LightPath Technologies(LPTH) - 2021 Q4 - Annual Report

PART I Business Overview LightPath, a global optical component manufacturer, is strategically shifting to 'optical engineered solutions' for long-term partnerships and growth General LightPath Technologies, Inc. was incorporated in Delaware in 1992 and operates as a global company with major facilities in the United States, the People's Republic of China, and the Republic of Latvia[16] Subsidiaries LightPath operates wholly-owned subsidiaries: LightPath Optical Instrumentation (Shanghai) Co., Ltd (LPOI) for sales and support, LightPath Optical Instrumentation (Zhenjiang) Co., Ltd (LPOIZ) as its primary manufacturing facility in China (expanded in fiscal 2019), and ISP Optics Corporation (acquired 2016) with its subsidiary ISP Optics Latvia, SIA, specializing in infrared products, with manufacturing relocated to Orlando, Florida and Riga, Latvia[17][18][19] Industry The company supports diverse industries, including automotive, telecommunications, defense, medical, and industrial, all utilizing photonics as an enabling technology[20] - The photonics industry has shifted from a specialty to a mainstream technology, driven by cost reduction in sensors and lasers, with light-enabled products and services estimated to be between $7 trillion and $10 trillion annually[21] - The evolving industry now requires an 'optical engineered solutions' ecosystem to support OEMs integrating photonics with other technologies, a role LightPath is uniquely positioned to fill[23] Growth Strategy LightPath's new strategy, implemented since March 2020 under CEO Sam Rubin, redefines its direction to provide domain expertise in optics and become a partner for the optical engine of customer systems, moving from a component manufacturer to a solution-focused industry[25][26] - This approach builds on unique, value-added technologies like optical molding, fabrication, and system design, aiming to create tailored solutions based on proprietary manufacturing technologies[26] Organizational Alignment The company aligned its organization with the new strategic plan by hiring a Vice President of Operations (Peter Grief) and a new Chief Financial Officer (Albert Miranda), and appointing a new director (S. Eric Creviston) to the Board[28] - Organizational efforts include standardizing processes, separating engineering functions into operations and a new product development group focused on unique technologies (e.g., tailored optical coatings, freeform components, custom materials)[29] - A leadership transition and operational enhancements occurred at Chinese subsidiaries (LPOIZ and LPOI) due to management terminations, adversely impacting domestic sales in China, with expected recovery in H1 fiscal 2022[31] Technologies LightPath focuses on developing innovative capabilities in systems design, optical fabrication, material production, optical coatings, and electro-mechanical design to provide domain expertise and differentiated solutions[32][33] - Key manufacturing technologies include high precision molded lenses (PMOs) for high volume and unique shapes, traditional polishing and diamond-turned optics, and proprietary materials like BD6 Chalcogenide glass[36] - New product development efforts in fiscal 2021 focused on unique materials, processing techniques, and optical coating offerings, such as developing thermal imaging optics for space applications, with expenditures of $2.2 million (vs $1.7 million in FY2020)[34][35] Product Groups and Markets LightPath's business is organized into three product groups: Precision Molded Optics (PMOs) for visible aspheric lenses, Infrared Products (molded and diamond-turned IR optics, thermal imaging assemblies, including proprietary BD6 glass), and Specialty Products (optical subsystems, assemblies, collimators, and NRE products)[37][38][39] - The company anticipates growth in infrared optics, particularly with the adoption of BD6 material in applications like thermal imaging cameras, temperature sensing, and automotive systems, and in specialty products for LIDAR technology and medical programs[46][47] Sales and Marketing Marketing efforts are shifting from technical aspects of components to best practice use cases and overall solution benefits, utilizing online advertising, social media, and direct marketing[49] - Organizational changes include a product management function, a unified global direct sales team (trained in Sandler Training), a global business development function, and technical program managers to support customized customer programs[50] - The company participates in trade shows, including virtual and in-person events, to expand its brand, enhance business relationships, and gain insight into technology trends[51][52] Competition LightPath competes in the emerging market for non-captive optical engineered solutions, with key differentiators being unique technologies, optical design expertise, cost-effectiveness, and manufacturing flexibility across continents[53][55] - For PMO products, competitors include Asia Optical, Anteryon BV, Rochester Precision Optics, and Sunny Optical[54][59] - For infrared products, competitors include Janos Technology, Ophir Optronics, and Umicore N.V[54][59] - The company's vertical integration in producing its own chalcogenide glass (BD6) provides technical advantages and cost savings in the infrared market, which is shifting towards synthetic materials[57][58] Manufacturing LightPath operates manufacturing facilities in Orlando, Florida (38,000 sq ft), Zhenjiang, China (55,000 sq ft), and Riga, Latvia (23,000 sq ft), with a sales and support office in Shanghai, China[62] - Facilities feature capabilities such as glass melting (Orlando), precision glass molding, diamond turning, optical coatings (anti-reflective, infrared), and integrated assembly, with ISO 9001:2015 certification across all main sites and ISO/TS 1649:2009 for Zhenjiang[63][65][66][67][68] - The company uses subcontractors for specialized processing steps and sources materials from various global suppliers, including internal production of BD6 chalcogenide glass[70][71] Intellectual Property LightPath protects its technology through patents, trade secrets, trademarks, and copyrights, with a primary reliance on trade secrets for process inventions and lens designs[74] - The company has been granted two new patents in the past two years and has three remaining patents related