Attached files

file filename
EX-32.2 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - LIGHTPATH TECHNOLOGIES INClpth_ex322.htm
EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - LIGHTPATH TECHNOLOGIES INClpth_ex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - LIGHTPATH TECHNOLOGIES INClpth_ex312.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - LIGHTPATH TECHNOLOGIES INClpth_ex311.htm
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
[X]             QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2019
 
OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to ____________
 
Commission file number 000-27548
 
LIGHTPATH TECHNOLOGIES, INC.
------------------------------------------------------------------------
 (Exact name of registrant as specified in its charter)
 
 DELAWARE
 86-0708398
 (State or other jurisdiction of incorporation or organization)  
 (I.R.S. Employer Identification No.)
 
http://www.lightpath.com
 
2603 Challenger Tech Ct. Suite 100
Orlando, Florida 32826
-----------------------------------------------------------
(Address of principal executive offices)
(ZIP Code)
 
(407) 382-4003
---------------------------------------------
(Registrant’s telephone number, including area code)
N/A
----------------------------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common
Stock, par value $0.01
LPTH
The Nasdaq Stock Market, LLC
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). YES [ X ] NO [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer [ ]
Accelerated filer [ ]
 
Smaller reporting company [ X ]
Non-accelerated filer [ X ]
Emerging growth company [ ]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [ ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
25,857,529 shares of common stock, Class A, $0.01 par value, outstanding as of February 3, 2020.
 
 

 
 
 
LIGHTPATH TECHNOLOGIES, INC.
Form 10-Q
 
Index
 
Item
 
Page

 

Cautionary Note Concerning Forward-Looking Statements 
 4
   
 
Part I Financial Information
 
Item 1
Financial Statements
 5

Unaudited Condensed Consolidated Balance Sheets
 5
 
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
 6
 
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity
 7
 
Unaudited Condensed Consolidated Statements of Cash Flows
 8
 
Notes to Unaudited Condensed Consolidated Financial Statements
 9
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
 
Overview
 21
 
Results of Operations
 22
 
Liquidity and Capital Resources
 25
 
Contractual Obligations and Commitments
 26
 
Off-Balance Sheet Arrangements
 26
 
Critical Accounting Policies and Estimates
 26
 
Non-GAAP Financial Measures
 30
Item 4
Controls and Procedures
 30
 
  
 
Part II  Other Information
 
Item 1
Legal Proceedings
 31
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
 31
Item 3
Defaults Upon Senior Securities
 31
Item 4
Mine Safety Disclosures
 31
Item 5
Other Information
 31
Item 6
Exhibits
 31
 
  

Signatures
  
34
 
 
 
 
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
 
Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended December 31, 2019 (the “Quarterly Report”) may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, which address activities, events, or developments that we expect or anticipate will or may occur in the future, including such things as future capital expenditures, growth, product development, sales, business strategy, and other similar matters are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or other comparable terminology. These forward-looking statements are based largely on our current expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control. These statements are subject to many risks, uncertainties, and other important factors that could cause actual future results to differ materially from those expressed in the forward-looking statements. For a discussion of risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements, please refer to Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended June 30, 2019. In light of these risks and uncertainties, all of the forward-looking statements made herein are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized. We undertake no obligation to update or revise any of the forward-looking statements contained herein.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
 

Item 1. Financial Statements
 
LIGHTPATH TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(unaudited)
 
    
 
  December 31,
 
 
  June 30,
 
    
 
  2019
 
 
  2019
 
   Assets
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $4,277,607 
 $4,604,701 
Trade accounts receivable, net of allowance of $20,780 and $29,406
  7,401,375 
  6,210,831 
Inventories, net
  7,542,329 
  7,684,527 
Other receivables
   
  353,695 
Prepaid expenses and other assets
  415,897 
  754,640 
Total current assets
  19,637,208 
  19,608,394 
 
    
    
Property and equipment, net
  11,640,542 
  11,731,084 
Operating lease right-of-use assets
  1,488,126 
   
Intangible assets, net
  7,270,506 
  7,837,306 
Goodwill
  5,854,905 
  5,854,905 
Deferred tax assets, net
  652,000 
  652,000 
Other assets
  290,200 
  289,491 
Total assets
 $46,833,487 
 $45,973,180 
   Liabilities and Stockholders’ Equity
    
    
Current liabilities:
    
    
Accounts payable
 $2,699,115 
 $2,227,768 
Accrued liabilities
  1,261,584 
  1,338,912 
Accrued payroll and benefits
  1,467,675 
  1,730,658 
Operating lease liabilities, current
  749,399 
   
Deferred rent, current portion
   
  72,151 
Loans payable, current portion
  581,350 
  581,350 
Finance lease obligation, current portion
  378,095 
  404,424 
Total current liabilities
  7,137,218 
  6,355,263 
 
    
    
Finance lease obligation, less current portion
  456,388 
  640,284 
Operating lease liabilities, noncurrent
  1,265,152 
   
Deferred rent, noncurrent
   
  518,364 
Loans payable, less current portion
  4,718,754 
  5,000,143 
Total liabilities
  13,577,512 
  12,514,054 
 
    
    
 Commitments and Contingencies
    
    
 
    
    
Stockholders’ equity:
    
    
Preferred stock: Series D, $.01 par value, voting;
500,000 shares authorized; none issued and outstanding
  
 
  
 
Common stock: Class A, $.01 par value, voting;
44,500,000 shares authorized; 25,840,362 and 25,813,895
shares issued and outstanding
  258,404 
  258,139 
Additional paid-in capital
  230,527,126 
  230,321,324 
Accumulated other comprehensive income
  1,005,340 
  808,518 
Accumulated deficit
  (198,534,895)
  (197,928,855)
Total stockholders’ equity
  33,255,975 
  33,459,126 
Total liabilities and stockholders’ equity
 $46,833,487 
 $45,973,180 
 
  The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
5
 
 
LIGHTPATH TECHNOLOGIES, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
December 31,
 
 
December 31,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Revenue, net
 $9,599,912 
 $8,548,507 
 $17,151,842 
 $17,098,228 
Cost of sales
  5,670,632 
  5,007,364 
  10,831,744 
  10,513,912 
 Gross margin
  3,929,280 
  3,541,143 
  6,320,098 
  6,584,316 
Operating expenses:
    
    
    
    
Selling, general and administrative
  2,199,133 
  2,518,853 
  4,540,911 
  4,982,731 
New product development
  468,646 
  518,793 
  897,057 
  988,776 
Amortization of intangibles
  283,279 
  324,351 
  566,800 
  653,622 
Loss (gain) on disposal of property and equipment
  (79,224)
  (15,500)
  (129,224)
  43,257 
  Total operating expenses
  2,871,834 
  3,346,497 
  5,875,544 
  6,668,386 
Operating income (loss)
  1,057,446 
  194,646 
  444,554 
  (84,070)
Other income (expense):
    
    
    
    
Interest expense, net
  (89,257)
  (153,289)
  (187,798)
  (298,302)
Other income (expense), net
  122,797 
  (48,484)
  (392,609)
  (386,606)
Total other income (expense), net
  33,540 
  (201,773)
  (580,407)
  (684,908)
Income (loss) before income taxes
  1,090,986 
  (7,127)
  (135,853)
  (768,978)
Income tax provision (benefit)
  321,869 
  (23,403)
  470,187 
  (202,363)
Net income (loss)
 $769,117 
 $16,276 
 $(606,040)
 $(566,615)
Foreign currency translation adjustment
  143,056 
  52,793 
  196,822 
  225,840 
Comprehensive income (loss)
 $912,173 
 $69,069 
 $(409,218)
 $(340,775)
Earnings (loss) per common share (basic)
 $0.03 
 $0.00 
 $(0.02)
 $(0.02)
Number of shares used in per share calculation (basic)
  25,837,903 
  25,781,941 
  25,832,337 
  25,777,330 
Earnings (loss) per common share (diluted)
 $0.03 
 $0.00 
 $(0.02)
 $(0.02)
Number of shares used in per share calculation (diluted)
  27,361,273 
  27,397,239 
  25,832,337 
  25,777,330 
 
  The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
6
 
 
LIGHTPATH TECHNOLOGIES, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Class A
 
 
 
 
 
Additional
 
 
Other
 
 
 
 
 
Total
 
 
 
Common Stock
 
 
 
 
 
Paid-in
 
 
Comphrehensive
 
 
Accumulated
 
 
Stockholders’
 
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Income
 
 
Deficit
 
 
Equity
 
Balances at June 30, 2019
  25,813,895 
 $258,139 
 $230,321,324 
 $808,518 
 $(197,928,855)
 $33,459,126 
Issuance of common stock for:
    
    
    
    
    
    
Employee Stock Purchase Plan
  13,370 
  134 
  12,033 
   
   
  12,167 
Exercise of RSUs, net
  4,394 
  44 
  (44)
   
   
   
Stock-based compensation on stock options & RSUs
   
   
  98,459 
   
   
  98,459 
Foreign currency translation adjustment
   
   
   
  53,766 
   
  53,766 
Net loss
   
   
   
   
  (1,375,157)
  (1,375,157)
Balances at September 30, 2019
  25,831,659 
 $258,317 
 $230,431,772 
 $862,284 
 $(199,304,012)
 $32,248,361 
Issuance of common stock for:
    
    
    
    
    
    
Exercise of RSUs, net
  8,703 
  87 
  (87)
   
   
   
Stock-based compensation on stock options & RSUs
   
   
  95,441 
   
   
  95,441 
Foreign currency translation adjustment
   
   
   
  143,056 
   
  143,056 
Net income
   
   
   
   
  769,117 
  769,117 
Balances at December 31, 2019
  25,840,362 
 $258,404 
 $230,527,126 
 $1,005,340 
 $(198,534,895)
 $33,255,975 
 
    
    
    
    
    
    
 
    
