Precision Optics Corporation, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2019, ended December 31, 2018; comparisons are to the corresponding 2017 periods. The company designs and manufactures optical products and services, primarily for medical-device customers, with a smaller military and industrial business.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2018 | Six months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Revenue | $1.478 million | $0.813 million | $3.037 million | $1.842 million |
| Gross profit / margin | $356,000 / 24.1% | $300,000 / 36.9% | $818,000 / 26.9% | $687,000 / 37.3% |
| Operating loss | ($126,000) | ($60,000) | ($424,000) | ($88,000) |
| Net loss | ($126,000) | ($60,000) | ($425,000) | ($89,000) |
| Loss per share, basic and diluted | ($0.01) | ($0.01) | ($0.04) | ($0.01) |
- Quarterly revenue rose 81.8%; six-month revenue increased 64.9%. Growth was chiefly driven by production sales as two products moved from engineering to production, alongside higher sales of a traditional spine product.
- Quarterly production revenue increased 282% to $933,000; six-month production revenue rose 311%. For the quarter, engineering-services revenue was $319,000 versus $343,000, while optical-component revenue was $226,000 versus $226,000. Six-month engineering revenue increased 8.9%, while optical-component revenue declined 21.7%.
- Gross profit increased in dollars, but margins fell materially. Management attributed the decline primarily to cost overruns on two projects, which together represented 27%–28% of revenue for the relevant periods. The company said it was addressing design challenges and expected the effect to be temporary.
- Six-month SG&A rose 79.4% to $1.016 million, mainly reflecting $320,000 of additional non-cash stock-based compensation, as well as higher personnel and other costs. Six-month R&D expense increased 8.5% to $226,000.
Cash, liquidity, and financing
- At December 31, 2018, cash was $1.745 million, working capital was $2.322 million, and current liabilities were $1.383 million. Working capital was $482,000 at June 30, 2018.
- Operating activities used $578,000 of cash in the six-month period, compared with $68,000 provided a year earlier. The current-period use included a $563,000 decrease in customer advances.
- Financing activities provided $1.996 million, primarily from a private placement: 1.6 million shares at $1.25 each for $2.0 million gross proceeds, intended for general working capital. The placement increased outstanding shares from 10.20 million at June 30 to 11.90 million at December 31. The resale registration statement became effective February 5, 2019.
- Capital-lease obligations totaled $19,000, including $9,000 current. The company reported approximately $402,000 of open-purchase-order commitments, including the lease amount. No other contractual cash commitments were reported; facilities were month-to-month.
Outlook, commentary, and risks
- No numerical revenue or earnings guidance was provided. Management said maintaining financial condition depends on quarterly revenue at or above the levels of the three most recent fiscal quarters, achieving targeted gross margins, and limiting operating-expense growth. Lower revenue, weaker margins, or higher expenses could consume cash and working capital.
- Management sees potential for growth from current production projects and an engineering pipeline involving Microprecision optics, micro medical cameras, and 3D endoscopes. Customer projects can fluctuate by product and period, and successful development work may transition to manufacturing orders.
- Customer concentration is significant: approximately 77% of six-month sales came from seven customers. The company also faces competition from larger, better-resourced domestic and foreign competitors.
- Disclosure controls and internal control over financial reporting were assessed as ineffective at December 31, 2018. The filing identifies material weaknesses involving segregation of accounting duties and inventory valuation; management described remediation steps but did not state that the weaknesses were fully remediated.
- The company reported recurring losses and a full valuation reserve against deferred tax assets. It said there were no material changes to previously disclosed risk factors and no known pending or threatened litigation expected to have a material impact.
Investor verification priorities
- Whether project cost overruns are resolved and gross margins recover, particularly as production volumes grow.
- Whether production revenue from recently transitioned products is sustainable and customer concentration declines.
- Cash burn, customer advances, and working-capital needs relative to management’s stated revenue and margin requirements.
- The status and effectiveness of remediation for the disclosed material weaknesses in financial controls.
- The effects of the 1.6 million-share placement, outstanding options and warrants, and subsequent resale registration on potential dilution and share supply.