
Current:
|
|
|
Federal tax
|
$
57,315
|
$
98,787
|
State
|
-
|
-
|
Foreign
|
(117,852
)
|
1,053,617
|
Total current
|
(60,537
)
|
1,152,404
|
|
|
|
Deferred:
|
|
|
Federal tax
|
(510,125
)
|
(5,384,171
)
|
State
|
(72,875
)
|
(121,000
)
|
Foreign
|
(183,540
)
|
11,467
|
Total deferred
|
(766,540
)
|
(5,493,704
)
|
|
|
|
Total income tax (benefit)
|
$
(827,077
)
|
$
(4,341,300
)
|
The reconciliation
of income tax computed at the U.S federal statutory rates to income
tax expense is as follows:
|
|
|
|
|
|
|
|
U.S. federal statutory tax rate
|
27.5
%
|
34.0
%
|
|
|
|
Income tax provision reconciliation:
|
|
|
Tax at statutory rate:
|
$
64,082
|
$
1,143,010
|
Net foreign income subject to lower tax rate
|
25,927
|
(464,335
)
|
State income taxes, net of federal benefit
|
(107,997
)
|
2,418,932
|
Valuation allowance
|
(11,763,000
)
|
(8,085,000
)
|
Changes in statutory income tax rates
|
9,114,886
|
-
|
IRC 965 repatriation
|
1,809,603
|
-
|
Federal research and development and other
credits
|
(163,165
)
|
(118,128
)
|
Stock-based compensation
|
43,818
|
100,469
|
Change in fair value of derivative warrants
|
53,524
|
158,965
|
Acquisiton costs
|
-
|
75,332
|
Other permanent differences
|
30,758
|
(43,295
)
|
Other, net
|
64,487
|
472,750
|
|
$
(827,077
)
|
$
(4,341,300
)
|
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 (“foreign E&P”) that had not
been previously repatriated.
As of June 30,
2018, we have not fully completed our accounting for the income tax
impact of enactment of the 2017 Act. In accordance with SEC Staff
Accounting Bulletin No.118, we have recognized provisional amounts
for income tax effects of the 2017 Act that we were able to
reasonably estimate. We intend to adjust the tax effects for the
relevant items during the allowed measurement period. We are still
evaluating certain aspects of the Tax Act and refining our
calculations, which could potentially affect our tax
balances.
We were also able
to reasonably estimate the tax treatment of our foreign E&P as
per the 2017 Act. The 2017 Act provides for a one-time transition
tax on our post-1986 foreign E&P that have not been previously
repatriated. We have provisionally determined our foreign E&P
inclusion is $6.9 million and anticipate that we will not owe any
one-time transition tax due to utilization of U.S. net operating
loss (“NOL”) carryforward benefits against these
earnings. However, we are still refining our calculations,
including estimated foreign E&P layers for fiscal 2018, which
could impact these amounts. Additionally, U.S. gross deferred tax
assets and liabilities have been reduced by an estimated $9.5
million based on the U.S. income tax rate change; however, this
reduction was primarily offset by a corresponding reduction to the
valuation allowance against the net deferred tax assets, which
resulted in minimal net effect to the provision for income taxes as
a result of the U.S. income tax rate
change.
The Company currently intends to permanently invest earnings
generated from its foreign Chinese operations, and, therefore, has
not previously provided for future Chinese withholding taxes on
such related earnings. However, if in the future the Company
changes such intention, the Company would provide for and pay
additional foreign taxes, if any, at that time.
The Company’s Chinese subsidiaries, LPOI and LPOIZ, are
governed by the Income Tax Law of the People’s Republic of
China concerning the privately run and foreign invested
enterprises, which are generally subject to tax at a statutory rate
of 25% on income reported in the statutory financial statements
after appropriate tax adjustments. During the three months ended
December 31, 2017, the statutory tax rate applicable to LPOIZ was
lowered from 25% to 15% in accordance with an incentive program for
technology companies. The lower rate applies to LPOIZ’s 2017
tax year, beginning January 1, 2017. Accordingly, we recorded a tax
benefit of approximately $100,000 during the year ended June 30,
2018 related to this retroactive rate change. For the fiscal year
ended June 30, 2018, income taxes were accrued at the applicable
rates. No deferred tax provision has been recorded for China, as
the effect is deemed de minimis.
The Company’s Latvian subsidiary is governed by the Law of
Corporate Income Tax of Latvia, which is applicable to privately
run and foreign invested enterprises, and which generally subjects
such enterprises to a statutory rate of 15% on income reported in
the statutory financial statements after appropriate tax
adjustments. 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, if any, 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
determining income taxes; therefore, the previously recorded net
deferred tax liability related to ISP Latvia was adjusted to zero
during the fiscal year ended June 30, 2018, resulting in a tax
benefit of approximately $184,000.
