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EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - LIGHTPATH TECHNOLOGIES INClpth_ex311.htm
EX-32.2 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - LIGHTPATH TECHNOLOGIES INClpth_ex322.htm
EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - LIGHTPATH TECHNOLOGIES INClpth_ex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - LIGHTPATH TECHNOLOGIES INClpth_ex312.htm
EX-10.8 - AFFIRMATION OF GUARANTEE OF GELTECH, INC. - LIGHTPATH TECHNOLOGIES INClpth_ex108.htm
EX-10.7 - THIRD AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT - LIGHTPATH TECHNOLOGIES INClpth_ex107.htm
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
[X]    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2018
 
OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to ____________
 
Commission file number 000-27548
 
LIGHTPATH TECHNOLOGIES, INC.
------------------------------------------------------------------------
 (Exact name of registrant as specified in its charter)
 
DELAWARE
 
86-0708398
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
http://www.lightpath.com
 
2603 Challenger Tech Ct. Suite 100
Orlando, Florida 32826
-----------------------------------------------------------
(Address of principal executive offices)
(ZIP Code)
 
(407) 382-4003
---------------------------------------------
(Registrant’s telephone number, including area code)
N/A
----------------------------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last report)
 
 
          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 and 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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post 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. (Check one):
 
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Smaller reporting company ☒
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:
 
25,731,544 shares of common stock, Class A, $.01 par value, outstanding as of May 11, 2018.

 
 
 
LIGHTPATH TECHNOLOGIES, INC.
Form 10-Q
 
Index
 
Item
 
Page
 
 
 
Part I
Financial Information
 
 
 
 
Item 1
Financial Statements
 
 
3
 
4
 
5
 
6
 
7
Item 2
25
 
27
 
30
 
35
 
36
 
36
Item 4
38
 
 
 
Part II
Other Information
 
 
 
 
Item 1
38
Item 2
38
Item 3
38
Item 4
38
Item 5
38
Item 6
38
 
 
 
41
 
 
 
 
Item 1. Financial Statements
 
 
 
 
 
 
 
LIGHTPATH TECHNOLOGIES, INC.
 
 
Consolidated Balance Sheets
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
March 31,
 
 
June 30,
 
Assets
 
2018
 
 
2017
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $6,388,164 
 $8,085,015 
Trade accounts receivable, net of allowance of $19,358 and $7,356
  5,672,071 
  5,890,113 
Inventories, net
  6,409,118 
  5,074,576 
Other receivables
  59,375 
  29,202 
Prepaid expenses and other assets
  1,043,603 
  641,469 
Total current assets
  19,572,331 
  19,720,375 
 
    
    
Property and equipment, net
  12,322,111 
  10,324,558 
Intangible assets, net
  9,387,240 
  10,375,053 
Goodwill
  5,854,905 
  5,854,905 
Deferred tax assets, net
  285,000 
  285,000 
Other assets
  137,084 
  112,323 
Total assets
 $47,558,671 
 $46,672,214 
Liabilities and Stockholders’ Equity
    
    
Current liabilities:
    
    
Accounts payable
 $2,039,090 
 $1,536,121 
Accrued liabilities
  514,479 
  966,929 
Accrued payroll and benefits
  1,113,840 
  1,896,530 
Loans payable, current portion
  1,458,800 
  1,111,500 
Capital lease obligation, current portion
  219,688 
  239,332 
Total current liabilities
  5,345,897 
  5,750,412 
 
    
    
Capital lease obligation, less current portion
  271,175 
  142,101 
Deferred rent
  400,605 
  458,839 
Deferred tax liabilities
  - 
  182,349 
Warrant liability
  - 
  490,500 
Loans payable, less current portion
  5,479,565 
  9,926,844 
Total liabilities
  11,497,242 
  16,951,045 
 
    
    
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; 25,730,544 and 24,215,733
    
    
shares issued and outstanding
  257,305 
  242,157 
Additional paid-in capital
  229,749,154 
  225,492,252 
Accumulated other comprehensive income
  496,282 
  295,396 
Accumulated deficit
  (194,441,312)
  (196,308,636)
Total stockholders’ equity
  36,061,429 
  29,721,169 
Total liabilities and stockholders’ equity
 $47,558,671 
 $46,672,214 
 
    
    
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
 
3
 
 
 
LIGHTPATH TECHNOLOGIES, INC.
 
 
Consolidated Statements of Comprehensive Income
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Three Months Ended  
 
 
  Nine Months Ended  
 
 
 
March 31,
 
 
March 31,
 
 
March 31,
 
 
March 31,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
Revenue, net
 $8,503,628 
 $8,490,042 
  24,437,094 
  19,360,109 
Cost of sales
  5,211,602 
  4,267,318 
  14,344,015 
  9,007,180 
Gross margin
  3,292,026 
  4,222,724 
  10,093,079 
  10,352,929 
Operating expenses:
    
    
    
    
Selling, general and administrative
  2,362,578 
  2,329,762 
  7,054,996 
  6,190,705 
New product development
  384,380 
  308,394 
  1,178,849 
  853,939 
Amortization of intangibles
  329,270 
  304,809 
  987,812 
  304,809 
Loss on disposal of property and equipment
   
   
  3,315 
   
Total operating costs and expenses
  3,076,228 
  2,942,965 
  9,224,972 
  7,349,453 
Operating income
  215,798 
  1,279,759 
  868,107 
  3,003,476 
Other income (expense):
    
    
    
    
Interest expense
  (118,890)
  (154,639)
  (434,671)
  (167,832)
Interest expense - debt costs
  461,686 
  (38,338)
  382,459 
  (38,338)
Change in fair value of warrant liability
  - 
  (748,169)
  (194,632)
  (457,784)
Other income (expense), net
  484,531 
  27,985 
  927,383 
  (228,935)
Total other income (expense), net
  827,327 
  (913,161)
  680,539 
  (892,889)
Income before income taxes
  1,043,125 
  366,598 
  1,548,646 
  2,110,587 
Provision for income taxes
  (183,154)
  265,774 
  (318,678)
  771,600 
Net income
 $1,226,279 
 $100,824 
 $1,867,324 
 $1,338,987 
Foreign currency translation adjustment
  77,477 
  38,636 
  200,886 
  113,818 
Comprehensive income
 $1,303,756 
 $139,460 
 $2,068,210 
 $1,452,805 
Earnings per common share (basic)
 $0.05 
 $0.00 
 $0.08 
 $0.07 
Number of shares used in per share calculation (basic)
  25,546,512 
  23,818,136 
  24,763,458 
  18,621,072 
Earnings per common share (diluted)
 $0.04 
 $0.00 
 $0.07 
 $0.07 
Number of shares used in per share calculation (diluted)
  27,281,010 
  25,628,703 
  26,618,956 
  20,145,976 
 
    
    
    
    
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
    

 
4
 
 
 
LIGHTPATH TECHNOLOGIES, INC.
 
 
Consolidated Statement of Stockholders' Equity
 
 
Nine Months Ended March 31, 2018
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Class A
 
 
 
 
 
Additional
 
 
Other
 
 
 
 
 
Total
 
 
 
Common Stock
 
 
 
 
 
Paid-in
 
 
Comphrehensive
 
 
Accumulated
 
 
Stockholders’
 
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Income
 
 
Deficit
 
 
Equity
 
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
  433,810 
  4,338 
  529,980 
   
   
  534,318 
Employee Stock Purchase Plan
  19,980 
  200 
  48,391 
   
   
  48,591 
Exercise of stock options
  93,813 
  938 
  193,212 
   
   
  194,150 
Satisfaction of Sellers Note
  967,208 
  9,672 
  2,237,392 
    
    
  2,247,064 
Reclassification of warrant liability upon exercise
   
   
  685,132 
   
   
  685,132 
Stock-based compensation on stock options and RSUs
   
   
  562,795 
   
   
  562,795 
Foreign currency translation adjustment
   
   
   
  200,886 
   
  200,886 
Net income
   
   
   
   
  1,867,324 
  1,867,324 
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 consolidated financial statements.
 
 
5
 
 
 
LIGHTPATH TECHNOLOGIES, INC.
 
 
Consolidated Statements of Cash Flows
 
 
 (unaudited)
 
 
 
  Nine Months Ended  
 
 
 
  March 31,  
 
 
 
2018
 
 
2017
 
Cash flows from operating activities
 
 
 
 
 
 
Net income
 $1,867,324 
 $1,338,987 
Adjustments to reconcile net income to net cash provided by operating activities:
    
    
       Depreciation and amortization
  2,492,003 
  1,240,232 
       Interest from amortization of debt costs
  13,704 
  3,861 
       Loss on disposal of property and equipment
  3,315 
   
       Stock-based compensation
  279,397 
  319,182 
       Bad debt expense
  (11,868)
  (29,551)
       Change in fair value of warrant liability
  194,632 
  457,784 
       Change in fair value of sellers note
  (396,163)
  34,476 
       Deferred rent amortization
  (58,234)
  (66,710)
       Inventory write-offs to reserve
  134,052 
  47,895 
       Deferred tax expense
  (205,884)
  (40,000)
Changes in operating assets and liabilities:
    
    
Trade accounts receivable
  312,026 
  (1,032,243)
Other receivables
  (29,018)
  142,919 
Inventories
  (1,013,201)
  (253,179)
    Prepaid expenses and other assets
  (409,137)
  171,753 
    Accounts payable and accrued liabilities
  (500,237)
  595,624 
                  Net cash provided by operating activities
  2,672,711
  2,931,030 
 
    
    
Cash flows from investing activities:
    
    
   Purchase of property and equipment
  (2,481,715)
  (1,412,738)
   Acquisiton of ISP Optics, net of cash acquired
   
  (11,777,336)
                  Net cash used in investing activities
  (2,481,715)
  (13,190,074)
 
