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YoY shift: Neutral
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.03pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.01pp
Flat
Net-tone change vs last year's 10-K.
MD&A
-0.06pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
adverse+2
negatively+1
unable+1
retaliatory+1
disproportionately+1
Positive rising
stability+1
proactive+1
Risk Factors (Item 1A)
7,045 words
Item 1A. Risk Factors.
The following is a discussion of the primary factors that may affect the operations and/or financial performance of our business. Refer to the section entitled Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K for an additional discussion of these and other related factors that affect our operations and/or financial performance.
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Risks Related to Our Business and Financial Results
We have a history of losses. We reported net losses for several consecutive fiscal years. As of June 30, 2025, we had an accumulated deficit of approximately $231 million. We may incur losses in the future if we do not achieve sufficient revenue to maintain profitability, or if we continue to incur unusual costs. We expect revenue to grow by generating additional sales through promotion of our infrared products, with a focus on engineered solutions, and continued cost reduction efforts across all product groups, but we cannot guarantee such improvement or growth.
Factors which could affect our future , include, but are not limited to, a 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 payments from our customers on accounts receivable.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
loss+6
default+3
closing+2
disproportionately+2
losses+1
Positive rising
gain+1
favorably+1
advances+1
stabilized+1
achieve+1
MD&A (Item 7)
9,345 words
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes.
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 Annual Report on Form 10-K regarding forward-looking statements.
The following discussions also include use of non-GAAP measures discussed in more detail under the heading “Non-GAAP Financial Measures.”
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Effect of Certain Events Occurring at Our Chinese Subsidiaries
In April 2021, we terminated several employees of our China subsidiaries, LPOIZ and LPOI, including the General Manager, the Sales Manager, and the Engineering Manager, after determining that they had engaged in malfeasance and conduct adverse to our interests, including efforts to misappropriate certain of our proprietary technology, diverting sales to entities owned or controlled by these former employees and other acts of , theft and . In connection with such , our China subsidiaries have engaged in certain legal proceedings with the employees.
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.
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 year 2025, 38% of our net revenue was derived from sales outside of the U.S., with 91% of our foreign sales derived from customers in Europe and Asia. In fiscal year 2024, 39% of our net revenue was derived from sales outside of the U.S., with 94% of our 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:
greaterdifficulty in accounts receivable collection and longer collection periods;
potentially different pricing environments and longer sales cycles;
the impact of recessions in economies outside the U.S.;
the impact of high, sustained inflation;
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.
Russia’s ongoing conflict with Ukraine may continue to disrupt our supply chain. Our business, financial condition, and results of operations could be adversely affected by continued disruption and global consequences stemming from the conflict. Although we have no direct operations in Russia or Ukraine, the broader consequences of this conflict have negatively affected, and are expected to continue to negatively affect, the global economy, including the imposition of sanctions, cyber incidents or information technology failures, supply disruptions, increases in inflation rates, increase in energy costs, changes to foreign currency exchange rates, constraints, volatility, or disruption in financial markets, the availability of raw materials, supplies, freight, and labor, and uncertainty about economic and global stability. Historically, we have sourced Germanium from suppliers located in Russia and China. At the start of the Russia\Ukraine conflict we had ceased all purchases of Germanium from vendors in Russia and instead have been purchasing Germanium from vendors in China. On July 4, 2023 China announced its intentions to impose some export restrictions on Germanium, requiring all international customers to provide an end user statement for approval before receiving an export license. Since that announcement, supply of Germanium has been disrupted, though not completely stopped. On December 3, 2024 China further announced an immediate export ban on Germanium, Gallium and antimony to the United States and for any dual use or military use applications. We have taken proactive steps to minimize the orders we accept for Germanium products and therefore minimize our exposure to this risk. We cannot provide any assurances that we will be able to obtain adequate supplies in the future or, if adequate supplies are available, that the timing or costs of obtaining such raw materials will be acceptable to us. Further, some of our major customers in Europe may be directly impacted by the Russian-Ukraine conflict, which could impact the amount and frequency of orders they place with us, as well as impact the timing and ability to pay for products ordered from us. Any material impacts to our customers could have a material adverse effect on our business and operating results.
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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 (including Germanium and sensors) 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 we could experience delays as a result of evaluating and testing the products or services of potential alternative suppliers. The economic decline in China 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. The economic decline in China has also 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.
International tariffs, including tariffs applied to goods traded between the U.S. and China, could materially and adversely affect our business and results of operations . The United States has recently enacted and proposed to enact significant new tariffs affecting certain products exported by a number of U.S. trading partners, including China. Additionally, President Trump has directed various federal agencies to further evaluate key aspects of U.S. trade policy and there has been ongoing discussion, commentary and actions regarding potential significant changes to U.S. trade policies, treaties and tariffs. In 2025, the Trump administration indicated that the United States would impose retaliatory measures with respect to jurisdictions that have or are likely to put in place tax rules that are extraterritorial or disproportionately affect U.S. companies. The likelihood of these changes being enacted or implemented is unclear. We are currently unable to predict whether such changes will occur and, if so, the ultimate impact on our business.
The institution of trade tariffs both globally and between the U.S. and China specifically carries the risk of negatively impacting China’s overall economic condition, which could have negative repercussions for us. Furthermore, imposition of tariffs could cause a decrease in the sales of our products to customers located in China or other customers selling to Chinese end users, which would directly impact our business. In light of these events, there continues to exist significant uncertainty about the future relationship between the U.S. and other countries with respect to such trade policies, treaties and tariffs. These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. Any of these factors could depress economic activity and restrict our access to suppliers or customers and have a material adverse effect on their business, financial condition and results of operations, which in turn would negatively impact us. We have operations, customers and suppliers in the U.S., China and other countries and regularly import and export goods and services to and from those countries. An increase in tariffs could have a material impact on our costs and on the demand for our products and services.
Discussions remain ongoing in respect of certain trade restrictions and tariffs on imports, as well as retaliatory actions by affected countries, which could impose restrictions tariffs enacted in response to such actions, which could prohibit, reduce, or discourage purchases of our products by foreign customers, leading to increased costs of products that contain our components, increased costs of manufacturing our products, and higher prices of our products in foreign markets. Changes in, and responses to, U.S. trade policy could reduce the competitiveness of our products and cause our sales and revenues to drop, which could materially and adversely impact our business and results of operations.
We utilize a number of strategies to mitigate the current and, hopefully, future impact of tariffs. However, given the uncertainty regarding the current tariffs, as well as the potential for additional trade actions by the U.S. or other countries in the future, any future impact on our operations and financial results is uncertain and these impacts could be more significant than those we have experienced in the past. Further, we can provide no assurance that the strategies we implemented to mitigate the impact of such tariffs or other trade actions will continue to be successful. To the extent that our supply chain, costs, sales, or profitability are negatively affected by the tariffs or other trade actions, our business, financial condition, and results of operations may be materially adversely affected.