The
tax effects of temporary differences that give rise to significant
portions of deferred tax assets and defer
red tax
liabilities are as follows at June 30:
|
|
|
|
Deferred tax
assets:
|
|
|
Net operating loss
and credit carryforwards
|
$
16,282,000
|
$
29,014,000
|
Stock-based
compensation
|
710,000
|
943,000
|
R&D and other
credits
|
1,899,000
|
1,983,000
|
Capitalized
R&D expenses
|
373,000
|
562,000
|
Inventory
|
143,000
|
243,000
|
Accrued expenses
and other
|
83,000
|
407,091
|
Gross deferred tax
assets
|
19,490,000
|
33,152,091
|
Valuation
allowance for deferred tax assets
|
(16,123,000
)
|
(27,886,000
)
|
Total deferred tax
assets
|
3,367,000
|
5,266,091
|
Deferred tax
liabilities:
|
|
|
Depreciation and
other
|
(563,000
)
|
(1,187,440
)
|
Intangible
assets
|
(2,180,000
)
|
(3,976,000
)
|
Total deferred tax
liabilities
|
(2,743,000
)
|
(5,163,440
)
|
Net deferred tax
asset
|
$
624,000
|
$
102,651
|
The above deferred
balances include a reduction of approximately $244,000 in federal
credits related to alternative minimum tax (“AMT”) that
have been reclassified to income taxes receivable, as the Company
expects to recover these amounts within the next five years due to
changes made by the 2017 Act.
In assessing the
potential future recognition of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. In order to fully realize the deferred tax asset, the
Company will need to generate future taxable income of
approximately $75 million prior to the expiration of NOL
carry-forwards from 2019 through 2035. Based on the level of
historical taxable income, management has provided for a valuation
adjustment against the deferred tax assets of $16,123,000 at June
30, 2018, a decrease of approximately $11,763,000 as compared to
June 30, 2017. The reduction in the valuation allowance for
deferred tax assets as compared to the prior year is primarily the
result of a $9.5 million decrease resulting from the reduction of
the U.S. statutory corporate income tax rate from a maximum of 35%
to a flat 21%, effective January 1, 2018. The net deferred tax
asset results from federal and state tax credits with indefinite
carryover periods and approximately $500,000 in federal NOL
carryforwards that management expects to utilize in a future
period.
State income tax expense
disclosed on the effective tax rate reconciliation above includes
state deferred taxes that are offset by a full valuation
allowance.
At June 30, 2018, in addition to net operating loss carry-forwards,
the Company also has research and development credit carry forwards
of approximately $1,630,000, of which $38,505 will expire in fiscal
2019 and the remainder will expire from 2020 through 2036. A
portion of the NOL carry forwards may be subject to certain
limitations of the Internal Revenue Code Sections 382 and 383,
which would restrict the annual utilization in future periods due
principally to changes in ownership in prior
periods.
The Company has not recognized a liability for uncertain tax
positions. A reconciliation of the beginning and ending amount of
unrecognized tax benefits or penalties has not been provided since
there has been no unrecognized tax benefit or penalty. If there
were an unrecognized tax benefit or penalty, the Company would
recognize interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating
expenses.
The Company files U.S. Federal income tax returns, and returns in
various states and foreign jurisdictions. The Company's open tax
years subject to examination by the Internal Revenue Service and
the Florida Department of Revenue generally remain open for three
years from the date of filing.
10. Compensatory Equity Incentive Plan and
Other Equity Incentives
Share-based payment arrangements
—
The
Omnibus
Plan
provides several available forms of stock compensation,
including incentive stock options, non-qualified stock options and
restricted stock unit (“RSU”) awards. Stock-based
compensation is measured at grant date, based on the fair value of
the award, and is recognized as an expense over the
employee’s requisite service period. The Company estimates
the fair value of each stock option as of the date of grant using
the Black-Scholes-Merton pricing model. Most options granted under
the Omnibus Plan vest ratably over two to four years and generally
have ten-year contract lives. The volatility rate is based on
four-year historical trends in common stock closing prices and the
expected term was determined based primarily on historical
experience of previously outstanding options. The interest rate
used is the U.S. Treasury interest rate for constant maturities.
The likelihood of meeting targets for option grants that are
performance based are evaluated each quarter. If it is determined
that meeting the targets is probable, then the compensation expense
will be amortized over the remaining vesting
period.