    
    
Cash flows from financing activities:
    
    
Proceeds from exercise of stock options
  194,150 
   
Proceeds from sale of common stock from employee stock purchase plan
  48,591 
  19,632 
Loan costs
  (60,453)
  (72,224)
Borrowings on loan payable
  2,942,583 
  5,000,000 
Proceeds from issuance of common stock under public equity placement
   
  8,730,209 
Proceeds from exercise of warrants, net of costs
  534,318 
  584,679 
    Net payments on loan payable
  (4,351,836)
   
    Payments on capital lease obligations
  (196,790)
  (141,874)
                 Net cash (used in) provided by financing activities
  (889,437)
  14,120,422 
Effect of exchange rate on cash and cash equivalents
  (998,410)
  62,119 
Change in cash and cash equivalents
  (1,696,851)
  3,923,497 
Cash and cash equivalents, beginning of period
  8,085,015 
  2,908,024 
Cash and cash equivalents, end of period
 $6,388,164
 $6,831,521 
 
    
    
Supplemental disclosure of cash flow information:
    
    
    Interest paid in cash
 $417,550 
 $91,525 
    Income taxes paid
 $562,491 
 $344,820 
 Supplemental disclosure of non-cash investing & financing activities:
    
    
     Purchase of equipment through capital lease arrangements
 $306,220 
 $230,000 
     Reclassification of warrant liability upon exercise
 $685,132 
 $509,771 
     Derecognition of liability associated with stock option grants
 $283,399 
 $352,765 
     Sellers Note issued to acquire ISP Optics, at fair value
   
 $6,327,208 
     Conversion of Sellers Note to common stock
 $2,247,064 
  
 
    
    
  The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
6
 
 
LIGHTPATH TECHNOLOGIES, INC.
Notes to Unaudited Consolidated Financial Statements
 
1. Basis of Presentation
 
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 Consolidated Financial Statements have been prepared in accordance with the requirements of Article 8 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended, 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 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, 2017, 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 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. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year as a whole. The Consolidated Balance Sheet as of June 30, 2017 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.
 
History:
 
We were incorporated in Delaware in 1992 as the successor to LightPath Technologies Limited Partnership, a New Mexico limited partnership, formed in 1989, and its predecessor, Integrated Solar Technologies Corporation, a New Mexico corporation, formed in 1985. We completed our initial public offering (“IPO”) during fiscal 1996. On April 14, 2000, we acquired Horizon Photonics, Inc. (“Horizon”). On September 20, 2000, we acquired Geltech, Inc. (“Geltech”). In November 2005, we formed LightPath Optical Instrumentation (Shanghai) Co., Ltd (“LPOI”), a wholly-owned subsidiary located in Jiading, People’s Republic of China. In December 2013, we formed LightPath Optical Instrumentation (Zhenjiang) Co., Ltd (“LPOIZ”), a wholly-owned subsidiary located in Zhenjiang, Jiangsu Province, People’s Republic of China. In December 2016, we acquired ISP Optics Corporation, a New York corporation (“ISP”), and its wholly-owned subsidiary, ISP Optics Latvia, SIA, a limited liability company founded in 1998 under the Laws of the Republic of Latvia (“ISP Latvia”). See Note 3, Acquisition of ISP Optics Corporation, to these unaudited Consolidated Financial Statements, for additional information.
 
We are a manufacturer and integrator of families of precision molded aspheric optics, diamond turned, ground and polished infrared optics, high-performance fiber-optic collimators, GRADIUM glass lenses and other optical materials used to produce products that manipulate light. We design, develop, manufacture and distribute optical components and assemblies utilizing the latest optical processes and advanced manufacturing technologies. We also perform research and development for optical solutions for the traditional optics markets and communications markets.
 
2.  Significant Accounting Policies
 
Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
 
Cash and cash equivalents consist of cash in the bank and cash equivalents with maturities of 90 days or less when purchased.
 
Allowance for accounts receivable, is calculated by taking 100% of the total of invoices that are over 90 days past due from the due date and 10% of the total of invoices that are over 60 days past due from the due date for United States ("U.S.") based accounts and 100% of invoices that are over 120 days past due for Chinese and Latvia-based accounts. Accounts receivable are customer obligations due under normal trade terms. We perform continuing credit evaluations of our customers’ financial condition. If our actual collection experience changes, revisions to our allowance may be required. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.
 
 
7
 
 
Inventories, which consist principally of raw materials, tooling, work-in-process and finished lenses, collimators and assemblies, are stated at the lower of cost or market, on a first-in, first-out basis. Inventory costs include materials, labor and manufacturing overhead. Acquisition of goods from our vendors has a purchase burden added to cover customs, shipping and handling costs. Fixed costs related to excess manufacturing capacity have been expensed. We look at the following criteria for parts to consider for the inventory reserve: (i) items that have not been sold in two years, (ii) items that have not been purchased in two years, or (iii) items of which we have more than a two-year supply.  These items as identified are reserved at 100%, as well as reserving 50% for other items deemed to be slow moving within the last twelve months and reserving 25% for items deemed to have low material usage within the last six months. The parts identified are adjusted for recent order and quote activity to determine the final inventory reserve.
 
Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets ranging from one to ten years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the related assets using the straight-line method. Construction in process represents the accumulated costs of assets not yet placed in service and primarily relates to manufacturing equipment.
 
Long-lived assets, such as property, plant, and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in our Consolidated Balance Sheets and reported at the lower of the carrying amount or fair value, less costs to sell, and would no longer be depreciated.
 
Goodwill and intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods appropriate for the type of intangible asset and reported separately from goodwill. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally two to fifteen years. We periodically re-assess the useful lives of its intangible assets when events or circumstances indicate that useful lives have significantly changed from the previous estimate. Definite-lived intangible assets consist primarily of customer relationships, know-how/trade secrets and trademarks.  Goodwill and intangible assets are tested for impairment on an annual basis and during the period between annual tests in certain circumstances, and written down when impaired.
 
Deferred rent relates to certain of our operating leases containing predetermined fixed increases of the base rental rate during the lease term being recognized as rental expense on a straight-line basis over the lease term, as well as applicable leasehold improvement incentives provided by the landlord. We have recorded the difference between the amounts charged to operations and amounts payable under the leases as deferred rent in the accompanying unaudited Consolidated Balance Sheets.
 
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are computed on the basis of differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based upon enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances have been established to reduce deferred tax assets to the amount expected to be realized.
 
We have not recognized a liability for uncertain tax positions. A reconciliation of the beginning and ending amount of unrecognized tax benefits or penalties has not been provided since there has been no unrecognized benefit or penalty. If there were an unrecognized tax benefit or penalty, we would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
 
We file U.S. Federal income tax returns, and tax returns in various states and foreign jurisdictions. Our open tax years subject to examination by the Internal Revenue Service generally remain open for three years from the filing date. Our tax years subject to examination by the state jurisdictions generally remain open for up to four years from the filing date. In Latvia, tax years subject to examination remain open for up to five years from the filing date and in China, tax years subject to examination remain open for up to ten years from the filing date.
 
Our cash and cash equivalents totaled approximately $6.4 million at March 31, 2018. Of this amount, approximately 56% was held by our foreign subsidiaries in China and Latvia. These foreign funds were generated in China and Latvia as a result of foreign earnings. With respect to the funds generated by our foreign subsidiaries in China, the retained earnings in China must equal at least 150% of the registered capital before any funds can be repatriated. As of March 31, 2018, we have retained earnings in China of approximately $1.9 million and we need to have approximately $11.3 million before repatriation will be allowed.
 
 
8
 
 
We currently intend to permanently invest earnings generated from our foreign Chinese operations, and, therefore, we have not previously provided for future Chinese withholding taxes on such related earnings. However, if, in the future, we change such intention, we would provide for and pay additional foreign taxes, if any, at that time.
 
Revenue is recognized from product sales when products are shipped to the customer; provided, that we have received a valid purchase order, the price is fixed, title has transferred, collection of the associated receivable is reasonably assured, and there are no remaining significant obligations. Product development agreements are generally short term in nature with revenue recognized upon shipment to the customer for products, reports or designs. Invoiced amounts for sales and value-added taxes (“VAT”) are posted to the the accompanying unaudited Consolidated Balance Sheets and not included in revenue.
 
VAT is computed on the gross sales price on all sales of our products sold in the People’s Republic of China and Latvia. The VAT rates range up to 21%, depending on the type of products sold. The VAT may be offset by VAT paid by us on raw materials and other materials included in the cost of producing or acquiring our finished products. We recorded a VAT receivable, net of payments, which is included in other receivables in the accompanying unaudited Consolidated Financial Statements.
 
New product development costs are expensed as incurred.
 
Stock-based compensation is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period.  We estimate the fair value of each restricted stock unit or stock option as of the date of grant using the Black-Scholes-Merton pricing model. Most awards granted under our Amended and Restated Omnibus Incentive Plan, as amended (the “Omnibus Plan”) vest ratably over two to four years and generally have four to ten-year contract lives.  The volatility rate is based on historical trends in common stock closing prices, and the expected term was determined based primarily on historical experience of previously outstanding awards.  The interest rate used is the U.S. Treasury interest rate for constant maturities. The likelihood of meeting targets for option grants that are performance based are evaluated each quarter. If it is determined that meeting the targets is probable, then the compensation expense will be amortized over the remaining vesting period.
 
Management estimates. Management makes estimates and assumptions during the preparation of our Consolidated Financial Statements that affect amounts reported in the Consolidated Financial Statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes available, which, in turn, could impact the amounts reported and disclosed herein.
 
Fair value of financial instruments. We account for financial instruments in accordance with the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which provides a framework for measuring fair value and expands required disclosure about fair value measurements of assets and liabilities.  ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
 
Level 1 - Quoted prices in active markets for identical assets or liabilities.
 
Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.
 
Level 3 - Unobservable inputs that are supported by little or no market activity, therefore, requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
 
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 2018.
 
 
9
 
 
The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values.  These financial instruments include receivables, accounts payable and accrued liabilities.  Fair values were assumed to approximate carrying values for these financial instruments since they are short term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The fair value of our capital lease obligations and acquisition term loan payable to Avidbank Corporate Finance, a division of Avidbank (“Avidbank”) approximates their carrying values based upon current rates available to us. Loans payable as of June 30, 2017 also included a note payable to the sellers of ISP, in the aggregate principal amount of $6 million (the “Sellers Note”). The carrying value of the Sellers Note included a fair value premium based on a risk-adjusted discount rate, a Level 2 fair value measurement. On January 16, 2018, the Sellers Note was satisfied in full and, therefore, is not included in loans payable as of March 31, 2018. See Note 13, Loans Payable, to these unaudited Consolidated Financial Statements for additional information.
 
We valued our warrant liabilities based on open-form option pricing models, which were based on the relevant inputs and rendered the fair value measurement at Level 3. We based our estimates of fair value for warrant liabilities on the amount a third-party market participant would pay to transfer the liability and incorporated inputs, such as equity prices, historical and implied volatilities, dividend rates and prices of convertible securities issued by comparable companies maximizing the use of observable inputs when available. See Note 10, Derivative Financial Instruments (Warrant Liability), to these unaudited Consolidated Financial Statements for additional information.
 
We do not have any other financial or non-financial instruments that would be characterized as Level 1, Level 2, or Level 3.
 
Debt issuance costs are recorded as a reduction to the carrying value of the related notes payable, by the same amount, and are amortized ratably over the term of the note.
 
Derivative financial instruments.  We account for derivative instruments in accordance with FASB’s ASC Topic 815, “Derivatives and Hedging” (“ASC 815”), which requires additional disclosures about our objectives and strategies for using derivative instruments, how the derivative instruments and related hedged items are accounted for, and how the derivative instruments and related hedging items affect these Consolidated Financial Statements.
 
We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk.  We review the terms of convertible debt instruments to determine whether they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately from the host contract, and recorded on the accompanying unaudited Consolidated Balance Sheets at fair value. The fair value of derivative liabilities, if any, must be revalued at each reporting date, with the corresponding changes in fair value recorded in current-period operating results.
 
Freestanding warrants issued by us in connection with the issuance or sale of debt and equity instruments are considered to be derivative instruments.  Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as equity or as a derivative liability.
 
Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.   It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners.   Comprehensive income has two components, net income and other comprehensive income, and is included in the accompanying unaudited Consolidated Statements of Comprehensive Income. Our other comprehensive income consists of foreign currency translation adjustments made for financial reporting purposes.
 
Business segments. As we only operate in principally one business segment, no additional reporting is required.
 
Recent accounting pronouncements. There are new accounting pronouncements issued by the FASB that are not yet effective.
 
Revenue from Contracts with Customers – In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 must be applied using one of two retrospective methods and were originally set to be effective for annual and interim periods beginning after December 15, 2016. On July 9, 2015, the FASB modified ASU 2014-09 to be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. As modified, the FASB permits the early adoption of the new revenue standard, but not before the annual periods beginning after December 15, 2017. A public organization would apply the new revenue standard to all interim reporting periods within the year of adoption.
 
 
10
 
 
ASU 2014-09 provides that an entity should apply a five-step approach for recognizing revenue, including (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when, or as, the entity satisfies a performance obligation. Also, the entity must provide various disclosures concerning the nature, amount and timing of revenue and cash flows arising from contracts with customers.
 
Based on our current assessment, which is not yet final, we currently believe the most significant impact will be related to the timing of the recognition of non-recurring engineering (“NRE”) revenue. We also cannot determine whether to adopt a full retrospective or modified retrospective application method until our assessment of ASU 2014-09 is final. We will continue to evaluate the future impact and method of adoption of ASU 2014-09 and related amendments on our Consolidated Financial Statements and related disclosures, and will subsequently disclose future identified material impacts, if any, and the method of adoption in our annual report on Form 10-K for the year ended June 30, 2018. ASU 2014-09 is effective for us in the first quarter of our fiscal year ending June 30, 2019.
 
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 in the first quarter of our fiscal year ending June 30, 2020.
 
Income Taxes – In October 2016, the FASB issued ASU 2016-16, “Income Taxes” (Topic 740) (“ASU 2016-16”). ASU 2016-16 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. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. ASU 2016-16 is effective for us in the first quarter of fiscal 2019. We are currently evaluating the adoption date and the impact, if any, adoption will have on our financial position and results of operations.
 
Compensation – Stock Compensation – In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation” (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). The new guidance clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. ASU 2017-09 is effective for fiscal years, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. ASU 2017-09 is effective for us in the first quarter of fiscal 2019. We are currently evaluating the adoption date and the impact, if any, adoption will have on our financial position and results of operations.
 
3. Acquisition of ISP Optics Corporation
 
On December 21, 2016 (the “Acquisition Date”), we acquired 100% of the issued and outstanding shares of common stock of ISP (the “Acquisition”) pursuant to the Stock Purchase Agreement, dated as of August 3, 2016 (the “Purchase Agreement”). Our Consolidated Financial Statements reflect the financial results of ISP’s operations beginning on the Acquisition Date.
 
Part of our growth strategy is to identify appropriate opportunities that would enhance our profitable growth through acquisition. As we developed our molded infrared capability and learned more about the infrared market, we became aware of larger business opportunities in this market that might be available with a broader range of product capability. We believed acquiring ISP would provide an excellent complementary fit with our business that would meet our requirement of profitable growth in a market space we are investing in, and saw the Acquisition as an opportunity to accelerate our growth, and expand our capabilities and our global reach.
 
 
11
 
 
We financed a portion of the Acquisition through a public offering of 8,000,000 shares of our Class A common stock, raising net proceeds of approximately $8.7 million. The public offering closed simultaneously with the closing of the Acquisition. For additional information, see Note 15, Public Offering of Class A Common Stock, to these unaudited Consolidated Financial Statements. We also closed an acquisition term loan in the aggregate principal amount of $5 million (the “Term Loan”) with AvidBank. For additional information, see Note 13, Loans Payable, to these unaudited Consolidated Financial Statements.
 
In lieu of cash paid, we also financed a portion of the Acquisition through the issuance of the Sellers Note in the aggregate principal amount of $6 million to Joseph Menaker and Mark Lifshotz (the “Sellers”). For additional information, see Note 13, Loans Payable, to these unaudited Consolidated Financial Statements.
 
 
The Acquisition Date fair value of the consideration transferred totaled approximately $19.1 million, which consisted of the following:
 
Cash Purchase Price
 $12,000,000 
Cash acquired
  1,243,216 
Tax payable assumed debt
  (200,477)
Fair value of Sellers Note
  6,327,208 
Working capital adjustment
  (315,003)
     Total purchase price
  19,054,944 
Sellers Note issued at fair value
  (6,327,208)
Preliminary working capital adjustment
  (760,822)
Adjustment to beginning cash
  (163,878)
Adjustment to beginning assumed debt
  (25,700)
Cash paid at Acquisition Date
 $11,777,336 
 
Subsequently, in March 2017, a portion of the working capital adjustment, in the amount of $292,816, was applied to the Sellers Note as a payment, thereby decreasing the outstanding principal amount due under the Sellers Note.
 
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date:
 
Cash
 $1,243,216 
 Accounts receivable
  1,108,980 
 Inventory
  1,134,628 
 Other current assets
  153,450 
 Property and equipment
  4,666,634 
 Security deposit and other assets
  45,359 
 Identifiable intangibles
  11,069,000 
   Total identifiable assets acquired
 $19,421,267 
 
    
 Accounts payable
 $(554,050)
 Accrued expenses and other payables
  (133,974)
 Other payables
  (146,324)
 Deferred tax liability
  (5,386,880)
  Total liabilities assumed
 $(6,221,228)
       Net identifiable assets acquired
  13,200,039 
 Goodwill
  5,854,905 
 Net assets acquired
 $19,054,944 
 
 
12
 
 
As part of the valuation analysis, we identified intangible assets, including customer relationships, customer backlog, trade secrets, trademarks, and non-compete agreements. The customer relationships, customer backlog, trade secrets, trademarks, and non-compete agreements were determined to have estimated values of $3,590,000, $366,000, $3,272,000, $3,814,000, and $27,000, respectively, and estimated useful lives of 15, 2, 8, 8, and 3 years, respectively. The estimated fair value of identifiable intangible assets is determined primarily using the “income approach”, which requires a forecast of all future cash flows. This also reflects a $2,744,262 adjustment to increase the basis of the acquired property, plant and equipment to reflect the fair value of the assets at the Acquisition Date. The estimated useful lives of acquired property, plant and equipment range from 3 years to 10 years. Depreciation and amortization of intangible assets and property, plant and equipment is calculated on a straight-line basis. This also reflects a $153,132 adjustment to increase the basis of the acquired inventory to reflect fair value of the inventory and a $230,407 adjustment to decrease the basis of the acquired deferred revenue to reflect the fair value of the deferred revenue at the Acquisition Date. The tax effects of these fair value adjustments resulted in a net deferred tax liability of approximately $5.4 million.
 
The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of ISP. None of the goodwill is expected to be deductible for income tax purposes.
 