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 U.S.-based facilities and inter-company transactions in U.S. dollars in order to partially mitigate the impact of foreign currency fluctuations. However, a portion of our international revenues and expenses are denominated in foreign currencies. Accordingly, we experience the risks of fluctuating currencies and corresponding exchange rates. In fiscal years 2025 and 2024, we recognized net losses of approximately $0.1 million and gains of approximately $0.1 million on foreign currency transactions, respectively. Any such fluctuations that result in a less favorable exchange rate could adversely affect a portion of our revenues and expenses, which could negatively impact our results of operations and financial condition.
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We also source certain raw materials from outside the U.S. Some of those materials, priced in non-dollar currencies, fluctuate in price due to the value of the U.S. dollar against non-dollar-pegged currencies, especially the Euro and Renminbi. As the dollar strengthens, this increases our margins and helps with our ability to reach positive cash flow and profitability. If the strength of the U.S. dollar decreases, the cost of foreign sourced materials could increase, which would adversely affect our financial condition and results of operations. If the Euro or Renminbi currencies were to trend unfavorablyagainst the U.S. dollar on a long-term basis, then we would seek to rebalance our strategic materials sourcing.
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 year 2025, we had sales to three customers that comprised an aggregate of approximately 23% of our annual revenue, with one customer at 9% of our sales, another customer at 7% of our sales, and the third customer at 6% of our sales. In fiscal year 2024, we had sales to three customers that comprised an aggregate of approximately 25% of our annual revenue, with one customer at 12% of our sales, another customer at 7% of our sales, and the third customer at 6% of our sales. Our current strategy of providing the domain expertise and the extensive “know how” in optical design, fabrication, production and testing technologies will allow our customers to focus on their own development efforts, without needing to develop subject matter expertise in optics. By providing the bridge into the optical solution world, we partner with our customers on a long-term basis, create value to our customers, and capture that value through the long-term supply relationships we develop. However, the loss of any of these customers, or a significant reduction in sales to any such customer, would adversely affect our revenues.
A significant portion of our cash is generated and held outside of the U.S. The risks of maintaining significant cash abroad could adversely affect our cash flows and financial results. As of June 30, 2025, approximately 25% of our cash was held abroad. Historically, we generally considered unremitted earnings of our subsidiaries operating outside of the U.S. to be indefinitely reinvested. During fiscal year 2020, we began declaring intercompany dividends to remit a portion of the earnings of our foreign subsidiaries to us. Remaining cash held outside of the U.S. 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 of the legal entity must equal at least 50% of its registered capital. As of June 30, 2025, LPOIZ had approximately $0.4 million in retained earnings available for repatriation, based on earnings accumulated through December 31, 2024, the end of the most recent statutory tax year, that remained undistributed as of June 30, 2025. This limitation may affect our ability to fully utilize our cash resources for needs in the U.S. 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 U.S., a failure to repatriate such cash in a timely and cost-effective manner could adversely affect our business and financial results.
We will likely need additional capital to sustain our operations in the future and to repay indebtedness. We have limited capital resources. Our operations have historically been largely funded from the proceeds of equity financings and cash flow from operations along with a minimal level of debt financing. On September 15, 2025, we announced a private placement pursuant to a securities purchase agreement, whereby we raised $8.0 million in gross proceeds to fund the working capital needs of our existing operations and for general corporate purposes. We will likely need to raise additional financing to repay our outstanding indebtedness of approximately $5.6 million, as of June 30, 2025, and to fund our current level of operations as well as our strategic plan. Additional financing will be required in order for us to take advantage of acquisition opportunities that we may identify. Such financing, which is not in place at this time, may be from the sale of equity or convertible or other debt securities in a public or private offering, or from an additional credit facility. We may be unable to raise sufficient additional capital on favorable terms, if at all, to supply the working capital needs of our existing operations or to expand our business.
Our stock price may fluctuate widely. Many factors, including, but not limited to, future announcements concerning the Company, its competitors or customers, as well as quarterly variations in operating results, announcements of technological innovations, seasonal or other variations in anticipated or actual results of operations, changes in earnings estimates by analysts or reports regarding the Company’s industries in the financial press or investment advisory publications, could cause the market price of the Company’s stock to fluctuate substantially. In addition, the Company’s stock price may fluctuate widely for reasons which may be unrelated to operating results. Also, any information concerning the Company, including projections of future operating results could in the future contribute to volatility in the market price of the Company’s common stock.
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 criminalpenalties, 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.
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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.
If the custodians or authorized users of our controlling non-tangible assets, including corporate chops and seals of our Chinese subsidiaries, fail to fulfill their responsibilities or misappropriate or misuse those assets, our business and operations could be materially and adversely affected. In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Under law of the People’s Republic of China, legal documents for corporate transactions, including contracts and leases that our business relies upon, are executed using “corporate chops,” which are instruments that contain either the official seal of the signing entity or the signature of a legal representative whose designation is registered and filed with the State Administration for Industry and Commerce, or SAIC.
Our Chinese subsidiary, LPOIZ (and formerly LPOI), generally executes legal documents with corporate chops. One or more of our corporate chops may be used to, among other things, execute commercial sales or purchase contracts, procurement contracts and office leases, open bank accounts, issue checks and to issue invoices. We have controls in place over access to and use of the chops. However, we cannot assure you that unauthorized access to or use of those chops can be prevented. Our designated employees who hold the corporate chops could abuse their authority by, for example, binding us to contracts against our interests or intentions, which could result in economic harm, disruption or our operations or other damages to them as a result of any contractual obligations, or resulting disputes, that might arise. If the party contracting with us asserted that we did not act in good faith under such circumstances, then we could incur costs to nullify such contracts. Such corporate or legal action could involve significant time and resources, while distracting management from our operations. In addition, we may not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation if a transferee relies on the apparent authority of the representative and acts in good faith.
If a designated employee uses a chop in an effort to obtain control over our Chinese subsidiary, we would need to take legal action to seek the return of the applicable chop(s), apply for a new chop(s) with the relevant authorities, or otherwise seek legal redress for the violation of their duties. During any period where we loseeffective control of the corporate activities of our Chinese subsidiary as a result of such misuse or misappropriation, the business activities of the affected entity could be disrupted, and we could lose the economic benefits of that aspect of our business. To the extent those chops are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of this entity could be severely and adversely compromised, and the operations of this entity could be significantly and adversely impacted.
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 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 continue to strengthen our sales and marketing organization 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 continue to expand our sales operations globally, we may not be able to continue to increase market awareness or sales of our products, which would adversely affect our revenues, results of operations, and financial condition.
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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 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 consistent profitable results. 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 certain 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, continue to reduce costs, and/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 . With our strategic transition into more value-added solutions, and the addition of Visimid in July 2023, we reorganized our products into four product groups: infrared components, visible components, assemblies and modules, and engineering services. The addition of G5 Infrared in February 2025 further expands our product offerings. In fiscal year 2025, sales of infrared components represented approximately 38% of our net revenues, sales of visible components represented approximately 32% of our net revenues, sales of assemblies and modules represented 21% of our revenues, and engineering services represented 9% of our revenues. In the future, we expect growth primarily from our assemblies and modules and engineering services product groups, the vertical integration of which will be supported by the infrared components product group. Continued and expanding market acceptance of these products, particularly infrared products based on our proprietary chalcogenide materials (Germanium alternatives), 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.
