RISK FACTORS
Investing in our securities offered pursuant to this prospectus
involves a high degree of risk. Before making an investment
decision, you should carefully review and consider the risk factors
in this prospectus or incorporated by reference into this
prospectus to our most recent Annual Report on Form 10-K and any
subsequent Quarterly Reports on Form 10-Q or Current Reports on
Form 8-K we file after the date of this prospectus, and all other
information contained or incorporated by reference into this
prospectus, as updated by our subsequent filings under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), before acquiring any of such securities in light of
your particular investment objectives and financial circumstances.
The risks so described are not the only risks we face. Additional
risks not presently known to us or that we currently deem
immaterial may also impair our business operations. Our business,
financial condition, results of operations, or prospects could be
materially adversely affected by any of these risks. The occurrence
of any of these risks might result in the trading price of our
securities to decline or cause you to lose all or part of your
investment in the offered securities. Please read
“
Cautionary Statement Regarding
Forward-Looking Statements.
”
Risks Related To Our Business and Financial Results
We have a history of losses.
We achieved net income of
approximately $641,000 for the six months ended December 31, 2017,
$7.7 million for fiscal 2017, and $1.4 million for fiscal 2016;
however, we incurred net losses of $715,000 and $313,000 for fiscal
2015 and 2014, respectively, and have a history of losses preceding
such periods. As of December 31, 2017, we had an accumulated
deficit of approximately $195.7 million. We may incur losses in the
future if we do not achieve sufficient revenue to maintain
profitability. We expect revenue to grow by seeking to improve
gross margins and generating additional sales, but we cannot
guarantee such improvement or growth.
Factors
that could adversely affect our future profitability, include, but
are not limited to, a decline in revenue either due to lower sales
unit volumes or decreasing selling prices or both, our ability to
order supplies from vendors, which in turn affects our ability to
manufacture our products, and slow payments from our customers on
accounts receivable.
Any
failure to maintain profitability would have a materially adverse
effect on our ability to implement our business plan, our results
and operations, and our financial condition, and could cause the
value of our Class A Common Stock to decline, resulting in a
significant or complete loss of your investment.
We may need additional capital to sustain our operations in the
future, and may need to seek further financing, which we may not be
able to obtain on acceptable terms or at all, which could affect
our ability to implement our business strategies.
We have
limited capital resources. To date, our operations have been
largely funded from the proceeds of equity financings with some
level of debt financing. We anticipate requiring additional capital
in the future to support our operations and further expand our
business and product lines. We may not be able to obtain additional
financing when we need it on terms acceptable to us, or at
all.
Our
future capital needs will depend on numerous factors including: (i)
profitability; (ii) the release of competitive products by our
competition; (iii) the level of our investment in research and
development; and (iv) the amount of our capital expenditures,
including equipment and acquisitions. We cannot assure you that we
will be able to obtain capital in the future to meet our needs. If
we are unable to raise capital when needed, our business, financial
condition, and results of operations would be materially adversely
affected, and we could be forced to reduce or discontinue our
operations.
We are dependent on a few key customers, and the loss of any key
customer could cause a significant decline in our revenues.
In fiscal 2017, we had sales to three customers that comprised an
aggregate of approximately 26% of our annual revenue with one
customer at 10% of our sales, another customer at 9% of our sales,
and the third customer at 7% of our sales. In fiscal 2016, we had
sales to three customers that comprised approximately 25% of our
annual revenue, with one customer at 10% of our sales, another
customer at 8% of our sales, and the third customer at 7% of our
sales. Part of our continuing strategy has been to gain key
customer relationships of more significance and impact to generate
higher revenues at lower costs. This strategy has met with some
success, and, therefore, we believe our operating results will
continue to be notably dependent on sales to a relatively small
number of significant customers. However, we continue to diversify
our business in order to minimize our sales concentration risk. The
loss of any of these customers, or a significant reduction in sales
to any such customer, would adversely affect our
revenues.
We may be affected by political and other risks as a result of our
sales to international customers and/or our sourcing of materials
from international suppliers.
In fiscal 2017, 61% of our net
revenue was derived from sales outside of the United States, with
88% of our foreign sales derived from customers in Europe and Asia.
In fiscal 2016, approximately 59% of our net revenues were from
sales to international customers, with 91% of foreign sales derived
from customers in Europe and Asia. Our international sales will be
limited, and may even decline, if we cannot establish relationships
with new international distributors, maintain relationships with
our existing international distributions, maintain and expand our
foreign operations, expand international sales, and develop
relationships with international service providers. Additionally,
our international sales may be adversely affected if international
economies weaken. We are subject to the following risks, among
others:
●
greater difficulty
in accounts receivable collection and longer collection
periods;
●
potentially
different pricing environments and longer sales
cycles;
●
the impact of
recessions in economies outside the United States;
●
unexpected changes
in foreign regulatory requirements;
●
the burdens of
complying with a wide variety of foreign laws and different legal
standards;
●
certification
requirements;
●
reduced protection
for intellectual property rights in some countries;
●
difficulties in
managing the staffing of international operations, including labor
unrest and current and changing regulatory
environments;
●
potentially adverse
tax consequences, including the complexities of foreign value-added
tax systems, restrictions on the repatriation of earnings, and
changes in tax rates;
●
price controls and
exchange controls;
●
government
embargoes or foreign trade restrictions;
●
imposition of
duties and tariffs and other trade barriers;
●
import and export
controls;
●
transportation
delays and interruptions;
●
terrorist attacks
and security concerns in general; and
●
political, social,
economic instability and disruptions.
As a U.S. corporation with international operations, we are subject
to the U.S. Foreign Corrupt Practices Act and other similar foreign
anti-corruption laws, as well as other laws governing our
operations. If we fail to comply with these laws, we could be
subject to civil or criminal penalties, other remedial measures,
and legal expenses, which could adversely affect our business,
financial condition, and results of operations.
Our
operations are subject to anti-corruption laws, including the U.S.
Foreign Corrupt Practices Act (“FCPA”), and other
foreign anti-corruption laws that apply in countries where we do
business. The FCPA and these other laws generally prohibit us and
our employees and intermediaries from offering, promising,
authorizing, or making payments to government officials or other
persons to obtain or retain business or gain some other business
advantage. In addition, we cannot predict the nature, scope, or
effect of future regulatory requirements to which our international
operations might be subject or the manner in which existing laws
might be administered or interpreted. Operations outside of the
U.S. may be affected by changes in trade production laws, policies,
and measures, and other regulatory requirements affecting trade and
investment.