    
    
    
    
    
Balances at June 30, 2018
  25,764,544 
 $257,645 
 $229,874,823 
 $473,508 
 $(195,248,532)
 $35,357,444 
Issuance of common stock for:
    
    
    
    
    
    
Employee Stock Purchase Plan
  9,061 
  91 
  20,750 
   
   
  20,841 
Stock-based compensation on stock options & RSUs
   
   
  93,910 
   
   
  93,910 
Foreign currency translation adjustment
   
   
   
  173,047 
   
  173,047 
Net loss
   
   
   
   
  (582,891)
  (582,891)
Balances at September 30, 2018
  25,773,605 
 $257,736 
 $229,989,483 
 $646,555 
 $(195,831,423)
 $35,062,351 
Issuance of common stock for:
    
    
    
    
    
    
Exercise of Stock Options & RSUs, net
  15,667 
  157 
  4,104 
   
   
  4,261 
Stock-based compensation on stock options & RSUs
   
   
  103,905 
   
   
  103,905 
Foreign currency translation adjustment
   
   
   
  52,793 
   
  52,793 
Net income
   
   
   
   
  16,276 
  16,276 
Balances at December 31, 2018
  25,789,272 
 $257,893 
 $230,097,492 
 $699,348 
 $(195,815,147)
 $35,239,586 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 
 
 
7
 
 
LIGHTPATH TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
 
 
Six Months Ended December 31,
 
 
 
2019
 
 
2018
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 $(606,040)
 $(566,615)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
    
    
Depreciation and amortization
  1,760,220 
  1,683,676 
Interest from amortization of debt costs
  9,286 
  11,962 
(Gain) loss on disposal of property and equipment
  (129,224)
  43,257 
Stock-based compensation on stock options & RSUs, net
  178,389 
  197,815 
Provision for doubtful accounts receivable
  9,147 
  1,469 
Change in operating lease liabilities
  (64,090)
  (27,096)
Inventory write-offs to reserve
   
  2,114 
Deferred tax benefit
   
  (406,000)
Changes in operating assets and liabilities:
    
    
Trade accounts receivable
  (1,199,691)
  (849,007)
Other receivables
  353,695 
  (22,858)
Inventories
  142,198 
  (594,141)
    Prepaid expenses and other assets
  338,034 
  214,960 
    Accounts payable and accrued liabilities
  146,547 
  (87,707)
                  Net cash provided by (used in) operating activities
  938,471 
  (398,171)
 
    
    
Cash flows from investing activities:
    
    
   Purchase of property and equipment
  (1,153,227)
  (1,180,184)
   Proceeds from sale of equipment
  179,573 
  110,500 
                  Net cash used in investing activities
  (973,654)
  (1,069,684)
 
    
    
Cash flows from financing activities:
    
    
Proceeds from exercise of stock options
   
  4,261 
Proceeds from sale of common stock from Employee Stock Purchase Plan
  12,167 
  20,841 
Payments on loan payable
  (290,675)
  (729,399)
Repayment of finance lease obligations
  (210,225)
   
Payments on capital lease obligations
   
  (167,626)
                 Net cash used in financing activities
  (488,733)
  (871,923)
Effect of exchange rate on cash and cash equivalents
  196,822 
  472,547 
Change in cash and cash equivalents and restricted cash
  (327,094)
  (1,867,231)
Cash and cash equivalents and restricted cash, beginning of period
  4,604,701 
  6,508,620 
Cash and cash equivalents and restricted cash, end of period
 $4,277,607 
 $4,641,389 
 
    
    
Supplemental disclosure of cash flow information:
    
    
 Interest paid in cash
 $182,241 
 $267,065 
 Income taxes paid
 $249,777 
 $247,664 
 Supplemental disclosure of non-cash investing & financing activities:
    
    
 Purchase of equipment through capital lease arrangements
   
 $411,750 
 
    
    
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 
 
 
8
 
 
LIGHTPATH TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
 
1.            
Basis of Presentation
 
References in this document to “the Company,” “LightPath,” “we,” “us,” or “our” are intended to mean LightPath Technologies, Inc., individually, or as the context requires, collectively with its subsidiaries on a consolidated basis.
 
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the requirements of Article 8 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with our Consolidated Financial Statements and related notes, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, filed with the Securities and Exchange Commission (the “SEC”). Unless otherwise stated, references to particular years or quarters refer to our fiscal years ended June 30 and the associated quarters of those fiscal years.
 
These Condensed Consolidated Financial Statements are unaudited, but include all adjustments, including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. The Consolidated Balance Sheet as of June 30, 2019 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year as a whole. The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
 
2.            
Significant Accounting Policies
 
Our significant accounting policies are provided in Note 2, Summary of Significant Accounting Policies, in the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
 
Use of Estimates
Management makes estimates and assumptions during the preparation of our unaudited Condensed Consolidated Financial Statements that affect amounts reported in the unaudited Condensed Consolidated Financial Statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes available, which, in turn, could impact the amounts reported and disclosed herein.
 
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB") issued ASU No. 2016-02, Leases (Topic 842) (“ASC Topic 842”). This guidance requires an entity to recognize lease liabilities and a right-of-use asset for all leases on the balance sheet and to disclose key information about the entity’s leasing arrangements. The Company adopted this standard as of July 1, 2019, using the modified retrospective transition method by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward historical lease classification, and not reassess (i) whether a contract was or contained a lease, and (ii) initial direct costs for any leases that existed prior to July 1, 2019. The Company also elected to combine lease and non-lease components and not to record leases with an initial term of 12 months or less on the unaudited Condensed Consolidated Balance Sheet. As a result of adopting ASC Topic 842 on July 1, 2019, the Company recognized operating lease right-of-use assets of $1.7 million and corresponding operating lease liabilities of $2.3 million from existing leases on the Company's unaudited Condensed Consolidated Balance Sheet. Operating lease liabilities include amounts previously classified as “Deferred Rent” in the unaudited Condensed Consolidated Balance Sheet as of June 30, 2019. See Note 11, Leases, for further details. The adoption of ASC Topic 842 had no impact on the Company’s unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) or Condensed Consolidated Statement of Cash Flows.
 
There have been no other material changes to our significant accounting policies during the six months ended December 31, 2019, from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
 
Reclassifications
The classification of certain prior-year amounts have been adjusted in our unaudited Condensed Consolidated Financial Statements to conform to current year classifications. An accrual of $467,000 related to the lease for ISP Optics Corporation’s (“ISP”) Irvington, New York facility (the “Irvington Facility”) was reclassified from “Deferred rent, current portion” to “Accrued liabilities” in the unaudited Condensed Consolidated Balance Sheet as of June 30, 2019. See Note 11, Lease Commitments, and Note 14, Restructuring, for further information. In addition, upon adoption of ASC Topic 842, amounts previously included in the line items “Capital lease obligation, current portion” and “Capital lease obligation, less current portion” are now included in the line items “Finance lease obligation, current portion” and “Finance lease obligation, less current portion”, respectively, in the unaudited Condensed Consolidated Balance Sheet as of June 30, 2019.
 
 
9
 
 
3.            
Revenue
 
Product Revenue
We are a manufacturer of optical components and higher-level assemblies, including precision molded glass aspheric optics, molded and diamond-turned infrared aspheric lenses, and other optical materials used to produce products that manipulate light. We design, develop, manufacture, and distribute optical components and assemblies utilizing advanced optical manufacturing processes. We also perform research and development for optical solutions for a wide range of optics markets. Revenue is derived primarily from the sale of optical components and assemblies.
 
Revenue Recognition
Revenue is generally recognized upon transfer of control, including the risks and rewards of ownership, of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We generally bear all costs, risk of loss, or damage and retain title to the goods up to the point of transfer of control of products to customers. Shipping and handling costs are included in the cost of goods sold. We present revenue net of sales taxes and any similar assessments.
 
Customary payment terms are granted to customers, based on credit evaluations. We currently do not have any contracts where revenue is recognized, but the customer payment is contingent on a future event. We record deferred revenue when cash payments are received or due in advance of our performance. Deferred revenue was immaterial as of June 30, 2019 and December 31, 2019.
 
Nature of Products
Revenue from the sale of optical components and assemblies is recognized upon transfer of control, including the risks and rewards of ownership, to the customer. The performance obligations for the sale of optical components and assemblies are satisfied at a point in time. Product development agreements are generally short term in nature, with revenue recognized upon satisfaction of the performance obligation, and transfer of control of the agreed-upon deliverable. We have organized our products in three groups: precision molded optics (“PMO”), infrared, and specialty products. Revenues from product development agreements are included in specialty products. Revenue by product group for the three and six months ended December 31, 2019 and 2018 was as follows:
 
 
 
Three Months Ended
December 31,
 
 
Six Months Ended
December 31,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
PMO
 $3,710,549 
 $4,126,091 
 $6,895,007 
 $7,238,195 
Infrared Products
  5,003,874 
  3,729,845 
  8,963,499 
  8,690,772 
Specialty Products
  885,489 
  692,571 
  1,293,336 
  1,169,261 
Total revenue
 $9,599,912 
 $8,548,507 
 $17,151,842 
 $17,098,228 
 
4.            
Inventories
 
The components of inventories include the following:
 
 
 
December 31,
2019
 
 
June 30,
2019
 
Raw materials
 $3,469,263 
 $3,467,105 
Work in process
  2,377,664 
  2,288,226 
Finished goods
  2,573,561 
  2,704,471 
Allowance for obsolescence
  (878,159)
  (775,275)
 
 $7,542,329 
 $7,684,527 
 
The value of tooling in raw materials was approximately $2.3 million and $2.2 million at December 31, 2019 and June 30, 2019, respectively.
 
