LSI INDUSTRIES INC 10-K

ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures The Company maintains disclosure controls and procedures (as such term is defined Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. - 13 - We conducted, under the supervision of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2020, our disclosure controls and procedures were effective. Management believes that the consolidated financial statements included in this Annual Report on Form 10-K are fairly presented in all material respects in accordance with U.S GAAP, and the Company’s Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations, statement of shareholders’ equity, and cash flows for each of the periods presented in this report. Management's Report on Internal Control over Financial Reporting appearing on page 28 of this report is incorporated by reference in this Item 9A. Changes in Internal Control There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. See Management’s Report On Internal Control Over Financial Reporting on page 28. ITEM 9B. OTHER INFORMATION Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information about our directors and officers may be found under the captions “Nominees for Board of Directors” and “Executive Officers” in our Proxy Statement for the Annual Meeting of Shareholders to be held November 10, 2020 (the “Proxy Statement”). Information about our Audit Committee may be found under the caption “Committees of the Board” in the Proxy Statement. That information is incorporated herein by reference. We have adopted a code of ethics that applies to all of our employees, including our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, and other finance organization employees. The code of ethics is publicly available on our website at lsicorp.com. If we make any substantive amendments to the code of ethics or grant any waiver, including any implicit waiver, from a provision of the code to our Chief Executive Officer, Chief Financial Officer, or Chief Accounting Officer, we will disclose the nature of the amendment or waiver on that website or in a report on Form 8-K. ITEM 11. EXECUTIVE COMPENSATION The information in the Proxy Statement set forth under the captions “Director Compensation,” “Compensation Discussion and Analysis” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information in the Proxy Statement set forth under the captions “Security Ownership,” and “Equity Compensation Plan Information” is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information set forth in the Proxy Statement under the captions “Corporate Governance” and “Related Person Transactions” is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information concerning principal accountant fees and services appears in the Proxy Statement under the headings “Ratification of Appointment of Independent Registered Public Accounting Firm” and “Committees of the Board” and is incorporated herein by reference. - 14 - PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: (1) Consolidated Financial Statements appear as part of Item 8 of this Form 10-K. (2) Exhibits – Exhibits set forth below are either on file with the Securities and Exchange Commission and are incorporated by reference as exhibits hereto, or are filed with this Form 10-K. - 15 - Exhibit No. Exhibit Description 3.1 Certificate of Amended Articles of Incorporation of LSI. 3.2 Amended and Restated Code of Regulations of LSI 4.1 Description of Securities (incorporated by reference to Exhibit 4.1 of LSI’s Annual Report on Form 10-K filed on September 6, 2019). 4.2 Warrant Agreement issued by LSI Industries Inc. (incorporated by reference to Exhibit 4.1 to LSI’s Form 8-K filed on February 21, 2017). 10.1 Third Amendment to Loan Documents dated February 21, 2017 between LSI and PNC Bank, National Association (incorporated by reference to Exhibit 4.2 to LSI’s Form 8-K filed on February 21, 2017). 10.2 Fourth Amendment to Loan Documents dated February 28, 2019 between LSI and PNC Bank, National Association (incorporated by reference to Exhibit 10.2 to LSI’s Form 10-Q filed on May 8, 2019). 10.3 Amended and Restated Loan Agreement dated as of June 19, 2014 between LSI and PNC Bank, National Association (incorporated by reference to Exhibit 10.1 of LSI’s Form 10-K filed on September 10, 2014) 10.4* Amended and Restated 2012 Stock Incentive Plan amended as of November 17, 2016 (incorporated by reference to Exhibit 10.1 to LSI’s Form 10-Q filed on February 3, 2017). 10.5* Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 of LSI’s Form 8-K filed on June 23, 2016) 10.6* LSI Industries Inc. Nonqualified Deferred Compensation Plan (Amended and Restated as of December 30, 2019) (incorporated by reference to Exhibit 10.1 to LSI’s Form 10-Q filed on February 6, 2020). 10.7* Employment Agreement between LSI and James A. Clark (incorporated by reference to Exhibit 10.1 to LSI’s 8-K filed on October 17, 2018). 10.8* Employment Offer Letter between LSI and James E. Galeese (incorporated by reference to Exhibit 10.1 to LSI’s Form 8-K filed on June 13, 2017). 10.9* Employment Offer Letter between LSI and Thomas A. Caneris (incorporated by reference to Exhibit 10.1 to LSI’s Form 8-K filed on August 5, 2019). 10.10 * Employment Offer Letter between LSI and Michael C. Beck (incorporated by reference to Exhibit 10.1 to LSI’s Form 8-K filed on January 16, 2019). 10.11 * Change of Control Policy (incorporated by reference to Exhibit 10 to LSI’s Form 8-K filed on October 3, 2011). 10.12 * Form of Restricted Stock Unit Award Agreement – Amended and Restated 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to LSI’s Form 8-K filed on July 6, 2015). 10.13 * Form of Non-qualified Stock Option Agreement / Inducement Awards – Amended and Restated 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to LSI’s Form 10-Q filed on November 7, 2018). 10.14 * Form of Nonqualified Stock Option Award Agreement - Service-Based – Amended and Restated 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to LSI’s Form 8-K filed on July 6, 2015). 10.15 * Form of Nonqualified Stock Option Award Agreement – Performance-Based – Amended and Restated 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to LSI’s Form 8-K filed on July 6, 2015). - 16 - 10.16 * Form of Incentive Stock Option Award Agreement – Amended and Restated 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to LSI’s Form 8-K filed on July 6, 2015). 10.17 * FY20 Long Term Incentive Plan*++ (incorporated by reference to Exhibit 10.1 to LSI’s Form 10-Q filed on November 7, 2019). 10.18 * FY20 Short Term Incentive Plan*++ (incorporated by reference to Exhibit 10.2 to LSI’s Form 10-Q filed on November 7, 2019). 10.19 * Form of Performance Share Unit Award Agreement – Amended and Restated 2012 Stock Incentive Plan*++ (incorporated by reference to Exhibit 10.3 to LSI’s Form 10-Q filed on November 7, 2019). 10.20 * 2019 Omnibus Award Plan (incorporated by reference to Exhibit 10.1 to LSI’s Form S-8 Registration Statement File No. 333-234556 filed on November 7, 2019). 14 Code of Ethics (incorporated by reference to exhibit 14 to LSI’s Form 10-K for the fiscal year ended June 30, 2004). 21 Subsidiaries of the Registrant 23.1 Consent of Independent Registered Public Accounting Firm (Grant Thornton LLP) 24 Power of Attorney (included as part of signature page) 31.1 Certification of Principal Executive Officer required by Rule 13a-14(a) 31.2 Certification of Principal Financial Officer required by Rule 13a-14(a) 32.1 18 U.S.C. Section 1350 Certification of Principal Executive Officer 32.2 18 U.S.C. Section 1350 Certification of Principal Financial Officer 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase 101.PRE XBRL Taxonomy Extension Presentation Linkbase 101.DEF XBRL Taxonomy Extension Definition Document *Management compensatory agreement. ++ Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K. The omitted information is not material and would likely cause competitive harm to the Registrant if publicly disclosed. The Registrant hereby agrees to furnish a copy of any omitted portion to the SEC upon request. LSI will provide shareholders with any exhibit upon the payment of a specified reasonable fee, which fee shall be limited to LSI’s reasonable expenses in furnishing such exhibit. The exhibits identified herein as being filed with the SEC have been so filed with the SEC but may not be included in this version of the Annual Report to Shareholders. ITEM 16. FORM 10-K SUMMARY Not included. - 17 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LSI INDUSTRIES INC. September 11, 2020 BY: /s/ James A. Clark Date James A. Clark Chief Executive Officer and President We, the undersigned directors and officers of LSI Industries Inc. hereby severally constitute James A. Clark and James E. Galeese, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title /s/ James A. Clark Chief Executive Officer and President James A. Clark (Principal Executive Officer) Date: September 11, 2020 /s/ James E. Galeese Executive Vice President, and Chief Financial Officer James E. Galeese (Principal Financial Officer) Date: September 11, 2020 /s/ Jeffery S. Bastian Vice President and Chief Accounting Officer Jeffery S. Bastian (Principal Accounting Officer) Date: September 11, 2020 /s/ Robert P. Beech Director Robert P. Beech Date: September 11, 2020 /s/ Ronald D. Brown Director Ronald D. Brown Date: September 9, 2020 /s/ Amy L. Hanson Director Amy L. Hanson Date: September 11, 2020 /s/ Chantel E. Lenard Director Chantel E. Lenard Date: September 11, 2020 /s/ John K. Morgan Director John K. Morgan Date: September 11, 2020 /s/ Wilfred T. O’Gara Chairman of the Board of Directors Wilfred T. O’Gara Date: September 11, 2020 - 18 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company’s “forward looking statements” and disclosures as presented earlier in this Form 10-K in the “Safe Harbor” Statement, as well as the Company’s consolidated financial statements and accompanying notes presented later in this Form 10-K should be referred to when reading Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview LSI Industries is a leading producer of high-performance, American-made lighting solutions. Our strength in outdoor lighting applications creates opportunities for us to introduce additional solutions to our valued customers. LSI’s indoor and outdoor products and services, including our digital and print graphics capabilities, are valued by architects, engineers, distributors and contractors for their quality, reliability and innovation. Our products are used extensively in automotive dealerships, petroleum stations, quick service restaurants, grocery stores and pharmacies, retail establishments, sports complexes, parking lots and garages, and commercial and industrial buildings. COVID-19 Pandemic Our business is significantly vulnerable to the economic effects of pandemics and other public health crises, including the ongoing novel coronavirus (“COVID-19”) outbreak that continues to spread in the U.S. and globally. During the fourth quarter of fiscal 2020, we experienced a decline in the demand for our products and services across all of our markets as a result of the impact of the spread of COVID-19 and the resulting disruptions to the non-residential construction market. We continue to assess the ongoing impact of COVID-19 on our business results and remain committed to taking actions to address the health, safety and welfare of our employees, customers, agents and suppliers as well as the negative effects from demand disruption and production impacts, including, but not limited to, the following: ● Operating our business with a focus on our employee health and safety, which includes minimizing travel, implementing appropriate distancing programs, enhanced and more frequent cleaning within our facilities, and requiring use of personal protective equipment; ● Monitoring of our liquidity, reduction of supply flows into our manufacturing facilities, disciplined inventory management, and continued scrutiny of our capital expenditures; and ● Continuously reviewing our financial strategy to strengthen financial flexibility in these volatile financial markets. We continue to maintain a strong balance sheet with a cash balance of $3.5 million and no long-term debt as of June 30, 2020. We believe that our liquidity position is adequate to meet our projected needs in the reasonably foreseeable future. Future developments, such as the potential of additional outbreaks of COVID-19 in the U.S. and globally and the actions taken by governmental authorities in response to future resurgence, that are highly uncertain and not able to be predicted will determine the extent to which the COVID-19 outbreak continues to impact our results of operations and financial conditions. See Item 1A, Risk Factors, included in Part I of this Annual Report on Form 10-K for an additional discussion of risks related to COVID-19. Summary of Consolidated Results Net Sales by Business Segment (In thousands) 2020 2019 Lighting Segment $ 206,199 $ 235,114 Graphics Segment 99,359 93,738 Total Net Sales $ 305,558 $ 328,852 - 19 - Operating Income (Loss) by Business Segment (In thousands) 2020 2019 Lighting Segment $ 16,123 $ (12,211 ) Graphics Segment 8,218 3,112 Corporate and Eliminations (11,265 ) (10,791 ) Total Operating Income (Loss) $ 13,076 $ (19,890 ) Fiscal 2020 net sales of $305.6 million decreased $23.3 million or 7% as compared to fiscal 2019 net sales of $328.9 million. Net sales were favorably influenced by increased net sales in the Graphics Segment (up $5.6 million or 6%) and were unfavorably influenced by decreased net sales in the Lighting Segment (down $28.9 million or 12%). Fiscal 2020 operating income of $13.1 million represents a $33.0 million increase from fiscal 2019 operating loss of ($19.9) million. The $33.0 million improvement from operating loss in fiscal 2019 was favorably impacted by