LIGHTPATH TECHNOLOGIES INC 10-Q

Item 1. Financial Statements LIGHTPATH TECHNOLOGIES, INC. Condensed Consolidated Balance Sheets (unaudited) September 30, June 30, Assets 2022 2022 Current assets: Cash and cash equivalents $ 4,298,869 $ 5,507,891 Trade accounts receivable, net of allowance of $ 46,691 and $ 36,313 4,584,019 5,211,292 Inventories, net 7,005,709 6,985,427 Other receivables 82,391 - Prepaid expenses and other assets 434,601 464,804 Total current assets 16,405,589 18,169,414 Property and equipment, net 10,767,788 11,640,463 Operating lease right-of-use assets 10,095,366 10,420,604 Intangible assets, net 4,176,527 4,457,798 Goodwill 5,854,905 5,854,905 Deferred tax assets, net 143,000 143,000 Other assets 47,066 27,737 Total assets $ 47,490,241 $ 50,713,921 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 2,344,334 $ 3,073,933 Accrued liabilities 864,301 558,750 Accrued payroll and benefits 1,888,766 2,081,212 Operating lease liabilities, current 960,331 965,622 Loans payable, current portion 1,091,145 998,692 Finance lease obligation, current portion 21,638 55,348 Total current liabilities 7,170,515 7,733,557 Deferred tax liabilities, net 511,419 541,015 Finance lease obligation, less current portion 8,085 11,454 Operating lease liabilities, noncurrent 9,114,599 9,478,077 Loans payable, less current portion 2,948,446 3,218,580 Total liabilities 19,753,064 20,982,683 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; 27,071,929 and 27,046,790 shares issued and outstanding 270,719 270,468 Additional paid-in capital 232,619,220 232,315,003 Accumulated other comprehensive income 17,296 935,125 Accumulated deficit ( 205,170,058 ) ( 203,789,358 ) Total stockholders’ equity 27,737,177 29,731,238 Total liabilities and stockholders’ equity $ 47,490,241 $ 50,713,921 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, 2022 2021 Revenue, net $ 7,366,901 $ 9,103,343 Cost of sales 5,132,989 5,931,408 Gross margin 2,233,912 3,171,935 Operating expenses: Selling, general and administrative 2,638,173 2,869,046 New product development 549,881 427,011 Amortization of intangibles 281,271 281,271 Total operating expenses 3,469,325 3,577,328 Operating loss ( 1,235,413 ) ( 405,393 ) Other income (expense): Interest expense, net ( 70,370 ) ( 45,749 ) Other income (expense), net 27,217 ( 51,082 ) Total other income (expense), net ( 43,153 ) ( 96,831 ) Loss before income taxes ( 1,278,566 ) ( 502,224 ) Income tax provision 102,134 129,873 Net loss $ ( 1,380,700 ) $ ( 632,097 ) Foreign currency translation adjustment ( 917,829 ) ( 144,174 ) Comprehensive loss $ ( 2,298,529 ) $ ( 776,271 ) Loss per common share (basic) $ ( 0.05 ) $ ( 0.02 ) Number of shares used in per share calculation (basic) 27,070,949 26,993,971 Loss per common share (diluted) $ ( 0.05 ) $ ( 0.02 ) Number of shares used in per share calculation (diluted) 27,070,949 26,993,971 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 Comprehensive Accumulated Stockholders’ Shares Amount Capital Income Deficit Equity Balances at June 30, 2022 27,046,790 $ 270,468 $ 232,315,003 $ 935,125 $ ( 203,789,358 ) $ 29,731,238 Issuance of common stock for: Employee Stock Purchase Plan 16,287 163 19,707 — — 19,870 Exercise of Stock Options & RSUs, net 8,852 88 ( 88 ) — — — Stock-based compensation on stock options & RSUs — — 284,598 — — 284,598 Foreign currency translation adjustment — — — ( 917,829 ) — ( 917,829 ) Net loss — — — — ( 1,380,700 ) ( 1,380,700 ) Balances at September 30, 2022 27,071,929 $ 270,719 $ 232,619,220 $ 17,296 $ ( 205,170,058 ) $ 27,737,177 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 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, 2022 2021 Cash flows from operating activities: Net loss $ ( 1,380,700 ) $ ( 632,097 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 816,334 910,962 Interest from amortization of debt costs 18,560 4,643 Stock-based compensation on stock options & RSUs, net 284,598 116,591 Provision for doubtful accounts receivable ( 12,452 ) 12,010 Change in operating lease assets and liabilities ( 43,531 ) ( 52,172 ) Inventory write-offs to allowance - 60,935 Deferred tax benefit ( 29,596 ) - Changes in operating assets and liabilities: Trade accounts receivable 639,725 ( 1,283,594 ) Other receivables ( 82,391 ) 134,860 Inventories ( 20,282 ) ( 109,829 ) Prepaid expenses and other assets 10,874 19,702 Accounts payable and accrued liabilities ( 616,494 ) ( 799,693 ) Net cash used in operating activities ( 415,355 ) ( 1,617,682 ) Cash flows from investing activities: Purchase of property and equipment ( 243,393 ) ( 1,199,005 ) Net cash used in investing activities ( 243,393 ) ( 1,199,005 ) Cash