LightPath Technologies, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2016, the first quarter of fiscal 2017. The unaudited consolidated results are compared with the three months ended September 30, 2015.
Business context
LightPath designs, manufactures and sells precision molded optics, infrared products, fiber-optic collimators, GRADIUM glass lenses and optical assemblies for industrial, telecommunications, defense, medical, laser and instrumentation markets. Its manufacturing operations include facilities in the United States and China.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $5.00 million | $4.19 million |
| Gross margin | $2.83 million; 57% | $2.25 million; 54% |
| Operating income | $391,000 | $665,000 |
| Net income | $140,000 | $843,000 |
| Basic / diluted EPS | $0.01 / $0.01 | $0.06 / $0.05 |
| Cash from operating activities | $922,000 | $897,000 |
| Capital expenditures | $387,000 | $285,000 |
- Revenue rose 19%. HVPMO revenue increased 80%, infrared revenue 41% and LVPMO revenue 16%; specialty products fell 32% and NRE revenue fell 5%.
- Gross margin improved on a stronger HVPMO mix, higher production volume relative to fixed overhead and improved infrared yields. Despite higher revenue, operating income declined as operating expenses increased.
- SG&A rose approximately $726,000 to $2.17 million, including approximately $484,000 of expenses related to the proposed ISP Optics acquisition. New product development expense increased approximately $130,000 to $278,000.
- Other income included a $43,500 non-cash gain from remeasuring warrant liabilities, versus a $368,114 gain in the prior-year quarter. Income tax expense was $265,200, primarily because China operations had used their NOL carryforwards.
- Cash and equivalents were $3.58 million at September 30, up from $2.91 million at June 30, 2016. Working capital was approximately $8.01 million. The company generated $922,000 from operations and spent $387,000 on capital equipment.
Balance sheet, debt and liquidity
- Total assets were $16.21 million and stockholders’ equity was $11.36 million at quarter-end. Current assets were $11.58 million and current liabilities $3.57 million.
- No amount was outstanding on the AvidBank receivables-based credit line. Capital lease obligations totaled approximately $310,000, including $166,000 current and $144,000 non-current.
- Approximately $1.74 million of cash was held by foreign subsidiaries. China retained earnings were approximately $2.12 million; the filing says they must reach approximately $11.3 million before funds can be repatriated. Management intends to permanently reinvest foreign earnings.
- The AvidBank line’s term was extended to December 23, 2016; advances are discretionary and secured by cash, U.S. inventory and receivables. The filing reports no balance outstanding at September 30.
Changes, outlook and risks
- Management expected fiscal 2017 sales growth, principally from precision molded optics, especially HVPMO, specialty products and infrared products. It anticipated new product development spending remaining near current levels and SG&A declining slightly from acquisition-related levels, while noting further ISP-related costs could continue.
- Management anticipated higher capital expenditures during fiscal 2017, with spending dependent on opportunities and circumstances. It said current financial resources were adequate for operations over the coming year, while warning that weaker sales, higher costs or unrealized efficiency improvements could require additional financing or other strategic actions.
- 12-month backlog declined to $5.81 million from $6.60 million at June 30, 2016. Management attributed the decrease to delayed expected orders and increased shipments during the quarter.
- Risks cited include limited cash resources and possible financing needs, reliance on a few key customers, challenges entering new markets, and the ability to grow sales, manage costs and fund capacity expansion. Demand and timing for NRE projects depend on customers.
- Warrant liabilities are Level 3 fair-value estimates and are remeasured each reporting period, causing non-cash earnings volatility. The company reported no legal proceedings or off-balance-sheet arrangements; management concluded disclosure controls were effective.
Important facts for investors to verify
- Status, terms and subsequent costs or benefits of the proposed ISP Optics acquisition.
- Whether the lower backlog converts into orders and revenue, particularly given management’s growth expectations.
- Availability of cash held in China, related tax consequences and the company’s ability to fund planned capital expenditures.
- Renewal or replacement of the AvidBank credit facility after its December 23, 2016 expiration, and any resulting liquidity needs.
- Future warrant remeasurement effects and potential dilution; diluted weighted-average shares were 17.15 million versus 15.62 million basic shares.
- The filing’s adjusted EBITDA reconciliation reports income taxes of $267,440, while the income statement reports $265,200; verify the discrepancy against the filed financial statements.