LIGHTPATH TECHNOLOGIES INC 10-Q

Item 1. Financial Statements LIGHTPATH TECHNOLOGIES, INC. Condensed Consolidated Balance Sheets (unaudited) September 30, June 30, 2021 2021 Assets Current assets: Cash and cash equivalents $ 3,976,981 $ 6,774,694 Trade accounts receivable, net of allowance of $ 33,418 and $ 45,643 5,927,938 4,656,354 Inventories, net 8,708,481 8,659,587 Other receivables 2,243 137,103 Prepaid expenses and other assets 455,662 475,364 Total current assets 19,071,305 20,703,102 Property and equipment, net 13,727,842 13,279,867 Operating lease right-of-use assets 9,944,236 9,015,498 Intangible assets, net 5,301,610 5,582,881 Goodwill 5,854,905 5,854,905 Deferred tax assets, net 147,000 147,000 Other assets 27,737 27,737 Total assets $ 54,074,635 $ 54,610,990 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 2,581,594 $ 2,924,333 Accrued liabilities 883,377 1,067,265 Accrued payroll and benefits 2,536,977 2,810,043 Operating lease liabilities, current 896,481 799,507 Loans payable, current portion 694,305 634,846 Finance lease obligation, current portion 172,382 212,212 Total current liabilities 7,765,116 8,448,206 Finance lease obligation, less current portion 32,739 66,801 Operating lease liabilities, noncurrent 9,240,725 8,461,133 Loans payable, less current portion 4,096,524 4,057,365 Total liabilities 21,135,104 21,033,505 Commitments and Contingencies Stockholders’ equity: Preferred stock: Series D, $ .01 par value, voting; 500,000 shares authorized; none issued and outstanding — — Common stock: Class A, $ .01 par value, voting; 44,500,000 shares authorized; 26,994,534 and 26,985,913 shares issued and outstanding 269,945 269,859 Additional paid-in capital 231,576,882 231,438,651 Accumulated other comprehensive income 1,971,978 2,116,152 Accumulated deficit ( 200,879,274 ) ( 200,247,177 ) Total stockholders’ equity 32,939,531 33,577,485 Total liabilities and stockholders’ equity $ 54,074,635 $ 54,610,990 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents LIGHTPATH TECHNOLOGIES, INC. Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three Months Ended September 30, 2021 2020 Revenue, net $ 9,103,343 $ 9,508,972 Cost of sales 5,931,408 5,658,780 Gross margin 3,171,935 3,850,192 Operating expenses: Selling, general and administrative 2,869,046 2,440,477 New product development 427,011 450,497 Amortization of intangibles 281,271 281,271 Loss (gain) on disposal of property and equipment — ( 45 ) Total operating expenses 3,577,328 3,172,200 Operating income (loss) ( 405,393 ) 677,992 Other income (expense): Interest expense, net ( 45,749 ) ( 58,549 ) Other income (expense), net ( 51,082 ) ( 87,735 ) Total other income (expense), net ( 96,831 ) ( 146,284 ) Income (loss) before income taxes ( 502,224 ) 531,708 Income tax provision 129,873 434,640 Net income (loss) $ ( 632,097 ) $ 97,068 Foreign currency translation adjustment ( 144,174 ) 729,308 Comprehensive income (loss) $ ( 776,271 ) $ 826,376 Earnings (loss) per common share (basic) $ ( 0.02 ) $ 0.00 Number of shares used in per share calculation (basic) 26,993,971 25,982,260 Earnings (loss) per common share (diluted) $ ( 0.02 ) $ 0.00 Number of shares used in per share calculation (diluted) 26,993,971 28,432,275 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents LIGHTPATH TECHNOLOGIES, INC. Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) Class A Accumulated Common Stock Additional Paid-in Other Comphrehensive Accumulated Total Stockholders’ Shares Amount Capital Income Deficit Equity Balances at June 30, 2021 26,985,913 $ 269,859 $ 231,438,651 $ 2,116,152 $ ( 200,247,177 ) $ 33,577,485 Issuance of common stock for: Employee Stock Purchase Plan 8,621 86 21,640 — — 21,726 Stock-based compensation on stock options & RSUs — — 116,591 — — 116,591 Foreign currency translation adjustment — — — ( 144,174 ) — ( 144,174 ) Net loss — — — — ( 632,097 ) ( 632,097 ) Balances at September 30, 2021 26,994,534 $ 269,945 $ 231,576,882 $ 1,971,978 $ ( 200,879,274 ) $ 32,939,531 Balances at June 30, 2020 25,891,885 $ 258,919 $ 230,634,056 $ 735,892 $ ( 197,061,926 ) $ 34,566,941 Issuance of common stock for: Employee Stock Purchase Plan 3,306 33 10,976 — — 11,009 Exercise of stock options, net 207,640 2,076 124,024 — — 126,100 Stock-based compensation on stock options & RSUs — — 136,849 — — 136,849 Foreign currency translation adjustment — — — 729,308 — 729,308 Net income — — — — 97,068 97,068 Balances at September 30, 2020 26,102,831 $ 261,028 $ 230,905,905 $ 1,465,200 $ ( 196,964,858 ) $ 35,667,275 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents LIGHTPATH TECHNOLOGIES, INC. Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended September 30, 2021 2020 Cash flows from operating activities: Net (loss) income $ ( 632,097 ) $ 97,068 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 910,962 826,308 Interest from amortization of debt costs 4,643 4,643 Gain on disposal of property and equipment — ( 45 ) Stock-based compensation on stock options & RSUs, net 116,591 136,849 Provision for doubtful accounts receivable 12,010 — Change in operating lease liabilities ( 52,172 ) ( 45,158 ) Inventory write-offs to allowance 60,935 112,282 Changes in operating assets and liabilities: Trade accounts receivable ( 1,283,594 ) ( 70,201 ) Other receivables 134,860 132,051 Inventories ( 109,829 ) ( 775,234 ) Prepaid expenses and other assets 19,702 147,148 Accounts payable and accrued liabilities ( 799,693 ) 96,727 Net cash (used in) provided by operating activities ( 1,617,682 ) 662,438 Cash flows from investing activities: Purchase of property and equipment ( 1,199,005 ) ( 1,216,817 ) Net cash used in investing activities ( 1,199,005 ) ( 1,216,817 ) Cash flows from financing activities: Proceeds from exercise of stock options — 126,100 Proceeds from sale of common stock from Employee Stock Purchase Plan 21,726 11,009 Borrowings on loans payable 266,850 — Payments on loans payable ( 163,758 ) ( 245,338 ) Repayment of finance lease obligations ( 73,891 ) ( 67,501 ) Net cash provided by (used in) financing activities 50,927 ( 175,730 ) Effect of exchange rate on cash and cash equivalents ( 31,953 ) 729,308 Change in cash and cash equivalents (2,797,713 ) (801 ) Cash and cash equivalents, beginning of period 6,774,694 5,387,388 Cash and cash equivalents, end of period $ 3,976,981 $ 5,386,587 Supplemental disclosure of cash flow information: Interest paid in cash $ 41,466 $ 54,089 Income taxes paid $ 111,535 $ 241,293 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents LIGHTPATH TECHNOLOGIES, INC. Notes to Unaudited Condensed 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 Condensed Consolidated Financial Statements have been prepared in accordance with the requirements of Article 8 of Regulation S-X promulgated under the Exchange Act and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with our Consolidated Financial Statements and related notes, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, filed with the SEC. Unless otherwise stated, references to particular years or quarters refer to our fiscal years ended June 30 and the associated quarters of those fiscal years. These Condensed Consolidated Financial Statements are unaudited, but include all adjustments, including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. The Consolidated Balance Sheet as of June 30, 2021 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year as a whole. The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 2. Significant Accounting Policies Our significant accounting policies are provided in Note 2, Summary of Significant Accounting Policies , in the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. There have been no material changes to our significant accounting policies during the three months ended September 30, 2021, from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. Use of Estimates Management makes estimates and assumptions during the preparation of our unaudited Condensed Consolidated Financial Statements that affect amounts reported in the unaudited Condensed Consolidated Financial Statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes available, which, in turn, could impact the amounts reported and disclosed herein. 3. Revenue Product Revenue We are a manufacturer of optical components and higher-level assemblies, including precision molded glass aspheric optics, molded and diamond-turned infrared optical components, and other optical materials used to produce products that manipulate light. We design, develop, manufacture, and distribute optical components and assemblies utilizing advanced optical manufacturing processes. We also perform research and development for optical solutions for a wide range of optics markets. Revenue is derived primarily from the sale of optical components and assemblies. Revenue Recognition Revenue is generally recognized upon transfer of control, including the risks and rewards of ownership, of products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We generally bear all costs, risk of loss, or damage and retain title to the goods up to the point of transfer of control of products to customers. Shipping and handling costs are included in the cost of goods sold. We present revenue net of sales taxes and any similar assessments. Customary payment terms are granted to customers, based on credit evaluations. We currently do not have any contracts where revenue is recognized, but the customer payment is contingent on a future event. We record deferred revenue when cash payments are received or due in advance of our performance. Deferred revenue was not significant as of June 30, 2021 and September 30, 2021. 8 Table of Contents Nature of Products Revenue from the sale of optical components and assemblies is recognized upon transfer of control, including the risks and rewards of ownership, to the customer. The performance obligations for the sale of optical components and assemblies are satisfied at a point in time. Product development agreements are generally short term in nature, with revenue recognized upon satisfaction of the performance obligation, and transfer of control of the agreed-upon deliverable. We have organized our products in three groups: precision molded optics (“PMO”), infrared, and specialty products. Revenues from product development agreements are included in specialty products. Revenue by product group for the three months ended September 30, 2021 and 2020 was as follows: Three Months Ended September 30, 2021 2020 PMO $ 3,812,950 $ 4,293,603 Infrared Products 4,887,918 4,724,504 Specialty Products 402,475 490,865 Total revenue $ 9,103,343 $ 9,508,972 4. Inventories The components of inventories include the following: September 30, 2021 June 30, 2021 Raw materials $ 4,011,350 $ 3,908,630 Work in process 2,918,858 2,473,070 Finished goods 2,994,503 3,467,105 Allowance for obsolescence ( 1,216,230 ) ( 1,189,218 ) $ 8,708,481 $ 8,659,587 The value of tooling in raw materials, net of the related allowance for obsolescence, was approximately $ 2.0 million at both September 30, 2021 and June 30, 2021. 