The LightPath
Technologies, Inc. Employee Stock Purchase Plan (“2014
ESPP”) was adopted by the Company’s board of directors
on October 30, 2014 and approved by the Company’s
stockholders on January 29, 2015. The 2014 ESPP permits employees
to purchase Class A common stock through payroll deductions, which
may not exceed 15% of an employee’s compensation, at a price
not less than 85% of the market value of the Class A common stock
on specified dates (June 30 and December 31). In no event can
any participant purchase more than $25,000 worth of shares of Class
A common stock in any calendar year and an employee cannot purchase
more than 8,000 shares on any purchase date within an offering
period of 12 months and 4,000 shares on any purchase date within an
offering period of six months. This discount of approximately
$4,900 and $1,900 for fiscal 2018 and 2017, respectively, is
included in the selling, general and administrative expense in the
accompanying Consolidated Statements 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
|
2,654,482
|
1,650,870
|
2014
ESPP
|
400,000
|
—
|
358,008
|
|
5,515,625
|
2,654,482
|
2,008,878
|
Grant Date Fair Values and Underlying
Assumptions; Contractual Terms—
The Company estimates
the fair value of each stock option as of the date of grant. The
Company uses the Black-Scholes-Merton pricing model. The 2014 ESPP
fair value is the amount of the discount the employee obtains at
the date of the purchase transaction.
For stock options
and RSUs granted in the years ended June 30, 2018 and 2017, the
Company estimated the fair value of each stock award as of the date
of grant using the following assumptions:
|
|
Year Ended June 30,
|
|
|
2018
|
|
2017
|
Weighted-average
expected volatility
|
|
63% -
75%
|
|
77% -
83%
|
Dividend
yields
|
|
0%
|
|
0%
|
Weighted-average
risk-free interest rate
|
|
1.28% -
2.82%
|
|
1.24% -
1.90%
|
Weighted-average
expected term, in years
|
|
7.27
|
|
7.49
|
The assumed
forfeiture rates used in calculating the fair value of options and
restricted stock unit grants with both performance and service
conditions were 20% for each of the years ended June 30, 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
Payment Awards —
A summary of the activity for
share-based payment awards in the years ended June 30, 2018
and 2017 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
819,260
|
$
1.90
|
5.6
|
1,311,795
|
0.9
|
|
|
|
|
|
|
Granted
|
346,926
|
$
1.63
|
9.4
|
230,772
|
2.3
|
Exercised
|
—
|
—
|
—
|
(33,785
)
|
—
|
Cancelled/Forfeited
|
(70,000
)
|
$
4.04
|
—
|
—
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
1,096,186
|
$
1.68
|
6.3
|
1,508,782
|
0.9
|
|
|
|
|
|
|
Granted
|
68,849
|
$
3.88
|
—
|
140,571
|
2.2
|
Exercised
|
(127,813
)
|
$
1.80
|
—
|
—
|
—
|
Cancelled/Forfeited
|
(32,093
)
|
$
2.62
|
—
|
—
|
—
|
June 30, 2018
|
1,005,129
|
$
1.77
|
6.3
|
1,649,353
|
0.9
|
|
|
|
|
|
|
Awards exercisable/
|
|
|
|
|
|
vested as of
|
|
|
|
|
|
June 30, 2018
|
786,710
|
$
1.63
|
5.7
|
1,287,370
|
—
|
|
|
|
|
|
|
Awards unexercisable/
|
|
|
|
|
|
unvested as of
|
|
|
|
|
|
June 30, 2018
|
218,419
|
$
2.26
|
8.4
|
361,983
|
0.9
|
|
1,005,129
|
|
|
1,649,353
|
|
The total intrinsic value of stock options exercised for the years
ended June 30, 2018 and 2017 was approximately $1,000 and $0,
respectively.
The total intrinsic value of stock options outstanding and
exercisable at June 30, 2018 and 2017 was approximately $573,000
and $803,000, respectively.
The total fair value of stock options vested during the years ended
June 30, 2018 and 2017 was approximately $103,000 and $318,000,
respectively.
The total intrinsic value of RSUs exercised during the years ended
June 30, 2018 and 2017 was approximately $0 and $79,000,
respectively.
The total intrinsic value of RSUs outstanding and exercisable at
June 30, 2018 and 2017 was approximately $3.0 million and $2.8
million, respectively.
The total fair value of RSUs vested during the years ended June 30,
2018 and 2017 was approximately $320,000 and $386,000,
respectively.
