LightPath Technologies, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2017, the first quarter of fiscal 2018. The filing is unaudited; comparative results are for the three months ended September 30, 2016.
Business context
LightPath manufactures and sells optical components and assemblies for industrial, laser, defense, medical, telecommunications and instrumentation markets. Results include ISP Optics, acquired in December 2016, for the full current quarter; the prior-year reported quarter did not include ISP.
Financial results and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $7.57 million | $5.00 million |
| Gross profit and margin | $3.29 million; 43% | $2.83 million; 57% |
| Operating income | $180,000 | $391,000 |
| Net income | $218,000 | $140,000 |
| Basic and diluted EPS | $0.01 | $0.01 |
| Operating cash flow | $1.66 million | $922,000 |
| Capital expenditures | $1.41 million | $387,000 |
- Revenue grew 51%, led by infrared products, which increased $3.11 million to $3.65 million, primarily due to ISP. LVPMO revenue fell 18%, specialty products fell 35%, and HVPMO revenue fell 3%; NRE revenue rose 95%.
- Gross margin increased in dollars but declined as a share of revenue, reflecting ISP’s historically lower margins, discount pricing on a large contract, and reduced yields on certain molded lenses. Management said it identified and corrected the yield issues.
- Operating income decreased 54%. Net income increased despite higher amortization, SG&A, development and interest costs; favorable foreign-exchange results and lower income tax expense contributed to the comparison.
- Adjusted EBITDA, a non-GAAP measure, was $1.23 million versus $619,000; adjusted net income was $169,000 versus $97,000. Both exclude the non-cash change in fair value of warrant liability.
- Cash and equivalents were $8.06 million at September 30, 2017, versus $8.09 million at June 30. Working capital was approximately $13.3 million. Operating cash flow was partly offset by capital investment and debt and lease payments.
- Total liabilities were $16.90 million. Loans payable were approximately $10.79 million, including $4.7 million outstanding on the Avidbank term loan and $5.7 million on the ISP sellers’ note. The $1 million revolving line had no outstanding balance. The company reported compliance with loan covenants.
- Approximately $4.5 million of cash was held by foreign subsidiaries. Management said China’s retained-earnings threshold for repatriation had not been met; the company intended to keep foreign earnings invested abroad.
Outlook, commentary and risks
- Management said it expected sales growth during the rest of fiscal 2018, particularly in precision molded optics, specialty and infrared products, with growth opportunities expected especially in the second half. It anticipated SG&A and new product development costs to remain near current levels and higher capital expenditures than in fiscal 2017.
- Management believed available financial resources were adequate for current operations over the coming year, while noting that weaker sales, higher input or labor costs, unrealized production improvements, or increased spending could require additional capital. If capital were unavailable on reasonable terms, strategic alternatives might be considered.
- 12-month backlog was $8.6 million, down from $9.3 million at June 30, 2017. Management attributed the decline mainly to shipments against large annual contracts and expected renewals within two quarters.
- Key risks identified include dependence on a few customers, limited cash resources and potential financing needs, execution of sales growth and cost control, production capacity and capital requirements, and competition or customer sourcing shifts as products enter higher-volume production.
- The $248,000 of other income included a $246,000 foreign-currency transaction gain; management noted that exchange-rate movements can affect reported results. The June 2012 warrants were scheduled to expire December 11, 2017, with their fair value remeasured each reporting period until exercise or expiration.
- The filing reported no legal proceedings and no material change in internal control over financial reporting. Management concluded disclosure controls were effective at quarter-end.
Important facts for investors to verify
- How much of revenue growth and future demand is attributable to ISP, and whether ISP can improve margins.
- Whether the reported lower production yields remain corrected and whether gross margin recovers from 43%.
- Renewal and conversion of the large customer contracts reflected in the declining backlog.
- Cash availability after planned capital expenditures, debt service and operating needs, including restrictions on foreign-held cash.
- Debt terms, covenant compliance, and the sellers’ note’s 10% interest provisions after its initial period.
- Whether management’s fiscal 2018 growth expectations are realized, given customer concentration, capacity constraints and the need for additional financing if results weaken.