We are
also subject to other laws and regulations governing our
international operations, including regulations administered by the
U.S. Department of Commerce’s Bureau of Industry and
Security, the U.S. Department of Treasury’s Office of Foreign
Asset Control, and various non-U.S. government entities, including
applicable export control regulations, economic sanctions on
countries and persons, customs, requirements, currency exchange
regulations, and transfer pricing regulations (collectively, the
“Trade Control Laws”).
Despite
our compliance programs, there can be no assurance that we will be
completely effective in ensuring our compliance with all applicable
anti-corruption laws, including the FCPA or other legal
requirements, or Trade Control Laws. If we are not in compliance
with the FCPA and other foreign anti-corruption laws or Trade
Control Laws, we may be subject to criminal and civil penalties,
disgorgement, and other sanctions and remedial measures, and legal
expenses, which could have an adverse impact on our business,
financial condition, results of operations and liquidity. Likewise,
any investigation of any potential violations of the FCPA, other
anti-corruption laws, or Trade Control Laws by the U.S. or foreign
authorities could also have an adverse impact on our reputation,
business, financial condition, and results of
operations.
Our future growth is partially dependent on our market penetration
efforts.
Our future growth is partially dependent on our
market penetration efforts, which include diversifying our sales to
high-volume, low-cost optical applications and other new market and
product opportunities in multiple industries. While we believe our
existing products are commercially viable, we anticipate the need
to educate the optical components markets in order to generate
market demand and market feedback may require us to further refine
these products. Expansion of our product lines and sales into new
markets will require significant investment in equipment,
facilities, and materials. There can be no assurance that any
proposed products will be successfully developed, demonstrate
desirable optical performance, be capable of being produced in
commercial quantities at reasonable costs or be successfully
marketed.
We rely, in large part, on key business and sales relationships for
the successful commercialization of our products, which if not
developed or maintained, will have an adverse impact on achieving
market awareness and acceptance and will result in a loss of
business opportunities.
To achieve wide market awareness and
acceptance of our products and technologies, as part of our
business strategy, we will attempt to enter into a variety of
business relationships with other companies that will incorporate
our technologies into their products and/or market products based
on our technologies. The successful commercialization of our
products and technologies will depend in part on our ability to
meet obligations under contracts with respect to the products and
related development requirements. The failure of these business
relationships will limit the commercialization of our products and
technologies, which will have an adverse impact on our business
development and our ability to generate revenues.
If we do not expand our sales and marketing organization, our
revenues may not increase.
The sale of our products requires
prolonged sales and marketing efforts targeted at several key
departments within our prospective customers’ organizations
and often time involves our executives, personnel, and specialized
systems and applications engineers working together. Currently, our
direct sales and marketing organization is somewhat limited. We
believe we will need to increase our sales force in order to
increase market awareness and sales of our products. There is
significant competition for qualified personnel, and we might not
be able to hire the kind and number of sales and marketing
personnel and applications engineers we need. If we are unable to
expand our sales operations, particularly in China, we may not be
able to increase market awareness or sales of our products, which
would adversely affect our revenues, results of operations, and
financial condition.
If we are unable to develop and successfully introduce new and
enhanced products that meet the needs of our customers, our
business may not be successful.
Our future success depends,
in part, on our ability to anticipate our customers’ needs
and develop products that address those needs. Introduction of new
products and product enhancements will require that we effectively
transfer production processes from research and development to
manufacturing, and coordinate our efforts with the efforts of our
suppliers to rapidly achieve efficient volume production. If we
fail to effectively transfer production processes, develop product
enhancements, or introduce new products that meet the needs of our
customers as scheduled, our net revenues may decline, which would
adversely affect our results of operations and financial
condition.
If we are unable to effectively compete, our business and operating
results could be negatively affected.
We face substantial
competition in the optical markets in which we operate. Many of our
competitors are large public and private companies that have longer
operating histories and significantly greater financial, technical,
marketing, and other resources than we have. As a result, these
competitors are able to devote greater resources than we can to the
development, promotion, sale, and support of their products. In
addition, the market capitalization and cash reserves of several of
our competitors are much larger than ours, and, as a result, these
competitors are much better positioned than we are to exploit
markets, develop new technologies, and acquire other companies in
order to gain new technologies or products. We also compete with
manufacturers of conventional spherical lens products and
aspherical lens products, producers of optical quality glass, and
other developers of gradient lens technology, as well as
telecommunications product manufacturers. In both the optical lens
and communications markets, we are competing against, among others,
established international companies, especially in Asia. Many of
these companies also are primary customers for optical and
communication components, and, therefore, have significant control
over certain markets for our products. There can be no assurance
that existing or new competitors will not develop technologies that
are superior to or more commercially acceptable than our existing
and planned technologies and products or that competition in our
industry will not lead to reduced prices for our products. If we
are unable to successfully compete with existing companies and new
entrants to the markets we compete in, our business, results of
operations, and financial condition could be adversely
affected.
We anticipate further reductions in the average selling prices of
some of our products over time, and, therefore, must increase our
sales volumes, reduce our costs, and/or introduce higher margin
products to reach and maintain financial stability.
We have
experienced decreases in the average selling prices of some of our
products over the last ten years, including most of our passive
component products. We anticipate that as products in the optical
component and module market become more commodity-like, the average
selling prices of our products will decrease in response to
competitive pricing pressures, new product introductions by us or
our competitors, or other factors. We attempt to offset anticipated
decreases in our average selling prices by increasing our sales
volumes and/or changing our product mix. If we are unable to offset
anticipated future decreases in our average selling prices by
increasing our sales volumes or changing our product mix, our net
revenues and gross margins will decline, increasing the projected
cash needed to fund operations. To address these pricing pressures,
we must develop and introduce new products and product enhancements
that will generate higher margins or change our product mix in
order to generate higher margins. If we cannot maintain or improve
our gross margins, our financial position, and results of
operations may be harmed.
Because of our limited product offerings, our ability to generate
additional revenues may be limited without additional
growth
.
