LightPath Technologies, Inc. — Fiscal 2017 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended December 31, 2016. The interim financial statements are unaudited. LightPath manufactures optical components and assemblies. Its December 21, 2016 acquisition of ISP Optics expanded its infrared products and manufacturing capabilities; ISP’s results are included only from the acquisition date, so reported comparisons are not on a like-for-like basis.
Financial performance and position
| Metric | Three months ended Dec. 31, 2016 | Prior-year quarter | Six months ended Dec. 31, 2016 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $5.87 million | $4.24 million | $10.87 million | $8.43 million |
| Gross margin | $3.30 million; 56% | $2.36 million; 56% | $6.13 million; 56% | $4.61 million; 55% |
| Operating income | $1.33 million | $0.61 million | $1.72 million | $1.27 million |
| Net income (loss) | $1.10 million | ($0.54 million) | $1.24 million | $0.31 million |
| Diluted EPS | $0.06 | ($0.04) | $0.07 | $0.02 |
- Cash flow: Six-month operating cash flow was $1.54 million, versus $1.05 million. Investing used $12.65 million, including $11.78 million cash paid for ISP and $0.87 million of capital expenditures. Financing provided $13.74 million, mainly from $5 million of term-loan proceeds and $8.73 million net equity-offering proceeds.
- Liquidity: Cash was $5.68 million at December 31, up from $2.91 million at June 30, 2016. Management reported working capital of approximately $12.05 million. About $2.92 million of cash was held by foreign subsidiaries; the filing says Chinese retained earnings had not reached the level required for repatriation.
- Debt: Loans payable totaled $11.38 million, including a $5 million Avidbank term loan and a $6 million seller note for ISP; $0.56 million was classified as current. The term loan has a five-year term and a minimum 5.5% interest rate. The seller note carries 10% interest under the stated initial-period terms, then applies to the full unpaid principal. Capital-lease obligations were approximately $0.49 million.
- Balance sheet: Total assets were $38.81 million and stockholders’ equity was $21.80 million. The ISP acquisition added $10.76 million of identifiable intangible assets and $1.23 million of goodwill, both based on preliminary valuations.
Material changes versus the prior comparable period
- Quarterly revenue rose 39%; six-month revenue rose 29%. Growth was concentrated in high-volume precision molded optics (HVPMO) and infrared products. For the quarter, HVPMO revenue increased 151% and infrared revenue 161%; for six months, they increased 115% and 98%, respectively.
- Specialty-products revenue declined 48% for the quarter and 41% for six months, partly because a prior customer license-related fiber-collimator assembly business did not recur. NRE revenue declined 66% and 40%, respectively, as customer project activity fell.
- Six-month SG&A increased to $3.86 million from $3.01 million, including $0.61 million of ISP acquisition-related expense. New-product-development expense rose to $0.55 million from $0.32 million.
- Reported earnings include noncash warrant-liability fair-value income of $0.25 million for the quarter and $0.29 million for six months; the prior-year periods included fair-value expense of $1.06 million and $0.69 million. Management’s non-GAAP adjusted net income was $0.85 million for the quarter and $0.95 million for six months, excluding these warrant changes.
- The company issued 8 million shares in the public offering to help finance ISP, increasing shares outstanding; 23,726,787 shares were outstanding as of February 13, 2017.
Outlook, commentary, and risks
- Management anticipated fiscal 2017 sales growth in precision molded optics, specialty products, and infrared products, and expected SG&A to increase slightly from ISP’s addition. It expected new-product-development costs to remain near current levels and anticipated higher fiscal-year capital expenditures, with the amount dependent on opportunities and circumstances.
- Management reported 12-month backlog of approximately $12.42 million at December 31, versus $6.60 million at June 30; about $7.5 million was ISP backlog. Backlog represents orders and qualifying supply-contract amounts considered reasonably likely to convert to revenue, not guaranteed sales.
- Management said it believed resources were adequate for current operations over the coming year, while noting that weaker sales, cost increases, unrealized efficiency gains, or other spending could require additional financing. If financing were unavailable on reasonable terms, the company said it might consider strategic alternatives, including asset or company sales, joint ventures, or licensing arrangements.
- Working-capital indicators weakened: days sales outstanding rose to 87 from 62 a year earlier, above management’s target of no more than 65; days cost of sales in inventory rose to 177 from 163. Management attributed the increases in part to ISP’s acquisition.
- Foreign-currency translation loss was approximately $0.24 million in the quarter and $0.27 million for six months. Management also cited customer concentration, market-transition, growth, cost-control, and capital-availability risks. The filing reported no legal proceedings and stated disclosure controls were effective.
Important facts for investors to verify
- Whether ISP integration, preliminary purchase-price valuations, and anticipated synergies translate into sustained revenue, margins, and cash flow.
- Whether the reported backlog converts into shipments and collections, particularly the acquired ISP portion, and whether elevated receivable days improve.
- The cash available for operations after considering foreign-cash repatriation limits, debt service, capital spending, and the seller note’s interest and maturity obligations.
- How much reported earnings are affected by noncash warrant remeasurement, acquisition expenses, and the stated out-of-period correction of a prior-year tax understatement.
- The dilution from the equity offering and outstanding stock awards, and the final values and useful lives of acquisition-related assets once third-party valuations and working-capital adjustments are completed.