LIGHTPATH TECHNOLOGIES INC 10-Q

Item 1. Financial Statements LIGHTPATH TECHNOLOGIES, INC. Condensed Consolidated Balance Sheets (unaudited) March 31, June 30, Assets 2022 2021 Current assets: Cash and cash equivalents $ 5,240,946 $ 6,774,694 Trade accounts receivable, net of allowance of $ 25,692 and $ 45,643 4,976,891 4,656,354 Inventories, net 7,617,849 8,659,587 Other receivables 31,505 137,103 Prepaid expenses and other assets 438,878 475,364 Total current assets 18,306,069 20,703,102 Property and equipment, net 12,628,654 13,279,867 Operating lease right-of-use assets 10,598,425 9,015,498 Intangible assets, net 4,739,069 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 $ 52,301,859 $ 54,610,990 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 2,661,862 $ 2,924,333 Accrued liabilities 670,171 1,067,265 Accrued payroll and benefits 1,986,328 2,810,043 Operating lease liabilities, current 973,174 799,507 Loans payable, current portion 902,601 634,846 Finance lease obligation, current portion 91,277 212,212 Total current liabilities 7,285,413 8,448,206 Finance lease obligation, less current portion 15,392 66,801 Operating lease liabilities, noncurrent 9,686,335 8,461,133 Loans payable, less current portion 3,489,070 4,057,365 Total liabilities 20,476,210 21,033,505 Commitments and Contingencies Stockholders’ equity: Preferred stock: Series D, $ 0.01 par value, voting; 500,000 shares authorized; none issued and outstanding - - Common stock: Class A, $ 0.01 par value, voting; 44,500,000 shares authorized; 27,034,266 and 26,985,913 shares issued and outstanding 270,343 269,859 Additional paid-in capital 232,031,350 231,438,651 Accumulated other comprehensive income 1,953,524 2,116,152 Accumulated deficit ( 202,429,568 ) ( 200,247,177 ) Total stockholders’ equity 31,825,649 33,577,485 Total liabilities and stockholders’ equity $ 52,301,859 $ 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 Nine Months Ended March 31, March 31, 2022 2021 2022 2021 Revenue, net $ 8,305,412 $ 10,701,362 $ 26,651,929 $ 30,132,505 Cost of sales 5,271,161 6,797,605 17,645,897 18,748,220 Gross margin 3,034,251 3,903,757 9,006,032 11,384,285 Operating expenses: Selling, general and administrative 2,619,269 2,805,829 8,435,313 8,009,484 New product development 590,405 640,528 1,569,376 1,620,927 Amortization of intangibles 281,270 281,270 843,812 843,812 Loss on disposal of property and equipment 337 9,473 337 8,951 Total operating expenses 3,491,281 3,737,100 10,848,838 10,483,174 Operating income (loss) ( 457,030 ) 166,657 ( 1,842,806 ) 901,111 Other income (expense): Interest expense, net ( 54,984 ) ( 52,795 ) ( 151,064 ) ( 166,491 ) Other income (expense), net 180,070 ( 28,592 ) 139,807 ( 23,075 ) Total other income (expense), net 125,086 ( 81,387 ) ( 11,257 ) ( 189,566 ) Income (loss) before income taxes ( 331,944 ) 85,270 ( 1,854,063 ) 711,545 Income tax provision 163,059 307,834 328,328 983,586 Net loss $ ( 495,003 ) $ ( 222,564 ) $ ( 2,182,391 ) $ ( 272,041 ) Foreign currency translation adjustment ( 18,738 ) ( 373,114 ) ( 162,628 ) 1,079,590 Comprehensive income (loss) $ ( 513,741 ) $ ( 595,678 ) $ ( 2,345,019 ) $ 807,549 Loss per common share (basic) $ ( 0.02 ) $ ( 0.01 ) $ ( 0.08 ) $ ( 0.01 ) Number of shares used in per share calculation (basic) 27,033,578 26,366,651 27,011,943 26,153,839 Loss per common share (diluted) $ ( 0.02 ) $ ( 0.01 ) $ ( 0.08 ) $ ( 0.01 ) Number of shares used in per share calculation (diluted) 27,033,578 26,366,651 27,011,943 26,153,839 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) Accumulated Class A Additional Other Total Common Stock Paid-in Comphrehensive Accumulated 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 Issuance of common stock for: Settlement of RSUs, net 27,341 274 ( 274 ) - - - Stock-based compensation on stock options & RSUs - - 184,538 - - 184,538 Foreign currency translation adjustment - - - 284 - 284 Net loss - - - - ( 1,055,291 ) ( 1,055,291 ) Balances at December 31, 2021 27,021,875 $ 270,219 $ 231,761,146 $ 1,972,262 $ ( 201,934,565 ) $ 32,069,062 Issuance of common stock for: Employee Stock Purchase Plan 12,391 124 29,861 - - 29,985 Stock-based compensation on stock options & RSUs - - 240,343 - - 240,343 Foreign currency translation adjustment - - - ( 18,738 ) - ( 18,738 ) Net loss - - - - ( 495,003 ) ( 495,003 ) Balances at March 31, 2022 27,034,266 $ 270,343 $ 232,031,350 $ 1,953,524 $ ( 202,429,568 ) $ 31,825,649 Balances at June 30, 2020 25,891,885 $ 258,919 $ 230,634,056 $ 735,892 $ ( 197,061,926 ) $ 34,566,941 Issuance of common stock for: Employee Stock Purchase Plan 3,306 33 10,976 - - 11,009 Exercise of