Our unaudited Consolidated Financial Statements reflect the financial results of ISP’s operations for the nine months ended March 31, 2018. The following represents unaudited pro forma consolidated information as if ISP had been included in our consolidated results for the nine months ended March 31, 2017:
 
 
 
Nine months ended
March 31, 2017
 
Revenue
 $25,491,276 
Net income
 $1,532,353 
 
These amounts have been calculated after applying our accounting policies and adjusting the results for Acquisition expenses and to reflect the additional interest expense and depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied on July 1, 2016, together with the consequential tax effects. For the nine months ended March 31, 2017, pro forma net income reflects adjustments of approximately $659,000 for amortization of intangibles and approximately $214,000 in additional interest, and excludes approximately $608,000 in Acquisition expenses and approximately $522,000 of nonrecurring fees incurred by ISP.
 
Prior to the Acquisition, we had a pre-existing relationship with ISP. We ordered anti-reflective coating services from ISP on an arms’ length basis. We had also partnered with ISP to develop and sell molded optics as part of a multiple lens assembly sold to a third party and had provided certain standard molded optics for resale through ISP’s catalog. At the Acquisition Date, we had amounts payable to ISP of $8,000 for services provided prior to the Acquisition, and ISP had payables of $24,500 due to us.
 
4. Inventories
 
The components of inventories include the following:
 
 
 
March 31, 2018
 
 
June 30, 2017
 
 
 
 
 
 
 
 
Raw materials
 $2,635,595 
 $2,282,880 
Work in process
  2,313,766 
  1,654,653 
Finished goods
  2,159,475 
  1,904,497 
Reserve for obsolescence
  (699,718)
  (767,454)
 
 $6,409,118 
 $5,074,576 
 
The value of tooling in raw materials was approximately $1.7 million and $1.6 million at March 31, 2018 and June 30, 2017, respectively.
 
 
13
 
 
5. Property and Equipment
 
Property and equipment are summarized as follows:
 
 
 
Estimated
 
 
March 31,
 
 
June 30,
 
 
 
Life (Years)
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing equipment
    5 - 10 
 $16,647,004 
 $13,804,964 
Computer equipment and software
    3 - 5 
  454,158 
  375,775 
Furniture and fixtures
    5 
  196,864 
  112,307 
Leasehold improvements
    5 - 7 
  1,260,415 
  1,228,797 
Construction in progress
    
  1,111,909 
  709,571 
     Total property and equipment
    
  19,670,350 
  16,231,414 
 
    
    
    
Less accumulated depreciation and amortization
    
  7,348,239 
  5,906,856 
            Total property and equipment, net
    
 $12,322,111 
 $10,324,558 
 
6. Goodwill and Intangible Assets
 
There were no changes in the net carrying value of goodwill during the nine months ended March 31, 2018.
 
Identifiable intangible assets, as a result of the Acquisition of ISP, were comprised of:
 
 
 
 
 
 
 
 
 
 Amortization through
 
 
 
 
 
 
 Useful Life (Yrs)
 
 
 Gross
 
 
 March 31, 2018
 
 
 Net
 
 Customer relationships
    15 
 $3,590,000 
 $305,600 
 $3,284,400 
 Backlog
    2 
  366,000 
  233,670 
  132,330 
 Trade secrets
    8 
  3,272,000 
  522,245 
  2,749,755 
 Trademarks
    8 
  3,814,000 
  608,753 
  3,205,247 
 Non-compete agreement
    3 
  27,000 
  11,492 
  15,508 
 
    
 $11,069,000 
 $1,681,760 
 $9,387,240 
 
Future amortization of intangibles is as follows:
 
Fiscal year ending:
 
 
 
 June 30, 2018
 $329,270 
 June 30, 2019
  1,220,664 
 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 
 
 $9,387,240 
 
 
14
 
 
7. Accounts Payable
 
The accounts payable balance as of March 31, 2018 and June 30, 2017 both include approximately $73,000 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, 2018 and 2017 is as follows:
 
 
 
Three Months Ended March 31,
 
 
Nine Months Ended March 31,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
Income before income taxes
 $1,043,125 
 $366,598 
 $1,548,646 
 $2,110,587 
Income tax expense (benefit)
 $(183,154)
 $265,774 
 $(318,678)
 $771,600 
Effective income tax rate
  -18%
  72%
  -21%
  37%
 
The difference between our effective tax rates in the periods presented above and the federal statutory rate is primarily due to a tax benefit from our domestic losses being recorded with a full valuation allowance, as well as the effect of foreign earnings taxed at rates differing from the U.S. federal statutory rate.
 
As of March 31, 2018, LPOIZ and LPOI were subject to statutory income tax rates of 15% and 25%, respectively. During the three months ended December 31, 2017, the statutory tax rate applicable to LPOIZ was lowered from 25% to 15% in accordance with an incentive program for technology companies in China. The lower rate applies to LPOIZ’s 2017 tax year, beginning January 1, 2017. Accordingly, we recorded a tax benefit of approximately $160,000 during the three months ended December 31, 2017 related to this retroactive rate change. For the three months ended March 31, 2018, income taxes were accrued at the applicable rates.
 
Through 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 rate of tax was changed to 20%, however, distribution amounts are first divided by 0.8 to arrive at the profit before tax amount, resulting in an effective tax rate of 25%. Our intent is to distribute profits from ISP Latvia to ISP, its parent company in the U.S.; therefore, we will accrue distribution taxes as profits are generated. With this change, the concept of taxable income and tax basis in assets and liabilities has been eliminated and is no longer relevant for purposes of determining income taxes; therefore, the previously recorded net deferred tax liability related to ISP Latvia was adjusted to zero during the three months ended March 31, 2018, resulting in a tax benefit of approximately $206,000.
 
We record net deferred tax assets to the extent we believe it is more likely than not that these assets will be realized. Based on the level of historical taxable income, we have provided a full valuation allowance against our net deferred tax assets as of March 31, 2018 and June 30, 2017, except for items with indefinite carryover periods. The net deferred tax asset results from federal and state tax credits with indefinite carryover periods that management expects to utilize in a future period.
 
Tax Cuts and Jobs Act
 
In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 Act”), which changes existing U.S. tax law and includes various provisions that are expected to affect companies. Among other things, the 2017 Act: (i) changes U.S. corporate tax rates, (ii) generally reduces a company’s ability to utilize accumulated net operating losses, and (iii) requires the calculation of a one-time transition tax on certain foreign earnings and profits (“E&P”) that had not been previously repatriated. In addition, the 2017 Act impacts a company’s estimates of its deferred tax assets and liabilities.
 
Pursuant to U.S. GAAP, changes in tax rates and tax laws are accounted for in the period of enactment, and the resulting effects are recorded as discrete components of the income tax provision related to continuing operations in the same period. We continue to evaluate the impact of the 2017 Act on our financial statements. Based on our initial assessments to date, we expect the one-time transition tax on certain foreign E&P to have a minimal impact on us because we anticipate that we will be able to utilize our existing net operating losses to substantially offset any taxes payable on foreign E&P. Additionally, we expect significant adjustments to our gross deferred tax assets and liabilities; however, we also expect to record a corresponding offset to our estimated full valuation allowance against our net deferred tax assets, which should result in minimal net effect to our provision for income taxes.
 
 
15
 
 
9. Compensatory Equity Incentive Plan and Other Equity Incentives
 
Share-Based Compensation Arrangements. The Omnibus Plan provides several available forms of stock compensation, including incentive stock options and restricted stock unit (“RSU”) awards. Stock-based compensation is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. We estimate the fair value of each stock option as of the date of grant using the Black-Scholes-Merton pricing model. Most options granted under the Omnibus Plan vest ratably over two to four years and generally have ten-year contract lives. The volatility rate is based on four-year historical trends in common stock closing prices and the expected term was determined based primarily on historical experience of previously outstanding options. The interest rate used is the U.S. Treasury interest rate for constant maturities. The likelihood of meeting targets for option grants that are performance based are evaluated each quarter. If it is determined that meeting the targets is probable, then the compensation expense will be amortized over the remaining vesting period.
 
The LightPath Technologies, Inc. Employee Stock Purchase Plan (“2014 ESPP”) was adopted by our Board of Directors on October 30, 2014 and approved by our stockholders on January 29, 2015. The 2014 ESPP permits employees to purchase shares of our Class A common stock through payroll deductions, which may not exceed 15% of an employee’s compensation, at a price not less than 85% of the market value of our Class A common stock on specified dates (June 30 and December 31). In no event can any participant purchase more than $25,000 worth of shares of Class A common stock in any calendar year and an employee cannot purchase more than 8,000 shares on any purchase date within an offering period of 12 months and 4,000 shares on any purchase date within an offering period of six months. A discount of $4,879 and $1,927 for the nine months ended March 31, 2018 and 2017, respectively, is included in the selling, general and administrative expense in the accompanying unaudited Consolidated Statements of Comprehensive Income, which represents the value of the 10% discount given to the employees purchasing stock under the 2014 ESPP.
 
These plans are summarized below:
 
 
 
 
 
 
Award Shares
 
 
Available for
 
 
 
Award Shares
 
 
Outstanding
 
 
Issuance
 
 
 
Authorized
 
 
at March 31,
 
 
at March 31,
 
Equity Compensation Arrangement
 
 
 
 
2018
 
 
2018
 
Omnibus Plan
  5,115,625 
  2,678,482 
  1,665,776 
2014 ESPP
  400,000 
   
  358,008 
 
  5,515,625 
  2,678,482 
  2,023,784 
 
Grant Date Fair Values and Underlying Assumptions; Contractual Terms. We estimate the fair value of each stock option as of the date of grant. We use the Black-Scholes-Merton pricing model. The 2014 ESPP fair value is the amount of the discount the employee obtains at the date of the purchase transaction.
 
For stock options granted under the Omnibus Plan in the nine month periods ended March 31, 2018 and 2017, we estimated the fair value of each stock option as of the date of grant using the following assumptions:
 
 
Nine months ended March 31,
 
2018
2017
Weighted-average expected volatility
63% - 75%
77% - 83%
Dividend yields
0%
0%
Weighted-average risk-free interest rate
1.28% - 1.80%
1.18% - 1.90%
Weighted-average expected term, in years
7.25
7.49
 
 
16
 
 
Most options granted under the Omnibus Plan 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, 2018 and 2017. The volatility rate and expected term are based on seven-year historical trends in Class A common stock closing prices and actual forfeitures. The interest rate used is the U.S. Treasury interest rate for constant maturities.
 
