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

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 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.)

 

2603 Challenger Tech Ct. Suite 100

Orlando, Florida 32826

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

(Address of principal executive offices)

(ZIP Code)

 

(407) 382-4003

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

(Registrant’s telephone number, including area code)

N/A

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

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

 

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

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	None	None

 

 

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 [ ]
Non-accelerated filer [ X]	Smaller reporting company [ 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:

 

25,813,895 shares of common stock, Class A, $.01 par value, outstanding as of May 6, 2019.

 

 

LIGHTPATH TECHNOLOGIES, INC.

Form 10-Q

Index

 

Item			Page
Cautionary Note Concerning Forward-Looking Statements			4
Part I	Financial Information		5
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 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		20
	Overview		20
	Results of Operations		21
	Liquidity and Capital Resources		24
	Contractual Obligations and Commitments		25
	Off-Balance Sheet Arrangements		25
	Critical Accounting Policies and Estimates		25
	Non-GAAP Financial Measures		29
Item 4	Controls and Procedures		31
Part II	Other Information		32
Item 1	Legal Proceedings		32
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 3	Defaults Upon Senior Securities		32
Item 4	Mine Safety Disclosures		32
Item 5	Other Information		32
Item 6	Exhibits		32
Signatures			36

 

 

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended March 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, 2018. 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.

 

 

 

  PART I

Financial Information

Item 1. Financial Statements

 

LIGHTPATH TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(unaudited)
	March 31,	June 30,
Assets	2019	2018
Current assets:
Cash and cash equivalents	$4,641,457	$5,508,620
Restricted cash	-	1,000,000
Trade accounts receivable, net of allowance of $27,145 and $13,364	5,899,062	5,370,508
Inventories, net	7,586,734	6,404,741
Other receivables	3,789	46,574
Prepaid expenses and other assets	934,068	1,058,610
Total current assets	19,065,110	19,389,053
Property and equipment, net	12,520,168	11,809,241
Intangible assets, net	8,120,826	9,057,970
Goodwill	5,854,905	5,854,905
Deferred tax assets, net	1,030,000	624,000
Other assets	319,021	381,945
Total assets	$46,910,030	$47,117,114
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$2,424,960	$2,032,834
Accrued liabilities	789,886	685,430
Accrued payroll and benefits	1,194,182	1,228,120
Loans payable, current portion	581,350	1,458,800
Capital lease obligation, current portion	401,666	307,199
Total current liabilities	5,392,044	5,712,383
Capital lease obligation, less current portion	673,659	550,127
Deferred rent	633,526	377,364
Loans payable, less current portion	5,140,837	5,119,796
Total liabilities	11,840,066	11,759,670
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; 25,813,895 and 25,764,544
shares issued and outstanding	258,139	257,645
Additional paid-in capital	230,226,315	229,874,823
Accumulated other comprehensive income	752,675	473,508
Accumulated deficit	(196,167,165)	(195,248,532)
Total stockholders’ equity	35,069,964	35,357,444
Total liabilities and stockholders’ equity	$46,910,030	$47,117,114

 

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

 

 

LIGHTPATH TECHNOLOGIES, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
	Three Months Ended March 31,		Nine Months Ended March 31,
	2019	2018	2019	2018
Revenue, net	$7,905,582	$8,503,628	$25,003,810	$24,437,094
Cost of sales	4,799,913	5,211,602	15,313,825	14,344,015
Gross margin	3,105,669	3,292,026	9,689,985	10,093,079
Operating expenses:
Selling, general and administrative	2,431,819	2,362,578	7,414,550	7,054,996
New product development	505,636	384,380	1,494,412	1,178,849
Amortization of intangibles	283,521	329,270	937,143	987,812
(Gain) loss on disposal of property and equipment	(136,125)	—	(92,868)	3,315
Total operating costs and expenses	3,084,851	3,076,228	9,753,237	9,224,972
Operating income (loss)	20,818	215,798	(63,252)	868,107
Other income (expense):
Interest expense, net	(275,233)	342,796	(573,535)	(52,212)
Change in fair value of warrant liability	—	—	—	(194,632)
Other income (expense), net	64,267	484,531	(322,339)	927,383
Total other income (expense), net	(210,966)	827,327	(895,874)	680,539
Income (loss) before income taxes	(190,148)	1,043,125	(959,126)	1,548,646
Income tax provision (benefit)	161,870	(183,154)	(40,493)	(318,678)
Net income (loss)	$(352,018)	$1,226,279	$(918,633)	$1,867,324
Foreign currency translation adjustment	53,327	77,477	279,167	200,886
Comprehensive income (loss)	$(298,691)	$1,303,756	$(639,466)	$2,068,210
Earnings (loss) per common share (basic)	$(0.01)	$0.05	$(0.04)	$0.08
Number of shares used in per share calculation (basic)	25,810,681	25,546,512	25,788,286	24,763,458
Earnings (loss) per common share (diluted)	$(0.01)	$0.04	$(0.04)	$0.07
Number of shares used in per share calculation (diluted)	25,810,681	27,281,010	25,788,286	26,618,956