stock options, net 207,640 2,076 124,024 - - 126,100 Stock-based compensation on stock options & RSUs - - 136,849 - - 136,849 Foreign currency translation adjustment - - - 729,308 - 729,308 Net income - - - - 97,068 97,068 Balances at September 30, 2020 26,102,831 $ 261,028 $ 230,905,905 $ 1,465,200 $ ( 196,964,858 ) $ 35,667,275 Issuance of common stock for: Exercise of stock options & RSU's, net 24,530 246 2,488 - - 2,734 Stock-based compensation on stock options & RSUs - - 106,167 - - 106,167 Foreign currency translation adjustment - - - 723,396 - 723,396 Net loss - - - - ( 146,545 ) ( 146,545 ) Balances at December 31, 2020 26,127,361 $ 261,274 $ 231,014,560 $ 2,188,596 $ ( 197,111,403 ) $ 36,353,027 Issuance of common stock for: Employee Stock Purchase Plan 4,839 48 18,920 - - 18,968 Exercise of stock options & RSUs, net 433,726 4,337 9,521 - - 13,858 Stock-based compensation on stock options & RSUs - - 200,061 - - 200,061 Foreign currency translation adjustment - - - ( 373,114 ) - ( 373,114 ) Net loss - - - - ( 222,564 ) ( 222,564 ) Balances at March 31, 2021 26,565,926 $ 265,659 $ 231,243,062 $ 1,815,482 $ ( 197,333,967 ) $ 35,990,236 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) Nine Months Ended March 31, 2022 2021 Cash flows from operating activities: Net loss $ ( 2,182,391 ) $ ( 272,041 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 2,763,620 2,608,472 Interest from amortization of debt costs 33,414 13,929 Loss on disposal of property and equipment 337 8,951 Stock-based compensation on stock options & RSUs, net 541,472 443,077 Provision for doubtful accounts receivable 20,200 ( 1,632 ) Change in operating lease assets and liabilities ( 184,058 ) ( 135,746 ) Inventory write-offs to allowance 188,011 144,741 Changes in operating assets and liabilities: Trade accounts receivable ( 340,737 ) 31,649 Other receivables 105,598 ( 186,769 ) Inventories 853,727 ( 43,542 ) Prepaid expenses and other assets 36,486 125,237 Accounts payable and accrued liabilities ( 1,483,281 ) 339,909 Net cash provided by operating activities 352,398 3,076,235 Cash flows from investing activities: Purchase of property and equipment ( 1,492,668 ) ( 2,721,567 ) Net cash used in investing activities ( 1,492,668 ) ( 2,721,567 ) Cash flows from financing activities: Proceeds from exercise of stock options - 142,693 Proceeds from sale of common stock from Employee Stock Purchase Plan 51,711 29,976 Loan costs ( 61,223 ) - Borrowings on loans payable 266,850 275,377 Payments on loans payable ( 509,754 ) ( 554,102 ) Repayment of finance lease obligations ( 172,344 ) ( 206,644 ) Net cash used in financing activities ( 424,760 ) ( 312,700 ) Effect of exchange rate on cash and cash equivalents 31,282 511,343 Change in cash and cash equivalents ( 1,533,748 ) 553,311 Cash and cash equivalents, beginning of period 6,774,694 5,387,388 Cash and cash equivalents, end of period $ 5,240,946 $ 5,940,699 Supplemental disclosure of cash flow information: Interest paid in cash $ 118,094 $ 151,537 Income taxes paid $ 243,162 $ 787,289 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 nine months ended March 31, 2022, 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 March 31, 2022. 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 and nine months ended March 31, 2022 and 2021 was as follows: Three Months Ended March 31, Nine Months Ended March 31, 2022 2021 2022 2021 PMO $ 4,033,218 $ 3,904,857 $ 11,608,665 $ 12,940,919 Infrared Products 3,725,684 6,462,527 13,688,770 15,995,133 Specialty Products 546,510 333,978 1,354,494 1,196,453 Total revenue $ 8,305,412 $ 10,701,362 $ 26,651,929 $ 30,132,505 4. Inventories The components of inventories include the following: March 31, 2022 June 30, 2021 Raw materials $ 3,305,164 $ 3,908,630 Work in process 2,551,647 2,473,070 Finished goods 3,338,454 3,467,105 Allowance for obsolescence ( 1,577,416 ) ( 1,189,218 ) $ 7,617,849 $ 8,659,587 The value of tooling in raw materials, net of the related allowance for obsolescence, was approximately $ 1.7 million and $ 2.0 million as of March 31, 2022 and June 30, 2021, respectively. 