Business context and reporting period
LightPath Technologies, Inc. designs and manufactures precision molded optics, fiber-optic collimators, GRADIUM glass lenses and optical assemblies. This unaudited Form 10-Q covers the fiscal second quarter and six months ended December 31, 2013; comparisons are with the periods ended December 31, 2012. The company formed a wholly owned subsidiary in Zhenjiang, China, in December 2013 to operate a planned manufacturing facility.
Financial and operating highlights
| Metric | Three months ended Dec. 31, 2013 | Six months ended Dec. 31, 2013 |
|---|---|---|
| Revenue | $2.908 million | $5.718 million |
| Gross margin | $1.240 million; 43% | $2.559 million; 45% |
| Operating loss | $186,000 | $248,000 |
| Net income (loss) | $(202,000); $(0.01) per share | $(282,000); $(0.02) per share |
| Cash used in operating activities | $(218,000) for the six-month period | |
| Capital expenditures | $942,000 for the six-month period |
Six-month EBITDA was $153,000 and Adjusted EBITDA, excluding the change in fair value of warrant liability, was $207,000; both were below the prior-year comparable figures of $697,000 and $432,000, respectively. These are non-GAAP measures.
At December 31, 2013, cash and cash equivalents were $1.955 million, current assets were $7.738 million, current liabilities were $1.905 million, and total liabilities were $2.934 million. Total stockholders’ equity was $7.207 million. The company reported no outstanding borrowings under its Avidbank credit facility; capital lease obligations totaled approximately $15,000. The facility provides up to $1 million in revolving advances, subject to eligible receivables, and up to $1 million in equipment advances, subject to its terms and covenants.
Material changes versus the prior comparable periods
- Quarterly revenue was down slightly from $2.917 million; six-month revenue declined 2% from $5.808 million. Management attributed the declines principally to prior-year Raytheon project revenue, partly offset by growth in precision molded optics. Unit shipments of those optics increased 12% for the quarter and 9% for the first half.
- First-half gross margin improved to 45% from 42%, while gross profit increased to $2.559 million from $2.444 million. Quarterly gross margin was 43% in both periods.
- The company moved from prior-year net income to losses: first-half net income of $242,000 became a loss of $282,000. The principal factors cited were the unfavorable year-over-year change in warrant fair-value adjustments, higher SG&A, and the absence of prior-year GRADIUM licensing income.
- Cash increased by $390,000 during the first half, compared with a $577,000 decrease in the prior-year period, mainly because of approximately $1.539 million in net proceeds from warrant exercises. Those exercises issued 1,136,142 shares; shares outstanding rose from 12.958 million at June 30 to 14.289 million at December 31.
- Inventory rose to $2.806 million from $1.771 million. A tooling-cost accounting reclassification moved approximately $426,000, net, from property and equipment into inventory; management said the change improves product costing and did not expect a material impact on future reported gross margins. The inventory-days measure also rose, with management attributing much of the increase to the reclassification.
Outlook, management commentary, risks and unusual items
Management expected revenue and operating cash flow to improve during the remainder of fiscal 2014, citing increased quote activity, a 12-month backlog of approximately $5.16 million at December 31 (up from $4.14 million at June 30), and growth opportunities in precision molded optics, industrial tools, fiber-laser systems and infrared products. Management anticipated infrared products would contribute more meaningfully from the fourth quarter of fiscal 2014 and into fiscal 2015.
The Zhenjiang facility was expected to incur startup costs in the third quarter, with production anticipated late in the fourth quarter and only minimal savings expected in that quarter. Management also cited potential margin improvements from production yields, lower-cost materials, in-house coating and cost reductions. These expectations are forward-looking and depend on execution, demand and available resources.
Liquidity remains a key risk: the company reported a cumulative deficit of approximately $204.7 million and a history of operating losses. Management said that if its efforts to reach positive cash flow and profitability fail, additional capital may be needed; financing may not be available on reasonable terms. Other cited risks include dependence on a few key customers, the ability to increase sales and control costs, and constraints on capacity and capital spending. The Avidbank facility is secured by substantially all company assets, guaranteed by Geltech, and includes financial and other covenants. The company reported no legal proceedings and stated that disclosure controls were effective.
Unusual or judgment-sensitive items include the Level 3 warrant liability, valued at $879,000 at December 31, and a $54,000 first-half expense from its fair-value change. The Raytheon project had recognized revenue of $1.097 million against $843,500 invoiced, leaving $253,530 recorded as other receivables; the filing expected that amount to be billed in the third quarter and the project to be completed by March 2014.
Important facts for investors to verify
- Whether backlog converts to shipped revenue and whether customer concentration or order timing affects the outlook.
- Collection and billing of the $253,530 Raytheon receivable, and completion of the project by the stated target date.
- Cash burn, warrant-related accounting volatility, and the company’s ability to fund operations and capital expenditures without additional financing.
- Actual startup costs, production timing, capacity utilization and savings at the Zhenjiang facility.
- Inventory composition and recoverability, including the impact of the tooling-cost reclassification and the existing obsolescence reserve.
- The dilution and future fair-value effects associated with outstanding warrants, options and restricted stock units.