LIGHTPATH TECHNOLOGIES INC - Quarter Report: 2019 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

[X]             QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2019

 

OR

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ____________

 

Commission file number 000-27548

 

LIGHTPATH TECHNOLOGIES, INC.

------------------------------------------------------------------------

 (Exact name of registrant as specified in its charter)

 

DELAWARE	86-0708398
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

http://www.lightpath.com

 

2603 Challenger Tech Ct. Suite 100

Orlando, Florida 32826

-----------------------------------------------------------

(Address of principal executive offices)

(ZIP Code)

 

(407) 382-4003

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(Registrant’s telephone number, including area code)

N/A

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(Former name, former address, and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $0.01	LPTH	The Nasdaq Stock Market, LLC

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). YES [ X ] NO [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]	Accelerated filer [ ]
	Smaller reporting company [ X ]
Non-accelerated filer [ X ]	Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

25,857,529 shares of common stock, Class A, $0.01 par value, outstanding as of February 3, 2020.

 

 

 

LIGHTPATH TECHNOLOGIES, INC.

Form 10-Q

Index

Item		Page
Cautionary Note Concerning Forward-Looking Statements		4

Part I Financial Information
Item 1	Financial Statements	5
	Unaudited Condensed Consolidated Balance Sheets	5
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)	6
	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity	7
	Unaudited Condensed Consolidated Statements of Cash Flows	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	Overview	21
	Results of Operations	22
	Liquidity and Capital Resources	25
	Contractual Obligations and Commitments	26
	Off-Balance Sheet Arrangements	26
	Critical Accounting Policies and Estimates	26
	Non-GAAP Financial Measures	30
Item 4	Controls and Procedures	30
Part II  Other Information
Item 1	Legal Proceedings	31
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3	Defaults Upon Senior Securities	31
Item 4	Mine Safety Disclosures	31
Item 5	Other Information	31
Item 6	Exhibits	31
Signatures		34

 

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended December 31, 2019 (the “Quarterly Report”) may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, which address activities, events, or developments that we expect or anticipate will or may occur in the future, including such things as future capital expenditures, growth, product development, sales, business strategy, and other similar matters are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or other comparable terminology. These forward-looking statements are based largely on our current expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control. These statements are subject to many risks, uncertainties, and other important factors that could cause actual future results to differ materially from those expressed in the forward-looking statements. For a discussion of risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements, please refer to Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended June 30, 2019. In light of these risks and uncertainties, all of the forward-looking statements made herein are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized. We undertake no obligation to update or revise any of the forward-looking statements contained herein.

 

	December 31,	June 30,
	2019	2019
Assets
Current assets:
Cash and cash equivalents	$4,277,607	$4,604,701
Trade accounts receivable, net of allowance of $20,780 and $29,406	7,401,375	6,210,831
Inventories, net	7,542,329	7,684,527
Other receivables	—	353,695
Prepaid expenses and other assets	415,897	754,640
Total current assets	19,637,208	19,608,394
Property and equipment, net	11,640,542	11,731,084
Operating lease right-of-use assets	1,488,126	—
Intangible assets, net	7,270,506	7,837,306
Goodwill	5,854,905	5,854,905
Deferred tax assets, net	652,000	652,000
Other assets	290,200	289,491
Total assets	$46,833,487	$45,973,180
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$2,699,115	$2,227,768
Accrued liabilities	1,261,584	1,338,912
Accrued payroll and benefits	1,467,675	1,730,658
Operating lease liabilities, current	749,399	—
Deferred rent, current portion	—	72,151
Loans payable, current portion	581,350	581,350
Finance lease obligation, current portion	378,095	404,424
Total current liabilities	7,137,218	6,355,263
Finance lease obligation, less current portion	456,388	640,284
Operating lease liabilities, noncurrent	1,265,152	—
Deferred rent, noncurrent	—	518,364
Loans payable, less current portion	4,718,754	5,000,143
Total liabilities	13,577,512	12,514,054
Commitments and Contingencies
Stockholders’ equity:
Preferred stock: Series D, $.01 par value, voting; 500,000 shares authorized; none issued and outstanding	—	—
Common stock: Class A, $.01 par value, voting; 44,500,000 shares authorized; 25,840,362 and 25,813,895 shares issued and outstanding	258,404	258,139
Additional paid-in capital	230,527,126	230,321,324
Accumulated other comprehensive income	1,005,340	808,518
Accumulated deficit	(198,534,895)	(197,928,855)
Total stockholders’ equity	33,255,975	33,459,126
Total liabilities and stockholders’ equity	$46,833,487	$45,973,180