 
10
 
 
5.            
Property and Equipment
 
Property and equipment are summarized as follows:
 
 
 
Estimated
 
 
December 31,
 
 
June 30,
 
 
 
Lives (Years)
 
 
2019
 
 
2019
 
Manufacturing equipment
  5 - 10 
 $18,246,535 
 $17,412,136 
Computer equipment and software
  3 - 5 
  786,089 
  706,840 
Furniture and fixtures
  5 
  315,190 
  293,582 
Leasehold improvements
  5 - 7 
  2,151,397 
  2,074,069 
Construction in progress
    
  522,697 
  697,126 
Total property and equipment
    
  22,021,908 
  21,183,753 
Less accumulated depreciation and amortization
    
  (10,381,366)
  (9,452,669)
Total property and equipment, net
    
 $11,640,542 
 $11,731,084 
 
6. Goodwill and Intangible Assets
 
There were no changes in the net carrying value of goodwill during the six months ended December 31, 2019.
 
Identifiable intangible assets were comprised of:
 
 
 
 Useful
 
 
 December 31,
 
 
 June 30,
 
 
 
 Lives (Years)
 
 
 2019
 
 
 2019
 
 Customer relationships
  15 
 $3,590,000 
 $3,590,000 
 Backlog
  2 
  366,000 
  366,000 
 Trade secrets
  8 
  3,272,000 
  3,272,000 
 Trademarks
  8 
  3,814,000 
  3,814,000 
 Non-compete agreement
  3 
  27,000 
  27,000 
 Total intangible assets
    
  11,069,000 
  11,069,000 
 Less accumulated amortization
    
  (3,798,494)
  (3,231,694)
 Total intangible assets, net
    
 $7,270,506 
 $7,837,306 
 
 
11
 
 
Future amortization of identifiable intangibles is as follows:
 
Fiscal year ending:
 
 
 
 June 30, 2020 (remaining six months)
 $562,542 
 June 30, 2021
  1,125,083 
 June 30, 2022
  1,125,083 
 June 30, 2023
  1,125,083 
 June 30, 2024 and later
  3,332,715 
 
 $7,270,506 
 
7.   Accounts Payable
 
The accounts payable balance as of December 31, 2019 and June 30, 2019 includes earned but unpaid Board of Directors’ fees of approximately $82,000 and $91,000, respectively.
 
8.   Income Taxes
 
A summary of our total income tax expense and effective income tax rate for the three and six months ended December 31, 2019 and 2018 is as follows:
 
 
 
Three Months Ended
December 31,
 
 
Six Months Ended
December 31,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Income (loss) before income taxes
 $1,090,986 
 $(7,127)
 $(135,853)
 $(768,978)
Income tax provision (benefit)
 $321,869 
 $(23,403)
 $470,187 
 $(202,363)
Effective income tax rate
  30%
  328%
  -346%
  26%
 
The difference between our effective tax rates in the periods presented above and the federal statutory rate is due to the mix of taxable income and losses generated in our various tax jurisdictions, which include the United States (the “U.S.”), the People’s Republic of China, and the Republic of Latvia. Income tax expense for the three and six months ended December 31, 2019 was primarily related to income taxes from our operations in China, as we are not recording additional income tax benefits on losses in the U.S. jurisdiction based on our assessment of the valuation allowance position on our U.S. net deferred tax assets. For the three and six months ended December 31, 2018, we recorded a net income tax benefit, comprised of a tax benefit on losses in the U.S. jurisdiction, offset by tax expense on income generated in China. Income tax expense for the three and six months ended December 31, 2019 also includes withholding taxes accrued on a $2 million intercompany dividend declared in December 2019 by LightPath Optical Instrumentation (Zhenjiang) Co., Ltd. (“LPOIZ”), which dividend will be paid to us, as its parent company.
 
We record net deferred tax assets to the extent we believe it is more likely than not that some portion or all of these assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of December 31, 2019 and June 30, 2019, we have provided for a valuation allowance against our net deferred tax assets to reduce the net deferred tax assets to the amount we estimate is more-likely-than-not to be realized. Our net deferred tax asset consists primarily of U.S. net operating loss (“NOL”) carryforward benefits, and federal and state tax credits with indefinite carryover periods.
 
 
12
 
 
U.S. Federal and State Income Taxes
Our U.S. federal and state statutory income tax rate is estimated to be 25%. Based on our current assessment of the valuation allowance position on our net deferred tax assets, no tax benefit is expected to be recorded on pre-tax losses generated in the U.S.
 
Income Tax Law of the People’s Republic of China
Our Chinese subsidiaries, LightPath Optical Instrumentation (Shanghai) Co., Ltd. (“LPOI”) and LPOIZ, are governed by the Income Tax Law of the People’s Republic of China. As of December 31, 2019, LPOI and LPOIZ were subject to statutory income tax rates of 25% and 15%, respectively. In December 2019, we declared an intercompany dividend of $2 million from LPOIZ, payable to us as its parent company. Accordingly, we accrued Chinese withholding taxes of $200,000 associated with the dividend. Of the $2 million dividend, $1 million was paid to us during the quarter ended December 31, 2019, from which taxes of $100,000 were withheld and paid. An additional $100,000 of withholding taxes were accrued as of December 31, 2019, and will be withheld and paid at a future date, when the remaining $1 million is paid to us. Other than these withholding taxes, this intercompany dividend has no impact on our unaudited Condensed Consolidated Finanacial Statements. This dividend is from earnings accumulated prior to January 1, 2019. We currently intend to permanently invest earnings generated after January 1, 2019 from LPOIZ and, therefore, have not provided for future Chinese withholding taxes on such related earnings.
 
Law of Corporate Income Tax of Latvia
Our Latvian subsidiary, ISP Optics Latvia, SIA (“ISP Latvia”), is governed by the Law of Corporate Income Tax of Latvia. Effective January 1, 2018, the Republic of Latvia enacted tax reform with the following key provisions: (i) corporations are no longer subject to income tax, but are instead subject to a distribution tax on distributed profits (or deemed distributions, as defined) and (ii) the rate of tax was changed to 20%; however, distribution amounts are first divided by 0.8 to arrive at the profit before tax amount, resulting in an effective tax rate of 25%. As a transitional measure, distributions of earnings prior to January 1, 2018 are not subject to tax if declared prior to December 31, 2019. ISP Latvia has declared an intercompany dividend to be paid to ISP, its U.S. parent company.  Distributions of this dividend will be from earnings prior to January 1, 2018 and, therefore, will not be subject to tax. We currently do not intend to distribute any earnings generated after January 1, 2018. If, in the future, we change such intention, we will accrue distribution taxes, if any, as profits are generated.
 
9.   Stock-Based Compensation
 
Our directors, officers, and key employees are granted stock-based compensation through our Amended and Restated Omnibus Incentive Plan, as amended (the “Omnibus Plan”), through October 2018 and after that date, the 2018 Stock and Incentive Compensation Plan (the “SICP”), including incentive stock options, non-qualified stock options, and restricted stock unit (“RSU”) awards. The stock-based compensation expense is based primarily on the fair value of the award as of the grant date, and is recognized as an expense over the requisite service period.
 
The following table shows total stock-based compensation expense for the six months ended December 31, 2019 and 2018 included in the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income (Loss):
 
 
 
Six Months Ended
December 31,
 
 
 
2019
 
 
2018
 
Stock options
 $5,307 
 $29,468 
RSUs
  173,082 
  168,347 
     Total
 $178,389 
 $197,815 
 
    
    
The amounts above were included in:
    
    
Selling, general & administrative
 $178,389 
 $196,378 
Cost of sales
  - 
  1,620 
New product development
  - 
  (183)
 
 $178,389 
 $197,815 
 
 
13
 
 
We also adopted the LightPath Technologies, Inc. Employee Stock Purchase Plan (the “2014 ESPP”). The 2014 ESPP permits employees to purchase Class A common stock through payroll deductions, subject to certain limitations. A discount of $1,203 and $2,084 for the six months ended December 31, 2019 and 2018, respectively, is included in the selling, general and administrative expense in the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income (Loss), which represents the value of the 10% discount given to the employees purchasing stock under the 2014 ESPP.
 
Grant Date Fair Values and Underlying Assumptions; Contractual Terms
We estimate the fair value of each stock option as of the date of grant, using the Black-Scholes-Merton pricing model. The fair value of 2014 ESPP shares is the amount of the discount the employee obtains at the date of the purchase transaction.
 
Most stock options granted vest ratably over two to four years and are generally exercisable for ten years. The assumed forfeiture rates used in calculating the fair value of RSU grants was 0%, and the assumed forfeiture rates used in calculating the fair value of options for performance and service conditions were 20% for each of the six-month periods ended December 31, 2019 and 2018. The volatility rate and expected term are based on seven-year historical trends in Class A common stock closing prices and actual forfeitures. The interest rate used is the U.S. Treasury interest rate for constant maturities.
 
