Business Context and Reporting Period
Precision Optics Corporation designs and manufactures medical optical instruments, including endoscopes, endocouplers, micro-optics and imaging products; approximately 10% of its business is military and industrial products. The filing covers the quarter and nine months ended March 31, 2014 (fiscal 2014 third quarter), compared with the same periods in 2013. This differs from the “2013 Q3” period in the request metadata.
Financial Results
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue, 2014 / 2013 | $833,451 / $655,341 | $2,748,594 / $1,717,406 |
| Gross profit, 2014 / 2013 | $189,232 / $158,761 | $654,882 / $368,572 |
| Gross margin, 2014 / 2013 | 22.7% / 24.2% | 23.8% / 21.5% |
| Operating loss, 2014 / 2013 | $(380,434) / $(349,994) | $(843,608) / $(1,060,313) |
| Net loss, 2014 / 2013 | $(380,434) / $(349,994) | $(843,608) / $(1,614,572) |
| Loss per share, 2014 / 2013 | $(0.09) / $(0.08) | $(0.19) / $(0.50) |
For the nine months, operating cash used was $668,858, versus $1,057,207 in the prior-year period. Cash and cash equivalents fell to $364,863 at March 31, 2014 from $1,034,587 at June 30, 2013. Current assets were $1,870,849 and current liabilities $919,074. The company reported no capital-equipment purchases in the first nine months. It reported no default on indebtedness; the 10% senior convertible notes had been retired in 2012.
Material Changes and Management Commentary
- Revenue increased 27.2% for the quarter and 60.0% for the nine months. Management attributed growth to higher sales of products including scanning otoscopes, laryngoscopes and micro-optics, and to initial shipments of a 3D surgical microscope adapter.
- Nine-month gross margin improved, primarily with higher overall unit volume, but was partly offset by less favorable product mix and manufacturing startup costs for new products. Quarterly gross margin declined year over year.
- Research and development expense declined 32.5% for the nine months, mainly due to lower labor and materials costs; SG&A expense rose 27.3%, including higher consulting, legal, selling and stock-based compensation costs.
- The prior-year nine-month net loss included a $629,000 noncash liquidated-damages expense and a $76,149 noncash gain on settlement of accounts payable. These items contributed to the larger prior-year net loss.
- Management anticipated continued revenue growth for the remainder of fiscal 2014, but said order timing and the introductory stage of new products make growth difficult to predict. It reported a $660,000 custom-endoscope order with an accelerated delivery schedule, an existing $1.032 million endoscope order with shipments begun, and a $250,000 order for micro medical camera assemblies. Potential projects were not all at volume-production stage; two customer projects could proceed to production in the next three to six months, but purchase orders had not yet been obtained for volume manufacturing.
Liquidity, Risks and Other Matters
Management said operating losses are expected to continue until sales reach breakeven and profitable levels. It stated that further financing may be needed through debt, equity or a strategic alliance; financing may not be available on acceptable terms, and equity or convertible debt could dilute shareholders. The company used $219,236 in operating cash during the quarter, according to MD&A. Contractual commitments included approximately $402,500 in open purchase orders and $26,369 in operating leases. The filing reported no material off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Disclosure controls and internal control over financial reporting were reported ineffective as of March 31, 2014. Management identified material weaknesses relating to segregation of accounting duties and inventory valuation, and said remediation efforts were continuing. Management also noted competition, regulatory requirements, product-development and commercialization risks, and dependence on uncertain customer order timing. No material pending or threatened litigation was identified.
Important Facts for Investors to Verify
- Whether cash and available financing are sufficient to fund operations, open purchase orders and planned product development until breakeven.
- Conversion of announced orders and customer discussions into shipments, repeat orders and profitable sales, including the schedule and margins for new products.
- Customer concentration: four customers represented 66% of nine-month revenue, including one customer at 22% and another at 20%.
- Progress in remediating the disclosed material weaknesses and improving disclosure controls.
- Whether management’s expectation of continued fiscal 2014 revenue growth is realized; the filing provides no quantified earnings or cash-flow guidance.