	Three Months Ended		Six Months Ended
	December 31,		December 31,
	2019	2018	2019	2018
Revenue, net	$9,599,912	$8,548,507	$17,151,842	$17,098,228
Cost of sales	5,670,632	5,007,364	10,831,744	10,513,912
Gross margin	3,929,280	3,541,143	6,320,098	6,584,316
Operating expenses:
Selling, general and administrative	2,199,133	2,518,853	4,540,911	4,982,731
New product development	468,646	518,793	897,057	988,776
Amortization of intangibles	283,279	324,351	566,800	653,622
Loss (gain) on disposal of property and equipment	(79,224)	(15,500)	(129,224)	43,257
Total operating expenses	2,871,834	3,346,497	5,875,544	6,668,386
Operating income (loss)	1,057,446	194,646	444,554	(84,070)
Other income (expense):
Interest expense, net	(89,257)	(153,289)	(187,798)	(298,302)
Other income (expense), net	122,797	(48,484)	(392,609)	(386,606)
Total other income (expense), net	33,540	(201,773)	(580,407)	(684,908)
Income (loss) before income taxes	1,090,986	(7,127)	(135,853)	(768,978)
Income tax provision (benefit)	321,869	(23,403)	470,187	(202,363)
Net income (loss)	$769,117	$16,276	$(606,040)	$(566,615)
Foreign currency translation adjustment	143,056	52,793	196,822	225,840
Comprehensive income (loss)	$912,173	$69,069	$(409,218)	$(340,775)
Earnings (loss) per common share (basic)	$0.03	$0.00	$(0.02)	$(0.02)
Number of shares used in per share calculation (basic)	25,837,903	25,781,941	25,832,337	25,777,330
Earnings (loss) per common share (diluted)	$0.03	$0.00	$(0.02)	$(0.02)
Number of shares used in per share calculation (diluted)	27,361,273	27,397,239	25,832,337	25,777,330

 

  The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

				Accumulated
	Class A		Additional	Other		Total
	Common Stock		Paid-in	Comphrehensive	Accumulated	Stockholders’
	Shares	Amount	Capital	Income	Deficit	Equity
Balances at June 30, 2019	25,813,895	$258,139	$230,321,324	$808,518	$(197,928,855)	$33,459,126
Issuance of common stock for:
Employee Stock Purchase Plan	13,370	134	12,033	—	—	12,167
Exercise of RSUs, net	4,394	44	(44)	—	—	—
Stock-based compensation on stock options & RSUs	—	—	98,459	—	—	98,459
Foreign currency translation adjustment	—	—	—	53,766	—	53,766
Net loss	—	—	—	—	(1,375,157)	(1,375,157)
Balances at September 30, 2019	25,831,659	$258,317	$230,431,772	$862,284	$(199,304,012)	$32,248,361
Issuance of common stock for:
Exercise of RSUs, net	8,703	87	(87)	—	—	—
Stock-based compensation on stock options & RSUs	—	—	95,441	—	—	95,441
Foreign currency translation adjustment	—	—	—	143,056	—	143,056
Net income	—	—	—	—	769,117	769,117
Balances at December 31, 2019	25,840,362	$258,404	$230,527,126	$1,005,340	$(198,534,895)	$33,255,975
Balances at June 30, 2018	25,764,544	$257,645	$229,874,823	$473,508	$(195,248,532)	$35,357,444
Issuance of common stock for:
Employee Stock Purchase Plan	9,061	91	20,750	—	—	20,841
Stock-based compensation on stock options & RSUs	—	—	93,910	—	—	93,910
Foreign currency translation adjustment	—	—	—	173,047	—	173,047
Net loss	—	—	—	—	(582,891)	(582,891)
Balances at September 30, 2018	25,773,605	$257,736	$229,989,483	$646,555	$(195,831,423)	$35,062,351
Issuance of common stock for:
Exercise of Stock Options & RSUs, net	15,667	157	4,104	—	—	4,261
Stock-based compensation on stock options & RSUs	—	—	103,905	—	—	103,905
Foreign currency translation adjustment	—	—	—	52,793	—	52,793
Net income	—	—	—	—	16,276	16,276
Balances at December 31, 2018	25,789,272	$257,893	$230,097,492	$699,348	$(195,815,147)	$35,239,586