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.
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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, beyond our ISO 9001:2015 certification. 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.
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 a significant portion 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 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 successfullylitigated 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; Hudson, New Hampshire; Riga, Latvia; and Zhenjiang, China. Our revenues are dependent upon the continued operation of these facilities. The Orlando Facility is subject to a lease that expires March 31, 2034. The Hudson, New Hampshire facility lease expires in November 2026. The Riga Facility is subject to two leases which expire in December 2030, and the Zhenjiang Facility is subject to one lease that expires in December 2027. 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 have a business continuity and recovery plan for our facilities however, 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, increased costs and/or loss of market share, any of which could substantially harm our business and our 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 in the United States and internationally. 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 claimingviolations of their intellectual property rights by us.
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In addition, we cannot assure that, in the future, our patent applications will be approved, that any patents that 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, expensive, and difficult 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 defendagainstclaims 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.
Data breach and breakdown of information and communication technologies. In the course of our business, we collect and store sensitive data, including intellectual property. We could be subject to service outages or breaches of security systems which may result in disruption, unauthorized access, misappropriation, or corruption of this information. We rely on our information technology systems to effectively manage our operational and financial functions. We increasingly rely on information technology systems to process, transmit, and store electronic information. In addition, a significant portion of internal communications, as well as communication with customers and suppliers, depends on information technology. We are exposed to the risk of cyber incidents in the normal course of business. Cyber incidents may be deliberate attacks for the theft of intellectual property, other sensitive information or cash or may be the result of unintentional events. Like most companies, our information technology systems may be vulnerable to interruption due to a variety of events beyond our control, including, but not limited to, physical or electronic break-ins, vendor service outages, terrorist attacks, telecommunications failures, computer viruses, hackers, foreign governments, and other security issues. We have technology security initiatives and data recovery plans in place to mitigate our risk to these vulnerabilities, but these measures may not be adequate, or implemented properly, or executed timely to ensure that our operations are not disrupted. We have insurance coverage for cyber liability, but there can be no assurances that the amount of coverage will be adequate or that insurance proceeds will be available for a particular claim.
Although we have not experienced an incident, potential consequences of a material cyber incident include damage to our reputation, litigation, system disruptions, shutdowns, unauthorized disclosure of confidential information, and increased cyber security protection and remediation costs. Such consequences could materially and adversely affect our results of operations.
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 U.S. 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 infringementclaimsagainst 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.
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suspected
fraud
embezzlement
terminations
terminated
In December 2023, the Company recovered approximately $0.2 million in funds that had been recovered by the Chinese authorities, which is included in “Other income” in the accompanying Consolidated Statements of Comprehensive Income (Loss) for the year ended June 30, 2024. We do not expect to recover any further funds or incur additional legal fees or consulting expenses in future periods as we have exhausted nearly all of our legal options and remedies.
Results of Operations
Operating Results for Fiscal Year Ended June 30, 2025 compared to the Fiscal Year Ended June 30, 2024:
Revenue.
Revenue for fiscal year 2025 was approximately $37.2 million, an increase of 17%, as compared to $31.7 million in fiscal year 2024. Revenue generated by the infrared components product group was approximately $14.3 million in fiscal year 2025, an increase of 2%, as compared to the prior fiscal year. Fiscal year 2025 includes $1.6 million of G5 Infrared sales of coating services and components. The remaining decrease of $1.4 million is primarily due to a decrease in sales against a large annual contract for Germanium-based products, which was not renewed in the second quarter of fiscal 2024, largely due to the challenges associated with the Germanium supply chain, where it is difficult to secure pricing and availability for long-term orders. The decrease in sales to this customer was partially offset by increases in sales of infrared components to several defense customers in the U.S. and in Europe.
Revenue generated by the visible components product group was approximately $11.7 million for fiscal year 2025, an increase of 4%, as compared to the prior fiscal year. The increase in revenue is primarily due to sales to defense customers, partially offset by decreases in sales through catalog and distribution channels in the U.S., as well as decreases in sales to commercial and medical customers.
Revenue from the assemblies and modules product group was approximately $8.0 million in fiscal year 2025, an increase of 79% as compared to fiscal year 2024. Fiscal year 2025 includes $4.0 million of G5 Infrared sales of cameras and modules. The remaining decrease is due to an end of life order for a custom visible lens assembly which shipped complete in the first quarter of fiscal 2025. This decrease in visible lens assembly sales was partially offset by increased sales of an infrared lens assembly to an industrial customer which started shipping at volume in the third quarter of fiscal 2025.
Revenue from engineering services increased by $1.2 million for fiscal 2025, as compared to the same period of the prior fiscal year. This increase was driven by Visimid’s contract with Lockheed Martin, as well as revenue from one of our space-related funded research contracts. The timing and dollar value of deliverables is not always consistent, which causes revenue for this product group to fluctuate from period to period.
Cost of Sales and Gross Margin.
Gross margin for fiscal year 2025 was approximately $10.1 million, an increase of 17%, as compared to approximately $8.6 million in fiscal year 2024. Total cost of sales was approximately $27.1 million for fiscal year 2025, compared to $23.1 million for fiscal year 2024, an increase of 17%. Gross margin as a percentage of revenue was 27% for fiscal year 2025 as compared to 27% for fiscal year 2024. Gross margin for fiscal year 2025 was favorably impacted by the addition of G5 Infrared revenue and gross margin since acquisition, particularly in the assemblies and modules product group. The assemblies and modules product group increased from 14% of revenue in fiscal year 2024, to 21% of revenue in fiscal year 2025, and these products typically have higher gross margins than the component product groups. Gross margin for fiscal year 2025 was unfavorably impacted by an approximately $0.5 million increase in inventory reserve charges primarily related to visible components where revenue has declined for the past several years.
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Selling, General and Administrative.
For fiscal year 2025, Selling, General and Administrative (“SG&A”) costs were approximately $15.8 million, an increase of approximately $3.5 million, or 29%, as compared to the prior fiscal year. The increase in SG&A for fiscal year 2025 is primarily related to the acquisition of G5 Infrared, including: (i) the addition of approximately $1.1 million in SG&A costs related to G5 Infrared; and (ii) non-recurring costs of $1.5 million related to the acquisition, an increase of $1.0 million as compared to prior fiscal year, as we began incurring costs related to this acquisition in the second half of fiscal year 2024. The remaining increase of approximately $1.5 million was driven by: (i) increased sales and marketing spend, including additional headcount, consultants, advertising and tradeshows; and (ii) an increase in information technology spend to upgrade our infrastructure to meet customer requirements, particularly, Cybersecurity, for the defense industry.
New Product Development.
New product development costs were approximately $3.1 million in fiscal year 2025, an increase of approximately $0.7 million, or 28%, as compared to the prior fiscal year. These increases are due to the addition of engineering personnel, as well as an increase in materials and outside services utilized for development projects, primarily for infrared cores and camera systems.