We organized our
business based on five product groups: LVPMOs, HVPMOs, infrared
products, specialty products, and NREs. In fiscal 2016, sales of
our LVPMOs generated approximately 42% of our net revenues, sales
of our HVPMOs generated approximately 23% of our net revenues,
sales of our infrared products generated approximately 10% of our
net revenues, sales of our specialty products generated
approximately 22% of our net revenues, and sales of our NRE
products generated approximately 3% of our net revenues.
Accordingly, in fiscal 2016, approximately 87% of our net revenues
were derived from sales of our LVPMOs, HVPMOs, and specialty
products. In fiscal 2017, sales of our LVPMOs generated
approximately 30% of our net revenues, sales of our HVPMOs
generated approximately 27% of our net revenues, sales of our
infrared products generated approximately 33% of our net revenues,
sales of our specialty products generated approximately 9% of our
net revenues, and sales of our NRE products generated approximately
1% of our net revenues. Accordingly, in fiscal 2017, approximately
66% of our net revenues were derived from our LVPMO, HVPMO, and
specialty products, and 33% was derived from our infrared products.
In the future, we expect a larger percentage of our revenues to be
generated from sales of our infrared products, particularly sales
of ISP’s infrared products. Demand for products in the
optical market has declined materially in recent years. Continued
and expanding market acceptance of these products is critical to
our future success. There can be no assurance that our current or
new products will achieve market acceptance at the rate at which we
expect, or at all, which could adversely affect our results of
operations and financial condition.
Litigation may adversely affect our business, financial condition,
and results of operations.
From time to time in the normal
course of business operations, we may become subject to litigation
that may result in liability material to our financial statements
as a whole or may negatively affect our operating results if
changes to our business operations are required. The cost to defend
such litigation may be significant and is subject to inherent
uncertainties. Insurance may not be available at all or in
sufficient amounts to cover any liabilities with respect to these
or other matters. There also may be adverse publicity with
litigation that could negatively affect customer perception of our
business, regardless of whether the allegations are valid or
whether we are ultimately found liable. An adverse result in any
such matter could adversely impact our operating results or
financial condition. Additionally, any litigation to which we are
subject could also require significant involvement of our senior
management and may divert management’s attention from our
business and operations.
We are exposed to fluctuations in currency exchange rates that
could negatively impact our financial results and cash
flows.
We execute all foreign sales from our Orlando and
Irvington facilities and inter-company transactions in United
States dollars in order to mitigate the impact of foreign currency
fluctuations. However, in the future, a portion of our
international revenues and expenses may be denominated in foreign
currencies. Accordingly, we could experience the risks of
fluctuating currencies and corresponding exchange rates. In fiscal
years 2017 and 2016, we recognized a gain of approximately $78,000
and a loss of $370,000 on foreign currency transactions,
respectively. Any such fluctuations that result in a less favorable
exchange rate could adversely affect our revenues, which could
negatively impact our results of operations and financial
condition.
We also
source certain raw materials from outside the United States. Some
of those materials, priced in non-dollar currencies, have lowered
in price due to the recent increase of the United States dollar
against non-dollar-pegged currencies, especially the Euro and
Renminbi. This increases our margins and helps with our ability to
reach positive cash flow and profitability. If the strength of the
United States dollar decreases, the cost of foreign sourced
materials could increase, which would adversely affect our
financial condition and results of operations.
A significant portion of our cash is generated and held outside of
the United States. The risks of maintaining significant cash abroad
could adversely affect our cash flows and financial results.
During fiscal 2017, approximately 58% of our cash was generated and
held abroad. We generally consider unremitted earnings of our
subsidiaries operating outside of the United States to be
indefinitely reinvested and it is not our current intent to change
this position. Cash held outside of the United States is primarily
used for the ongoing operations of the business in the locations in
which the cash is held. Certain countries, such as China, have
monetary laws that limit our ability to utilize cash resources in
China for operations in other countries. Before any funds can be
repatriated the retained earnings in China must equal at least 150%
of the registered capital. As of December 31, 2017, we had retained
earnings in China of $1.4 million and we need to have retained
earnings of $11.3 million before repatriation will be allowed. This
limitation may affect our ability to fully utilize our cash
resources for needs in the United States or other countries and may
adversely affect our liquidity. Further, since repatriation of such
cash is subject to limitations and may be subject to significant
taxation, we cannot be certain that we will be able to repatriate
such cash on favorable terms or in a timely manner. If we incur
operating losses and/or require cash that is held in international
accounts for use in our operations based in the United States, a
failure to repatriate such cash in a timely and cost-effective
manner could adversely affect our business and financial
results.
Further,
our worldwide operations subject us to the jurisdiction of a number
of taxing authorities. The income earned in these various
jurisdictions is taxed on a differing basis, including net income
actually earned, net income deemed earned, and revenue-based tax
withholding. The final determination of our income tax liabilities
involves the interpretation of local tax laws, tax treaties, and
related authorities in each jurisdiction, as well as the use of
estimates and assumptions regarding the scope of future operations
and results achieved and the timing and nature of income earned and
expenditures incurred. Changes in or interpretations of tax law and
currency/repatriation control could impact the determination of our
income tax liabilities for a tax year. Legislative initiatives in
the United States to reform the United States’ tax laws could
also have a material impact on our future tax rate and our
repatriation plans.
Uncertainties in the interpretation and application of the 2017 Tax
Cuts and Jobs Act could materially affect our tax obligations and
effective tax rate.
The 2017 Tax Cuts and Jobs Act (the
“Tax Act”) was enacted on December 22, 2017, and
significantly affected United States tax law by changing how the
United States imposes income tax on multinational corporations. The
U.S. Department of Treasury has broad authority to issue
regulations and interpretative guidance that may significantly
impact how we will apply the law and impact our results of
operations in the period issued.
The Tax
Act requires complex computations not previously provided in United
States tax law. As such, the application of accounting guidance for
such items is currently uncertain. Further, compliance with the Tax
Act and the accounting for such provisions require accumulation of
information not previously required or regularly produced. As
additional regulatory guidance is issued by the applicable taxing
authorities, as accounting treatment is clarified, as we perform
additional analysis on the application of the law, and as we refine
estimates in calculating the effect, our final analysis, which will
be recorded in the period completed, may be different from our
current provisional amounts, which could materially affect our tax
obligations and effective tax rate.
