LIGHTPATH TECHNOLOGIES INC - Quarter Report: 2020 December (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 December 31, 2020

 

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

 

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

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:

 

26,138,292 shares of common stock, Class A, $0.01 par value, outstanding as of February 1, 2021.

 

 

 

LIGHTPATH TECHNOLOGIES, INC.

Form 10-Q

Index

Item		Page
Cautionary Note Concerning Forward-Looking Statements		3
Part I	Financial Information	4
Item 1	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)	5
	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity	6
	Unaudited Condensed Consolidated Statements of Cash Flows	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	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	31
Part II	Other Information	32
Item 1	Legal Proceedings	32
Item 1A	Risk Factors	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	33
Signatures		35

 

 

 

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended December 31, 2020 (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, statements related to the expected effects on our business from the coronavirus (“COVID-19”) pandemic, 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 including, but not limited to, the duration and scope of the COVID-19 pandemic and impact on the demand for our products; our ability to obtain needed raw materials and components from our suppliers; actions governments, businesses, and individuals take in response to the pandemic, including mandatory business closures and restrictions on onsite commercial interactions; the impact of the pandemic and actions taken in response to the pandemic on global and regional economies and economic activity; the pace of recovery when the COVID-19 pandemic subsides; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; the effects of steps that we could take to reduce operating costs; our inability to sustain profitable sales growth, convert inventory to cash, or reduce our costs to maintain competitive prices for our products; circumstances or developments that may make us unable to implement or realize the anticipated benefits, or that may increase the costs, of our current and planned business initiatives; and those factors detailed by us in our public filings with the Securities and Exchange Commission (the “SEC”), including in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended June 30, 2020. 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)

 

	December 31,	June 30,
Assets	2020	2020
Current assets:
Cash and cash equivalents	$5,306,243	$5,387,388
Trade accounts receivable, net of allowance of $10,352 and $9,917	6,842,818	6,188,726
Inventories, net	9,693,277	8,984,482
Other receivables	—	132,051
Prepaid expenses and other assets	346,377	565,181
Total current assets	22,188,715	21,257,828
Property and equipment, net	13,631,399	11,799,061
Operating lease right-of-use assets	1,389,428	1,220,430
Intangible assets, net	6,145,423	6,707,964
Goodwill	5,854,905	5,854,905
Deferred tax assets, net	659,000	659,000
Other assets	27,737	75,730
Total assets	$49,896,607	$47,574,918
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$2,737,740	$2,558,638
Accrued liabilities	1,175,444	992,221
Accrued payroll and benefits	2,164,827	1,827,740
Operating lease liabilities, current	843,533	765,422
Loans payable, current portion	936,615	981,350
Finance lease obligation, current portion	274,112	278,040
Total current liabilities	8,132,271	7,403,411
Finance lease obligation, less current portion	147,031	279,435
Operating lease liabilities, noncurrent	891,849	887,766
Loans payable, less current portion	4,372,429	4,437,365
Total liabilities	13,543,580	13,007,977
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; 26,127,361 and 25,891,885
shares issued and outstanding	261,274	258,919
Additional paid-in capital	231,014,560	230,634,056
Accumulated other comprehensive income	2,188,596	735,892
Accumulated deficit	(197,111,403)	(197,061,926)
Total stockholders’ equity	36,353,027	34,566,941
Total liabilities and stockholders’ equity	$49,896,607	$47,574,918

 

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		Six Months Ended
	December 31,		December 31,
	2020	2019	2020	2019
Revenue, net	$9,922,171	$9,599,912	$19,431,143	$17,151,842
Cost of sales	6,291,835	5,670,632	11,950,615	10,831,744
Gross margin	3,630,336	3,929,280	7,480,528	6,320,098
Operating expenses:
Selling, general and administrative	2,763,178	2,199,133	5,203,655	4,540,911
New product development	529,902	468,646	980,399	897,057
Amortization of intangibles	281,271	283,279	562,542	566,800
Gain on disposal of property and equipment	(477)	(79,224)	(522)	(129,224)
Total operating expenses	3,573,874	2,871,834	6,746,074	5,875,544
Operating income	56,462	1,057,446	734,454	444,554
Other income (expense):
Interest expense, net	(55,147)	(89,257)	(113,696)	(187,798)
Other income (expense), net	93,252	122,797	5,517	(392,609)
Total other income (expense), net	38,105	33,540	(108,179)	(580,407)
Income (loss) before income taxes	94,567	1,090,986	626,275	(135,853)
Income tax provision	241,112	321,869	675,752	470,187
Net income (loss)	$(146,545)	$769,117	$(49,477)	$(606,040)
Foreign currency translation adjustment	723,396	143,056	1,452,704	196,822
Comprehensive income (loss)	$576,851	$912,173	$1,403,227	$(409,218)
Earnings (loss) per common share (basic)	$(0.01)	$0.03	$(0.00)	$(0.02)
Number of shares used in per share calculation (basic)	26,117,239	25,837,903	26,049,750	25,832,337
Earnings (loss) per common share (diluted)	$(0.01)	$0.03	$(0.00)	$(0.02)
Number of shares used in per share calculation (diluted)	26,117,239	27,361,273	26,049,750	25,832,337

 

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

 

 

LIGHTPATH TECHNOLOGIES, INC.