9 Table of Contents 5. Property and Equipment Property and equipment are summarized as follows: Estimated Lives (Years) March 31, 2022 June 30, 2021 Manufacturing equipment 5 - 10 $ 23,087,018 $ 21,465,402 Computer equipment and software 3 - 5 989,771 918,679 Furniture and fixtures 5 361,793 362,944 Leasehold improvements 5 - 7 3,120,978 2,944,543 Construction in progress 826,563 1,529,452 Total property and equipment 28,386,123 27,221,020 Less accumulated depreciation and amortization ( 15,757,469 ) ( 13,941,153 ) Total property and equipment, net $ 12,628,654 $ 13,279,867 6. Goodwill and Intangible Assets There were no changes in the net carrying value of goodwill during the nine months ended March 31, 2022. Identifiable intangible assets were comprised of: Useful Lives (Years) March 31, 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 ( 5,936,931 ) ( 5,093,119 ) Total intangible assets, net $ 4,739,069 $ 5,582,881 Future amortization of identifiable intangibles is as follows: Fiscal year ending: June 30, 2022 (remaining three months) $ 281,271 June 30, 2023 1,125,083 June 30, 2024 1,125,083 June 30, 2025 658,398 After June 30, 2025 1,549,234 $ 4,739,069 10 Table of Contents 7. Income Taxes A summary of our total income tax expense and effective income tax rate for the three and nine months ended March 31, 2022 and 2021 is as follows: Three Months Ended March 31, Nine Months Ended March 31, 2022 2021 2022 2021 (Loss) income before income taxes $ ( 331,944 ) $ 85,270 $ ( 1,854,063 ) $ 711,545 Income tax provision $ 163,059 $ 307,834 $ 328,328 $ 983,586 Effective income tax rate - 49 % 361 % - 18 % 138 % 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 and nine months ended March 31, 2022 and 2021, 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 March 31, 2022 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 March 31, 2022, 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 and nine months ended March 31, 2022 and 2021 included in selling, general and administrative (“SG&A”) expenses in the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income: Three Months Ended March 31, Nine Months Ended March 31, 2022 2021 2022 2021 Stock options $ 25,596 $ 17,036 $ 75,603 $ 51,277 RSUs 214,747 183,025 465,869 391,800 Total $ 240,343 $ 200,061 $ 541,472 $ 443,077 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 $ 5,129 and $ 2,978 for the nine months ended March 31, 2022 and 2021, 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 nine months ended March 31, 2022 and 2021. 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 were granted during the nine months ended March 31, 2022. For stock options granted in the nine-month period ended March 31, 2021, we estimated the fair value of each stock option as of the date of grant using the following assumptions: Weighted-average expected volatility 71.2 % Dividend yields 0 % Weighted-average risk-free interest rate 0.28 % Weighted-average expected term, in years 7.49 12 Table of Contents Information Regarding Current Share-Based Compensation Awards A summary of the activity for share-based compensation awards in the nine months ended March 31, 2022 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 - $ - 368,461 1.2 Exercised - $ - ( 27,341 ) Cancelled/Forfeited ( 23,465 ) $ 1.67 ( 5,534 ) March 31, 2022 409,462 $ 2.03 8.1 2,097,471 0.9 Awards exercisable/ vested as of March 31, 2022 151,691 $ 1.61 7.5 1,334,978 Awards unexercisable/ unvested as of March 31, 2022 257,771 $ 2.28 8.4 762,493 0.9 409,462 2,097,471 RSU awards vest immediately or from one to four years from the date of grant. As of March 31, 2022, there was approximately $ 1.3 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements (including stock options and RSUs) granted. We expect to recognize the compensation cost as follows: Fiscal Year Ending: Stock Options RSUs Total June 30, 2022 (remaining three months) $ 26,682 $ 214,698 $ 241,380 June 30, 2023 115,881 531,851 647,732 June 30, 2024 94,196 190,864 285,060 June 30, 2025 33,885 54,308 88,193 $ 270,644 $ 991,721 $ 1,262,365 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 March 31, Nine Months Ended March 31, 2022 2021 2022 2021 Net loss $ ( 495,003 ) $ ( 222,564 ) $ ( 2,182,391 ) $ ( 272,041 ) Weighted-average common shares outstanding: Basic number of shares 27,033,578 26,366,651 27,011,943 26,153,839 Effect of dilutive securities: Options to purchase common stock - - - - RSUs - - - - Diluted number of shares 27,033,578 26,366,651 27,011,943 26,153,839 Loss per common share: Basic $ ( 0.02 ) $ ( 0.01 ) $ ( 0.08 ) $ ( 0.01 ) Diluted $ ( 0.02 ) $ ( 0.01 ) $ ( 0.08 ) $ ( 0.01 ) 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 March 31, Nine Months Ended March 31, 2022 2021 2022 2021 Options to purchase common stock 414,664 364,536 420,835 515,870 RSUs 2,077,780 2,255,487 1,904,081 2,331,648 2,492,444 2,620,023 2,324,916 2,847,518 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 three finance lease agreements, entered into during fiscal 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. Effective in January 2022, our leases in Zhenjiang, China and Riga, Latvia were extended to December 31, 2024 and 2030, respectively. 