Our future success depends on our key executive officers and our
ability to attract, retain, and motivate qualified
personnel.
Our future success largely depends upon the
continued services of our key executive officers, management team,
and other engineering, sales, marketing, manufacturing, and support
personnel. If one or more of our key employees are unable or
unwilling to continue in their present positions, we may not be
able to replace them readily, if at all. Additionally, we may incur
additional expenses to recruit and retain new key employees. If any
of our key employees joins a competitor or forms a competing
company, we may lose some or all of our customers. Because of these
factors, the loss of the services of any of these key employees
could adversely affect our business, financial condition, and
results of operations.
Our
continuing ability to attract and retain highly qualified personnel
will also be critical to our success because we will need to hire
and retain additional personnel to support our business strategy.
We expect to continue to hire selectively in the manufacturing,
engineering, sales and marketing, and administrative functions to
the extent consistent with our business levels and to further our
business strategy. We face significant competition for skilled
personnel in our industry. This competition may make it more
difficult and expensive to attract, hire, and retain qualified
managers and employees. Because of these factors, we may not be
able to effectively manage or grow our business, which could
adversely affect our financial condition or business.
We depend on single or limited source suppliers for some of the key
materials or process steps in our products, making us susceptible
to supply shortages, poor performance, or price
fluctuations.
We currently purchase several key materials,
or have outside vendors perform process steps, such as lens
coatings, used in or during the manufacture of our products from
single or limited source suppliers. We may fail to obtain required
materials or services in a timely manner in the future, or could
experience delays as a result of evaluating and testing the
products or services of these potential alternative suppliers. The
decline in demand in the telecommunications equipment industry may
have adversely impacted the financial condition of certain of our
suppliers, some of whom have limited financial resources. We have
in the past, and may in the future, be required to provide advance
payments in order to secure key materials from financially limited
suppliers. Financial or other difficulties faced by these suppliers
could limit the availability of key components or materials. For
example, increasing labor costs in China has increased the risk of
bankruptcy for suppliers with operations in China, and has led to
higher manufacturing costs for us and the need to identify
alternate suppliers. Additionally, financial difficulties could
impair our ability to recover advances made to these suppliers. Any
interruption or delay in the supply of any of these materials or
services, or the inability to obtain these materials or services
from alternate sources at acceptable prices and within a reasonable
amount of time, would impair our ability to meet scheduled product
deliveries to our customers and could cause customers to cancel
orders, thereby negatively affecting our business, financial
condition, and results of operation.
We face product liability risks, which could adversely affect our
business
.
The sale of our
optical products involves the inherent risk of product liability
claims by others. We do not currently maintain product liability
insurance coverage. Product liability insurance is expensive,
subject to various coverage exclusions, and may not be obtainable
on terms acceptable to us if we decide to procure such insurance in
the future. Moreover, the amount and scope of any coverage may be
inadequate to protect us in the event that a product liability
claim is successfully asserted. If a claim is asserted and
successfully litigated by an adverse party, our financial position
and results of operations could be adversely affected.
Business interruptions could adversely affect our
business
.
We manufacture our
products at manufacturing facilities located in Orlando, Florida,
Irvington, New York, Riga, Lativa, and Zhenjiang, China. Our
revenues are dependent upon the continued operation of these
facilities. The Orlando facility is subject to a lease that expires
in April 2022, the Irvington facility is subject to a lease that
expires in September 2020, the Riga facility is subject to a lease
that expires in December 2019, and the Zhenjiang facility is
subject to two leases that expire in March 2019 and December 2021.
Our operations are vulnerable to interruption by fire, hurricane
winds and rain, earthquakes, electric power loss,
telecommunications failure, and other events beyond our control. We
do not have detailed disaster recovery plans for our facilities and
we do not have a backup facility, other than our other facilities,
or contractual arrangements with any other manufacturers in the
event of a casualty to or destruction of any facility or if any
facility ceases to be available to us for any other reason. If we
are required to rebuild or relocate either of our manufacturing
facilities, a substantial investment in improvements and equipment
would be necessary. We carry only a limited amount of business
interruption insurance, which may not sufficiently compensate us
for losses that may occur.
Our
facilities may be subject to electrical blackouts as a consequence
of a shortage of available electrical power. We currently do not
have backup generators or alternate sources of power in the event
of a blackout. If blackouts interrupt our power supply, we would be
temporarily unable to continue operations at such
facility.
Any
losses or damages incurred by us as a result of blackouts,
rebuilding, relocation, or other business interruptions, could
result in a significant delay or reduction in manufacturing and
production capabilities, impair our reputation, harm our ability to
retain existing customers and to obtain new customers, and could
result in reduced sales, lost revenue, and/or loss of market share,
any of which could substantially harm our business and our results
of operations.
Our failure to accurately forecast material requirements could
cause us to incur additional costs, have excess inventories, or
have insufficient materials to manufacture our products.
Our
material requirements forecasts are based on actual or anticipated
product orders. It is very important that we accurately predict
both the demand for our products and the lead times required to
obtain the necessary materials. Lead times for materials that we
order vary significantly and depend on factors such as specific
supplier requirements, the size of the order, contract terms, and
the market demand for the materials at any given time. If we
overestimate our material requirements, we may have excess
inventory, which would increase our costs. If we underestimate our
material requirements, we may have inadequate inventory, which
could interrupt our manufacturing and delay delivery of our
products to our customers. Any of these occurrences would
negatively impact our results of operations. Additionally, in order
to avoid excess material inventories we may incur cancellation
charges associated with modifying existing purchase orders with our
vendors, which, depending on the magnitude of such cancellation
charges, may adversely affect our results of
operations.
If we do not achieve acceptable manufacturing yields our operating
results could suffer.
The manufacture of our products
involves complex and precise processes. Our manufacturing costs for
several products are relatively fixed, and, thus, manufacturing
yields are critical to the success of our business and our results
of operations. Changes in our manufacturing processes or those of
our suppliers could significantly reduce our manufacturing yields.
In addition, we may experience manufacturing delays and reduced
manufacturing yields upon introducing new products to our
manufacturing lines. The occurrence of unacceptable manufacturing
yields or product yields could adversely affect our financial
condition and results of operations.