As of
June 30, 2018, there was approximately $484,000 of total
unrecognized compensation cost related to
n
on-vested
share-based compensation arrangements, including share options and
restricted stock units (“RSUs”), granted under the
Omnibus Plan. The expected compensation cost to be recognized is as
follows:
|
|
|
|
|
|
|
|
Year ending June
30, 2019
|
21,953
|
264,982
|
286,935
|
|
|
|
|
Year ending June
30, 2020
|
8,926
|
149,944
|
158,870
|
|
|
|
|
Year ending June
30, 2021
|
5,939
|
29,978
|
35,917
|
|
|
|
|
Year ending June
30, 2022
|
2,021
|
—
|
2,021
|
|
$
38,839
|
$
444,904
|
$
483,743
|
The table above
does not include shares under the Company’s 2014 ESPP, which
has purchase settlement dates in the second and fourth fiscal
quarters. The Company’s 2014 ESPP is not administered with a
look-back option provision and, as a result, there is not a
population of outstanding option grants during the employee
contribution period.
RSU awards vest
immediately or from two to four years from the grant
date.
The Company issues
new shares of Class A common stock upon the exercise of stock
options. The following table is a summary of the number and
weighted-average grant date fair values regarding our
unexercisable/unvested awards as of June 30, 2018 and 2017 and
changes during the two years then ended:
Unexercisable/Unvested Awards
|
|
|
|
Weighted-Average
Grant Date Fair Values
(per share)
|
June 30,
2016
|
182,250
|
441,599
|
623,849
|
$
1.35
|
Granted
|
346,926
|
230,772
|
577,698
|
$
1.33
|
Vested
|
(275,915
)
|
(233,459
)
|
(509,374
)
|
$
1.28
|
Cancelled/Forfeited
|
(8,750
)
|
—
|
(8,750
)
|
$
1.02
|
June 30,
2017
|
244,511
|
438,912
|
683,423
|
$
1.39
|
Granted
|
68,849
|
140,571
|
209,420
|
$
3.61
|
Vested
|
(85,191
)
|
(217,500
)
|
(302,691
)
|
$
3.78
|
Cancelled/Forfeited
|
(9,750
)
|
—
|
(9,750
)
|
$
2.36
|
June 30,
2018
|
218,419
|
361,983
|
580,402
|
$
1.53
|
Acceleration of Vesting —
The
Company does not generally accelerate the vesting of any stock
options.
Financial Statement Effects and Presentation
—
The following table shows total stock-based
compensation expense for the years ended June 30, 2018 and
2017 included in the accompanying Consolidated Statements of
Comprehensive Income:
|
|
|
|
|
|
|
|
Stock
options
|
$
38,572
|
$
46,840
|
RSUs
|
334,982
|
348,035
|
Total
|
$
373,554
|
$
394,875
|
|
|
|
The amounts above were included in:
|
|
|
Selling, general
& administrative
|
$
366,407
|
$
389,675
|
Cost of
sales
|
5,910
|
3,876
|
New product
development
|
1,237
|
1,324
|
|
$
373,554
|
$
394,875
|
11. Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares of Class A common stock
outstanding during each period presented. Diluted earnings per
share is computed similarly to basic earnings per share except that
it reflects the potential dilution that could occur if dilutive
securities or other obligations to issue shares of Class A common
stock were exercised or converted into shares of Class A common
stock. The computations for basic and diluted earnings per share
are described in the following table:
|
|
|
|
|
|
|
|
Net
income
|
$
1,060,104
|
$
7,703,086
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
Basic number of shares
|
25,006,467
|
20,001,868
|
|
|
|
Effect of dilutive
securities:
|
|
|
Options to
purchase common stock
|
331,985
|
142,482
|
RSUs
|
1,387,348
|
1,167,540
|
Common stock
warrants
|
85,668
|
354,502
|
Diluted number of shares
|
26,811,468
|
21,666,392
|
|
|
|
Earnings per common share:
|
|
|
Basic
|
$
0.04
|
$
0.39
|
Diluted
|
$
0.04
|
$
0.36
|
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
|
739,864
|
378,278
|
RSUs
|
216,946
|
289,036
|
Common stock
warrants
|
85,018
|
518,087
|
|
1,041,828
|
1,185,401
|
12.
Defined Contribution Plan
The Company
provides retirement benefits to its U.S.-based employees through a
defined contribution retirement plan. Until April 12, 2018, these
benefits were offered under the ADP Total Source 401(k) plan (the
“ADP Plan”). The ADP Plan was a defined 401(k)
contribution plan, administered by a third party, that all U.S.
employees, over the age of 21, were eligible to participate in
after three months of employment. Under the ADP Plan, annual
discretionary contributions could be made by the Company to match a
portion of the funds contributed by employees. Effective April 12,
2018, all plan assets were transferred to the Insperity 401(k) plan
(the “Insperity Plan”). The Insperity Plan is a defined
401(k) contribution plan that all employees, over the age of 21,
are eligible to participate in after three months of employment.