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 

 

 

	Six Months Ended December 31,
	2019	2018
Cash flows from operating activities:
Net loss	$(606,040)	$(566,615)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	1,760,220	1,683,676
Interest from amortization of debt costs	9,286	11,962
(Gain) loss on disposal of property and equipment	(129,224)	43,257
Stock-based compensation on stock options & RSUs, net	178,389	197,815
Provision for doubtful accounts receivable	9,147	1,469
Change in operating lease liabilities	(64,090)	(27,096)
Inventory write-offs to reserve	—	2,114
Deferred tax benefit	—	(406,000)
Changes in operating assets and liabilities:
Trade accounts receivable	(1,199,691)	(849,007)
Other receivables	353,695	(22,858)
Inventories	142,198	(594,141)
Prepaid expenses and other assets	338,034	214,960
Accounts payable and accrued liabilities	146,547	(87,707)
Net cash provided by (used in) operating activities	938,471	(398,171)
Cash flows from investing activities:
Purchase of property and equipment	(1,153,227)	(1,180,184)
Proceeds from sale of equipment	179,573	110,500
Net cash used in investing activities	(973,654)	(1,069,684)
Cash flows from financing activities:
Proceeds from exercise of stock options	—	4,261
Proceeds from sale of common stock from Employee Stock Purchase Plan	12,167	20,841
Payments on loan payable	(290,675)	(729,399)
Repayment of finance lease obligations	(210,225)	—
Payments on capital lease obligations	—	(167,626)
Net cash used in financing activities	(488,733)	(871,923)
Effect of exchange rate on cash and cash equivalents	196,822	472,547
Change in cash and cash equivalents and restricted cash	(327,094)	(1,867,231)
Cash and cash equivalents and restricted cash, beginning of period	4,604,701	6,508,620
Cash and cash equivalents and restricted cash, end of period	$4,277,607	$4,641,389
Supplemental disclosure of cash flow information:
Interest paid in cash	$182,241	$267,065
Income taxes paid	$249,777	$247,664
Supplemental disclosure of non-cash investing & financing activities:
Purchase of equipment through capital lease arrangements	—	$411,750

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 

 

 

LIGHTPATH TECHNOLOGIES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

References in this document to “the Company,” “LightPath,” “we,” “us,” or “our” are intended to mean LightPath Technologies, Inc., individually, or as the context requires, collectively with its subsidiaries on a consolidated basis.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the requirements of Article 8 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with our Consolidated Financial Statements and related notes, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, filed with the Securities and Exchange Commission (the “SEC”). Unless otherwise stated, references to particular years or quarters refer to our fiscal years ended June 30 and the associated quarters of those fiscal years.

These Condensed Consolidated Financial Statements are unaudited, but include all adjustments, including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. The Consolidated Balance Sheet as of June 30, 2019 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year as a whole. The unaudited Condensed 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.

 

Our significant accounting policies are provided in Note 2, Summary of Significant Accounting Policies, in the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

 

Use of Estimates

Management makes estimates and assumptions during the preparation of our unaudited Condensed Consolidated Financial Statements that affect amounts reported in the unaudited Condensed 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.

 

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB") issued ASU No. 2016-02, Leases (Topic 842) (“ASC Topic 842”). This guidance requires an entity to recognize lease liabilities and a right-of-use asset for all leases on the balance sheet and to disclose key information about the entity’s leasing arrangements. The Company adopted this standard as of July 1, 2019, using the modified retrospective transition method by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward historical lease classification, and not reassess (i) whether a contract was or contained a lease, and (ii) initial direct costs for any leases that existed prior to July 1, 2019. The Company also elected to combine lease and non-lease components and not to record leases with an initial term of 12 months or less on the unaudited Condensed Consolidated Balance Sheet. As a result of adopting ASC Topic 842 on July 1, 2019, the Company recognized operating lease right-of-use assets of $1.7 million and corresponding operating lease liabilities of $2.3 million from existing leases on the Company's unaudited Condensed Consolidated Balance Sheet. Operating lease liabilities include amounts previously classified as “Deferred Rent” in the unaudited Condensed Consolidated Balance Sheet as of June 30, 2019. See Note 11, Leases, for further details. The adoption of ASC Topic 842 had no impact on the Company’s unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) or Condensed Consolidated Statement of Cash Flows.