to specialty products expiring through 2023, with three new invention disclosures submitted since January 2021[75] Registered and Unregistered Service Marks and Trademarks | Mark | Type | Registered | Country | Renewal Date | | :--- | :--- | :--- | :--- | :--- | | LightPath® | Service mark | Yes | United States | October 22, 2022 | | GRADIUM™ | Trademark | Yes | United States | April 29, 2027 | | Circulight | Trademark | No | - | - | | BLACK DIAMOND | Trademark | No | - | - | | GelTech | Trademark | No | No | - | | Oasis | Trademark | No | - | - | | LightPath® | Service mark | Yes | People's Republic of China | September 13, 2025 | | ISP Optics® | Trademark | Yes | United States | August 12, 2022 | Environmental and Governmental Regulation The company's manufacturing processes have low emissions and waste, requiring no special environmental permits, and it believes it complies with all material federal, state, and local laws[79][80] - LightPath is subject to Dodd-Frank Act disclosure requirements regarding 'conflict minerals' and strives to use conflict-free suppliers, acknowledging potential costs and supply chain impacts[82] Concentration of Customer Risk Customer Concentration (FY2021 vs FY2020) | Metric | Fiscal 2021 | Fiscal 2020 | | :--- | :--- | :--- | | Sales to top 3 customers (aggregate) | 38% of annual revenue | 31% of annual revenue | | Largest customer sales | 18% of sales | 15% of sales | | Second largest customer sales | 10% of sales | 10% of sales | | Third largest customer sales | 10% of sales | 6% of sales | Geographic Revenue Concentration (FY2021 vs FY2020) | Metric | Fiscal 2021 | Fiscal 2020 | | :--- | :--- | :--- | | Net revenue from outside U.S. | 68% | 66% | | Foreign sales from Europe and Asia | 95% | 96% | Employees Employee Breakdown as of June 30, 2021 | Category | Number of Employees | | :--- | :--- | | Total Employees | 361 | | Full-time Equivalent Employees | 353 | | U.S. Employees | 122 | | Riga, Latvia Employees | 101 | | Jiading and Zhenjiang, China Employees | 138 | | Management, Administrative, Clerical | 28 | | New Product Development | 35 | | Sales and Marketing | 13 | | Production and Quality Control | 277 | - Employees in China are represented by a labor union[86] Risk Factors LightPath faces significant risks including pandemic impacts, a history of net losses, high dependence on key customers, and international operational uncertainties Risks Related to Our Business and Financial Results The COVID-19 pandemic, despite the company being an 'essential business,' poses ongoing risks to operations, supply chain, customers, and financial markets, with future impacts remaining uncertain[88][89] - LightPath reported a net loss of $3.2 million for fiscal 2021 and has an accumulated deficit of approximately $200.2 million as of June 30, 2021, indicating a history of losses[90] - The company is highly dependent on a few key customers; in fiscal 2021, three customers accounted for 38% of annual revenue, and the loss or significant reduction in sales to any of these could adversely affect revenues[93] - International sales (68% of net revenue in FY2021) expose the company to political, economic, and regulatory risks, including difficulties in accounts receivable collection, foreign regulatory changes, and reduced intellectual property protection[94] - Misappropriation or misuse of corporate chops and seals by custodians in Chinese subsidiaries could materially and adversely affect business operations and financial results[98][99][100] - International tariffs, particularly between the U.S. and China, have negatively impacted cost of sales and could further affect sales, manufacturing costs, and product prices[101][103] - Future growth is dependent on market penetration efforts, including diversifying sales and offering complete optical solutions, which requires significant investment and customer trust[104] - The company faces intense competition from larger, more resourced companies in the optical markets, which could lead to reduced prices and negatively affect business and operating results[108] - Anticipated reductions in average selling prices necessitate increasing sales volumes, reducing costs, or introducing higher-margin products to maintain profitability[110] - The company may need additional capital to sustain operations or support acquisitions, which may not be obtainable on acceptable terms, potentially affecting business strategies[112][113] - Fluctuations in currency exchange rates, particularly for foreign-denominated revenues and expenses, could negatively impact financial results and cash flows[115][116] - A significant portion of cash is held abroad, and repatriation is subject to limitations and potential taxation, which could adversely affect liquidity[117] - Changes to fiscal and tax policies, such as the TCJA and proposed changes by the U.S. Presidential Administration, could materially affect financial results[118][122] - Dependence on single or limited source suppliers for key materials or process steps makes the company susceptible to supply shortages, poor performance, or price fluctuations[125] - Business interruptions at manufacturing facilities due to natural disasters, power loss, or other events could significantly delay production and harm the business[127][128][129] - Failure to accurately forecast material requirements could lead to excess inventories or insufficient materials, negatively impacting operating results[130] - Inability to achieve acceptable manufacturing yields or obtain customer qualification for volume shipments could adversely affect financial condition and results of operations[131][132] - The United Kingdom's withdrawal from the European Union (BREXIT) creates ongoing uncertainties and risks related to trade, currency exchange rates, and economic stability[133] Risks Related To Our Intellectual Property The company's inability to protect and enforce its intellectual property rights (patents, copyrights, trademarks, trade secrets) could hinder its competitive position and success[134][135] - LightPath primarily relies on trade secrets for formulas and processes, but there's no assurance that competitors won't independently develop similar technology or that existing processes don't infringe on others' patents[138] - Protecting intellectual property rights globally is expensive and challenging, as legal systems in some countries offer less protection, potentially