If our customers do not qualify our manufacturing lines for volume
shipments, our operating results could suffer
.
Our manufacturing
lines have passed our qualification standards, as well as our
technical standards. However, our customers may also require that
our manufacturing lines pass their specific qualification
standards, and that we be registered under international quality
standards, such as ISO 9001:2008, ISO 9001:2015, and ISO/TS 16949:
2009 certifications. This customer qualification process determines
whether our manufacturing lines meet the customers’ quality,
performance, and reliability standards. Generally, customers do not
purchase our products, other than limited numbers of evaluation
units, prior to qualification of the manufacturing line for volume
production. We may be unable to obtain customer qualification of
our manufacturing lines or we may experience delays in obtaining
customer qualification of our manufacturing lines. If there are
delays in the qualification of our products or manufacturing lines,
our customers may drop the product from a long-term supply program,
which would result in significant lost revenue opportunity over the
term of each such customer’s supply program, or our customers
may purchase from other manufacturers. The inability to obtain
customer qualification of our manufacturing lines, or the delay in
obtaining such qualification, could adversely affect our financial
condition and results of operations.
Risks Related To Our Intellectual Property
If we are unable to protect and enforce our intellectual property
rights, we may be unable to compete effectively.
We believe
that our intellectual property rights are important to our success
and our competitive position, and we rely on a combination of
patent, copyright, trademark, and trade secret laws and
restrictions on disclosure to protect our intellectual property
rights. Although we have devoted substantial resources to the
establishment and protection of our intellectual property rights,
the actions taken by us may be inadequate to prevent imitation or
improper use of our products by others or to prevent others from
claiming violations of their intellectual property rights by
us.
In
addition, we cannot assure that, in the future, our patent
applications will be approved, that any patents that we may be
issued will protect our intellectual property, or that third
parties will not challenge any issued patents. Other parties may
independently develop similar or competing technology or design
around any patents that may be issued to us. We also rely on
confidentiality procedures and contractual provisions with our
employees, consultants, and corporate partners to protect our
proprietary rights, but we cannot assure the compliance by such
parties with their confidentiality obligations, which could be very
time consuming and expensive to enforce.
It may
be necessary to litigate to enforce our patents, copyrights, and
other intellectual property rights, to protect our trade secrets,
to determine the validity of and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity.
Such litigation can be time consuming, distracting to management,
expensive, and difficult to predict. Our failure to protect or
enforce our intellectual property could have an adverse effect on
our business, financial condition, prospects, and results of
operation.
We do not have patent protection for our formulas and processes,
and a loss of ownership of any of our formulas and processes would
negatively impact our business.
We believe that we own our
formulas and processes. However, we have not sought, and do not
intend to seek, patent protection for all of our formulas and
processes. Instead, we rely on the complexity of our formulas and
processes, trade secrecy laws, and employee confidentiality
agreements. However, we cannot assure you that other companies will
not acquire our confidential information or trade secrets or will
not independently develop equivalent or superior products or
technology and obtain patent or similar rights. Although we believe
that our formulas and processes have been independently developed
and do not infringe the patents or rights of others, a variety of
components of our processes could infringe existing or future
patents, in which event we may be required to modify our processes
or obtain a license. We cannot assure you that we will be able to
do so in a timely manner or upon acceptable terms and conditions
and the failure to do either of the foregoing would negatively
affect our business, results of operations, financial condition,
and cash flows.
We may become involved in intellectual property disputes and
litigation, which could adversely affect our
business
.
We anticipate, based
on the size and sophistication of our competitors and the history
of rapid technological advances in our industry that several
competitors may have patent applications in progress in the United
States or in foreign countries that, if issued, could relate to
products similar to ours. If such patents were to be issued, the
patent holders or licensees may assert infringement claims against
us or claim that we have violated other intellectual property
rights. These claims and any resulting lawsuits, if successful,
could subject us to significant liability for damages and
invalidate our proprietary rights. The lawsuits, regardless of
their merits, could be time-consuming and expensive to resolve and
would divert management time and attention. Any potential
intellectual property litigation could also force us to do one or
more of the following, any of which could harm our business and
adversely affect our financial condition and results of
operations:
●
stop selling,
incorporating or using our products that use the disputed
intellectual property;
●
obtain from third
parties a license to sell or use the disputed technology, which
license may not be available on reasonable terms, or at all;
or
●
redesign our
products that use the disputed intellectual property.
Risks Related To An Investment In Our Securities
Historically, our quarterly results have fluctuated and continued
fluctuations could negatively impact our stock price.
Revenues and results of operations are difficult to predict and may
fluctuate substantially from quarter to quarter. As a result, the
market price of our Class A Common Stock may also fluctuate
substantially.
We may issue additional securities with rights superior to those of
our Class A Common Stock, which could materially limit the
ownership rights of our stockholders.
We may offer
additional debt or equity securities in private and/or public
offerings in order to raise working capital or to refinance our
debt. Our board of directors (our
“
Board
”
) has the right to determine the
terms and rights of any debt securities and preferred stock without
obtaining the approval of the stockholders. It is possible that any
debt securities or preferred stock that we sell would have terms
and rights superior to those of our Class A Common Stock and may be
convertible into shares of our Class A Common Stock. Any sale of
securities could adversely affect the interests or voting rights of
the holders of our Class A Common Stock, result in substantial
dilution to existing stockholders, or adversely affect the market
price of our Class A Common Stock.
The price of our Class A Common Stock has been, and may continue to
be, subject to substantial volatility.
Broad market
fluctuations or fluctuations in our operations may adversely affect
the price of our Class A Common Stock. The market for our Class A
Common Stock is volatile, the bid-ask spread is often large, and
the trading volume and activity can be low and sporadic. The price
of our Class A Common Stock may fluctuate significantly in response
to numerous factors, many of which are beyond our control,
including:
●
volatility in the
trading markets generally and in our particular market
segment;
●
limited trading of
our Class A Common Stock;
●
actual or
anticipated fluctuations in our results of operations;
●
the financial
projections we may provide to the public, any changes in these
projections, or our failure to meet these projections;
●
announcements
regarding our business or the business of our customers or
competitors;
●
changes in
accounting standards, policies, guidelines, interpretations, or
principles;
●
actual or
anticipated developments in our business or our
competitors
’
businesses
or the competitive landscape generally;
●
developments or
disputes concerning our intellectual property or our offerings, or
third-party proprietary rights;
●
announced or
completed acquisitions of businesses or technologies by us or our
competitors;
●
new laws or
regulations or new interpretations of existing laws or regulations
applicable to our business;
●
any major change in
our Board or management;
●
sales of shares of
our Class A Common Stock by us or our stockholders;
●
lawsuits threatened
or filed against us; and
●
other events or
factors, including those resulting from war, incidents of
terrorism, or responses to these events.