the $4.8 million pre-tax gain on the sale of the New Windsor, New York facility and the $3.7 million pre-tax gain on the sale of the North Canton, Ohio facility, both of which occurred in fiscal 2020, and a $20.2 million pre-tax goodwill impairment charge in fiscal 2019 in the Lighting Segment. The year over year increase in operating income was partially offset by a one-time adjustment to a Company benefit plan in fiscal 2019 which resulted in a favorable pre-tax adjustment to earnings of $1.2 million. Non-GAAP adjusted operating income in fiscal 2020 of $6.4 million increased $2.4 million or 58% from adjusted fiscal 2019 operating income of $4.0 million. Refer to “Non-GAAP Financial Measures” below for a reconciliation of Non-GAAP financial measures to U.S. GAAP measures. The increase in adjusted operating income was the net result of a higher-value sales mix, lower selling and administrative expenses and cost savings from the closure of the New Windsor, New York facility, partially offset by a decrease in net sales. Non-GAAP Financial Measures We believe it is appropriate to evaluate our performance after making adjustments to the as-reported U.S. GAAP operating income, net income, and earnings per share. Adjusted operating income, net income and earnings per share, which exclude the impact of restructuring and plant closure (gains) costs, severance costs, goodwill impairment charges, and transition and re-alignment costs are Non-GAAP financial measures. Also included below are Non-GAAP financial measures including Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA and Adjusted EBITDA), Free Cash Flow and Net Debt. We believe that these adjusted supplemental measures are useful in assessing the operating performance of our business. These supplemental measures are used by our management, including our chief operating decision maker, to evaluate business results. We exclude these items because they are not representative of the ongoing results of operations of our business. These Non-GAAP measures may be different from Non-GAAP measures used by other companies. In addition, the Non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations, in that they do not reflect all amounts associated with our results as determined in accordance with U.S. GAAP. Therefore, these measures should only be used to evaluate our results in conjunction with corresponding GAAP measures. Below is a reconciliation of these non-GAAP measures to operating income, net income, and earnings per share for the periods indicated along with the calculation of EBITDA and Adjusted EBITDA, Free Cash Flow and Net Debt. Reconciliation of operating income (loss) to adjusted operating income: (In thousands) 2020 2019 Operating Income (Loss) as reported $ 13,076 $ (19,890 ) Restructuring, plant closure (gain) costs and related inventory write-downs (7,038 ) 3,073 Severance costs 346 560 Goodwill impairment - 20,165 Transition and re-alignment costs - 120 Adjusted Operating Income $ 6,384 $ 4,028 - 20 - Reconciliation of net income (loss) to adjusted net income (In thousands, except per share data) 2020 2019 Diluted EPS Diluted EPS Net Income (Loss) as reported $ 9,592 $ 0.36 $ (16,339 ) $ (0.63 ) Restructuring, plant closure (gain) costs and related inventory write-downs (5,774 ) (1) (0.22 ) 2,410 0.09 Severance costs 245 (2) 0.01 426 0.02 Goodwill impairment - - 15,325 0.59 Transition and re-alignment costs - - 91 - Tax impact from the anticipated sale of New Windsor assets - $ - (928 ) (0.04 ) Tax impact due to the change in the estimated annual tax rate used for GAAP reporting purposes (851 ) (0.03 ) - - Net Income adjusted $ 3,212 $ 0.12 $ 985 $ 0.04 The following represents the income tax effects of the adjustments in the tables above, which were calculated using the estimated combined U.S. and Mexico effective income tax rates for the periods indicated: (1) $(1,264) ( 2 ) $101 ( 3 ) $663 ( 4 ) $134 ( 5 ) $4,840 ( 6 ) $29 The reconciliation of reported earnings per share to adjusted earnings per share may not produce identical amounts due to rounding differences and due to the difference between basic and dilutive weighted average shares outstanding in the computation of earnings per share. Reconciliation of operating income (loss) to EBITDA and Adjusted EBITDA (In thousands) 2020 2019 Operating Income (Loss) as reported $ 13,076 $ (19,890 ) Depreciation and Amortization 8,654 10,221 EBITDA $ 21,730 $ (9,669 ) Restructuring, plant closure (gain) costs and related inventory write-downs (7,038 ) 3,073 Severance costs 346 560 Goodwill impairment - 20,165 Transition and re-alignment costs - 120 Adjusted EBITDA $ 15,038 $ 14,249 - 21 - Reconciliation of cash flow from operations to free cash flow (In thousands) 2020 2019 Cash Flow from Operations $ 29,710 $ 11,491 Proceeds from sale of assets 20,150 - Capital expenditures (2,739 ) (2,618 ) Free Cash Flow $ 47,121 $ 8,873 Reconciliation of Net Debt June 30, June 30, (In thousands) 2020 2019 Long-Term Debt as reported $ - $ 39,541 Less: Cash and cash equivalents as reported 3,517 966 Net Debt $ (3,517 ) $ 38,575 - 22 - Results of Operations 20 20 Compared to 201 9 Lighting Segment (In thousands) 2020 2019 Net Sales $ 206,199 $ 235,114 Gross Profit $ 56,855 $ 55,119 Operating Income (Loss) $ 16,123 $ (12,211 ) Lighting Segment net sales of $206.2 million in fiscal 2020 decreased 12% from fiscal 2019 same period net sales of $235.1 million. The 12% drop in sales is attributed to the impact of COVID-19 disruptions on construction markets in the fourth quarter of fiscal 2020, inventory de-stocking by distributors, and continued competitiveness in our project and stock and flow markets. Gross profit of $56.9 million in fiscal 2020 increased $1.7 million or 3% from the same period of fiscal 2019 and increased from 23.4% to 27.1% as a percentage of Lighting Segment net sales. The growth in gross profit and gross profit as a percentage of sales reflects the progress in transitioning toward a higher-value sales mix, cost savings from the closure of the New Windsor facility, the successful introduction of new products and operating cost reductions. Selling and administrative expenses of $40.7 million in fiscal year 2020 decreased $26.6 million or 39% from the same period of fiscal 2019 selling and administrative expenses of $67.3 million, primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor facility in fiscal 2020 and the $20.2 million pre-tax goodwill impairment charge in fiscal 2019. When the $4.8 million gain is removed from fiscal 2020 results and the goodwill impairment charge is removed from fiscal 2019 results, there was a $1.6 million or 3% decrease in selling and administrative expenses. The decrease in selling and administrative expenses is mostly driven by lower commission expense in fiscal 2020 as a result of lower sales and a conscientious effort to reduce spending as a result of the pandemic, partially offset by a one-time adjustment to a Company benefit plan in fiscal 2019 with no comparable event in fiscal 2020. The Lighting Segment fiscal 2020 operating income of $16.1 increased $28.3 million from an operating loss of ($12.2) million in the same period of fiscal 2019 primarily due to the $4.8 million pre-tax gain on the sale of the New Windsor facility in fiscal 2020 and a $20.2 million pre-tax goodwill impairment charge in fiscal 2019. Fiscal 2020 Non-GAAP adjusted operating income of $11.6 million was $0.4 million higher than fiscal 2019 on-GAAP adjusted operating income of $11.2 million (refer to the Non-GAAP table below for a reconciliation of Lighting Segment operating income (loss) to adjusted operating income). The increase in Non-GAAP adjusted operating income is primarily due to a favorable mix of sales on lower sales volume, improved productivity from manufacturing facility consolidation and lower operating expenses. Reconciliation of Lighting Segment operating income (loss) to adjusted operating income: (In thousands) 2020 2019 Operating Income (Loss) $ 16,123 $ (12,211 ) Restructuring and plant closure (gain) costs (4,674 ) 3,024 Severance 167 240 Goodwill impairment - 20,165 Adjusted operating income $ 11,616 $ 11,218 - 23 - Graphics Segment (In thousands) 2020 2019 Net Sales $ 99,359 $ 93,738 Gross Profit $ 16,649 $ 18,602 Operating Income $ 8,218 $ 3,112 Graphics Segment net sales of $99.4 million increased $5.6 million or 6% from fiscal 2019 net sales of $93.7 million. Growth was realized across the petroleum market and digital sales, partially offset by interruptions to product installation schedules in the fourth quarter of fiscal 2020 caused by COVID-19 restrictions limiting construction activity in many states. Gross profit of $16.6 million in fiscal 2020 decreased $2.0 million or 10% from the fiscal 2019. Gross profit as a percentage of segment net sales (customer plus inter-segment net sales) decreased from 19.8% in fiscal 2019 to 16.7% in fiscal 2020. The decrease in the amount of gross profit is due to the net effect of increased net sales (customer plus inter-segment net sales) offset by a change in customer program mix. Graphics gross margin was unfavorably impacted by new and early stage petroleum products and start-up costs associated therewith and the cost associated with the re-alignment of manufacturing resources required to support the transition from print to digital in certain market applications. Selling and administrative expenses of $8.4 million in fiscal 2020 decreased $7.1 million or 46% from the same period of fiscal 2019, primarily as a result of the $3.7 million pre-tax gain on the sale of the North Canton facility in fiscal 2020. When the $3.7 million gain is removed from fiscal 2020 results, there was a $3.3 million or 21% decrease in selling and administrative expenses. The decrease in selling and administrative expenses was due to lower operating costs as a result of an organizational realignment executed earlier in the fiscal year and overall cost management. Graphics Segment fiscal 2020 operating income of $8.2 million increased $5.1 million from operating income of $3.1 million in the same period of fiscal 2019. The increase of $5.1 million was primarily the result of the $3.7 million pre-tax gain on the sale of the North Canton facility and lower operating costs. Corporate and Eliminations (In thousands) 2020 2019 Gross Profit (Loss) $ 26 $ (8 ) Operating (Loss) $ (11,265 ) $ (10,791 ) The gross profit (loss) relates to the intercompany profit in inventory elimination. Administrative expenses of $11.3 million in fiscal 2020 increased $0.5 million or 5% from the same period of the prior year. The increase is primarily the result of filling key vacancies in corporate administration. Consolidated Results We reported $0.9 million net interest expense in fiscal 2020 compared to $2.2 million net interest expense in fiscal 2019. The decrease in interest expense from fiscal 2019 to fiscal 2020 is the result of reduced borrowings against our line of credit. We also recorded other expense of $0.5 million in fiscal 2020 and $0.1 million in fiscal 2019, both of which relate to net foreign currency transaction losses through our Mexican subsidiary. The increase in other expense was due to the devaluation of the Mexican Peso as a result of market conditions surrounding the COVID-19 pandemic. - 24 - The $2.1 million income tax expense in fiscal 2020 represents a consolidated effective tax rate of 18.0%. The effective tax rate is mostly driven by the following: 1) a tax rate benefit resulting from carryback of a net operating loss (NOL) allowed due to the enactment of the Coronavirus Aid, Relief and Economic Security (CARES) Act; 2) the utilization of a capital loss carryforward related to the capital gain on the sale of the North Canton facility, and; 3) a discrete item related to stock-based compensation expense. The $5.9 million income tax benefit in fiscal 2019 represents a consolidated effective tax rate of 26.6%, which is inclusive of a $0.9 million tax benefit from the sale of the New Windsor facility. The tax benefit results from the reduction of a valuation allowance for a capital loss deferred tax asset that can be utilized against the gain on sale. The effective tax rate also varied from the statutory rate due to a 30% tax rate on our Mexican subsidiary’s profits and certain permanent book-tax differences and adjustments related to uncertain income tax positions. We reported net income of $9.6 million in fiscal 2020 compared to net loss of ($16.3) million in fiscal 2019. The change from net loss from fiscal 2019 to net income in fiscal 2020 is mostly driven by the $3.7 million pre-tax gain on the sale of the North Canton facility and the $4.8 million pre-tax gain on the sale of the New Windsor facility in fiscal 2020 and the $20.2 million pre-tax goodwill impairment charge in fiscal 2019. Also contributing to the period-over-period results is a one-time adjustment to the Company’s benefit policy in the first quarter of fiscal 2019 which resulted in a favorable pre-tax adjustment to earnings of $1.2 million. When the impact of all Non-GAAP items is removed from both fiscal years, the fiscal 2020 Non-GAAP adjusted net income of $3.2 million increased $2.2 million from fiscal 2019 adjusted net income of $1.0 million (Refer to the Non-GAAP tables above). The increase in Non-GAAP adjusted net income is primarily the net result of an improved gross profit margin and a decrease in interest expense, partially offset by decreased net sales and higher foreign currency transaction losses. Diluted earnings per share of $0.36 was reported in fiscal 2020 compared to diluted loss per share of ($0.63) in fiscal 2019. The weighted average common shares outstanding for purposes of computing diluted earnings per share in fiscal 2020 were 26,473,000 shares as compared to 26,109,000 shares in the same period last year. - 25 - Liquidity and Capital Resources We consider our level of cash on