leading to substantial costs and diversion of management attention due to litigation[139][140] Properties LightPath's primary operations are conducted in leased office and manufacturing facilities across Orlando, Florida; Zhenjiang, China; and Riga, Latvia, with a sales office in Shanghai, China Company Facilities as of June 30, 2021 | Location | Square Feet | Commitment and Use | | :--- | :--- | :--- | | Orlando, Florida | 65,000 | Leased; 4 suites for corporate headquarters, manufacturing, R&D | | Riga, Latvia | 29,000 | Leased; 3 suites for administrative offices, manufacturing, crystal growing | | Zhenjiang, China | 55,000 | Leased; 1 building for manufacturing, 1 floor for manufacturing | | Shanghai, China | 1,900 | Leased; 1 office suite for sales, marketing, administrative offices | Legal Proceedings LightPath is not currently involved in any material legal proceedings, nor does it anticipate any significant adverse legal activity - The company is not currently a party to any material legal proceedings and does not anticipate any material adverse legal activity[142] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities LightPath's Class A common stock is traded on the Nasdaq Capital Market under 'LPTH', with no cash dividends ever paid, and future earnings retained for business expansion - LightPath's Class A common stock is traded on the Nasdaq Capital Market under the symbol 'LPTH'[146] - As of August 31, 2021, there were approximately 199 holders of record and 17,951 street name holders of Class A common stock[147] - The company has never declared or paid cash dividends on its Class A common stock and plans to retain all future earnings to finance business operations and expansion[148] Management's Discussion and Analysis of Financial Condition and Results of Operations LightPath experienced a 10% revenue increase in fiscal 2021 to $38.5 million, despite a $3.2 million net loss due to lower gross margins and increased operating expenses, including significant non-recurring costs related to malfeasance at Chinese subsidiaries Potential Impact of COVID-19 LightPath was deemed an 'essential business' during the COVID-19 pandemic, allowing manufacturing facilities to operate, with non-manufacturing employees working remotely and staggered shifts implemented[152] - To date, the company has not seen significant direct financial impact from COVID-19, but acknowledges potential future negative impacts on demand, results of operations, cash flows, and financial position[152] Effect of Certain Events Occurring at Our Chinese Subsidiaries In April 2021, LightPath terminated several employees, including management, at its Chinese subsidiaries (LPOIZ and LPOI) due to malfeasance, misappropriation of technology, and diverting sales[153] Expenses Related to Chinese Subsidiaries Events (FY2021) | Expense Type | Amount | | :--- | :--- | | Investigation, legal, consulting, transitional management fees (SG&A) | $718,000 | | Potential future liability (accrued in Other Expense, net) | $210,000 | | Accrued severance payments (SG&A) | $485,000 | - The company transitioned to a new management team without significant detrimental effects on operations, but anticipates short-term adverse impacts on domestic sales in China for one to two quarters[157][158] Results of Operations Revenues Revenue by Product Group (FY2021 vs FY2020) | Product Group | FY2021 Revenue | FY2020 Revenue | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $38.5 million | $35.0 million | +10% | | Infrared Products | $21.0 million | $18.1 million | +16% | | PMO Products | $15.9 million | $14.6 million | +8% | | Specialty Products | $1.6 million | $2.3 million | -29% | - Increased infrared revenue was driven by sales of molded and diamond-turned products to the industrial market, including a renewed annual supply agreement, and increased demand for medical and temperature sensing applications (accelerated by COVID-19)[159] - PMO revenue increase was primarily from catalog and distribution channels recovering from COVID-19 impacts, partially offset by a slowdown in telecommunications market sales expected to continue for at least two more quarters[160] - Specialty products revenue decreased due to non-recurring NRE project revenue and sales of certain legacy products in fiscal 2020[161] Cost of Sales and Gross Margin Cost of Sales and Gross Margin (FY2021 vs FY2020) | Metric | FY2021 | FY2020 | YoY Change | | :--- | :--- | :--- | :--- | | Gross Margin | $13.4 million | $13.8 million | -3% | | Total Cost of Sales | $25.0 million | $21.1 million | +18% | | Gross Margin as % of Revenue | 35% | 40% | -5 ppts | - The decrease in gross margin percentage was due to inefficiencies from under-utilized capacity in PMO products and below-target margins for infrared products, which experienced technical challenges during high-volume scaling of new OEM projects[162] Selling, General and Administrative Selling, General and Administrative (SG&A) Costs (FY2021 vs FY2020) | Metric | FY2021 | FY2020 | YoY Change | | :--- | :--- | :--- | :--- | | SG&A Costs | $12.0 million | $9.0 million | +34% | | Non-recurring expenses related to Chinese subsidiaries | $1.2 million | N/A | N/A | | Additional compensation to former CEO | $400,000 | N/A | N/A | | Additional stock compensation (director retirement) | $150,000 | N/A | N/A | - The remaining increase in SG&A was due to higher recruiting costs for executive leadership, increased outside consulting services for operational improvements, and higher personnel-related costs[163] New Product Development New Product Development Costs (FY2021 vs FY2020) | Metric | FY2021 | FY2020 | YoY Change | | :--- | :--- | :--- | :--- | | New Product Development Costs | $2.2 million | $1.7 million | +26% | - The increase was primarily due to the addition of engineering employees and outside services to support demand for optical design[164] Other Expense Other Expense, Net (FY2021 vs FY2020) | Metric | FY2021 | FY2020 | YoY Change | | :--- | :--- | :--- | :--- | | Interest Expense, net | $215,000 | $339,000 | -37% | | Other Expense, net | $194,000 | $175,000 | +11% | | Net Foreign Currency Transaction Losses | $1,000 | $214,000 | -99.5% | - The decrease in interest expense was due to lower interest rates and a 17% reduction in total debt[165] - Other expense, net, included a $210,000 accrual related to the Chinese subsidiaries' events[166] Income Taxes Income Tax Provision (FY2021 