Precision Optics Corporation, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended December 31, 2015 (fiscal 2016). The unaudited statements cover the company and its wholly owned subsidiaries.
Business context
Precision Optics designs and manufactures optical products, predominantly for medical-device customers; approximately 10% of its business is military and industrial. Products include endoscopes, optical components, micro cameras, fiberscopes, and imaging systems. The company is investing in Microprecision optics, micro medical cameras, and 3D endoscopes.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2015 | Six months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Revenue | $954,772 | $976,548 | $1,813,199 | $1,807,262 |
| Gross profit | $217,022 | $162,512 | $349,360 | $274,650 |
| Gross margin | 22.7% | 16.6% | 19.3% | 15.2% |
| Research and development expense | $108,146 | $138,893 | $258,914 | $215,605 |
| Selling, general and administrative expense | $407,088 | $346,770 | $772,114 | $693,917 |
| Net loss | ($281,310) | ($321,223) | ($663,200) | ($617,662) |
| Loss per share, basic and diluted | ($0.04) | ($0.05) | ($0.10) | ($0.10) |
Revenue declined 2.2% in the quarter but increased 0.3% for the six-month period. Higher sales of newer products and engineering services partly offset lower volume in certain traditional products. Gross margin improved, which management attributed mainly to reduced manufacturing start-up costs and inefficiencies experienced in the prior-year periods. The quarterly loss narrowed, while the six-month loss widened.
Cash flow, balance sheet, and liquidity
- Six-month operating cash use was $524,931, versus $660,201 in the prior-year period. Investing activities provided $11,225; financing provided $683,548, including the private placement. Cash increased $169,842 to $410,893.
- At December 31, cash was $410,893, accounts receivable $425,733, inventory $1,093,756, current assets $2,019,594, and current liabilities $1,260,677. Current liabilities were below $1,374,994 at June 30, 2015; cash was then $241,051.
- Stockholders’ equity was $829,664, including an accumulated deficit of $43,292,710. No borrowing balance is presented on the balance sheet; the filing does not provide a clear separate debt total.
- The company raised $700,000 gross through an October 2015 private placement of 1,044,776 shares at $0.67 per share, with $16,452 of placement expenses reported in cash flows. The issuance increased outstanding shares from 6,389,806 at June 30 to 7,434,582 at December 31. Anti-dilution provisions also increased certain outstanding warrant counts and reduced their exercise prices.
- Commitments included approximately $354,000 in open purchase orders, including a $51,000 five-year capital lease obligation beginning February 2016. Listed operating lease commitments totaled $2,190. No material off-balance-sheet arrangements were reported.
Management outlook, risks, and unusual items
- Management expects operating losses to continue until sales reach breakeven and profitable levels. It believes product opportunities could support higher sales, but provides no quantified guidance or timetable.
- Management states that continued losses may require additional financing through debt, equity, or a strategic alliance. Financing may be unavailable or unacceptable; additional equity or convertible debt could dilute shareholders, while debt could impose restrictive covenants. The filing warns that inability to raise funds or achieve positive cash flow could impair continued operations and growth.
- Approximately 55% of six-month sales came from five customers. The company identifies customer concentration, competition from larger and better-resourced competitors, and reliance on increased sales to existing and prospective customers as business considerations.
- Management reported disclosure controls and internal control over financial reporting were not effective at December 31, 2015. It identified material weaknesses relating to inadequate segregation of accounting duties and inventory valuation controls; remediation efforts were ongoing, with no guarantee of successful remediation.
- Equipment previously written off was sold for $18,468, recorded as a gain. No income tax provision was recorded because of losses; a full valuation reserve was maintained against deferred tax assets. Management reported no known pending or threatened litigation with a material impact and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether operating performance, gross margins, and engineering-service activity translate into sustained revenue growth and a path to breakeven.
- Cash needs and available financing, particularly in light of continued operating cash use, purchase-order commitments, and management’s stated dependence on future funding if cash flow does not improve.
- Customer concentration and the durability of sales from newer products versus declining traditional-product volumes.
- Progress in remediating the disclosed material weaknesses and whether later filings report effective controls.
- The full dilution impact of the private placement, adjusted warrants, and other potentially dilutive securities; approximately 4.478 million shares issuable under options and warrants were excluded from diluted loss-per-share calculations as antidilutive.