9 Table of Contents 5. Property and Equipment Property and equipment are summarized as follows: Estimated Lives (Years) September 30, 2021 June 30, 2021 Manufacturing equipment 5 - 10 $ 22,101,074 $ 21,465,402 Computer equipment and software 3 - 5 929,244 918,679 Furniture and fixtures 5 362,630 362,944 Leasehold improvements 5 - 7 3,129,950 2,944,543 Construction in progress 1,706,147 1,529,452 Total property and equipment 28,229,045 27,221,020 Less accumulated depreciation and amortization ( 14,501,203 ) ( 13,941,153 ) Total property and equipment, net $ 13,727,842 $ 13,279,867 6. Goodwill and Intangible Assets There were no changes in the net carrying value of goodwill during the three months ended September 30, 2021. Identifiable intangible assets were comprised of: Useful Lives (Years) September 30, 2021 June 30, 2021 Customer relationships 15 $ 3,590,000 $ 3,590,000 Trade secrets 8 3,272,000 3,272,000 Trademarks 8 3,814,000 3,814,000 Total intangible assets 10,676,000 10,676,000 Less accumulated amortization ( 5,374,390 ) ( 5,093,119 ) Total intangible assets, net $ 5,301,610 $ 5,582,881 Future amortization of identifiable intangibles is as follows: Fiscal year ending: June 30, 2022 (remaining nine months) 843,812 June 30, 2023 1,125,083 June 30, 2024 1,125,083 June 30, 2025 658,398 After June 30, 2025 1,549,234 $ 5,301,610 10 Table of Contents 7. Income Taxes A summary of our total income tax expense and effective income tax rate for the three months ended September 30, 2021 and 2020 is as follows: Three Months Ended September 30, 2021 2020 (Loss) income before income taxes $ ( 502,224 ) $ 531,708 Income tax provision $ 129,873 $ 434,640 Effective income tax rate - 26 % 82 % The difference between our effective tax rates in the periods presented above and the federal statutory rate is due to the mix of taxable income and losses generated in our various tax jurisdictions, which include the United States (the “U.S.”), the People’s Republic of China, and the Republic of Latvia. For the three months ended September 30, 2021 and 2020, income tax expense was primarily related to income taxes from our operations in China, including accruals for withholding taxes on intercompany dividends declared by LightPath Optical Instrumentation (Zhenjiang) Co., Ltd. (“LPOIZ”), which dividend will be paid to us, as its parent company. We record net deferred tax assets to the extent we believe it is more likely than not that some portion or all of these assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of September 30, 2021 and June 30, 2021, we have provided for a valuation allowance against our net deferred tax assets to reduce the net deferred tax assets to the amount we estimate is more-likely-than-not to be realized. Our net deferred tax asset consists primarily of federal and state tax credits with indefinite carryover periods. U.S. Federal and State Income Taxes Our U.S. federal and state statutory income tax rate is estimated to be 25.5 %. Based on our current assessment of the valuation allowance position on our net deferred tax assets, no additional tax expense or benefit is expected to be recorded on pre-tax income or losses generated in the U.S. Income Tax Law of the People’s Republic of China Our Chinese subsidiaries, LightPath Optical Instrumentation (Shanghai) Co., Ltd. (“LPOI”) and LPOIZ, are governed by the Income Tax Law of the People’s Republic of China. As of September 30, 2021, LPOI and LPOIZ were subject to statutory income tax rates of 25 % and 15 %, respectively. During fiscal 2020, the Company began declaring intercompany dividends to remit a portion of the historical earnings of its foreign subsidiaries to the U.S. parent company. The Company intends to reinvest a portion of the more recent earnings generated by its foreign subsidiaries, however the Company also plans to repatriate a portion of the historical earnings of its subsidiaries. During fiscal 2020, the Company began to accrue for these taxes on the portion of historical earnings that it intends to repatriate. Law of Corporate Income Tax of Latvia Our Latvian subsidiary, ISP Optics Latvia, SIA (“ISP Latvia”), is governed by the Law of Corporate Income Tax of Latvia. Effective January 1, 2018, the Republic of Latvia enacted tax reform with the following key provisions: (i) corporations are no longer subject to income tax, but are instead subject to a distribution tax on distributed profits (or deemed distributions, as defined) and (ii) the rate of tax was changed to 20%; however, distribution amounts are first divided by 0.8 to arrive at the profit before tax amount, resulting in an effective tax rate of 25%. As a transitional measure, distributions of earnings prior to January 1, 2018 are not subject to tax if declared prior to December 31, 2019. ISP Latvia has declared an intercompany dividend to be paid to ISP, its U.S. parent company, for the full amount of earnings accumulated prior to January 1, 2018. Distributions of this dividend will be from earnings prior to January 1, 2018 and, therefore, will not be subject to tax. We currently do not intend to distribute any earnings generated after January 1, 2018. If, in the future, we change such intention, we will accrue distribution taxes, if any, as profits are generated. 