Precision Optics Corporation, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, three months ended September 30, 2018. The company designs and manufactures optical products and medical devices, primarily for medical-device OEMs, with 10%–20% of its business in military and industrial products.
Financial performance and liquidity
| Metric | Quarter ended Sep. 30, 2018 | Prior-year quarter |
|---|---|---|
| Revenue | $1,559,458 | $1,028,746 |
| Gross profit / margin | $462,507 / 29.7% | $386,742 / 37.6% |
| Operating expenses | $761,287 | $415,011 |
| Operating loss | $(298,780) | $(28,269) |
| Net loss | $(299,285); $(0.03) per share | $(28,785); reported as $(0.00) per share |
| Cash used in operations | $(6,430) | $(131,646) |
- At September 30, cash was $351,314; current assets were $2.18 million and current liabilities were $1.69 million (current ratio approximately 1.29). Working capital was approximately $487,000.
- Total assets were $2.31 million. Capital lease obligations totaled $21,378, of which $9,111 was current. The filing reports no other contractual cash commitments beyond approximately $545,000 for open purchase orders, including the lease commitment.
- Cash declined by $51,424 during the quarter. Operating cash use was partly offset by a $342,984 noncash stock-compensation add-back and working-capital movements; capital expenditures were $42,809.
- On October 16, 2018, the company raised $2.0 million gross by issuing 1.6 million shares at $1.25 per share for general working capital. This subsequent financing was not reflected in September 30 cash.
Changes versus the prior-year quarter
- Revenue rose $530,712, or 51.6%. Engineering design services increased 22%; production revenue increased 72%. Medical device products and assemblies revenue was $749,503 versus $165,231, while optical components revenue declined to $298,057 from $443,591.
- Gross profit increased 19.6%, but gross margin fell 7.9 percentage points to 29.7%. Management attributed the decline principally to cost overruns on two projects, representing 25% of quarterly revenue.
- SG&A rose $363,905, or 122.7%, primarily due to increased noncash stock-based compensation, including stock and option awards. The company reported non-GAAP net income of $43,699 after excluding $342,984 of stock-based compensation; this is a company-defined adjustment, not GAAP net income.
- R&D expense declined 14.9% to $100,798. Weighted-average shares increased to 10.26 million from 9.11 million.
Outlook, commentary, and risks
- No specific financial guidance was provided. Management said maintaining quarterly revenue at or above the levels achieved in the June and September 2018 quarters is critical; a return to lower revenue levels could consume cash and weaken financial condition.
- Management views customer engineering projects and recently transitioned production programs—including Microprecision optics, micro medical cameras, and 3D endoscopy—as potential sources of future production revenue. The company expects its customer pipeline to expand, but timing and conversion to production are uncertain.
- Management said the two projects with cost overruns involved design challenges and expected the margin impact to be temporary. Estimated effects on gross margin percentage were 4.8% for one production project and 3.3% for one engineering project.
- Customer concentration is significant: approximately 74% of quarterly sales came from seven customers. The company also notes competition from larger, better-resourced domestic and foreign businesses and recurring historical losses.
- Disclosure controls and internal control over financial reporting were deemed ineffective at quarter-end. The filing identifies material weaknesses involving segregation of accounting duties and inventory valuation; management says remediation efforts continue but cannot assure they will resolve the weaknesses.
- ASC 606 was adopted July 1, 2018 using the modified retrospective method; management reported no material impact. No material pending or threatened litigation was identified. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether the $2.0 million October equity financing and the resulting additional share dilution adequately address near-term working-capital needs.
- Whether revenue levels can be sustained and customer development projects convert into repeat production orders, given concentration among seven customers.
- Whether the identified project cost overruns are temporary and gross margins recover.
- Whether the reported material weaknesses in financial controls, particularly inventory valuation and segregation of duties, are remediated.
- The balance-sheet share count was 10,297,139 at September 30, while the filing cover reports 11,897,139 shares outstanding at October 31; verify the post-quarter issuance and fully diluted share impact.