vs FY2020) | Metric | FY2021 | FY2020 | YoY Change | | :--- | :--- | :--- | :--- | | Income Tax Provision | $934,000 | $764,000 | +22.2% | | Chinese Withholding Taxes on Intercompany Dividends | $500,000 | $200,000 | +150% | - The income tax expense was primarily related to operations in China and increased Chinese withholding taxes on intercompany dividends from LPOIZ, which qualifies for a reduced income tax rate[167] Net Income (Loss) Net Income (Loss) and EPS (FY2021 vs FY2020) | Metric | FY2021 | FY2020 | YoY Change | | :--- | :--- | :--- | :--- | | Net Income (Loss) | $(3.2) million | $0.9 million | -455.6% | | Basic EPS | $(0.12) | $0.03 | -500% | | Diluted EPS | $(0.12) | $0.03 | -500% | | Weighted-average common shares outstanding (basic) | 26,314,025 | 25,853,419 | +1.8% | | Weighted-average common shares outstanding (diluted) | 26,314,025 | 27,469,845 | -4.2% | - The decrease in net income was primarily due to a $4.0 million decrease in operating income, resulting from lower gross margin and higher operating expenses, including $2.0 million in non-recurring SG&A and Other expenses related to the Chinese subsidiaries' events and executive compensation[168] Liquidity and Capital Resources Overview Liquidity Snapshot as of June 30, 2021 | Metric | Amount | | :--- | :--- | | Working Capital | $12.3 million | | Total Cash and Cash Equivalents | $6.8 million | | Cash held by foreign subsidiaries | >50% of total cash | - The company intends to reinvest a significant portion of foreign earnings but also plans to repatriate a portion, with LPOIZ having $5.6 million available for repatriation as of December 31, 2020, subject to Chinese regulations[170][171] BankUnited Loans LightPath entered a Loan Agreement with BankUnited in February 2019, including a Term Loan (original $5.8 million), a Revolving Line of Credit (up to $2 million), and a Guidance Line (up to $10 million)[172] - A Letter Agreement in September 2021 modified financial covenants, terminated the Guidance Line, and requires BankUnited approval for Revolving Line draws, while also granting a waiver for a prior default on the fixed charge coverage ratio[172] - As of June 30, 2021, the outstanding balance on the BankUnited Term Loan was approximately $4.5 million, with no amounts outstanding on the Revolving Line[176][175] Equipment Loan In December 2020, ISP Latvia secured an Equipment Loan of 225,000 EUR (USD $275,000) from a significant customer, subordinate to BankUnited Loans, for equipment prepayment[179] Cash Flows – Operating Cash Flow from Operating Activities (FY2021 vs FY2020) | Metric | FY2021 | FY2020 | YoY Change | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $4.7 million | $3.7 million | +27% | - The increase was primarily due to improved receivables and inventory management, despite increased sales, and an increase in accounts payable and accrued liabilities (partially due to Chinese subsidiary events)[183] Cash Flows – Investing Cash Flow from Investing Activities (FY2021 vs FY2020) | Metric | FY2021 | FY2020 | YoY Change | | :--- | :--- | :--- | :--- | | Net Cash Used in Investing Activities | $3.2 million | $2.4 million | +33.3% | | Capital Expenditures | $3.2 million | $2.4 million | +33.3% | - Capital expenditures in fiscal 2021 were primarily for expanding infrared coating capacity and increasing lens pressing and dicing capacity[185] Cash Flows – Financings Cash Flow from Financing Activities (FY2021 vs FY2020) | Metric | FY2021 | FY2020 | YoY Change | | :--- | :--- | :--- | :--- | | Net Cash Used in Financing Activities | $843,000 | $622,000 | +35.5% | | Principal Payments on Loans and Finance Leases | $1.3 million | $1.1 million | +18.2% | | Proceeds from Equipment Loan | $275,000 | N/A | N/A | | Proceeds from Stock Options/ESPP | $173,000 | $47,000 | +268% | How We Operate LightPath focuses on converting business to a 'design win' and 'annuity' revenue stream model, involving customer product development and 'engineered solutions,' to create predictable, high-volume orders[188] - Challenges include maintaining optical design and sampling capabilities, managing cost reduction pressures from high-volume customers, and overcoming financial constraints for additional capital expenditures[190] - The company believes its unique optical design engineering capabilities and its role as a U.S. supply source for critical components provide competitive advantages[189] Our Key Performance Indicators Sales Backlog LightPath evaluates total backlog, including all firm orders reasonably expected to convert to revenue, as a key indicator of sales efforts and success[193] Total Sales Backlog ($000) by Quarter | Quarter | Total Backlog ($000) | | :--- | :--- | | Q4 2021 | $21,329 | | Q3 2021 | $19,498 | | Q2 2021 | $23,835 | | Q1 2021 | $20,866 | | Q4 2020 | $21,908 | | Q3 2020 | $22,772 | | Q2 2020 | $22,559 | | Q1 2020 | $16,567 | - Total backlog remained near the prior fiscal year level at $21.3 million as of June 30, 2021, despite a 10% increase in sales, indicating strong booking performance[194] - Backlog fluctuations are influenced by the timing of large annual contract renewals, which can substantially increase levels when orders are received and then draw down as shipments are made[194] Revenue Dollars and Units by Product Group Revenue and Units by Product Group (FY2021 vs FY2020) | Product Group | FY2021 Revenue | FY2020 Revenue | FY2021 Units | FY2020 Units | YoY Revenue Change | YoY Unit Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | PMO | $15,882,189 | $14,639,687 | 3,139,774 | 3,198,672 | +8% | -2% | | Infrared Products | $20,971,080 | $18,052,856 | 579,563 | 384,344 | +16% | +51% | | Specialty Products | $1,611,552 | $2,275,420 | 32,980 | 41,443 | -29% | -20% | | Total | $38,464,821 | $34,967,963 | 3,752,317 | 3,624,459 | +10% | +4% | - PMO revenue increased 8% year-over-year, primarily from catalog and distribution channels, despite a 2% decrease in units, leading to an 11% increase in average selling prices due to a shift away from lower-priced telecommunications products[202] - Infrared product revenue increased 16% year-over-year, with a 51% increase in units, driven by molded and diamond-turned products for industrial, firefighting, public safety, and temperature sensing applications, though average selling prices decreased 23% due to a higher mix of lower-priced molded products[203] - Specialty products revenue decreased 29% year-over-year due