Precision Optics Corporation, Inc. — Form 10-Q Summary
Business context and reporting period. The company designs and manufactures optical products, primarily medical devices such as endoscopes, endocouplers, micro-optics and medical camera assemblies; about 10% of its business is military and industrial products. This report covers the first quarter of fiscal 2014, the three months ended September 30, 2013, and compares results with the quarter ended September 30, 2012. The interim statements are unaudited.
Key financial metrics
| Metric | Quarter ended Sep. 30, 2013 | Quarter ended Sep. 30, 2012 / comparison |
|---|---|---|
| Revenue | $907,426 | $563,398; up 61.1% |
| Gross profit / margin | $260,234 / 28.7% | $129,473 / 23.0% |
| Research and development expense, net | $134,913 | $207,291; down 34.9% |
| Selling, general and administrative expense | $336,042 | $280,964; up 19.6% |
| Operating loss | $(210,721) | $(356,844) |
| Net loss | $(210,721) | $(358,094) |
| Basic and diluted loss per share | $(0.05) | $(0.27) |
| Cash used in operating activities | $(147,033) | $(228,126) |
At September 30, 2013, cash and cash equivalents were $879,030; accounts receivable were $373,190; inventory was $805,382; current assets were $2,144,027; and current liabilities were $642,657. Total assets were $2,175,734. Stockholders’ equity was $1,533,077. The balance sheet reported no debt, and the company stated it was not in default on indebtedness. Cash declined by $155,557 during the quarter; there were no financing cash flows. Capital equipment expenditures were zero.
Material changes versus the prior comparable quarter
- Revenue increased $344,028, primarily on higher unit sales, including initial shipments of a new ultra-small fiberscope and scanning otoscope, as well as higher micro-optics and endocoupler sales.
- Gross margin improved by 5.7 percentage points, attributed mainly to higher sales volume, partly offset by manufacturing start-up costs for initial product shipments.
- R&D expense decreased by $72,378, primarily due to lower product-development labor and materials costs. SG&A rose by $55,078, mainly from higher stock compensation, legal, consulting and selling costs, partly offset by lower insurance expense.
- Net loss narrowed by $147,373. Loss per share also improved, but weighted-average shares increased to 4,455,134 from 1,341,919, reflecting the materially larger share count following the September 2012 stock-and-warrant offering.
Outlook, risks and other notable items
- Management anticipated continued fiscal 2014 revenue growth but said the rate and timing were difficult to predict because many products are at an introductory stage and customer orders are unpredictable. Management expected operating losses to continue until sales reach breakeven and profitable levels.
- Management cited a $660,000 order for custom endoscopes, with requested deliveries accelerated from 16 months to 10 months; a previously announced $1,032,000 endoscope order for which shipments were beginning; and a $250,000 order for micro medical camera assemblies. These orders support potential future revenue but are not a guarantee of delivery, acceptance or collection.
- Key opportunities include Microprecision optical components and sub-millimeter medical camera assemblies, and handheld 3D endoscopes. The company reported customer demonstrations and discussions, but provided no quantified revenue guidance.
- Risks include intense price competition, lengthy product-development and commercialization cycles, regulation by the FDA, ISO and other bodies, and variability in sales mix and volume. Four customers accounted for 72% of quarterly revenue: 28%, 17%, 15% and 12%, respectively.
- Contractual commitments included operating leases totaling $35,441 after September 30, 2013, and approximately $436,000 of open purchase orders for fiscal 2014. Management reported no material off-balance-sheet arrangements and no known pending or threatened litigation expected to have a material impact.
- Disclosure controls and internal control over financial reporting were deemed ineffective as of September 30, 2013. Management identified material weaknesses relating to limited segregation of accounting duties and inventory valuation controls; it reported remediation procedures but could not guarantee full remediation. This is a significant financial-reporting risk.
- Deferred tax assets had a full valuation allowance. No income tax provision was recorded for the quarter. The company also reported approximately $3.782 million of shares issuable under options and warrants excluded from diluted loss per share as antidilutive.
Most important facts for investors to verify
- Whether the accelerated $660,000 order and other announced orders convert into timely shipments, customer acceptance, cash collections and sustained revenue growth.
- Whether improving gross margin persists after start-up costs and in the face of changing product mix and customer concentration.
- Cash runway and financing needs if operating losses and operating cash outflows continue; quarter-end cash was $879,030.
- Progress in remediating the material weaknesses, particularly accounting-duty segregation and inventory valuation controls.
- Potential dilution from outstanding options and warrants and the effect of the larger share count on per-share results.