Amortization of Intangibles.
Amortization of intangibles decreased by $0.2 million for fiscal year 2025, as compared to the prior fiscal year, as certain of the intangible assets related to the acquisition of ISP were fully amortized as of December 31, 2024. This decrease was largely offset by the addition of amortization of intangible assets associated with the G5 Infrared acquisition. See Note 3, Acquisitions , in the Consolidated Financial Statements included in this Annual Report on Form 10-K, for further information.
Other Expense.
Interest expense, net, was approximately $1.1 million for fiscal year 2025, compared to approximately $0.2 million in the prior fiscal year. Interest expense for fiscal year 2025 include financing costs associated with the warrant liability of approximately $0.3 million. The remaining increase in interest expense is due to the interest and amortization of loan issuance costs associated with the Bridge Note, executed in August 2024, which was subsequently replaced by the Acquisition Notes executed in February 2025. See Note 14, Loans Payable , in the Consolidated Financial Statements included in this Annual Report on Form 10-K, for definitions and further information.
We recorded a loss in extinguishment of debt of $0.4 million during fiscal year 2025, related to the exchange of the Bridge Note for an Acquisition Note in connection with the financing of the acquisition of G5 Infrared. The loss is based on the difference between the carrying value of the debt being extinguished and the fair value of the new debt, plus any other payments exchanged (e.g. the aforementioned Class A Common Stock, Series G Convertible Preferred Stock and warrants).
Other expense, net, was approximately $0.1 million for fiscal year 2025, compared to other income, net of $0.1 million for fiscal year 2024. Other expense, net, for fiscal year 2025 primarily consists of net foreign exchange losses. Other income, net, for fiscal year 2024 includes a gain of $0.2 million for the return of funds previously misappropriated by our former Chinese management team, as a result of the ongoing legal proceedings described in Note 15, Contingencies , in the Consolidated Financial Statements included in this Annual Report on Form 10-K. This gain was largely offset by expenses of $0.2 million associated with an event of default by a sub-tenant of a portion of our Orlando Facility lease.
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 fiscal year 2025, we incurred net foreign currency transaction losses of approximately $0.1 million, compared to net foreign currency transaction gains of $0.1 million for fiscal year 2024.
Income Taxes.
During fiscal year 2025, we recorded income tax expense of approximately $0.1 million, compared to $0.1 million in fiscal year 2024, primarily related to our operations in China. Income taxes for fiscal years 2025 and 2024 include Chinese withholding tax expenses of $0.2 million and $0.2 million, respectively, the majority of which are associated with intercompany dividends declared by LPOIZ, payable to us as the parent company. While these repatriation transactions result 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. Income tax expense for fiscal years 2025 and 2024 are also offset by deferred income tax benefits from the turnaround of temporary differences, and increased by deferred income tax expense related to certain indefinite lived temporary differences. Please refer to Note 9, Income Taxes , in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional information related to each of our tax jurisdictions.
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Net Income (Loss).
Net loss for fiscal year 2025 was approximately $14.9 million, or $0.36 basic and diluted loss per share, compared to approximately $8.0 million, or $0.21 basic and diluted loss per share, for fiscal year 2024. The increase in net loss for fiscal year 2025, as compared to fiscal year 2024, is partially attributable to the approximately $3.5 million increase in operating loss due to higher operating expenses, partially offset by the increase in gross margin. In addition, fiscal year 2025 net income reflects a number of non-operating items driven by the acquisition financing, including the increased interest expense of $1.0 million, loss on extinguishment of debt of $0.4 million, and change in fair value of warrant liability of $1.4 million.
Weighted-average common stock shares outstanding were 40,874,068 for both basic and diluted in fiscal year 2025, compared to 37,944,935 for both basic and diluted in fiscal year 2024. The increase in weighted-average basic common shares was primarily due to the Class A Common Stock issued in conjunction with the financing of the acquisition of G5 Infrared (refer to Note 8, Stockholders’ Equity , in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional information). The increase is also attributable to: (i) the 585,483 shares of Class A Common Stock issued during the second half of fiscal year 2024 pursuant to the at-the-market equity program; (ii) the shares of Class A Common Stock issued in conjunction with the acquisition of Visimid; and (iii) the issuance of shares of Class A Common Stock under the 2014 ESPP and underlying vested RSUs and RSAs. Potential dilutive common stock equivalents were excluded from the calculation of diluted shares for all periods presented, as their effects would have been anti-dilutive due to net losses in those periods.
Liquidity and Capital Resources
At June 30, 2025, we had working capital of approximately $11.3 million and total cash and cash equivalents of approximately $4.9 million. Approximately 25% of our total cash, cash equivalents and restricted cash was held by our foreign subsidiaries in China and Latvia. Cash and cash equivalents held by our foreign subsidiaries in China and Latvia were generated in-country as a result of foreign earnings. Historically, we considered unremitted earnings held by our foreign subsidiaries to be permanently reinvested. However, during fiscal year 2020, we began declaring intercompany dividends to remit a portion of the earnings of our foreign subsidiaries to us, as the U.S. parent company. It is still our intent to reinvest a portion of earnings generated by our foreign subsidiaries, however we also plan to repatriate a portion of their earnings.
In China, before any funds can be repatriated, the retained earnings of the legal entity must equal at least 50% of the registered capital. During fiscal years 2025 and 2024, we repatriated approximately $1.2 million and $1.4 million, respectively, from LPOIZ. As of June 30, 2025, LPOIZ had approximately $0.4 million in retained earnings available for repatriation, based on earnings accumulated through December 31, 2024, the end of the most recent statutory tax year, that remained undistributed as of June 30, 2025.
Loans payable as of June 30, 2025 consisted of the Acquisition Notes (as defined below) and two third-party equipment loans (as defined below). Details of the loans are as follows:
Acquisition Notes
On February 18, 2025 in connection with the closing of the Securities Purchase Agreement (as defined in Note 3, Acquisitions , to the Notes to the Consolidated Financial Statements to this Annual Report on Form 10-K), we issued senior secured promissory notes in an aggregate principal amount of $5.2 million (the “Acquisition Notes”). The Acquisition Notes accrue interest at the rate between 10-12% per annum (12% as of June 30, 2025), based on the ratio of indebtedness to EBIDTA of the Company, unless an event of default (as defined in the Acquisition Notes) occurs, at which time the Acquisition Notes would accrue interest at 15% per annum.
The Acquisition Notes will mature on February 18, 2027, the second anniversary of the issuance date.
The Acquisition Notes will automatically convert into shares of Series G Convertible Preferred Stock, which are convertible into Conversion Shares, if the EBIDTA reported by the Company for the calendar year ending December 31, 2025, is less than approximately $4.9 million, which are in turn convertible into Conversion Shares (the “Automatic Note Conversion”). The Series G Convertible Preferred Stock is convertible into Class A Common Stock. The Company determined that the Automatic Note Conversion did not require bifurcation from the Acquisition Notes as the Automatic Note Conversion (i) is indexed to the Company’s own stock, (ii) is settled in shares, not cash, and (iii) is only exercisable into a fixed number of shares at a fixed exercise price of $1,000 per share once it is triggered to convert and the conversion price can only be adjusted for standard antidilution provisions.
