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Acquisition of ISP Optics Corporation | 6 Months Ended
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Dec. 31, 2016
Business Combinations [Abstract] |
Acquisition of ISP Optics Corporation | 3. Acquisition of ISP Optics Corporation In the ordinary course of business, our Board and senior management regularly review and assess various strategic alternatives available to us that may enhance stockholder value. A part of our growth strategy is to identify appropriate opportunities that would enhance our profitable growth through acquisition. As we developed our molded infrared capability and learned more about the infrared market, we became aware of larger business opportunities in this market that might be available with a broader range of product capability. When we thought about the possibility of acquiring ISP we saw an excellent complementary fit with our business that met our requirement of profitable growth in a market space we are investing in and saw it as an opportunity to accelerate our growth and expand our capabilities. We believe that the acquisition of 100% of the issued and outstanding shares of common stock of ISP (the “Acquisition”) will combine our high-volume molding technology with ISP’s high value diamond turning, coating, and polishing capabilities to establish a global, leading-edge industrial technology company. We expect the Acquisition to allow us to expand significantly and increase our scope of products and capabilities. Due to the location of ISP Latvia’s manufacturing facility, we also expect the Acquisition to increase our global customer base in Europe and generate synergies due to cross-selling of products, expanded distribution channels, and increased revenue through expanded product offerings. Finally, we expect improved production and assembly capabilities, as well as material processing capabilities as a result of the Acquisition. On December 21, 2016 (the “Acquisition Date”), LightPath acquired 100% of the issued and outstanding shares of common stock of ISP pursuant to the Stock Purchase Agreement, dated as of August 3, 2016 (the “Purchase Agreement”). The Company’s consolidated financial statements reflect the financial results of ISP’s operations beginning on the Acquisition Date. For the purposes of financing the acquisition, simultaneous with the closing, the Company sold 8,000,000 shares of its Class A common stock, raising net proceeds of approximately $8.75 million. For additional information, please see Note 13 to these Consolidated Financial Statements. The Company also closed a $5 million acquisition term loan with AvidBank. For additional information, see Note 12, Loans Payable, to these consolidated financial statements. In lieu of cash paid, the Company financed a portion of the Acquisition through the issuance of a promissory note in the aggregate principal amount of $6 million to the sellers of ISP (the “Sellers Note”). Pursuant to the Sellers Note, during the period commencing on the Acquisition Date and continuing until the fifteen month anniversary of the Acquisition Date (the “Initial Period”), interest will accrue on only the principal amount of the Sellers Note in excess of $2,700,000 at an interest rate equal to ten percent (10%) per annum. After the Initial Period, interest will accrue on the entire unpaid principal amount of the Sellers Note from time to time outstanding, at an interest rate equal to ten percent (10%) per annum. Interest is payable semi-annually in arrears beginning in June 2017. The term of the Sellers Note is five years, and any unpaid interest and principal, together with any other amounts payable under the Sellers Note, is due and payable on the maturity date of December 21, 2021. The Company may prepay the Sellers Note in whole or in part without penalty or premium. If the Company does not pay any amount payable when due, whether at the maturity date, by acceleration, or otherwise, such overdue amount will bear interest at a rate equal to twelve (12%) per annum from the date of such non-payment until the Company pays such amount in full. The Acquisition Date fair value of the consideration transferred totaled approximately $19.1 million, which consisted of the following:
Cash Purchase Price |  | $ | 12,000,000 |
Cash acquired |  |  | 1,243,216 |
Tax payable assumed debt |  |  | (215,847 | )
Fair value of Sellers’ Note |  |  | 6,455,559 |
Working capital adjustment |  |  | (422,269 | )
Total purchase price |  | $ | 19,060,659 |
Sellers Note issued at fair value |  |  | (6,455,559 | )
Preliminary working capital adjustment |  |  | (653,556 | )
Adjustment to beginning cash |  | $ | (163,878 | )
Adjustment to beginning assumed debt |  |  | (10,330 | )
Cash paid at Acquisition Date |  |  | 11,777,336 |
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date. The Company is in the process of obtaining third-party valuations of certain intangible assets and finalizing the working capital adjustment with the sellers; thus, the provisional measurements of intangible assets, goodwill and deferred income tax assets are subject to change.