For the six months ended December 31, 2019 and 2018, there were no stock options granted under the Omnibus Plan. For stock options granted under the SICP in the six-month periods ended December 31, 2019 and 2018, we estimated the fair value of each stock option as of the date of grant using the following assumptions:
 
 
 
 Six Months Ended December 31,
 
 
 
 2019
 
 
 2018
 
 Weighted-average expected volatility
  63.7%
  56%-69%
 Dividend yields
  0%
  0%
 Weighted-average risk-free interest rate
  1.57%
  2.65%-3.00%
  Weighted-averageexpected term, in years
  7.50 
  2.53 
 
Information Regarding Current Share-Based Compensation Awards
A summary of the activity for share-based compensation awards in the six months ended December 31, 2019 is presented below:
  
 
 
 
 
 
 
 
 
 
 
 
 Restricted
 
 
 
     Stock Options    
 
 
 Stock Units (RSUs)
 
 
 
 
 
 
Weighted-
 
 
Weighted-
 
 
 
 
 
Weighted-
 
 
 
 
 
 
Average
 
 
Average
 
 
 
 
 
Average
 
 
 
 
 
 
Exercise
 
 
Remaining
 
 
 
 
 
Remaining
 
 
 
 Shares
 
 
 Price
 
 
 Contract
 
 
 Shares
 
 
 Contract
 
June 30, 2019
  979,925 
 $1.80 
  5.5 
  1,864,526 
  0.9 
 
    
    
    
    
    
Granted
  64,817 
 $1.28 
  9.9 
  384,000 
  2.9 
Exercised
   
    
    
  (17,204)
    
Cancelled/Forfeited
  (191,366)
 $1.73 
    
   
    
December 31, 2019
  853,376 
 $1.77 
  5.3 
  2,231,322 
  0.9 
 
    
    
    
    
    
Awards exercisable/
    
    
    
    
    
vested as of
    
    
    
    
    
December 31, 2019
  788,229 
 $1.73 
  5.1 
  1,650,325 
   
 
    
    
    
    
    
Awards unexercisable/
    
    
    
    
    
unvested as of
    
    
    
    
    
December 31, 2019
  65,147 
 $1.72 
  5.1 
  580,997 
  0.9 
 
  853,376 
    
    
  2,231,322 
    
 
RSU awards vest immediately or from two to four years from the date of grant. 
 
 
14
 
 
As of December 31, 2019, there was approximately $584,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements (including stock options and RSUs) granted. We expect to recognize the compensation cost as follows:
 
 
 
Stock
 
 
 
 
 
 
 
Fiscal Year Ending:
 
Options
 
 
RSUs
 
 
Total
 
June 30, 2020 (remaining six months)
 $4,084 
 $169,349 
 $173,433 
June 30, 2021
  6,870 
  248,698 
  255,568 
June 30, 2022
  2,952 
  125,374 
  128,326 
June 30, 2023
  310 
  26,233 
  26,543 
 
 $14,216 
 $569,654 
 $583,870 
 
10.            
Earnings (Loss) Per Share
 
Basic earnings per share is computed by dividing net income or loss by the weighted-average number of shares of Class A common stock outstanding, during each period presented. Diluted earnings per share is computed similarly to basic earnings per share, except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue shares of Class A common stock were exercised or converted into shares of Class A common stock. The computations for basic and diluted earnings per share of Class A common stock are described in the following table:
 
 
 
Three Months Ended December 31,
 
 
Six Months Ended December 31,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Net income (loss)
 $769,117 
 $16,276 
 $(606,040)
 $(566,615)
 
    
    
    
    
Weighted-average common shares outstanding:
    
    
    
    
Basic number of shares
  25,837,903 
  25,781,941 
  25,832,337 
  25,777,330 
 
    
    
    
    
Effect of dilutive securities:
    
    
    
    
Options to purchase common stock
  - 
  133,471 
  - 
  - 
RSUs
  1,523,370 
  1,481,827 
  - 
  - 
Diluted number of shares
  27,361,273 
  27,397,239 
  25,832,337 
  25,777,330 
 
    
    
    
    
Earnings (loss) per common share:
    
    
    
    
Basic
 $0.03 
 $0.00 
 $(0.02)
 $(0.02)
Diluted
 $0.03 
 $0.00 
 $(0.02)
 $(0.02)
 
The following potential dilutive shares were not included in the computation of diluted earnings per share of Class A common stock, as their effects would be anti-dilutive:
 
 
 
Three Months Ended December 31,
 
 
Six Months Ended December 31,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Options to purchase common stock
  1,013,743 
  875,085 
  996,834 
  1,006,348 
RSUs
  527,416 
  274,334 
  1,957,189 
  1,702,757 
 
  1,541,159 
  1,149,419 
  2,954,023 
  2,709,105 
 
 
15
 
 
11.            
Leases
 
As discussed in Note 2, Significant Accounting Policies, the Company adopted ASC Topic 842 effective July 1, 2019. Our leases primarily consist of operating leases related to our facilities located in Orlando, Florida; Irvington, New York; Riga, Latvia; Shanghai, China; and Zhenjiang, China, and finance leases related to certain equipment located in Orlando, Florida. The operating leases for facilities are non-cancelable operating leases, expiring through 2022. We include options to renew (or terminate) in our lease term, and as part of our right-of-use (“ROU”) assets and lease liabilities, when it is reasonably certain that we will exercise that option. We currently have obligations under five finance lease agreements, entered into during fiscal years 2016 to 2019, with terms ranging from three to five years. The leases are for computer and manufacturing equipment.
 
Our operating lease ROU assets and the related lease liabilities are initially measured at the present value of future lease payments over the lease term. Two of our operating leases include renewal options, which were not included in the measurement of the operating lease ROU assets and related lease liabilities. As most of our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Currently, none of our leases include variable lease payments that are dependent on an index or rate. We are responsible for payment of certain real estate taxes, insurance and other expenses on certain of our leases. These amounts are generally considered to be variable and are not included in the measurement of the ROU asset and lease liability. We generally account for non-lease components, such as maintenance, separately from lease components. Our lease agreements do not contain any material residual value guarantees or material restricted covenants. Leases with a term of 12 months or less are not recorded on the unaudited Condensed Consolidated Balance Sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
 
We are party to two leases with respect to our facility located in Orlando, Florida (the “Orlando Facility”). We received tenant improvement allowances for each of our two Orlando Facility leases. These allowances were used to construct improvements and are included in leasehold improvements and operating lease liabilities. The balances are being amortized over the corresponding lease terms.
 
The components of lease expense were as follows:
 
 
 
Three Months Ended December 31, 2019
 
 
Six Months Ended December 31,
2019
 
Operating lease cost
 $172,102 
 $336,973 
Finance lease cost:
    
    
Depreciation of lease assets
  86,063 
  172,126 
Interest on lease liabilities
  20,425 
  42,957 
Total finance lease cost
  106,488 
  215,083 
Total lease cost
 $278,590 
 $552,056 
 
Supplemental balance sheet information related to leases was as follows:
 
 
Classification
 
As of December 31,
2019
 
Assets:
 
 
 
 
Operating lease assets
Operating lease assets
 $1,488,126 
Finance lease assets
Property and equipment, net(1)
  913,234 
Total lease assets
 
 $2,401,360 
 
    
Liabilities:
 
    
Current:
 
    
Operating leases
Operating lease liabilities, current
 $749,399 
Short-term leases
Accrued liabilities(2)
  282,985 
Finance leases
Finance lease liabilities, current
  378,095 
 
    
Noncurrent:
 
    
Operating leases
Operating lease liabilities, less current portion
  1,265,152 
Finance leases
Finance lease liabilities, less current portion
  456,388 
Total lease liabilities
 
 $3,132,019 
 
(1)
Finance lease assets are recorded net of accumulated depreciation of approximately $1.1 million as of December 31, 2019.
(2)
Represents accrual related to the lease of the Irvington Facility, which we ceased use of as of June 30, 2019. All remaining lease payments were accrued as of that date, through the lease expiration in September 2020. See Note 14, Restructuring, to these unaudited Condensed Consolidated Financial Statements for additional information.
 
 
16
 
 
Lease term and discount rate information related to leases was as follows:
 
Lease Term and Discount Rate
 
As of December 31,
2019
 
Weighted Average Remaining Lease Term (in years)
 
 
 
Operating leases
  2.6 
Finance leases
  2.4 
 
    
Weighted Average Discount Rate
    
Operating leases
  4.9%
Finance leases
  7.9%
 
Supplemental cash flow information:
 
 
 
Six Months Ended December 31,
2019
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash used for operating leases
 $386,661 
Operating cash used for finance leases
 $42,970 
Financing cash used for finance leases
 $210,225 
 
Future maturities of lease liabilities, excluding amounts accrued for the Irvington Facility lease, were as follows as of December 31, 2019:
 
Fiscal year ending:
 
Finance Leases
 
 
Operating Leases
 
June 30, 2020 (remaining six months)
 $229,857 
 $409,244 
June 30, 2021
  407,954 
  829,565 
June 30, 2022
  231,783 
  771,283 
June 30, 2023
  59,647 
  157,849 
June 30, 2024
  11,811 
   
Total future minimum payments
  941,052 
  2,167,941 
   Less imputed interest
  (106,569)
  (153,390)
Present value of lease liabilities
 $834,483 
 $2,014,551 
 
 
17
 
 
12.            
Loans Payable
 
During the three months ended December 31, 2019, loans payable consisted of the BankUnited Term Loan (as defined below) payable to BankUnited N.A. (“BankUnited”). On February 26, 2019, we entered into a Loan Agreement (the “Loan Agreement”) with BankUnited for (i) a revolving line of credit up to maximum amount of $2,000,000 (the “BankUnited Revolving Line”), (ii) a term loan in the amount of up to $5,813,500 (“BankUnited Term Loan”), and (iii) a non-revolving guidance line of credit up to a maximum amount of $10,000,000 (the “Guidance Line” and, together with the BankUnited Revolving Line and BankUnited Term Loan, the “BankUnited Loans”). Each of the BankUnited Loans is evidenced by a promissory note in favor of BankUnited (the “BankUnited Notes”). Simultaneously with the execution of the Loan Agreement, we used the proceeds from the BankUnited Term Loan to pay in full, all outstanding amounts owed to Avidbank Corporate Finance, a division of Avidbank (“Avidbank”) pursuant to a then-outstanding acquisition term loan. For additional information related to the Avidbank loans, please see Note 18, Loans Payable, to our audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended June 30, 2019.
 
On May 6, 2019, we entered into that certain First Amendment to Loan Agreement, effective February 26, 2019, with BankUnited (the “Amendment” and, together with the Loan Agreement, the “Amended Loan Agreement”). The Amendment amended the definition of the fixed charge coverage ratio to more accurately reflect the parties’ understandings at the time the Loan Agreement was executed.
 