 

There have been no other material changes to our significant accounting policies during the six months ended December 31, 2019, from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

 

Reclassifications

The classification of certain prior-year amounts have been adjusted in our unaudited Condensed Consolidated Financial Statements to conform to current year classifications. An accrual of $467,000 related to the lease for ISP Optics Corporation’s (“ISP”) Irvington, New York facility (the “Irvington Facility”) was reclassified from “Deferred rent, current portion” to “Accrued liabilities” in the unaudited Condensed Consolidated Balance Sheet as of June 30, 2019. See Note 11, Lease Commitments, and Note 14, Restructuring, for further information. In addition, upon adoption of ASC Topic 842, amounts previously included in the line items “Capital lease obligation, current portion” and “Capital lease obligation, less current portion” are now included in the line items “Finance lease obligation, current portion” and “Finance lease obligation, less current portion”, respectively, in the unaudited Condensed Consolidated Balance Sheet as of June 30, 2019.

 

 

 

Product Revenue

We are 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. We design, develop, manufacture, and distribute optical components and assemblies utilizing advanced optical manufacturing processes. We also perform research and development for optical solutions for a wide range of optics markets. Revenue is derived primarily from the sale of optical components and assemblies.

 

Revenue Recognition

Revenue is generally recognized upon transfer of control, including the risks and rewards of ownership, of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We generally bear all costs, risk of loss, or damage and retain title to the goods up to the point of transfer of control of products to customers. Shipping and handling costs are included in the cost of goods sold. We present revenue net of sales taxes and any similar assessments.

 

Customary payment terms are granted to customers, based on credit evaluations. We currently do not have any contracts where revenue is recognized, but the customer payment is contingent on a future event. We record deferred revenue when cash payments are received or due in advance of our performance. Deferred revenue was immaterial as of June 30, 2019 and December 31, 2019.

 

Nature of Products

Revenue from the sale of optical components and assemblies is recognized upon transfer of control, including the risks and rewards of ownership, to the customer. The performance obligations for the sale of optical components and assemblies are satisfied at a point in time. Product development agreements are generally short term in nature, with revenue recognized upon satisfaction of the performance obligation, and transfer of control of the agreed-upon deliverable. We have organized our products in three groups: precision molded optics (“PMO”), infrared, and specialty products. Revenues from product development agreements are included in specialty products. Revenue by product group for the three and six months ended December 31, 2019 and 2018 was as follows:

 

	Three Months Ended December 31,		Six Months Ended December 31,
	2019	2018	2019	2018
PMO	$3,710,549	$4,126,091	$6,895,007	$7,238,195
Infrared Products	5,003,874	3,729,845	8,963,499	8,690,772
Specialty Products	885,489	692,571	1,293,336	1,169,261
Total revenue	$9,599,912	$8,548,507	$17,151,842	$17,098,228

 

The components of inventories include the following:

	December 31, 2019	June 30, 2019
Raw materials	$3,469,263	$3,467,105
Work in process	2,377,664	2,288,226
Finished goods	2,573,561	2,704,471
Allowance for obsolescence	(878,159)	(775,275)
	$7,542,329	$7,684,527

 

The value of tooling in raw materials was approximately $2.3 million and $2.2 million at December 31, 2019 and June 30, 2019, respectively.

 

Property and equipment are summarized as follows:

	Estimated	December 31,	June 30,
	Lives (Years)	2019	2019
Manufacturing equipment	5 - 10	$18,246,535	$17,412,136
Computer equipment and software	3 - 5	786,089	706,840
Furniture and fixtures	5	315,190	293,582
Leasehold improvements	5 - 7	2,151,397	2,074,069
Construction in progress		522,697	697,126
Total property and equipment		22,021,908	21,183,753
Less accumulated depreciation and amortization		(10,381,366)	(9,452,669)
Total property and equipment, net		$11,640,542	$11,731,084

 

6. Goodwill and Intangible Assets

There were no changes in the net carrying value of goodwill during the six months ended December 31, 2019.

