LightPath Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
LightPath manufactures optical components and assemblies, including precision molded optics, infrared products and specialty products. This unaudited report covers the first quarter of fiscal 2019, the three months ended September 30, 2018; comparisons are with the three months ended September 30, 2017 unless noted.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $8.55 million | $7.57 million |
| Gross margin | $3.04 million; 36% of revenue | $3.29 million; 43% of revenue |
| Operating income (loss) | $(279,000) | $180,000 |
| Net income (loss) | $(583,000); $(0.02) per share | $218,000; $0.01 per share |
| Adjusted EBITDA (non-GAAP) | $245,000; 3% of revenue | $1.23 million; 16% of revenue |
| Cash from (used in) operations | $(299,000) | $1.66 million |
| Capital expenditures | $670,000 | $1.41 million |
Revenue rose 13%, led by infrared products, up 38% to $4.96 million. PMO revenue fell 3% to $3.11 million, and specialty revenue fell 36% to $477,000, partly because a large prior-year non-recurring engineering project did not recur. Cost of sales increased to $5.51 million. Infrared products’ larger share of sales, material costs, manufacturing inefficiencies and facility-relocation costs pressured margins.
Foreign-currency transaction losses were approximately $338,000, versus gains of approximately $246,000 a year earlier, contributing to the earnings decline. Interest expense decreased to $145,000 from $201,000, primarily following repayment of the Sellers Note. The company recorded a $179,000 income-tax benefit, compared with $58,000 of tax expense in the prior-year quarter.
Balance sheet, debt and liquidity
At September 30, 2018, cash and cash equivalents were $4.53 million, plus $1.00 million of restricted cash, for total cash and restricted cash of $5.53 million. Current assets were $18.33 million and current liabilities $5.32 million, implying working capital of approximately $13.00 million. Total assets were $45.98 million and total liabilities $10.92 million.
Loans payable were approximately $6.22 million net of unamortized debt costs; capital lease obligations totaled approximately $757,000. The Term II Loan bore interest at 7.25% at quarter-end. The company had no Revolving Line borrowings. Approximately $1 million of domestic cash was restricted under a lender amendment, and about 60% of cash, cash equivalents and restricted cash was held by foreign subsidiaries. Management said Chinese funds cannot be repatriated until retained earnings reach the required threshold; current retained earnings were approximately $2.1 million versus $11.3 million required.
Operating cash flow was negative, and combined cash and restricted cash decreased by $977,000 during the quarter to $5.53 million. The company reported approximately $14.0 million of 12-month backlog, up from $12.8 million at June 30, 2018.
Material changes, outlook and risks
- Management anticipated sales growth for the remainder of fiscal 2019, primarily from infrared products, and cited recent quote activity as supporting further infrared growth. No specific revenue or earnings guidance was provided.
- The relocation of the Irvington, New York facility to Orlando and Riga is expected to proceed in phases through fiscal year-end 2019. Relocation increased costs in the quarter, and management expected elevated costs for the next few quarters; it expects longer-term savings from consolidating manufacturing.
- Management expects new product development expenses to remain near current levels and fiscal 2019 capital expenditures to be lower than in fiscal 2018. It expects cash flow to improve with sales growth, production efficiencies and lower product costs, but these are forward-looking expectations.
- The company had failed its fixed-charge coverage covenant at June 30, 2018; Avidbank waived that default in September. The company reported covenant compliance at September 30. The October 30 amendment changed the Adjusted EBITDA definition for covenant purposes and extended the Revolving Line maturity to March 21, 2019. The $1 million cash restriction is to be released only after two consecutive compliant quarters and if no continuing default exists.
- Management stated that it believed available resources were adequate for current operations over the coming year, but warned that weaker sales, higher material or labor costs, unrealized efficiency improvements or increased spending could require additional capital. If capital is unavailable on reasonable terms, it may consider further cost actions or strategic alternatives, including asset or company sales, joint ventures or licensing.
- Germanium pricing and availability remain risks to infrared margins. The company expects its BD6 material to reduce costs and improve margins over time, but timing and results are uncertain. Foreign-exchange movements and customer-dependent timing of specialty/NRE projects also affect results.
Important facts for investors to verify
- Whether infrared sales growth converts into sustained profitable growth, and whether BD6 adoption improves product margins.
- Progress, costs and expected savings from the Irvington facility relocation, including any further disruption or one-time expenses.
- Subsequent covenant compliance, the conditions for release of restricted cash, and the Revolving Line’s March 21, 2019 maturity.
- Cash generation and liquidity, including the location and repatriation limits on foreign cash and the company’s ability to fund operations and debt service.
- Quality and conversion timing of the $14.0 million 12-month backlog, especially its dependence on large orders and customer project schedules.
- Tax exposure: the company had not completed its accounting for the U.S. Tax Cuts and Jobs Act and described its transition-tax estimates as provisional.
The filing reports no legal proceedings and states that disclosure controls were effective as of September 30, 2018. Management cautions that interim results may not indicate full-year results and that forward-looking statements are subject to risks described in its fiscal 2018 Form 10-K.