to non-recurring NRE project revenue and legacy product sales from the prior fiscal year[204] Inventory Levels Days Cost of Sales in Inventory (DCSI) by Quarter | Fiscal Quarter | DCSI (days) | | :--- | :--- | | Q4 2021 | 126 | | Q3 2021 | 119 | | Q2 2021 | 142 | | Q1 2021 | 154 | | Fiscal 2021 average | 135 | | Q4 2020 | 146 | | Q3 2020 | 160 | | Q2 2020 | 121 | | Q1 2020 | 142 | | Fiscal 2020 average | 142 | - The average DCSI decreased from 142 days in fiscal 2020 to 135 days in fiscal 2021, reflecting an increased focus on inventory management and higher sales, with a target range of 110 to 120 days[205] Accounts Receivable Levels and Quality Days Sales Outstanding (DSO) by Quarter | Fiscal Quarter | DSO (days) | | :--- | :--- | | Q4 2021 | 51 | | Q3 2021 | 53 | | Q2 2021 | 63 | | Q1 2021 | 60 | | Fiscal 2021 average | 57 | | Q4 2020 | 62 | | Q3 2020 | 66 | | Q2 2020 | 70 | | Q1 2020 | 67 | | Fiscal 2020 average | 66 | - The average DSO improved from 66 days in fiscal 2020 to 57 days in fiscal 2021, driven by increased focus on collections, tighter payment terms, and a higher sales mix to customers with shorter payment terms, aiming for a DSO no higher than 60 days[206] Other Key Indicators Other key performance indicators include on-time delivery trends, units of shippable output by product line, production yield rates, and fully-yielded unit production per-shift, which are used to determine tactical operating actions and changes[207] Non-GAAP Financial Measures EBITDA EBITDA (FY2021 vs FY2020) | Metric | FY2021 | FY2020 | YoY Change | | :--- | :--- | :--- | :--- | | EBITDA | $1.5 million | $5.4 million | -72.2% | | EBITDA as % of Revenue | 4% | 15% | -11 ppts | - The decrease in EBITDA for fiscal 2021 was primarily due to increased SG&A and Other expenses, including $2.0 million related to the Chinese subsidiaries' events, executive compensation, and increased new product development costs[211] Off Balance Sheet Arrangements LightPath does not engage in any activities involving variable interest entities or off-balance sheet arrangements[212] Critical Accounting Policies and Estimates Critical accounting estimates include the allowance for trade receivables, inventory obsolescence allowance, valuation of stock-based compensation, and accounting for income taxes, all requiring significant management judgment and assumptions[213][214][215][217][220] - Revenue is recognized upon transfer of control of products or services, with performance obligations for optical components and assemblies satisfied at a point in time[216] - Goodwill and intangible assets are recognized at fair value and tested for impairment annually, with definite-lived assets amortized over their useful lives (2-15 years)[218][219] Impact of recently issued accounting pronouncements The company is evaluating the impact of ASU 2019-12, 'Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,' which becomes effective for LightPath in the first quarter of fiscal year 2022[311] Financial Statements and Supplementary Data This item incorporates by reference the consolidated financial statements and supplementary data found in Item 15 of Part IV of this Annual Report on Form 10-K - The required financial statements and supplementary data are incorporated by reference from Item 15 of Part IV[224] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - There are no changes in or disagreements with accountants on accounting and financial disclosure[225] Controls and Procedures LightPath's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2021, and internal control over financial reporting was also deemed effective based on the COSO framework Evaluation of Disclosure Controls and Procedures The CEO and CFO concluded that LightPath's disclosure controls and procedures were effective as of June 30, 2021, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[226] Management's Annual Report on Internal Control over Financial Reporting Management assessed and concluded that internal control over financial reporting was effective as of June 30, 2021, based on the COSO Integrated Framework (2013)[227] Auditor's Report on Internal Control over Financial Reporting This Annual Report does not include an attestation report from the independent registered public accounting firm regarding internal control over financial reporting, as permitted by SEC rules[229] Changes in Internal Controls over Financial Reporting Following events at its Chinese subsidiaries, LightPath adopted additional policies and procedures to improve internal controls, including revising reporting structures, adopting Codes of Conduct, implementing an internal authority approval matrix, and hiring additional accounting staff[230] Other Information LightPath entered into a Letter Agreement with BankUnited on September 9, 2021, which modified loan covenants, terminated the Guidance Line, and requires specific lender approval for Revolving Line draws, while also waiving a prior default - On September 9, 2021, LightPath entered a Letter Agreement with BankUnited, which reduced fixed charge coverage ratios, modified calculation for leverage ratios, terminated the Guidance Line, and requires BankUnited approval for Revolving Line draws[231][232] - The Letter Agreement also granted a waiver of default for the company's failure to comply with the fixed charge coverage ratio as of June 30, 2021, and included a $10,000 fee paid to BankUnited[232] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's fiscal 2022 Annual Stockholders' Meeting Proxy Statement - Information for this item is incorporated by reference from the proxy statement for the fiscal 2022 Annual Stockholders' Meeting[235] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's fiscal 2022 Annual Stockholders' Meeting Proxy Statement - Information for this item is incorporated by reference from the proxy statement for the fiscal 2022 Annual Stockholders' Meeting[236] Security Ownership of Certain Beneficial Owners and Management Information on security ownership of certain beneficial owners and management is incorporated by reference from the company's fiscal 2022 Annual Stockholders' Meeting Proxy Statement, with specific details provided on securities authorized for issuance under equity compensation plans Securities Authorized for Issuance Under Equity Compensation Plans Equity Compensation Plan Information (as of FY2021 end) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise and grant price of outstanding options, warrants and rights | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 2,194,812 | $1.78 | 829,786 | | Equity compensation plans not approved by security holders | — | — | — | Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's fiscal 2022 Annual Stockholders' Meeting Proxy Statement - Information for this item is incorporated by reference from the proxy statement for the fiscal 2022 Annual Stockholders' Meeting[239] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's fiscal 2022 Annual Stockholders' Meeting Proxy Statement - Information for this item is incorporated by reference from the proxy statement for the fiscal 2022 Annual Stockholders' Meeting[240] PART IV Exhibits, Financial Statement Schedules This section lists all exhibits and financial statement schedules filed as part of the Annual Report on Form 10-K, including various certificates of incorporation, bylaws, incentive plans, lease agreements, loan agreements, and certifications - The section details a comprehensive list of exhibits filed with the Annual Report on Form 10-K, including corporate governance documents, equity compensation plans, lease agreements, and loan agreements[243][246][247][248] - It also includes financial statements and supplementary data, as well as certifications from the Chief Executive Officer and Chief Financial Officer[244][248] Form 10-K Summary The company does not provide a separate Form 10-K Summary - No Form 10-K Summary is provided[249] Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm – MSL, P.A. MSL, P.A. issued an unqualified opinion on LightPath Technologies, Inc.'s consolidated financial statements for June 30, 2021 and 2020, affirming their fair presentation in accordance with GAAP Opinion on the Consolidated Financial Statements MSL, P.A. issued an unqualified opinion, stating that LightPath Technologies, Inc.'s consolidated financial statements for June 30, 2021 and 2020, present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with GAAP[255] Basis for Opinion The audits were conducted in accordance with PCAOB standards, focusing on obtaining reasonable assurance about material misstatement, but did not include an audit of internal control over financial reporting[257][258] Critical Audit Matters The critical audit matter identified was the auditing of management's estimate of the inventory allowance, which involved subjective evaluation and a high degree of auditor judgment due to significant assumptions in estimating future inventory turnover and sales[260][261] - Audit procedures included evaluating internal controls, testing data accuracy, recomputing the allowance, comparing historical allowances to actual write-offs, and reviewing management's business plan and sales forecasts[262] Consolidated Financial Statements This section presents LightPath Technologies, Inc.'s core consolidated financial statements, including the Balance Sheets, Statements of Comprehensive Income (Loss), Statements of Changes in Stockholders' Equity, and Statements of Cash Flows for the fiscal years ended June 30, 2021 and 2020, providing a comprehensive overview of the company's financial position, performance, and liquidity Consolidated Balance Sheets Consolidated Balance Sheets (as of June 30, 2021 and 2020) | Asset/Liability/Equity | June 30, 2021 | June 30, 2020 | | :--- | :--- | :--- | | Assets: | | | | Cash and cash equivalents | $6,774,694 | $5,387,388 | | Trade accounts receivable, net | $4,656,354 | $6,188,726 | | Inventories, net | $8,659,587 | $8,984,482 | | Total current assets | $20,703,102 | $21,257,828 | | Property and equipment, net | $13,279,867 | $11,799,061 | | Operating lease right-of-use assets | $9,015,498 | $1,220,430 | | Intangible assets, net | $5,582,881 | $6,707,964 | | Goodwill | $5,854,905 | $5,854,905 | | Deferred tax assets, net | $147,000 | $659,000 | | Total assets | $54,610,990 | $47,574,918 | | Liabilities: | | | | Accounts payable | $2,924,333 | $2,558,638 | | Accrued liabilities | $1,067,265 | $992,221 | | Accrued payroll and benefits | $2,810,043 | $1,827,740 | | Operating lease liabilities, current | $799,507 | $765,422 | | Loans payable, current portion | $634,846 | $981,350 | | Finance lease obligation, current portion | $212,212 | $278,040 | | Total current liabilities | $8,448,206 | $7,403,411 | | Total liabilities | $21,033,505 | $13,007,977 | | Stockholders' Equity: | | | | Total stockholders' equity | $33,577,485 | $34,566,941 | | Total liabilities and stockholders' equity | $54,610,990 | $47,574,918 | Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Comprehensive Income (Loss) (Years Ended June 30, 2021 and 2020) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Revenue, net | $38,464,821 | $34,967,963 | | Cost of sales | $25,017,051 | $21,125,464 | | Gross margin | $13,447,770 | $13,842,499 | | Total operating expenses | $15,289,582 | $11,697,288 | | Operating income (loss) | $(1,841,812) | $2,145,211 | | Total other expense, net | $(409,524) | $(514,284) | | Income (loss) before income taxes | $(2,251,336) | $1,630,927 | | Income tax provision | $933,915 | $763,998 | | Net income (loss) | $(3,185,251) | $866,929 | | Foreign currency translation adjustment | $1,380,260 | $(72,626) | | Comprehensive income (loss) | $(1,804,991) | $794,303 | | Earnings (loss) per common share (basic) | $(0.12) | $0.03 | | Earnings (loss) per common share (diluted) | $(0.12) | $0.03 | Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Changes in Stockholders' Equity (Years Ended June 30, 2021 and 2020) | Metric | June 30, 2021 | June 30, 2020 | | :--- | :--- | :--- | | Class A Common Stock (Shares) | 26,985,913 | 25,891,885 | | Class A Common Stock (Amount) | $269,859 | $258,919 | | Additional Paid-in Capital | $231,438,651 | $230,634,056 | | Accumulated Other Comprehensive Income | $2,116,152 | $735,892 | | Accumulated Deficit | $(200,247,177) | $(197,061,926) | | Total Stockholders' Equity | $33,577,485 | $34,566,941 | | Net Income (Loss) | $(3,185,251) | $866,929 | | Foreign Currency Translation Adjustment | $1,380,260 | $(72,626) | | Stock-based Compensation | $642,865 | $260,487 | | Issuance of Common Stock (ESPP) | $29,978 | $24,612 | | Exercise of Stock Options & RSUs, net | $142,692 | $22,263 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (Years Ended June 30, 2021 and 2020) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,732,024 | $3,732,813 | | Net cash used in investing activities | $(3,158,784) | $(2,255,793) | | Net cash used in financing activities | $(843,429) | $(621,708) | | Effect of exchange rate on cash and cash equivalents | $657,495 | $(72,625) | | Change in cash and cash equivalents | $1,387,306 | $782,687 | | Cash and cash equivalents, end of period | $6,774,694 | $5,387,388 | | Interest paid in cash | $199,524 | $330,910 | | Income taxes paid | $1,054,232 | $526,225 | Notes to Consolidated Financial Statements 1. Organization and History LightPath Technologies, Inc. was incorporated in Delaware in 1992 and has expanded through acquisitions, including Geltech (2000) and ISP Optics Corporation (2016), and the formation of subsidiaries in China (LPOI, LPOIZ)[277] - The company designs, develops, manufactures, and distributes optical components and assemblies, such as precision molded glass aspheric optics and infrared lenses, for diverse applications in defense, medical, industrial, and automotive industries[278] 2. Significant Accounting Policies The consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries, with all significant intercompany balances and transactions eliminated[280] - Key accounting policies include management estimates, cash and cash equivalents, allowance for accounts receivable, inventories (lower of cost or net realizable value), property and equipment (straight-line depreciation), goodwill and intangible assets (annual impairment testing), and leases (ASC Topic 842 adoption in FY2020)[281][282][283][285][286][288][290] - Income taxes are accounted for under the asset and liability method, with deferred taxes and valuation allowances based on future taxable income projections[291] - The company has not recognized a liability for uncertain tax positions[292] - Over 50% of cash and cash equivalents are held by foreign subsidiaries, with a portion of foreign earnings intended for repatriation, subject to local regulations and withholding taxes[294][295] - Stock-based compensation is measured at grant date fair value using the Black-Scholes-Merton model and recognized as an expense over the service period[301] 3. Revenue Revenue is primarily derived from the sale of optical components and assemblies, recognized upon transfer of control to customers, with performance obligations satisfied at a point in time[313][314][316] Revenue by Product Group (Years Ended June 30, 2021 and 2020) | Product Group | 2021 | 2020 | | :--- | :--- | :--- | | PMO | $15,882,189 | $14,639,687 | | Infrared Products | $20,971,080 | $18,052,856 | | Specialty Products | $1,611,552 | $2,275,420 | | Total revenue | $38,464,821 | $34,967,963 | 4. Inventories, net Components of Inventories, net (as of June 30, 2021 and 2020) | Component | June 30, 2021 | June 30, 2020 | | :--- | :--- | :--- | | Raw materials | $3,908,630 | $3,876,955 | | Work in process | $2,473,070 | $2,989,070 | | Finished goods | $3,467,105 | $3,134,800 | | Allowance for obsolescence | $(1,189,218) | $(1,016,343) | | Total Inventories, net | $8,659,587 | $8,984,482 | - The company disposed of approximately $157,000 and $128,000 of inventory parts in fiscal 2021 and 2020, respectively, writing them off against the allowance for obsolescence[317] 5. Property and Equipment, net Property and Equipment, net (as of June 30, 2021 and 2020) | Category | June 30, 2021 | June 30, 2020 | | :--- | :--- | :--- | | Manufacturing equipment | $21,465,402 | $18,444,448 | | Computer equipment and software | $918,679 | $801,625 | | Furniture and fixtures | $362,944 | $321,418 | | Leasehold improvements | $2,944,543 | $2,171,388 | | Construction in progress | $1,529,452 | $1,274,880 | | Total property and equipment | $27,221,020 | $23,013,759 | | Less accumulated depreciation and amortization | $(13,941,153) | $(11,214,698) | | Total property and equipment, net | $13,279,867 | $11,799,061 | - The company received tenant improvement allowances for its Orlando leases, which were used for improvements and recorded as leasehold improvements and deferred rent liability, amortized over the lease terms[319] 6. Goodwill and Intangible Assets Goodwill of $5,854,905 remained unchanged in fiscal 2021 and 2020, with no impairment recorded[321][322] Identifiable Intangible Assets, net (as of June 30, 2021 and 2020) | Asset | Useful Lives (Years) | June 30, 2021 | 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 | | $(5,093,119) | $(3,968,036) | | Total intangible assets, net | | $5,582,881 | $6,707,964 | Future Amortization of Identifiable Intangibles | Fiscal Year Ending | Amount | | :--- | :--- | | June 30, 2022 | $1,125,083 | | June 30, 2023 | $1,125,083 | | June 30, 2024 | $1,125,083 | | June 30, 2025 | $658,398 | | After June 30, 2025 | $1,549,234 | | Total | $5,582,881 | 7. Accounts Payable Accounts payable balances as of June 30, 2021 and 2020 included earned but unpaid Board of Directors' fees of approximately $99,500 and $91,000, respectively[324] 8. Stockholders' Equity The company's authorized capital stock consists of 55,000,000 shares, including 50,000,000 common stock (44,500,000 Class A) and 5,000,000 preferred stock (Series A, B, C, D, F), with none of Series D preferred stock issued[326] 9. Income Taxes Pretax Income (Loss) by Jurisdiction (Years Ended June 30, 2021 and 2020) | Jurisdiction | 2021 | 2020 | | :--- | :--- | :--- | | United States | $(5,265,803) | $(3,739,527) | | Foreign | $3,014,467 | $5,370,454 | | Total | $(2,251,336) | $1,630,927 | Components of Income Tax Provision (Years Ended June 30, 2021 and 2020) | Component | 2021 | 2020 | | :--- | :--- | :--- | | Current Federal tax | $- | $- | | Current State tax | $18,563 | $3,047 | | Current Foreign tax | $403,352 | $767,951 | | Total current | $421,915 | $770,998 | | Deferred Federal tax | $510,069 | $4,931 | | Deferred State tax | $1,931 | $(11,931) | | Deferred Foreign tax | $- | $- | | Total deferred | $512,000 | $(7,000) | | Total income tax provision | $933,915 | $763,998 | - The CARES Act allowed the company to accelerate recovery of a $107,000 alternative minimum tax receivable in fiscal 2020 and defer approximately $325,000 in payroll taxes in fiscal 2021[328] - Chinese subsidiaries are subject to a 25% statutory tax rate, with LPOIZ qualifying for a reduced 15% rate[329] - The company accrued $400,000 and $200,000 in Chinese withholding taxes on intercompany dividends in fiscal 2021 and 2020, respectively, and a further $100,000 for future