3. Acquisition of G5 Infrared

In February 2025, the Company acquired G5 Infrared LLC (“G5 Infrared”), pursuant to a Membership Interest Purchase Agreement (the “MIPA”) by and among the Company, G5 Infrared, the members of G5 Infrared (collectively, the “Sellers”), and Kenneth R. Greenslade, solely in his capacity as Sellers’ Representative. The Company has acquired from the Sellers all of the issued and outstanding membership interests of G5 Infrared, which transaction closed on February 18, 2025 (the “G5 Acquisition Date”).

G5 Infrared is a vertically-integrated manufacturer of infrared camera systems and imaging solutions, and also provides infrared coatings. G5 Infrared operates from a manufacturing facility in Hudson, New Hampshire. The Company acquired G5 Infrared to expand the Company’s portfolio to include cooled infrared cameras.

Net assets and results of operations of G5 Infrared are reflected in our financial results commencing on the G5 Acquisition Date. Revenue generated by G5 Infrared is included in our infrared and assemblies and modules product groups. We are in the process of further refining our product groups and evaluating our operating segments following the acquisition.

We accounted for the acquisition of G5 Infrared using the acquisition method of accounting, which required us to measure identifiable assets acquired and liabilities assumed in the acquiree at their fair values as of the G5 Acquisition Date, with the excess of the consideration transferred over those fair values recorded as goodwill.

The fair value of the aggregate consideration was approximately $27.6 million which consisted of (i) $20.25 million in cash, (ii) 1,972,501 shares of the Company’s Class A common stock, $0.01 par value (“Class A Common Stock”) (at a value of $2.47 per share, which was the closing price on the G5 Acquisition Date), and (iii) potential earnout consideration paid annually in fiscal years 2026 and 2027 subject to achievement of certain revenue and EBITDA targets set forth in the MIPA. As of the G5 Acquisition Date, the preliminary estimate of fair value of consideration transferred consisted of the following:

The fair value of the equity portion of the consideration was determined by multiplying the number of shares issued, 1,972,501, by the fair value of the Class A Common Stock on the G5 Acquisition Date, which was $2.47.

Earnout payments of an aggregate of up to $23 million of additional consideration may be paid annually in fiscal years 2026 and 2027 subject to achievement of certain minimum EBITDA and revenue targets for the one and two-year periods beginning on the first full calendar month commencing after the G5 Acquisition Date, as set forth in the MIPA. If the targets are achieved during the respective periods, LightPath will (i) issue an aggregate number of shares of Class A Common Stock equal to 30% of the earnout payment divided by the average close price for the ten trading days immediately prior to the first anniversary of the earnout commencement date, as defined in the MIPA, and (ii) pay additional cash consideration in an amount equal to 70% of the earnout payment. The earnout is considered contingent consideration and is accounted for as a liability initially measured at fair value, with changes during each reporting period recognized in earnings. The portion of the earnout that will be settled in stock will also be accounted for as a liability since the achievement of targets adjusts the number of shares to be issued at settlement based on a variable other than the Company’s Class A Common Stock, and therefore it does not meet the criteria in ASC 480, Distinguishing Liabilities from Equity. The fair value of the earnout in the accompanying unaudited Condensed Consolidated Balance Sheet is calculated using a Monte Carlo simulation to determine the probability of achieving the earnout and its fair value.

The following table summarizes the preliminary allocation of the fair value of consideration transferred to assets acquired and liabilities assumed as of the G5 Acquisition Date:

Due to the timing of the acquisition of G5 Infrared, our accounting for the acquisition remains preliminary. Amounts recorded associated with these assets and liabilities are based on preliminary calculations and estimates. Our preliminary estimates and assumptions are subject to change as we obtain additional information during the measurement period (up to one year from the G5 Acquisition Date). The allocation of the purchase price is determined by management and utilizes certain third-party valuations and other analyses that have not been completed as of the date of this Quarterly Report on Form 10-Q, including but not limited to working capital, certain tax matters, property and equipment, and intangible assets. The final allocation could be materially different from the preliminary allocation used herein and may include (i) changes in fair values of property and equipment; (ii) changes in allocations to intangibles assets as well as goodwill; and (iii) other changes to certain assets and liabilities, including deferred taxes. Any potential adjustments made could be material in relation to the preliminary values presented above.

