LightPath Technologies, Inc. — Form 10-Q Summary
Business context and period: The company designs and manufactures optical components and assemblies, including precision molded optics (PMO), infrared products, and specialty products. This unaudited report covers the three months ended September 30, 2021, the first quarter of fiscal 2022, compared with the three months ended September 30, 2020.
Financial performance and position
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $9.10 million | $9.51 million |
| Gross margin | $3.17 million; 35% of revenue | $3.85 million; 40% of revenue |
| Operating income (loss) | $(405,000) | $678,000 |
| Net income (loss) | $(632,000); $(0.02) per diluted share | $97,000; $0.00 per diluted share |
| Operating cash flow | $(1.62) million | $662,000 |
| Capital expenditures | $1.20 million | $1.22 million |
| EBITDA (non-GAAP) | $454,000; 5% of revenue | $1.42 million; 15% of revenue |
At September 30, 2021, cash was $3.98 million, down from $6.77 million at June 30, 2021; working capital was approximately $11.3 million. More than half of cash was held by foreign subsidiaries. Current assets were $19.1 million and current liabilities $7.8 million. Loans payable totaled approximately $4.79 million, including about $4.4 million under the BankUnited term loan and $476,000 under an equipment loan. The company also reported approximately $10.14 million of operating lease liabilities and $205,000 of finance lease liabilities.
Changes versus the prior-year quarter
- Revenue declined 4%. PMO revenue fell 11% to $3.81 million, specialty revenue fell 18% to $402,000, and infrared revenue rose 3% to $4.89 million.
- Revenue declined less than unit volume: total units fell 51%, while PMO unit volume fell 56% and infrared units fell 19%. Management attributed the difference partly to product mix and higher average selling prices.
- Gross margin percentage fell from 40% to 35%, primarily because infrared products, which generally carry lower margins than PMO, made up a larger share of sales. Management said newer infrared-product margins improved sequentially and BD6 coating yield issues were resolved during the quarter.
- SG&A increased 18% to $2.87 million, including $328,000 of China-related legal, consulting, and transition expenses. Lower gross margin and higher SG&A drove the move from operating and net income to losses.
- Operating cash flow declined to a $1.62 million use, reflecting the net loss, higher receivables, and payments of previously accrued liabilities. Cash decreased by $2.80 million during the quarter.
Outlook, financing, and risks
- Outlook: No formal revenue or earnings guidance is provided. Management anticipated improved operating cash flow in future quarters, based on forecast sales growth, margin improvement, and working-capital improvement; these expectations are forward-looking. The company expected fiscal 2022 capital expenditures to be below fiscal 2021, subject to opportunities and circumstances.
- Backlog and demand: Backlog was $19.3 million at September 30, down 8% year over year and 10% from fiscal year-end. Management cited shipments against annual contracts, no major contract renewals during the quarter, and fewer orders from a large telecommunications customer. It expected annual and multi-year contracts to renew in future quarters, but timing and levels are uncertain. Management reported demand growth for infrared products in industrial, defense, and first-responder markets.
- China employee matters: The company terminated several China-subsidiary employees in April 2021 following alleged misconduct, including suspected efforts to misappropriate technology and divert sales. Related proceedings and disputes continue. The company incurred $328,000 of associated expense in the quarter; previously accrued amounts included a potential $210,000 liability and approximately $485,000 in disputed severance. Management said the transition had not materially impaired production or supply, but domestic China sales were affected and could remain pressured for one to two more quarters. Additional legal and consulting costs are expected.
- Debt and covenants: A September 2021 BankUnited letter amended covenant terms and waived a prior fixed-charge-coverage default; the company reported covenant waivers for the September quarter. A November 5, 2021 letter, after quarter-end, waived defaults related to September-quarter fixed-charge-coverage and total-leverage ratios and contemplated further waivers through June 2022. It also initiated discussions on a restructuring targeted for completion by December 31, 2021. Proposed terms included extending term-loan maturity to April 15, 2023, higher monthly payments beginning November 2022, a higher interest rate beginning August 2022, and a potential 4% exit fee if the loan remained outstanding at maturity. The company was also discussing refinancing with other lenders; completion on reasonable terms was not assured.
- Other risks: COVID-19 had not caused a significant direct financial impact to date, but its effects on demand, operations, and liquidity remained uncertain. Risks also include supplier availability, sales growth, converting inventory to cash, manufacturing efficiency, and obtaining refinancing or additional capital. Management stated that insufficient capital on reasonable terms could require strategic alternatives.
- Controls and legal matters: Management concluded disclosure controls were effective at September 30, 2021 and described added controls and staffing in China after the employee matters. Part II reports no separate legal proceedings or risk-factor updates, while the notes describe the China-related proceedings and contingencies.
Important facts for investors to verify
- Whether revenue and gross-margin trends improve, particularly PMO sales, infrared product economics, and the recovery of domestic China sales.
- Backlog conversion and renewal of annual or multi-year contracts, including orders from the large telecommunications customer.
- Cash burn, working-capital movements, and the extent to which foreign-held cash can be repatriated and used by the parent company.
- Completion and final terms of the proposed BankUnited restructuring or a refinancing, including covenant waivers, repayment schedule, interest costs, and any exit fee.
- Progress and costs of the China employee proceedings, resolution of disputed severance, and any effect on customer relationships or operations.
- Whether projected sales growth, margin improvement, and lower capital spending materialize; management’s cash-flow outlook is not a guarantee.