The Company acquired the adjacent premises at 1900 Bannard Street, Cinnaminson, New Jersey on July 31, 2013 pursuant to an earlier reported Agreement of Sale for $367,500. After completing required renovations over the course of the next twelve months, the Company plans to use the premises for storage, manufacturing and office space. The Company is not aware of any other event that occurred subsequent to the balance sheet date but prior to the filing of this report that could have a material impact on our financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
We make statements in this Report, and we may from time to time make other statements, regarding our outlook or expectations for earnings, revenues, expenses and/or other matters regarding or affecting the Company that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as "believe", "expect", "anticipate", "intend", "outlook", "estimate", "forecast", "project" and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made. We do not assume any duty and do not undertake to update our forward-looking statements. Actual results or future events could differ, possibly materially, from those that we anticipated in our forward-looking statements, and future results could differ materially from our historical performance. Our forward-looking statements are subject to the following principal risks and uncertainties:
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Uncertain demand for the Company's products because of the current international financial concerns;
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Risks associated with dependence on a few major customers; and
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The performance, financial strength and reliability of the Company's vendors.
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We provide greater detail regarding other factors in our 2012 Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Specifically, inventory is estimated quarterly and reconciled at the end of the fiscal year when a comprehensive physical count is conducted (also see Notes to Consolidated Financial Statements, Note 1 Summary of Significant Accounting Policies and Note 2 Inventories).
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EXECUTIVE SUMMARY
Opt-Sciences Corporation, through its wholly owned subsidiary, O and S Research, Inc., both New Jersey corporations, manufactures anti-glare and transparent conductive optical coatings which are deposited on glass used primarily to cover instrument panels in aircraft cockpits. The Company's business is highly dependent on a robust commercial, business, regional and military aircraft market. We recorded third quarter sales of $1,572,160 and net income of $220,477. Sales decreased approximately 9% or $155,003 from the second quarter of Fiscal Year 2013. Compared to the third quarter of 2012, sales decreased approximately 12% or $206,994. We currently expect fourth quarter sales to be approximately $1,500,000 or slightly lower than the third quarter.International financial concerns combined with political unrest in the Middle East(resulting in higher oil prices) and the prospect of higher interest rates may adversely affect aircraft users and purchasers by inhibiting their ability to finance and their desire to purchase new airplanes as well as their ability and desire to upgrade existing aircraft. During the third quarter of 2013, the Company booked $1,654,000 in new orders compared to $1,706,000 in new orders booked for the second quarter of 2013 and $1,197,000 in new orders booked in the third quarter of 2012. Our backlog of unshipped orders was approximately $2,172,000 at the end of the third quarter, up approximately $90,000 from the end of the second quarter of 2013 and down $366,000 from the
third quarter of 2012. The higher backlog at the end of the same period last year was primarily due to an inventory buildup by one of our major customers causing a temporary spike in demand.
Even though we have a significant backlog, approximately
half the backlog is scheduled for delivery in Fiscal Year 2014. Based on their needs which change from time to time, our customers may accelerate or defer delivery dates; and we typically try to accommodate their needs if we have available manufacturing capacity and access to the required raw materials. We generally have a four to twelve week delivery cycle depending on product complexity, plant capacity and lead time for raw materials, such as polarizers or filter glass. Our sales tend to fluctuate from quarter to quarter, because all orders are custom manufactured and customer orders are generally scheduled for delivery based on our customer's need date and not based on our ability to manufacture and ship our products. Since the Company has two customers that together represented over
46% of sales this quarter, any significant change in the requirements of either of those customers has a direct impact on our revenue for a quarter.
RESULTS OF OPERATIONS - THIRD QUARTER
THREE MONTHS ENDED JULY 27, 2013 COMPARED WITH THREE
MONTHS ENDED
JULY 28, 2012
NET SALES
Net sales for the third quarter were $1,572,160 which is $206,994 and about 12% less than the net sales of $1,779,154 for the same quarter last year.