Information Regarding Current Share-Based Compensation Awards. A summary of the activity for share-based compensation awards under the Omnibus Plan in the nine months ended March 31, 2018 is presented below:
 
 
 
           
 
 
 Restricted
 
 
 
Stock Options
 
 
 Stock Units (RSUs)
 
 
 
 
 
 
Weighted-
 
 
Weighted-
 
 
 
 
 
Weighted-
 
 
 
 
 
 
Average
 
 
Average
 
 
 
 
 
Average
 
 
 
 
 
 
Exercise
 
 
Remaining
 
 
 
 
 
Remaining
 
 
 
 Shares
 
 
 Price
 
 
 Contract
 
 
 Shares
 
 
 Contract
 
June 30, 2017
  1,096,186 
 $1.68 
  6.3 
  1,508,782 
  0.9 
 
    
    
    
    
    
Granted
  58,849 
 $4.24 
   
  140,571 
   
Exercised
  (93,813)
 $2.10 
   
   
   
Cancelled/Forfeited
  (32,093)
 $2.62 
   
   
   
March 31, 2018
  1,029,129 
 $1.74 
  6.4 
  1,649,353 
  0.9 
 
    
    
    
    
    
Awards exercisable/
    
    
    
    
    
vested as of
    
    
    
    
    
March 31, 2018
  818,960 
 $1.60 
  5.9 
  1,287,370 
   
 
    
    
    
    
    
Awards unexercisable/
    
    
    
    
    
unvested as of
    
    
    
    
    
March 31, 2018
  210,169 
 $2.27 
  8.6 
  361,983 
  0.9 
 
  1,029,129 
    
    
  1,649,353 
    
 
The total intrinsic value of options outstanding and exercisable at March 31, 2018 and 2017 was approximately $639,000 and $900,135, respectively.
 
The total fair value of option shares vested during the nine months ended March 31, 2018 and 2017 was approximately $550,000 and $406,000 respectively.
 
No RSUs were exercised during the nine months ended March 31, 2018. The total intrinsic value of RSUs exercised during the nine months ended March 31, 2017 was approximately $79,000.
 
The total intrinsic value of RSUs outstanding and exercisable at March 31, 2018 and 2017 was approximately $2.8 million and $2.9 million, respectively.
 
The total fair value of RSUs vested during the nine months ended March 31, 2018 and 2017 was approximately $519,000 and $333,000, respectively.
 
 
17
 
 
As of March 31, 2018, there was approximately $569,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements (including share options and RSUs) granted under the Omnibus Plan. We expect to recognize the compensation cost as follows:
 
 
 
Stock
 
 
 
 
 
 
 
 
 
Options
 
 
RSUs
 
 
Total
 
Three months ending June 30, 2018
  8,938 
  85,036 
  93,974 
 
    
    
    
Year ending June 30, 2019
  19,747 
  264,982 
  284,729 
 
    
    
    
Year ending June 30, 2020
  6,720 
  149,944 
  156,664 
 
    
    
    
Year ending June 30, 2021
  3,733 
  29,978 
  33,711 
 
 $39,138 
 $529,940 
 $569,078 
 
RSU awards vest immediately or from two to four years from the date of grant.
 
We issue new shares of Class A common stock upon the exercise of stock options. The following table is a summary of the number and weighted average grant date fair values regarding our unexercisable/unvested awards as of March 31, 2018 and changes during the nine months then ended:
 
 
Unexercisable/unvested awards
Stock Options Shares 
 
RSU Shares 
 
Total Shares 
 
 
Weighted-Average
 
 
 
Grant Date Fair Values
 
 
 
(per share)
June 30, 2017
          244,511
 
          438,912
 
        683,423
 
 
 $ 1.39
Granted
            58,849
 
140,571
 
        199,420
 
 
 $ 3.69
Vested
           (83,441)
 
         (217,500)
 
       (300,941)
 
 
 $ 3.79
Cancelled/Forfeited
             (9,750)
 
—    
 
           (9,750)
 
 
 $ 0.97
March 31, 2018
          210,169
 
         361,983
 
        572,152
 
 
 $ 1.51
 
 
Financial Statement Effects and Presentation. The following table shows total stock-based compensation expense for the nine months ended March 31, 2018 and 2017 included in the accompanying unaudited Consolidated Statements of Comprehensive Income:
 
 
 
Nine Months Ended March 31,
 
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
Stock options
 $249,946 
 $34,882 
RSUs
  29,450 
  284,300 
     Total
 $279,396 
 $319,182 
 
    
    
The amounts above were included in:
    
    
Selling, general & administrative
 $274,004 
 $315,429 
Cost of sales
  4,388 
  2,792 
New product development
  1,004 
  961 
 
 $279,396 
 $319,182 
 
 
18
 
 
10. Derivative Financial Instruments (Warrant Liability)
 
In June 2012, we executed a Securities Purchase Agreement with respect to a private placement of an aggregate of 1,943,852 shares of our Class A common stock at $1.02 per share and warrants to purchase up to 1,457,892 shares of our Class A common stock at an initial exercise price of $1.32 per share, which was subsequently reduced to $1.26 and then to $1.22 on December 21, 2016 as a result of our public offering (the “June 2012 Warrants”). The June 2012 Warrants were exercisable for a five-year period from December 11, 2012 to December 11, 2017. We accounted for the June 2012 Warrants in accordance with ASC 815-10. ASC 815-10 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. This applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative under ASC 815-10, including any freestanding financial instrument that is potentially settled in an entity’s own stock.
 
Due to certain adjustments that could be made to the exercise price of the June 2012 Warrants if we issued or sold shares of our Class A common stock at a price that was less than the then-current warrant exercise price, the June 2012 Warrants were classified as a liability, as opposed to equity, in accordance with ASC 815-10, as we determined that the June 2012 Warrants were not indexed to our Class A common stock.
 
During the term of the June 2012 Warrants, we re-measured the fair value of the outstanding June 2012 Warrants at the end of each reporting period to reflect their then-current fair market value. We also measured the fair value upon each warrant exercise, to determine the fair value adjustment to the warrant liability related to the warrant exercise. We recorded the change in fair value of the June 2012 Warrants in the accompanying unaudited Consolidated Statements of Comprehensive Income, which is estimated using the Lattice option-pricing model using the following range of assumptions for the respective periods:
 
 
December 31,
June 30,
Inputs into Lattice model for warrants:
2017
2017
Equivalent volatility
21.06% - 162.92%
47.39% - 75.80%
Equivalent interest rate
0.95% - 1.14%
0.62% - 1.13%
Floor
$1.15
$1.15
Stock price
 $2.56 - $2.60
 $1.15 - $3.25
Probability price < strike price
0.00%
4.70%
Fair value of call
$1.13 - $2.79
$0.30 - $2.04
Probability of fundamental transaction occurring
0%
0%
 
During the six months ended December 31, 2017, we issued 433,810 shares of our Class A common stock upon the exercise of the June 2012 Warrants, which included 329,195 that were subject to re-measurement. The June 2012 Warrants expired on December 11, 2017; therefore, we reduced the warrant liability to zero as of December 31, 2017.
 
The warrant liabilities were considered recurring Level 3 financial instruments. The following table summarizes the activity of Level 3 instruments measured on a recurring basis for the nine months ended March 31, 2018:
 
 
 
Warrant Liability
 
Fair value, June 30, 2017
 $490,500 
Exercise of common stock warrants
  (685,132)
Change in fair value of warrant liability
  194,632 
Fair value, March 31, 2018
 $- 
 
11.   Earnings Per Share
 
Basic earnings per share is computed by dividing the weighted-average number of shares of Class A common stock outstanding, during each period presented. Diluted earnings per share is computed similarly to basic earnings per share, except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue shares of Class A common stock were exercised or converted into shares of Class A common stock. The computations for basic and diluted earnings per share are described in the following table:
 
 
19
 
 
 
 
  Three Months Ended
 
 
  Nine Months Ended
 
 
 
March 31,
 
 
March 31,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 $1,226,279 
 $100,824 
 $1,867,324 
 $1,338,987 
 
    
    
    
    
Weighted-average common shares outstanding:
    
    
    
    
Basic number of shares
  25,546,512 
  23,818,136 
  24,763,458 
  18,621,072 
 
    
    
    
    
Effect of dilutive securities:
    
    
    
    
Options to purchase common stock
  295,055 
  208,429 
  355,858 
  92,094 
RSUs
  1,439,443 
  1,267,572 
  1,381,190 
  1,139,142 
Common stock warrants
  - 
  334,566 
  118,450 
  293,668 
Diluted number of shares
  27,281,010 
  25,628,703 
  26,618,956 
  20,145,976 
 
    
    
    
    
Earnings per common share:
    
    
    
    
Basic
 $0.05 
 $0.00 
 $0.08 
 $0.07 
Diluted
 $0.04 
 $0.00 
 $0.07 
 $0.07 
 
The following potential dilutive shares were not included in the computation of diluted earnings per share, as their effects would be anti-dilutive:
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
March 31,
 
 
March 31,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
Options to purchase common stock
  748,326 
  833,701 
  732,350 
  868,209 
RSUs
  209,911 
  262,983 
  208,138 
  300,096 
Common stock warrants
  - 
  531,925 
  108,924 
  683,744 
 
  958,237 
  1,628,609 
  1,049,412 
  1,852,049 
 
12.   Lease Commitments
 
We have operating leases for office space. At March 31, 2018, we have a lease agreement for our manufacturing and office facility in Orlando, Florida (the “Orlando Lease”). The Orlando Lease, which is for a seven-year original term with renewal options, expires in April 2022 and expanded our space to 25,847 square feet, including space added in July 2014. Minimum rental rates for the extension term were established based on annual increases of two-and-one-half percent starting in the third year of the extension period. Additionally, there is one five-year extension option exercisable by us. The minimum rental rates for such additional extension options will be determined at the time an option is exercised and will be based on a “fair market rental rate,” as determined in accordance with the Orlando Lease, as amended.
 
