LightPath Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2017. The filing is a fiscal 2017 Q3 report, despite the request metadata identifying 2016 Q3. Financial statements are unaudited.
Business context and reporting period
LightPath manufactures precision optical components and assemblies. In December 2016, it acquired ISP Optics and its Latvia subsidiary, expanding its infrared products, manufacturing capabilities and geographic reach. ISP’s results are consolidated from December 21, 2016.
Financial performance and position
| Metric | Three months ended March 31, 2017 | Nine months ended March 31, 2017 |
|---|---|---|
| Revenue | $8.49 million, up 106% | $19.36 million, up 54% |
| Gross profit / margin | $4.22 million / 50%; prior-year margin 54% | $10.35 million / 53%; prior-year margin 55% |
| Operating income | $1.28 million | $3.00 million |
| Net income | $101,000; $0.00 basic and diluted EPS | $1.34 million; $0.07 basic and diluted EPS |
| Operating cash flow | Not separately provided for the quarter | $2.93 million, compared with $1.24 million |
Quarterly revenue growth principally reflected ISP infrared sales and higher high-volume precision molded optics (HVPMO) sales. For the nine months, infrared revenue rose 375% and HVPMO revenue rose 121%; specialty products and non-recurring engineering revenue declined 40% and 32%, respectively. SG&A and new-product development costs also increased. Adjusted net income, a company-defined non-GAAP measure excluding warrant fair-value changes, was $849,000 for the quarter and $1.80 million for the nine months.
At March 31, 2017, cash was $6.83 million, working capital was approximately $13.0 million, and total assets were $39.71 million. Current liabilities were $5.31 million. Total liabilities were $16.81 million. Loans payable were $11.00 million net of fair-value and debt-cost adjustments: $5.0 million Avidbank term loan and approximately $5.7 million seller note; the $1.0 million receivables-based revolving line had no balance outstanding. Management reported compliance with loan covenants.
For the nine months, investing cash outflow was $13.19 million, including $11.78 million for the ISP acquisition and $1.41 million for property and equipment. Financing provided $14.12 million, including $8.73 million net from an 8-million-share public offering and $5.0 million of term-loan proceeds. Cash increased from $2.91 million at June 30, 2016. Approximately $3.6 million of cash was held by foreign subsidiaries; China retained earnings had not reached the threshold for repatriation.
Material changes and unusual items
- ISP acquisition consideration was approximately $19.1 million. ISP contributed $4.10 million revenue and $1.01 million net income from acquisition through March 31. Purchase accounting remained provisional, including acquired intangible assets and goodwill.
- Quarterly net income fell from $776,000 a year earlier despite higher revenue and operating income. A $748,000 non-cash warrant-liability remeasurement expense, versus $662,000 of non-cash income in the prior-year quarter, was the principal reason. The company’s nine-month net income increased from $1.08 million to $1.34 million.
- Shares outstanding increased materially following the public offering: 24.12 million shares were outstanding at March 31, 2017, versus 15.59 million at June 30, 2016.
- The company recorded a $74,000 prior-year tax understatement as an out-of-period correction in fiscal 2017, which management said was not material. China’s net operating loss carryforwards had been exhausted in fiscal 2016, increasing current tax expense.
Outlook, management commentary and risks
Management said it expected sales growth for the remainder of fiscal 2017, particularly in molded optics, specialty products and infrared products, and anticipated slightly higher SG&A from ISP integration. It expected new-product development expense to remain near current levels. Management provided no quantified earnings or revenue guidance, but stated that it believed available resources were adequate for operations over the coming year.
Management cited a 12-month backlog of $11.1 million at March 31, 2017, compared with $6.6 million at June 30, 2016; approximately $6.6 million related to ISP. It also described opportunities from telecommunications demand and infrared markets, while noting that backlog and project timing do not assure future revenue.
Risks include dependence on a few key customers, execution and integration of ISP, limited cash resources and potential need for additional financing, inability to realize expected sales growth or production efficiencies, cost increases, and capacity constraints that could require further capital spending. Foreign cash may be restricted from repatriation, and warrant remeasurement can cause earnings volatility. The Avidbank loan is secured by specified assets and includes financial covenants. Management said disclosure controls were effective and reported no material change in internal control over financial reporting; no legal proceedings were reported.
Important facts for investors to verify
- Whether ISP’s acquired operations, provisional purchase accounting and expected synergies deliver sustained growth and profitability.
- Whether the reported backlog converts to revenue, particularly the ISP-related portion, and whether growth is concentrated among a small number of customers or markets.
- Gross-margin trends, integration costs, capital expenditure needs, and cash conversion as receivables and inventory expand.
- Debt repayment capacity, seller-note interest terms, covenant compliance and the availability and conditions of the undrawn revolving line.
- The effects of warrant-liability remeasurement, share dilution, foreign-cash restrictions and the tax correction on future reported results.