Condensed Consolidated Statements of Changes in Stockholders' Equity

(unaudited)

 

				Accumulated
	Class A		Additional	Other		Total
	Common Stock		Paid-in	Comphrehensive	Accumulated	Stockholders’
	Shares	Amount	Capital	Income	Deficit	Equity
Balances at June 30, 2020	25,891,885	$258,919	$230,634,056	$735,892	$(197,061,926)	$34,566,941
Issuance of common stock for:
Employee Stock Purchase Plan	3,306	33	10,976	—	—	11,009
Exercise of stock options, net	207,640	2,076	124,024	—	—	126,100
Stock-based compensation on stock options & RSUs	—	—	136,849	—	—	136,849
Foreign currency translation adjustment	—	—	—	729,308	—	729,308
Net income	—	—	—	—	97,068	97,068
Balances at September 30, 2020	26,102,831	$261,028	$230,905,905	$1,465,200	$(196,964,858)	$35,667,275
Issuance of common stock for:
Exercise of stock options & RSU's, net	24,530	246	2,488	—	—	2,734
Stock-based compensation on stock options & RSUs	—	—	106,167	—	—	106,167
Foreign currency translation adjustment	—	—	—	723,396	—	723,396
Net loss	—	—	—	—	(146,545)	(146,545)
Balances at December 31, 2020	26,127,361	$261,274	$231,014,560	$2,188,596	$(197,111,403)	$36,353,027
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

 

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

 

 

LIGHTPATH TECHNOLOGIES, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

	Six Months Ended December 31,
	2020	2019
Cash flows from operating activities:
Net loss	$(49,477)	$(606,040)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	1,691,163	1,760,220
Interest from amortization of debt costs	9,286	9,286
Gain on disposal of property and equipment	(522)	(129,224)
Stock-based compensation on stock options & RSUs, net	243,016	178,389
Provision for doubtful accounts receivable	—	9,147
Change in operating lease liabilities	(86,804)	(64,090)
Inventory write-offs to allowance	133,204	—
Changes in operating assets and liabilities:
Trade accounts receivable	(654,092)	(1,199,691)
Other receivables	132,051	353,695
Inventories	(841,999)	142,198
Prepaid expenses and other assets	266,797	338,034
Accounts payable and accrued liabilities	699,412	146,547
Net cash provided by operating activities	1,542,035	938,471
Cash flows from investing activities:
Purchase of property and equipment	(2,160,710)	(1,153,227)
Proceeds from sale of equipment	—	179,573
Net cash used in investing activities	(2,160,710)	(973,654)
Cash flows from financing activities:
Proceeds from exercise of stock options	128,834	—
Proceeds from sale of common stock from Employee Stock Purchase Plan	11,009	12,167
Borrowings on loan payable	275,377	—
Payments on loan payable	(395,257)	(290,675)
Repayment of finance lease obligations	(136,332)	(210,225)
Net cash used in financing activities	(116,369)	(488,733)
Effect of exchange rate on cash and cash equivalents	653,899	196,822
Change in cash and cash equivalents and restricted cash	(81,145)	(327,094)
Cash and cash equivalents, beginning of period	5,387,388	4,604,701
Cash and cash equivalents, end of period	$5,306,243	$4,277,607
Supplemental disclosure of cash flow information:
Interest paid in cash	$105,029	$182,241
Income taxes paid	$512,499	$249,777

 

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, 2020, filed with 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, 2020 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, 2020. There have been no material changes to our significant accounting policies during the six months ended December 31, 2020, from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.

 

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.

 

 

Product Revenue

We are a manufacturer of optical components and higher-level assemblies, including precision molded glass aspheric optics, molded and diamond-turned infrared optical components, 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, 2020 and December 31, 2020.