11 Table of Contents 8. Stock-Based Compensation Our directors, officers, and key employees are granted stock-based compensation through our Amended and Restated Omnibus Incentive Plan, as amended (the “Omnibus Plan”), through October 2018 and after that date, the 2018 Stock and Incentive Compensation Plan (the “SICP”), including incentive stock options, non-qualified stock options, and restricted stock unit (“RSU”) awards. The stock-based compensation expense is based primarily on the fair value of the award as of the grant date, and is recognized as an expense over the requisite service period. The following table shows total stock-based compensation expense for the three months ended September 30, 2021 and 2020 included in selling, general and administrative (“SG&A”) expenses in the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income: Three Months Ended September 30, 2021 2020 Stock options $ 24,128 $ 15,220 RSUs 92,463 121,629 Total $ 116,591 $ 136,849 We also adopted the LightPath Technologies, Inc. Employee Stock Purchase Plan (the “2014 ESPP”). The 2014 ESPP permits employees to purchase Class A common stock through payroll deductions, subject to certain limitations. A discount of $ 2,155 and $ 1,091 for the three months ended September 30, 2021 and 2020, respectively, is included in SG&A expenses in the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income, which represents the value of the 10 % discount given to the employees purchasing stock under the 2014 ESPP. Grant Date Fair Values and Underlying Assumptions; Contractual Terms We estimate the fair value of each stock option as of the date of grant, using the Black-Scholes-Merton pricing model. The fair value of 2014 ESPP shares is the amount of the discount the employee obtains at the date of the purchase transaction. Most stock options granted vest ratably over two to four years and are generally exercisable for ten years. The assumed forfeiture rates used in calculating the fair value of RSU grants was 0%, and the assumed forfeiture rates used in calculating the fair value of options for performance and service conditions were 20% for each of the three months ended September 30, 2021 and 2020. 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. No stock options or RSUs were granted during the three-month periods ended September 30, 2021 and 2020. 12 Table of Contents Information Regarding Current Share-Based Compensation Awards A summary of the activity for share-based compensation awards in the three months ended September 30, 2021 is presented below: Stock Options Restricted Stock Units (RSUs) Weighted- Weighted- Weighted- Average Average Average Exercise Remaining Remaining Shares Price Contract Shares Contract June 30, 2021 432,927 $ 2.01 8.8 1,761,885 0.9 Granted - $ - - Exercised - $ - - Cancelled/Forfeited ( 8,700 ) $ 1.93 ( 5,534 ) September 30, 2021 424,227 $ 2.01 8.5 1,756,351 0.9 Awards exercisable/ vested as of September 30, 2021 110,943 $ 1.55 7.7 1,163,298 — Awards unexercisable/ unvested as of September 30, 2021 313,284 $ 2.17 8.8 593,053 0.9 424,227 1,756,351 RSU awards vest immediately or from two to four years from the date of grant. As of September 30, 2021, there was approximately $ 963,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements (including stock options and RSUs) granted. We expect to recognize the compensation cost as follows: Fiscal Year Ending: Stock Options RSUs Total June 30, 2022 (remaining nine months) $ 79,443 $ 216,566 $ 296,009 June 30, 2023 116,117 256,102 372,219 June 30, 2024 94,273 132,045 226,318 June 30, 2025 33,885 34,707 68,592 $ 323,718 $ 639,420 $ 963,138 13 Table of Contents 9. Earnings (Loss) Per Share Basic earnings per share is computed by dividing net income or loss by the weighted-average number of shares of Class A common stock outstanding, during each period presented. Diluted earnings per share is computed similarly to basic earnings per share, except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue shares of Class A common stock were exercised or converted into shares of Class A common stock. The computations for basic and diluted earnings (loss) per share of Class A common stock are described in the following table: Three Months Ended September 30, 2021 2020 Net income (loss) $ ( 632,097 ) $ 97,068 Weighted-average common shares outstanding: Basic number of shares 26,993,971 25,982,260 Effect of dilutive securities: Options to purchase common stock - 289,506 RSUs - 2,160,509 Diluted number of shares 26,993,971 28,432,275 Earnings (loss) per common share: Basic $ ( 0.02 ) $ 0.00 Diluted $ ( 0.02 ) $ 0.00 The following potential dilutive shares were not included in the computation of diluted earnings per share of Class A common stock, as their effects would be anti-dilutive: Three Months Ended September 30, 2021 2020 Options to purchase common stock 427,726 517,502 RSUs 1,738,439 166,794 2,166,165 684,296 10. Leases Our leases primarily consist of operating leases related to our facilities located in