Intangible assets – All intangible assets acquired in the acquisition of G5 Infrared are subject to amortization. The preliminary fair value of identifiable intangible assets acquired as of the G5 Acquisition Date is as follows:

The fair value of intangible assets is estimated using the multi-period excess earnings approach for acquired customer relationships and the relief from royalty method for the acquired trade names and know-how. All of these level 3 fair value methods are income-based valuation approaches, which require judgment to estimate appropriate discount rates, royalty rates related to the trade names intangible assets, revenue growth attributable to the intangible assets and remaining useful lives. The acquired intangible assets are not expected to be deductible for New Hampshire state income taxpurposes, which resulted in a deferred tax liability of $1.1 million.

Goodwill – The $3.0 million of goodwill recognized is attributable to G5 Infrared’s market presence, the assembled workforce and established operating infrastructure. The acquired goodwill is expected to be deductible for Federal income tax purposes. See Note 8, Goodwill and Intangible Assets, in these Notes to these unaudited Condensed Consolidated Financial Statements for further information.

Financial Results

Revenue and loss before income taxes of G5 Infrared included in our Condensed Consolidated Statement of Operations for the G5 Acquisition Date through March 31, 2025 was $1.4 million and $0.6 million, respectively. The following table presents unaudited pro forma financial results of the operations acquired with G5 Infrared. The pro forma results for the three quarters ended March 31, 2025 were prepared as if the acquisition was completed on the first day of our fiscal 2025, July 1, 2024, and include adjustments to remove costs directly attributable to the acquisition, such as transaction-related costs and the loss on extinguishment of debt (as described below). The pro forma results for the three quarters ended March 31, 2024 were prepared as if the acquisition was completed on the first day of our fiscal 2024, July 1, 2023, and include adjustments to remove transaction-related costs directly attributable to the acquisition. The pro forma results do not include any integration synergies and are not necessarily indicative of our results of operations that actually would have been obtained had the acquisition of G5 Infrared been completed for the period presented, or which may be realized in the future.

Acquisition-related costs have been expensed as incurred. In connection with the acquisition of G5 Infrared, we recorded transaction and integration costs of $0.4 million and $1.3 million for the three and nine months ended March 31, 2025, respectively, which were included in the “Selling, general and administrative expenses” line item in our unaudited Condensed Consolidated Statement of Operations.

Acquisition Financing

Concurrent with the entry into the MIPA on February 13, 2025, we entered into a Securities Purchase Agreement, a Class A Common Securities Purchase Agreement and two promissory notes for total proceeds of approximately $32.2 million, inclusive of the conversion of the Bridge Promissory Note (see Note 13, Loans Payable), and before deducting estimated offering expenses of $2.0 million incurred by the Company, which was used to fund, in part, the cash consideration payable in connection with the acquisition of G5 Infrared. Pursuant to the Securities Purchase Agreement (the “Securities Purchase Agreement”) with North Run Capital, AIGH Investment Partners, LP, WVP Emerging Manager Offshore Fund LLC, the Lytton-Kambara Foundation and Alice W. Lytton Family LLC (collectively, the “Purchasers”), the Purchasers purchased from the Company (i) an aggregate of approximately 24,956 shares of Series G Convertible Preferred Stock (the Series G Convertible Preferred Stock is convertible into shares of Class A Common Stock), (ii) warrants to purchase an aggregate of 4,352,774 shares of Class A Common Stock, with an exercise price of $2.58 per share (the “Purchasers Warrants”), and (iii) two senior secured promissory notes in an aggregate principal amount of $5.2 million (the “Acquisition Notes”), which are convertible into shares of Series G Convertible Preferred Stock upon the occurrence of certain events (see Note 13, Loans Payable). The Securities Purchase Agreement closed on February 18, 2025.