We received approximately $420,000 in a leasehold improvement allowance in fiscal 2015. The improvements were recorded as property and equipment and deferred rent on the accompanying unaudited Consolidated Balance Sheets. Amortization of leasehold improvements was approximately $172,000 as of March 31, 2018. The deferred rent is being amortized as a reduction in lease expense over the term of the Orlando Lease.
 
Subsequent to March 31, 2018, we entered into a lease agreement for an additional 12,378 square feet in Orlando, Florida (the “Orlando Lease II”). The Orlando Lease II will provide additional manufacturing and office space near our corporate headquarters. The anticipated commencement date of the Orlando Lease II is August 1, 2018, with a four-year original term with one renewal option for a five-year term. The Orlando Lease II provides for a tenant improvement allowance of up to $309,450.
 
 
20
 
 
At March 31, 2018, we, through our wholly-owned subsidiary, LPOI, have a lease agreement for an office facility in Shanghai, China (the “Shanghai Lease”) for 1,900 square feet. The Shanghai Lease commenced in October 2015 and was set to expire in October 2017. During the nine months ended March 31, 2018, the Shanghai Lease was renewed for an additional one-year term, and now expires in October 2018.
 
At March 31, 2018, we, through our wholly-owned subsidiary, LPOIZ, have two lease agreements for a manufacturing and office facility in Zhenjiang, China (collectively, the “Zhenjiang Leases”) for 39,000 square feet. The first Zhenjiang Lease is for 26,000 square feet, has a five-year original term with renewal options, and expires in March 2019. During the nine months ended March 31, 2018, another lease was executed for 13,000 additional square feet in this same facility. This new lease has a 54-month term, and expires in December 2021.
 
At March 31, 2018, we, through our wholly-owned subsidiary ISP, have a lease agreement for a manufacturing and office facility in Irvington, New York (the “ISP Lease”) for 13,000 square feet. The ISP Lease, which is for a five-year original term with renewal options, expires in September 2020.
 
At March 31, 2018, we, through ISP’s wholly-owned subsidiary ISP Latvia, have two lease agreements for a manufacturing and office facility in Riga, Latvia (collectively, the “Riga Leases”) for an aggregate of 23,000 square feet. The Riga Leases, each of which is for a five-year original term with renewal options, expire in December 2019.
 
Rent expense totaled approximately $779,000 and $530,000 during the nine months ended March 31, 2018 and 2017, respectively.
 
We currently have obligations under four capital lease agreements, entered into during fiscal years 2015, 2016, and 2017, with terms ranging from three to five years. The leases are for computer and manufacturing equipment, which are included as part of property and equipment. Assets under capital lease include approximately $1.0 million in manufacturing equipment, with accumulated amortization of approximately $541,000 as of March 31, 2018. Amortization related to capital lease assets is included in depreciation and amortization expense.
 
The approximate future minimum lease payments under capital and operating leases at March 31, 2018 were as follows:
 
Fiscal year ending June 30,
 
Capital Leases
 
 
Operating Leases
 
 
 
 
 
 
 
 
2018
 $84,838 
 $226,000 
2019
  212,435 
  769,000 
2020
  161,302 
  693,000 
2021
  86,657 
  446,000 
2022
   
  285,000 
Total minimum payments
  545,232 
 $2,419,000 
   Less imputed interest
  (54,369)
    
Present value of minimum lease payments included in capital lease obligations
  490,863 
    
Less current portion
  219,688 
    
Non-current portion
 $271,175 
    

13. Loans Payable
 
AvidBank Note
 
Amended LSA and Term Loan
 
On December 21, 2016, we executed the Second Amended and Restated Loan and Security Agreement (the “Amended LSA”) with AvidBank for the Term Loan in the aggregate principal amount of $5 million and a working capital revolving line of credit (the “Revolving Line”). The Amended LSA amends and restates that certain Loan and Security Agreement between AvidBank and us dated September 30, 2013, as amended and restated pursuant to that certain Amended and Restated Loan and Security Agreement dated as of December 23, 2014, and as further amended pursuant to that certain First Amendment to Amended and Restated Loan and Security Agreement dated as of December 23, 2015.
 
 
21
 
 
The Term Loan was for a five-year term. Pursuant to the Amended LSA, interest on the Term Loan began accruing on December 21, 2016 and was paid monthly for the first six months of the term of the Term Loan. Thereafter, both principal and interest was due and payable in fifty-four (54) monthly installments. The Term Loan bore interest at a per annum rate equal to two percent (2.0%) above the Prime Rate, or 6.5% at December 31, 2017; provided, however, that at no time was the applicable rate permitted to be less than five and one-half percent (5.50%) per annum. Prepayment was permitted; however, in order to prepay the Term Loan, certain prepayment fees applied.
 
Pursuant to the Amended LSA, AvidBank will, in its discretion, make loan advances under the Revolving Line to us up to a maximum aggregate principal amount outstanding not to exceed the lesser of (i) One Million Dollars ($1,000,000) or (ii) eighty percent (80%) (the “Maximum Advance Rate”) of the aggregate balance of our eligible accounts receivable, as determined by AvidBank in accordance with the Amended LSA. Upon the occurrence and during the continuance of an event of default, AvidBank may, in its discretion, cease making advances and terminate the Amended LSA; provided, that at the time of termination, no obligations remain outstanding and AvidBank has no obligation to make advances under the Amended LSA. AvidBank also has the discretion to determine that certain accounts are not eligible accounts.
 
Amounts borrowed under the Revolving Line may be repaid and re-borrowed at any time prior to December 21, 2018, at which time all amounts shall be immediately due and payable. The advances under the Revolving Line bear interest, on the outstanding daily balance, at a per annum rate equal to one percent (1%) above the Prime Rate; provided, however, that at no time shall the applicable rate be less than four and one-half percent (4.5%) per annum. Interest payments are due and payable on the last business day of each month. Payments received with respect to accounts upon which advances are made will be applied to the amounts outstanding under the Amended LSA. There were no borrowings under the Revolving Line during the period. As of March 31, 2018, there was no outstanding balance under the Revolving Line.
 
Our obligations under the Amended LSA are collateralized by a first priority security interest (subject to permitted liens) in cash, U.S. inventory and accounts receivable. In addition, our wholly-owned subsidiary, Geltech, has guaranteed our obligations under the Amended LSA.
 
The Amended LSA contains customary covenants, including, but not limited to: (i) limitations on the disposition of property; (ii) limitations on changing our business or permitting a change in control; (iii) limitations on additional indebtedness or encumbrances; (iv) restrictions on distributions; and (v) limitations on certain investments. Additionally, the Amended LSA requires us to maintain a fixed charge coverage ratio (as defined in the Amended LSA) of at least 1.15 to 1.00 and an asset coverage ratio (as defined in the Amended LSA) of at least 1.50 to 1.00. As of March 31, 2018, we were not in compliance with the fixed charge coverage ratio; however, AvidBank provided a waiver of compliance pursuant to that certain Third Amendment to the Amended LSA, dated May 11, 2018, entered into between us and AvidBank (the "Third Amendment"), as discussed below.
 
Late payments are subject to a late fee equal to the lesser of five percent (5%) of the unpaid amount or the maximum amount permitted to be charged under applicable law. Amounts outstanding during an event of default accrue interest at a rate of five percent (5%) above the interest rate applicable immediately prior to the occurrence of the event of default. The Amended LSA contains other customary provisions with respect to events of default, expense reimbursement, and confidentiality.
 
First Amendment to the Amended LSA 
 
On December 20, 2017, we executed the First Amendment to the Amended LSA (the "First Amendment"). The First Amendment amended, among other items, the maturity date of the Revolving Line from December 20, 2017 to March 21, 2018, increased the maximum amoutn of indebtedness secured by permitted liens from $600,000 to $800,000 in the aggregate, and increased the aggregate amount we may maintain in accounts with financial institutions in Riga, Latvia to $1,000,000. 
 
 
22
 
 
Second Amendment to the Amended LSA and Term II Loan
 
On January 16, 2018, we entered into a Second Amendment to the Amended LSA (the “Second Amendment”) relating to the Term Loan. Pursuant to the Second Amendment, Avidbank paid a single cash advance to us in an original principal amount of $7,294,000 (the “Term II Loan”). The proceeds of the Term II Loan were used to repay all amounts owing with respect to the Term Loan, with the remainder used to repay the amounts owing under the Sellers Note. As of January 16, 2018, the Term Loan was deemed satisfied in full and terminated. The Term II Loan is for a five-year term. Pursuant to the Second Amendment, interest on the Term II Loan accrues starting on January 16, 2018 and both principal and interest is due and payable in sixty (60) monthly installments beginning on the tenth day of the first month following the date of the Second Amendment (or February 10, 2018), and continuing on the same day of each month thereafter for so long as the Term II Loan is outstanding. The Term II Loan bears interest at a per annum rate equal to two percent (2.0%) above the Prime Rate; provided, however, that at no time shall the applicable rate be less than five-and-one-half percent (5.50%) per annum. Prepayment by us is permitted; however, we must pay a prepayment fee in an amount equal to (i) 0.75% of the Excess Prepayment Amount if prepayment occurs on or prior to January 16, 2019, or (ii) 0.5% of the Excess Prepayment Amount if prepayment occurs after January 16, 2019 but on or before January 16, 2020, or (iii) 0.25% of the Excess Prepayment Amount if prepayment occurs after January 16, 2020 but on or prior to January 16, 2021, or (iv) 0.10% of the Excess Prepayment Amount if such prepayment occurs after January 16, 2021 but on or prior to January 16, 2022. For purposes of the Second Amendment, the “Excess Prepayment Amount” equals the amount of the Term II Loan being prepaid in excess of $2,850,000.
 