Orlando, Florida; Riga, Latvia; Shanghai, China; and Zhenjiang, China, and finance leases related to certain equipment located in Orlando, Florida. The operating leases for facilities are non-cancelable operating leases, expiring through 2032 . We include options to renew (or terminate) in our lease term, and as part of our right-of-use ("ROU") assets and lease liabilities, when it is reasonably certain that we will exercise that option. We currently have obligations under four finance lease agreements, entered into during fiscal years 2018 and 2019, with terms ranging from three to five years . The leases are for computer and manufacturing equipment. Our operating lease ROU assets and the related lease liabilities are initially measured at the present value of future lease payments over the lease term. Two of our operating leases include renewal options, which were not included in the measurement of the operating lease ROU assets and related lease liabilities. One such lease ends in November 2022 and we do not plan to renew, and the second such lease was amended in April 2021, and subsequently amended in September 2021, to extend the term to 2032 and increase the leased space from 26,000 square feet to approximately 58,500 square feet. As most of our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Currently, none of our leases include variable lease payments that are dependent on an index or rate. We are responsible for payment of certain real estate taxes, insurance and other expenses on certain of our leases. These amounts are generally considered to be variable and are not included in the measurement of the ROU asset and lease liability. We generally account for non-lease components, such as maintenance, separately from lease components. Our lease agreements do not contain any material residual value guarantees or material restricted covenants. Leases with a term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. 14 Table of Contents We received tenant improvement allowances for each of our two leases with respect to our facility located in Orlando, Florida (the “Orlando Facility”). These allowances were used to construct improvements and are included in leasehold improvements and operating lease liabilities. The balances are being amortized over the corresponding lease terms. The components of lease expense were as follows: Three Months Ended September 30, 2021 2020 Operating lease cost $ 172,230 $ 166,974 Finance lease cost: Depreciation of lease assets 47,354 65,869 Interest on lease liabilities 6,432 12,824 Total finance lease cost 53,786 78,693 Total lease cost $ 226,016 $ 245,667 Supplemental balance sheet information related to leases was as follows: Classification September 30, 2021 June 30, 2021 Assets: Operating lease assets Operating lease assets $ 9,944,236 $ 9,015,498 Finance lease assets Property and equipment, net (1) 429,748 477,102 Total lease assets $ 10,373,984 $ 9,492,600 Liabilities: Current: Operating leases Operating lease liabilities, current $ 896,481 $ 799,507 Finance leases Finance lease liabilities, current 172,382 212,212 Noncurrent: Operating leases Operating lease liabilities, less current portion 9,240,725 8,461,133 Finance leases Finance lease liabilities, less current portion 32,739 66,801 Total lease liabilities $ 10,342,327 $ 9,539,653 (1) Finance lease assets were recorded net of accumulated depreciation of approximately $ 1.2 million as of both September 30, 2021 and June 30, 2021. Lease term and discount rate information related to leases was as follows: Lease Term and Discount Rate September 30, 2021 Weighted Average Remaining Lease Term (in years) Operating leases 10.9 Finance leases 1.2 Weighted Average Discount Rate Operating leases 3.0 % Finance leases 7.8 % 15 Table of Contents Supplemental cash flow information: Three Months Ended September 30, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash used for operating leases $ 224,402 $ 212,132 Operating cash used for finance leases $ 6,432 $ 12,824 Financing cash used for finance leases $ 73,891 $ 67,501 Future maturities of lease liabilities were as follows as of September 30, 2021: Fiscal year ending: Finance Leases Operating Leases June 30, 2022 (remaining nine months) $ 151,459 $ 642,670 June 30, 2023 59,647 1,134,242 June 30, 2024 11,811 1,041,476 June 30, 2025 — 1,069,181 June 30, 2026 — 980,589 Thereafter — 7,034,987 Total future minimum payments 222,917 11,903,145 Less imputed interest ( 17,796 ) ( 1,765,939 ) Present value of lease liabilities $ 205,121 $ 10,137,206 11. Loans Payable As of September 30, 2021 and June 30, 2021, loans payable primarily consisted of the BankUnited Term Loan (as defined below) payable to BankUnited N.A. (“BankUnited”). On February 26, 2019, we entered into a Loan Agreement (the “Loan Agreement”) with BankUnited for (i) a revolving line of credit up to maximum amount of $ 2,000,000 (the “BankUnited Revolving Line”), (ii) a term loan in the amount of up to $ 5,813,500 (“BankUnited Term Loan”), and (iii) a non-revolving guidance line of credit up to a maximum amount of $ 10,000,000 (the “Guidance Line” and, together with the BankUnited Revolving Line and BankUnited Term Loan, the “BankUnited Loans”), which Guidance Line has since been terminated. Each of the BankUnited Loans is evidenced by a promissory note in favor of BankUnited (the “BankUnited Notes”). Simultaneously with the execution of the Loan Agreement, we used the proceeds from the BankUnited Term Loan to pay in full, all outstanding amounts owed to Avidbank Corporate Finance, a division of Avidbank (“Avidbank”) pursuant to an acquisition term loan. On May 6, 2019, we entered into that certain First Amendment to Loan Agreement, effective February 26, 2019, with BankUnited (the “Amendment” and, together with the Loan Agreement, the “Amended Loan Agreement”). The Amendment amended the definition of the fixed charge coverage ratio to more accurately reflect the parties’ understandings at the time the Loan Agreement was executed. On September 9, 2021, we entered into a letter agreement with BankUnited (the “Letter Agreement”). The Letter Agreement: (i) reduces the fixed charge coverage ratio to 1.0 for the quarter ending September 30, 2021 and to 1.1 for the quarter ended December 31, 2021 ; (ii) modifies the calculation for both the fixed charge coverage ratio and the total leverage ratio to provide for adjustments related to expenses incurred in connection with the employee matters that occurred during fiscal 2021 at LPOI and LPOIZ, which expenses must be approved by BankUnited; (iii) terminates the Guidance Line; and (iv) requires approval from BankUnited prior to our being able to draw upon the Revolving Line, subject to our compliance with the fixed charge coverage ratio for the quarters ending September 30, 2021 and December 31, 2021. The Letter Agreement also granted us a waiver of default arising prior to the Letter Agreement for our failure to comply with the fixed charge coverage ratio measured on June 30, 2021. Based on the waiver, we are no longer in default of the Amended Loan Agreement. Finally, in connection with the Letter Agreement, we paid BankUnited a fee equal to $ 10,000 . 16 Table of Contents On November 5, 2021, we entered into a letter agreement with BankUnited (the “Second Letter Agreement”). In accordance with the Second Letter Agreement, the parties agreed to initiate discussions regarding a possible modification, forbearance, or other resolution of the Amended Loan Agreement (the “Proposed Restructuring Agreement”), which closing will occur on or before December 31, 2021. The Second Letter Agreement contemplates that the Proposed Restructuring Agreement will include the following terms, among others: (i) a maturity date of April 15, 2023 with respect to the Term Loan; (ii) an increased monthly payment amount of $ 100,000 commencing on November 1, 2022; (iii) the Term Loan will bear a higher interest rate commencing on August 1, 2022; (iv) an exit fee equal to 4 % of the outstanding principal balance of the term loan on April 15, 2023 to the extent the Term Loan is still outstanding on such date and has not been refinanced with another lender; and (v) a fee of $ 50,000 payable upon execution of the Proposed Restructuring Agreement. The Second Letter Agreement also granted us a waiver of default arising prior to the Second Letter Agreement for our failure to comply with the fixed charge coverage ratio and total leverage ratio measured on September 30, 2021. Based on the Second Letter Agreement and the waiver, we are no longer in default of the Amended Loan Agreement. Additionally, the Second Letter Agreement states that BankUnited will waive compliance for the fixed charge coverage ratio and the total leverage ratio for the quarters ended December 31, 2021, March 31, 2022 and June 30, 2022, which waivers will be included in the Proposed Restructuring Agreement. Finally, in accordance with the Second Letter Agreement, we paid BankUnited a deposit equal to $ 25,000 to be used in connection with BankUnited’s legal fees, costs and expenses in connection with the Second Letter Agreement and the Proposed Restructuring Agreement. We have commenced discussions with other lenders, with the intent of refinancing our credit facility prior to maturity with reasonable commercial terms, of which there can be no assurance. BankUnited Revolving Line Pursuant to the Amended Loan Agreement, BankUnited will make loan advances under the BankUnited Revolving Line to us up to a maximum aggregate principal amount outstanding not to exceed $2,000,000, which proceeds will be used for working capital and general corporate purposes. Amounts borrowed under the BankUnited Revolving Line may be repaid and re-borrowed at any time prior to February 26, 2022, at which time all amounts will be immediately due and payable. The advances under the BankUnited Revolving Line bear interest, on the outstanding daily balance, at a per annum rate equal to 2.75 % above the 30-day LIBOR. Interest payments are due and payable, in arrears, on the first day of each month. There were no borrowings under the BankUnited Revolving Line as of September 30, 2021. BankUnited Term Loan Pursuant to the Amended Loan Agreement, BankUnited advanced us $ 5,813,500 to satisfy in full the amounts owed to Avidbank, including the outstanding principal amount and all accrued interest under the acquisition term loan and to pay the fees and expenses incurred in connection with closing of the BankUnited Loans. The BankUnited Term Loan was for a 5 -year term, but co-terminus with the BankUnited Revolving Line should the BankUnited Revolving Line not be renewed beyond February 26, 2022. Pursuant