All or part of the Acquisition Notes may, unless converted under the Automatic Note Conversion, be redeemed by the Company prior to the maturity date at a redemption price equal to the portion of principal so redeemed plus all accrued and unpaid interest thereon, provided that if the funds used for redemption were not generated internally by Company operations, the redemption amount will be multiplied by 102%. In addition, following an event of default or upon a change of control, the Purchaser may require the Company to redeem all or any portion of the Acquisition Notes. Notwithstanding anything to the contrary, upon any bankruptcy event of default, the Company will immediately pay the holder an amount in cash representing all outstanding principal and accrued and unpaid interest. The Company determined that these redemption features did not require bifurcation from the Acquisition Notes as these are clearly and closely related to the Acquisition Notes.
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The Acquisition Notes include customary affirmative and negative covenants and events of default. Additionally, the Acquisition Notes include financial covenants requiring the Company to maintain a Total Leverage Ratio (as defined in the Acquisition Notes) of not greater than 4.00:1:00 and a Fixed Charge Covered Ratio (as defined in the Acquisition Notes) of greater than 1.20:1.00 for each fiscal quarter beginning with the fiscal quarter ending December 31, 2025.
Equipment Loans.
In December 2020, ISP Latvia entered into an equipment loan with a third party (the “2020 Equipment Loan”), which is also a customer. The 2020 Equipment Loan is subordinate to the Term Loan and is collateralized by certain equipment. The initial advance under the 2020 Equipment Loan was 225,000 EUR (or approximately USD $0.3 million), payable in equal installments over 60 months, the proceeds of which were used to make a prepayment to a vendor for equipment to be delivered at a future date. The 2020 Equipment Loan bears interest at a fixed rate of 3.3%. An additional 225,000 EUR (or approximately USD $0.3 million) was drawn in September 2021, which proceeds were paid to the vendor for the equipment, payable in equal installments over 52 months. As of June 30, 2025, the outstanding balance on the 2020 Equipment Loan was approximately 49,000 EUR (or USD $0.1 million).
In May 2023, ISP Latvia entered into an equipment loan with a third party financial institution (the “2023 Equipment Loan”). The 2023 Equipment Loan is collateralized by certain equipment. The initial advances under the 2023 Equipment Loan totaled 260,258 EUR (or approximately USD $0.3 million), the proceeds of which were used to make prepayments to a vendor for equipment to be delivered at a future date. The final advance for the final payment to the equipment vendor was 132,674 EUR (or approximately USD $0.1 million). The 2023 Equipment Loan is payable over 48 months, with monthly installments beginning January 1, 2024. The 2023 Equipment Loan bears interest at the six-month EURIBOR rate, plus 2.84% (4.89% as of June 30, 2025). As of June 30, 2025, the outstanding balance on the 2023 Equipment Loan was approximately 263,000 EUR (or USD $0.3 million).
For additional information regarding the Acquisition Notes and the equipment loans, see Note 14, Loans Payable , to the Notes to the Consolidated Financial Statements to this Annual Report on Form 10-K.
Equity Financing.
In February 2022, we filed a shelf registration statement to facilitate the issuance of our Class A common stock, warrants exercisable for shares of our Class A common stock, and/or units up to an aggregate offering price of $75.8 million from time to time. In connection with the filing of the shelf registration statement, we also included a prospectus supplement relating to an at-the-market equity program under which we may issue and sell shares of our Class A common stock up to an aggregate offering price of $25.2 million from time to time, decreasing the aggregate offering price available under our shelf registration statement to $50.6 million. The shelf registration statement was declared effective by the Securities and Exchange Commission (the “SEC”) on March 1, 2022. During the year ended June 30, 2024, we issued 585,483 shares of our Class A common stock pursuant to the at-the-market equity program. No shares were issued under this program during fiscal year 2025 before the shelf registration expired on March 1, 2025.
On February 18, 2025, we announced the closing of the acquisition of G5 Infrared and the related financing, including the issuance of shares of Series G Convertible Preferred Stock. For additional information, refer to Note 3, Acquisitions , to the Notes to the Consolidated Financial Statements to this Annual Report on Form 10-K.
There are a number of factors that could result in the need to raise additional funds in the longer term, including a decline in revenue or a lack of anticipated sales growth, increased material costs, increased labor costs, planned production efficiencyimprovements not being realized, increases in property, casualty, benefit and liability insurance premiums, and increases in other costs. In addition, approximately 25% of our cash and cash equivalents was held by our foreign subsidiaries as of June 30, 2025 and, although we regularly repatriate cash, it may not be readily available to repay our liabilities in the U.S. should our cash assets in the U.S. not be sufficient. We may also identify opportunities for additional acquisitions and other strategic transactions to expand and further enhance our business that may require that we raise additional capital should we elect to pursue any of such transactions.
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Cash Flows – Operating.
Cash used in operations was $8.3 million, compared to cash provided by operations was approximately $0.5 million for fiscal year 2024. The cash used in operations for fiscal 2025 was driven by the net loss, after considering non-cash items, which was partially driven by significant legal and consulting expenses related to the acquisition of G5 Infrared. In addition, inventory increased $1.4 million (net of inventory included in the acquisition of G5 Infrared), while the increase in accounts payable was largely offset by increases in accounts payable and accrued liabilities. The cash provided by operations during fiscal year 2024 was primarily due decreases in accounts receivable and inventory, due to lower sales in fiscal year 2024, as compared to fiscal year 2023.
We anticipate continued improvement in our cash flows provided by operations in future years and as we continue to focus on managing our receivables, payables and inventory, while continuing to grow our sales and improve gross margins, with moderate increases in general, administrative, sales and marketing and new product development costs.
Cash Flows – Investing.
During fiscal years 2025 and 2024, we expended approximately $18.5 million and $0.8 million, net, to acquire G5 Infrared and Visimid, respectively, as disclosed in Note 3, Acquisitions , in the Consolidated Financial Statements in this Annual Report on Form 10-K. During fiscal 2025, we expended approximately $1.3 million for capital equipment, as compared to approximately $2.2 million during fiscal year 2024. During fiscal year 2025, our capital expenditures were primarily related to expansion of our glass fabrication capacity, as well as metrology and infrared coating equipment, whereas our capital expenditures in fiscal year 2024 were primarily related to the expansion of our Orlando Facility. In August 2023, we completed the construction of certain tenant improvements subject to our continuing lease for our Orlando Facility, of which the landlord provided $2.4 million in tenant improvement allowances. We funded the balance of the tenant improvement costs of approximately $3.7 million over fiscal years 2023 and 2024.
We anticipate a moderate level of capital expenditures during fiscal year 2026; however, the total amount expended will depend on sales growth opportunities and other circumstances.
Cash Flows – Financing.