 

Identifiable intangible assets were comprised of:

 

	Useful	December 31,	June 30,
	Lives (Years)	2019	2019
Customer relationships	15	$3,590,000	$3,590,000
Backlog	2	366,000	366,000
Trade secrets	8	3,272,000	3,272,000
Trademarks	8	3,814,000	3,814,000
Non-compete agreement	3	27,000	27,000
Total intangible assets		11,069,000	11,069,000
Less accumulated amortization		(3,798,494)	(3,231,694)
Total intangible assets, net		$7,270,506	$7,837,306

 

 

Future amortization of identifiable intangibles is as follows:

 

Fiscal year ending:
June 30, 2020 (remaining six months)	$562,542
June 30, 2021	1,125,083
June 30, 2022	1,125,083
June 30, 2023	1,125,083
June 30, 2024 and later	3,332,715
	$7,270,506

 

7.   Accounts Payable

The accounts payable balance as of December 31, 2019 and June 30, 2019 includes earned but unpaid Board of Directors’ fees of approximately $82,000 and $91,000, respectively.

 

8.   Income Taxes

A summary of our total income tax expense and effective income tax rate for the three and six months ended December 31, 2019 and 2018 is as follows:

	Three Months Ended December 31,		Six Months Ended December 31,
	2019	2018	2019	2018
Income (loss) before income taxes	$1,090,986	$(7,127)	$(135,853)	$(768,978)
Income tax provision (benefit)	$321,869	$(23,403)	$470,187	$(202,363)
Effective income tax rate	30%	328%	-346%	26%

The difference between our effective tax rates in the periods presented above and the federal statutory rate is due to the mix of taxable income and losses generated in our various tax jurisdictions, which include the United States (the “U.S.”), the People’s Republic of China, and the Republic of Latvia. Income tax expense for the three and six months ended December 31, 2019 was primarily related to income taxes from our operations in China, as we are not recording additional income tax benefits on losses in the U.S. jurisdiction based on our assessment of the valuation allowance position on our U.S. net deferred tax assets. For the three and six months ended December 31, 2018, we recorded a net income tax benefit, comprised of a tax benefit on losses in the U.S. jurisdiction, offset by tax expense on income generated in China. Income tax expense for the three and six months ended December 31, 2019 also includes withholding taxes accrued on a $2 million intercompany dividend declared in December 2019 by LightPath Optical Instrumentation (Zhenjiang) Co., Ltd. (“LPOIZ”), which dividend will be paid to us, as its parent company.

 

We record net deferred tax assets to the extent we believe it is more likely than not that some portion or all of these assets will 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. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of December 31, 2019 and June 30, 2019, we have provided for a valuation allowance against our net deferred tax assets to reduce the net deferred tax assets to the amount we estimate is more-likely-than-not to be realized. Our net deferred tax asset consists primarily of U.S. net operating loss (“NOL”) carryforward benefits, and federal and state tax credits with indefinite carryover periods.

 

 

U.S. Federal and State Income Taxes

Our U.S. federal and state statutory income tax rate is estimated to be 25%. Based on our current assessment of the valuation allowance position on our net deferred tax assets, no tax benefit is expected to be recorded on pre-tax losses generated in the U.S.

 

Income Tax Law of the People’s Republic of China

Our Chinese subsidiaries, LightPath Optical Instrumentation (Shanghai) Co., Ltd. (“LPOI”) and LPOIZ, are governed by the Income Tax Law of the People’s Republic of China. As of December 31, 2019, LPOI and LPOIZ were subject to statutory income tax rates of 25% and 15%, respectively. In December 2019, we declared an intercompany dividend of $2 million from LPOIZ, payable to us as its parent company. Accordingly, we accrued Chinese withholding taxes of $200,000 associated with the dividend. Of the $2 million dividend, $1 million was paid to us during the quarter ended December 31, 2019, from which taxes of $100,000 were withheld and paid. An additional $100,000 of withholding taxes were accrued as of December 31, 2019, and will be withheld and paid at a future date, when the remaining $1 million is paid to us. Other than these withholding taxes, this intercompany dividend has no impact on our unaudited Condensed Consolidated Finanacial Statements. This dividend is from earnings accumulated prior to January 1, 2019. We currently intend to permanently invest earnings generated after January 1, 2019 from LPOIZ and, therefore, have not provided for future Chinese withholding taxes on such related earnings.

