Business context and reporting period
LightPath Technologies, Inc. manufactures precision-molded optics, fiber-optic collimators, infrared products and optical assemblies. This unaudited Form 10-Q covers the fiscal first quarter ended September 30, 2015 (FY2016 Q1); comparisons are with the three months ended September 30, 2014 unless noted.
Financial performance and liquidity
| Metric | FY2016 Q1 | FY2015 Q1 / comparison |
|---|---|---|
| Revenue | $4.19 million | $2.60 million; up 61% |
| Gross profit and margin | $2.25 million; 54% | $0.98 million; 38% |
| Operating income (loss) | $663,000 | ($511,000) |
| Net income (loss) | $843,000 | ($579,000) |
| Basic EPS | $0.06 | ($0.04) |
| Operating cash flow | $965,000 | ($100,000) |
| Capital expenditures | $198,000 | $303,000 |
Revenue rose across all product groups: low-volume molded optics (LVPMO) $1.83 million (+34%); high-volume molded optics (HVPMO) $847,000 (+52%); infrared $380,000 (+146%); specialty products $991,000 (+103%); and non-recurring engineering $139,000 (+250%). The filing attributes improved gross margin to product mix and pricing, higher production volume against overhead, and benefits from the Zhenjiang facility.
Cash and equivalents were $2.35 million at September 30, up from $1.64 million at June 30, 2015; working capital was $6.23 million. Current liabilities were $2.66 million. Total liabilities were $4.32 million, including $447,000 of capital lease obligations. No amount was drawn on the Avidbank revolving line at quarter-end. Cash increased by $706,000 during the quarter.
Approximately $1.30 million of cash was held by Chinese subsidiaries. The company said repatriation requires China retained earnings of about $11.3 million; current retained earnings were about $1.7 million. The filing reports a $1 million receivables-based credit facility expiring December 23, 2015, and management expected to renew it; advances are at Avidbank’s discretion.
Changes versus prior period
- Revenue increased 61%, while gross margin improved from 38% to 54%; the company moved from an operating and net loss to operating and net income.
- Operating cash flow improved by about $1.07 million, from a $100,000 use to $965,000 provided.
- FY2016 Q1 12-month backlog was $5.06 million, down 22% from $6.49 million at June 30, 2015. Management linked softer order intake to delayed projects and changed requirements in specialty products, while quote activity remained strong.
- Net income included $368,000 of noncash income from remeasurement of warrant liabilities, versus a $54,000 expense in the prior-year quarter. Excluding this change, adjusted net income was $475,000, compared with an adjusted loss of $525,000.
Outlook, commentary and risks
Management expected revenue increases in LVPMO, HVPMO, specialty and infrared products for the remainder of FY2016, citing quote activity, Chinese industrial-tool recovery and continued telecommunications demand. The fiscal 2016 plan anticipated growth primarily from molded optics, specialty products and infrared products. Management said it believed available resources were adequate for its plan and the coming year, while anticipating higher capital expenditures in FY2016; no expenditure target was provided.
Management intends to keep SG&A generally near current levels and expected new-product-development expenses to remain near current levels for the rest of FY2016. Risks identified include limited cash resources and potential need for financing, reliance on a few key customers, market-transition and sales-growth execution, cost pressures, and constraints on production capacity and capital investment. If cash-flow and sales efforts are unsuccessful, management said additional capital may be needed and described possible strategic alternatives.
Unusual items include the customer technology-license agreement: $200,000 in total fees, with $71,000 recognized in FY2016 Q1; the customer also agreed to purchase a specified quantity of assemblies. Foreign-exchange transactions contributed approximately $175,000 of other expense in the quarter. The filing reports no legal proceedings, defaults on senior securities, or off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile diluted EPS: the income statement displays $0.06, while the EPS note reports $0.05 for FY2016 Q1.
- Track whether the $5.06 million backlog converts to sales, particularly given its 22% sequential decline and the delays in specialty projects.
- Assess the sustainability of margin improvement and earnings apart from the noncash warrant-liability remeasurement benefit.
- Confirm renewal and availability of the Avidbank facility before its December 23, 2015 expiration, and monitor domestic liquidity given cash held in China.
- Monitor delivery of management’s product-growth outlook, planned capital spending, and the customer’s assembly-purchase commitments under the license agreement.