flows from financing activities: Proceeds from sale of common stock from Employee Stock Purchase Plan 19,870 21,726 Borrowings on loans payable - 266,850 Payments on loans payable ( 169,902 ) ( 163,758 ) Repayment of finance lease obligations ( 37,079 ) ( 73,891 ) Net cash (used in) provided by financing activities ( 187,111 ) 50,927 Effect of exchange rate on cash and cash equivalents ( 363,163 ) ( 31,953 ) Change in cash and cash equivalents ( 1,209,022 ) ( 2,797,713 ) Cash and cash equivalents, beginning of period 5,507,891 6,774,694 Cash and cash equivalents, end of period $ 4,298,869 $ 3,976,981 Supplemental disclosure of cash flow information: Interest paid in cash $ 48,803 $ 41,466 Income taxes paid $ 140,756 $ 111,535 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, 2022, 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, 2022 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, 2022. There have been no material changes to our significant accounting policies during the three months ended September 30, 2022, from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022. 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, 2022 and September 30, 2022, respectively. 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, 2022 and 2021 was as follows: Three Months Ended September 30, 2022 2021 PMO $ 3,272,555 $ 3,812,950 Infrared Products 3,639,659 4,887,918 Specialty Products 454,687 402,475 Total revenue $ 7,366,901 $ 9,103,343 4. Inventories The components of inventories include the following: September 30, 2022 June 30, 2022 Raw materials $ 2,788,577 $ 3,019,156 Work in process 2,731,354 2,243,907 Finished goods 2,916,888 3,052,001 Allowance for obsolescence ( 1,431,110 ) ( 1,329,637 ) $ 7,005,709 $ 6,985,427 The value of tooling in raw materials, net of the related allowance for obsolescence, was approximately $ 1.5 million and $ 1.6 million as of September 30, 2022 and June 30, 2022, respectively. 5. Property and Equipment Property and equipment are summarized as follows: Estimated Lives (Years) September 30, 2022 June 30, 2022 Manufacturing equipment 5 - 10 $ 21,291,400 $ 22,058,636 Computer equipment and software 3 - 5 989,720 978,348 Furniture and fixtures 5 338,819 352,060 Leasehold improvements 5 - 7 2,976,292 3,043,867 Construction in progress 972,199 943,793 Total property and equipment 26,568,430 27,376,704 Less accumulated depreciation and amortization ( 15,800,642 ) ( 15,736,241 ) Total property and equipment, net $ 10,767,788 $ 11,640,463 9 Table of Contents 6. Goodwill and Intangible Assets There were no changes in the net carrying value of goodwill during the three months ended September 30, 2022. Identifiable intangible assets were comprised of: Useful Lives (Years) September 30, 2022 June 30, 2022 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 ( 6,499,473 ) ( 6,218,202 ) Total intangible assets, net $ 4,176,527 $ 4,457,798 Future amortization of identifiable intangibles is as follows: Fiscal year ending: June 30, 2023 (remaining nine months) 843,812 June 30, 2024 1,125,083 June 30, 2025 658,398 June 30, 2026 239,334 After June 30, 2026 1,309,900 $ 4,176,527 7. Income Taxes A summary of our total income tax expense and effective income tax rate for the three months ended September 30, 2022 and 2021 is as follows: Three Months Ended September 30, 2022 2021 (Loss) income before income taxes $ ( 1,278,566 ) $ ( 502,224 ) Income tax provision $ 102,134 $ 129,873 Effective income tax rate - 8 % - 26 % 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, 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 September 30, 2022 and June 30, 2022, our net deferred tax assets are related to the U.S. jurisdiction and we have provided for a valuation allowance 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. 10 Table of Contents 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, 2022, LPOI and LPOIZ were subject to statutory income tax rates of 25 % and 15 %, respectively. The net deferred tax liabilities included in the accompanying unaudited Condensed Consolidated Balance Sheets as of September 30, 2022 and June 30, 2022 are related to LPOIZ, and primarily consist of timing differences related to depreciation. 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. The Company accrues withholding taxes on the portion of LPOZ’s earnings that it intends to repatriate. Accrued and unpaid withholding taxes were approximately $ 40,000 as of both September 30, 2022 and June 30, 2022. Other than these withholding taxes, these intercompany dividends have no impact on the Consolidated Financial Statements. 