Business context and reporting period
LightPath Technologies, Inc. designs and manufactures precision molded aspherical lenses, GRADIUM glass lenses, collimators and other optical products for industrial, medical, defense, test-and-measurement and telecommunications markets. This Form 10-Q covers the three months ended September 30, 2011, the first quarter of fiscal 2012; comparisons are with the three months ended September 30, 2010 unless stated otherwise.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2011 | Quarter ended Sep. 30, 2010 |
|---|---|---|
| Revenue | $2.733 million | $2.254 million |
| Gross profit / margin | $1.083 million / 39.6% | $826,000 / 36.7% |
| Operating loss | $209,000 | $475,000 |
| Net loss | $198,000; $0.02 per share | $853,000; $0.09 per share |
| EBITDA, non-GAAP | $71,000 | $(261,000) |
| Operating cash flow | $117,000 provided | $42,000 used |
| Capital expenditures | $347,000 | $289,000 |
Cash decreased $235,000 during the quarter, to $694,000 at September 30. At October 31, cash was approximately $592,000. Total assets were $7.498 million, current assets $4.888 million and current liabilities $1.966 million, giving working capital of approximately $2.922 million. Accounts receivable was $2.070 million and inventory $1.818 million. Inventory days cost of sales (DCSI) rose to 100 from 78 a year earlier; days sales outstanding (DSO) was 69 versus 71, above the company’s target of 50.
Total liabilities were $3.489 million. The company had $1.088 million principal outstanding on 8% senior convertible debentures, including $1.013 million owed to related parties. The secured debentures mature in August 2013; interest is prepaid annually in shares. The company reported an accumulated deficit of $203.9 million.
Material changes versus the prior comparable period
- Revenue increased 21%, primarily on higher precision molded optics sales; that product line accounted for 77% of revenue. Unit shipments of precision molded optics rose 80% year over year.
- Gross margin improved to 39.6% from 36.7%, although management said margins fell short of budget because of product mix, higher labor and benefit costs in Shanghai, and overtime associated with machine repairs and conversion.
- SG&A fell by approximately $76,000 to $996,000, mainly due to lower investor-relations costs. New product development expense increased 29% to $288,000, primarily for infrared lenses and new lens designs.
- Net loss narrowed by approximately $655,000. The prior-year quarter included substantial accelerated debt-conversion-related interest and debt-cost charges; interest expense was $24,000 this quarter versus $381,000 a year earlier.
- Operating cash flow turned positive, but higher capital spending and working-capital investment contributed to the cash decline. Accounts receivable and inventory increased from June 30, 2011.
Outlook, management commentary and risks
Management said the 12-month sales backlog increased by approximately $330,000 from June 30 to $4.20 million. Based on bookings, quotes and backlog, management expected higher revenue in fiscal 2012’s second quarter and modest revenue increases in the remaining quarters. The operating plan targets growth in precision molded optics, including low-cost lenses, infrared products and collimators, with margin improvement dependent on sales growth, production efficiencies and cost reductions. These are forward-looking expectations, not guarantees.
Management stated that existing resources were expected to fund operations through November 2012, assuming revenue remained at current levels and no additional capital was raised. The filing highlights recurring operating losses, limited cash resources, dependence on sales growth and gross-margin improvements, customer and market exposure, collections, material and labor costs, and the risk that planned efficiency gains may not be achieved. Management cautioned there was no assurance of sufficient future cash flow or financing and that the financial statements include no adjustments that might be needed if the company could not continue as a going concern. If projections are missed, possible responses include further cost reductions, asset or product-line sales, strategic arrangements, or additional financing.
On September 29, 2011, the company filed an S-1 proposing a fully underwritten offering of up to 4.5 million units, each comprising one Class A share and warrants to purchase up to an additional 0.5 share in total. The filing describes an intended offering, not completed proceeds. The company reported no borrowing availability under equipment leases or other loan facilities. No material change in internal control over financial reporting was reported; management judged disclosure controls effective as of September 30, 2011.
Important facts for investors to verify
- Whether the proposed equity offering was completed, its pricing and net proceeds, and the resulting dilution.
- Actual cash use and financing needs relative to management’s stated runway through November 2012.
- Whether backlog converts into shipments and revenue, particularly in low-cost lenses, infrared optics and collimators.
- Whether gross-margin improvements, lower-cost production and inventory reduction are achieved despite higher labor costs and the reported product-mix shift.
- Debenture repayment, conversion and related-party terms, including the August 2013 maturity and stock-based interest payments.
- Receivables collection performance, given DSO above the company’s target, and inventory levels, given higher DCSI.