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 March 31, Nine Months Ended March 31, 2022 2021 2022 2021 Operating lease cost $ 129,934 $ 168,017 $ 474,075 $ 508,428 Finance lease cost: Depreciation of lease assets 36,767 47,354 127,946 160,577 Interest on lease liabilities 4,323 11,432 16,070 35,688 Total finance lease cost 41,090 58,786 144,016 196,265 Total lease cost $ 171,024 $ 226,803 $ 618,091 $ 704,693 Supplemental balance sheet information related to leases was as follows: Classification March 31, 2022 June 30, 2021 Assets: Operating lease assets Operating lease assets $ 10,598,425 $ 9,015,498 Finance lease assets Property and equipment, net (1) 95,677 477,102 Total lease assets $ 10,694,102 $ 9,492,600 Liabilities: Current: Operating leases Operating lease liabilities, current $ 973,174 $ 799,507 Finance leases Finance lease liabilities, current 91,277 212,212 Noncurrent: Operating leases Operating lease liabilities, less current portion 9,686,335 8,461,133 Finance leases Finance lease liabilities, less current portion 15,392 66,801 Total lease liabilities $ 10,766,178 $ 9,539,653 (1) Finance lease assets were recorded net of accumulated depreciation of approximately $ 435,000 and $ 1.2 million as of March 31, 2022 and June 30, 2021, respectively. In December 2021, we executed a purchase option at the end of one of our finance leases, therefore the related asset and accumulated depreciation were reclassified from finance lease assets. Lease term and discount rate information related to leases was as follows: Lease Term and Discount Rate March 31, 2022 Weighted Average Remaining Lease Term (in years) Operating leases 10.2 Finance leases 1.0 Weighted Average Discount Rate Operating leases 3.0 % Finance leases 7.7 % 15 Table of Contents Supplemental cash flow information: Nine Months Ended March 31, 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash used for operating leases $ 638,943 $ 645,174 Operating cash used for finance leases $ 16,070 $ 35,688 Financing cash used for finance leases $ 172,344 $ 206,644 Future maturities of lease liabilities were as follows as of March 31, 2022: Fiscal year ending: Finance Leases Operating Leases June 30, 2022 (remaining three months) $ 43,369 $ 168,270 June 30, 2023 59,647 1,195,376 June 30, 2024 11,811 1,213,080 June 30, 2025 - 1,177,525 June 30, 2026 - 1,143,042 Thereafter - 7,779,560 Total future minimum payments 114,827 12,676,853 Less imputed interest ( 8,158 ) ( 2,017,344 ) Present value of lease liabilities $ 106,669 $ 10,659,509 11. Loans Payable As of March 31, 2022 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 “First Amendment”). The First 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) reduced 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) modified 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) terminated the Guidance Line; and (iv) required 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 were no longer in default of the Amended Loan Agreement as of June 30, 2021. 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, forebearance, or other resolution of the Amended Loan Agreement (as defined below), which resolution would occur on or before December 31, 2021. On December 20, 2021, we entered into the Second Amendment to the Loan Agreement dated February 26, 2019 (the “Second Amendment”), which further amended the Loan Agreement with BankUnited. In accordance with the Second Amendment, the parties agreed to the following terms, among others: (i) a maturity date of April 15, 2023 with respect to the Term Loan (as defined in the Amended Loan Agreement); (ii) an increased monthly payment amount of $ 100,000 commencing on November 1, 2022; (iii) beginning on December 20, 2021, each facility will bear interest at BankUnited’s then-prime rate of interest minus fifty (50) basis points ( 3 .0% as of March 31, 2022), as adjusted from time to time, (iv) the Term Loan will bear a higher interest rate commencing on August 1, 2022; (v) 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 (vi) a fee of $ 50,000 payable upon execution of the Second Amendment. The Second Amendment also granted us a waiver of compliance for the Financial Covenants (as set forth in the Amended Loan Agreement) for the periods ended December 31, 2021, March 31, 2022 and June 30, 2022. On May 11, 2022, we entered into the Third Amendment to the Loan Agreement dated February 26, 2019 (the “Third Amendment”; and, together with the First Amendment, the Letter Agreement and the Second Letter Agreement, the “Amended Loan Agreement”), which further amended the Loan Agreement with BankUnited. In accordance with the Third Amendment, the parties agreed to the following terms, among others: (i) an amended maturity date of April 15, 2024 with respect to the Term Loan (as defined in the Amended Loan Agreement); and (ii) an amended exit fee equal to (a) 2% of the outstanding principal balance of the Term Loan on September 30, 2022, (b) 1% of the outstanding principal balance on December 31, 2022, (c) 1% of the outstanding principal balance on March 31, 2023, and (d) 4% of the outstanding principal balance on April 15, 2024 (to the extent the Term Loan is still outstanding on the respective dates and has not been refinanced with another lender). 