Precision Optics Corporation, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2014 (fiscal 2015 second quarter). The company develops and manufactures optical products, primarily medical devices, including endoscopes, micro-optics and imaging systems.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Three months ended Dec. 31, 2013 | Six months ended Dec. 31, 2014 | Six months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Revenue | $976,548 | $1,007,717 | $1,807,262 | $1,915,143 |
| Gross profit | $162,512 | $205,416 | $274,650 | $465,650 |
| Gross margin | 16.6% | 20.4% | 15.2% | 24.3% |
| Net loss | $(321,223) | $(252,453) | $(617,662) | $(463,174) |
| Loss per share, basic and diluted | $(0.05) | $(0.06) | $(0.10) | $(0.10) |
Second-quarter revenue declined 3.1%; six-month revenue declined 5.6%. Management attributed lower sales mainly to reduced volume of a spinal-surgery visualization system and a 120-degree fiberscope, partly offset by increased sales of new ultra-small fiberscopes. Lower volume, less favorable product mix and new-product manufacturing startup expenses reduced gross margins. Second-quarter R&D expense rose 50.7% to $138,893, mainly due to product-development labor and materials and lower customer reimbursements; six-month R&D expense decreased 5.0% to $215,605. SG&A declined 5.5% for the quarter and 1.3% for the six-month period.
Cash, liquidity and capital
- Cash and cash equivalents were $385,167 at December 31, 2014, versus $202,380 at June 30, 2014. Six-month operating cash use was $660,201, compared with $449,622 in the prior-year period; investing cash use was $49,731.
- Six-month financing cash provided was $892,719, primarily from the July 2014 stock placement. The placement sold 1,717,152 shares at $0.60 each for reported gross proceeds of $1,030,291; cash-flow reporting reflects $980,291 of gross proceeds received during the six-month period, less $87,572 of paid placement expenses.
- Current assets were $2.404 million and current liabilities $1.403 million at period-end. No long-term debt is shown on the balance sheet; the company reported no default on indebtedness. Accounts payable included approximately $160,000 owed to a component supplier on extended terms.
- Common shares outstanding increased from 4,455,134 at June 30 to 6,262,584 at December 31, 2014, mainly reflecting the placement. The company also reports that anti-dilution provisions increased the number of certain outstanding warrants and reduced their exercise prices.
- There was no income-tax provision because of losses; deferred tax assets carry a full valuation allowance.
Outlook, risks and notable items
- No numerical revenue or earnings guidance is provided. Management expects to continue pursuing customer design and development contracts and selective R&D investment in micro-optics, micro medical cameras and 3D endoscopes. It described increased quote requests following marketing efforts, but did not provide a quantified forecast.
- Management states that the company will need to manage cash and raise capital until it reaches break-even and profitable results. Possible funding includes debt, equity or a strategic alliance; financing may be unavailable or unacceptable, and equity issuance would dilute shareholders. Management warns that failure to raise funds or achieve positive cash flow could impair continued operations and growth.
- Customer concentration is material: during the six months, Customer A accounted for 25% of revenue, Customer B 14%, and Customer C 10%. The filing also notes that approximately 75% of fiscal 2014 sales came from the top six customers.
- Open purchase-order commitments were approximately $465,000, including about $220,000 for components tied to a customer whose delivery schedule was under renegotiation. Operating lease commitments totaled $23,026.
- The company recorded a $17,210 gain from selling previously written-off equipment. It issued 90,298 restricted shares to consultants in July 2014 and reported additional 82,222 shares issued to two consultants and an employee in January 2015.
- Management concluded that disclosure controls and internal control over financial reporting were not effective at December 31, 2014. It identified material weaknesses involving segregation of accounting duties and inventory valuation, and stated that remediation efforts continue without assurance of success.
- The filing reports no material change to previously disclosed risk factors and no known pending or threatened litigation expected to materially affect operations or finances. Management cautions that forward-looking statements are subject to risks and actual results may differ.
Important facts for investors to verify
- Whether operating cash use and losses continue, and how long available cash and working-capital sources can support operations.
- Whether sales recover and gross margins improve as product mix and new-product manufacturing stabilize.
- Customer demand and delivery timing, particularly for the components associated with the purchase-order commitments under renegotiation.
- Potential dilution from future financing, outstanding warrants and equity compensation.
- Progress in remediating the disclosed material weaknesses in financial reporting controls.