Net cash provided by financing activities was approximately $29.3 million, whereas cash used in financing activities was approximately $1.5 million in fiscal year 2024. Cash provided by financing activities for fiscal year 2025 reflects approximately $29.8 million from financing related to the acquisition of G5 Infrared, offset by $0.4 million in principal payments on loans and finance leases. Cash used in financing activities for fiscal year 2024 reflects approximately $2.6 million in principal payments on our loans and finance leases, offset by $0.3 million in proceeds from the 2023 Equipment Loan, $0.8 million in proceeds from the sale of Class A common stock pursuant to the at-the-market equity program.
How We Operate
We have continuing sales of two basic types: sales of standard product configurations and sales of customized products or products developed specifically for a certain customer. In this latter type of business, we work with customers to help them determine optical specifications and then create certain optical designs for them, including complex multi-component, optical system or sub-system designs that we call “engineered solutions.” This is followed by “sampling” or prototyping 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 and longer-term revenue planning, as compared to the turns business, which is unpredictable and uneven. 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 the design and new product development capability, including a high-quality and responsive optical design engineering staff, opto-mechanical engineering, and all related disciplines;
The fact that as our customers take products of this nature into higher volume, commercial production they begin to work seriously to reduce costs – which may lead them to turn to larger producers, domestic or overseas, 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 market to our current and potential customers looking for specific solutions to their needs. 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 critical component(s) from foreign sources. For information regarding revenue recognition related to our various revenue streams, refer to Critical Accounting Policies and Estimates in this Annual Report on Form 10-K.
Our Key Performance Indicators
Usually on a weekly basis, management reviews several performance indicators. Some of these indicators are qualitative and others are quantitative. These indicators change from time to time as the opportunities and challenges in the business change. They are mostly non-financial indicators, such as units of shippable output by product line, production yield rates by major product line, and the output and yield data from significant intermediary manufacturing processes that support the production of the finished shippable product. These indicators can be used to calculate such other related indicators as fully yielded unit production per-shift, which varies by the product and our state of automation in production of that product at any given time. Higher unit production per shift means lower unit cost, and, therefore, improved margins or improved ability to compete, where desirable, for price sensitive customer applications. The data from these reports is used to determine tactical operating actions and changes. We believe that our non-financial production indicators, such as those noted, are proprietary information.
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Financial indicators that are usually reviewed at the same time include the major elements of the micro-level business cycle:
sales backlog;
revenue by product group;
inventory levels;
accounts receivable levels and quality;
EBITDA and Adjusted EBITDA; and
other key indicators.
These indicators are similarly used to determine tactical operating actions and changes and are discussed in more detail below. Management will evaluate these key indicators as we transition to our new strategic plan to determine whether any changes or updates to our key indicators are warranted.
Sales Backlog.
We believe sales growth has been and continues to be a key 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 monitor and evaluate our total backlog, which includes all firm orders requested by a customer that are reasonably believed 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.
Quarterly backlog levels for fiscal years 2025 and 2024 are as follows:
Quarter
Total Backlog
Change From
Prior Year End
Change From
Prior Quarter
End
The acquisition of G5 Infrared added $5.6 million of backlog as of the Acquisition Date. As of June 30, 2025, backlog for G5 Infrared products was $16.6 million. The remaining backlog of $20.8 million as of June 30, 2025 represents an increase of 8% as compared to the end of the prior fiscal year, primarily due to an increase in orders from an industrial customer, which are scheduled into fiscal year 2027. The timing of multi-year contract renewals are not always consistent and, thus, backlog levels may increase substantially when annual and multi-year orders are received, and decrease as shipments are made against these orders. We anticipate that our existing annual and multi-year contracts will be renewed in future quarters.
Markets continue to experience growing demand for infrared products used in the industrial, defense and first responder sectors. Demand for infrared products continues to be fueled by interest in lenses made with our BD6 glass and our new BDNL materials. With the global supply of germanium concentrated in Russia and China, recent global events and increases in restrictions on the sourcing of these materials are generating renewed interest in germanium alternatives such as our proprietary BlackDiamond materials, and other materials we are currently developing under an exclusive license with the Naval Research Lab.
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As we have outlined in our strategic direction, we do not expect to see significant growth in our visible components product group in the near future. Competition in that product line has grown substantially over the last few years, and some of our new molding capabilities and technologies such as free-form molded optics, might take longer than anticipated to reach full commercialization, depending on economic conditions and technology trends in the area of AR\VR.
In addition, order bookings for both visible and infrared components and assemblies continue to be slow in China. Domestic sales in China have also been adversely impacted by the economic downturn in China, which continues to negatively impact revenue and bookings in that region.
Revenue by Product Group.
The following table sets forth revenue dollars by our three product groups for the three months and year ended June 30, 2025 and 2024:
(unaudited)
Three Months Ended
June 30,
Quarter
Year Ended
June 30,
Year-to-date
% Change
% Change
Revenue
Infrared components
Visible components
Assemblies and modules
Engineering services
Total revenue
Three months ended June 30, 2025 compared to three months ended June 30, 2024.
Our revenue increased by 41% in the fourth quarter of fiscal year 2025, as compared to the same quarter of the prior fiscal year, primarily driven by increases in infrared components and assemblies and modules resulting from the addition of G5 Infrared revenue since acquisition.
Revenue generated by the infrared components product group for the fourth quarter of fiscal year 2025 was $5.0 million, an increase of 63%, as compared to the same quarter of the prior fiscal year. The fourth quarter of fiscal 2025 includes $1.1 million of G5 Infrared sales of coating services and components. The remaining $0.8 million increase in revenue is primarily due to an increase in sales to defense customers.
Revenue from the visible components product group for the fourth quarter of fiscal year 2025 was $2.8 million, or flat in comparison to the same quarter of the prior fiscal year. The decrease was primarily driven by a decrease in sales through U.S. catalog and distribution channels, due to a special order which increased revenue in the fourth quarter of the prior fiscal year.
Revenue from assemblies and modules increased by $2.8 million, or 203%, for the fourth quarter of fiscal 2025, as compared to the same quarter of the prior fiscal year. The fourth quarter of fiscal 2025 includes $3.1 million of G5 Infrared sales of cameras and modules. The remaining decrease is partially due to the absence of revenue from an end of life order for a custom visible lens assembly which shipped complete in the first quarter of fiscal 2025, and a decrease in sales of infrared camera cores due to timing of an order in the prior year.
Revenue from engineering services decreased $0.8 million, for the fourth quarter of fiscal 2025, as compared to the same quarter of the prior fiscal year. This increase was primarily driven by Visimid’s contract with Lockheed Martin, where the timing and dollar value of deliverables is not always consistent, which causes revenue for this product group to fluctuate from period to period. For the fourth quarter of fiscal 2025, the revenue recognized against this contract was less than in the fourth quarter of fiscal 2024.
Year ended June 30, 2025 compared to year ended June 30, 2024.
Our revenue increased by approximately 17%, for fiscal year 2025, as compared to the prior fiscal year, primarily driven by increases in assemblies and modules and engineering services, as well as increases in both infrared and visible components. The acquisition of G5 Infrared contributed to the increases in assemblies and modules, and infrared components.