BankUnited Revolving Line
 
Pursuant to the Amended Loan Agreement, BankUnited will make loan advances under the BankUnited Revolving Line to us up to a maximum aggregate principal amount outstanding not to exceed $2,000,000, which proceeds will be used for working capital and general corporate purposes. Amounts borrowed under the BankUnited Revolving Line may be repaid and re-borrowed at any time prior to February 26, 2022, at which time all amounts will be immediately due and payable. The advances under the BankUnited Revolving Line bear interest, on the outstanding daily balance, at a per annum rate equal to 2.75% above the 30-day LIBOR. Interest payments are due and payable, in arrears, on the first day of each month. There were no borrowings under the BankUnited Revolving Line as of December 31, 2019.
 
BankUnited Term Loan
 
Pursuant to the Amended Loan Agreement, BankUnited advanced us $5,813,500 to satisfy in full the amounts owed to Avidbank, including the outstanding principal amount and all accrued interest under the acquisition term loan and to pay the fees and expenses incurred in connection with closing of the BankUnited Loans. The BankUnited Term Loan is for a 5-year term, but co-terminus with the BankUnited Revolving Line. The BankUnited Term Loan bears interest at a per annum rate equal to 2.75% above the 30-day LIBOR. Equal monthly principal payments of approximately $48,446, plus accrued interest, are due and payable, in arrears, on the first day of each month during the term. Upon maturity, all principal and interest shall be immediately due and payable. As of December 31, 2019, the applicable interest rate was 4.44%.
 
Guidance Line
 
Pursuant to the Amended Loan Agreement, BankUnited, in its sole discretion, may make loan advances to us under the Guidance Line up to a maximum aggregate principal amount outstanding not to exceed $10,000,000, which proceeds will be used for capital expenditures and approved business acquisitions. Such advances must be in minimum amounts of $1,000,000 for acquisitions and $500,000 for capital expenditures, and will be limited to 80% of cost or as otherwise determined by BankUnited. Amounts borrowed under the Guidance Line may not re-borrowed. The advances under the Guidance Line bear interest, on the outstanding daily balance, at a per annum rate equal to 2.75% above the 30-day LIBOR. Interest payments are due and payable, in arrears, on the first day of each month. On each anniversary of the Amended Loan Agreement, monthly principal payments become payable, amortized based on a ten-year term. There were no borrowings under the Guidance Line as of December 31, 2019.
 
 
18
 
 
Security and Guarantees
 
Our obligations under the Amended Loan Agreement are collateralized by a first priority security interest (subject to permitted liens) in all of our assets and the assets of our U.S. subsidiaries, GelTech, Inc. (“GelTech”) and ISP, pursuant to a Security Agreement granted by GelTech, ISP, and us in favor of BankUnited. Our equity interests in, and the assets of, our foreign subsidiaries are excluded from the security interest. In addition, all of our subsidiaries have guaranteed our obligations under the Amended Loan Agreement and related documents, pursuant to Guaranty Agreements executed by us and our subsidiaries in favor of BankUnited.
 
General Terms
 
The Amended Loan Agreement contains customary covenants including, but not limited to: (i) limitations on the disposition of property; (ii) limitations on changing our business or permitting a change in control; (iii) limitations on additional indebtedness or encumbrances; (iv) restrictions on distributions; and (v) limitations on certain investments. The Amended Loan Agreement also contains certain financial covenants, including obligations to maintain a fixed charge coverage ratio of 1.25 to 1.00 and a total leverage ratio of 4.00 to 1.00. As of December 31, 2019, the Company was in compliance with all required covenants.
 
We may prepay any or all of the BankUnited Loans in whole or in part at any time, without penalty or premium. Late payments are subject to a late fee equal to five percent (5%) of the unpaid amount. Amounts outstanding during an event of default accrue interest at a rate of five percent (5%) above the 30-day LIBOR applicable immediately prior to the occurrence of the event of default. The Amended Loan Agreement contains other customary provisions with respect to events of default, expense reimbursement, and confidentiality.
 
Financing costs incurred were recorded as a discount on debt and are amortized over the term. Amortization of approximately $9,300 and $12,000 is included in interest expense for the six months ended December 31, 2019 and 2018, respectively. For the six months ended December 31, 2018, the amortization of financing costs was related to the previous term loan payable to Avidbank.
 
Future maturities of loans payable are as follows:
 
 
 
BankUnited Term Loan
 
 
Unamortized Debt Costs
 
 
Total
 
Fiscal year ending:
 
 
 
 
 
 
 
 
 
June 30, 2020 (remaining six months)
 $290,675 
 $(8,357)
 $282,318 
June 30, 2021
  581,350 
  (17,334)
  564,016 
June 30, 2022
  581,350 
  (17,334)
  564,016 
June 30, 2023
  581,350 
  (17,334)
  564,016 
June 30, 2024
  3,342,762 
  (17,024)
  3,325,738 
Total payments
 $5,377,487 
 $(77,383)
  5,300,104 
Less current portion
    
    
  (581,350)
Non-current portion
    
    
 $4,718,754 
 
 
19
 
 
13.            
Foreign Operations
 
Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the balance sheet date, and revenues and expenses are translated at average rates of exchange for the period. Gains or losses on the translation of the financial statements of a non-U.S. operation, where the functional currency is other than the U.S. dollar, are reflected as a separate component of equity, which was a cumulative gain of approximately $1.0 million and $809,000 as of December 31, 2019 and June 30, 2019, respectively. During the six months ended December 31, 2019 and 2018, we also recognized net foreign currency transaction losses of approximately $376,000 and $388,000, respectively, included in the unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) in the line item entitled “Other income (expense), net.”
 
Our cash and cash equivalents totaled $4.3 million at December 31, 2019. Of this amount, greater than 50% was held by our foreign subsidiaries in China and Latvia. These foreign funds were generated in China and Latvia as a result of foreign earnings. With respect to the funds generated by our foreign subsidiaries in China, the retained earnings of the respective subsidiary must equal at least 50% of its registered capital before any funds can be repatriated through dividends. Based on retained earnings as of the end of the prior statotury tax year ended December 31, 2018, LPOIZ had approximately $3.5 million available for repatriation and LPOI did not have any earnings available for repatriation. During the three months ended December 31, 2019, we declared an intercompany dividend of $2 million payable by LPOIZ to us, of which $1 million has been paid to us as of December 31, 2019. The remaining $1 million will be paid to us in a future period.
 
Assets and net assets in foreign countries are as follows:
 
 
China
 
Latvia
 
December 31, 2019
 
June 30, 2019
 
December 31, 2019
 
June 30, 2019
Assets
 $16.5 million
 
 $16.9 million
 
 $9.5 million
 
 $8.2 million
Net assets
 $13.9 million
 
 $14.5 million
 
 $8.2 million
 
 $7.8 million
 
14.            
Restructuring
 
In July 2018, we announced the relocation and consolidation of ISP’s Irvington Facility into our existing Orlando Facility and our existing facility in Riga, Latvia (the “Riga Facility”). We recorded charges for restructuring and other exit activities related to the closure or relocation of business activities at fair value, when incurred. Such charges include termination benefits, contract termination costs, and costs to consolidate facilities or relocate employees. For the year ended June 30, 2019, we recorded approximately $1.2 million in expenses related to the relocation of the Irvington Facility, of which approximately $291,000 were recorded during the six months ended December 31, 2018. These charges are included as a component of the “Selling, general and administrative” expenses line item in our unaudited Condensed Consolidated Statement of Comprehensive Income (Loss). The charges recorded during the fiscal year ended June 30, 2019 included approximately $467,000 for our remaining obligation under the lease agreement for the Irvington Facility until the lease expires in September 2020 because we ceased use of this facility as of June 30, 2019. Amounts accrued and included in our unaudited Condensed Consolidated Balance Sheet as of June 30, 2019 related to this activity were comprised of the remaining lease obligation of approximately $467,000, included in “Accrued liabilities”, and approximately $246,000 of termination benefits and other costs, included in “Accrued payroll and benefits.” As of December 31, 2019, the remaining amounts accrued in our unaudited Condensed Consolidated Balance sheet included approximately $283,000 related to the lease obligation.
 
 
20
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations, and liquidity. This discussion and analysis should be read in conjunction with the attached unaudited Condensed Consolidated Financial Statements and notes thereto and our Annual Report on Form 10-K for the year ended June 30, 2019, including the audited Consolidated Financial Statements and notes thereto. The following discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Please also see the cautionary language at the beginning of this Quarterly Report regarding forward-looking statements.
 
The discussions of our results as presented in this Quarterly Report include use of the non-GAAP term “gross margin,” as well as other non-GAAP measures discussed in more detail under the heading “Non-GAAP Financial Measures.” Gross margin is determined by deducting the cost of sales from operating revenue. Cost of sales includes manufacturing direct and indirect labor, materials, services, fixed costs for rent, utilities and depreciation, and variable overhead. Gross margin should not be considered an alternative to operating income or net income, which are determined in accordance with GAAP. We believe that gross margin, although a non-GAAP financial measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates our cost structure and provides funds for our total costs and expenses. We use gross margin in measuring the performance of our business and have historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different manner.
 
Introduction
 
We were incorporated in Delaware in 1992 as the successor to LightPath Technologies Limited Partnership, a New Mexico limited partnership, formed in 1989, and its predecessor, Integrated Solar Technologies Corporation, a New Mexico corporation, formed in 1985. Today, LightPath is a global company with major facilities in the United States, the People’s Republic of China, and the Republic of Latvia.
 
Our capabilities include precision molded optics, thermal imaging optics and custom designed optics. These capabilities allow us to manufacture optical components and higher-level assemblies, including precision molded glass aspheric optics, molded and diamond-turned infrared aspheric lenses and other optical materials used to produce products that manipulate light. We design, develop, manufacture and distribute optical components and assemblies utilizing advanced optical manufacturing processes. We serve a wide and diverse number of industries including defense and security, optical systems and components, datacom/telecom, information technology, life sciences, machine vision and production technology. Our products are incorporated into a variety of applications by our broad and diverse customer base. These applications include defense products, medical devices, laser aided industrial tools, automotive safety applications, barcode scanners, optical data storage, hybrid fiber coax datacom, telecommunication optical networks, machine vision and sensors, among others. All the products we produce enable lasers and imaging devices to function more effectively.
 