 

  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, 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
Issuance of common stock for:
Exercise of stock options, net	12,813	128	9,378	—	—	9,506
Employee Stock Purchase Plan	11,810	118	20,963	—	—	21,081
Stock-based compensation on stock options & RSUs	—	—	98,482	—	—	98,482
Foreign currency translation adjustment	—	—	—	53,327	—	53,327
Net loss	—	—	—	—	(352,018)	(352,018)
Balances at March 31, 2019	25,813,895	$258,139	$230,226,315	$752,675	$(196,167,165)	$35,069,964
Balances at June 30, 2017	24,215,733	$242,157	$225,492,252	$295,396	$(196,308,636)	$29,721,169
Issuance of common stock for:
Exercise of warrants	25,000	250	30,000	—	—	30,250
Employee Stock Purchase Plan	7,093	71	19,009	—	—	19,080
Reclassification of warrant liability upon exercise	—	—	34,500	—	—	34,500
Stock-based compensation on stock options & RSUs	—	—	92,241	—	—	92,241
Foreign currency translation adjustment	—	—	—	54,147	—	54,147
Net income	—	—	—	—	217,695	217,695
Balances at September 30, 2017	24,247,826	$242,478	$225,668,002	$349,543	$(196,090,941)	$30,169,082
Exercise of warrants	408,810	4,088	504,980	—	—	509,068
Exercise of stock options	46,250	463	103,238	—	—	103,701
Reclassification of warrant liability upon exercise	—	—	650,632	—	—	650,632
Stock-based compensation on stock options & RSUs	—	—	377,367	—	—	377,367
Foreign currency translation adjustment	—	—	—	69,262	—	69,262
Net income	—	—	—	—	423,351	423,351
Balances at December 31, 2017	24,702,886	$247,029	$227,304,219	$418,805	$(195,667,590)	$32,302,463
Exercise of warrants	—	—	(5,000)	—	—	(5,000)
Employee Stock Purchase Plan	12,887	129	29,382	—	—	29,511
Exercise of stock options	47,563	475	89,974	—	—	90,449
Settlement of Sellers Note	967,208	9,672	2,237,392	—	—	2,247,064
Stock-based compensation on stock options & RSUs	—	—	93,187	—	—	93,187
Foreign currency translation adjustment	—	—	—	77,477	—	77,477
Net income	—	—	—	—	1,226,278	1,226,278
Balances at March 31, 2018	25,730,544	$257,305	$229,749,154	$496,282	$(194,441,312)	$36,061,429

 

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

 

 

LIGHTPATH TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
	Nine Months Ended March 31,
	2019	2018
Cash flows from operating activities:
Net (loss) income	$(918,633)	$1,867,324
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	2,540,963	2,492,003
Interest from amortization of debt costs	112,618	13,704
(Gain) loss on disposal of property and equipment	(92,868)	3,315
Stock-based compensation on stock options & RSUs, net	296,297	279,397
Provision for doubtful accounts receivable	(4,436)	(11,868)
Change in fair value of warrant liability	—	194,632
Change in fair value of Sellers Note	—	(396,163)
Deferred rent amortization	(52,720)	(58,234)
Inventory write-offs to reserve	3,193	134,052
Deferred tax benefit	(406,000)	(205,884)
Changes in operating assets and liabilities:
Trade accounts receivable	(523,661)	312,026
Other receivables	42,575	(29,018)
Inventories	(1,614,551)	(1,013,201)
Prepaid expenses and other assets	181,200	(409,137)
Accounts payable and accrued liabilities	461,970	(500,237)
Net cash provided by operating activities	25,947	2,672,711
Cash flows from investing activities:
Purchase of property and equipment	(1,673,482)	(2,481,715)
Proceeds from sale of equipment	316,750	—
Net cash used in investing activities	(1,356,732)	(2,481,715)
Cash flows from financing activities:
Proceeds from exercise of stock options	13,767	194,150
Proceeds from sale of common stock from Employee Stock Purchase Plan	41,922	48,591
Loan costs	(92,860)	(60,453)
Borrowings on loan payable	5,813,500	2,942,583
Proceeds from exercise of warrants, net of costs	—	534,318
Payments on loan payable	(6,686,167)	(4,351,836)
Payments on capital lease obligations	(244,210)	(196,790)
Net cash used in financing activities	(1,154,048)	(889,437)
Effect of exchange rate on cash and cash equivalents	617,670	(998,410)
Change in cash and cash equivalents and restricted cash	(1,867,163)	(1,696,851)
Cash and cash equivalents and restricted cash, beginning of period	6,508,620	8,085,015
Cash and cash equivalents and restricted cash, end of period	$4,641,457	$6,388,164
Supplemental disclosure of cash flow information:
Interest paid in cash	$379,539	$417,550
Income taxes paid	$297,599	$562,491
Supplemental disclosure of non-cash investing & financing activities:
Purchase of equipment through capital lease arrangements	$462,209	$306,220
Reclassification of warrant liability upon exercise	—	$685,132
Derecognition of liability associated with stock option grants	—	$283,399
Conversion of Sellers Note to Common Stock	—	$2,247,064