Statements
of, or changes in, opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the markets in
which we operate or expect to operate could have an adverse effect
on the market price of our Class A Common Stock. In addition, the
stock market as a whole, as well as our particular market segment,
have from time to time experienced extreme price and volume
fluctuations, which may affect the market price for the securities
of many companies, and which often have appeared unrelated to the
operating performance of such companies.
Although
our shares are publicly traded on the NCM, the trading market for
shares of our Class A Common Stock has been inconsistent with wide
fluctuations in the trading volume. There are periods where the
trading volume is extremely low and somewhat limited, which could
negatively affect our stockholders
’
ability to sell their shares of our
Class A Common Stock at the time and price they
desire.
We do not currently pay dividends on our Class A Common Stock, and
do not anticipate paying dividends on our Class A Common Stock in
the foreseeable future.
Our Board has never declared a
dividend on our Class A Common Stock and we do not anticipate
paying dividends on our Class A Common Stock in the foreseeable
future. We intend to retain our cash and future earnings, if any,
to fund our business plan. Our future dividend policy is within the
discretion of our Board and will depend upon various factors,
including our business, financial condition, results of operations,
and capital requirements. Therefore, we cannot offer any assurance
that our Board will determine to pay special or regular dividends
in the future. Unless our Board determines to pay dividends,
stockholders will be required to look to appreciation of our Class
A Common Stock to realize a gain on their investment. There can be
no assurance that this appreciation will occur.
Our management and principal stockholders control a substantial
amount of our stock and, therefore, may influence our
affairs.
If our management and a few principal stockholders
act in concert, they could determine the outcomes of matters
submitted to stockholders or the election of our Board. We estimate
that management, including directors, and our principal
stockholders (stockholders owning more than 5% of our Class A
Common Stock) beneficially owned approximately 21.5% of Class A
Common Stock outstanding, on a fully-diluted basis, as of March 5,
2018.
Our charter documents and Delaware law may inhibit a
takeover.
In certain circumstances, the fact that corporate
devices are in place that will inhibit or discourage takeover
attempts could reduce the market value of our Class A Common Stock.
Our Certificate of Incorporation, as amended (the
“
Certificate of
Incorporation
”
), Amended
and Restated Bylaws, as amended (the
“
Bylaws
”
), and certain other agreements
contain certain provisions that may discourage other persons from
attempting to acquire control of us. These provisions include, but
are not limited to, the following:
●
staggered-terms of
service for our Board;
●
the authorization
of our Board to issue shares of undesignated preferred stock in one
or more series without the specific approval of the
stockholders;
●
the adoption of a
stockholder rights plan in 1998 and a dividend distribution of a
right to purchase one share of Series D Participating Preferred
Stock (the
“
Rights
”
) for each outstanding share of
Class A Common Stock. The description and terms of such rights are
set forth in the Rights Agreement dated as of May 1, 1998 between
LightPath and Continental Stock Transfer & Trust Company, as
Rights Agent (the
“
Rights
Agreement
”
) (a copy of
the Rights Agreement and related documents are filed as Exhibit 1
to the Form 8-A for Registration of Certain Classes of Securities
Pursuant to Section 12(b) or (g) of the Exchange Act, filed on
April 28, 1998). The Rights Agreement was amended on February 25,
2008 to extend the termination date through February 25, 2018. The
Rights Agreement was amended on January 30, 2018 to extend the
termination date through February 28, 2021;
●
the establishment
of advance notice requirements for director nominations and actions
to be taken at annual meetings; and
●
the fact that
special meetings of the stockholders may be called only by our
Chairman, President, or upon the request of a majority of our
Board.
All of
these provisions, as well as the provisions of Section 203 of the
Delaware General Corporation Law (
“
DGCL
”
) (to which we are subject), could
impede a merger, consolidation, takeover, or other business
combination involving us or discourage a potential acquirer from
making a tender offer or otherwise attempting to obtain control of
us.
Our outstanding stock options and restricted stock units may
inhibit our ability to accomplish future financings and adversely
affect the price and liquidity of our Class A Common Stock.
As of March 5, 2018, there were issued and
outstanding:
●
25,727,981 shares
of our Class A Common Stock;
●
outstanding options
under the Plan to purchase an aggregate of 1,034,035 shares of our
Class A Common Stock, with a weighted average exercise price of
approximately $1.74 per share; and
●
restricted stock
unit awards for 1,649,353 shares of our Class A Common Stock that
have been granted but that remain unissued, of which 1,287,370 have
vested.
In
addition, 1,660,870 shares of our Class A Common Stock were
reserved as of March 5, 2018, for issuance pursuant to future
grants to be made under the Plan and 358,008 shares of our Class A
Common Stock were reserved as of March 5, 2018 for issuance
pursuant to the 2014 ESPP. The existence of our outstanding options
restricted stock units, and the potential for sales of significant
amounts of previously unregistered shares of our Class A Common
Stock in the public market, or the perception that such sales could
occur, following the exercise of these derivative securities may
adversely affect the terms on which we can obtain additional
financing or the prevailing price of our Class A Common
Stock.
We may issue additional shares of our Class A Common Stock in the
future, which could cause significant dilution to all
stockholders.
Our authorized capital stock consists of
55,000,000 shares, divided into 50,000,000 shares of common stock,
par value $0.01 per share, and 5,000,000 shares of preferred stock,
par value $0.01 per share. As of March 5, 2018, 25,727,981 shares
of our Class A Common Stock were outstanding. We may issue
additional shares of Class A Common Stock in the future in
connection with a financing, acquisition, upon exercise of
outstanding options, or in connection with the grant of restricted
stock units. Any issuance of additional shares of our Class A
Common Stock, or equity securities convertible into our Class A
Common Stock, including, but not limited to, preferred stock,
warrants, and options, will dilute the percentage ownership
interest of all stockholders, may dilute the book value per share
of our Class A Common Stock, and may negatively impact the market
price of our Class A Common Stock.