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. If we are unable to refinance the credit facility with other commercial lenders prior to maturity, we may need to raise additional equity financing, source financing through non-commercial lenders or further reduce certain operating expenses and capital expenditures. For additional information, see Note 14, Liquidity . BankUnited Revolving Line Pursuant to the Amended Loan Agreement, BankUnited agreed to 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 could have been used for working capital and general corporate purposes. There were no amounts outstanding on the BankUnited Revolving Line as of June 30, 2021 and no amounts were due upon its expiration on February 26, 2022. 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 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 Amendment, the maturity date of the Term Loan was April 15, 2023, and pursuant to the Third Amendment, the maturity date of the Term Loan is April 15, 2024. The Term Loan initially bore interest at a per annum rate equal to 2.75 % above the 30-day LIBOR. However, pursuant to the Second Amendment, beginning on December 20, 2021, each facility bears interest at BankUnited’s then-prime rate of interest minus fifty (50) basis points ( 3.0 % as of March 31, 2022), as adjusted from time to time. 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. Pursuant to the Second Amendment, the monthly payment, including principal and interest, will increase to $100,000, commencing November 1, 2022. Upon maturity, all principal and interest shall be immediately due and payable. 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. 17 Table of Contents 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. Pursuant to the Second Amendment, compliance for both the fixed charge coverage ratio and total leverage ratio was waived for the quarter ended March 31, 2022 , 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 were to 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. Pursuant to the Second Amendment, beginning on December 20, 2021, the default rate was converted to five percent (5%) above BankUnited’s then-prime rate of interest minus fifty (50) basis points, as adjusted from time to time. 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 $ 33,400 and $ 13,900 is included in interest expense for the nine-month periods ended March 31, 2022 and 2021, respectively. 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: Bank United Term Loan Equipment Loan Unamortized Debt Costs Total Fiscal year ending: June 30, 2022 (remaining three months) $ 145,337 $ 27,243 ( 18,561 ) $ 154,019 June 30, 2023 931,289 108,969 ( 58,773 ) 981,485 June 30, 2024 2,992,824 108,969 - 3,101,793 June 30, 2025 - 108,969 - 108,969 After June 30, 2025 - 45,405 - 45,405 Total payments $ 4,069,450 $ 399,555 $ ( 77,334 ) 4,391,671 Less current portion ( 902,601 ) Non-current portion $ 3,489,070 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 March 31, 2022 and June 30, 2021, respectively. We also recognized net foreign currency transaction losses of $ 67,000 and $ 17,000 during the three months ended March 31, 2022 and 2021, respectively. During the nine months ended March 31, 2022 and 2021, we recognized net foreign currency transaction losses of approximately $ 107,000 and $ 38,000 , respectively, included in the unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) in the line item entitled “Other income (expense), net.” 18 Table of Contents Our cash and cash equivalents totaled approximately $ 5.2 million at March 31, 2022. 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 March 31, 2022, LPOIZ had approximately $ 4.8 million in retained earnings available for repatriation, and LPOI did not have any earnings available for repatriation, based on earnings accumulated through December 31, 2021, the end of the most recent statutory tax year, that remained undistributed as of March 31, 2022. Assets and net assets in foreign countries are as follows: China Latvia March 31, 2022 June 30, 2021 March 31, 2022 June 30, 2021 Assets $ 20.5 million $ 20.1 million $ 12.6 million $ 11.3 million Net assets $ 16.4 million $ 16.6 million $ 9.9 million $ 9.0 million 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 and nine months ended March 31, 2022, we incurred an additional $ 45,000 and $ 526,000 , respectively. 