 

Law of Corporate Income Tax of Latvia

Our Latvian subsidiary, ISP Optics Latvia, SIA (“ISP Latvia”), is governed by the Law of Corporate Income Tax of Latvia. 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%. As a transitional measure, distributions of earnings prior to January 1, 2018 are not subject to tax if declared prior to December 31, 2019. ISP Latvia has declared an intercompany dividend to be paid to ISP, its U.S. parent company.  Distributions of this dividend will be from earnings prior to January 1, 2018 and, therefore, will not be subject to tax. We currently do not intend to distribute any earnings generated after January 1, 2018. If, in the future, we change such intention, we will accrue distribution taxes, if any, as profits are generated.

 

9.   Stock-Based Compensation

Our directors, officers, and key employees are granted stock-based compensation through our Amended and Restated Omnibus Incentive Plan, as amended (the “Omnibus Plan”), through October 2018 and after that date, the 2018 Stock and Incentive Compensation Plan (the “SICP”), including incentive stock options, non-qualified stock options, and restricted stock unit (“RSU”) awards. The stock-based compensation expense is based primarily on the fair value of the award as of the grant date, and is recognized as an expense over the requisite service period.

 

The following table shows total stock-based compensation expense for the six months ended December 31, 2019 and 2018 included in the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income (Loss):

 

	Six Months Ended December 31,
	2019	2018
Stock options	$5,307	$29,468
RSUs	173,082	168,347
Total	$178,389	$197,815
The amounts above were included in:
Selling, general & administrative	$178,389	$196,378
Cost of sales	-	1,620
New product development	-	(183)
	$178,389	$197,815

 

 

We also adopted the LightPath Technologies, Inc. Employee Stock Purchase Plan (the “2014 ESPP”). The 2014 ESPP permits employees to purchase Class A common stock through payroll deductions, subject to certain limitations. A discount of $1,203 and $2,084 for the six months ended December 31, 2019 and 2018, respectively, is included in the selling, general and administrative expense in the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income (Loss), which represents the value of the 10% discount given to the employees purchasing stock under the 2014 ESPP.

 

Grant Date Fair Values and Underlying Assumptions; Contractual Terms

We estimate the fair value of each stock option as of the date of grant, using the Black-Scholes-Merton pricing model. The fair value of 2014 ESPP shares is the amount of the discount the employee obtains at the date of the purchase transaction.

Most stock options granted vest ratably over two to four years and are generally exercisable for ten years. The assumed forfeiture rates used in calculating the fair value of RSU grants was 0%, and the assumed forfeiture rates used in calculating the fair value of options for performance and service conditions were 20% for each of the six-month periods ended December 31, 2019 and 2018. The volatility rate and expected term are based on seven-year historical trends in Class A common stock closing prices and actual forfeitures. The interest rate used is the U.S. Treasury interest rate for constant maturities.

For the six months ended December 31, 2019 and 2018, there were no stock options granted under the Omnibus Plan. For stock options granted under the SICP in the six-month periods ended December 31, 2019 and 2018, we estimated the fair value of each stock option as of the date of grant using the following assumptions:

	Six Months Ended December 31,
	2019	2018
Weighted-average expected volatility	63.7%	56%-69%
Dividend yields	0%	0%
Weighted-average risk-free interest rate	1.57%	2.65%-3.00%
Weighted-averageexpected term, in years	7.50	2.53

 

Information Regarding Current Share-Based Compensation Awards

A summary of the activity for share-based compensation awards in the six months ended December 31, 2019 is presented below:

  

				Restricted
	Stock Options			Stock Units (RSUs)
		Weighted-	Weighted-		Weighted-
		Average	Average		Average
		Exercise	Remaining		Remaining
	Shares	Price	Contract	Shares	Contract
June 30, 2019	979,925	$1.80	5.5	1,864,526	0.9
Granted	64,817	$1.28	9.9	384,000	2.9
Exercised	—			(17,204)
Cancelled/Forfeited	(191,366)	$1.73		—
December 31, 2019	853,376	$1.77	5.3	2,231,322	0.9
Awards exercisable/
vested as of
December 31, 2019	788,229	$1.73	5.1	1,650,325	—
Awards unexercisable/
unvested as of
December 31, 2019	65,147	$1.72	5.1	580,997	0.9
	853,376			2,231,322

 

 

 

Basic earnings per share is computed by dividing net income or loss 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 of Class A common stock are described in the following table:

	Three Months Ended December 31,		Six Months Ended December 31,
	2019	2018	2019	2018
Net income (loss)	$769,117	$16,276	$(606,040)	$(566,615)
Weighted-average common shares outstanding:
Basic number of shares	25,837,903	25,781,941	25,832,337	25,777,330
Effect of dilutive securities:
Options to purchase common stock	-	133,471	-	-
RSUs	1,523,370	1,481,827	-	-
Diluted number of shares	27,361,273	27,397,239	25,832,337	25,777,330
Earnings (loss) per common share:
Basic	$0.03	$0.00	$(0.02)	$(0.02)
Diluted	$0.03	$0.00	$(0.02)	$(0.02)

 

The following potential dilutive shares were not included in the computation of diluted earnings per share of Class A common stock, as their effects would be anti-dilutive:

	Three Months Ended December 31,		Six Months Ended December 31,
	2019	2018	2019	2018
Options to purchase common stock	1,013,743	875,085	996,834	1,006,348
RSUs	527,416	274,334	1,957,189	1,702,757
	1,541,159	1,149,419	2,954,023	2,709,105

 

 

 

As discussed in Note 2, Significant Accounting Policies, the Company adopted ASC Topic 842 effective July 1, 2019. Our leases primarily consist of operating leases related to our facilities located in Orlando, Florida; Irvington, New York; Riga, Latvia; Shanghai, China; and Zhenjiang, China, and finance leases related to certain equipment located in Orlando, Florida. The operating leases for facilities are non-cancelable operating leases, expiring through 2022. We include options to renew (or terminate) in our lease term, and as part of our right-of-use (“ROU”) assets and lease liabilities, when it is reasonably certain that we will exercise that option. We currently have obligations under five finance lease agreements, entered into during fiscal years 2016 to 2019, with terms ranging from three to five years. The leases are for computer and manufacturing equipment.

 

Our operating lease ROU assets and the related lease liabilities are initially measured at the present value of future lease payments over the lease term. Two of our operating leases include renewal options, which were not included in the measurement of the operating lease ROU assets and related lease liabilities. As most of our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Currently, none of our leases include variable lease payments that are dependent on an index or rate. We are responsible for payment of certain real estate taxes, insurance and other expenses on certain of our leases. These amounts are generally considered to be variable and are not included in the measurement of the ROU asset and lease liability. We generally account for non-lease components, such as maintenance, separately from lease components. Our lease agreements do not contain any material residual value guarantees or material restricted covenants. Leases with a term of 12 months or less are not recorded on the unaudited Condensed Consolidated Balance Sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

 

We are party to two leases with respect to our facility located in Orlando, Florida (the “Orlando Facility”). We received tenant improvement allowances for each of our two Orlando Facility leases. These allowances were used to construct improvements and are included in leasehold improvements and operating lease liabilities. The balances are being amortized over the corresponding lease terms.

 

The components of lease expense were as follows:

 

	Three Months Ended December 31, 2019	Six Months Ended December 31, 2019
Operating lease cost	$172,102	$336,973
Finance lease cost:
Depreciation of lease assets	86,063	172,126
Interest on lease liabilities	20,425	42,957
Total finance lease cost	106,488	215,083
Total lease cost	$278,590	$552,056

 

Supplemental balance sheet information related to leases was as follows:

 

	Classification	As of December 31, 2019
Assets:
Operating lease assets	Operating lease assets	$1,488,126
Finance lease assets	Property and equipment, net(1)	913,234
Total lease assets		$2,401,360
Liabilities:
Current:
Operating leases	Operating lease liabilities, current	$749,399
Short-term leases	Accrued liabilities(2)	282,985
Finance leases	Finance lease liabilities, current	378,095
Noncurrent:
Operating leases	Operating lease liabilities, less current portion	1,265,152
Finance leases	Finance lease liabilities, less current portion	456,388
Total lease liabilities		$3,132,019

 

 

 

Lease term and discount rate information related to leases was as follows:

 

Lease Term and Discount Rate	As of December 31, 2019
Weighted Average Remaining Lease Term (in years)
Operating leases	2.6
Finance leases	2.4
Weighted Average Discount Rate
Operating leases	4.9%
Finance leases	7.9%

 

Supplemental cash flow information:

 

	Six Months Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash used for operating leases	$386,661
Operating cash used for finance leases	$42,970
Financing cash used for finance leases	$210,225