 

  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 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, 2018, 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, 2018 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, 2018.

 

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

 

Revenue from Contracts with Customers – In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-9, Revenue from Contracts with Customers (“ASU 2014-9”). The standard, along with the amendments issued in 2016 and 2015, provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the previous revenue guidance. ASU 2014-9 is required to be adopted, using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-9; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-9 recognized at the date of initial application and providing certain additional disclosures. This standard, as amended, is effective for annual and interim periods beginning after December 15, 2017 and permits entities to early adopt for annual and interim reporting periods beginning after December 15, 2016. We adopted this standard as of July 1, 2018, using the modified retrospective transition method. The impact on the Consolidated Financial Statements upon adoption of this standard was immaterial. For additional information, see Note 3, Revenue, to these unaudited Condensed Consolidated Financial Statements.

 

Income Taxes – In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) (“ASU 2016-16”). ASU 2016-16 will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. ASU 2016-16 was effective for us beginning in the first quarter of fiscal 2019. We adopted this standard effective July 1, 2018, and there was no significant impact on the unaudited Condensed Consolidated Financial Statements upon the adoption of this standard.

 

 

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. ASU 2017-09 was effective for us beginning in the first quarter of fiscal 2019. We adopted this standard effective July 1, 2018, and there was no impact on the unaudited Condensed Consolidated Financial Statements upon the adoption of this standard.

 

There have been no other material changes to our significant accounting policies during the nine months ended March 31, 2019, from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

 

Recent Accounting Standards Yet to be Adopted

 

Leases – In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). This guidance requires an entity to recognize lease liabilities and a right-of-use asset for all leases on the balance sheet and to disclose key information about the entity’s leasing arrangements. ASU 2016-02 must be adopted using a modified retrospective approach for all leases existing at, or entered into after the date of initial adoption, with an option to elect to use certain transition relief. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with earlier adoption permitted. Our current operating lease portfolio is primarily comprised of real estate leases. Upon adoption of this standard, we expect our Consolidated Balance Sheet to include a right-of-use asset and liability related to substantially all operating lease arrangements. ASU 2016-02 is effective for us beginning in the first quarter of our fiscal year ending June 30, 2020.

 

 

On July 1, 2018, the Company adopted ASU 2014-9 using the modified retrospective method, which required us to record a cumulative effect adjustment, if any, at the date of adoption. The adoption did not have a material impact on our unaudited Condensed Consolidated Financial Statements and, as a result, no changes were made to prior reporting periods presented.

 

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 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 promised 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, 2018 and March 31, 2019.

 

Nature of Products

Revenue from the sale of optical components and assemblies is recognized upon transfer of control 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 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. Our revenue by product group for the three and nine months ended March 31, 2019 and 2018 was as follows:

 

	Three Months Ended March 31,		Nine Months EndedMarch 31,
	2019	2018	2019	2018
PMO	$3,351,916	$3,603,670	$10,590,111	$10,144,516
Infrared Products	3,833,969	4,149,026	12,524,741	11,987,377
Specialty Products	719,697	750,932	1,888,958	2,305,201
Total revenue	$7,905,582	$8,503,628	$25,003,810	$24,437,094

 

 

 

The components of inventories include the following:

	March 31, 2019	June 30, 2018
Raw materials	$3,104,825	$2,309,454
Work in process	2,588,073	2,506,891
Finished goods	2,687,663	2,263,121
Allowance for obsolescence	(793,827)	(674,725)
	$7,586,734	$6,404,741

 

The value of tooling in raw materials was approximately $1.9 million and $1.6 million at March 31, 2019 and June 30, 2018, respectively.