 

 

 

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, 2020 and 2019 was as follows:

 

	Three Months Ended December 31,		Six Months Ended December 31,
	2020	2019	2020	2019
PMO	$4,742,459	$3,710,549	$9,036,062	$6,895,007
Infrared Products	4,808,102	5,003,874	9,532,606	8,963,499
Specialty Products	371,610	885,489	862,475	1,293,336
Total revenue	$9,922,171	$9,599,912	$19,431,143	$17,151,842

 

The components of inventories include the following:

	December 31, 2020	June 30, 2020
Raw materials	$4,094,767	$3,876,955
Work in process	3,390,968	2,989,070
Finished goods	3,302,822	3,134,800
Allowance for obsolescence	(1,095,280)	(1,016,343)
	$9,693,277	$8,984,482

 

The value of tooling in raw materials, net of the related allowance for obsolescence, was approximately $2.1 million and $2.3 million at December 31, 2020 and June 30, 2020, respectively.

 

 

 

Property and equipment are summarized as follows:

	Estimated	December 31,	June 30,
	Lives (Years)	2020	2020
Manufacturing equipment	5 - 10	$20,870,729	$18,444,448
Computer equipment and software	3 - 5	852,575	801,625
Furniture and fixtures	5	364,506	321,418
Leasehold improvements	5 - 7	2,697,248	2,171,388
Construction in progress		1,597,166	1,274,880
Total property and equipment		26,382,224	23,013,759
Less accumulated depreciation and amortization		(12,750,825)	(11,214,698)
Total property and equipment, net		$13,631,399	$11,799,061

 

6. Goodwill and Intangible Assets

There were no changes in the net carrying value of goodwill during the six months ended December 31, 2020.

 

Identifiable intangible assets were comprised of:

 

	Useful Lives (Years)	December 31, 2020	June 30, 2020
Customer relationships	15	$3,590,000	$3,590,000
Trade secrets	8	3,272,000	3,272,000
Trademarks	8	3,814,000	3,814,000
Total intangible assets		10,676,000	10,676,000
Less accumulated amortization		(4,530,577)	(3,968,036)
Total intangible assets, net		$6,145,423	$6,707,964

 

Future amortization of identifiable intangibles is as follows:

 

Fiscal year ending:
June 30, 2021 (remaining six months)	$562,542
June 30, 2022	1,125,083
June 30, 2023	1,125,083
June 30, 2024	1,125,083
June 30, 2025 and later	2,207,632
	$6,145,423

 

7.   Accounts Payable

The accounts payable balance as of December 31, 2020 and June 30, 2020 both include approximately $91,000 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 six months ended December 31, 2020 and 2019 is as follows:

 

	Three Months Ended December 31,		Six Months Ended December 31,
	2020	2019	2020	2019
Income (loss) before income taxes	$94,567	$1,090,986	$626,275	$(135,853)
Income tax provision	$241,112	$321,869	$675,752	$470,187
Effective income tax rate	255%	30%	108%	-346%

 

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. For the six months ended December 31, 2020 and 2019, income tax expense was primarily related to income taxes from our operations in China. Income tax expense for the six months ended December 31, 2020 also includes withholding taxes of $300,000 accrued on a $3 million intercompany dividend declared in July 2020 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, 2020 and June 30, 2020, 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 25.5%. Based on our current assessment of the valuation allowance position on our net deferred tax assets, no additional 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 LightPath Optical Instrumentation (Zhenjiang) Co., Ltd. (“LPOIZ”), are governed by the Income Tax Law of the People’s Republic of China. As of December 31, 2020, LPOI and LPOIZ were subject to statutory income tax rates of 25% and 15%, respectively.

 

In July 2020, we declared an intercompany dividend of $3 million from LPOIZ, payable to us as its parent company. Accordingly, we accrued Chinese withholding taxes of $300,000 associated with the dividend. LPOIZ paid to us $900,000, after the withholding of $100,000 in taxes, during each of the quarters ended September 30, 2020 and December 31, 2020. The remaining $100,000 of withholding taxes are included in accrued liabilities in the accompanying unaudited Condensed Consolidated Balance Sheet as of December 31, 2020. Other than these withholding taxes, this intercompany dividend has no impact on our unaudited Condensed Consolidated Financial Statements.

 

Historically, the Company considered unremitted earnings held by its foreign subsidiaries to be permanently reinvested. However, during fiscal 2020, the Company began declaring intercompany dividends to remit a portion of the historical earnings of its foreign subsidiaries to the U.S. parent company. It is still the Company’s intent to reinvest a significant portion of the more recent earnings generated by its foreign subsidiaries, however the Company also plans to repatriate a portion of the historical earnings of its subsidiaries. Based on its previous intent, the Company had not historically provided for future Chinese withholding taxes on the related earnings. However, during fiscal 2020 the Company began to accrue for these taxes on the portion of historical earnings that it intends to repatriate.