COST OF SALES
Cost of sales for the third quarter decreased $189,165 or 17% to $922,827 or
59% of sales, compared to $1,111,992 or 63% of sales, for the third quarter last year. The decrease in cost of sales was primarily due to the lower sales of approximately $68,000 during the third quarter and due to lower material costs and lower direct labor costs of approximately $121,000. Cost of sales is comprised of raw materials, manufacturing direct labor and overhead expenses. The overhead portion of cost of sales is primarily comprised of salaries, benefits, building expenses, production supplies, and maintenance costs related to our production, inventory control and quality departments.
GROSS PROFIT
Gross profit for the third quarter decreased $17,829 to $649,333 or 41% of sales from $667,162 or
37% of sales reported for the same quarter last year.
OPERATING EXPENSES
Operating expenses increased $22,818 to $271,621 from $248,803 for the same quarter last year.
This increase was primarily due to an increase in travel and legal expenses. Operating expenses consist of marketing and business development expenses, professional expenses, salaries and benefits for executive and administrative personnel, hiring, legal, accounting, and other general corporate expenses.
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OPERATING INCOME
The Company realized operating income of $377,712 or 24% of sales for the
third quarter compared to an operating income of $418,359 or 24% of sales, for the same quarter last year.
OTHER INCOME
Other income of $9,565 for the third quarter decreased by $82,051 from the same quarter last year. This decrease was primarily related to the recognition of realized losses from the company's securities' portfolio. During this quarter, the Company made certain adjustments to its portfolio of income securities in an attempt to minimize the anticipated effect of prospective policy changes of the Federal Reserve Bank leading to higher interest rates.
PROVISONS FOR INCOME TAX
Income tax expense for the third quarter was $166,800 or 43% of pre tax income compared to $209,000 and 41% of pre tax income for the comparable prior period.
NET INCOME
There was net income for the third quarter of $220,477 or $0.28 per share compared to $300,975 or $0.39
per share for third quarter of Fiscal 2012.
NINE MONTHS ENDED JULY 27, 2013 COMPARED WITH NINE MONTHS ENDED JULY 28, 2012
NET SALES
Net sales for the nine months ended July 27, 2013 were $4,659,934 which is $134,856 and
about 3% less than the net sales of $4,794,790 for the same nine month period last year.
COST OF SALES
Cost of sales for the nine months ended July 27, 2013 was $2,878,178 or
62% of sales, compared to $3,351,227 or 70% of sales, for the same period last year. The larger decrease in cost of sales despite a small decrease in sales was primarily due to the higher operating efficiencies experienced during the third quarter resulting in lower material costs and lower direct labor costs. Cost of sales is comprised of raw materials, manufacturing direct labor and overhead expenses. The overhead portion of cost of sales is primarily comprised of salaries, benefits, building expenses, production supplies, and maintenance costs related to our production, inventory control and quality departments.
GROSS PROFIT
Gross profit for the nine months ended July 27, 2013 increased $338,193 to $1,781,756 or
38% of sales, from $1,443,563 or 30% of sales reported for the same period last year. The
increase in total gross profit was due to higher operating
efficiencies and margins than for the same period last year.
OPERATING EXPENSES
Operating expenses increased by $126,279 to $828,459 during the nine month period ended July
27, 2013 from $702,180 during the same nine month period last year. This was due
primarily to higher travel expenses and higher legal expenses. Operating expenses consist of marketing and business development expenses, professional expenses, salaries and benefits for executive and administrative personnel, hiring, legal, accounting, and other general corporate expenses.
OPERATING INCOME
The Company realized operating income of $953,297 or 20% of sales, for the
nine month period ended July 27, 2013, compared to operating income of $741,383 or
15% of sales, for the same period last year. The increase in operating income is primarily
due to higher operating efficiencies.
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OTHER INCOME
Other income of $233,223 for the nine month period ended July 27, 2013
decreased $28,426 from $261,649 for the same period for last year. This
difference was primarily related to the recognition of unrealized losses from the company's securities' portfolio.
INCOME TAX
Income tax expense for the nine month period ended July 27, 2013 was $486,500 and 41% of pre tax income, compared to $411,200 and 41% of pre tax income for the
nine month period ended July
28, 2012.
NET INCOME
Net income for the nine month period ended July 27, 2013 increased $108,189 to $700,020 or $0.90 per share, compared to net income of $591,832 or $0.76 per share for the prior comparable period, primarily because of the
increased operating efficiencies over those experienced in the prior year.