Cash |  | $ | 1,243,216 |
Accounts receivable |  |  | 1,069,369 |
Inventory |  |  | 1,135,946 |
Other Current assets |  |  | 105,806 |
Property and equipment |  |  | 4,546,402 |
Security deposit and other assets |  |  | 45,359 |
Identifiable intangibles |  |  | 10,759,000 |
Total identifiable assets acquired |  | $ | 18,905,098 |
Accounts payable |  |  | (553,747 | )
Accrued expenses and other payables |  |  | (34,147 | )
Other payables |  |  | (484,297 | )
Total liabilities assumed |  | $ | (1,072,191 | )
Net identifiable assets acquired |  |  | 17,832,907 |
Goodwill |  |  | 1,227,752 |
Net assets acquired |  | $ | 19,060,659 |
As part of the preliminary valuation analysis, the Company identified intangible assets, including customer relationships, customer backlog, trade secrets, trademarks and non-compete agreements. The customer relationships, customer backlog, trade secrets, trademarks and non-compete agreements were determined to have estimated values of $5,633,000, $261,000, $2,546,000, $2,290,000 and $29,000, respectively, and estimated useful lives of 15, 2, 8, 8, and 3 years, respectively. The estimated fair value of identifiable intangible assets is determined primarily using the "income approach", which requires a forecast of all future cash flows. This also reflects a $2,532,824 adjustment to increase the basis of the acquired property, plant and equipment to reflect fair value of the assets at acquisition date. The estimated useful lives range from 3 years to 7 years. Depreciation and amortization on intangible assets and property, plant and equipment is calculated on a straight-line basis. This also reflects a $153,132 adjustment to increase the basis of the acquired inventory to reflect fair value of the inventory at the Acquisition date. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of ISP. None of the goodwill is expected to be deductible for income tax purposes. As of December 31, 2016, there were no changes in the recognized amounts of goodwill resulting from the Acquisition. The Company recognized approximately $125,000 of Acquisition related costs that were expensed in the current period and approximately $609,000 for the six months ended December 31, 2016. These costs are included in the consolidated statements of comprehensive income (loss) in the line item entitled “Selling, general and administrative.” The Company recognized Acquisition related expenses of approximately $209,000 in fiscal 2016. The Company also recognized approximately $950,000 in expenses associated with the public offering of shares of Class A common stock, the net proceeds of which were used to provide funds to pay for a portion of the purchase price of the Acquisition. These expenses were deducted from the gross proceeds received as a result of the public offering of Class A common stock, as reflected in stockholders’ equity. For additional information on this public offering, see Note 13, Public Offering of Class A Common Stock, in these consolidated financial statements. The amounts of revenue and net income of ISP included in the Company’s consolidated statements of comprehensive income (loss) from the Acquisition Date to the period ending December 31, 2016 are as follows:
Revenue |  | $ | 533,569 |
Net income |  | $ | 20,592 |
The following represents unaudited pro forma consolidated information as if ISP had been included in the consolidated results of the Company for the six months ending December 31, 2016 and 2015:
|  | Six months ended |  |  | Six months ended |
|  | December 31, 2016 |  |  | December 31, 2015 |
Revenue |  | $ | 17,001,233 |  |  | $ | 14,403,914 |
Net income |  | $ | 2,150,254 |  |  | $ | 616,610 |
These amounts have been calculated after applying the Company’s accounting policies and adjusting the results for Acquisition expenses and to reflect the additional interest expense and depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied on July 1, 2015, together with the consequential tax effects. Prior to the Acquisition, the Company had a preexisting relationship with ISP. The Company ordered anti-reflective coating services from ISP on an arms’ length basis. The Company had also partnered with ISP to develop and sell molded optics as part of a multiple lens assembly sold to a third party and had provided certain standard molded optics for resale through ISP’s catalog. At the Acquisition Date, the Company had amounts payable to ISP of $8,000 for services provided prior to the acquisition, and ISP had payables of $24,500 due to the Company.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1497-128463 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1490-128463 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1392-128463 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7008-128479 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1486-128463 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6927-128479 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4845-128472 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1524-128463 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7000-128479 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4922-128472 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4934-128472 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4926-128472 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=73530397&loc=SL65897772-128472 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1383-128463 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6996-128479 + Details
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