Sales of a substantial number of shares of our Class A Common Stock
in the public market, or the perception that they may occur, may
depress the market price of our Class A Common Stock.
Of the
total number of shares of Class A Common Stock currently issued and
outstanding, almost all of our outstanding shares are freely
transferable or can be publicly resold pursuant to Rule 144
promulgated under the Securities Act of 1933, as amended (the
“
Securities
Act
”
). In general, under
Rule 144 as currently in effect, a person (or persons whose shares
are aggregated) who has beneficially owned restricted securities
for at least six months, including our affiliates, would be
entitled to sell such securities, subject to the availability of
current public information about the company. A person who has not
been our affiliate at any time during the three months preceding a
sale, and who has beneficially owned his shares for at least one
year, would be entitled under Rule 144 to sell such shares without
regard to any limitations under Rule 144. Under Rule 144, sales by
our affiliates are subject to volume limitations, manner of sale
provisions and notice requirements. The ability to sell shares of
our Class A Common Stock to the public, whether pursuant to an
effective registration statement, Rule 144, or an exemption from
the registration requirements, may adversely affect the price of
our Class A Common Stock by creating an excessive supply, the scope
or extent of which effect we cannot predict. Likewise, the ability
for sale of substantial amounts of our Class A Common Stock could
reduce the prevailing market price.
DESCRIPTION OF CAPITAL STOCK
The following is a summary of all material characteristics of our
capital stock as set forth in our Certificate of Incorporation, and
our Bylaws. The summary does not purport to be complete and is
qualified in its entirety by reference to our Certificate of
Incorporation and our Bylaws, and to the provisions of the DGCL. We
encourage you to review complete copies of our Certificate of
Incorporation and our Bylaws. You can obtain copies of these
documents by following the directions outlined in “Where You
Can Find More Information” elsewhere in this
prospectus.
General
Our
authorized capital stock consists of 55,000,000 shares, divided
into 50,000,000 shares of common stock, par value $0.01 per share,
and 5,000,000 shares of preferred stock, par value $0.01 per share.
Under our Certificate of Incorporation, our Board has the authority
to issue such shares of common stock and preferred stock in one or
more classes or series, with such voting powers, designations,
preferences and relative, participating, optional or other special
rights, if any, and such qualifications, limitations or
restrictions thereof, if any, as shall be provided for in a
resolution or resolutions adopted by our Board and filed as
designations.
Class A Common Stock
Of the
50,000,000 shares of common stock authorized in our Certificate of
Incorporation, our Board has previously designated 44,500,000
shares as Class A Common Stock. As of March 5, 2018, 25,727,981
shares of our Class A Common Stock were outstanding. The remaining
5,500,000 shares of authorized common stock were designated as
Class E-1 common stock, Class E-2 common stock, or Class E-3 common
stock, all previously outstanding shares of which have been
previously redeemed or converted into shares of our Class A Common
Stock.
Holders
of our Class A Common Stock are entitled to one vote per share in
the election of directors and on all other matters of which
stockholders are entitled or permitted to vote. Holders of our
Class A Common Stock are not entitled to cumulative voting rights
for election of directors. Subject to the terms of any outstanding
series of preferred stock, the holders of Class A Common Stock are
entitled to dividends in the amounts and at times as may be
declared by our Board out of funds legally available. We have not
paid any dividends and do not anticipate paying any dividends on
our Class A Common Stock in the foreseeable future. It is our
present policy to retain earnings, if any, for use in the
development of our business. Upon liquidation, dissolution, or
winding-up, holders of our Class A Common Stock are entitled to
share ratably in all net assets available for distribution to
stockholders after payment of any liquidation preferences to
holders of our preferred stock, if any. Holders of our Class A
Common Stock do not have any redemption rights or any preemptive or
preferential rights enabling a holder to subscribe for, or receive
shares of, any class of our common stock or any other securities
convertible into shares of any class of our common
stock.
As of
March 5, 2018, we have reserved for issuance 1,649,353 shares of
our Class A Common Stock underlying outstanding restricted stock
units, 1,034,035 shares of our Class A Common Stock for issuance
upon the exercise of outstanding stock options, 1,660,870 shares of
our Class A Common Stock for issuance under the Plan, and 358,008
shares of our Class A Common Stock for issuance under our 2014
ESPP.
Preferred Stock
Of the
5,000,000 shares of preferred stock authorized in our Certificate
of Incorporation, our Board has previously designated:
●
250 shares of our
preferred stock as Series A Preferred Stock, all previously
outstanding shares of which have been previously redeemed or
converted into shares of our Class A Common Stock and may not be
reissued;
●
300 shares of our
preferred stock as Series B Preferred Stock, all previously
outstanding shares of which have been previously redeemed or
converted into shares of our Class A Common Stock and may not be
reissued;
●
500 shares of our
preferred stock as Series C Preferred Stock, all previously
outstanding shares of which have been previously redeemed or
converted into shares of our Class A Common Stock and may not be
reissued;
●
500,000 shares of
our preferred stock as Series D Participating Preferred Stock, none
of which have been issued; however, in 1998, our Board declared a
dividend distribution as a right to purchase one share of Series D
Participating Preferred Stock for each outstanding share of Class A
Common Stock (see “Series D Participating Preferred Stock
Purchase Rights” below); and
●
500 shares of our
preferred stock as Series F Preferred Stock, all previously
outstanding shares of which have been previously redeemed or
converted into shares of our Class A Common Stock and may not be
reissued.
4,498,450
shares of our preferred stock remain available for designation by
our Board. Accordingly, our Board is empowered, without stockholder
approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of common stock. The
issuance of preferred stock could have the effect of restricting
dividends on the common stock, diluting the voting power of the
common stock, impairing the liquidation rights of the common stock,
or delaying or preventing a change in control of us, all without
further action by our stockholders.