dividends[330][331] - Latvian subsidiary ISP Latvia is subject to a distribution tax of 20% (effective 25%) on distributed profits since January 1, 2018, but distributions from pre-2018 earnings were not taxed[333] Net Deferred Tax Assets (as of June 30, 2021 and 2020) | Category | 2021 | 2020 | | :--- | :--- | :--- | | Gross deferred tax assets | $17,489,000 | $19,819,000 | | Valuation allowance for deferred tax assets | $(15,644,000) | $(17,044,000) | | Total deferred tax assets | $1,845,000 | $2,775,000 | | Total deferred tax liabilities | $(1,698,000) | $(2,116,000) | | Net deferred tax assets | $147,000 | $659,000 | - A valuation allowance of $15.6 million was provided against deferred tax assets at June 30, 2021, due to uncertainty regarding the realization of future taxable income[335] 10. Compensatory Equity Incentive Plan and Other Equity Incentives LightPath grants stock-based compensation (incentive stock options, non-qualified stock options, restricted stock units) through the Omnibus Plan and the 2018 Stock and Incentive Compensation Plan (SICP), with most options vesting over two to four years and having ten-year contract lives[337] - The 2014 Employee Stock Purchase Plan (ESPP) allows employees to purchase Class A common stock at a discount, with approximately $3,000 and $2,500 discounts recognized as SG&A expense in fiscal 2021 and 2020, respectively[338] Share-Based Payment Awards Activity (Years Ended June 30, 2021 and 2020) | Metric | Stock Options (2021) | Stock Options (2020) | RSUs (2021) | RSUs (2020) | | :--- | :--- | :--- | :--- | :--- | | Shares Outstanding (June 30, 2019) | 979,925 | 979,925 | 1,864,526 | 1,864,526 | | Granted | 121,933 | 314,817 | 296,386 | 484,000 | | Exercised | (225,137) | (29,356) | (862,804) | (17,204) | | Cancelled/Forfeited | (406,444) | (322,811) | - | (3,019) | | Shares Outstanding (June 30, 2021/2020) | 432,927 | 942,575 | 1,761,885 | 2,328,303 | | Total intrinsic value of stock options exercised | $344,000 | $35,000 | N/A | N/A | | Total intrinsic value of RSUs exercised | N/A | N/A | $2.8 million | $12,000 | | Total stock-based compensation expense | $642,865 | $250,738 | N/A | N/A | Unrecognized Compensation Cost (as of June 30, 2021) | Fiscal Year Ending | Stock Options | RSUs | Total | | :--- | :--- | :--- | :--- | | June 30, 2022 | $110,128 | $312,766 | $422,894 | | June 30, 2023 | $116,986 | $258,592 | $375,578 | | June 30, 2024 | $94,516 | $132,045 | $226,561 | | June 30, 2025 | $33,885 | $34,707 | $68,592 | | Total | $355,515 | $738,110 | $1,093,625 | 11. Earnings (Loss) Per Share Basic and Diluted Earnings (Loss) Per Share (Years Ended June 30, 2021 and 2020) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net income (loss) | $(3,185,251) | $866,929 | | Basic number of shares | 26,314,025 | 25,853,419 | | Diluted number of shares | 26,314,025 | 27,469,845 | | Basic EPS | $(0.12) | $0.03 | | Diluted EPS | $(0.12) | $0.03 | - Potential dilutive shares (options and RSUs) were excluded from diluted EPS calculation in fiscal 2021 due to the net loss, making their effects anti-dilutive[349] 12. Defined Contribution Plan LightPath provides retirement benefits to U.S.-based employees through the Insperity 401(k) plan, matching 100% of the first 2% of employee contributions[350] Company Matching Contributions to 401(k) Plan | Fiscal Year | Amount | | :--- | :--- | | 2021 | $111,000 | | 2020 | $97,000 | 13. Leases LightPath has operating leases for manufacturing and office space in Orlando, Shanghai, Zhenjiang, and Riga, with terms expiring through 2022 and beyond, including a recently amended Orlando lease extending to 127 months after commencement[351][352][353][355] - The company adopted ASC Topic 842 in fiscal 2020, recognizing operating lease right-of-use assets and corresponding lease liabilities on the balance sheet[290][357] Lease Cost (Years Ended June 30, 2021 and 2020) | Lease Type | 2021 | 2020 | | :--- | :--- | :--- | | Operating lease cost | $682,980 | $646,845 | | Finance lease cost (depreciation) | $207,931 | $324,058 | | Finance lease cost (interest) | $44,248 | $77,540 | | Total lease cost | $935,159 | $1,048,443 | Lease Assets and Liabilities (as of June 30, 2021 and 2020) | Category | June 30, 2021 | June 30, 2020 | | :--- | :--- | :--- | | Operating lease assets | $9,015,498 | $1,220,430 | | Finance lease assets | $477,102 | $666,519 | | Total lease assets | $9,492,600 | $1,886,949 | | Operating lease liabilities, current | $799,507 | $765,422 | | Finance lease liabilities, current | $212,212 | $278,040 | | Operating lease liabilities, noncurrent | $8,461,133 | $887,766 | | Finance lease liabilities, noncurrent | $66,801 | $279,435 | | Total lease liabilities | $9,539,653 | $2,308,328 | Weighted Average Lease Term and Discount Rate (as of June 30, 2021) | Metric | Operating Leases | Finance Leases | | :--- | :--- | :--- | | Weighted Average Remaining Lease Term (years) | 10.9 | 1.4 | | Weighted Average Discount Rate | 3.0% | 7.8% | 14. Contingencies LightPath is involved in legal actions related to the termination of Chinese subsidiary employees due to malfeasance, incurring $718,000 in expenses in fiscal 2021 and accruing $210,000 for potential future liability and $485,000 for disputed severance payments[364][365][366][367] - While new management has been transitioned without significant operational impact, short-term adverse effects on domestic sales in China are anticipated for one to two quarters[368][370] - The COVID-19 pandemic continues to pose potential risks to demand, results of operations, cash flows, and financial position, though no significant direct financial impact has been experienced to date[371][373] 15. Foreign Operations Assets and liabilities in non-U.S. currencies are translated at prevailing exchange rates, with translation gains or losses reflected in equity as a separate component of comprehensive income[374] Assets and Net Assets in Foreign Countries (as of June 30, 2021 and 2020) | Country | June 30, 2021 Assets | June 30, 2020 Assets | June 30, 2021 Net Assets | June 30, 2020 Net Assets | | :--- | :--- | :--- | :--- | :--- | | China | $20.1 million | $19.0 million | $16.6 million | $16.2 million | | Latvia | $11.3 million | $9.8 million | $9.0 million | $8.2 million | 16. Supplier and Customer Concentrations LightPath utilizes multiple suppliers for glass compositions and infrared materials, including internal production of BD6 glass, believing