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 Optics Corporation (“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. 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, 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 September 30, 2022 2021 Stock options $ 58,765 $ 24,128 RSUs 225,833 92,463 Total $ 284,598 $ 116,591 We also adopted the LightPath Technologies, Inc. Employee Stock Purchase Plan (the “2014 ESPP”). The 2014 ESPP permits employees to purchase Class A common stock through payroll deductions, subject to certain limitations. A discount of $ 1,954 and $ 2,155 for the three months ended September 30, 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. 11 Table of Contents 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, 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 three months ended September 30, 2022 or during the three months ended September 30, 2021. Information Regarding Current Share-Based Compensation Awards A summary of the activity for share-based compensation awards in the three months ended September 30, 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, 2022 534,462 $ 2.03 7.0 2,079,669 0.9 Granted - $ - 8,852 Exercised - $ - ( 8,852 ) Cancelled/Forfeited - $ - - September 30, 2022 534,462 $ 2.03 6.9 2,079,669 0.9 Awards exercisable/ vested as of September 30, 2022 246,392 $ 1.89 6.6 1,334,978 — Awards unexercisable/ unvested as of September 30, 2022 288,070 $ 2.15 7.1 744,691 0.9 534,462 2,079,669 RSU awards vest immediately or from one to four years from the date of grant. As of September 30, 2022, there was approximately $ 836,000 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, 2023 (remaining nine months) $ 145,557 $ 317,172 $ 462,729 June 30, 2024 94,196 190,864 285,060 June 30, 2025 33,885 54,308 88,193 $ 273,638 $ 562,344 $ 835,982 12 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, 2022 2021 Net loss $ ( 1,380,700 ) $ ( 632,097 ) Weighted-average common shares outstanding: Basic number of shares 27,070,949 26,993,971 Effect of dilutive securities: Options to purchase common stock - - RSUs - - Diluted number of shares 27,070,949 26,993,971 Loss per common share: Basic $ ( 0.05 ) $ ( 0.02 ) Diluted $ ( 0.05 ) $ ( 0.02 ) The following potential dilutive shares were not included in the computation of diluted earnings per share of Class A common stock, as their effects would be anti-dilutive: Three Months Ended September 30, 2022 2021 Options to purchase common stock 534,462 427,726 RSUs 2,061,090 1,738,439 2,595,552 2,166,165 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 two 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. We have had two leases for premises comprising our primary facility in Orlando, Florida (the “Orlando Facility”). We assigned one of such leases to a third-party and agreed that we would vacate the premises subject to the assigned lease on November 30,2022. We are in discussions with the third party to extend our occupancy for a limited period of time after November 30, 2022. If the third party does not agree to extend our occupancy, and we do not vacate the premises on or before November 30, 2022, we may be subject to claims as a result thereof. We amended the second such lease in April 2021, and again in September 2021, to extend the term of such lease 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 . 13 Table of Contents As most of our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Currently, none of our leases include variable lease payments that are dependent on an index or rate. We are responsible for payment of certain real estate taxes, insurance and other expenses on certain of our leases. These amounts are generally considered to be variable and are not included in the measurement of the ROU asset and lease liability. We generally account for non-lease components, such as maintenance, separately from lease components. Our lease agreements do not contain any material residual value guarantees or material restricted covenants. Leases with a term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. We received tenant improvement allowances for each of our two leases with respect to our 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. We are constructing additional tenant improvements in the premises subject to our continuing lease for our Orlando Facility, of which the landlord has agreed to provide $ 2.4 million in tenant improvement allowances. We will fund the balance of the tenant improvement costs, which we estimate will be approximately $ 2.5 million. The components of lease expense were as follows: Three Months Ended September 30, 2022 2021 Operating lease cost $ 231,501 $ 172,230 Finance lease cost: Depreciation of lease assets 34,111 47,354 Interest on lease liabilities 2,683 6,432 Total finance lease cost 36,794 53,786 Total lease cost $ 268,295 $ 226,016 Supplemental balance sheet information related to leases was as follows: Classification September 30, 2022 June 30, 2022 Assets: Operating lease assets Operating lease assets $ 10,095,366 $ 10,420,604 Finance lease assets Property and equipment, net (1) 28,783 61,566 Total lease assets $ 10,124,149 $ 10,482,170 Liabilities: Current: Operating leases Operating lease liabilities, current $ 960,331 $ 965,622 Finance leases Finance lease liabilities, current 21,638 55,348 Noncurrent: Operating leases Operating lease liabilities, less current portion 9,114,599 9,478,077 Finance leases Finance lease liabilities, less current portion 8,085 11,454 Total lease liabilities $ 10,104,653 $ 10,510,501 (1) Finance lease assets were recorded net of accumulated depreciation of approximately $ 451,000 and $ 418,000 as of September 30, 2022 and June 30, 2022, respectively. 14 Table of Contents Lease term and discount rate information related to leases was as follows: Lease Term and Discount Rate September 30, 2022 Weighted Average Remaining Lease Term (in years) Operating leases 9.9 Finance leases 1.1 Weighted Average Discount Rate Operating leases 2.9 % Finance leases 7.1 % Supplemental cash flow information: Three Months Ended September 30, 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash used for operating leases $ 268,580 $ 224,402 Operating cash used for finance leases $ 2,683 $ 6,432 Financing cash used for finance leases $ 37,079 $ 73,891 Future maturities of lease liabilities were as follows as of September 30, 2022: Fiscal year ending: Finance Leases Operating Leases June 30, 2023 (remaining nine months) 19,886 $ 523,109 June 30, 2024 11,811 1,103,955 June 30, 2025 — 1,206,658 June 30, 2026 — 1,178,872 June 30, 2027 — 1,151,769 Thereafter — 6,874,560 Total future minimum payments 31,697 12,038,923 Less imputed interest ( 1,974 ) ( 1,963,993 ) Present value of lease liabilities $ 29,723 $ 10,074,930 11. Loans Payable As of September 30, 2022 and June 30, 2022, 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”). 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. 15 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 (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). Prior to September 30, 2022, BankUnited agreed to defer the exit fee that would have been due on September 30, 2022 to October 30, 2022, and reduce the amount to 1%. 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 ( 5.0 % as of September 30, 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, increased to $ 100,000 on November 1, 2022. Upon maturity, all principal and interest shall be immediately due and payable. 16 Table of Contents 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 . Pursuant to the Third Amendment, compliance for both the fixed charge coverage ratio and total leverage ratio was waived for the quarter ended September 30, 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, other than the exit fees, as discussed above. 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 others. 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 $ 18,600 and $ 4,600 is included in interest expense for the three-month periods ended September 30, 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: BankUnited Term Loan Equipment Loan Unamortized Debt Costs Total Fiscal year ending: June 30, 2023 (remaining nine months) $ 734,037 $ 71,296 ( 40,213 ) $ 765,120 June 30, 2024 3,044,738 95,062 — 3,139,800 June 30, 2025 — 95,062 — 95,062 June 30, 2026 — 39,609 — 39,609 After June 30, 2026 — — — — Total payments $ 3,778,775 $ 301,029 $ ( 40,213 ) 4,039,591 Less current portion ( 1,091,145 ) Non-current portion $ 2,948,446 17 Table of Contents 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 $ 17,300 and $ 935,000 as of September 30, 2022 and June 30, 2022, respectively. We also recognized net foreign currency transaction gains of $ 23,000 and losses of $ 26,000 during the three months ended September 30, 2022 and 2021, 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 $ 4.3 million at September 30, 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 September 30, 2022, LPOIZ had approximately $ 3.3 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 September 30, 2022. Assets and net assets in foreign countries are as follows: China Latvia September 30, 2022 June 30, 2022 September 30, 2022 June 30, 2022 Assets $ 18.4 million $ 19.6 million $ 11.9 million $ 12.7 million Net assets $ 14.6 million $ 15.7 million $ 9.3 million $ 10.0 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 and $ 400,000 during the years ended June 30, 2021 and 2022, respectively. During the three months ended September, 2022, we incurred an additional $ 27,000 . Such expenses were recorded as SG&A expenses in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss). 