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 could have been 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. During the third quarter of fiscal 2022, it was determined that our Chinese subsidiary would not be responsible for this amount. As such, this accrual was reversed and is included in the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) in the line item entitled “Other income (expense), net” for the three and nine months ended March 31, 2022. 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 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 March 31, 2022. 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. 19 Table of Contents 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 period ended June 30, 2021 and the nine-month period ended March 31, 2022, which management anticipates may continue for the next few 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. The duration of the COVID-19 pandemic continues to impact global economic conditions, even as restrictions have lifted in many places throughout the world. Currently, China continues to experience rolling COVID-19 lockdowns in efforts to mitigate the spread of COVID-19. These lockdowns are resulting in global supply chain issues. To date, our facilities have not been directly impacted by these lockdowns; however, many of our customers located in China have delayed receipt of orders while the customers are closed for business. Even though these customers have not cancelled any orders with us, the delayed receipt of orders has impacted our revenue and we expect it to continue to impact our revenue in future periods while China has these rolling lockdowns. 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. Impact of Russian-Ukraine Conflict In February 2022, Russian military forces invaded Ukraine. This conflict has resulted in significant economic disruption and continues to adversely impact the broader global economy, including certain of our customers and suppliers. Given the dynamic nature of this situation, we cannot reasonably estimate the impact of the Russian-Ukraine conflict on our financial condition, results of operations or cash flows into the foreseeable future. 14. Liquidity We generally rely on cash from operations and equity and debt offerings, to the extent available, to satisfy our liquidity needs and to maintain our ability to repay the BankUnited Term Loan. As discussed in in Note 11, Loans Payable , we have commenced discussions with other lenders, and we anticipate refinancing our debt obligations with a new lender prior to the maturity date of the Term Loan, of which there can be no assurances. If we are unable to refinance the credit facility with other commercial lenders prior to maturity, we may need to raise additional equity financing, source financing through non-commercial lenders or further reduce certain operating expenses and capital expenditures. We filed a shelf registration statement, effective March 1, 2022, which is available for equity offerings. There are a number of factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated sales growth, increased material costs, increased labor costs, planned production efficiency improvements not being realized, increases in property, casualty, benefit and liability insurance premiums, and increases in other costs. In addition, greater than 50 % of our cash and cash equivalents is held by our foreign subsidiaries and, although we regularly repatriate cash, it may not be readily available to repay liabilities in the U.S. We will also continue efforts to keep costs under control as we seek renewed sales growth. Our efforts are directed toward generating positive cash flow and profitability. If these efforts are not successful, we may need to raise additional capital. Should capital not be available to us at reasonable terms, other actions may become necessary in addition to cost control measures and continued efforts to increase sales. These actions may include exploring strategic options for the sale of the Company, the sale of certain product lines, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, the creation of licensing arrangements with respect to our technology, or other alternatives. 20 Table of Contents