Series D Participating Preferred Stock Purchase Rights
On
February 25, 1998, our Board declared a dividend distribution of a
right to purchase one share of Series D Participating Preferred
Stock (the
“
Series D
Participating Preferred Stock Purchase Rights
”
or, the
“
Rights
”
) for each outstanding share of
Class A Common Stock, which dividend distribution was paid on May
1, 1998. The Rights are designed to guard against partial tender
offers and other abusive and coercive tactics that might be used in
an attempt to gain control of us or to deprive our stockholders of
their interest in our long-term value. These Rights seek to achieve
these goals by forcing a potential acquirer to negotiate with our
Board (or go to court to try to force the Board to redeem the
Rights), because only our Board can redeem the Rights and allow the
potential acquirer to acquire our shares without suffering very
significant dilution. However, these Rights also could deter or
prevent transactions that stockholders deem to be in their
interests, and could reduce the price that investors or an acquirer
might be willing to pay in the future for shares of our Class A
Common Stock.
Each
Right entitles the registered holder to purchase one one-hundredth
of a share of our Series D Participating Preferred Stock at a price
of $35.00 per share, subject to adjustment. Because of the nature
of the dividend, liquidation, and voting rights of the Series D
Participating Preferred Stock, the value of one one-hundredth
interest in a share of the Series D Participating Preferred Stock
purchasable upon exercise of each right should approximate the
value of one share of Class A Common Stock.
The
Rights will be exercisable only if a person or group acquires
twenty percent (20%) or more of our Class A Common Stock or
announces a tender offer the consummation of which would result in
ownership by a person or group of twenty percent (20%) or more of
our Class A Common Stock. Our Board may redeem the Rights at a
price of $0.01 per Right. The Rights will expire at the close of
business on February 28, 2021 unless the expiration date is
extended or unless the Rights are earlier redeemed or exchanged by
us.
Options
As of
March 5, 2018, we had 1,034,035 shares of our Class A Common Stock
underlying stock options outstanding, having a weighted-average
exercise price of approximately $1.74 per share.
Anti-Takeover Effects of Delaware Law and our Certificate of
Incorporation and Bylaws
In
addition to the Series D Participating Preferred Stock Purchase
Rights, certain provisions of the DGCL, our Certificate of
Incorporation, and our Bylaws could make the acquisition of the
Company or the removal of incumbent officers and directors more
difficult. In certain circumstances, the fact that corporate
devices are in place that will inhibit or discourage takeover
attempts could reduce the market value of our Class A Common Stock.
Such provisions may discourage other persons from attempting to
acquire control of us. These provisions include the
following:
Section 203 of the Delaware General Corporation Law.
We are
subject to the provisions of Section 203 of the DGCL. Section 203
of the DGCL prohibits a publicly-held Delaware corporation from
engaging in a
“
business
combination
”
with an
“
interested
stockholder
”
for a period
of three years after the person became an interested stockholder,
unless:
●
the board of
directors of the corporation approved the business combination or
the other transaction in which the person became an interested
stockholder prior to the date of the business combination or other
transaction;
●
upon consummation
of the transaction that resulted in the person becoming an
interested stockholder, the person owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of
shares outstanding, shares owned by persons who are directors and
also officers of the corporation and shares issued under employee
stock plans under which employee participants do not have the right
to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
●
on or subsequent to
the date the person became an interested stockholder, the board of
directors of the corporation approved the business combination and
the stockholders of the corporation authorized the business
combination at an annual or special meeting of stockholders by the
affirmative vote of at least 66-2/3% of the outstanding voting
stock of the corporation that is not owned by the interested
stockholder.
A
“
business
combination
”
includes
mergers, asset sales, and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain
exceptions, an
“
interested stockholder
”
is a person who, together with
affiliates and associates, owns, or within the prior three years
did own, 15% or more of a corporation
’
s voting stock.
Section
203 of the DGCL could depress our stock price and delay,
discourage, or prohibit transactions not approved in advance by our
Board, such as takeover attempts that might otherwise involve the
payment to our stockholders of a premium over the market price of
our Class A Common Stock.
Certificate of Incorporation and Bylaws
Our
Certificate of Incorporation and Bylaws include a number of
provisions that may have the effect of deterring hostile takeovers
or delaying or preventing changes in our control or our management,
including, but not limited to the following:
●
Our Certificate of
Incorporation provides that our Board is to be divided into three
classes, as nearly equal in number as possible, with directors in
each class serving three-year terms. Provisions of this type may
serve to delay or prevent an acquisition of us or a change in our
directors and officers.
●
Our Certificate of
Incorporation and Bylaws provide that all stockholder actions must
be effected at a duly called meeting of stockholders and not by
written consent.
●
Our Bylaws provide
that special meetings of our stockholders may be called only by the
Chairman of the Board, President, or a majority of the
Board.
●
Our Bylaws provide
that stockholders seeking to present proposals before a meeting of
stockholders or to nominate candidates for election as directors at
a meeting of stockholders must provide timely notice in writing and
also specify requirements as to the form and content of a
stockholder’s notice. These provisions may delay or preclude
stockholders from bringing matters before a meeting of our
stockholders or from making nominations for directors at a meeting
of stockholders, which could delay or deter takeover attempts or
changes in our management.
●
Our Certificate of
Incorporation does not include a provision for cumulative voting
for directors. Under cumulative voting, a minority stockholder
holding a sufficient percentage of a class of shares could be able
to ensure the election of one or more directors.
●
Our Bylaws provide
that unless we consent in writing to the selection of an
alternative forum, the courts in the State of Delaware are, to the
fullest extent permitted by applicable law, the sole and exclusive
forum for any claims, including claims in the right of the Company,
brought by a stockholder (i) that are based upon a violation of a
duty by a current or former director or officer or stockholder in
such capacity or (ii) as to which the DGCL confers jurisdiction
upon the Court of Chancery of the State of Delaware.
These
and other provisions contained in our Certificate of Incorporation
and Bylaws are expected to discourage coercive takeover practices
and inadequate takeover bids. These provisions are also designed to
encourage persons seeking to acquire control of us to first
negotiate with our Board. However, these provisions could delay or
discourage transactions involving an actual or potential change in
control of us, including transactions in which stockholders might
otherwise receive a premium for their shares over then current
prices. Such provisions could also limit the ability of
stockholders to remove current management or approve transactions
that stockholders may deem to be in their best interests and,
therefore, could adversely affect the price of our Class A Common
Stock.