Subsidiaries
 
In November 2005, we formed LPOI, a wholly-owned subsidiary, located in Jiading, People’s Republic of China. LPOI provides sales and support functions. In December 2013, we formed LPOIZ, a wholly-owned subsidiary located in the New City district, of the Jiangsu province, of the People’s Republic of China. LPOIZ’s 55,000 square foot manufacturing facility (the “Zhenjiang Facility”) serves as our primary manufacturing facility in China and provides a lower cost structure for production of larger volumes of optical components and assemblies. Late in fiscal 2019, this facility was expanded from 39,000 to 55,000 square feet to add capacity for polishing to support our growing infrared business.
 
In December 2016, we acquired ISP, and its wholly-owned subsidiary, ISP Latvia. ISP is a vertically integrated manufacturer offering a full range of infrared products from custom infrared optical elements to catalog and high-performance lens assemblies. Historically, ISP’s Irvington Facility functioned as its global headquarters for operations, while also providing manufacturing capabilities, optical coatings, and optical and mechanical design, assembly, and testing. In June 2019, we completed the relocation of the Irvington Facility to our existing Orlando Facility and Riga Facility. ISP Latvia is a manufacturer of high precision optics and offers a full range of infrared products, including catalog and custom infrared optics. ISP Latvia’s Riga Facility functions as its manufacturing facility.
 
For additional information, please refer to our Annual Report on Form 10-K for the year ended June 30, 2019.
 
Recent Organizational and Strategic Initiatives
 
To ensure we fully leverage the expanded capabilities and manage the broader product portfolio that we now have, we begun introducing organizational changes in July 2019. We created and filled the position of Chief Operating Officer. This position combines all operations, engineering, sales and marketing functions under one leader to ensure the closest possible ties between demand and supply of our products. We believe this will ensure the best coordination between technical and operational requirements. The position is responsible for managing annual plan objectives, i.e., revenues, gross margin, controllable operating income and return on asset objectives. We have also implemented a product management function, with a product manager for each of our major product capabilities: molded optics, thermal imaging optics and custom designed optics. Product management is principally a portfolio management process that analyzes products within the product capability areas as defined above. This function will facilitate choosing investment priorities and ensuring successful product life cycle management. We have also defined, but not filled, the position of Senior Vice President, Strategic Business Assessment. This person will be responsible for strategically aligning LighPath’s competencies with strategic industry revenue opportunities, and will manage the product management function.
 
 
21
 
  
Product Groups and Markets
 
In fiscal 2019, we reorganized our business into three product groups: PMO, infrared products and specialty products. These product groups are supported by our major product capabilities: molded optics, thermal imaging optics, and custom designed optics.
 
Our PMO product group consists of visible precision molded optics with varying applications. Our infrared product group is comprised of infrared optics, both molded and diamond-turned, and thermal imaging assemblies. This product group also includes both conventional and CNC ground and polished lenses. Between these two product groups, we have the capability to manufacture lenses from very small (with diameters of sub-millimeter) to over 300 millimeters, and with focal lengths from approximately 0.4mm to over 2000mm. In addition, both product groups offer both catalog and custom designed optics.
 
Our specialty product group is comprised of value-added products, such as optical subsystems, assemblies, and collimators, and non-recurring engineering (“NRE”) products, consisting of those products we develop pursuant to product development agreements that we enter into with customers. Typically, customers approach us and request that we develop new products or applications for our existing products to fit their particular needs or specifications. The timing and extent of any such product development is outside of our control.
 
We have also aligned our marketing efforts by our capabilities (i.e., molded optics, thermal imaging optics, and custom optics), and then by industry. We currently serve the following major markets: defense and security, optical systems and components, datacom/telecom, information technology, life sciences, machine vision and production technology. Customers in each of these markets may select the best optical technologies that suit their needs from our entire suite of products, availing us to cross-selling opportunities, particularly where we can leverage our knowledge base against our expanding design library. Within our product groups, we have various applications that serve our major markets. For example, our infrared products can be used for gas sensing devices, spectrometers, night vision systems, advanced driver-assistance systems (“ADAS”), thermal weapon gun sights, and infrared counter measure systems, among others.
 
The photonics market drives our growth and is comprised of eight application areas: information and communication technology, display, lighting, photovoltaic, production technology, life sciences, and measurement and automated vision. In 2018, the market size for these applications at the system level was estimated at approximately $556 billion. LightPath has product applications in six of the eight application areas, all except for displays and photovoltaic. According to the latest Markets and Markets survey, these six application areas had an estimated market value of approximately $401 billion and are growing at a 7% compound annual growth rate. Within the larger overall markets, we believe there is a market of approximately $2.0 billion for our current products and capabilities. We continue to believe our products will provide significant growth opportunities over the next several years and, therefore, we will continue to target specific applications in each of these major markets. In addition to these major markets, a large percentage of our revenues are derived from sales to unaffiliated companies that purchase our products to fulfill their customers’ orders, as well as unaffiliated companies that offer our products for sale in their catalogs. Our strategy is to leverage our technology, know-how, established low-cost manufacturing capability and partnerships to grow our business. Our product managers focus on pursuing customer growth opportunities where our differential advantages coincide with key customer needs.
 
Results of Operations
 
Fiscal Second Quarter: Three months ended December 31, 2019, compared to three months ended December 31, 2018
 
Revenues:
Revenue for the second quarter of fiscal 2020 was approximately $9.6 million, an increase of approximately $1.1 million, or 12%, as compared to the same period of the prior fiscal year. Revenue generated by infrared products was approximately $5.0 million in the second quarter of fiscal 2020, an increase of approximately $1.3 million, or 34%, compared to approximately $3.7 million in the same period of the prior fiscal year. This increase is primarily due to the timing of order shipments against a large-volume annual contract for diamond-turned infrared products. During the second quarter of fiscal 2019, revenue from this contract was lower, as we had shipped the balance of the existing contract before the renewal was finalized. In the second quarter of fiscal 2020, the customer requested that we accelerate shipments that the customer had previously delayed in the preceding quarter because of delays it experienced for other components in the supply chain; thus, order shipments related to this large contract were higher in the second quarter of fiscal 2020, as compared to the second quarter of fiscal 2019. According to the terms of the contract, these orders cannot be delayed beyond March 31, 2020 and, therefore, the balance of this order must ship next quarter. Revenue generated by PMO products was approximately $3.7 million for the second quarter of fiscal 2020, as compared to $4.1 million in the same period of the prior fiscal year, a decrease of approximately $416,000, or 10%. The decrease in revenue is primarily attributed to decreases in sales to customers in the commercial market, as well as the defense and industrial markets. Revenue generated by our specialty products was approximately $885,000 in the second quarter of fiscal 2020, an increase of approximately $193,000, or 28%, compared to $693,000 in the same period of the prior fiscal year. This increase is primarily related to new NRE projects for customers in the medical and commercial markets.
 
 
22
 
 
Cost of Sales and Gross Margin:
Gross margin in the second quarter of fiscal 2020 was approximately $3.9 million, an increase of 11%, as compared to approximately $3.5 million in same quarter of the prior fiscal year. Total cost of sales was approximately $5.7 million for the second quarter of fiscal 2020, compared to $5.0 million for the same period of the prior fiscal year. The increases in gross margin and cost of sales are primarily driven by the increase in sales. Gross margin as a percentage of revenue was 41% for the second quarter of fiscal 2020, consistent with the second quarter of fiscal 2019. Given the shift in revenue toward infrared products, which typically have lower margins than PMO products, this actually reflects an overall improvement in gross margins, due to our improved cost structure and operating performance following the completion of the Irvington Facility relocation in June 2019.
 
Selling, General and Administrative:
Selling, general and administrative (“SG&A”) costs were approximately $2.2 million for the second quarter of fiscal 2020, a decrease of approximately 13%, as compared to approximately $2.5 million in the same quarter of the prior fiscal year. SG&A for the second quarter of fiscal 2019 included approximately $200,000 of non-recurring expenses related to the relocation of the Irvington Facility to our existing Orlando Facility and Riga Facility. The second quarter of fiscal 2020 reflects savings from the absence of these non-recurring costs, as well as reduced personnel and overhead costs resulting from the restructuring associated with the relocation of the Irvington Facility. We expect future SG&A costs to continue to reflect reduced operating and overhead costs as a result of the consolidation of our manufacturing facilities.
 
New Product Development:
New product development costs were approximately $469,000 in the second quarter of fiscal 2020, a decrease of 10%, as compared to approximately $519,000 in the same period of the prior fiscal year. This decrease in new product development costs was primarily due a decrease in personnel costs associated with restructuring personnel from product development to our newly created product management function, for which expenses are now included in SG&A costs. This decrease in personnel costs was partially offset by an increase in patent appliation filing expenses incurred during the second quarter of fiscal 2020.
 
Other Income (Expense):
In the second quarter of fiscal 2020, interest expense was approximately $89,000, compared to approximately $153,000 in the same period of the prior fiscal year. The decrease in interest expense is primarily due to more favorable terms associated with the BankUnited Term Loan we entered into during the third quarter of fiscal 2019. We expect that interest expense will remain near current levels for the remainder of fiscal 2020.
 