The Second Amendment amended, among other items, (1) certain definitions related to the fixed charge coverage ratio, and (2) the maturity date of the Revolving Line from March 21, 2018 to December 21, 2018.
 
Costs incurred of approximately $72,000 were recorded as a discount on debt and will be amortized over the five-year term of the Term Loan. Additional costs of approximately $60,000 were incurred in conjunction with the Second Amendment and were also recorded as a discount on debt, and the combined costs will be amortized over the five-year term of the Term II Loan. Amortization of approximately $13,700 is included in interest expense for the nine months ended March 31, 2018.
 
Third Amendment to the Amended LSA
 
Subsequent to the quarter ending March 31, 2018, we entered into the Third Amendment. The Third Amendment (i) amends the definition of "Permitted Indebtedness" and (ii) amends Section 6.8(a) of the Amended LSA to require that we, and each of our domestic subsidiaries, maintain all of our domestic depository and operating accounts with AvidBank begining on June 1, 2018 and to prohibit us from maintaining a domestic account balance outside of AvidBank that exceeds Ten Thousand Dollars ($10,000) during the transition period. The Third Amendment also amends Section 6.9(a) of the Amended LSA to require that we maintain a fixed charge coverage ratio, as measured on the June 30, 2018, of at least 1.10 to 1.00, and thereafter, begining with the quarter ending on September 30, 2018, to maintian a fixed charge coverage ratio of at least 1.15 to 1.00. Additionally, pursuant to the Third Amendment, AvidBank granted us a waiver of default arising prior to the Third Amendment from our failure to comply with the fixed charge coverage ratio measured on March 31, 2018. Based on the waiver, we are no longer in default of the Term II Loan or Revolving Line.
 
Sellers Note
 
On December 21, 2016, we also entered into the Sellers Note in the aggregate principal amount of $6 million. The Sellers Note was fully satisfied on January 16, 2018, as discussed in Note 14, Note Satisfaction and Securities Purchase Agreement, to these unaudited Consolidated Financial Statements.
 
Pursuant to the Sellers Note, during the period commencing on December 21, 2016 (the “Issue Date”) and continuing until the fifteen-month anniversary of the Issue Date (the “Initial Period”), interest accrued on only the principal amount of the Sellers Note in excess of $2.7 million at an interest rate equal to ten percent (10%) per annum. After the Initial Period, interest would have accrued on the entire unpaid principal amount of the Sellers Note from time to time outstanding, at an interest rate equal to ten percent (10%) per annum. Given that the Sellers Note was satisfied in full in January 2018, we paid interest semi-annually in arrears solely during the Initial Period. The Sellers Note originally had a five-year term. We had the right to prepay the Sellers Note in whole or in part without penalty or premium.
 
The Sellers Note was valued based on the present value of expected cash flows. The fair value of the Sellers Note was determined to be approximately $6,327,200 based on the present value of expected future cash flows, using a risk-adjusted discount rate of 7.5%. The Sellers Note is included in loans payable, less current portion on the acconmpanying unaudited Consolidated Balance Sheet. As of January 16, 2018, the date the note was satisfied in full, the fair value adjustment liability was approximately $467,000. Upon satisfaction of the Sellers Note, this amount was reduced to zero and the resulting gain is in the accompanying unaudited Consolidated Statements of Comprehensive Income in the line item entitled “Interest expense – debt costs.”
 
There were no payment defaults or other events of default prior to the Sellers Note being paid in full on January 16, 2018. If a payment default, or any other “event of default,” such as a bankruptcy event or a change of control of the Company had occurred, the entire unpaid and outstanding principal balance of the Sellers Note, together with all accrued and unpaid interest and any and all other amounts payable under the Sellers Note, would have been immediately be due and payable.
 
 
23
 
 
Future maturities of loans payable are as follows:
 
 
 
Avidbank Note
 
 
Unamortized Debt Costs
 
 
Total
 
Year ending June 30,
 
 
 
 
 
 
 
 
 
2018
 $364,700 
 $(5,627)
 $359,073 
2019
  1,458,800 
  (22,500)
  1,436,300 
2020
  1,458,800 
  (22,500)
  1,436,300 
2021
  1,458,800 
  (22,500)
  1,436,300 
2022
  1,458,800 
  (22,500)
  1,436,300 
2023
  850,967 
  (16,875)
  834,092 
Total payments
 $7,050,867 
 $(112,502)
 $6,938,365 
Less current portion
  
  
  (1,458,800)
Non-current portion
  
  
 $5,479,565 
 
14. Note Satisfaction and Securities Purchase Agreement
 
Note Satisfation and Securities Purchase Agreement

On January 16, 2018 (the “Satisfaction Date”), we entered into a Note Satisfaction and Securities Purchase Agreement (the “Note Satisfaction Agreement”) with the Sellers with respect to the Sellers Note. At the closing of the Acquisition of ISP, as partial consideration for the shares of ISP, we issued the Sellers Note in the original principal amount of $6,000,000, which principal payment amount was subsequently reduced to $5.7 million, after applying the approximately $293,000 working capital adjustment, as discussed in Note 3, Acquisition of ISP Optics Corporation, to these unaudited Consolidated Financial Statements.
 
Pursuant to the Note Satisfaction Agreement, we and the Sellers agreed to satisfy the Sellers Note in full by (i) converting 39.5% of the outstanding principal amount of the Sellers Note into shares of our Class A common stock, and (ii) paying the remaining 60.5% of the outstanding principal amount of the Sellers Note, plus all accrued but unpaid interest, in cash to the Sellers. As of the Satisfaction Date, the outstanding principal amount of the Sellers Note was $5,707,183, and there was $20,883 in accrued but unpaid interest thereon (collectively, the “Note Satisfaction Amount”). Accordingly, we paid approximately $3,453,582 plus all accrued but unpaid interest on the Sellers Note, in cash (the “Cash Payment”) and issued 967,208 shares of Class A common stock (the “Shares”), which represents the balance of the Note Satisfaction Amount divided by the Conversion Price. The “Conversion Price” equaled $2.33, representing the average closing bid price of the Class A common stock, as reported by Bloomberg for the five (5) trading days preceding the Satisfaction Date. The Cash Payment was paid using approximately $600,000 of cash on hand and approximately $2.9 million in proceeds from the Term II Loan from Avidbank. As of the Satisfaction Date, the Sellers Note was deemed satisfied in full and terminated.
 
The Shares issued to the Sellers were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”), pursuant to Section 4(a)(2) of the Act (in that the Shares were issued by us in a transaction not involving any public offering), and pursuant to Rule 506 of Regulation D as promulgated by the SEC under the Act.
 
Registration Rights Agreement
 
In connection with the Note Satisfaction Agreement, we and the Sellers also entered into a Registration Rights Agreement dated January 16, 2018, pursuant to which we agreed to file with the SEC by February 15, 2018, and to cause to be declared effective, a registration statement to register the resale of the Shares issued to partially pay the Note Satisfaction Amount. The Registration Statement on Form S-3 (File No. 333-223028) was declared effective by the SEC on March 8, 2018.
 
15. Public Offering of Class A Common Stock
 
On December 16, 2016, we entered into an Underwriting Agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC (“Roth Capital”), as representative of the several underwriters identified therein (collectively, the “Underwriters”), relating to the firm commitment offering of 7,000,000 shares of our Class A common stock, at a public offering price of $1.21 per share. Under the terms of the Underwriting Agreement, we also granted the Underwriters an option, exercisable for 45 days, to purchase up to an additional 1,000,000 shares of Class A common stock to cover any over-allotments.
 
 
24
 
 
On December 21, 2016, we completed our underwritten public offering of 8,000,000 shares of Class A common stock, which included the full exercise by the Underwriters of their option to purchase 1,000,000 shares of Class A common stock to cover over-allotments, at a public offering price of $1.21 per share. We realized net proceeds of approximately $8.7 million, after deducting underwriting discounts and commissions and estimated offering expenses. The net proceeds from the offering provided funds for a portion of the purchase price of the Acquisition of ISP, as well as provided funds for the payment of transaction expenses and other costs incurred in connection with the Acquisition.
 
The offering of the shares of Class A common stock was made pursuant to a Registration Statement on Form S-1, as amended (Registration No. 333-213860), which the SEC declared effective on December 15, 2016, and the final prospectus dated December 16, 2016.
 
16. Foreign Operations
 
Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the balance sheet date, and revenues and expenses are translated at average rates of exchange for the period. During the nine months ended March 31, 2018 and 2017, we recognized a gain of approximately $859,000 and a loss of $254,000 on foreign currency transactions, respectively, included in the consolidated statements of comprehensive income in the line item entitled “Other income (expense), net.” Gains or losses on the translation of the financial statements of a non-U.S. operation, where the functional currency is other than the U.S. dollar, are reflected as a separate component of equity, which was a gain of approximately $201,000 and $114,000 for the nine months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, we had approximately $14.7 million in assets and $12.6 million in net assets located in China, compared to approximately $14.0 million in assets and $12.3 million in net assets located in China as of June 30, 2017. As of March 31, 2018, we had approximately $6.6 million in assets and $6.3 million in net assets located in Latvia, compared to approximately $6.1 million in assets and $6.0 in net assets located in Latvia as of June 30, 2017.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. All statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 (the “Quarterly Report”), 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. 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. Actual results could differ materially from the forward-looking statements set forth herein as a result of a number of factors, including, but not limited to, limited cash resources and the need for additional financing, our dependence on a few key customers, our ability to transition our business into new markets, our ability to increase sales and manage and control costs and other risks described in our reports on file with the SEC. 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.
 