to the Second Letter Agreement, the maturity date of the Term Loan will be amended to April 15, 2023. The BankUnited Term Loan bears interest at a per annum rate equal to 2.75 % above the 30-day LIBOR. Equal monthly principal payments of approximately $ 48,446 , plus accrued interest, are due and payable, in arrears, on the first day of each month during the term. Upon maturity, all principal and interest shall be immediately due and payable. As of September 30, 2021, the applicable interest rate was 2.84 %. Security and Guarantees Our obligations under the Amended Loan Agreement are collateralized by a first priority security interest (subject to permitted liens) in all of our assets and the assets of our U.S. subsidiaries, GelTech, Inc. (“GelTech”), and ISP, pursuant to a Security Agreement granted by GelTech, ISP, and us in favor of BankUnited. Our equity interests in, and the assets of, our foreign subsidiaries are excluded from the security interest. In addition, all of our subsidiaries have guaranteed our obligations under the Amended Loan Agreement and related documents, pursuant to Guaranty Agreements executed by us and our subsidiaries in favor of BankUnited. General Terms The Amended Loan Agreement 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. The Amended Loan Agreement also contains certain financial covenants, including obligations to maintain a fixed charge coverage ratio of 1.25 to 1.00 and a total leverage ratio of 4.00 to 1.00. As of September 30, 2021, we obtained a waiver of compliance for both the fixed charge coverage ratio and total leverage ratio, and we were in compliance with all other required covenants, as amended. We may prepay any or all of the BankUnited Loans in whole or in part at any time, without penalty or premium. Late payments are subject to a late fee equal to five percent ( 5 %) of the unpaid amount. Amounts outstanding during an event of default accrue interest at a rate of five percent ( 5 %) above the 30-day LIBOR applicable immediately prior to the occurrence of the event of default. The Amended Loan Agreement contains other customary provisions with respect to events of default, expense reimbursement, and confidentiality. Financing costs incurred related to the BankUnited Loans were recorded as a discount on debt and will be amortized over the term. Amortization of approximately $ 4,600 is included in interest expense for the each of the three months ended September 30, 2021 and 2020, respectively. 17 Table of Contents In December 2020, ISP Latvia entered into an equipment loan with a third party (the “Equipment Loan”), which party is also a significant customer, and which the Equipment Loan is subordinate to the BankUnited Loans, and collateralized by certain equipment. The initial advance under the Equipment Loan was 225,000 EUR (or USD $ 275,000 ), payable in equal installments over 60 months, the proceeds of which were used to make a prepayment to a vendor for equipment to be delivered at a future date. An additional 225,000 EUR (or USD $ 267,000 ) was drawn in September 2021, which proceeds were paid to the vendor for the equipment, payable in equal installments over 52 months. The Equipment Loan bears interest at a fixed rate of 3.3 %. Future maturities of loans payable are as follows: BankUnited Term Loan Equipment Loan Unamortized Debt Costs Total Fiscal year ending: June 30, 2022 (remaining nine months) $ 436,012 $ 84,715 ( 13,928 ) $ 506,799 June 30, 2023 3,924,113 112,954 ( 30,953 ) 4,006,114 June 30, 2024 — 112,954 — 112,954 June 30, 2025 — 112,954 — 112,954 After June 30, 2025 — 52,008 — 52,008 Total payments $ 4,360,125 $ 475,585 $ ( 44,881 ) 4,790,829 Less current portion ( 694,305 ) Non-current portion $ 4,096,524 12 . 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. 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 cumulative gain of approximately $2.0 million and $2.1 million as of September 30, 2021 and June 30, 2021, respectively. During the three months ended September 30, 2021 and 2020, we recognized net foreign currency transaction losses of approximately $ 26,000 and $ 98,000 , respectively, included in the unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) in the line item entitled “Other income (expense), net.” Our cash and cash equivalents totaled approximately $ 4.0 million at September 30, 2021. Of this amount, greater than 50% 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 of the respective subsidiary must equal at least 50% of its registered capital before any funds can be repatriated through dividends. As of September 30, 2021, LPOIZ had approximately $ 4.6 million available for repatriation and LPOI did not have any earnings available for repatriation, based on undistributed earnings accumulated through the end of the most recent statutory tax year. Assets and net assets in foreign countries are as follows: China Latvia September 30, 2021 June 30, 2021 September 30, 2021 June 30, 2021 Assets $ 19.5 million $ 20.1 million $ 12.1 million $ 11.3 million Net assets $ 15.8 million $ 16.6 million $ 9.6 million $ 9.0 million 18 Table of Contents 13. Contingencies Legal The Company from time to time is involved in various legal actions arising in the normal course of business. Management, after reviewing with legal counsel all of these actions and proceedings, believes that the