At the closing of the Securities Purchase Agreement, the Company and the Purchasers entered into a registration rights agreement, pursuant to which the Company agreed to register the Class A Common Stock Issuable upon the conversion of the Series G Convertible Preferred Stock (including those shares of Series G Convertible Preferred Stock that are issuable upon the conversion of the Acquisition Notes) and the Purchasers Warrants (collectively, the “Registrable Securities”) under the Securities Act. The Company filed a registration statement covering the resale of such Registrable Securities on May 2, 2025, which became effective on May 12, 2025.

The Company may not issue Class A Common Stock upon the conversion of the Series G Convertible Preferred Stock or the Purchasers Warrants to the extent such issuances would result in an aggregate number of shares of Class A Common Stock exceeding 19.99% of the total shares of Class A Common Stock issued and outstanding as of the G5 Acquisition Date, in accordance with the rules and regulations of the Nasdaq Stock Market, LLC (“Nasdaq”) unless the Company first obtains stockholder approval (the “Stockholder Approval”). Pursuant to the Securities Purchase Agreement and as required by Nasdaq, the Company agreed to file a proxy statement to obtain the Stockholder Approval and hold a special meeting of stockholders of the Company not later than 120 days after the G5 Acquisition Date.

On February 13, 2025, the Company also entered into a Securities Purchase Agreement (the “Class A Common Securities Purchase Agreement”) with Lytton-Kambara Foundation (the “Buyer”), pursuant to which Buyer purchased from the Company: (i) 455,192 shares of Class A Common Stock at a purchase price of approximately $2.15 per share, and warrants to purchase 37.5% of the number of shares, or 170,697 shares of Class A Common Stock, with an exercise price of $2.58 per share (the “Buyer's Warrants”); and (ii) 232,258 shares of Class A Common Stock at a purchase price of approximately $2.15 per share (the “Common Offering”). The Buyer and its affiliate, Alice W. Lytton Family LLC, (collectively, the “Lytton Buyers”) were also among the Purchasers in the Securities Purchase Agreement, and the Buyer was also the Lender of our Bridge Promissory Note (see Note 13, Loans Payable). In connection with the closing of Securities Purchase Agreement and the Class A Securities Purchase Agreement, the Company received $1.5 million in cash from the Lytton Buyers, and the remaining consideration was exchanged for the outstanding principal and accrued interest of the Bridge Promissory note as of February 18, 2025 (see Note 13, Loans Payable). The Class A Common Securities Purchase Agreement closed on February 18, 2025.

The proceeds were allocated to the instruments as follows: (i) to the Class A Common Stock, Buyer's Warrants, Purchaser Warrants, Series G Convertible Preferred Stock, and Acquisition Note issued to the Lytton Buyers at fair value, as the instruments were issued in exchange for the Bridge Promissory Note outstanding, which was accounted for as an extinguishment as further detailed in Note 13, Loans Payable, (ii) to the remaining Purchasers Warrants at fair value as the Purchasers Warrants are liabilities, and (iii) the remaining proceeds, to the remaining Series G Convertible Preferred Stock, and Acquisition Notes issued on a relative fair value basis, by investor.

Warrants – The Company issued 4,352,775 Purchasers Warrants in connection with the Securities Purchase Agreement and 170,697 Buyer's Warrants in connection with the Class A Securities Purchase Agreement (collectively, the “Warrants”). The exercise price of the Warrants is $2.58 (the “Exercise Price”). The Exercise Price and the number of underlying shares of Class A Common Stock is subject to proportional adjustment in the event of customary stock splits, stock dividends, combinations or similar events. The Warrants became exercisable upon the issuance date and will expire on the six-year anniversary of issuance. A holder may not exercise any portion of the Warrants, to the extent that after giving effect to such issuance exercise, either (i) the holder (together with the holder’s affiliates and any other persons acting as a group together with the holder or any of the holder’s affiliates would beneficially own in excess of 19.99%, or, if elected be such holder, a lesser percentage of the number of shares of the Class A Common Stock outstanding immediately after giving effect to the issuance of shares of Class A Common Stock issuable upon exercise of the Warrant, or (ii) the aggregate number of shares of Class A Common Stock issued upon exercise of the Warrant, the exercise of any other Warrants issued pursuant to the Securities Purchase Agreement, and upon conversion of Series G Convertible Preferred Stock, exceeds the Exchange Cap (6,055,606 shares, as adjusted to reflect any share splits, reverse share splits or similar recapitalizations that occur after the Issue Date).

