Business context and reporting period
LightPath Technologies, Inc. manufactures optical components and assemblies for markets including infrared imaging, telecommunications, medical, defense, automotive and public safety. This is its unaudited Form 10-Q for the fiscal quarter and nine months ended March 31, 2018 (fiscal 2018 Q3); the filing was signed May 14, 2018. The supplied metadata’s “2017 Q3” does not match the reporting period stated in the filing.
Financial performance and position
| Metric | Three months ended March 31, 2018 | Prior-year quarter | Nine months ended March 31, 2018 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $8.50 million | $8.49 million | $24.44 million | $19.36 million |
| Gross margin | $3.29 million; 39% | $4.22 million; 50% | $10.09 million; 41% | $10.35 million; 53% |
| Operating income | $216,000 | $1.28 million | $868,000 | $3.00 million |
| Net income | $1.23 million | $101,000 | $1.87 million | $1.34 million |
| Diluted earnings per share | $0.04 | $0.00 | $0.07 | $0.07 |
- Cash flow: Nine-month operating cash flow was $2.67 million, versus $2.93 million. Capital expenditures were $2.48 million, versus $1.41 million. Financing activities used $889,000, compared with $14.12 million provided in the prior period, which included financing for the ISP acquisition.
- Liquidity: At March 31, cash and cash equivalents were $6.39 million, working capital was approximately $14.2 million, and current assets were $19.57 million against current liabilities of $5.35 million. Cash declined $1.70 million from June 30, 2017; the cash-flow statement reports a $998,000 adverse exchange-rate effect.
- Debt: The balance sheet reported loans payable of $6.94 million, net of debt costs, including $1.46 million current and $5.48 million long-term. The Term II Loan’s outstanding principal was approximately $7.1 million at March 31. The $1 million revolving line had no balance outstanding. Total liabilities were $11.50 million.
- Other balance-sheet items: Inventory was $6.41 million, up from $5.07 million at June 30, 2017; net property and equipment was $12.32 million, up from $10.32 million. Stockholders’ equity was $36.06 million, versus $29.72 million.
Material changes versus comparable periods
- Quarterly revenue was essentially flat. Infrared revenue rose 10% to $4.23 million and specialty products rose 22% to $628,000, while high-volume precision molded optics (HVPMO) fell 29% to $1.53 million. Management attributed the HVPMO decline chiefly to weak telecommunications demand and lower average selling prices.
- Nine-month revenue increased 26%, principally because infrared revenue, largely from ISP Optics, increased 131% to $12.17 million. ISP was acquired in December 2016, so prior-period comparisons include a shorter period of ISP operations.
- Gross margin fell in both the quarter and nine-month period. Management cited product mix, lower sales of higher-margin HVPMO products, ISP’s historically lower margins, foreign-exchange effects, Germanium costs up 28% over 12 months, and a pricing discount on a large contract that reduced nine-month margin by about four percentage points of revenue.
- Quarterly net income rose substantially, but operating income declined. Results benefited from foreign-exchange gains, a gain on extinguishing the Sellers Note, a quarterly income-tax benefit, and the absence of prior-year warrant fair-value expense. These items make reported net income less indicative of underlying operating performance.
- Weighted-average basic shares increased to 25.55 million for the quarter and 24.76 million for the nine months, in part due to 967,208 shares issued in the Sellers Note settlement and the earlier ISP acquisition equity issuance.
Outlook, commentary and risks
- Management expected sales growth in the remainder of fiscal 2018, primarily from infrared products, with some growth in specialty products; it cited recent quote activity and increasing bookings from industrial and medical sectors. The filing provides no numerical revenue or earnings guidance.
- Management reported a 12-month sales backlog of $12.9 million at March 31, up from $9.3 million at June 30, 2017. Backlog is not a guarantee of revenue; conversion depends on customer schedules and orders.
- Management said it believed available resources were adequate for current operations over the coming year, while noting that lower sales, increased material or labor costs, unrealized efficiency improvements, and other spending could require additional capital. It warned that financing might not be available on reasonable terms and identified strategic alternatives if needed.
- The company was not in compliance with its AvidBank fixed-charge coverage covenant as of March 31. A May 11, 2018 amendment waived the resulting default; it set a minimum ratio of 1.10:1.00 for June 30, 2018 and 1.15:1.00 beginning September 30, 2018. The amendment also requires domestic operating and depository accounts to be maintained with AvidBank beginning June 1, 2018.
- Approximately $3.6 million of cash was held by foreign subsidiaries. China’s repatriation rules require retained earnings equal to 150% of registered capital; the company reported $1.9 million in China retained earnings against approximately $11.3 million required. Management intended to permanently reinvest Chinese earnings.
- Other risks include dependence on a few key customers, soft telecommunications demand, rising Germanium costs, currency fluctuations, limited cash resources and the need to fund production capacity. Management anticipated higher fiscal 2018 capital expenditures than fiscal 2017, but gave no specific total.
- After quarter-end, LightPath entered a lease for an additional 12,378 square feet in Orlando, expected to commence August 1, 2018, with a four-year initial term and up to $309,450 in tenant improvements.
- Management stated that disclosure controls were effective as of March 31, 2018 and reported no material change in internal control over financial reporting during the quarter. The filing reported no legal proceedings.
Most important facts for investors to verify
- Whether forecast growth in infrared and specialty products translates into orders and revenue, and whether the reported backlog converts on schedule.
- Whether gross margins recover despite lower-margin product mix, contract pricing, Germanium inflation and foreign-currency movements.
- Performance against the revised AvidBank covenant thresholds, debt repayment requirements and the company’s ability to maintain adequate liquidity.
- How much cash is practically available for U.S. operations given foreign cash and China repatriation restrictions.
- How much reported earnings depended on the Sellers Note gain, foreign-exchange gains and tax benefits, versus recurring operating results.
- Potential dilution from outstanding options and restricted stock units, and the ongoing effect of share issuance on per-share results.