Under the Insperity Plan, the Company matches 100% of the first 2%
of employee contributions. As of June 30, 2018, there were 56
employees who are enrolled in this plan. The Company made matching
contributions of approximately $34,000 during the year ended June
30, 2018. There were no matching contributions during the year
ended June 30, 2017.
The Company has operating leases for its manufacturing and office
space. At June 30, 2018, the Company has a lease agreement for its
corporate headquarters and manufacturing 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 the Company. The minimum rental rates for such additional
extension option will be determined at the time an option is
exercised and will be based on a “fair market rental
rate,” as determined in accordance with the Orlando Lease, as
amended.
The Company received $420,000 in a leasehold improvement allowance
in fiscal 2015. This amount is included in the property and
equipment and deferred rent on the Consolidated Balance Sheets.
Amortization of leasehold improvements was approximately $187,000
as of June 30, 2018. The deferred rent is being amortized as a
reduction in lease expense over the term of the
lease.
On April 20, 2018, the Company entered into a lease agreement for
an additional 12,378 square feet in Orlando, Florida (the
“Orlando Lease II”). The Orlando Lease II will provide
additional manufacturing and office space near the Company’s
corporate headquarters. The anticipated commencement date of the
Orlando Lease II is November 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.
As of June 30, 2018, the Company, through its wholly-owned
subsidiary, LPOI, has a lease agreement for an office facility in
Shanghai, China (the “Shanghai Lease”) for 1,900 square
feet. The Shanghai Lease commenced in October 2015. During fiscal
2018, the Shanghai Lease was renewed for an additional one-year
term, and now expires in October 2019.
As of June 30, 2018, the Company, through its wholly-owned
subsidiary, LPOIZ, has a lease agreement for a manufacturing and
office facility in Zhenjiang, China (the “Zhenjiang
Lease”) for 26,000 square feet. The Zhenjiang Lease, which is
for a five-year original term with renewal options, expires in
March 2019. During fiscal 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 June 30, 2018, the Company, through its wholly-owned subsidiary
ISP, has a lease agreement for a manufacturing and office facility
in Irvington, New York (the “ISP Lease”) for 13,000
square feet. The ISP Lease, which is for a five-year original term
with renewal options, expires in September 2020. We will be
relocating the Irvington manufacturing operations to our existing
facilities in Orlando and Riga during fiscal 2019, and some of the
manufacturing operations currently performed in the Irvington
facility will transition to our facility in
Zhenjiang.
At June 30, 2018, the Company, through ISP’s wholly-owned
subsidiary ISP Latvia, has two lease agreements for a manufacturing
and office facility in Riga, Latvia (the “Riga Leases”)
for an aggregate of 23,000 square feet. The Riga Leases, each of
which is for a five-year original term with renewal options,
expires in December 2019.
As of June 30, 2018, the Company has obligations under five capital
lease agreements, entered into during fiscal years 2015, 2016, 2017
and 2018, with terms ranging from three to five years. The leases
are for manufacturing equipment, which are included as part of
property and equipment in the accompanying Consolidated Balance
Sheets. Assets under capital lease include approximately $1.5
million and $749,000 in manufacturing equipment, with accumulated
amortization of approximately $646,000 and $361,000 as of June 30,
2018 and 2017, respectively. Amortization related to assets under
capital leases is included in depreciation
expense.
Rent expense totaled $1.0 million and $770,000 during the years
ended June 30, 2018 and 2017, respectively.
The
approximate future minimum lease payments under capital and
operating leases at June 30, 2018 were as
fo
llows:
Fiscal year ending June 30,
|
|
|
|
|
|
2019
|
$
360,256
|
$
909,000
|
2020
|
309,122
|
917,000
|
2021
|
234,478
|
679,000
|
2022
|
58,308
|
558,000
|
2023
|
—
|
60,869
|
Total minimum
payments
|
962,164
|
$
3,123,869
|
Less
imputed interest
|
(104,838
)
|
|
Present value of
minimum lease payments included in capital lease
obligations
|
857,326
|
|
Less current
portion
|
307,199
|
|
Non-current
portion
|
$
550,127
|
|
The Company from
time to time is involved in various legal actions arising in the
normal course of business. Management, after reviewing with legal
counsel all of these actions and proceedings, believes that the
aggregate losses, if any, will not have a material adverse effect
on the Company’s financial position or results of
operations.
