Business context and reporting period
LightPath Technologies, Inc. manufactures precision optical components and assemblies, including molded optics, fiber-optic collimators, GRADIUM glass lenses and infrared products. This unaudited Form 10-Q covers the three months ended September 30, 2013, the first quarter of fiscal 2014, compared principally with the quarter ended September 30, 2012.
Financial results and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $2.810 million | $2.891 million |
| Gross profit / margin | $1.319 million / 47% | $1.177 million / 41% |
| Operating income (loss) | ($61,782) | ($26,519) |
| Net income (loss) | ($80,345) | $101,221 |
| Operating cash flow | $250,915 | ($21,026) |
| Capital expenditures | $225,515 | $171,069 |
- At September 30, 2013, cash and cash equivalents were $2.879 million, total assets $9.890 million, and total liabilities $2.902 million. The company reported an accumulated deficit of approximately $204.5 million.
- Current liabilities were $1.867 million. Debt included capital lease obligations of approximately $16,814; no amounts were outstanding under the new Avidbank facility at quarter-end.
- Q1 EBITDA was $148,825 and Adjusted EBITDA, excluding the noncash warrant fair-value expense, was $167,777. These are non-GAAP measures.
- Net receivables were $1.997 million and inventory was $2.091 million at quarter-end. Management reported days sales outstanding of 65 and days cost of sales in inventory of 128.
Material changes versus the prior comparable period
- Revenue declined 3%, primarily because the prior-year quarter included approximately $253,000 of Raytheon project revenue; precision molded optics lens unit shipments increased 6%.
- Gross margin rose to 47% from 41%. Management attributed lower manufacturing costs to reduced Raytheon-related direct costs, lower coating costs, product mix and increased in-house anti-reflective coating.
- SG&A increased approximately $94,000 to $1.077 million, while new product development expense rose 39% to $295,000, principally reflecting added staffing and materials for infrared product development.
- The company moved from prior-year net income to a net loss. The comparison was affected by $50,000 of GRADIUM license income and a $95,784 warrant fair-value gain in the prior-year quarter, versus a $18,952 warrant fair-value expense this quarter. Current-quarter interest expense was lower, reflecting conversion of the convertible debentures.
- Cash increased by $1.314 million during the quarter, largely due to net proceeds of approximately $1.279 million from warrant exercises. The company issued 832,336 shares in connection with warrant exercises, increasing dilution.
Outlook, management commentary and risks
- Management said the fiscal 2014 plan anticipates sales growth in precision molded optics, optical assemblies and infrared products, and expects further margin improvement from production efficiencies and yield gains. It expects modestly higher new product development expense and potentially higher capital spending.
- Management cited a September 30, 2013 12-month backlog of approximately $4.42 million, up from $4.14 million at June 30, and increasing bookings and quote activity for low-cost industrial lenses in Asia. Management expected operating cash flow to improve during the rest of fiscal 2014 and said it believed resources were adequate for the plan and current operations over the coming year.
- The September 30 Avidbank agreement provides a revolving line capped at the lesser of $1 million or 80% of eligible receivables, plus up to $1 million in equipment advances. The facilities are secured by substantially all company assets, guaranteed by Geltech, and subject to financial and other covenants.
- Management warned that if sales, positive cash flow and profitability targets are not achieved, additional capital may be needed; financing may not be available on reasonable terms. Potential alternatives could include selling the company or product lines, joint ventures, alliances or licensing arrangements. Other stated risks include reliance on a limited number of customers, market and economic uncertainty, limited production capacity and the need for capital investment.
- The Raytheon $1.1 million development project was expected to be completed by December 2013. At quarter-end, $1.097 million had been recognized as revenue against $843,500 invoiced, with $253,530 recorded as other receivables; $100,000 of billed receivables remained outstanding.
- The company had discontinued marketing its isolator product line and had fully reserved isolator inventory. No legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether backlog converts into shipments and revenue, particularly amid customer concentration and dependence on new markets.
- Whether the improved gross margin and positive operating cash flow are sustainable, given the quarter’s operating loss and increased development spending.
- Collection and completion of the Raytheon project, including the $253,530 unbilled balance and the stated December 2013 completion target.
- Potential dilution from outstanding warrants, options and restricted stock units, and the recurring Level 3 fair-value remeasurement of the warrant liability.
- Availability and covenant compliance of the Avidbank facilities, and whether further financing or capital expenditures will be needed.