The Purchasers Warrants are not indexed the Company’s own stock due to the Exchange Cap, as shareholder approval is not an input for determining the fair value of a fixed-for-fixed option on the Company’s Class A Common Stock. As such, the Purchasers Warrants are classified as liabilities on the condensed consolidated balance sheets, with subsequent changes in the fair value of the warrant recorded in the change in fair value of warrant liability in other income (expense) on the condensed consolidated statements of comprehensive income (loss). The Buyer's Warrants are indexed to the Company's own stock, and meet the criteria for equity classification. The Warrants are valued using the Black-Scholes-Merton pricing model.

Series G Convertible Preferred Stock – Based on an analysis of the Series G Convertible Preferred Stock, it was concluded that they are more akin to an equity-type instrument. Economic characteristics and risks of an equity-linked conversion option are clearly and closely related to an equity-type host; thus, the conversion option embedded in the Series G Convertible Preferred Stock do not require bifurcation or liability classification under ASC 815, Derivatives and Hedging. It also does not meet the definition of being mandatorily redeemable under ASC 480-10-20 because it does not embody an unconditional obligation to redeem the instrument. The Series G Convertible Preferred Stock is redeemable at the option of the holder after the 5 year Guaranteed Term, thus, it should be classified as mezzanine equity, outside of permanent equity. The Series G Convertible Preferred was valued using a Binomial Lattice Model which considers the ability of the Investor to convert the instrument into common stock at any time, and for the Company's call option and the Investor's put option which are available after 5 years. The model incorporates transaction details such as stock price, contractual conversion price, dividend yield, risk-free rate, historical volatility, market credit spread, estimated yield and investor exercise behavior. The Series G Convertible Preferred Stock bears dividends at a per annum rate of 6.5%. The Company elected to recognize any redemption value changes immediately as they occur and adjust the carrying amount to equal the redemption value at each reporting period.

Promissory Notes – The Acquisition Notes were recorded at fair value based on several probability weighted Binomial Lattice Models which considered the following outcomes: (i) the Company's EBITDA for the fiscal year ended December 31, 2025 would be less than $4,921,875 the ("EBITDA target") which would cause automatic conversion of the Notes into shares of Preferred Stock at a price of $1,000 per share; (ii) the Company would chose to redeem the Notes at a premium of 102% prior to the two year maturity date, or (iii) the Notes will be repaid at maturity. The models incorporate transaction details such as stock price, contractual conversion price, dividend yield, risk-free rate, historical volatility, market credit spread, estimated yield, and the probability the Company will meet the EBITDA target which was based on a simulation technique considering the Company's historical EBITDA. Refer to Note 13, Loans Payable, for further information regarding the Acquisition Notes.

Offering costs – The $2.0 million of estimated direct and incremental offering costs in connection with the Acquisition Financing, allocated based on the relative fair values of the warrants, Class A Common Stock, Series G Convertible Preferred Stock and the Acquisition Notes that comprise the offering. Issuance costs were allocated as follows: (i) $1.4 million allocated to the Series G Convertible Preferred Stock and the Class A Common Stock issued in conjunction with the Acquisition Financing were recorded as a reduction to temporary equity; (ii) $0.3 million allocated to the warrants were expensed, as the warrants were determined to be classified as a liability, initially; and (iii) $0.3 million allocated to the Acquisition Notes, which are deferred and will be expensed over the term of the Acquisition Notes using the effective interest method.