Other income, net, was approximately $123,000 in the second quarter of fiscal 2020, compared to other expense, net, of approximately $48,000 in the second quarter of fiscal 2019, primarily resulting from net gains and losses, respectively, on foreign exchange transactions. We execute all foreign sales from our U.S. facilities and inter-company transactions in U.S. dollars, partially mitigating the impact of foreign currency fluctuations. Assets and liabilities denominated in non-United States currencies, primarily the Chinese Yuan and Euro, are translated at rates of exchange prevailing on the balance sheet date, and revenues and expenses are translated at average rates of exchange for the year. During the second quarter of fiscal 2019, we incurred net foreign currency transaction gains of approximately $119,000, compared to net foreign currency transaction losses of $50,000 for the same period of the prior fiscal year.
 
Income Taxes:
During the second quarter of fiscal 2020, we recorded income tax expense of approximately $322,000, primarily related to income taxes from our operations in China and Chinese withholding taxes associated with the intercompany dividend declared by LPOIZ during the quarter. While this repatriation transaction resulted in some additional Chinese withholding taxes, LPOIZ currently qualifies for a reduced Chinese income tax rate; therefore, the total tax on those earnings was still below the normal income tax rate. This compares to a net income tax benefit of approximately $23,000 recorded for the second quarter of fiscal 2019, which was comprised of a tax benefit on losses in the U.S. jurisdiction, offset by tax expense on income generated in China. Please refer to Note 8, Income Taxes, in the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information.
 
Net Income:
Net income for the second quarter of fiscal 2020 was approximately $769,000, or $0.03 basic and diluted earnings per share, compared to net income of approximately $16,000, or $0.00 basic and diluted earnings per share, for the second quarter of fiscal 2019. The increase in net income for the second quarter of fiscal 2020, as compared to the second quarter of fiscal 2019, is primarily attributable to the increase in sales, resulting in higher gross margin, coupled with a decrease in expenses for SG&A and amortization of intangibles. These differences increased operating income by approximately $863,000 for the second quarter of fiscal 2020, as compared to the same period of the prior fiscal year. In addition, there were favorable differences in interest expense and foreign currency gains and losses, offset by an unfavorable difference of $345,000 in the provision for income taxes.
 
Weighted-average common stock shares outstanding were 25,837,903 and 27,361,273 basic and diluted, respectively, in the second quarter of fiscal 2020, compared to 25,781,941 and 27,397,239 basic and diluted, respectively, in the second quarter of fiscal 2019. The increase in the weighted-average basic common stock shares, and decrease in weighted-average diluted common stock shares, was due to the issuance of shares of Class A common stock under the 2014 ESPP and upon the exercises of stock options and RSUs.
 
 
23
 
 
Fiscal First Half: Six months ended December 31, 2019, compared to six months ended December 31, 2018
 
Revenues:
Revenue for the first half of fiscal 2020 was approximately $17.1 million, an increase of less than 1%, as compared to the same period of the prior fiscal year. Revenue generated by infrared products was approximately $9.0 million in the first half of fiscal 2020, an increase of 3%, compared to approximately $8.7 million in the same period of the prior fiscal year. The increase in infrared product revenue is primarily attributable to sales of molded infrared products, including products made with our new BD6 material. Revenues from shipments against the large-volume annual contract for diamond-turned infrared products during the first half of fiscal 2020 were similar to the first half of fiscal 2019. Revenue generated by PMO products was approximately $6.9 million for the first half of fiscal 2020, a decrease of 5%, as compared to $7.2 million in the same period of the prior fiscal year. The decrease in revenue is primarily attributed to decreases in sales to customers in the commercial and defense markets, partially offset by increases in sales to customers in the medical and telecommunications markets. Revenue generated by our specialty products was approximately $1.3 million in the first half of fiscal 2020, an increase of approximately 11%, as compared to $1.2 million in the same period of the prior fiscal year. This increase is primarily related to new NRE projects for customers in the medical and commercial markets, partially offset by a decrease in sales of specialty products to a medical customer, due to timing of orders.
 
Cost of Sales and Gross Margin:
Gross margin in the first half of fiscal 2020 was approximately $6.3 million, a decrease of 4%, as compared to approximately $6.6 million in the same period of the prior fiscal year. Total cost of sales was approximately $10.8 million for the first half of fiscal 2020, compared to $10.5 million for the same period of the prior fiscal year. Gross margin as a percentage of revenue was 37% for the first half of fiscal 2020, compared to 39% for the first half of fiscal 2019. The increase in cost of sales, and decrease in gross margin as a percentage of revenue, is due to several factors that impacted the first quarter of 2020, which were substantially mitigated during the second quarter of fiscal 2020. First, gross margins for our PMO products were negatively impacted by higher duties and freight charges resulting from increased tariffs beginning in June 2019. These additional costs increased cost of sales for the first quarter of fiscal 2020; however, these costs were mitigated in the second quarter by the strategies we implemented during the first quarter. Second, gross margins for infrared products were impacted by yield issues related to our BD6 products, which contributed to higher costs during the first quarter of fiscal 2020. Yields improved significantly during the second quarter of fiscal 2020 as a result of actions taken early in the second quarter. Volumes continue to increase for our BD6-based infrared molded products, and we continue to work toward converting germanium-based diamond-turned infrared products to our BD6 material, which we expect will continue to improve our infrared margins over time.
 
Selling, General and Administrative:
For the first half of fiscal 2020, SG&A costs were approximately $4.5 million, a decrease of approximately 9%, as compared to approximately $5.0 million in the same period of the prior fiscal year. SG&A for the first half of fiscal 2019 included approximately $291,000 of non-recurring expenses related to the relocation of the Irvington Facility to our existing Orlando Facility and Riga Facility. The first half of fiscal 2020 reflects savings from the absence of these non-recurring costs, as well as reduced personnel and overhead costs resulting from the restructuring associated with the relocation of the Irvington Facility.
 
New Product Development:
New product development costs were approximately $897,000 in the first half of fiscal 2020, a decrease of approximately 9%, as compared to approximately $989,000 in the same period of the prior fiscal year. This decrease was primarily due to the restructuring of personnel from product development to our newly created product management function, for which expenses are now included in SG&A. The decrease in personnel costs was partially offset by increases in patent expenses incurred during the first half of fiscal 2020.
 
Other Income (Expense):
In the first half of fiscal 2020, interest expense was approximately $188,000, compared to approximately $298,000 in the same period of the prior fiscal year. The decrease in interest expense is primarily due to more favorable terms associated with the BankUnited Term Loan we entered into during the third quarter of fiscal 2019.
 
Other expense, net, was approximately $393,000 in the first half of fiscal 2020, compared to approximately $387,000 in the first half of fiscal 2019, primarily resulting from net losses on foreign exchange transactions. We execute all foreign sales from our U.S. facilities and inter-company transactions in U.S. dollars, partially mitigating the impact of foreign currency fluctuations. Assets and liabilities denominated in non-United States currencies, primarily the Chinese Yuan and Euro, are translated at rates of exchange prevailing on the balance sheet date, and revenues and expenses are translated at average rates of exchange for the year. During the first half of fiscal 2020, we incurred net foreign currency transaction losses of approximately $376,000, compared to $388,000 for the same period of the prior fiscal year.
 
 
24
 
 
Income Taxes:
During the first half of fiscal 2020, we recorded income tax expense of $470,000, primarily related to income taxes from our operations in China, and Chinese withholding taxes associated with the intercompany dividend declared by LPOIZ during the second quarter. This compares to a net income tax benefit of approximately $202,000 recorded for the first half of fiscal 2019, which was comprised of a tax benefit on losses in the U.S. jurisdiction, offset by tax expense on income generated in China. Please refer to Note 8, Income Taxes, in the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information.
 
Net Income (Loss):
Net loss for the first half of fiscal 2020 was approximately $606,000, or $0.02 basic and diluted loss per share, compared to a net loss of approximately $567,000, or $0.02 basic and diluted loss per share, for the first half of fiscal 2019. The slight increase in net loss for the first half of fiscal 2020, as compared to the first half of fiscal 2019, is primarily attributable to the unfavorable difference of $673,000 in the provision for income taxes, offset by an increase of $529,000 in operating income, coupled with a decrease in interest expense of $111,000.
 
Weighted-average common stock shares outstanding were to 25,832,337, for both basic and diluted, in the first half of fiscal 2020, compared to 25,777,330, for both basic and diluted, in the first half of fiscal 2019. The increase in the weighted-average basic common stock shares was due the issuance of shares of Class A common stock under the 2014 ESPP and upon the exercises of stock options and RSUs.
 
Liquidity and Capital Resources
 
At December 31, 2019, we had working capital of approximately $12.5 million and total cash and cash equivalents of approximately $4.3 million, of which, greater than 50% of our cash and cash equivalents was held by our foreign subsidiaries.
 
Cash and cash equivalents held by our foreign subsidiaries were generated in China and Latvia as a result of foreign earnings. Before any funds can be repatriated from China through dividends, the retained earnings of the legal entity must equal at least 50% of its registered capital. Based on retained earnings as of December 31, 2018, the end of the prior statutory tax year, LPOIZ had approximately $3.5 million available for repatriation and LPOI did not have any earnings available for repatriation. During the three months ended December 31, 2019, we declared an intercompany dividend of $2 million payable from LPOIZ to us as its parent company, of which $1 million has been paid to us as of December 31, 2019. The remaining $1 million will be paid to us in a future period. This dividend is from earnings accumulated prior to January 1, 2019. We currently intend to permanently invest earnings generated after January 1, 2019, and, therefore, have not provided for future Chinese withholding taxes on such related earnings.
 
Loans payable consists of the BankUnited Term Loan pursuant to the Amended Loan Agreement. The Amended Loan Agreement also provides for a BankUnited Revolving Line and a Guidance Line. As of December 31, 2019, the outstanding balance on the BankUnited Term Loan was approximately $5.3 million, and we had no borrowings outstanding on the BankUnited Revolving Line or Guidance Line.
 