hand, borrowing capacity, current ratio and working capital levels to be our most important measures of short-term liquidity. For long-term liquidity indicators, we believe our ratio of long-term debt to equity and our historical levels of net cash flows from operating activities to be the most important measures. At June 30, 2020 we had working capital of $51.2 million, compared to $71.1 million at June 30, 2019. The ratio of current assets to current liabilities was 2.48 to 1 as compared to a ratio of 2.78 to 1 at June 30, 2019. The balance sheet at June 30, 2019 included as asset held for sale of $7.5 million which was sold in the first quarter of fiscal 2020. When June 30, 2019 current assets are revised to exclude the asset held for sale, adjusted working capital, a non-GAAP financial measure, and the ratio of current assets to current liability are $63.6 million and 2.59 to 1, respectively, as of June 30, 2019. The $12.4 million decrease in working capital from June 30, 2019 to June 30, 2020 (as adjusted and excludes held for sale assets) is primarily driven by a $16.9 million decrease in accounts receivable, a $4.8 million decrease in inventory, a $4.4 million decrease in accounts payable, partially offset by a $2.6 million increase in cash and a $1.9 million increase in refundable taxes. We generated $29.7 million of cash from operating activities in fiscal 2020 compared to $11.5 million in fiscal 2019. The $18.2 million increase in net cash flows from operating activity is the result of our improved earnings as well as our ongoing strategy to aggressively manage our working capital which includes the reduction in accounts receivable days sales outstanding (DSO), increasing inventory turns while simultaneously reducing inventory levels, and effectively managing our supply chain which includes partnering with our suppliers to find the appropriate service level while effectively managing payment terms. Net accounts receivable were $37.8 million and $54.7 million at June 30, 2020 and June 30, 2019, respectively. DSO decreased from 63 days at June 30, 2019 to 56 days at June 30, 2020. We believe that our receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate. Net inventories of $38.8 million at June 30, 2020 decreased $4.8 million from $43.5 million at June 30, 2019. The decrease of $4.8 million is the result of a decrease in gross inventory of $5.5 million and a decrease in obsolescence reserves of $0.7 million. Based on a strategy of balancing inventory reductions with customer service and the timing of shipments, net inventory decreased $3.4 million in the Graphics Segment and decreased $1.4 million in the Lighting Segment in fiscal 2020. Cash generated from operations and borrowing capacity under our line of credit is our primary source of liquidity. We have a secured $75 million revolving line of credit with our bank, with $75 million of the credit line available as of August 26, 2020. We amended our revolving line of credit in the third quarter of fiscal 2019 and reduced our available line of credit from $100 million to $75 million in order to better match our financing needs with an appropriate borrowing capacity. This line of credit is a $75 million five-year credit line expiring in the third quarter of fiscal 2022. We are in compliance with all of our loan covenants. We believe that our $75 million line of credit plus cash flows from operating activities are adequate for calendar year 2020 operational and capital expenditure needs. However, as the impact of COVID-19 on the economy evolves, we will continue to assess our liquidity needs. We had a source of cash of $17.4 million in investing activities in fiscal 2020 as compared to a use of cash of $2.6 million in fiscal 2019, resulting in a favorable change of $20.0 million. Capital expenditures increased from $2.6 million in fiscal 2019 to $2.7 million in fiscal 2020. We sold our New Windsor manufacturing facility for $12.3 million and our North Canton facility for $7.7 million in fiscal 2020, which were the primary contributing factors to the increase in cash flow from investing activities from fiscal 2019 to fiscal 2020. We used $44.4 million of cash related to financing activities in fiscal 2020 compared to $11.1 million in fiscal 2019. The $33.3 million change in cash flow was primarily the net result of payments of long-term debt in excess of borrowings which was primarily driven by the cash flow from operations and the sale of the New Windsor and North Canton facilities. We have on our balance sheet financial instruments consisting primarily of cash and cash equivalents, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates. Off-Balance Sheet Arrangements We have no financial instruments with off-balance sheet risk. - 26 - Cash Dividends In August 2020, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable September 8, 2020 to shareholders of record as of August 31, 2020. The indicated annual cash dividend rate for fiscal 2020 was $0.20 per share. The Board of Directors has adopted a policy regarding dividends which indicates that dividends will be determined by the Board of Directors at its discretion based upon its evaluation of earnings, cash flow requirements, financial conditions, debt levels, stock repurchases, future business developments and opportunities, and other factors deemed relevant. Critical Accounting Policies and Estimates A summary of our significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2020 Annual Report on Form 10-K. We are required to make estimates and judgments in the preparation of our financial statements that affect the reported amounts of assets, liabilities, revenues and expenses, and related footnote disclosures. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We continually review these estimates and their underlying assumptions to ensure they remain appropriate. We believe the items discussed below are among its most significant accounting policies because they utilize estimates about the effect of matters that are inherently uncertain and therefore are based on management’s judgment. Significant changes in the estimates or assumptions related to any of the following critical accounting policies could possibly have a material impact on the financial statements. - 27 - M ANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Management of LSI Industries Inc. and subsidiaries (the “Company” or “LSI”) is responsible for the preparation and accuracy of the financial statements and other information included in this report. LSI’s Management is also responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f). Under the supervision and with the participation of Management, including LSI’s principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting as of June 30, 2020, based on the criteria set forth in “the 2013 Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the reality that judgments in decision making can be faulty, the possibility of human error, and the circumvention or overriding of the controls and procedures. In meeting its responsibility for the reliability of the financial statements, the Company depends upon its system of internal accounting controls. The system is designed to provide reasonable assurance that assets are safeguarded and that transactions are properly authorized and recorded. The system is supported by policies and guidelines, and by careful selection and training of financial management personnel. The Company also has a Disclosure Controls Committee, whose responsibility is to help ensure appropriate disclosures and presentation of the financial statements and notes thereto. Additionally, the Company has an Internal Audit Department to assist in monitoring compliance with financial policies and procedures. The Board of Directors meets its responsibility for overview of the Company’s financial statements through its Audit Committee which is composed entirely of independent Directors who are not employees of the Company. The Audit Committee meets periodically with Management and Internal Audit to review and assess the activities of each in meeting their respective responsibilities. Grant Thornton LLP has full access to the Audit Committee to discuss the results of their audit work, the adequacy of internal accounting controls, and the quality of financial reporting. Based upon LSI’s evaluation, the Company’s principal executive officer and principal financial officer concluded that internal control over financial reporting was effective as of June 30, 2020. We reviewed the results of Management’s assessment with the Audit Committee of our Board of Directors. Additionally, our independent registered public accounting firm audited and independently assessed the effectiveness of the Company’s internal control over financial reporting. Grant Thornton LLP, an independent registered public accounting firm, has issued an opinion on the effectiveness of the Company’s internal control over financial reporting, which is presented in the financial statements. James A. Clark President and Chief Executive Officer (Principal Executive Officer) James E. Galeese Executive Vice President and Chief Financial Officer (Principal Financial Officer) - 28 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders LSI Industries Inc. Opinion on internal control over financial reporting We have audited the internal control over financial reporting of LSI Industries Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of June 30, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended June 30, 2020, and our report dated September 11, 2020 expressed an unqualified opinion on those financial statements. Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP Cincinnati, Ohio September 11, 2020 - 29 - REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM Board of Directors and Shareholders LSI Industries Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of LSI Industries Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of June 30, 2020 and 2019, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended June 30, 2020, and the related notes and financial statement schedules included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated September 11, 2020 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Change in Accounting Principle As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases in the year ended June 30, 2020 due to the adoption of Account Standards Update 2016-02, Leases (Topic 842) . /s/ GRANT THORNTON LLP We have served as the Company’s auditor since fiscal 2010. Cincinnati, Ohio September 11, 2020 - 30 - LSI INDUSTRIES INC. CONSOLIDATED S TATEMENTS OF OPERATION S For the years ended June 30, 20 20 and 20 1 9 (In thousands, except per share data ) 2020 2019 Net Sales $ 305,558 $ 328,852 Cost of products and services sold 230,944 253,621 Restructuring costs 980 1,441 Severance costs 104 77 Gross profit 73,530 73,713 Selling and administrative expenses 68,783 72,470 Restructuring (gains) costs (8,571 ) 365 Severance costs 242 483 Impairment of goodwill - 20,165 Transition and realignment costs - 120 Operating income (loss) 13,076 (19,890 ) Interest (income) (3 ) (38 ) Interest expense 873 2,278 Other expense 513 138 Income (loss) before income taxes 11,693 (22,268 ) Income tax expense (benefit) 2,101 (5,929 ) Net income (loss) $ 9,592 $ (16,339 ) Earnings (loss) per common share (see Note 3) Basic $ 0.37 $ (0.63 ) Diluted $ 0.36 $ (0.63 ) Weighted average common shares outstanding Basic 26,274 26,109 Diluted 26,473 26,109 The accompanying notes are an integral part of these financial statements. - 31 - LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the years ended June 30, 20 20 and 201 9 (In thousands) 2020 2019 Net Income (Loss) $ 9,592 $ (16,339 ) Foreign currency translation adjustment (109 ) 16 Comprehensive Income (Loss) $ 9,483 $ (16,323 ) The accompanying notes are an integral part of these financial statements. - 32 - LSI INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS June 30, 20 20 and 20 19 (In thousands, except shares) June 30, June 30, 2020 2019 ASSETS Current assets $ 3,517 $ 966 Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $273 and $879, respectively 37,836 54,728 Inventories 38,752 43,512 Refundable income tax 2,776 882 Asset held for sale - 7,512 Other current assets 2,977 3,380 Total current assets 85,858 110,980 Property, Plant and Equipment, at cost Land 3,933 4,576 Buildings 20,638 27,015 Machinery and equipment 67,796 73,185 Buildings under finance leases 2,033 - Construction in progress 440 455 94,840 105,231 Less accumulated depreciation (68,305 ) (73,255 ) Net property, plant and equipment 26,535 31,976 Goodwill 10,373 10,373 Other Intangible Assets, net 29,960 32,647 Operating Lease Right-of-Use Assets 8,663 - Other Long-Term Assets, net 10,874 15,124 Total assets $ 172,263 $ 201,100 The accompanying notes are an integral part of these financial statements. - 33 - June 30, June 30, 2020 2019 LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 14,216 $ 18,664 Accrued expenses 20,433 21,211 Total current liabilities 34,649 39,875 Long-Term Debt - 39,541 Finance Lease Liabilities 1,755 - Operating Lease Liabilities 9,021 - Other Long-Term Liabilities 1,138 1,747 Commitments and Contingencies (Note 13) - - Shareholders' Equity Preferred shares, without par value; Authorized 1,000,000 shares, none issued - - Common shares, without par value; Authorized 40,000,000 shares; Outstanding 26,286,009 and 25,967,275 shares, respectively 127,713 125,729 Treasury shares, without par value (1,121 ) (1,468 ) Deferred compensation plan 1,121 1,468 Retained (loss) (1,920 ) (5,808 ) Accumulated other comprehensive (loss) income (93 ) 16 Total shareholders' equity 125,700 119,937 Total liabilities & shareholders' equity $ 172,263 $ 201,100 The accompanying notes are an integral part of these financial statements. - 34 - LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY For the years ended June 30, 20 20 and 20 19 (In thousands, except shares) Common Shares Treasury Shares Key Executive Accumulated Other Retained Total Number Of Number Of Compensation Comprehensive Earnings Shareholders' Shares Amount Shares Amount Amount Income (Loss) (Loss) Equity Balance at June 30, 2018 25,884 $ 124,104 (242 ) $ (2,110 ) $ 2,133 - $ 15,124 $ 139,251 Net Loss - - - - - - (16,339 ) (16,339 ) Other comprehensive income - - - - - 16 - 16 Stock compensation awards 104 354 - - - - - 354 Restricted stock units issued 114 - - - - - - - Shares issued for deferred compensation 74 290 - - - - - 290 Activity of treasury shares, net - - 33 642 - - - 642 Deferred stock compensation - - - - (665 ) - - (665 ) Stock-based compensation expense - 981 - - - - - 981 Dividends — $0.20 per share - - - - - - (5,184 ) (5,184 ) Cumulative effect of adoption of accounting guidance - - - - - - 591 591 Balance at June 30, 2019 26,176 $ 125,729 (209 ) $ (1,468 ) $ 1,468 $ 16 $ (5,808 ) $ 119,937 Net Income - - - - - - 9,592 9,592 Other comprehensive loss - - - - - (109 ) - (109 ) Stock compensation awards 72 300 - - - - - 300 Restricted stock units issued 21 - - - - - - - Shares issued for deferred compensation 85 473 - - - - - 473 Activity of treasury shares, net - - 29 347 - - - 347 Deferred stock compensation - - - - (347 ) - - (347 ) Stock-based compensation expense - 599 - - - - - 599 Stock options exercised, net 112 612 - - - - - 612 Dividends — $0.20 per share - - - - - - (5,276 ) (5,276 ) Cumulative effect of adoption of accounting guidance - - - - - - (428 ) (428 ) Balance at June 30, 2020 26,466 $ 127,713 (180 ) $ (1,121 ) $ 1,121 $ (93 ) $ (1,920 ) $ 125,700 The accompanying notes are an integral part of these financial statements. - 35 - LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30, 20 20 and 20 1 9 (In thousands) 2020 2019 Cash Flows from Operating Activities Net income (loss) $ 9,592 $ (16,339 ) Non-cash items included in net income (loss) Depreciation and amortization 8,654 10,221 Deferred income taxes 3,925 (6,370 ) Impairment of goodwill - 20,165 Deferred compensation plan 473 266 Stock compensation expense 599 981 Issuance of common shares as compensation 300 355 Gain on disposition of fixed assets (8,521 ) (32 ) Allowance for doubtful accounts 19 776 Inventory obsolescence reserve 2,454 3,607 Changes in certain assets and liabilities Accounts receivable 16,340 74 Inventories 2,246 (326 ) Refundable income taxes (1,893 ) 902 Accounts payable (3,883 ) 684 Accrued expenses and other (546 ) (4,171 ) Customer prepayments (47 ) 698 Net cash flows provided by operating activities 29,712 11,491 Cash Flows from Investing Activities Proceeds from the sale of fixed assets 20,150 32 Purchases of property, plant and equipment (2,739 ) (2,618 ) Net cash flows provided by (used in) investing activities 17,411 (2,586 ) Cash Flows from Financing Activities Payments of long-term debt (204,676 ) (126,431 ) Borrowings of long-term debt 165,135 120,612 Cash dividends paid (5,276 ) (5,184 ) Shares withheld for employees' taxes (152 ) (114 ) Payments on financing lease obligations (39 ) - Proceeds from stock option exercises 612 - Net cash flows used in financing activities (44,396 ) (11,117 ) Change related to foreign currency (176 ) - Increase (decrease) in cash and cash equivalents 2,551 (2,212 ) Cash and cash equivalents at beginning of period 966 3,178 Cash and cash equivalents at end of period $ 3,517 $ 966 The accompanying notes are an integral part of these financial statements. - 36 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation: The consolidated financial statements include the accounts of LSI Industries Inc. (an Ohio corporation) and its subsidiaries (collectively, the “Company”), all of which are wholly owned. All intercompany transactions and balances have been eliminated in consolidation. Impact of COVID-19: The COVID-19 pandemic has impacted and could further impact the Company’s business and operations and the operations of its suppliers, vendors and customers. The pandemic continues to significantly impact global economic conditions and in the U.S. as federal, state and local governments react to the public health crisis with mitigation measures, creating significant uncertainties in the U.S. and global economies. The extent to which the pandemic will continue to affect the Company’s business, operations and financial results will depend on numerous factors that it may not be able to accurately predict and which may cause the actual results to differ from the estimates and assumptions the Company is required to make in preparation of financial statements according to U.S. GAAP. See Risk Factors in Part I, Item 1A of this Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on the Company’s business . Revenue Recognition: The Company recognizes revenue when it satisfies the performance obligations in its customer contracts or purchase orders. Most of the Company’s products have a single performance obligation which is satisfied at a point in time when control is transferred to the customer. Control is generally transferred at time of shipment when title and risk of ownership passes to the customer. For customer contracts with multiple performance obligations, the Company allocates the transaction price and any discounts to each performance obligation based on relative standalone selling prices. Payment terms are typically within 30 to 90 days from the shipping date, depending on our terms with the customer. The Company offers standard warranties that do not represent separate performance obligations. Installation is a separate performance obligation, except for our digital signage products. For digital signage products, installation is not a separate performance obligation as the product and installation is the combined item promised in digital signage contracts. The Company is not always responsible for installation of products it sells and has no post-installation responsibilities other than standard warranties. A number of the Company's graphics and select lighting products are highly customized for specific customers. As a result, these customized products do not have an alternative use. For these products, the Company generally has a legal right to payment for performance to date and generally does not accept returns on these items. The measurement of performance is based upon cost plus a reasonable profit margin for work completed. Because there is no alternative use and there is a legal right to payment, the Company transfers control of the item as the item is being produced and therefore, recognizes revenue over time. The customized product types are as follows: ● Customer specific branded print graphics ● Electrical components based on customer specifications ● Digital signage and related media content The Company also offers installation services for its graphics and select lighting products. Installation revenue is recognized over time as our customer simultaneously receives and consumes the benefits provided through the installation process. For these customized products and installation services, revenue is recognized using a cost-based input method: recognizing revenue and gross profit as work is performed based on the relationship between the actual cost incurred and the total estimated cost for the contract. Disaggregation of Revenue The Company disaggregates the revenue from contracts with customers by the timing of revenue recognition because the Company believes it best depicts the nature, amount, and timing of our revenue and cash flows. The table presents a reconciliation of the disaggregation by reportable segments. - 37 - Twelve Months Ended (In thousands) June 30, 2020 Lighting Segment Graphics Segment Timing of revenue recognition Products and services transferred at a point in time $ 181,613 $ 66,605 Products and services transferred over time 24,586 32,754 $ 206,199 $ 99,359 Type of Product and Services LED lighting, digital signage solutions, electronic circuit boards $ 177,000 $ 15,075 Legacy products 26,964 62,409 Turnkey services and other 2,235 21,875 $ 206,199 $ 99,359 Legacy products include lighting fixtures utilizing light sources other than LED technology, poles used to mount the fixtures and printed two and three dimensional graphic products. Turnkey services and other includes installation services along with shipping and handling charges. Practical Expedients and Exemptions ● The Company’s contracts with customers have an expected duration of one year or less, as such the Company applies the practical expedient to expense sales commissions as incurred, and have omitted disclosures on the amount of remaining performance obligations. ● Shipping costs that are not material in context of the delivery of products are expensed as incurred. ● The Company’s accounts receivable balance represents the Company’s unconditional right to receive payment from its customers with contracts. Payments are generally due within 30 to 90 days of completion of the performance obligation and invoicing, therefore, payments do not contain significant financing components. ● The Company collects sales tax and other taxes concurrent with revenue-producing activities which are excluded from revenue. Shipping and handling costs are treated as fulfillment activities and included in cost of products and services sold on the Consolidated Statements of Operations. Credit and Collections: The Company maintains allowances for doubtful accounts receivable for probable estimated losses resulting from either customer disputes or the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income. The Company determines its allowance for doubtful accounts by first considering all known collectability problems of customers’ accounts, and then applying certain percentages against the various aging categories based on the due date of the remaining receivables. The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, the current economic climate and historical trends. Receivables deemed uncollectable are written-off against the allowance for doubtful accounts receivable after all reasonable collection efforts have been exhausted. The Company also establishes allowances, at the time revenue is recognized, for returns, discounts, pricing and other possible customer deductions. These allowances are based upon historical trends. - 38 - The following table presents the Company’s net accounts receivable at the dates indicated. (In thousands) June 30, 2020 June 30, 2019 Accounts receivable $ 38,109 $ 55,607 Less: Allowance for doubtful accounts (273 ) (879 ) Accounts receivable, net $ 37,836 $ 54,728 Cash and Cash Equivalents: The cash balance includes cash and cash equivalents which have original maturities of less than three months. Cash and cash equivalents consist primarily of bank deposits and a bank money market account that is stated at cost, which approximates fair value. The Company maintains balances at financial institutions in the United States and Mexico. In the United States, the FDIC limit for insurance coverage on non-interest bearing accounts is $250,000. As of June 30, 2020 and June 30, 2019, the Company had bank balances of $3.7 million and $1.5 million, respectively, without insurance coverage. Inventories and Inventory Reserves: Inventories are stated at the lower of cost or net realizable value. Cost of inventories includes the cost of purchased raw materials and purchased components, direct labor, as well as manufacturing overhead which is generally applied to inventory based on direct labor and on material content, is determined on the first-in, first-out basis. The Company maintains an inventory reserve for obsolete and excess inventory. The Company first determines its obsolete inventory reserve by considering specific known obsolete items, and then by applying certain percentages to specific inventory categories based upon inventory turns. The Company uses various tools, in addition to inventory turns, to identify which inventory items have the potential to become obsolete. Judgment is used to establish excess and obsolete inventory reserves and management adjusts these reserves as more information becomes available about the ultimate disposition of the inventory item. Property, Plant and Equipment and Related Depreciation: Property, plant and equipment are stated at cost. Major additions and betterments are capitalized while maintenance and repairs are expensed. For financial reporting purposes, depreciation is computed on the straight-line method over the estimated useful lives of the assets as follows: Buildings (in years) 28 - 40 Machinery and equipment (in years) 3 - 10 Computer software (in years) 3 - 8 Costs related to the purchase, internal development, and implementation of the Company’s fully integrated enterprise resource planning/business operating software system are either capitalized or expensed. Leasehold improvements are depreciated over the shorter of fifteen years or the remaining term of the lease. The Company recorded $6.0 million and $7.5 million of depreciation expense in the years ended June 30, 2020 and, 2019 respectively. Goodwill and Intangible Assets: Intangible assets consisting of customer relationships, trade names and trademarks, patents, technology and software are recorded on the Company's balance sheet. The definite-lived intangible assets are being amortized to expense over periods ranging between eight and twenty years. The Company evaluates definite-lived intangible assets for possible impairment when triggering events are identified. Neither indefinite-lived intangible assets nor the excess of cost over fair value of assets acquired ("goodwill") are amortized, however, they are subject to review for impairment. See additional information about goodwill and intangibles in Note 6. Fair Value: The Company has financial instruments consisting primarily of cash and cash equivalents, revolving lines of credit, accounts receivable, accounts payable, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and/or variable, market-driven interest rates. The Company has no financial instruments with off-balance sheet risk. - 39 - Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in goodwill and other intangible asset impairment analyses and long-lived asset impairment analyses. The accounting guidance on fair value measurement was used to measure the fair value of these nonfinancial assets and nonfinancial liabilities. Product Warranties: The Company offers a limited warranty that its products are free from defects in workmanship and materials. The specific terms and conditions vary somewhat by product line, but generally cover defective products returned within one to five years, with some exceptions where the terms extend to 10 years, from the date of shipment. The Company records warranty liabilities to cover the estimated future costs for repair or replacement of defective returned products as well as products that need to be repaired or replaced in the field after installation. The Company calculates its liability for warranty claims by applying estimates based upon historical claims as a percentage of sales to cover unknown claims, as well as estimating the total amount to be incurred for known warranty issues. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amount as necessary. Changes in the Company’s warranty liabilities, which are included in accrued expenses in the accompanying consolidated balance sheets, during the periods indicated below were as follows: (In thousands) June 30, 2020 June 30, 2019 Balance at beginning of the period $ 7,687 $ 6,876 Additions charged to expense 2,482 5,190 Deductions for repairs and replacements (3,213 ) (4,379 ) Balance at end of the period $ 6,956 $ 7,687 Employee Benefit Plans: The Company has a 401(k) retirement plan whereby employee’s contributions to the 401(k) are matched by the Company. The 401(k) match program covers substantially all of its employees. The Company also has a nonqualified deferred compensation plan covering certain employees. The costs of employee benefit plans are charged to expense and funded annually. Total costs were $1.3 million and $1.3 million in June 30, 2020 and 2019, respectively. Research and Development Costs: Research and development costs are directly attributable to new product development, including the development of new technology for both existing and new products, and consist of salaries, payroll taxes, employee benefits, materials, outside legal costs and filing fees related to obtaining patents, supplies, depreciation and other administrative costs. The Company expenses as research and development all costs associated with development of software used in solid-state LED products. All costs are expensed as incurred and are included in selling and administrative expenses. Research and development costs related to both product and software development totaled $3.6 million and $5.3 million for the fiscal years ended June 30, 2020 and 2019, respectively. Cost of Products and Services Sold: Cost of products sold is primarily comprised of direct materials and supplies consumed in the manufacture of products, as well as manufacturing labor, depreciation expense and direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product. Cost of products sold also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs and other shipping and handling activity. Cost of services sold is primarily comprised of the internal and external labor costs required to support the Company’s installation and service revenue along with the management of media content. Earnings (Loss) Per Common Share: The computation of basic earnings (loss) per common share is based on the weighted average common shares outstanding for the period net of treasury shares held in the Company’s nonqualified deferred compensation plan. The computation of diluted earnings (loss) per share is based on the weighted average common shares outstanding for the period and includes common share equivalents. Common share equivalents include the dilutive effect of stock options, restricted stock units, stock warrants, contingently issuable shares and common shares to be issued under a deferred compensation plan, all of which totaled 368,000 shares and 324,000 shares in fiscal 2020 and 2019, respectively. See further discussion in Note 3. - 40 - Income Taxes: The Company accounts for income taxes in accordance with the accounting guidance for income taxes. Accordingly, deferred income taxes are provided on items that are reported as either income or expense in different time periods for financial reporting purposes than they are for income tax purposes. Deferred income tax assets are reported on the Company’s balance sheet. Significant management judgment is required in developing the Company’s income tax provision, including the estimation of taxable income and the effective income tax rates in the multiple taxing jurisdictions in which the Company operates, the estimation of the liability for uncertain income tax positions, the determination of deferred tax assets and liabilities, and any valuation allowances that might be required against deferred tax assets. Foreign Exchange : The functional currency of the Company’s Mexican subsidiary is the Mexican Peso. Assets and liabilities of foreign operations are translated using period end exchange rates. Revenue and expenses are translated using average exchange rates during each period reported. Translation losses (gains) are reported in accumulated other comprehensive loss (gain) as a component of shareholders equity and were $109,000 and ($16,000) as of June 30, 2020 and 2019, respectively. The Company recognizes foreign currency transaction (gains) and losses on certain assets and liabilities that are denominated in the Mexican Peso. These transaction (gains) and losses are reported in other expense in the consolidated statements of operations and were $0.5 million and $0.1 million for the twelve months ended June 30, 2020 and 2019, respectively. New Accounting Pronouncements: In June 2016, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update (“ASU”) 2016-13 (“ASU 2016-13), "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (ASC 326 or "CECL"), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for public companies for annual periods beginning after December 13, 2019, including interim periods within those fiscal years. The Company will adopt this guidance effective in the first quarter of fiscal 2021. The Company does not expect the adoption of ASU 2016-13 to have a material impact on the its consolidated financial statements and disclosures. On July 1, 2018, the Company adopted ASU 2014-09. “Revenue from Contracts with Customers,” (Topic 606) using the modified retrospective adoption method which requires a cumulative effect adjustment to the opening balance of retained earnings. This approach was applied to contracts that were not completed as of June 30, 2018. Results for reporting periods beginning July 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and were reported under the accounting standards in effect for the prior period. The Company recorded a net increase to beginning retained earnings of $591,000 on July 1, 2018 due to the cumulative impact of adopting Topic 606, as described below. Opening (In thousands) Balance as of Balance as of June 30, 2018 Adjustments July 1, 2018 Assets: Accounts receivable, net $ 50,609 $ 4,935 $ 55,544 Inventories, net $ 50,994 $ (4,167 ) $ 46,827 Other long-term assets, net $ 9,786 $ (177 ) $ 9,609 Shareholder's Equity: Retained earnings $ 15,124 $ 591 $ 15,715 On July 1, 2019, the Company adopted ASU 2016-02, “Leases,” using a modified-retrospective transition method, under which it elected not to adjust comparative periods. The Company elected the package of practical expedients permitted under the new guidance. In addition, the Company elected accounting policies to not record short-term leases on the balance sheet and to not separate lease and non-lease components. - 41 - The Company’s most significant leases are those related to certain manufacturing facilities along with a small office space. Besides these real estate leases, most other leases are insignificant and consist of leases related to a vehicle, forklifts and various office equipment. The adoption of the new lease standard resulted in the recognition of right-of-use assets (ROU assets) of $10.4 million, lease liabilities of $10.8 million which includes the impact of existing deferred rents and tenant improvement allowances and a $0.4 million adjustment to retained earnings on the consolidated balance sheets as of July 1, 2019 for the Company’s real estate leases. The adoption of the standard resulted in no material impact to the consolidated statements of operations or consolidated statements of cash flow. Refer to Note 10. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications: Certain amounts reported in the prior year in Note 10 have been reclassified to conform to the current year’s presentation. Subsequent Events: The Company has evaluated subsequent events for potential recognition and disclosure through the date the consolidated financial statements were filed. No items were identified during this evaluation that required adjustment to or disclosure in the accompanying consolidated financial statements. NOTE 2 — BUSINESS SEGMENT INFORMATION The accounting guidance on Segment Reporting establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information of those segments to be presented in financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer or “CODM”) in making decisions on how to allocate resources and assess performance. The Company’s two operating segments are Lighting and Graphics, with one executive team under the organizational structure reporting directly to the CODM with responsibilities for managing each segment. Corporate and Eliminations, which captures the Company’s corporate administrative activities, is also reported in the segment information. The Lighting Segment includes outdoor and indoor lighting utilizing LED light sources that have been fabricated and assembled for the Company’s markets, primarily petroleum / convenience stores, parking lot and garage markets, automotive dealerships, quick-service restaurants, grocery and pharmacy stores, and retail/national accounts. The Company also services lighting product customers through the commercial industrial, stock and flow, and renovation channels. The Lighting Segment also includes the design, engineering and manufacturing of electronic circuit boards, assemblies and sub-assemblies which are sold directly to customers. The Graphics Segment designs, manufactures and installs exterior and interior visual image elements such as traditional graphics, interior branding, electrical and architectural signage, active digital signage along with the management of media content related to digital signage and menu board systems that are either digital or traditional by design. These products are used in visual image programs in several markets including the petroleum/convenience store market, quick-service restaurant market, the grocery store and pharmacy markets, as well as customers with multi-site retail operations. The Graphics Segment implements, installs and provides program management services related to products sold by the Graphics Segment and by the Lighting Segment. The Company’s corporate administration activities are reported in the Corporate and Eliminations line item. These activities primarily include intercompany profit in inventory eliminations, expense related to certain corporate officers and support staff, the Company’s internal audit staff, expense related to the Company’s Board of Directors, equity compensation expense for various equity awards granted to corporate administration employees, certain consulting expenses, investor relations activities, and a portion of the Company’s legal, auditing and professional fee expenses. Corporate identifiable assets primarily consist of cash, invested cash (if any), refundable income taxes (if any), and deferred income taxes. - 42 - There were no customers or customer programs representing a concentration of 10% or more of the Company’s net sales in the fiscal years ended June 30, 2020 and 2019. There was no concentration of accounts receivable at June 30, 2020 or 2019. Summarized financial information for the Company’s reportable business segments is provided for the indicated periods and as of June 30, 2020 and June 30, 2019: (In thousands) 2020 2019 Net Sales: Lighting Segment $ 206,199 $ 235,114 Graphics Segment 99,359 93,738 $ 305,558 $ 328,852 Operating Income (Loss): Lighting Segment $ 16,123 $ (12,211 ) Graphics Segment 8,218 3,112 Corporate and Eliminations (11,265 ) (10,791 ) $ 13,076 $ (19,890 ) Capital Expenditures: Lighting Segment $ 1,386 $ 2,239 Graphics Segment 1,093 342 Corporate and Eliminations 260 37 $ 2,739 $ 2,618 Depreciation and Amortization: Lighting Segment $ 6,714 $ 7,648 Graphics Segment 1,436 1,594 Corporate and Eliminations 504 979 $ 8,654 $ 10,221 June 30, 2020 June 30, 2019 Identifiable Assets: Lighting Segment $ 118,819 $ 142,105 Graphics Segment 35,021 40,914 Corporate and Eliminations 18,423 18,081 $ 172,263 $ 201,100 The segment net sales reported above represent sales to external customers. Segment operating income (loss), which is used in management’s evaluation of segment performance, represents net sales less all operating expenses. Identifiable assets are those assets used by each segment in its operations. The Company records a 10% mark-up on intersegment revenues. Any intersegment profit in inventory is eliminated in consolidation. Intersegment revenues were eliminated in consolidation as follows: (In thousands) 2020 2019 Lighting