LightPath Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2021 (fiscal 2021 third quarter), with nine-month results compared with the period ended March 31, 2020. The filing is for 2021, notwithstanding the request metadata identifying 2020 Q3. LightPath manufactures optical components and assemblies, including precision molded and infrared optics, with operations in the U.S., China, and Latvia.
Key financial results
| Metric | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Nine months ended March 31, 2021 | Nine months ended March 31, 2020 |
|---|---|---|---|---|
| Revenue | $10.70 million | $8.71 million | $30.13 million | $25.86 million |
| Gross margin dollars | $3.90 million | $4.01 million | $11.38 million | $10.33 million |
| Gross margin rate | 36% | 46% | 38% | 40% |
| Operating income | $167,000 | $1.06 million | $901,000 | $1.51 million |
| Net income (loss) | ($223,000) | $816,000 | ($272,000) | $210,000 |
| Basic and diluted EPS | ($0.01) | $0.03 | ($0.01) | $0.01 |
| Operating cash flow | Quarterly figure not clearly provided | Quarterly figure not clearly provided | $3.08 million | $1.87 million |
Liquidity and debt at March 31, 2021: Cash and cash equivalents were $5.94 million; working capital was approximately $14.0 million; current assets were $21.79 million versus current liabilities of $7.74 million. Loans payable totaled approximately $5.14 million, including $4.7 million on the BankUnited term loan, $300,000 on its revolving line, and approximately $247,000 on an equipment loan. Finance lease obligations were about $351,000. The company reported compliance with debt covenants. More than half of cash was held by foreign subsidiaries.
Changes and operating performance
- Quarterly revenue rose 23%; nine-month revenue rose 17%. Infrared revenue increased 50% for the quarter and 21% for the nine-month period, led by industrial and defense demand, including products using new BD6 material. Nine-month PMO revenue increased 20%, while specialty revenue declined 35%.
- Quarterly gross margin dollars fell 3% and the gross margin rate declined 10 percentage points. Management cited product mix, lower yields in some infrared products, BD6 coating issues, and startup inefficiencies on new volume programs. It expects efficiencies to improve as programs mature.
- SG&A and product-development spending increased. Quarterly SG&A rose 24% to $2.81 million; nine-month SG&A rose 18% to $8.01 million. The nine-month increase included approximately $400,000 of additional compensation to the former CEO, China-related investigation costs, director-related stock compensation, and higher personnel and consulting costs.
- Despite revenue growth, the company moved from net income to a net loss in both comparable periods. Quarterly EBITDA, a non-GAAP measure, was $1.06 million versus $1.93 million; nine-month EBITDA was $3.49 million versus $3.74 million.
- Nine-month operating cash flow increased to $3.08 million, attributed to improved receivables and inventory management and fewer restructuring-related cash outflows. Capital expenditures rose to $2.72 million from $1.51 million, primarily for infrared coating, lens pressing, and dicing capacity.
Outlook, risks, and unusual items
- No formal quantified revenue or earnings guidance is provided. Management expects continued demand for infrared products and moderate growth in visible PMO, anticipates higher fiscal 2021 capital expenditures than fiscal 2020, and expects future operating cash-flow improvement based on sales growth and margin improvement.
- Total backlog was $19.5 million at March 31, 2021, down 14% year over year and 18% from the prior quarter. Management attributed the quarterly decline to record sales, no major contract renewals during the quarter, and fewer orders from a large telecom customer; it believes the telecom slowdown is temporary as customers adjust inventory for the next 5G rollout phase.
- In April 2021, LightPath terminated several China-subsidiary employees, including senior managers, after determining they engaged in misconduct, including attempted misappropriation of proprietary technology. The company recorded $194,000 of investigation-related legal and consulting costs in the quarter and agreed to approximately $470,000 of severance, payable over six months subject to compliance with agreements. Management anticipates possible adverse effects on China domestic sales and results in the June and September 2021 quarters, but does not expect material disruption to production or product supply.
- COVID-19 had not caused a significant direct negative business impact as of the filing, and demand for fever-detection thermal imaging products remained elevated after an initial surge. Future effects on demand, operations, and liquidity could not be estimated. Other risks include supply availability, production yields and costs, customer demand, and foreign currency movements.
- Income tax expense was $308,000 for the quarter despite $85,000 of pretax income, reflecting a reported 361% effective rate; taxes primarily related to China operations and withholding taxes on intercompany dividends. Approximately $3 million was repatriated from China during the first nine months, and LPOIZ had about $6.6 million available for repatriation at period end.
Important facts for investors to verify
- Whether infrared production yields and BD6 coating issues improve enough to restore targeted margins, and how product mix affects profitability.
- Backlog conversion, contract renewals, and whether the telecom customer’s order slowdown proves temporary.
- The actual sales, cost, and management-transition effects of the China employee terminations, including severance and additional investigation expenses.
- Availability and practical accessibility of foreign-held cash, including taxes and Chinese repatriation restrictions.
- Capital spending, cash generation, and debt covenant headroom as the company expands production capacity.