aggregate losses, if any, will not have a material adverse effect on the Company’s financial position or results of operations. In April 2021, we terminated several employees of our China subsidiaries, LPOIZ and LPOI, including the General Manager, the Sales Manager, and the Engineering Manager, after determining that they had engaged in malfeasance and conduct adverse to our interests, including efforts to misappropriate certain of our proprietary technology, diverting sales to entities owned or controlled by these former employees and other suspected acts of fraud, theft and embezzlement. In connection with such terminations, our China subsidiaries have engaged in certain legal proceedings with the terminated employees. We have incurred various expenses associated with its investigation into these matters prior and subsequent to the termination of the employees and the associated legal proceedings. These expenses, which included legal, consulting and other transitional management fees, totaled $ 718,000 during the year ended June 30, 2021. During the three months ended September 30, 2021, we incurred an additional $ 328,000 . Such expenses were recorded as SG&A expenses in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss). We also identified a further liability in the amount of $ 210,000 , which may be incurred in the future due to the actions of these employees. This amount was accrued as of June 30, 2021, pending further investigation, and was included in “Other Expense, net” in the Consolidated Statement of Comprehensive Income (Loss) for the year ended June 30, 2021. This amount remains accrued as of September 30, 2021. Knowing that employee transitions in international subsidiaries can lead to lengthy legal proceedings that can interrupt the subsidiary’s ability to operate, compounded by the fact that our officers could not travel to China to oversee the transitions because of the travel restrictions imposed by COVID-19, we chose to enter into severance agreements with certain of the employees at the time of termination. Pursuant to the severance agreements, LPOIZ and LPOI agreed to pay such employees severance of approximately $ 485,000 in the aggregate, to be paid over a six-month period. After the execution of the severance agreements, we discovered additional wrongdoing by the terminated employees. As a result, LPOIZ and LPOI have not yet paid the severance payments and have disputed the employees’ rights to such payments. However, based on the likelihood that the courts in China will determine that our subsidiaries will ultimately be obligated to pay these amounts, we have accrued for these payments as of June 30, 2021. Such expenses were recorded as SG&A expenses in the Consolidated Statement of Comprehensive Income (Loss) for the year ended June 30, 2021. This amount remains accrued as of September 30, 2021. We have transitioned the management of LPOI and LPOIZ to a new management team without any significant detrimental effects on the ability of those subsidiaries to operate. Management does not expect any material adverse impact to the business operations of LPOI or LPOIZ as a result of the transition. We expect to incur additional legal fees and consulting expenses in future periods as all legal options and remedies are pursued; however, such future fees are expected to be at lower levels than have been incurred to date. Although we have taken steps to minimize the business impacts from the termination of the management employees and transition to new management personnel, we have experienced some short-term adverse impacts on LPOIZ’s and LPOI’s domestic sales in China and results of operations in the three-month periods ended June 30, 2021 and September 30, 2021, which management anticipates may continue for the next one to two quarters. The Company has not experienced, nor does management anticipate, any material adverse impact on LPOIZ’s or LPOI’s production and supply of products to its other subsidiaries for their customers. COVID-19 Our business, results of operations financial condition, cash flows, and the stock price of our Class A common stock can be adversely affected by pandemics, epidemics, or other public health emergencies, such as the recent outbreak of COVID-19, which spread from China to countries across the world, including the United States. To date, we have not experienced any significant direct financial impact of COVID-19 to our business. However, the COVID-19 pandemic continues to impact economic conditions, which could impact the short-term and long-term demand from customers and, therefore, has the potential to negatively impact our results of operations, cash flows, and financial position in the future. Additionally, some areas have imposed travel restrictions, which may impact some aspects of our operations that depend on travel, such as recruitment of senior positions, and travel of service providers to maintain our production equipment. Management is actively monitoring this situation and any impact on our financial condition, liquidity, and results of operations. However, given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not presently able to estimate the effects of the COVID-19 pandemic on our future results of operations, financial, or liquidity for the remainder of fiscal year 2022 or beyond. 19 Table of Contents