Precision Optics Corporation, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2015, the first quarter of fiscal 2016. The filing compares results with the three months ended September 30, 2014. The interim financial statements are unaudited.
Business context
Precision Optics designs and manufactures optical instruments, with most of its business in medical devices and about 10% in military and industrial products. Its development focus includes micro-optics, miniature CMOS camera modules and 3D endoscopes. In June 2015, it announced a jointly developed 1.6 mm CMOS camera module with OmniVision Technologies and Fujikura.
Financial results and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $858,427 | $830,714 |
| Gross profit | $132,338 | $112,138 |
| Gross margin | 15.4% | 13.5% |
| Research and development expense | $150,768 | $76,712 |
| Selling, general and administrative expense | $365,026 | $347,147 |
| Net loss | $(381,890) | $(296,439) |
| Loss per share, basic and diluted | $(0.06) | $(0.05) |
| Cash used in operating activities | $(125,084) | $(591,156) |
- Revenue increased 3.3%. Gross profit rose by $20,200 and gross margin improved 1.9 percentage points.
- Higher R&D spending and higher SG&A contributed to a larger net loss. R&D increased 96.5%, mainly from product-development labor, lower customer reimbursements and higher stock compensation.
- At September 30, cash was $111,718, current assets were $1,647,561 and current liabilities were $1,336,865; working capital was $310,696. Total assets were $1,722,186 and stockholders’ equity was $385,321.
- Operating cash use improved year over year, but cash fell by $129,333 during the quarter. No debt balance is separately reported in the presented balance sheet.
- Capital expenditures were $4,372. Contractual commitments included $7,985 of operating leases and approximately $234,000 in open purchase orders.
Material changes, outlook and risks
- Management attributed revenue growth to higher sales of optical components, single-use fiberscopes and CMOS micro cameras, and higher engineering-services revenue; lower sales of rigid endoscopes, couplers and a 3D surgical microscope adapter partly offset the gains.
- Gross margin benefited from higher overall unit volume and start-up costs and inefficiencies in the prior-year period, partly offset by stock-based compensation. Current-quarter stock compensation reduced gross margin by 4.0 percentage points, according to management.
- Management expects operating losses to continue until sales reach breakeven and profitable levels. It said additional capital may be needed through equity, debt or a strategic alliance; financing may be unavailable or unacceptable, and equity financing would dilute existing holders.
- On October 19, 2015, after quarter-end, the company sold 1,044,776 shares at $0.67 each for $700,000 gross proceeds, intended for general working capital. The transaction triggered warrant anti-dilution adjustments, increasing warrant counts and reducing exercise prices.
- Customer concentration remains a risk: three customers represented 21%, 16% and 13% of quarterly revenue, respectively. Management also described larger, better-resourced competitors and dependence on product development and successful commercialization.
- Management reported disclosure controls and internal control over financial reporting were not effective at September 30, 2015, citing material weaknesses in segregation of duties and inventory valuation. It described remediation measures but said it could not guarantee remediation.
- No material changes to the risk factors in the fiscal 2015 Form 10-K were reported. The company reported no known pending or threatened litigation expected to have a material impact.
Important facts for investors to verify
- Whether the October financing provides sufficient runway, given quarter-end cash, ongoing losses and operating cash use.
- Whether revenue growth and improved gross margin can continue as product mix and customer demand change.
- Progress toward commercial sales from new micro-camera, Microprecision optics and 3D endoscope products.
- Customer concentration, including the sustainability of major-customer orders.
- Remediation of the disclosed material weaknesses and effectiveness of financial reporting controls.
- The full dilution and potential share overhang from the October share issuance and adjusted outstanding warrants.