Segment inter-segment net sales $ 3,718 $ 2,043 Graphics Segment inter-segment net sales $ 552 $ 928 - 43 - NOTE 3 — EARNINGS (LOSS) PER COMMON SHARE The following table presents the amounts used to compute basic and diluted earnings (loss) per common share, as well as the effect of dilutive potential common shares on weighted average shares outstanding: (In thousands, except per share data) 2020 2019 BASIC EARNINGS (LOSS) PER SHARE Net income (loss) $ 9,592 $ (16,339 ) Weighted average shares outstanding during the period, net of treasury shares 26,105 25,858 Weighted average vested restricted stock units outstanding 7 36 Weighted average shares outstanding in the Deferred Compensation Plan during the period 162 215 Weighted average shares outstanding 26,274 26,109 Basic income (loss) per share $ 0.37 $ (0.63 ) DILUTED EARNINGS (LOSS) PER SHARE Net income (loss) $ 9,592 $ (16,339 ) Weighted average shares outstanding Basic 26,274 26,109 Effect of dilutive securities (a): Impact of common shares to be issued under stock option plans, and contingently issuable shares, if any 199 - Weighted average shares outstanding 26,473 26,109 Diluted income (loss) per share $ 0.36 $ (0.63 ) Anti-dilutive securities (b) 1,957 3,556 (a) Calculative using the “Treasury Stock” method as if dilutive securities were exercised and the funds were used to purchase common shares at the average market price during the period. (b) Anti-dilutive securities were excluded in the computation of diluted earnings per share for the year ended June 30, 2020 because the exercise price was greater than the fair market price of the common shares or because the assumed proceeds from the award’s exercise or vesting was greater than the average fair market price of the common shares. For the year ended June 30, 2019, the effect of dilutive securities was not included in the calculation of diluted loss per share because there was a net loss for the period. - 44 - NOTE 4 — INVENTORIES The following information is provided as of the dates indicated: (In thousands) June 30, 2020 June 30, 2019 Inventories: Raw materials $ 27,331 $ 27,927 Work-in-progress 1,566 2,193 Finished goods 9,855 13,392 Total Inventories $ 38,752 $ 43,512 NOTE 5 — A CCRUED EXPENSES The following information is provided as of the dates indicated: (In thousands) June 30, 2020 June 30, 2019 Accrued Expenses: Compensation and benefits $ 6,001 $ 5,319 Customer prepayments 1,698 1,768 Accrued sales commissions 1,289 1,301 Accrued warranty 6,956 7,687 Operating lease liabilities 376 - Finance lease liabilities 239 - Other accrued expenses 3,874 5,136 Total Accrued Expenses $ 20,433 $ 21,211 NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS The carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment. The Company may first assess qualitative factors in order to determine if goodwill and indefinite-lived intangible assets are impaired. If through the qualitative assessment it is determined that it is more likely than not that goodwill and indefinite-lived assets are not impaired, no further testing is required. If it is determined more likely than not that goodwill and indefinite-lived assets are impaired, or if the Company elects not to first assess qualitative factors, the Company’s impairment testing continues with the estimation of the fair value of the reporting unit using a combination of a market approach and an income (discounted cash flow) approach, at the reporting unit level. The estimation of the fair value of reporting unit requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of the fair value of reporting units are based on the best information available as of the date of the assessment. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired. The Company identified its reporting units in conjunction with its annual goodwill impairment testing. The Company currently has two reporting units that contain goodwill. There is one reporting unit within the Lighting Segment and one reporting unit within the Graphics Segment. The Company relies upon a number of factors, judgments and estimates when conducting its impairment testing including, but not limited to, the Company’s stock price, operating results, forecasts, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and judgments in applying them to the analysis of goodwill impairment. Fiscal 20 20 : As of March 1, 2020, the Company performed its annual goodwill impairment test on the two reporting units that contain goodwill. The goodwill impairment test of the reporting unit in the Lighting Segment passed with a business enterprise value of $31.6 million or 33% above the carrying value of this reporting unit including goodwill. The goodwill impairment test of the reporting unit in the Graphics Segment passed with a business enterprise value of $4.7 million or 619% above the carrying value of the reporting unit including goodwill. - 45 - A significant decline in the Company’s stock price during March 2020 related to the COVID-19 pandemic led management to conclude that a triggering event occurred. As a result, an interim goodwill impairment test subsequent to the March 1 testing date was required for both reporting units as of March 31, 2020 . The result of the impairment test on both reporting units indicated that goodwill was not impaired . The Company has performed an assessment of its goodwill from the date of the interim test as of March 31, 2020 through the balance sheet date for possible triggering events and has concluded that there were no triggering events that would indicate the assets are impaired. Fiscal 2019: A sustained and significant decline in the Company’s stock price in the second quarter of fiscal 2019 led management to believe that a triggering event occurred and that an interim goodwill impairment test was required for one of the two reporting units in the Lighting Segment that contained goodwill, as of December 31, 2018. The result of the impairment test on the reporting unit in the Lighting Segment indicated that goodwill was fully impaired by $20.2 million. As a result of the full impairment of the goodwill of this reporting unit, the Company has two remaining reporting units that contain goodwill; one reporting unit in the Lighting Segment and one reporting unit in the Graphics Segment. As of March 1, 2019, the Company performed its annual goodwill impairment test on the two remaining reporting units that contain goodwill. The preliminary goodwill impairment test on one reporting unit in the Lighting Segment passed with a business enterprise value that was $38.9 million or 54% above the carrying value of this reporting unit including goodwill. The goodwill impairment test of the reporting unit with goodwill in the Graphics Segment passed with an estimated business enterprise value that was $3.0 million or 297% above the carrying value of the reporting unit including goodwill. The Company has performed an assessment of its goodwill from the date of the annual test through the balance sheet date for possible triggering events and has concluded that there were no triggering events that would indicate the assets are impaired. The following table presents information about the Company's goodwill on the dates or for the periods indicated: (In thousands) Lighting Graphics Segment Segment Total Balance as of June 30, 2019 Goodwill $ 94,564 $ 28,690 $ 123,254 Accumulated impairment losses (85,356 ) (27,525 ) (112,881 ) Goodwill, net as of June 30, 2019 $ 9,208 $ 1,165 $ 10,373 Balance as of June 30, 2020 Goodwill $ 86,711 $ 28,690 $ 115,401 Accumulated impairment losses (77,503 ) (27,525 ) (105,028 ) Goodwill, net as of June 30, 2020 $ 9,208 $ 1,165 $ 10,373 In fiscal 2020, the Company wrote-off the goodwill and impairment loss for a dissolved entity. The net impact to the consolidated financial statements, including the goodwill, net balance, was zero. The Company performed its annual review of its indefinite-lived intangible asset as of March 1, 2020 and determined there was no impairment. The indefinite-lived intangible impairment test passed with a fair market value that was $16.8 million or 392% above its carrying value. The Company has performed an assessment of its intangible asset from the date of the annual test through the balance sheet date for possible triggering events and has concluded that there were no triggering events that would indicate the asset is impaired. The Company performed its annual review of its indefinite-lived intangible asset as of March 1, 2019 and determined there was no impairment. The indefinite-lived intangible impairment test passed with a fair market value that was $19.2 million or 462% above its carrying value. - 46 - The gross carrying amount and accumulated amortization by major other intangible asset class is as follows: Other Intangible Assets June 30, 2020 (In thousands) Gross Carrying Accumulated Net Amount Amortization Amount Amortized Intangible Assets Customer relationships $ 35,563 $ 14,129 $ 21,434 Patents 338 277 61 LED technology firmware, software 16,066 12,852 3,214 Trade name 2,658 829 1,829 Total Amortized Intangible Assets 54,625 28,087 26,538 Indefinite-lived Intangible Assets Trademarks and trade names 3,422 - 3,422 Total indefinite-lived Intangible Assets 3,422 - 3,422 Total Other Intangible Assets $ 58,047 $ 28,087 $ 29,960 Other Intangible Assets June 30, 2019 (In thousands) Gross Carrying Accumulated Net Amount Amortization Amount Amortized Intangible Assets Customer relationships $ 35,563 $ 12,070 $ 23,493 Patents 338 247 91 LED technology firmware, software 16,066 12,364 3,702 Trade name 2,658 719 1,939 Total Amortized Intangible Assets 54,625 25,400 29,225 Indefinite-lived Intangible Assets Trademarks and trade names 3,422 - 3,422 Total indefinite-lived Intangible Assets 3,422 - 3,422 Total Other Intangible Assets $ 58,047 $ 25,400 $ 32,647 (In thousands) 2020 2019 Amortization Expense of Other Intangible Assets $ 2,687 $ 2,762 The Company expects to record annual amortization expense as follows: (In thousands) 2021 $ 2,682 2022 $ 2,461 2023 $ 2,412 2024 $ 2,412 2025 $ 2,412 After 2025 $ 14,159 - 47 - NOTE 7 — REVOLVING LINE OF CREDIT AND LONG-TERM DEBT In February 2019, the Company amended its secured line of credit to a $75 million facility from a $100 million facility in order to better match its financing needs with an appropriate borrowing capacity. The line of credit expires in the third quarter of fiscal 2022. Interest on the revolving line of credit is charged based upon an increment over the LIBOR rate as periodically determined, or at the bank’s base lending rate, at the Company’s option. The increment over the LIBOR borrowing rate, as periodically determined, fluctuates between 125 and 250 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the line of credit agreement. The increment over LIBOR borrowing rate will be 125 basis points for the first quarter of fiscal 2021. The fee on the unused balance of the $75 million committed line of credit is 20 basis points. Under the terms of this line of credit, the Company has agreed to a negative pledge of real estate assets and is required to comply with financial covenants that limit the ratio of indebtedness to EBITDA and require a minimum fixed charge coverage ratio. As of June 30, 2020, there were no borrowings against the line of credit, and $75.0 million was available as of that date. Based on the terms of the line of credit and the maturity date, the debt has been classified as long term. The Company is in compliance with all of its loan covenants as of June 30, 2020. NOTE 8 — CASH DIVIDENDS The Company paid cash dividends of $5.3 million and $5.2 million in fiscal years 2020 and 2019, respectively. Dividends on restricted stock units in the amount of $63,796 and $28,158 were accrued as of June 30, 2020 and 2019, respectively. These dividends are paid upon the vesting of the restricted stock units when shares are issued to the award recipients. In August 2020, the Board of Directors declared a regular quarterly cash dividend of $0.05 per share payable September 8, 2020 to shareholders of record August 31, 2020. NOTE 9 — EQUITY COMPENSATION In November 2019, the Company’s shareholders approved the 2019 Omnibus Award Plan (“2019 Omnibus Plan”). The purpose of the 2019 Omnibus Plan is to provide a means through which the Company may attract and retain key personnel and to provide a means by which directors, officers, and employees can acquire and maintain an equity interest in the Company. The 2019 Omnibus Plan replaced the 2012 Stock Incentive Plan (“2012 Stock Plan”). The number of shares of common stock authorized for issuance under the 2019 Omnibus Plan is 2,650,000 which were combined with the remaining shares available under the 2012 Stock Plan. The number of shares reserved for issuance under the 2019 Omnibus Plan is 3,907,749 shares all of which are available for future grant or award as of June 30, 2020. The Plan contains a fungible share ratio that consumes 2.5 available shares for every full value share awarded by the Company as stock compensation. The 2019 Omnibus Plan allows for the grant of non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance stock units and other stock-based awards. The Company has made time-based and performance-based stock option awards. Options generally have a three- or four-year ratable vesting period beginning one year after the date of grant. The maximum exercise period of service-based and performance-based stock options granted under the Plan is ten years. Inducement stock option agreements are granted by the Company to attract and retain key executives. Inducement stock options are separately registered securities and are not part of the 2019 Omnibus Plan. Some options granted have a three-year ratable vesting period whereas other options vest upon specific performance of the Company’s stock. All Inducement stock options have a term of ten years only if the employee