Assets and
liabilities denominated in non-U.S. currencies are translated at
rates of exchange prevailing on the balance sheet date, and
revenues and expenses are translated at average rates of exchange
for the period. During the years ended June 30, 2018 and 2017, we
recognized a gain of approximately $141,000 and $78,000 on foreign
currency translation, 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 $474,000 and $295,000 at June 30, 2018 and 2017,
respectively.
Assets and net
assets in foreign countries are as follows:
|
|
China
|
|
Latvia
|
|
|
June 30,
2018
|
|
June 30,
2017
|
|
June 30,
2018
|
|
June 30,
2017
|
Assets
|
|
$14.7
million
|
|
$14.0
million
|
|
$6.4
million
|
|
$6.1
million
|
Net
assets
|
|
$12.6
million
|
|
$12.3
milllion
|
|
$5.9
million
|
|
$6.0
million
|
16.
Supplier and Customer Concentrations
We utilize a
number of glass compositions in manufacturing our molded glass
aspheres and lens array products. These glasses or equivalents are
available from a large number of suppliers, including
CDGM Glass Company Ltd., Ohara Corporation,
and Sumita Optical Glass, Inc
. Base optical materials, used
in certain of our specialty products, are manufactured and supplied
by a number of optical and glass manufacturers. ISP utilizes major
infrared material suppliers located around the globe for a broad
spectrum of infrared crystal and glass. The Company believes that a
satisfactory supply of such production materials will continue to
be available, at reasonable prices or, in some cases, at increased
prices, although there can be no assurance in this
regard.
In fiscal 2018,
sales to three customers comprised an aggregate of approximately
28% of our annual revenue, and 28% of accounts receivable as of
June 30, 2018. In fiscal 2017, sales to three customers comprised
an aggregate of approximately 26% of our annual revenue, and 26% of
accounts receivable as of June 30, 2017. The loss of any of these
customers, or a significant reduction in sales to any such
customer, would adversely affect our revenues.
In fiscal 2018,
58% of our net revenue was derived from sales outside of the United
States, with 84% of our foreign sales derived from customers in
Europe and Asia. In fiscal 2017, 61% of our net revenue was derived
from sales outside of the United States, with 88% of our foreign
sales derived from customers in Europe and
Asia.
17.
Derivative Financial Instruments (Warrant
Liability)
On June 11, 2012, the Company executed a Securities Purchase
Agreement with respect to a private placement of an aggregate of
1,943,852 shares of its Class A common stock at $1.02 per share and
the June 2012 Warrants to purchase up to 1,457,892 shares of its
Class A common stock at an initial exercise price of $1.32 per
share, which was subsequently reduced to $1.26, and then to $1.22
on December 21, 2016 as a result of our public offering. The June
2012 Warrants are exercisable for a period of five years beginning
on December 11, 2012. The Company accounted for the June 2012
Warrants issued to investors in accordance with ASC 815-10. ASC
815-10 provides guidance for determining whether an equity-linked
financial instrument (or embedded feature) is indexed to an
entity’s own stock. This applies to any freestanding
financial instrument or embedded feature that has all the
characteristics of a derivative under ASC 815-10, including any
freestanding financial instrument that is potentially settled in an
entity’s own stock.
Due to certain
adjustments that may be made to the exercise price of the June 2012
Warrants if the Company issues or sell shares of its Class A common
stock at a price that is less than the then-current warrant
exercise price, the June 2012 Warrants have been classified as a
liability, as opposed to equity, in accordance with ASC 815-10, as
it was determined that the June 2012 Warrants were not indexed to
the Company’s Class A common stock.
The fair value of
the outstanding June 2012 Warrants was re-measured at the end of
each reporting period to reflect the then-current fair market
value. The fair value was also re-measured upon each warrant
exercise, to determine the fair value adjustment to the warrant
liability related to the warrant exercise. As of June 30, 2017,
there were 329,195 shares of Class A common stock underlying our
outstanding June 2012 Warrants that were issued to investors. As of
June 30, 2017, there were also 172,279 shares of Class A common
stock underlying the outstanding June 2012 Warrants, which were
issued to investment bankers, that do not require fair value
re-measurement as they contain different provisions. The June 2012
Warrants expired on December 11, 2017. All warrants that required
fair value re-measurement were exercised prior to expiration, and
as such, the warrant liability was reduced to zero as of that date.
