Precision Optics Corporation, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2016. The filing is dated May 16, 2016; despite the request metadata indicating “2015 Q3,” the filing covers fiscal 2016 Q3.
Business context
The company develops and manufactures optical instruments, with most business in medical devices and approximately 10% in military and industrial products. Its offerings include endoscopes, fiberscopes, micro cameras, optical components, and engineering services. Management is investing in Microprecision optics, micro medical cameras, and 3D endoscopes. About 50% of nine-month sales came from five customers.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue, 2016 (2015) | $1.141 million ($1.142 million) | $2.954 million ($2.949 million) |
| Gross profit, 2016 (2015) | $274,000 ($313,000) | $623,000 ($588,000) |
| Gross margin, 2016 (2015) | 24.0% (27.4%) | 21.1% (19.9%) |
| Operating loss, 2016 (2015) | $244,000 ($237,000) | $907,000 ($855,000) |
| Net loss, 2016 (2015) | $222,000 ($198,000) | $885,000 ($816,000) |
| Loss per share, basic and diluted | $0.03 ($0.03) | $0.13 ($0.13) |
For the nine months, operating cash use was $750,213, compared with $724,840 in the prior-year period. Investing activities provided $18,164, while financing activities provided $663,267, including $700,000 gross proceeds from a private stock placement. Cash declined by $68,782 to $172,269 during the period.
At March 31, 2016, current assets were $1.934 million and current liabilities were $1.319 million. Total assets were $2.042 million and stockholders’ equity was $689,385. The company reported capital lease obligations with a present value of $41,696; no other debt balance is shown in the balance sheet. Contractual operating and capital lease payments totaled $81,221, and open purchase-order commitments were approximately $243,000.
Changes and notable items
- Quarterly revenue was essentially flat year over year; nine-month revenue increased 0.2%. Higher sales of newer products and engineering services partly offset declines in traditional products.
- Quarterly gross margin fell, which management attributed primarily to manufacturing inefficiencies on a few projects. Nine-month gross margin improved, mainly due to reduced manufacturing inefficiencies, partly offset by higher stock-based compensation.
- Nine-month net loss widened by approximately $70,000. SG&A and R&D expenses increased year over year, with higher stock-based compensation and consulting expenses contributing.
- The October 2015 stock placement issued 1,044,776 shares at $0.67 per share. Anti-dilution provisions also increased certain warrant share counts and reduced their exercise prices. Common shares outstanding rose to 7,539,582 at March 31, 2016 from 6,389,806 at June 30, 2015.
- The company entered a five-year capital lease for manufacturing equipment. It also issued 105,000 shares for services in February 2016, recording a noncash gain on settlement of liabilities.
Outlook, risks, and controls
Management expects operating losses to continue until sales reach breakeven and profitable levels. It sees potential for newer products and engineering activity to support future sales, but provides no quantified forecast or timetable. Management says additional capital may be needed through equity, debt, or a strategic alliance; financing may not be available on acceptable terms. Failure to obtain capital or positive cash flow could require reduced R&D and other cost actions and could affect the company’s ability to continue operations.
Risks include limited cash, recurring losses, dependence on financing, customer concentration, competition from larger companies, and variability in product mix and new-product production costs. Management reported that disclosure controls and internal control over financial reporting were not effective at March 31, 2016, citing material weaknesses in segregation of accounting duties and inventory valuation. Remediation efforts are ongoing, with no guarantee of successful resolution. The filing reports no known pending or threatened litigation expected to have a material impact and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Current cash needs, operating cash burn, and the company’s ability to secure additional financing or reach breakeven.
- Whether new-product and engineering-service activity converts into sustained revenue growth and improved margins.
- Customer concentration and the durability of purchases from major OEM customers.
- Progress in remediating the disclosed internal-control material weaknesses, especially inventory valuation and segregation of duties.
- Potential dilution from outstanding options and warrants and the terms and use of proceeds from future financing.