Precision Optics Corporation, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2015, with fiscal 2014 comparatives. The filing is an annual report, not a standalone 2014 fourth-quarter report; it was signed October 13, 2015.
Business context
The company designs and manufactures optical systems and components, with most of its business in medical devices, including endoscopes, endocouplers, micro-optics and imaging systems. Approximately 10% of its business is military and industrial products. It is developing Microprecision lenses, micro medical cameras and 3D endoscopes. In June 2015, it announced a camera-module partnership with OmniVision Technologies and Fujikura; the module was described as 1.6 mm in diameter with 400 x 400 pixel resolution.
Key financial results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $3,912,060 | $3,651,181 |
| Gross profit | $798,271 | $800,795 |
| Gross margin | 20.4% | 21.9% |
| Operating loss | $(1,213,053) | $(1,159,726) |
| Net loss | $(1,178,793) | $(1,160,638) |
| Basic and diluted loss per share | $(0.19) | $(0.26) |
| Net cash used in operating activities | $(773,793) | $(886,031) |
Revenue grew 7.1%, mainly from higher unit sales of new ultra-small fiberscopes and micro-imaging systems and increased engineering services, partly offset by lower optical-component and spinal-visualization-system sales. Gross profit was nearly flat; margin fell as product mix became less favorable and new-product manufacturing startup costs were incurred. Research and development expense, net of customer reimbursements, was $492,937 versus $471,106; selling, general and administrative expense was $1,545,462 versus $1,503,443.
At June 30, 2015, cash and cash equivalents were $241,051, current assets $1,967,531, current liabilities $1,374,994 and working capital $592,537, down from $718,352 a year earlier. Accounts receivable were $588,042 and inventory was $1,073,256. The balance sheet lists no long-term debt; current liabilities were primarily accounts payable and accruals. Operating cash use was partly offset by $858,779 of net financing cash, principally proceeds from the 2014 private placement. Cash increased by $38,671 during the year.
Material changes, outlook and risks
- The July 2014 private placement issued 1,717,152 shares at $0.60 per share for $1,030,291 gross proceeds. Shares outstanding rose from 4,455,134 at June 30, 2014 to 6,389,806 at June 30, 2015. The company also issued 217,520 shares for services.
- Management said new optical platforms could support sales growth and eventually breakeven, but provided no quantified revenue, earnings or cash-flow guidance. It expected to continue product development and seek customer design and development contracts.
- The company reported recurring losses, operating cash outflows and limited cash. The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern. Management said it may need additional equity, debt or a strategic alliance; financing may be unavailable or cause further dilution.
- Customer concentration is material: the four largest customers represented 58% of FY2015 revenue; the largest accounted for 23%. The four largest customers represented 73% of year-end receivables. Fixed-price purchase orders have historically represented approximately 25%–50% of revenue and may not be profitable.
- Other risks include competition from larger, better-resourced companies; regulatory approvals for future medical products; reliance on a small number of optical-glass suppliers and outside services; product-liability exposure; key-person dependence; and the illiquidity and volatility of OTCQB shares. Outstanding options and warrants create additional potential dilution.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end, citing material weaknesses in segregation of duties and inventory valuation. The filing describes review and inventory procedures but does not report that the weaknesses were fully remediated.
- Unusual items included $35,172 of noncash other income from settling service liabilities with stock and a $27,075 gain on sale of previously written-off equipment. The company also reported $125,675 of stock-based compensation.
Important facts for investors to verify
- Current cash burn, available financing and the company’s runway, given the going-concern warning.
- Whether development activity and the camera-module partnership have resulted in repeat production orders and meaningful commercial revenue.
- Customer concentration, receivable collection status and inventory demand or obsolescence exposure.
- Current fully diluted share count, including outstanding warrants, options and remaining equity-plan capacity.
- Progress in remediating the disclosed internal-control weaknesses and the status of any subsequent audit findings.