The change in fair value of the June 2012 Warrants is recorded in
the Consolidated Statements of Comprehensive Income, as estimated
using the Lattice option-pricing model using the following range of
assumptions for the respective periods:
|
Year Ended June 30,
|
Inputs into Lattice model for warrants:
|
2018
|
|
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%
|
All warrants
issued by the Company other than the above noted June 2012 Warrants
are classified as equity.
The warrant
liabilities were considered recurring Level 3 financial
instruments. The following table summarizes the activity of Level 3
financial instruments measured on a recurring basis for the years
ended June 30, 2018 and 2017:
|
|
Fair value, June 30, 2016
|
$
717,393
|
Reclassification of warrant liability upon
exercise
|
(694,436
)
|
Change in fair value of warrant liability
|
467,543
|
Fair value, June 30, 2017
|
490,500
|
Reclassification of warrant liability upon
exercise
|
(685,132
)
|
Change in fair value of warrant liability
|
194,632
|
Fair value, June 30, 2018
|
$
-
|
Avidbank Note
Amended LSA and Term Loan
On December 21, 2016, the Company executed the Second Amended and
Restated Loan and Security Agreement (the “Amended
LSA”) with Avidbank for the acquisition term loan (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 the
Company 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, which was paid in full on January 16, 2018, pursuant
to the Second Amendment, as defined below, 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; 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 agreed, in its discretion, to
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 the maturity date, 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 fiscal years ended June 30, 2018 and 2017. As of June
30, 2018 and 2017, there was no outstanding balance under the
Revolving Line.
The Company’s obligations under the Amended LSA are
collateralized by a first priority security interest (subject to
permitted liens) in cash, U.S. inventory, accounts receivable,
inventory and equipment. In addition, the Company’s
wholly-owned subsidiary, Geltech, has guaranteed its 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. The
fixed charge coverage ratio was amended for the quarters ended
March 31, 2018 and June 30, 2018, pursuant to the Third Amendment,
as defined below. As of June 30, 2018, we were not in compliance
with the fixed charge coverage ratio; however, Avidbank provided a
waiver of compliance pursuant to that certain Fourth Amendment to
the Amended LSA, dated September 7, 2018, entered into between us
and Avidbank (the “Fourth 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, the Company executed the First Amendment to
the Amended LSA (the “First Amendment”). The First
Amendment amended, among other items, the maturity date of the
Revolving Line from December 21, 2017 to March 21, 2018, increased
the maximum amount of indebtedness collateralized by permitted
liens from $600,000 to $800,000 in the aggregate, and increased the
aggregate amount the Company may maintain in accounts with
financial institutions in Riga, Latvia from $500,000 to $1,000,000.
The maturity date of the Revolving Line was extended to December
21, 2018, pursuant to the Second Amendment (as defined
below).
Second Amendment to the Amended LSA
On January 16, 2018, the Company 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 the Company 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, which was approximately $4.4 million, with the
remaining $2.9 million in proceeds 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, or 7.0% as of June 30, 2018; provided, however, that at no
time shall the applicable rate be less than five-and-one-half
percent (5.50%) per annum. Prepayment by the Company is permitted;
however, the Company 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
$19,700 and $7,700 is included in interest expense for the years
ended June 30, 2018 and 2017,
respectively.
Third Amendment to the Amended LSA
On May 11, 2018, the Company and Avidbank entered into the Third
Amendment to the Amended LSA (“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 the Company, and each of its domestic
subsidiaries, maintain all of its domestic depository and operating
accounts with Avidbank beginning on June 1, 2018 and to prohibit
the Company from maintaining a domestic account balance outside of
Avidbank that exceeds Ten Thousand Dollars ($10,000) during the
transition period. The Third Amendment also amends Section 6.9(a)
of the Amended LSA to require that the Company maintain a fixed
charge coverage ratio, as measured on June 30, 2018, of at least
1.10 to 1.00,and thereafter, beginning with the quarter 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 the Company a waiver of default arising prior to
the Third Amendment from its failure to comply with the fixed
charge coverage ratio measured on March 31,
2018.
Fourth Amendment to the Amended LSA
On September 7, 2018, the Company entered into the Fourth
Amendment. Pursuant to the Fourth Amendment, Avidbank granted the
Company a waiver of default arising prior to the Fourth Amendment
from its failure to comply with the fixed charge coverage ratio
covenant measured on June 30, 2018. Based on the waiver, the
Company is no longer in default on the Term II Loan or Revolving
Line. The Fourth Amendment also provides for the restriction of $1
million of the Company’s cash, which will be released upon
two consecutive quarters of compliance with the fixed charge
coverage ratio covenant, and so long as no event of default has
occurred that is continuing on that date. The Fourth Amendment also
provides that during the restrictive period, the calculation of the
fixed charge coverage ratio will be determined as if the
outstanding principal amount of the Term II Loan is $1,000,000 less
than the actual outstanding principal amount of the Term II Loan.