 

Property and equipment are summarized as follows:

	Estimated	March 31,	June 30,
	Lives (Years)	2019	2018
Manufacturing equipment	5 - 10	$17,688,302	$16,534,124
Computer equipment and software	3 - 5	667,175	513,681
Furniture and fixtures	5	288,474	199,872
Leasehold improvements	5 - 7	1,989,263	1,350,482
Construction in progress		858,611	954,317
Total property and equipment		21,491,825	19,552,476
Less accumulated depreciation and amortization		(8,971,657)	(7,743,235)
Total property and equipment, net		$12,520,168	$11,809,241

 

 

There were no changes in the net carrying value of goodwill during the nine months ended March 31, 2019, and there have been no events of changes in circumstances that indicate the carrying value of goodwill may not be recoverable.

 

Identifiable intangible assets were comprised of:

 

	Useful	March 31,	June 30,
	Lives (Years)	2019	2018
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		(2,948,174)	(2,011,030)
Total intangible assets, net		$8,120,826	$9,057,970

 

Future amortization of identifiable intangibles is as follows:

 

Fiscal year ending:
June 30, 2019 (remaining three months)	$283,520
June 30, 2020	1,129,342
June 30, 2021	1,125,083
June 30, 2022	1,125,083
June 30, 2023 and later	4,457,798
	$8,120,826

 

7.   Accounts Payable

The accounts payable balance as of March 31, 2019 and June 30, 2018 both include approximately $82,000 of earned but unpaid Board of Directors’ fees.

 

 

8.   Income Taxes

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

	Three Months Ended March 31,		Nine Months Ended March 31,
	2019	2018	2019	2018
Income (loss) before income taxes	$(190,148)	$1,043,125	$(959,126)	$1,548,646
Income tax provision (benefit)	$161,870	$(183,154)	$(40,493)	$(318,678)
Effective income tax rate	-85%	-18%	4%	-21%

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 (“U.S.”), the People’s Republic of China, and the Republic of Latvia. For the three months ended March 31, 2019, the provision for income taxes is primarily attributable to tax expense on income generated in China. For the nine months ended March 31, 2019, we recorded a net income tax benefit, representing a tax benefit on losses in the U.S. jurisdiction, offset by tax expense on income generated in China. The income tax benefit for the three and nine months ended March 31, 2018 was primarily related to discrete income tax items related to our non-U.S. operations. First, the statutory tax rate applicable to one of our Chinese subsidiaries, LightPath Optical Instrumentation (Zhenjiang) Co., Ltd. (“LPOIZ”), was lowered from 25% to 15% in accordance with an incentive program for technology companies. The rate change occurred during the three months ended December 31, 2017, and applied to LPOIZ’s 2017 tax year, beginning on January 1, 2017. Accordingly, we recorded a tax benefit during the nine months ended March 31, 2018 related to this retroactive rate change. Second, the Republic of Latvia enacted income tax reform effective January 1, 2018, which resulted in a tax benefit from the reduction of the previously recorded net deferred tax liability to zero during the three months ended March 31, 2018.

 

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 March 31, 2019, and June 30, 2018, 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.

 

Tax Cuts and Jobs Act

In December 2017, Congress passed, and the President signed into law, the Tax Cuts and Jobs Act (the “2017 Act”), which changed existing U.S. tax law and included various provisions that affect companies in the United States. Among other things, the 2017 Act: (i) changed U.S. corporate tax rates, (ii) generally reduced a company’s ability to utilize accumulated net operating losses, and (iii) required the calculation of a one-time transition tax on certain foreign earnings and profits (“foreign E&P”) that had not been previously repatriated.

 

During the quarter ended December 31, 2018, we completed our accounting of the income tax impact from the enactment of the 2017 Act and there were no material changes from the estimates reported in our Annual Report on Form 10-K for the year ended June 30, 2018. The 2017 Act provides for a one-time transition tax on our post-1986 foreign E&P that have not been previously repatriated. We determined that our foreign E&P was approximately $9.9 million and we do not owe any one-time transition tax due to the utilization of U.S. NOL carryforward benefits against these earnings. We have also completed our evaluation of the U.S. federal corporate income tax impacts of the Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income provisions of the 2017 Act, and our tax expense includes the impact of these provisions as a period cost in our effective tax rate.

