LightPath Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2017; comparisons are to the periods ended December 31, 2016. The company manufactures optical components and assemblies. Results include ISP Optics, acquired in December 2016, so comparisons reflect a changed business mix.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Prior year | Six months ended Dec. 31, 2017 | Prior year |
|---|---|---|---|---|
| Revenue | $8.36 million | $5.87 million | $15.93 million | $10.87 million |
| Gross margin | $3.51 million; 42% | $3.30 million; 56% | $6.80 million; 43% | $6.13 million; 56% |
| Operating income | $472,000 | $1.33 million | $652,000 | $1.72 million |
| Net income | $423,000; $0.02 diluted EPS | $1.10 million; $0.06 diluted EPS | $641,000; $0.02 diluted EPS | $1.24 million; $0.07 diluted EPS |
- Revenue grew 42% in the quarter and 47% for the half, primarily from infrared products, largely attributable to ISP. Quarterly infrared revenue increased 378%; first-half infrared revenue increased 453%.
- Telecommunications-related softness reduced quarterly LVPMO revenue 8% and HVPMO revenue 36%. First-half LVPMO and HVPMO revenue declined 14% and 22%, respectively.
- Lower gross margin rates reflected ISP’s historically lower-margin product mix and pricing discounts on a large volume contract. Management said the discount reduced gross margin by about 3 percentage points in the quarter and 4 points for the half.
- Higher SG&A, product development, acquired-intangible amortization and interest expense weighed on operating results. Net income also reflected warrant fair-value changes: a $243,000 noncash expense in the quarter versus $247,000 of noncash income a year earlier. Adjusted net income, a company-defined non-GAAP measure excluding warrant fair-value changes, was $666,000 for the quarter and $836,000 for the half.
Cash flow, debt and liquidity
- Six-month operating cash flow was $1.62 million, compared with $1.54 million. Investing cash outflow was $1.90 million, principally capital equipment purchases, versus $873,000 a year earlier. Financing cash outflow was $14,000; cash declined $351,000 to $7.73 million.
- At December 31, 2017, working capital was approximately $14.8 million. Cash was $7.73 million, with approximately $4.0 million held by foreign subsidiaries. China’s retained-earnings threshold for repatriation had not been met; the filing says approximately $11.3 million was required versus $1.4 million retained earnings.
- Balance-sheet loans payable totaled approximately $10.56 million, including the Avidbank term loan and $5.7 million Sellers Note; capital lease obligations totaled $568,000. There were no Revolving Line borrowings, and the company reported compliance with debt covenants at period-end.
- After quarter-end, on January 16, 2018, the company borrowed $7.294 million under a new five-year Avidbank Term II Loan, used proceeds to repay the prior term loan and part of the Sellers Note, paid the remaining Sellers Note amount in cash, and converted 39.5% of its outstanding principal into 967,208 common shares. The prior loans were reported satisfied in full.
Outlook, commentary and risks
- Management expected sales growth during the remainder of fiscal 2018, primarily from infrared products and also specialty products. It cited a 12-month backlog of $12.3 million at December 31, up from $9.3 million at June 30, largely following renewal of a large annual contract. Backlog is not guaranteed revenue.
- Management expected SG&A and new-product-development costs to remain at similar levels for the rest of fiscal 2018, and anticipated higher fiscal 2018 capital expenditures than in fiscal 2017. No quantified revenue or earnings guidance was provided.
- The company said it believed resources were adequate for current operations over the coming year, while warning that weaker sales, higher material or labor costs, missed efficiency improvements and other cost increases could require additional capital. If financing were unavailable on reasonable terms, it might consider strategic alternatives, including asset or company sales, joint ventures or licensing.
- Risks discussed include dependence on a few key customers, demand and pricing pressure in telecom markets, execution of growth and acquisition integration, constrained production capacity and capital resources, and foreign currency and tax exposure. Management reported effective disclosure controls and no material change in internal controls. No legal proceedings were reported.
- The December 2017 U.S. tax law changes were still under evaluation; management expected minimal net tax-provision impact based on its initial assessment and full valuation allowance.
Important facts for investors to verify
- Whether the renewed large contract converts backlog into shipments and revenue on schedule, and how customer concentration affects that outlook.
- Whether infrared growth can be sustained while improving consolidated gross margins and offsetting weakness in legacy lens product groups.
- Terms, repayment burden and covenant compliance under the new Avidbank loan, along with cash available after the refinancing.
- How much foreign-held cash is practically available for corporate needs, given China’s repatriation restrictions.
- Whether planned capital spending and production-capacity improvements generate expected efficiency, cash flow and profitable growth.