is employed for three years from the date of grant. In fiscal 2020, 280,000 Inducement stock options were granted. Restricted Stock Units (RSUs) ratably vest over a three- or four-year period beginning one year after the date of award. Performance Stock Units (PSUs) vest if the Company meets certain financial metrics over a three-year period. - 48 - Stock Warrants The Company has outstanding 200,000 fully exercisable stock warrants with an exercise price of $9.95 as of June 30, 2020. As of June 30, 2020, the warrants had a remaining contractual life of 1.6 years. The fair value of the warrants on the date of grant was estimated using the Black-Scholes option pricing model. The following table summarizes the weighted-average assumptions used in the Black-Scholes option price model to value the warrants in the period indicated: February 21, 2017 Dividend yield 2.01 % Expected volatility 39 % Risk-free interest rate 1.80 % Expected life (in years) 4.5 Fair value per share $ 2.87 Stock Options The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model. The following table summarizes the weighted-average assumptions used in the Black-Scholes option pricing model to value the stock options granted in the periods indicated: 2020 2019 Dividend yield 4.7 % 4.6 % Expected volatility 43 % 42 % Risk-free interest rate 1.4 % 2.8 % Expected life (in years) 6.0 4.9 Fair value per share $ 1.22 $ 1.48 The Company calculates stock option expense using the Black-Scholes model. Stock option expense is recorded on a straight-line basis, or sooner if the grantee is retirement eligible as defined in the Plan, net of forfeitures. The forfeiture rate is based on historical rates and reduces the compensation expense recognized. The expected volatility of the Company’s stock was calculated based upon the historic monthly fluctuation in stock price for a period approximating the expected life of option grants. The risk-free interest rate is the rate of a five-year Treasury security at constant, fixed maturity on the approximate date of the stock option grant. The expected life of outstanding options is determined to be less than the contractual term for a period equal to the aggregate group of option holders’ estimated weighted average time within which options will be exercised. It is the Company’s policy that when stock options are exercised, new common shares shall be issued. The Company recorded $0.4 million and $0.9 million of expense related to stock options in fiscal years 2020 and 2019, respectively. A summary of stock option activity as of June 30, 2020 and changes during the period from July 1, 2019 through June 30, 2020 are as follows: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value Outstanding at June 30, 2019 2,749,626 $ 7.23 6.8 $ 23,500 Granted 735,429 $ 4.51 Exercised (143,766 ) $ 5.57 Forfeited (889,351 ) $ 7.69 Expired (169,000 ) $ 8.24 Outstanding at June 30, 2020 2,282,938 $ 6.20 7.1 $ 2,731,949 Exercisable at June 30, 2020 1,017,148 $ 8.35 5.1 $ 100,719 Vested and expected to vest at June 30, 2020 2,206,744 $ 6.26 7.0 $ 2,574,232 The aggregate intrinsic value of options exercised during the years ended June 30, 2020 and June 30, 2019 was $0.1 million and $0, respectively. The Company received $0.6 million of proceeds from stock options exercises in fiscal 2020. There were no exercises of stock options in fiscal 2019. - 49 - As of June 30, 2020, there was $1.0 million of unrecognized compensation cost, net of forfeitures, related to stock options, which is expected to be recognized over a weighted-average remaining period of 2.4 years. For fiscal year 2020, the Company recognized a current income tax benefit of $43,000 for tax deductions related to equity compensation. A discrete tax expense of $0.4 million was recognized to reduce deferred tax assets for cancelled awards and detriments in excess of the tax deductions. For fiscal year 2019, the Company recognized a current income tax benefit of $0.1 million for tax deductions related to equity compensation. A discrete tax expense of $0.3 million was recognized to reduce deferred tax assets for cancelled awards and detriments in excess of the tax deductions. Restricted Stock Units A total of 81,917 RSUs with a weighted average fair value of $3.83 per share were awarded to employees during fiscal 2020. There were no RSUs awarded to employees during fiscal 2019. RSUs awarded during fiscal 2020 have a three-year ratable vesting period. The Company determined the fair value of the awards based on the closing price of the Company stock on the date the RSUs were awarded. The unvested RSUs are non-voting, but accrue cash dividends at the same per share rate as those cash dividends declared and paid on LSI’s common stock. Dividends on RSUs in the amount of $16,931 and $16,848 were accrued as of June 30, 2020 and 2019, respectively. Accrued dividends are paid to the holder upon vesting of the RSUs and issuance of shares. The Company recorded $0.1 million of expense related to RSUs during fiscal year 2020. A summary of outstanding and unvested RSU activity as of June 30, 2020 and changes during the period from July 1, 2019 through June 30, 2020 are as follows: Shares Weighted- Average Grant Date Fair Value Unvested at June 30, 2019 33,042 $ 7.72 Granted 81,917 $ 3.83 Vested (21,126 ) $ 8.06 Forfeited (21,013 ) $ 5.00 Unvested at June 30, 2020 72,820 $ 4.03 As of June 30, 2020, there was $0.2 million of unrecognized compensation cost, net of forfeitures, related to RSUs, which is expected to be recognized over a weighted-average remaining period of 2.1 years. The total fair value of RSUs that became fully vested during fiscal 2020 was $0.1 million. Performance Stock Units A total of 199,310 PSUs with a weighted average fair value of $3.83 per share were awarded to employees during fiscal 2020. The Company determined the fair value of the awards based on the closing price of the Company stock on the date the PSUs were awarded. The PSUs are non-voting, but accrue cash dividends at the same per share rate as those cash dividends declared and paid on LSI’s common stock. Dividends on PSUs in the amount of $46,865 and $11,310 were accrued as of June 30, 2020 and 2019, respectively. Accrued dividends are paid to the holder upon vesting of the PSUs and issuance of shares. The Company recorded $0.1 million and $0.1 million of expense related to PSUs during fiscal years 2020 and 2019, respectively. - 50 - A summary of outstanding and unvested PSU activity as of June 30, 2020 and changes during the period from July 1, 2019 through June 30, 2020 are as follows: Shares Weighted- Average Grant Date Fair Value Unvested at June 30, 2019 56,550 $ 4.94 Granted 199,310 $ 3.83 Vested - $ - Forfeited (48,886 ) $ 4.49 Unvested at June 30, 2020 206,974 $ 3.98 As of June 30, 2020, there was $0.4 million of unrecognized compensation cost, net of forfeitures, related to PSUs, which is expected to be recognized over a weighted-average remaining period of 2.1 years. Director and Employee Stock Compensation Awards The Company awarded a total of 71,581 and 104,020 common shares as stock compensation awards in fiscal years 2020 and 2019, respectively. These common shares were valued at their approximate $0.3 million and $0.4 million fair market values based on their stock price at dates of issuance multiplied by the number of common shares awarded, respectively, pursuant to the compensation programs for non-employee directors who receive a portion of their compensation as an award of Company stock and for employees who received a nominal recognition award in the form of Company stock. Stock compensation awards are made in the form of newly issued common shares of the Company. Deferred Compensation Plan The Company has a non-qualified deferred compensation plan providing for both Company contributions and participant deferrals of compensation. This plan is fully funded in a Rabbi Trust. All plan investments are in common shares of the Company. As of June 30, 2020, there were 26 participants, all with fully vested account balances. A total of 180,264 common shares with a cost of $1.1 million, and 208,965 common shares with a cost of $1.5 million were held in the plan as of June 30, 2020 and 2019, respectively, and, accordingly, have been recorded as treasury shares. The change in the number of shares held by this plan is the net result of purchases of shares on the open stock market or newly issued shares as compensation deferred into the plan offset by distributions to terminated employees. The Company issued 85,560 and 74,721 new common shares for purposes of the non-qualified deferred compensation plan during fiscal 2020 and during fiscal 2019, respectively. The Company’s non-qualified deferred compensation is no longer funded by purchases in the open market of LSI stock as of September 30, 2017. This plan is now solely funded by newly issued shares that are authorized from the Plan. NOTE 10 — LEASES AND PURCHASE COMMITMENTS Purchase commitments of the Company totaled $14.3 million and $19.7 million as of June 30, 2020 and June 30, 2019, respectively. The Company leases certain manufacturing facilities along with a small office space, a company vehicle, several forklifts, several small tooling items and various items of office equipment. All but one of the Company’s leases are operating. Leases have a remaining term of one to five years some of which have an option to renew. The Company does not assume renewals in determining the lease term unless the renewals are deemed reasonably certain. The lease agreements do not contain any material residual guarantees or material variable lease payments. The Company has periodically entered into short-term operating leases with an initial term of twelve months or less. The Company elected not to record these leases on the balance sheet. The rent expense for these leases is immaterial for fiscal 2020. The Company has certain leases that contain lease and non-lease components and has elected to utilize the practical expedient to account for these components together as a single lease component. Lease expense is recognized on a straight-line basis over the lease term. The Company used its incremental borrowing rate when determining the present value of lease payments. The adoption of the new lease standard resulted in the recognition of right-of-use (ROU) assets of $10.4 million and lease liabilities of $10.8 million which includes the impact of existing deferred rents and tenant improvement allowances on the consolidated balance sheets as of July 1, 2019 for the Company’s real estate leases. The adoption of the new standard resulted in no material impact to the consolidated statements of operations or consolidated statements of cash flow. - 51 - (In thousands) 2020 Operating lease cost $ 2,308 Financing lease cost: Amortization of right of use assets 48 Interest on lease liabilities 16 Variable Lease Cost 6 Total lease Cost $ 2,378 Supplemental Cash Flow Information: (In thousands) 2020 Cash flows from operating leases Fixed payments - operating cash flows $ 2,296 Liability reduction - operating cash flows $ 1,810 Cash flows from finance leases Interest - operating cash flows $ 16 Repayments of principal portion - financing cash flows $ 39 Operating Leases: At June 30, 2020 Total operating right-of-use assets $ 8,663 Accrued expenses (Current liabilities) $ 376 Long-term operating lease liability 9,021 Total operating lease liabilities $ 9,397 Weighted Average remaining Lease Term (in years) 4.59 Weighted Average Discount Rate 4.85 % Finance Leases: At June 30, 2020 Buildings under finance leases $ 2,033 Accumulated depreciation (48 ) Total finance lease assets, net $ 1,985 Accrued expenses (Current liabilities) $ 239 Long-term finance lease liability 1,755 Total finance lease liabilities $ 1,994 Weighted Average remaining Lease Term (in years) 6.83 Weighted Average Discount Rate 4.86 % - 52 - Maturities of Lease Liability: Operating Lease Liabilities Finance Lease Liabilities 2021 $ 486 $ 329 2022 2,323 329 2023 2,299 329 2024 2,250 335 2025 1,923 362 Thereafter 1,704 664 Total lease payments 10,985 2,348 Less: Interest (1,588 ) (354 ) Present Value of Lease Liabilities $ 9,397 $ 1,994 NOTE 11 — INCOME TAXES The following information is provided for the years ended June 30: (In thousands) 2020 2019 Components of income (loss) before income taxes: United States $ 11,494 $ (23,005 ) Foreign 199 737 Income (loss) before income taxes $ 11,693 $ (22,268 ) Provision for income taxes U.S. Federal $ (2,082 ) $ 88 Foreign 83 221 State and local 175 132 Total current (1,824 ) 441 Deferred 3,925 (6,370 ) Total provision for income taxes $ 2,101 $ (5,929 ) (In thousands) 2020 2019 Reconciliation to federal statutory rate: Federal statutory rate 21.0 % 21.0 % State and local taxes, net of federal benefit 2.0 3.3 Foreign operations 0.4 (0.3 ) Federal tax credits (0.7 ) 0.8 Valuation allowance (13.4 ) 3.8 Expiration of capital loss carryforward 8.9 - Uncertain tax position activity (0.5 ) 0.3 Stock-based compensation 3.6 (1.3 ) Tax rate changes (5.4 ) (0.2 ) Other 2.1 (0.8 ) Effective tax rate 18.0 % 26.6 % - 53 - The favorable tax rate change for the year ended June 30, 2020 is due to the enactment of the CARES Act. The CARES Act allows the Company to carryback a federal net operating loss to prior tax years, offset taxable income in those earlier tax years, and obtain a refund of income taxes that were paid at a higher statutory tax rate. The components of deferred income tax assets and (liabilities) at June 30, 2020 and 2019 are as follows: (In thousands) 2020 2019 Uncertain tax positions $ 125 $ 128 Reserves against current assets 798 1,800 Accrued expenses 2,196 1,722 Interest - 388 Deferred compensation 235 308 Stock-based compensation 597 926 State net operating loss carryover and credits 2,194 2,374 Long term capital loss carryforward - 2,555 Right of use asset 1,992 - Goodwill, acquisition costs and