 

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 March 31, 2019, LPOI and LPOIZ were subject to statutory income tax rates of 25% and 15%, respectively.

 

We currently intend to permanently invest earnings generated from our foreign Chinese operations and, therefore, have not previously provided for future Chinese withholding taxes on such related earnings. However, if in the future we change such intention, the Company would provide for and pay additional foreign taxes, if any, at that time.

 

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. As of December 31, 2017, ISP Latvia was subject to a statutory income tax rate of 15%. Effective January 1, 2018, the Republic of Latvia enacted tax reform with the following key provisions: (i) corporations are no longer subject to income tax, but are instead subject to a distribution tax on distributed profits (or deemed distributions, as defined) and (ii) the tax rate was changed to 20%; however, distribution amounts are first divided by 0.8 to arrive at the taxable amount of profit, resulting in an effective tax rate of 25%. As a transitional measure, distributions made from earnings prior to January 1, 2018, distributed prior to December 31, 2019, are not subject to tax. As such, any distributions of profits from ISP Latvia to ISP Optics Corporation (“ISP”), its U.S. parent company, 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 current 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 were granted stock-based compensation through our Amended and Restated Omnibus Incentive Plan, as amended (the “Omnibus Plan”), through October 2018 and after that date, the 2018 Stock and Incentive Compensation Plan (the “SICP”). The awards include 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 nine months ended March 31, 2019 and 2018 included in the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income:

 

	Nine Months EndedMarch 31,
	2019	2018
Stock options	$32,963	$29,450
RSUs	263,334	249,947
Total	$296,297	$279,397
The amounts above were included in:
Selling, general & administrative	$294,859	$274,005
Cost of sales	1,620	4,388
New product development	(182)	1,004
	$296,297	$279,397

 

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 $3,856 and $4,879 for the nine months ended March 31, 2019 and 2018, respectively, is included in the selling, general and administrative expense in the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income, 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 nine months ended March 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 stock options granted under the Omnibus Plan or SICP, as applicable, in the nine-month periods ended March 31, 2019 and 2018, we estimated the fair value of each stock option as of the date of grant using the following assumptions:

	Nine Months Ended March 31,
	2019		2018
Weighted-average expected volatility	56%-69%		63% - 75%
Dividend yields	0%		0%
Weighted-average risk-free interest rate	2.65%-3.00%		1.28% - 1.80%
Weighted-average expected term, in years	2.53		7.25

 

Information Regarding Current Share-Based Compensation Awards

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

 

		Stock Options		Stock Units (RSUs)
		Weighted-	Weighted-		Weighted-
		Average	Average		Average
		Exercise	Remaining		Remaining
	Shares	Price	Contract	Shares	Contract
June 30, 2018	1,005,129	$1.77	6.3	1,649,353	0.9
Granted	13,058	$2.10	9.6	229,509	2.6
Exercised	(17,610)	$1.08	—	(14,336)	—
Cancelled/Forfeited	(20,652)	$1.17	—	—	—
March 31, 2019	979,925	$1.80	5.7	1,864,526	0.9
Awards exercisable/
vested as of
March 31, 2019	864,980	$1.70	5.4	1,464,382	—
Awards unexercisable/
unvested as of
March 31, 2019	114,945	$2.55	8.0	400,144	0.9
	979,925			1,864,526

 

RSU awards vest immediately or from two to four years from the grant date.

As of March 31, 2019, there was approximately $589,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements (including share options and RSUs) granted. We expect to recognize the compensation cost as follows:

 

	Stock
	Options	RSUs	Total
Three months ending June 30, 2019	3,498	62,032	65,530
Year ending June 30, 2020	8,926	289,944	298,870
Year ending June 30, 2021	5,939	169,978	175,917
Year ending June 30, 2022	2,021	46,654	48,675
	$20,384	$568,608	$588,992

 

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 presented in the following table:

	Three Months Ended March 31,		Nine Months Ended March 31,
	2019	2018	2019	2018
Net income (loss)	$(352,018)	$1,226,279	$(918,633)	$1,867,324
Weighted-average common shares outstanding:
Basic number of shares	25,810,681	25,546,512	25,788,286	24,763,458
Effect of dilutive securities:
Options to purchase common stock	-	295,055	-	355,858
RSUs	-	1,439,443	-	1,381,190
Common stock warrants	-	-	-	118,450
Diluted number of shares	25,810,681	27,281,010	25,788,286	26,618,956
Earnings (loss) per common share:
Basic	$(0.01)	$0.05	$(0.04)	$0.08
Diluted	$(0.01)	$0.04	$(0.04)	$0.07