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Revenue generated by the infrared components product group for fiscal year 2025 was $14.3 million, an increase of approximately 2%, as compared to the prior fiscal year. Fiscal year 2025 includes $1.6 million of G5 Infrared sales of coating services and components. The remaining decrease of $1.4 million is primarily due to a decrease in sales against a large annual contract for Germanium-based products, which was not renewed in the second quarter of fiscal 2024. Due to the uncertainty surrounding the global Germanium supply, we decided to reduce the amount of optics we produce from Germanium, both to reduce our exposure to the risk of supply chain disruption, and more importantly, to work with customers to convert their systems to use optics made of our own BlackDiamond materials. We continue to work with this single customer, as well as other customers to convert their systems to use BlackDiamond optics. We continue to see growth in the number of customers making that transition, as well as the volume of demand for solutions made using our BlackDiamond materials to replace legacy Germanium systems. As a result, we continue to also add more manufacturing capacity for our BlackDiamond glass, to address the growing number of customers adopting the material. Disruptions in the Germanium supply continue to cause delays in fulfilling orders, and we are accepting fewer orders for Germanium-based products. The decrease in sales to this customer was partially offset by increases in sales of infrared components to several defense customers in the U.S. and in Europe.
Revenue from the visible components product group for fiscal year 2025 was $11.7 million, an increase of 4%, as compared to the prior fiscal year. The increase in revenue is primarily due to sales to defense customers, partially offset by decreases in sales through catalog and distribution channels in the U.S., as well as decreases in sales to commercial and medical customers. In the prior fiscal year, we saw a decrease in this product group, primarily driving by lower sales customers in Asia, however the demand seems to have stabilized.
Revenue from assemblies and modules for fiscal year 2025 was $8.0 million, an increase of $3.5 million, or 79%, as compared to the prior fiscal year. Fiscal 2025 includes $4.0 million of G5 Infrared sales of cameras and modules. The remaining decrease is due to an end of life order for a custom visible lens assembly which shipped complete in the first quarter of fiscal 2025. This decrease in visible lens assembly sales was partially offset by increased sales to an industrial customer which started shipping at volume in the third quarter of fiscal 2025.
Revenue from engineering services increased by $1.2 million for fiscal year 2025, as compared to the prior fiscal year. This increase was driven by Visimid’s contract with Lockheed Martin, as well as revenue from one of our space-related funded research contracts, where the timing and dollar value of deliverables is not always consistent, which causes revenue for this product group to fluctuate from period to period. Projects related to this product group are expected to drive sales growth in the other product groups over time, as these new products transition to from development and prototyping to production.
Inventory Levels.
We manage inventory levels to minimize investment in working capital but still have the flexibility to meet customer demand to a reasonable degree. We review our inventory for obsolete items quarterly. While the mix of inventory is an important factor, including adequate safety stocks of long lead-time materials, an important aggregate measure of inventory in all phases of production is the quarter’s ending inventory expressed as a number of days’ worth of the quarter’s cost of sales, also known as “days cost of sales in inventory,” or “DCSI.” It is calculated by dividing the quarter’s ending inventory by the quarter’s cost of goods sold, multiplied by 365 and divided by 4. Generally, a lower DCSI measure equates to a lesser investment in inventory, and, therefore, more efficient use of capital. The table below shows our DCSI for the immediately preceding eight fiscal quarters:
Fiscal Quarter
Ended
DCSI (days)
Fiscal Year 2025 Average
Fiscal Year 2024 Average
Our average DCSI for fiscal year 2025 was 130, compared to 112 for fiscal year 2024. The increase in average DCSI is driven by the is acquisition of G5 Infrared during the third quarter of fiscal 2025, which increase the inventory balance disproportionately to sales for that quarter. We expect DCSI to return to an average of 110 to 120 days.
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Accounts Receivable Levels and Quality.
Similarly, we manage our accounts receivable to minimize investment in working capital. We measure the quality of receivables by the proportions of the total that are at various increments past due from our normally extended terms, which are generally 30 days. The most important aggregate measure of accounts receivable is the quarter’s ending balance of net accounts receivable expressed as a number of days’ worth of the quarter’s net revenues, also known as “days sales outstanding,” or “DSO.” It is calculated by dividing the quarter’s ending net accounts receivable by the quarter’s net revenues, multiplied by 365 and divided by 4. Generally, a lower DSO measure equates to a lesser investment in accounts receivable and, therefore, more efficient use of capital. The table below shows our DSO for the preceding eight fiscal quarters:
Fiscal Quarter
Ended
DSO (days)
Fiscal Year 2025 Average
Fiscal Year 2024 Average
Our average DSO for fiscal year 2025 was 67, compared to 56 for fiscal year 2024. The increase in average DSO for fiscal year 2025 is due to the addition of G5 Infrared revenue, which had a higher concentration of shipments in the third month of the third and fourth fiscal quarters which drives the accounts receivable balance up disproportionately to sales. We strive to maintain a DSO of less than 60, which we did achieve during fiscal 2025, when calculated on a monthly basis.
Other Key Indicators.
Other key indicators include various operating metrics, some of which are qualitative and others are quantitative. These indicators change from time to time as the opportunities and challenges in the business change. They are mostly non-financial indicators, such as on time delivery trends, units of shippable output by major product line, production yield rates by major product line, and the output and yield data from significant intermediary manufacturing processes that support the production of the finished shippable product. These indicators can be used to calculate such other related indicators as fully-yielded unit production per-shift, which varies by the particular product and our state of automation in production of that product at any given time. Higher unit production per shift means lower unit cost, and, therefore, improved margins or improved ability to compete where desirable for price sensitive customer applications. The data from these reports is used to determine tactical operating actions and changes. Management also assesses business performance and makes business decisions regarding our operations using certain non-GAAP measures. These non-GAAP measures are described in more detail below under the heading “Non-GAAP Financial Measures”.
Non-GAAP Financial Measures
We report our historical results in accordance with GAAP; however, our management also assesses business performance and makes business decisions regarding our operations using certain non-GAAP financial measures. We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition and results of operations computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use.
EBITDA and Adjusted EBITDA.
EBITDA and Adjusted EBIDA are non-GAAP financial measures used by management, lenders, and certain investors as a supplemental measure in the evaluation of some aspects of a corporation’s financial position and core operating performance. Investors sometimes use EBITDA as it allows for some level of comparability of profitability trends between those businesses differing as to capital structure and capital intensity by removing the impacts of depreciation and amortization. EBITDA also does not include changes in major working capital items, such as receivables, inventory, and payables, which can also indicate a significant need for, or source of, cash. Since decisions regarding capital investment and financing and changes in working capital components can have a significant impact on cash flow, EBITDA is not a good indicator of a business’s cash flows. We use EBITDA for evaluating the relative underlying performance of our core operations and for planning purposes. We calculate EBITDA by adjusting net income to exclude net interest expense, income tax expense or benefit, depreciation, and amortization, thus the term “Earnings Before Interest, Taxes, Depreciation and Amortization” and the acronym “EBITDA.”