intangible assets 8,040 8,949 U.S. Federal net operating loss carryover and credits 217 1,139 Deferred income tax asset before valuation allowance 16,394 20,289 Valuation allowance (2,194 ) (3,820 ) Deferred income tax asset 14,200 16,469 Depreciation (1,837 ) (2,169 ) Lease liability (1,992 ) - Deferred income tax liability (3,829 ) (2,169 ) Net deferred income tax asset $ 10,371 $ 14,300 The Company has deferred tax assets for US federal net operating loss carry forwards of $0.1 million and $0.9 million at June 30, 2020 and June 30, 2019, respectively. The $0.1 million was acquired from Virticus Corporation and will expire over a 3-year period beginning in June 30, 2029. The acquired federal net operating loss is subject to Internal Revenue Code Section 382. The Company has determined, more likely than not, the amount will be realized before expiration. The Company has deferred tax assets for research and development credits of $0.1 million and $0.2 million, at June 30, 2020 and June 30, 2019, respectively. Of the $0.1 million, $45,000 will expire on June 30, 2039 and the remainder, which was acquired from Virticus Corporation, will expire over a 2-year period beginning June 30, 2029. The acquired credit is limited by Internal Revenue Code Section 382. The Company has determined, more likely than not, the amount will be realized before expiration. The Company has state net operating loss carryovers and credits of $2.4 million at both June 30, 2020 and June 30, 2019. The amount recognized in fiscal 2020 relates to net deferred tax assets of $0.1 million from various state net operating losses. Also related to the acquisition of Virticus Corporation, the Company has recorded a deferred state income tax asset related to a state net operating loss carryover and a state research and development credit in Oregon in the amount of $0.1 million for both fiscal years 2020 and 2019. The Company has determined this asset, more likely than not, will not be realized and that a full valuation reserve is required. The Oregon net operating loss will expire over a period of 4 years, beginning in June 30, 2027. The Company has recorded a deferred state income tax asset net of federal tax benefits related to non-refundable New York state tax credits in the amount of $2.1 million at both June 30, 2020 and June 30, 2019. These credits do not expire, but pursuant to New York state legislation enacted in fiscal 2014, the Company has determined that this asset, more likely than not, will not be realized. As of June 30, 2020, and 2019, the Company has recorded a full valuation reserve in the amount of $2.1 million. - 54 - The Company had a capital loss carry forward of $10.7 million at June 30, 2019 that was generated from the sale of a Canadian subsidiary during fiscal 2015. During fiscal 2020, the Company sold its North Canton, Ohio and New Windsor, New York facilities, resulting in taxable capital gain and expects to use $6.6 million of the capital loss carry forward to offset the gain. The remaining capital loss carryforward of $4.2 million expired unused. The Company recognized the tax benefits of utilizing the capital loss of $0.6 million and $0.8 million in the fiscal years 2020 and 2019 by releasing the related valuation allowance. Considering all items discussed above, the Company has recorded valuation reserves of $2.2 million and $3.8 million as of June 30, 2020 and 2019, respectively. At June 30, 2020, tax, interest, and penalties, net of potential federal tax benefits, were $0.5 million, $0.3 million, and $0.1 million, respectively, of the total reserve for uncertain tax positions of $0.9 million. The entire uncertain tax position of $0.5 million, net of federal tax benefit, would impact the effective tax rate if recognized. At June 30, 2019, tax, interest, and penalties, net of potential federal tax benefits, were $0.6 million, $0.2 million and $0.2 million, respectively, of the total reserve for uncertain tax positions of $1.0 million. The entire uncertain tax position of $0.6 million net of federal tax benefit, would impact the effective tax rate if recognized. The liability for uncertain tax position is included in Other Long-Term Liabilities. The Company is recording estimated interest and penalties related to potential underpayment of income taxes as a component of tax expense in the Consolidated Statements of Operations. The Company recognized a $0.1 million net tax benefit in both fiscal 2020 and fiscal 2019, related to the change in reserves for uncertain tax positions. The Company recognized interest net of federal benefit and penalties of $0 and $13,000, respectively, in fiscal 2020 and $14,000 and $7,000, respectively, in fiscal 2019. The reserve for uncertain tax positions is not expected to change significantly in the next twelve months. The tax activity in the liability for uncertain tax positions was as follows: (In thousands) 2020 2019 Balance at the beginning of the fiscal year $ 675 $ 736 Decreases - tax positions in prior period (70 ) (120 ) Increase - tax positions in current period 15 59 Increases - tax positions in prior period - - Settlements and payments (13 ) - Lapse of statute of limitations - - Balance at end of the fiscal year 607 675 The Company files a consolidated federal income tax return in the United States, and files various combined and separate tax returns in several state and local jurisdictions and Mexico. With limited exceptions, the Company is no longer subject to U.S. Federal, state and local tax examinations by tax authorities for fiscal years ending prior to June 30, 2017. NOTE 12 — SUPPLEMENTAL CASH FLOW INFORMATION (In thousands) 2020 2019 Cash Payments: Interest $ 990 $ 2,222 Income taxes $ 6 $ 86 Non-cash investing and financing activities Issuance of common shares as compensation $ 300 $ 355 Issuance of common shares to fund deferred compensation plan $ 473 $ 290 NOTE 13 — COMMITMENTS AND CONTINGENCIES The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. The Company does not disclose a range of potential loss because the likelihood of such a loss is remote. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity. - 55 - The Company may occasionally issue a standby letter of credit in favor of third parties. As of June 30, 2020, there were no such standby letters of credit issued. In August 2020, the Company experienced a cybersecurity incident. For details regarding this incident, see risk factor on page 7 of this Form 10-K. NOTE 14 – SEVERANCE COSTS The Company recorded severance charges of $0.3 million and $0.6 million in fiscal 2020 and 2019, respectively. This severance expense was related to reductions in staffing not related to plant restructuring. See further discussion of restructuring expenses in Note 15. The activity in the Company’s accrued severance liability was as follows for the twelve months ended June 30, 2020 and 2019: June 30, June 30, (In thousands) 2020 2019 Balance at beginning of period $ 1,134 $ 1,772 Accrual of expense 344 560 Payments (839 ) (1,198 ) Balance at end of period $ 639 $ 1,134 The $0.6 million severance reserve reported as of June 30, 2020 has been classified as a current liability and will be paid out over the next twelve months. NOTE 1 5 – RESTRUCTURING COSTS In fiscal 2019, the Company closed its 12,000 square foot leased facility in Hawthorne, California. The facility was used as a warehouse and for light assembly of light fixtures. The Company moved the light assembly to its Cincinnati, Ohio facility. The restructuring charges consist primarily of transportation costs to move inventory to Cincinnati, the impairment of equipment, costs to restore the leased facility, and severance benefits. As of June 30, 2019, the Company incurred restructuring costs of $0.1 million related to the closure of the Hawthorne facility. The Company also incurred $0.1 million of expense to write-down inventory which is a re-valuation of the previous estimate and which is not included in the tables below. Also occurring in fiscal 2019, the Company announced plans to close its lighting manufacturing facility in New Windsor, New York. The closure was part of ongoing actions to align the Company’s supply chain to more cost effectively serve the changing requirements of the lighting market. The Company moved production to its other existing facilities in the second half of fiscal 2019. The closure allowed the Company to improve utilization of existing manufacturing capacity and will generate annual savings of approximately $4.0 million. The sale of the facility is listed as an asset held for sale as of June 30, 2019. As of June 30, 2019, the Company incurred restructuring costs of $1.7 million related to the closure of the New Windsor facility. The Company also incurred $1.1 million of expense in fiscal 2019 to write-down inventory which is not included in the tables below. The sale of the New Windsor facility occurred during the first quarter of fiscal 2020. The net proceeds were $12.3 million resulting in a gain of $4.8 million. In addition, in the third quarter of fiscal 2020, the Company sold its North Canton, Ohio facility. The net proceeds were $7.7 million resulting in a net gain of $3.7 million. The Company relocated the production at the North Canton facility to smaller, leased facility in Akron, Ohio during the fourth quarter of fiscal 2020. The Company also incurred $0.6 million of expense to write-down inventory which is not includes in the tables below. Other restructuring costs incurred in 2020 relate to the realignment of the Company’s manufacturing footprint at its Houston, Texas facility. The realignment occurred as the result of the movement of equipment related to the closure of the New Windsor facility along with preparations to receive additional equipment resulting from the relocation of the North Canton facility. - 56 - The following table presents information about restructuring (gains) costs recorded in fiscal years 2020 and 2019: (In thousands) 2020 2019 Severance benefits $ - $ 537 Impairment of fixed assets and accelerated depreciation 59 427 Gain on sale of facility (8,562 ) - Exit costs 636 842 Manufacturing realignment costs 276 - Total $ (7,591 ) $ 1,806 The following table presents restructuring (gains) costs incurred by line item in the consolidated statement of operations in which the costs are included: (In thousands) 2020 2019 Cost of goods sold $ 980 $ 1,441 Operating expenses (8,571 ) 365 Total $ (7,591 ) $ 1,806 The following table presents information about restructuring (gains) costs by segment for the periods indicated: (In thousands) 2020 2019 Lighting Segment $ (4,674 ) $ 1,757 Graphics Segment (2,940 ) - Corporate and Eliminations 23 49 Total $ (7,591 ) $ 1,806 The following table presents a roll forward of the beginning and ending liability balances related to the restructuring costs: Balance as of Balance as of June 30, Restructuring June 30, (In thousands) 2019 Expense Payments Adjustments 2020 Severance and termination benefits $ 236 $ - $ (209 ) $ - $ 27 Other restructuring costs - 912 (912 ) - - Total $ 236 $ 912 $ (1,121 ) $ - $ 27 Refer to Note 14 for information regarding additional severance expenses that are not included in the restructuring costs identified in this footnote. NOTE 1 6 — RELATED PARTY TRANSACTIONS Wesco International, of which one of the Company’s independent outside directors is a director, purchases lighting fixtures from the Company. The Company has recognized revenue related to the following related party transactions in the fiscal years indicated: (In thousands) 2020 2019 Wesco International $ 1,575 $ 1,347 - 57 - As of the balance sheet date indicated, the Company had the following accounts receivable recorded with respect to related party transactions: (In thousands) 2020 2019 Wesco International $ 108 $ 55 NOTE 1 7 — SUMMARY OF QUARTERLY RESULTS (UNAUDITED) Quarter Ended (In thousands except per share data) Sep. 30 Dec. 31 Mar. 31 Jun. 30 Fiscal Year 2020 Net Sales $ 88,701 $ 82,377 $ 71,010 $ 63,470 $ 305,558 Gross profit 21,855 19,964 15,942 15,769 73,530 Net Income (loss) 4,475 1,743 1,861 1,513 9,592 Earnings (loss) per share Basic $ 0.17 $ 0.07 $ 0.07 $ 0.06 $ 0.37 (a) Diluted $ 0.17 $ 0.07 $ 0.07 $ 0.06 $ 0.36 (a) Range of share prices High $ 5.22 $ 6.30 $ 7.28 $ 6.81 $ 7.28 Low $ 3.63 $ 4.90 $ 2.59 $ 3.51 $ 2.59 2019 Net Sales $ 84,957 $ 89,541 72,832 $ 81,522 $ 328,852 Gross profit 21,261 19,656 15,337 17,459 73,713 Net Income (loss) 1,749 (15,782 ) (3,168 ) 862 (16,339 ) Earnings (loss) per share Basic $ 0.07 $ (0.61 ) $ (0.12 ) $ 0.03 $ (0.63 ) (a) Diluted $ 0.07 $ (0.61 ) $ (0.12 ) $ 0.03 $ (0.63 ) (a) Range of share prices High $ 5.62 $ 4.63 $ 3.86 $ 3.72 $ 5.62 Low $ 4.20 $ 3.15 $ 2.51 $ 2.59 $ 2.51 (a) The total of the earnings per share for each of the four quarters does not equal the total earnings per share for the full year because the calculations are based on the average shares outstanding during each of the individual periods. There is no difference between basic and diluted shares due to losses. - 58 - LSI I NDUSTRIES INC. AND SUBSIDIARIES SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 20 20 and 20 1 9 (In t housands) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F Description Balance Beginning of Period Additions Charged to Costs and Expenses Additions from Company Acquired Deductions (a) Balance End of Period Allowance for Doubtful Accounts: Year Ended June 30, 2020 $ 879 $ 19 $ - $ (625 ) $ 273 Year Ended June 30, 2019 $ 409 $ 776 $ - $ (306 ) $ 879 Inventory Obsolescence Reserve: Year Ended June 30, 2020 $ 4,605 $ 2,454 $ 10 $ (3,248 ) $ 3,821 Year Ended June 30, 2019 $ 3,632 $ 3,641 $ - $ (2,668 ) $ 4,605 Deferred Tax Asset Valuation Reserve: Year Ended June 30, 2020 $ 3,820 $ - $ - $ (1,626 ) $ 2,194 Year Ended June 30, 2019 $ 4,749 $ - $ - $ (929 ) $ 3,820 (a) For Allowance for Doubtful Accounts, deductions are uncollectible accounts charged off, less recoveries. - 59 -