As a result, the Term II Loan is classified in the Consolidated
Balance Sheets according to the original minimum maturity
schedule.
Sellers Note
On December 21, 2016, the Company 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
19
, Note
Satisfaction and Securities Purchase Agreement, to these
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, the
Company paid interest semi-annually in arrears solely during the
Initial Period. The Sellers Note originally had a five-year term.
The Company 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 accompanying Consolidated Balance Sheet as of June 30, 2017. 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 note, this amount was reduced to zero and the
resulting gain in extinguishment of debt is in the accompanying
Consolidated Statements of Comprehensive Income in the line item
entitled “Interest expense,
net.”
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
pay
ment 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,
|
|
|
|
2019
|
$
1,458,800
|
$
(22,924
)
|
$
1,435,876
|
2020
|
1,458,800
|
(22,924
)
|
1,435,876
|
2021
|
1,458,800
|
(22,924
)
|
1,435,876
|
2022
|
1,458,800
|
(22,924
)
|
1,435,876
|
2023
|
850,967
|
(15,875
)
|
835,092
|
Total
payments
|
$
6,686,167
|
$
(107,571
)
|
$
6,578,596
|
Less current
portion
|
|
|
(1,458,800
)
|
Non-current
portion
|
|
|
$
5,119,796
|
19.
Note Satisfaction and Securities Purchase
Agreement
Note Satisfaction and Securities Purchase
Agreement
On January 16,
2018 (the “Satisfaction Date”), the Company entered
into a Note Satisfaction and Securities Purchase Agreement (the
“Note Satisfaction Agreement”) with the Sellers with
respect to the Sellers Note. At the closing of the Acquisition of
ISP, as partial consideration for the shares of ISP, the Company
issued the Sellers Note in the original principal amount of
$6,000,000, which principal payment amount was subsequently reduced
to $5.7 million, after applying the approximately $293,000 working
capital adjustment, as discussed in Note 3, Acquisition of ISP
Optics Corporation, to these Consolidated Financial
Statements.
Pursuant to the
Note Satisfaction Agreement, the Company and the Sellers agreed to
satisfy the Sellers Note in full by (i) converting 39.5% of the
outstanding principal amount of the Sellers Note into shares of the
Company’s Class A common stock, and (ii) paying the remaining
60.5% of the outstanding principal amount of the Sellers Note, plus
all accrued but unpaid interest, in cash to the Sellers. As of the
Satisfaction Date, the outstanding principal amount of the Sellers
Note was $5,707,183, and there was $20,883 in accrued but unpaid
interest thereon (collectively, the “Note Satisfaction
Amount”). Accordingly, the Company paid approximately
$3,453,582 plus all accrued but unpaid interest on the Sellers
Note, in cash (the “Cash Payment”) and issued 967,208
shares of Class A common stock (the “Shares”), which
represents the balance of the Note Satisfaction Amount divided by
the Conversion Price. The “Conversion Price” equaled
$2.33, representing the average closing bid price of the Class A
common stock, as reported by Bloomberg for the five (5) trading
days preceding the Satisfaction Date. The Cash Payment was paid
using approximately $600,000 of cash on hand and approximately $2.9
million in proceeds from the Term II Loan from Avidbank. As of the
Satisfaction Date, the Sellers Note was deemed satisfied in full
and terminated.
The Shares issued
to the Sellers were exempt from the registration requirements of
the Securities Act of 1933, as amended (the “Act”),
pursuant to Section 4(a)(2) of the Act (in that the Shares were
issued by us in a transaction not involving any public offering),
and pursuant to Rule 506 of Regulation D as promulgated by the SEC
under the Act.
Registration Rights Agreement
In connection with
the Note Satisfaction Agreement, the Company and the Sellers also
entered into a Registration Rights Agreement dated January 16,
2018, pursuant to which the Company agreed to file with the
Securities and Exchange Commission by February 15, 2018, and to
cause to be declared effective, a registration statement to
register the resale of the Shares issued to partially pay the Note
Satisfaction Amount. The Registration Statement on Form S-3 (File
No. 333-223028) was declared effective by the SEC on March 8,
2018.
20. Public Offering of Class A Common Stock
On December 16, 2016, the Company 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 the Company’s
Class A common stock, at a public offering price of $1.21 per
share. Under the terms of the Underwriting Agreement, the Company
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, the Company completed its 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. The
Company 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.
End of Consolidated Financial Statements