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We also calculate an adjusted EBITDA, which excludes: (1) stock compensation expenses; (2) the loss on extinguishment of debt; (3) the effect of the non-cash income or expense associated with the mark-to-market adjustments, related to the warrants; and (4) the effect of foreign exchange gains or losses. Management uses adjusted EBITDA to evaluate our underlying operating performance and for planning and forecasting future business operations.
The fair value of the warrants was re-measured each reporting period until the warrants were reclassified from liabilities to equity as a result of the action taken at a special meeting of the stockholders on June 16, 2025. The change in the fair value of the warrants was either recognized as a non-cash expense or non-cash income each reporting period from February 18, 2025, the date of issuance, through June 16, 2025, when the liability was reclassified to equity. The change in the fair value of the warrants was not impacted by our actual operations but was instead strongly tied to the change in the market value of our Class A Common Stock. Please refer to Note 8, Stockholders’ Equity , in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for additional information.
We believe EBITDA and Adjusted EBITDA are helpful for investors to better understand our underlying business operations. The following table adjusts net income to EBITDA and Adjusted EBITDA for the three months and year ended June 30, 2025 and 2024:
(unaudited)
Three Months Ended June 30,
Year Ended June 30,
Net loss
Depreciation and amortization
Income tax provision
Interest expense
EBITDA
Stock-based compensation
Loss on extinguishment of debt
Change in fair value of warrant liability
Change in fair value of acquisition liabilities
Foreign exchange (gain) loss
Adjusted EBITDA
% of revenue
Our adjusted EBITDA for the quarter ended June 30, 2025 was a loss of approximately $2.0 million, compared to a loss of $1.1 million for the same period of the prior fiscal year. The decrease in adjusted EBITDA in the fourth quarter of fiscal year 2025 is primarily attributable to higher SG&A, including non-recurring costs related to the acquisition of G5 Infrared, and new product development expenses, partially offset by the increase in gross margin.
Our adjusted EBITDA for fiscal year 2025 was a loss of approximately $5.1 million, compared to a loss of $2.8 million for fiscal year 2024. The decrease in adjusted EBITDA for fiscal year 2025 is primarily attributable to higher SG&A, including non-recurring costs of approximately $1.5 million related to the acquisition of G5 Infrared, an increase of $1.0 million as compared to prior fiscal year, as we began incurring costs related to this acquisition in the second half of fiscal year 2024, and higher new product development expenses, partially offset by the increase in gross margin.
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
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of income and expense during the reporting periods presented. Our critical estimates include the allowance for trade receivables, which is made up of allowances for credit losses, allowances for obsolete inventory, valuation of compensation expense on stock-based awards and accounting for income taxes. Although we believe that these estimates are reasonable, actual results could differ from those estimates given a change in conditions or assumptions that have been consistently applied. We also have other policies that we consider key accounting policies, such as our policy for revenue recognition, however, the application of these policies does not require us to make significant estimates or judgments that are difficult or subjective.
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Management has discussed the selection of critical accounting policies and estimates with our Board, and the Board has reviewed our disclosure relating to critical accounting policies and estimates in this Annual Report on Form 10-K. The critical accounting policies used by management and the methodology for its estimates and assumptions are as follows:
Inventory obsolescence allowance is calculated by reserving 100% for items that have not been sold in two years or that have not been purchased in two years. These items, as identified, are allowed for at 100%, as well as allowing 50% for other items deemed to be slow moving within the last twelve months and allowing 25% for items deemed to have low material usage within the last six months. Items of which we have excess supply are also reserved at 25% to 100%, depending on usage rates. The parts identified are adjusted for recent order and quote activity to determine the final inventory allowance. To date, our actual results have been materially consistent with our estimates, and we expect such estimates to continue to be materially consistent in the future.
Revenue is generally recognized upon transfer of control, including the risks and rewards of ownership, of products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. The performance obligations for the sale of optical components and assemblies are satisfied at a point in time. 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. Revenues from product development agreements are recognized as performance obligations are met in accordance with the terms of the agreements and upon transfer of control of products, reports or designs to the customer. 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. Invoiced amounts for VAT related to sales are posted to the balance sheet and are not included in revenue.
Stock-based compensation is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. We estimate the fair value of each stock option as of the date of grant using the Black-Scholes-Merton pricing model. Our directors, officers, and key employees were 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”). Most options granted under the Omnibus Plan and the SICP vest ratably over two to four years and generally have ten-year contract lives. The volatility rate is based on four-year historical trends in common stock closing prices and the expected term was determined based primarily on historical experience of previously outstanding options. The interest rate used is the U.S. Treasury interest rate for constant maturities. The likelihood of meeting targets for option grants that are performance based are evaluated each quarter. If it is determined that meeting the targets is probable, then the compensation expense will be amortized over the remaining vesting period. As of June 30, 2025, there are no outstanding option grants with performance-based vesting criteria.
Goodwill and amortizable intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally two to fifteen years. We periodically reassess the useful lives of intangible assets when events or circumstances indicate that useful lives have significantly changed from the previous estimate. Amortizable intangible assets consist primarily of customer relationships, know-how/trade secrets and tradenames. They are generally valued as the present value of estimated cash flows expected to be generated from the asset using a risk-adjusted discount rate. When determining the fair value of our intangible assets, estimates and assumptions about future expected revenue and remaining useful lives are used. Goodwill and intangible assets are tested for impairment on an annual basis and during the period between annual tests if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.
We assess the qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the goodwill impairment analysis. If we determine that it is more likely than not that its fair value is less than its carrying amount, then the goodwill impairment test is performed. The fair value of the reporting unit is compared to its carrying amount, and if the carrying amount exceeds its fair value, then an impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, up to the total amount of goodwill allocated to that reporting unit.
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Accounting for income taxes requires estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of the recognition of revenue and expense for tax and financial statement purposes. We assessed the likelihood of the realization of deferred tax assets and concluded that a valuation allowance is needed to reserve the amount of the deferred tax assets that may not be realized due to the uncertainty of the timing and amount of taxable income in certain jurisdictions. In reaching our conclusion, we evaluated certain relevant criteria, including the amount of pre-tax income generated during the current and prior two years, as adjusted for non-recurring items, the existence of deferred tax liabilities that can be used to realize deferred tax assets, the taxable income in prior carryback years in the impacted jurisdictions that can be used to absorb net operating losses and taxable income in future years. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made, which, in turn, may result in an increase or decrease to our tax provision in a subsequent period.
In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement and royalty arrangements among related entities, which could impact our income or loss in each jurisdiction in which we operate. Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions and accruals. In the event our assumptions are incorrect, the differences could have a material impact on our income tax provision and operating results in the period in which such determination is made. In addition to the factors described above, our current and expected effective tax rate is based on then-current tax law. Significant changes during the year in enacted tax law could affect these estimates.
Impact of recently issued accounting pronouncements that have recently been issued but have not yet been implemented by us are described in Note 2, Summary of Significant Accounting Policies , to the Notes to the Consolidated Financial Statements to this Annual Report on Form 10-K, which describes the potential impact that these pronouncements are expected to have on our financial condition, results of operations and cash flows.