 

 

 

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, for the full amount of earnings accumulated prior to January 1, 2018. 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, 2020 and 2019 included in the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income:

 

	Six Months Ended December 31,
	2020	2019
Stock options	$34,241	$5,307
RSUs	208,775	173,082
Total	$243,016	$178,389
The amounts above were included in:
Selling, general & administrative	$243,016	$178,389
Cost of sales	-	-
New product development	-	-
	$243,016	$178,389

 

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 $1,091 and $1,203 for the six months ended December 31, 2020 and 2019, 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 six months ended December 31, 2020 and 2019. 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, 2020 and 2019, 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, 2020 and 2019, we estimated the fair value of each stock option as of the date of grant using the following assumptions:

 

	Six Months Ended December 31,
	2020	2019
Weighted-average expected volatility	71.2%	63.7%
Dividend yields	0%	0%
Weighted-average risk-free interest rate	0.74%	1.57%
Weighted-average expected term, in years	7.49	7.50

 

Information Regarding Current Share-Based Compensation Awards

A summary of the activity for share-based compensation awards in the six months ended December 31, 2020 is presented below:

 

	Stock Options			Restricted Stock Units (RSUs)
		Weighted-	Weighted-		Weighted-
		Average	Average		Average
		Exercise	Remaining		Remaining
	Shares	Price	Contract	Shares	Contract
June 30, 2020	942,575	$1.65	6.5	2,328,303	0.9
Granted	18,139	$2.80	9.8	177,776	2.9
Exercised	(209,776)	$1.47		(24,452)
Cancelled/Forfeited	(378,558)	$1.72		–
December 31, 2020	372,380	$1.73	8.8	2,481,627	0.9
Awards exercisable/
vested as of
December 31, 2020	90,095	$1.58	7.6	1,871,348	—
Awards unexercisable/
unvested as of
December 31, 2020	282,285	$1.77	9.1	610,279	0.9
	372,380			2,481,627

 

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

As of December 31, 2020, there was approximately $1.1 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements (including stock options and RSUs) granted. We expect to recognize the compensation cost as follows:

 

Fiscal Year Ending:	Stock Options	RSUs	Total
June 30, 2021 (remaining six months)	$33,884	$200,962	$234,846
June 30, 2022	65,160	308,534	373,694
June 30, 2023	72,024	228,716	300,740
June 30, 2024	49,425	93,848	143,273
	$220,493	$832,060	$1,052,553

 

 

 

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,
	2020	2019	2020	2019
Net income (loss)	$(146,545)	$769,117	$(49,477)	$(606,040)
Weighted-average common shares outstanding:
Basic number of shares	26,117,239	25,837,903	26,049,750	25,832,337
Effect of dilutive securities:
Options to purchase common stock	–	–	–	–
RSUs	–	1,523,370	–	–
Diluted number of shares	26,117,239	27,361,273	26,049,750	25,832,337
Earnings (loss) per common share:
Basic	$(0.01)	$0.03	$(0.00)	$(0.02)
Diluted	$(0.01)	$0.03	$(0.00)	$(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,
	2020	2019	2020	2019
Options to purchase common stock	372,776	1,013,743	589,892	996,834
RSUs	2,409,499	527,416	2,368,901	1,957,189
	2,782,275	1,541,159	2,958,793	2,954,023

 

 

Our leases primarily consist of operating leases related to our facilities located in Orlando, Florida; 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 2025. 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 four finance lease agreements, entered into during fiscal years 2018 and 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 balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

 

 

We received tenant improvement allowances for each of our two leases with respect to our facility located in Orlando, Florida (the “Orlando Facility”). 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,		Six Months Ended December 31,
	2020	2019	2020	2019
Operating lease cost	$173,437	$172,102	$340,411	$336,973
Finance lease cost:
Depreciation of lease assets	47,354	86,063	113,223	172,126
Interest on lease liabilities	11,432	20,425	24,256	42,957
Total finance lease cost	58,786	106,488	137,479	215,083
Total lease cost	$232,223	$278,590	$477,890	$552,056

 

Supplemental balance sheet information related to leases was as follows:

 

	Classification	December 31, 2020	June 30, 2020
Assets:
Operating lease assets	Operating lease assets	$1,389,428	$1,220,430
Finance lease assets	Property and equipment, net(1)	571,811	666,519
Total lease assets		$1,961,239	$1,886,949
Liabilities:
Current:
Operating leases	Operating lease liabilities, current	$843,533	$765,422
Short-term leases	Accrued liabilities(2)	–	97,665
Finance leases	Finance lease liabilities, current	274,112	278,040
Noncurrent:
Operating leases	Operating lease liabilities, less current portion	891,849	887,766
Finance leases	Finance lease liabilities, less current portion	147,031	279,435
Total lease liabilities		$2,156,525	$2,308,328