LightPath Technologies, Inc. — Form 10-Q Summary
Period: Fiscal first quarter ended September 30, 2020 (three months); comparable period ended September 30, 2019. The interim financial statements are unaudited. LightPath manufactures optical components and assemblies, including precision molded and infrared optics.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $9.51 million | $7.55 million |
| Gross margin | $3.85 million; 40% of revenue | $2.39 million; 32% of revenue |
| Operating income (loss) | $678,000 | $(613,000) |
| Net income (loss) | $97,000; $0.00 per diluted share | $(1.38) million; $(0.05) per diluted share |
| Operating cash flow | $662,000 | $450,000 |
| Capital expenditures | $1.22 million | $257,000 |
- Revenue increased 26% year over year. PMO revenue rose 35% to $4.29 million, infrared revenue rose 19% to $4.72 million, and specialty revenue rose 20% to $491,000.
- EBITDA, a company-reported non-GAAP measure, was $1.42 million versus a loss of $236,000.
- Cash and cash equivalents were $5.39 million at quarter-end, nearly unchanged from June 30, 2020. Working capital was approximately $14.5 million; current assets were $21.96 million and current liabilities $7.45 million.
- Loans payable totaled approximately $5.18 million, including a $300,000 revolver balance; no Guidance Line borrowings were outstanding. The company reported compliance with its loan covenants. Lease liabilities totaled approximately $2.38 million.
Changes and management commentary
- Improved revenue and gross margin drove the move from an operating loss to operating income and a small net profit. Management attributed higher margins to increased volume across product groups and the mitigation of prior-year tariff and BD6 yield impacts.
- Net income included $435,000 of income tax expense, including $300,000 of Chinese withholding tax accrued on a $3 million intercompany dividend. The reported effective tax rate was 82%.
- Other expense was $88,000, versus $515,000 in the prior-year quarter; foreign currency transaction losses were approximately $98,000 versus $497,000.
- Inventory increased to $9.65 million from $8.98 million. Operating cash flow was more than offset by investment spending; cash remained nearly flat after financing flows and exchange-rate effects.
- Total backlog was $20.9 million, up 26% year over year but down 5% from fiscal year-end. Management said the sequential decline largely reflected shipment timing against long-term contracts.
- Management expected revenue increases in molded and turned infrared products and visible PMO products for the rest of fiscal 2021, based on backlog and quote activity. It anticipated new-product-development expense near current levels and fiscal 2021 capital expenditures above fiscal 2020; no quantified full-year revenue or earnings guidance was provided.
Outlook, risks, and unusual items
- COVID-19 had not caused a significant direct negative business impact to date; manufacturing sites continued operating. Demand for fever-detection thermal imaging products increased, remained elevated after an initial spike, and was a contributor to infrared demand. Management could not estimate the pandemic’s future financial effects.
- Key risks include changing customer demand and economic conditions, supplier availability, execution of cost and growth initiatives, inventory conversion to cash, and access to additional capital if cash generation or sales growth disappoints.
- More than half of cash was held by foreign subsidiaries. Repatriation from China is subject to retained-earnings requirements and withholding taxes; management planned to repatriate some historical earnings while reinvesting a significant portion of newer foreign earnings.
- Loan covenants include a 1.25-to-1.00 fixed-charge coverage ratio and a 4.00-to-1.00 total leverage ratio. The company reported compliance at September 30, 2020. It stated that legal matters were not expected to have a material adverse effect and reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether backlog converts into shipments and revenue, particularly given the sequential backlog decline and contract shipment timing.
- How sustainable the 40% gross margin is as product mix shifts toward higher-volume, lower-priced molded products, and whether BD6 yields and margins continue to improve.
- Whether inventory growth, elevated capital spending, and foreign cash availability affect future liquidity and operating cash flow.
- The effects of Chinese dividend withholding taxes, foreign-currency movements, COVID-19 demand, and loan covenant headroom on subsequent results.