The Amended Loan Agreement includes certain customary covenants. As of December 31, 2019, we were in compliance with all covenants. For additional information, see Note 12, Loans Payable, to the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
 
We generally rely on cash from operations and equity and debt offerings, to the extent available, to satisfy our liquidity needs and to maintain our ability to repay the BankUnited Term Loan. There are a number of factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated sales growth, increased material costs, increased labor costs, planned production efficiency improvements not being realized, increases in property, casualty, benefit and liability insurance premiums, and increases in other costs. We will also continue efforts to keep costs under control as we seek renewed sales growth. Our efforts are directed toward generating positive cash flow and profitability. If these efforts are not successful, we may need to raise additional capital. Should capital not be available to us at reasonable terms, other actions may become necessary in addition to cost control measures and continued efforts to increase sales. These actions may include exploring strategic options for the sale of the Company, the sale of certain product lines, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, the creation of licensing arrangements with respect to our technology, or other alternatives.
 
Cash Flows – Financings:
Net cash used in financing activities was approximately $489,000 in the first six months of fiscal 2020, compared to approximately $872,000 used in the first six months of fiscal 2019. Cash used in financing activities for the first six months of fiscal 2020 reflected approximately $501,000 in principal payments on our loans and finance leases, partially offset by approximately $12,000 in proceeds from the sale of Class A common stock under the 2014 ESPP. Cash used in financing activities for the first six months of fiscal 2019 was comprised of approximately $897,000 in principal payments on our loans and capital leases, partially offset by approximately $25,000 in proceeds from the sale of Class A common stock under the 2014 ESPP and from the exercise of stock options.
 
 
25
 
 
Cash Flows – Operating:
Cash flow provided by operations was approximately $938,000 for the first six months of fiscal 2020, compared to cash used in operations of approximately $398,000 for the first six months of fiscal 2019. The increase in cash flow from operations for the first six months of fiscal 2020 was primarily due to a reduction in inventory, compared to an increase in inventory during the same period of the prior fiscal year, and collections on other receivables during the first six months of fiscal 2020. We anticipate improvement in our cash flows provided by operations in future years based on our forecasted sales growth and anticipated margin improvements based on production efficiencies, including the relocation of our Irvington Facility, partially offset by marginal increases in sales and marketing and new product development expenditures.
 
Cash Flows – Investing:
During the first six months of fiscal 2020, we expended approximately $1.2 million in investments in capital equipment, compared to approximately $1.6 million, including equipment financed through capital leases, in the first six months of fiscal 2019. The majority of our capital expenditures during the first six months of fiscal 2020 were related to expansion of our BD6 material production and our infrared coating capacity. Overall, we anticipate that the level of capital expenditures during fiscal 2020 will be lower than in fiscal 2019, however, the total amount expended will depend on opportunities and circumstances.
 
Contractual Obligations and Commitments
 
As of December 31, 2019, our principal commitments consisted of obligations under operating and finance leases and debt agreements. No material changes occurred during the first half of fiscal 2020 in our contractual cash obligations to repay debt or to make payments under operating and finance leases, or in our contingent liabilities as disclosed in our Annual Report on Form 10-K for the year ended June 30, 2019.
 
Off Balance Sheet Arrangements
 
We do not engage in any activities involving variable interest entities or off-balance sheet arrangements.
 
Critical Accounting Policies and Estimates
 
Other than the policy changes disclosed in Note 2, Significant Accounting Policies, to the unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report, there have been no material changes to our critical accounting policies and estimates during the six months ended December 31, 2019 from those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended June 30, 2019.
 
Recent Accounting Pronouncements
 
See Note 2, Significant Accounting Policies, to the unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report for a description of recent accounting pronouncements and accounting changes.
 
 
26
 
 
How We Operate
 
We have continuing sales of two basic types: sales via ad-hoc purchase orders of mostly standard product configurations (our “turns” business) and the more challenging and potentially more rewarding business of customer product development. In this latter type of business, we work with customers to help them determine optical specifications and even create certain optical designs for them, including complex multi-component designs that we call “engineered assemblies.” This is followed by “sampling” small numbers of the product for the customers’ test and evaluation. Thereafter, should a customer conclude that our specification or design is the best solution to their product need; we negotiate and “win” a contract (sometimes called a “design win”) – whether of a “blanket purchase order” type or a supply agreement. The strategy is to create an annuity revenue stream that makes the best use of our production capacity, as compared to the turns business, which is unpredictable and uneven. This annuity revenue stream can also generate low-cost, high-volume type orders. A key business objective is to convert as much of our business to the design win and annuity model as is possible. We face several challenges in doing so:
 
Maintaining an optical design and new product sampling capability, including a high-quality and responsive optical design engineering staff;
 
The fact that as our customers take products of this nature into higher volume, commercial production (for example, in the case of molded optics, this may be volumes over one million pieces per year) they begin to work seriously to reduce costs – which often leads them to turn to larger or overseas producers, even if sacrificing quality; and
 
Our small business mass means that we can only offer a moderate amount of total productive capacity before we reach financial constraints imposed by the need to make additional capital expenditures – in other words, because of our limited cash resources and cash flow, we may not be able to service every opportunity that presents itself in our markets without arranging for such additional capital expenditures.
 
Despite these challenges to winning more “annuity” business, we nevertheless believe we can be successful in procuring this business because of our unique capabilities in optical design engineering that we make available on the merchant market, a market that we believe is underserved in this area of service offering. Additionally, we believe that we offer value to some customers as a source of supply in the U.S. should they be unwilling to commit to purchase their supply of a critical component from foreign merchant production sources. For information regarding revenue recognition related to our various revenue streams, refer to Critical Accounting Policies and Estimates in our Annual Report on Form 10-K dated June 30, 2019.
 
Our Key Performance Indicators:
 
Usually on a weekly basis, management reviews a number of performance indicators, both qualitative and quantitative. These indicators change from time to time as the opportunities and challenges in the business change. These indicators are used to determine tactical operating actions and changes. We believe that our non-financial production indicators, such as those noted, are proprietary information.
  
Financial indicators that are considered key and reviewed regularly are as follows:
 
sales backlog;
revenue dollars and units by product group; and
other key indicators.
 
These indicators are also used to determine tactical operating actions and changes and are discussed in more detail below.
 
 
27
 
 
Sales Backlog
 
We believe our sales growth has been and continues to be our best indicator of success. Our best view into the efficacy of our sales efforts is in our “order book.” Our order book equates to sales “backlog.” It has a quantitative and a qualitative aspect: quantitatively, our backlog’s prospective dollar value and qualitatively, what percent of the backlog is scheduled by the customer for date-certain delivery. We define our “12-month backlog” as that which is requested by the customer for delivery within one year and which is reasonably likely to remain in the backlog and be converted into revenues. This includes customer purchase orders and may include amounts under supply contracts if they meet the aforementioned criteria. Generally, a higher 12-month backlog is better for us.
 
Our 12-month backlog at December 31, 2019 was approximately $19.1 million, an increase of 7%, as compared to $18.1 million as of December 31, 2018. Compared to the end of fiscal 2019, our 12-month backlog increased by 12% during the first six months of fiscal 2020. Backlog growth rates for the last five fiscal quarters are:
 
 
Quarter
 
 
Backlog ($ 000)
 
 
Change From Prior Year End
 
 
Change From Prior Quarter End
 
  Q2 2019 
 $18,145 
  41%
  30%
  Q3 2019 
 $17,137 
  34%
  -6%
  Q4 2019 
 $17,121 
  33%
  0%
  Q1 2020 
 $15,390 
  -10%
  -10%
  Q2 2020 
 $19,095 
  12%
  24%
 
 
The increase in our 12-month backlog from the first quarter of fiscal 2020 to the second quarter of fiscal 2020 was largely due to the renewal of a large annual contract for diamond-turned infrared products during the second quarter, which we will begin shipping against in the third quarter of fiscal 2020, after shipments against the previous contract are completed. The timing of this renewal is similar to the prior fiscal year. During the fourth quarter of fiscal 2019, we booked new annual contracts for molded infrared products. These annual contracts are expected to renew during the second half of the current fiscal year. The timing of each of these annual contract renewals may vary, and may substantially increase backlog levels at the time the orders are received, and backlog will subsequently be drawn down as shipments are made against these orders.
 
We have experienced strong demand for infrared products used in the industrial, defense and first responder sectors. Demand for infrared products is being further fueled by interest in lenses made with our new BD6 material. We expect to maintain moderate growth in our visible PMO product group by continuing to diversify and offer new applications, with a cost competitive structure. Over the past several years, we have broadened our capabilities to include additional glass types and the ability to make much larger lenses, providing long-term opportunities for our technology roadmap and market share expansion. Based on our backlog and recent quote activity, we expect increases in revenue from sales of both molded and turned infrared products for the remainder of fiscal 2020.
 
Revenue Dollars and Units by Product Group
 
The following table sets forth revenue dollars and units for our three product groups for the three and six-month periods ended December 31, 2019 and 2018:
 
 
 
     Three Months Ended December 31,
 
 
     Six Months Ended December 31,
 
 
 Quarter
 
 
 Year-to-date
 
 
 
 2019
 
 
 2018
 
 
 2019
 
 
 2018
 
 
 % Change
 
 
 % Change
 
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PMO
 $3,710,549 
 $4,126,091 
 $6,895,007 
 $7,238,195 
  -10%
  -5%
Infrared Products
  5,003,874 
  3,729,845 
  8,963,499 
  8,690,772 
  34%
  3%
Specialty Products
  885,489 
  692,571 
  1,293,336 
  1,169,261 
  28%
  11%
Total revenue
 $9,599,912 
 $8,548,507 
 $17,151,842 
 $17,098,228 
  12%
  0%
 
    
    
    
    
    
    
Units
    
    
    
    
    
    
PMO
  779,434 
  647,363 
  1,348,164 
  1,078,141 
  20%
  25%
Infrared Products
  74,597 
  39,109 
  139,654 
  88,033 
  91%
  59%
Specialty Products
  14,133