Business context and reporting period
LightPath Technologies, Inc. designs and manufactures optical components and assemblies for industrial, defense, medical, telecommunications and other markets. This filing covers the quarter and nine months ended March 31, 2019 (fiscal Q3 and year to date for fiscal 2019), not Q3 2018. The financial statements are unaudited.
Financial performance and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | 2019: $7.91 million; 2018: $8.50 million | 2019: $25.00 million; 2018: $24.44 million |
| Gross margin | 2019: $3.11 million (39%); 2018: $3.29 million (39%) | 2019: $9.69 million (39%); 2018: $10.09 million (41%) |
| Operating income (loss) | 2019: $21,000; 2018: $216,000 | 2019: loss of $63,000; 2018: income of $868,000 |
| Net income (loss) | 2019: loss of $352,000; 2018: income of $1.23 million | 2019: loss of $919,000; 2018: income of $1.87 million |
| Basic and diluted EPS | 2019: $(0.01); 2018: basic $0.05, diluted $0.04 | 2019: $(0.04); 2018: basic $0.08, diluted $0.07 |
- Fiscal Q3 revenue fell 7% year over year; year-to-date revenue rose 2%. Nine-month PMO and infrared revenue increased 4% each, while specialty revenue declined 18%.
- For the nine months, operating cash flow was $26,000, compared with $2.67 million in 2018. Investing cash outflow was $1.36 million; financing cash outflow was $1.15 million. Cash and restricted cash decreased by $1.87 million, ending at $4.64 million.
- At March 31, cash was $4.64 million, working capital approximately $13.7 million, current assets $19.07 million and current liabilities $5.39 million. Approximately 65% of cash was held abroad; about $3 million was held by foreign subsidiaries and Chinese funds face repatriation restrictions.
- Loans payable were $5.81 million gross under the BankUnited term loan, or $5.72 million net of unamortized debt costs; capital lease obligations totaled $1.08 million. No revolving-line borrowings were outstanding. The company reported compliance with loan covenants at March 31.
- Non-GAAP adjusted EBITDA was $942,000 for the quarter and $2.16 million year to date, versus $1.57 million and $4.29 million, respectively, in the prior-year periods.
Material changes, outlook and risks
- Quarterly gross margin percentage held at 39%, but the year-to-date margin fell from 41% to 39%. Management cited product mix, tariffs and freight, and costs and inefficiencies tied to relocating ISP’s Irvington, New York facility.
- The company recorded $394,000 of relocation-related expenses in the first nine months and expected a further $250,000 through June 30, 2019. It expected relocation substantially completed in fiscal Q4 and anticipated longer-term operating-cost savings; up to $433,000 of remaining lease obligation was expected to be accrued after vacating the site.
- On February 26, 2019, LightPath refinanced its Avidbank debt with BankUnited: a $5.81 million term loan, a $2 million revolving line, and a discretionary guidance line of up to $10 million for approved acquisitions or capital expenditures. The term loan and revolving line bear interest at 2.75% above 30-day LIBOR. A May 6 amendment revised the fixed-charge-coverage calculation, effective February 26.
- Management said it believed resources were adequate for the coming year and expected infrared growth, including from BD6 material and customer backlog. It reported 12-month backlog of $17.1 million at March 31, up 34% from June 30, 2018, but down 6% from the prior quarter after anticipated customer orders were delayed. No quantified revenue or earnings guidance was provided.
- Management warned that weaker sales, higher material or labor costs, failure to realize production improvements, or spending increases could require additional capital. If financing were unavailable on reasonable terms, it might consider strategic alternatives, including asset or product-line sales, joint ventures, licensing or a company sale.
- Other notable items included a $94,000 write-off of unamortized Avidbank financing costs on refinancing, a substantial adverse year-to-date foreign-exchange comparison, and higher product-development spending. The company reported effective disclosure controls, no material change in internal controls, and no legal proceedings.
Important facts for investors to verify
- Whether the delayed customer orders convert to shipments and whether backlog remains strong; backlog is not guaranteed revenue.
- Progress and final costs of the Irvington facility relocation, including the remaining lease obligation and expected savings.
- Gross-margin recovery, particularly the effects of infrared product mix, tariffs, germanium costs and adoption of BD6.
- Operating cash generation, foreign-cash accessibility, and the ability to meet BankUnited financial covenants and debt payments.
- Actual borrowing availability and conditions under the BankUnited revolving and discretionary guidance lines, including the amended covenant calculation.
- Whether the company’s stated expectation of adequate liquidity for the coming year remains supportable given low year-to-date operating cash flow.