The discussions of our results as presented in this Quarterly Report include use of the non-GAAP term “gross margin,” as well as other non-GAAP measures discussed in more detail under the heading “Non-GAAP Financial Measures.” Gross margin is determined by deducting the cost of sales from operating revenue. Cost of sales includes manufacturing direct and indirect labor, materials, services, fixed costs for rent, utilities and depreciation, and variable overhead. Gross margin should not be considered an alternative to operating income or net income, which are determined in accordance with GAAP. We believe that gross margin, although a non-GAAP financial measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates our cost structure and provides funds for our total costs and expenses. We use gross margin in measuring the performance of our business and have historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different manner.
 
 
 
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Overview
 
Historical: 
We are in the business of manufacturing optical components and higher level assemblies, including precision molded glass aspheric optics, diamond turned, ground and polished infrared optics, proprietary high performance fiber optic collimators, GRADIUM glass lenses and other optical materials used to produce products that manipulate light. All the products we produce enable lasers and imaging devices to function more effectively.
 
In November 2005, we formed LPOI, a wholly-owned subsidiary, located in Jiading, People’s Republic of China. In December 2013, we formed LPOIZ, a wholly-owned subsidiary located in the New City district, of the Jiangsu province, of the People’s Republic of China. LPOIZ’s 39,000 square foot manufacturing facility serves as our primary manufacturing facility in China and provides a lower cost structure for production of larger volumes of optical components and assemblies. The LPOI facility is primarily used for sales and support functions.
 
In December 2016, we acquired ISP and its wholly-owned subsidiary, ISP Latvia. ISP is a vertically integrated manufacturer offering a full range of infrared products from custom infrared optical elements to catalog and high performance lens assemblies. ISP’s New York facility functions as its global headquarters for operations, while also providing manufacturing capabilities, optical coatings, and optical and mechanical design, assembly, and testing. ISP Latvia is located in Riga, Latvia. It is a manufacturer of high precision optics and offers a full range of infrared products, including catalog and custom infrared optics. For additional information, see Note 3, Acquisition of ISP Optics Corporation, to the unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
 
Product Groups and Markets:
We organized our business based on five product groups: low volume precision molded optics (“LVPMO”), high volume precision molded optics (“HVPMO”), specialty products, infrared products, and NRE. Our LVPMO product group consists of precision molded optics with a sales price greater than $10 per lens and is usually sold in smaller lot quantities. Our HVPMO product group consists of precision molded optics with a sales price of less than $10 per lens and is usually sold in larger lot quantities. Our infrared product group is comprised of both molded and turned lenses and assemblies and includes all ISP products. Our specialty product group is comprised of value-added products, such as optical subsystems, assemblies, GRADIUM lenses, and isolators. Our NRE product group consists of those products we develop pursuant to product development agreements we enter into with customers. Typically, customers approach us and request that we develop new products or applications for our existing products to fit their particular needs or specifications. The timing and extent of any such product development is outside of our control.
 
We currently serve the following major markets: defense, medical, telecommunications, public safety, mobility and auto safety, drones and commercial infrared. Within our product groups, we have various applications that serve these major markets. For example, our HVPMO and LVPMO lenses are used in applications for the telecommunications market, such as cloud computing, video distribution via digital technology, wireless broadband, and machine to machine connection, and the laser market, such as laser tools, scientific and bench top lasers, and bar code scanners. Our infrared products can also be used in various applications within our major markets. Our infrared products can be used for thermal imaging cameras, gas sensing devices, spectrometers, night vision systems, automotive driver systems, thermal weapon gun sights, and infrared counter measure systems, among others.
 
Within the larger overall markets, which are estimated to be in the multi-billions of dollars, we believe there is a market of approximately $1.7 billion for our current products and capabilities. We continue to believe our products will provide significant growth opportunities over the next several years and, therefore, we will continue to target specific applications in each of these major markets. In addition to these major markets, a large percentage of our revenues are derived from sales to unaffiliated companies that purchase our products to fulfill their customer’s orders, as well as unaffiliated companies that offer our products for sale in their catalogs. Our strategy is to leverage our technology, know-how, established low cost manufacturing capability and partnerships to grow our business.
 
 
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Results of Operations
 
Fiscal Third Quarter: Three months ended March 31, 2018, compared to the three months ended March 31, 2017
 
Revenues:
Revenue for the third quarters of fiscal 2018 and fiscal 2017 was approximately $8.5 million. Revenues generated by infrared products, primarily attributable to ISP, was approximately $4.2 million in the third quarter of fiscal 2018, an increase of approximately $385,000, or 10%, compared to approximately $3.8 million in the third quarter of fiscal 2017. Industrial applications, firefighting cameras and other public safety applications are the primary drivers of the increased demand for infrared products. Total revenues generated by precision molded optics (“PMO”), including both LVPMO and HVPMO products, was approximately $3.6 million for the third quarter of fiscal 2018, as compared to $4.0 million in the third quarter of fiscal 2017. Revenues from sales of LVPMO products increased by approximately $231,000, or 13% in the third quarter of fiscal 2018, as compared to the prior year period, primarily attributable to higher sales to customers in the medical industry. These increases were offset by an approximately $612,000, or 29%, decrease in sales from HVPMO lenses during the third quarter of fiscal 2018, as compared to the prior year period, primarily attributed to continued soft demand from the telecommunications industry. Revenue generated by our specialty products was approximately $628,000 in the third quarter of fiscal 2018, an increase of approximately $112,000, or 22%, compared to $516,000 in the third quarter of fiscal 2017. This growth was led by demand from the defense industry, automotive industry, and for collimators used in a variety of end markets, including light distance and ranging (“LIDAR”) sensing and auto safety. This is a relatively new focus area for us, given that we expect these projects to deliver a future stream of larger production quantities.
 
Cost of Sales and Gross Margin:
Gross margin in the third quarter of fiscal 2018 was approximately $3.3 million, a decrease of 22%, as compared to approximately $4.2 million in same quarter of the prior fiscal year. Gross margin as a percentage of revenue was 39% for the third quarter of fiscal 2018, compared to 50% for the third quarter of fiscal 2017. The change in gross margin as a percentage of revenue is attributable to several factors, including: (i) a shift in the sales mix within infrared products, with a higher percentage of sales derived from contract sales and a smaller percentage of sales derived from custom products, (ii) fewer sales of higher margin HVPMO products to the telecommunications industry, and (iii) an unfavorable shift in foreign currency exchange rates for our offshore manufacturing locations, while approximately 90% of our sales are transacted in U.S. dollars. In addition to these factors, the cost of Germanium, a key component in many of our infrared lenses, has increased by 28% over the last 12 months. While this cost increase has been accounted for in the pricing of our custom products, it has raised the costs of our products sold under a long-term contract. Total cost of sales was approximately $5.2 million for the third quarter of fiscal 2018, an increase of approximately $944,000, compared to $4.3 million for the same period of the prior fiscal year.
 
Selling, General and Administrative:
During the third quarter of fiscal 2018, selling, general and administrative (“SG&A”) costs were approximately $2.4 million, compared to approximately $2.3 million in the third quarter of fiscal 2017, an increase of approximately $33,000. Slight increases in wages and professional fees during the third quarter of fiscal 2018 were offset by the absence of approximately $45,000 in expenses related to the Acquisition of ISP incurred during the third quarter of fiscal 2017. We expect future SG&A costs to remain at similar levels during the remainder of fiscal 2018.
 
New Product Development:
New product development costs were approximately $384,000 in the third quarter of fiscal 2018, an increase of approximately $76,000, or 25%, as compared to the third quarter of fiscal 2017. This increase was primarily due to an approximately $52,000 increase in wages, and an approximately $24,000 increase in materials and other expenses. We anticipate that these expenses will remain at current levels for the remainder of fiscal 2018.
 
Other Income (Expense):
In the third quarter of fiscal 2018, we recognized net interest income of approximately $343,000, primarily due to the satisfaction of the Sellers Note, in full, and the reversal of the related fair value adjustment liability, which resulted in a gain of approximately $467,000. Excluding the impact of this gain, interest expense was approximately $124,000 in the third quarter of fiscal 2018, compared to approximately $193,000 in the third quarter of fiscal 2017. This decrease is primarily due to the full satisfaction of the Sellers Note during the third quarter of fiscal 2018. We expect future interest expense to remain at similar levels during the remainder of fiscal 2018, excluding the gain associated with the satisfaction of the Sellers Note.
 
In the third quarter of fiscal 2018, we did not recognize any non-cash income or expense related to the change in the fair value of warrant liability in connection with our June 2012 Warrants. The June 2012 Warrants expired on December 11, 2017; therefore, there was no remaining warrant liability as of that date. We recognized non-cash expense of approximately $748,000 in the same period last year. The change in fair value of the June 2012 Warrants was not impacted by our actual operations but was instead strongly tied to the change in market value of our Class A common stock.
 
Other income, net, was approximately $485,000 in the third quarter of fiscal 2018, compared to approximately $28,000 in the third quarter of fiscal 2017, primarily resulting from foreign exchange gains and losses. We execute all foreign sales from our Orlando and New York facilities and inter-company transactions in United States dollars, mitigating the impact of foreign currency fluctuations. Assets and liabilities denominated in non-United States currencies, primarily the Chinese Yuan and Euro, are translated at rates of exchange prevailing on the balance sheet date, and revenues and expenses are translated at average rates of exchange for the year. During the third quarters of fiscal 2018 and 2017, we incurred a gain of $446,000 and $18,000, respectively, on foreign currency translation.
 
 
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Income taxes:
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