Precision Optics Corporation, Inc. — Form 10-Q Summary
Period: Third quarter and nine months ended March 31, 2018 (fiscal 2018). The request metadata says “2017 Q3,” but the filing itself covers fiscal 2018 Q3.
Business context
The company designs and manufactures optical instruments, primarily medical devices and related engineering services, including endoscopes and Microprecision optics. It reports that about 67% of nine-month sales came from seven customers.
Financial results
| Metric | Three months ended Mar. 31, 2018 | Three months ended Mar. 31, 2017 | Nine months ended Mar. 31, 2018 | Nine months ended Mar. 31, 2017 |
|---|---|---|---|---|
| Revenue | $735,597 | $983,186 | $2,577,116 | $2,434,324 |
| Gross profit / margin | $236,153 / 32.1% | $278,124 / 28.3% | $923,117 / 35.8% | $593,582 / 24.4% |
| Operating loss | $(278,823) | $(162,770) | $(366,936) | $(767,013) |
| Net loss | $(279,271) | $(163,353) | $(368,382) | $(768,856) |
| Loss per share, basic and diluted | $(0.03) | $(0.02) | $(0.04) | $(0.09) |
Quarterly revenue fell 25.2% year over year, as engineering-service revenue declined 53%; production revenue increased 9%. Nine-month revenue rose 5.9%, with engineering-service revenue down 6% and production revenue up 15%. Management attributed the nine-month gross-margin improvement to project mix, better absorption of fixed manufacturing costs, lower compensation costs for part of the period, and improved production and engineering efficiencies. It cautioned that hiring and production start-up activity could pressure future costs and margins.
For the nine months, operating cash used was $106,782, versus $631,924 in the prior-year period. Investing cash used was $17,189; financing cash provided was $207,463, including $210,001 in private-placement proceeds and $6,667 from warrant exercises. Cash increased by $83,492 to $201,897. At March 31, 2018, working capital was $404,801, accounts receivable were $579,165, and current liabilities were $1,589,311. Capital-lease obligations totaled $25,713; the filing reports no other debt. Total assets were $2,091,913.
Outlook, liquidity, and risks
- Management reported production orders from two customers totaling approximately $2 million, expected to begin fulfillment in fiscal Q4 2018 and continue into the following two fiscal years. The company had increased vendor purchase commitments in anticipation of these orders.
- Management expects revenue from Q3 engineering work to be recognized in Q4 and anticipates production revenue growth as customer development projects move into production. These expectations are forward-looking, not guaranteed.
- The company reported recurring losses and said its financial condition may raise substantial doubt about its ability to continue as a going concern. It stated that available cash may not support operations for the next six to nine months if revenue does not reach or remain near cash-breakeven levels; external financing may be unavailable or dilutive, and the company might need to significantly reduce or cease operations.
- A $113,750 increase in the doubtful-accounts reserve related to one customer was recorded during the nine months, including $88,750 in Q3; management cited this as the main reason for the quarter’s higher selling, general and administrative expense.
- Open purchase-order commitments were approximately $674,413, including the $25,713 capital-lease commitment. The company leases its facilities month to month.
- Disclosure controls and internal control over financial reporting were deemed ineffective at March 31, 2018. The filing identifies material weaknesses involving segregation of accounting duties and inventory valuation; management described remediation efforts but gave no assurance they would resolve the weaknesses.
- The company had not yet adopted the revenue-recognition standard ASC 606 and expected adoption effective July 1, 2018; it was still assessing the effect, if any.
Most important facts to verify
- Whether the approximately $2 million in customer production orders convert into shipments, recognized revenue, and collected cash on the expected schedule.
- Cash runway, receivable collections, and any financing needs or going-concern developments.
- The status and potential further impact of the customer-related doubtful-account reserve.
- Whether the material weaknesses in financial reporting controls have been remediated, especially inventory valuation and segregation of duties.
- The effect of ASC 606 adoption and of production start-up costs on reported revenue, gross margin, and cash flow.