Precision Optics Corporation, Inc. — Form 10-Q Summary
Period: The filing covers the fiscal quarter and nine months ended March 31, 2019, compared with the periods ended March 31, 2018. This corresponds to fiscal 2019 Q3; the request metadata’s “2018 Q3” does not match the filing.
Business context
The company designs and manufactures optical instruments, primarily medical devices and components, with a smaller military and industrial business. Its work includes engineering design services, optical components, and medical device products and assemblies. It says customer engineering projects can progress into manufacturing orders.
Financial performance and liquidity
- Quarter revenue: $1.386 million, up 89% from $736,000. Medical device production revenue rose 208% to $1.074 million; combined engineering services and optical components fell 19.3% to $312,000.
- Nine-month revenue: $4.424 million, up 72%. Production revenue increased 264% to $2.757 million, while engineering services declined 10% and optical components declined 7%.
- Gross profit and margin: Quarter gross profit was $456,000, versus $236,000; gross margin improved to 32.9% from 32.1%. Nine-month gross profit was $1.274 million, versus $923,000, but margin declined to 28.8% from 35.8%.
- Net loss: $80,000 for the quarter, compared with $279,000; $506,000 for nine months, compared with $368,000. Loss per share was $0.01 for the quarter and $0.04 for nine months.
- Operating expenses: Nine-month R&D was $348,000, up 4%; SG&A was $1.431 million, up 50%, primarily reflecting increased non-cash stock compensation.
- Cash flow: Nine-month operating cash use was $954,000, compared with $107,000. Investing cash use was $114,000, including $112,000 of property and equipment purchases. Financing provided $2.018 million, principally from a stock offering.
- Liquidity: March 31 cash was $1.353 million, working capital was $2.251 million, and current liabilities were $1.197 million. Cash increased from $403,000 at June 30, 2018. The October 2018 private placement raised $2.0 million gross through 1.6 million shares at $1.25 each.
- Debt and commitments: Capital lease obligations totaled $16,897, including $9,416 current. Open purchase orders represented approximately $1.059 million of contractual cash commitments.
Changes, outlook, and risks
- Production growth reflected two projects transitioning from engineering to manufacturing and higher sales of a traditional spine product. Management reported near-full utilization of engineering personnel and one large 3D instrument project still in process, with completion and related revenue expected in coming quarters; no quantified revenue or earnings guidance was provided.
- Management attributed lower nine-month gross margin primarily to cost overruns on two projects, which together represented 22%–25% of revenue. It said design and manufacturing issues were being corrected and reported improved gross margin versus the immediately preceding quarter.
- The company reported recurring losses and said maintaining recent revenue levels, achieving target gross margins, and limiting expense growth are important to its financial condition. Weaker revenue, lower margins, or higher expenses could consume cash and working capital.
- Customer concentration is significant: seven customers represented approximately 77% of nine-month sales. The company also competes with larger, better-resourced domestic and international firms.
- Disclosure controls and internal control over financial reporting were deemed ineffective at March 31, 2019. The filing identifies material weaknesses in segregation of accounting duties and inventory valuation; management described remediation efforts but gave no assurance they will succeed.
- After quarter-end, the board accelerated vesting of all unvested options held by the CFO and extended their exercise period in specified circumstances. The filing also describes a similar prior amendment for director options. Litigation was reported as not material, and no material changes to previously disclosed risk factors were identified.
Important facts for investors to verify
- Whether production growth and the 3D project translate into sustained revenue, and whether the two project cost overruns are resolved.
- Cash runway and working-capital needs, considering operating cash use, the $1.059 million open-purchase-order commitment, and dependence on customer advances and external financing.
- Customer concentration and the durability of demand from the seven largest customers.
- Progress in remediating the disclosed material weaknesses, particularly inventory valuation and segregation of duties.
- Share dilution and compensation effects from the private placement, stock awards, outstanding options, and post-quarter option amendments.
- Period identification: the filing is for the quarter ended March 31, 2019, notwithstanding the request metadata’s “2018 Q3” label.