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 following the terminations in April 2021. After the execution of the severance agreements, we discovered additional wrongdoing by the terminated employees. As a result, LPOIZ and LPOI have disputed the employees’ rights to such payments and did not immediately begin making the severance payments. However, based on the likelihood that the courts in China would determine that our subsidiaries would ultimately be obligated to pay these amounts, we accrued for these payments as of June 30, 2021 and they remained accrued as of June 30, 2022 and September 30, 2022. Such expenses were recorded as SG&A expenses in the Consolidated Statement of Comprehensive Income (Loss) for the year ended June 30, 2021. In October 2022, the severance amounts were paid to the court in accordance with a court order. 18 Table of Contents 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. We have not experienced any material adverse impact to the business operations of LPOI or LPOIZ as a result of the transition. We expect to incur minimal additional legal fees and consulting expenses in future periods as we have exhausted nearly all of our legal options and remedies. 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 fiscal year ended June 30, 2022. 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 COVID-19 pandemic, 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, particularly in China, which has impacted the short-term and long-term demand from customers and, therefore, has negatively impacted our results of operations, cash flows, and financial position in that region. Additionally, some areas still have travel restrictions in place, which has impacted 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 taking steps to mitigate the impact on our financial condition, liquidity, and results of operations globally. However, given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not able to precisely estimate the effects of the COVID-19 pandemic on our future results of operations, financial, or liquidity for the remainder of fiscal year 2023 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. Potential Impact of Economic Conditions in China Due to our operations in China, our business, results of operations, financial condition and prospects may be influenced to a significant degree by economic, political, legal and social conditions in China. China’s economy differs from the economies of other countries in many respects, including with respect to the level of development, growth rate, amount of government involvement, control of foreign exchange and allocation of resources. While China’s economy has experienced significant growth over the past several decades, its growth rate has declined in recent years and may continue to decline. Deteriorating economic conditions in China generally and as a result of China’s zero-COVID strategy, have led to lower demand for our products in China and thus lower revenues and net income for our subsidiaries in China and the Company overall. A continuation of China’s current economic conditions or a further slowdown in the economic growth, an economic downturn, a recession, or other adverse economic conditions in China is likely to have a material adverse effect on our business and results of operations in future quarters. 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 to facilitate the issuance of our Class A common stock, warrants exercisable for shares of our Class A common stock, and/or units up to an aggregate offering price of $ 75.8 million from time to time. In connection with the filing of the shelf registration statement, we also included a prospectus supplement relating to an at-the-market equity program under which we may issue and sell shares of our Class A common stock up to an aggregate offering price of $ 25.2 million from time to time, decreasing the aggregate offering price available under its shelf registration statement to $ 50.6 million. The shelf registration statement was declared effective by the SEC on March 1, 2022. As of September 30, 2022, we have not issued any shares of its Class A common stock pursuant to the at-the-market equity program. 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 or rates, 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. 19 Table of Contents