Opt-Sciences Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of Opt-Sciences Corporation, Inc. and its wholly-owned subsidiary, O & S Research, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
These consolidated financial statements have been prepared by the Company, without audit, and reflect normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the results for the first three months of the Company's fiscal year 2012. These consolidated financial statements do not include all disclosures associated with annual consolidated financial statements and, accordingly, should be read in conjunction with footnotes contained in the Company's consolidated financial statements for the year ended October 29, 2011 together with the auditors' report filed as part of the Company's 2011 Annual Report on Form 10-K.
The preparation of these consolidated 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.
2. INVENTORIES
Inventories consisted of the following:
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January 28, 2012
(Unaudited)
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October 29, 2011
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Raw materials and supplies
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$ 341,517
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$ 336,176
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Work in progress
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278,258
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309,769
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Finished goods
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106,297
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110,776
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Total Inventory
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$ 726,072
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$ 756,721
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End of quarter inventories are stated at the lower of cost (first-in, first-out) or market. The inventory included in unaudited quarterly financial statements and in this Form 10-Q is based on estimates derived from
an unaudited physical inventory count of work-in-progress and raw materials. The Company provides for estimated obsolescence on unmarketable inventory based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable than those projected by management, additional inventory write downs may be required. Inventory, once written down, is not subsequently written back up, as these adjustments are considered permanent adjustments to the carrying value of the inventory. The Company conducts an audited physical inventory at the end of the fiscal year in connection with its audited financial statements and preparation of its Form 10-K.
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3. REVENUE RECOGNITION
The Company recognizes revenue in accordance with U.S. GAAP and SEC Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition. SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price to the buyer is fixed and determinable; and (4) collectabality is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the price to the buyer charged for products delivered or services rendered and collectability of the sales price. The Company assesses credit worthiness of customers based upon prior history with the customer and assessment of financial condition. The Company's shipping terms
are customarily FOB shipping point.
4. FINANCIAL INSTRUMENTS
SFAS No. 157
(ASC 820), "Fair Value Measurements", requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS No. 157 (ASC 820) establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. SFAS No. 157 (ASC 820) prioritizes the inputs into three levels that may be used to
measure fair value:
Level 1
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applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
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Level 2
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applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
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Level 3
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applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
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The Company's financial instruments consist principally of cash, cash equivalents, marketable securities, trade accounts receivable, accounts payable and accrued liabilities. Pursuant to SFAS No. 157 (ASC 820), the fair value of our cash equivalents and marketable securities is determined based on "Level 1" inputs, which consist of quoted prices in active markets for identical assets. The Company believes that the recorded values of all of the other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
5.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2011, the FASB issued Accounting Standards Update No. 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and IFRS ("ASU 2011-04"), which amends ASC 820 Fair Value Measurement. ASU 2011-04 improves the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB's intent about the application of existing fair value measurement and disclosure requirements. Although ASU 2011-04 is not expected to have a significant effect on practice, it changes some fair value measurement principles and disclosure requirements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011, and must be applied prospectively. Early application is not permitted. We do not anticipate that the adoption of ASU 2011-04 will have a material impact on our financial position or results of operations.
In June 2011, the FASB issued the FASB Accounting Standards Update No. 2011-05 "Comprehensive Income" ("ASU 2011-05"), which was the result of a joint project with the IASB and amends the guidance in ASC 220, Comprehensive Income, by eliminating the option to present components of other comprehensive income (OCI) in the statement of stockholders' equity. Instead, the new guidance now gives entities the option to present all non-owner changes in stockholders' equity either as a single continuous statement of comprehensive income or as two separate but consecutive statements. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the amendments require entities to present all reclassification adjustments from OCI to net income on the face of the statement of comprehensive income. The amendments in this Update should be applied retrospectively and are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. This statement will be effective for us for our 2013 fiscal year. We do not anticipate that the adoption of ASE 2011-05 will have a material impact on our financial position or results of operations.
6. SUBSEQUENT EVENTS
The Company is not aware of any 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:
- Uncertain demand for the Company's products because of the current international financial concerns;
- Risks associated with dependence on a few major customers;and
- The performance, financial strength and reliability of the Company's vendors.
We provide greater detail regarding other factors in our 2011 Form 10-K.
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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).
EXECUTIVE SUMMARY
Opt-Sciences Corporation, through its wholly owned subsidiary, O & 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 first quarter sales of $1,386,614 and net income of $141,383. Sales are up 14% or $171,078 from the fourth quarter of Fiscal Year 2011. Compared to the first quarter of 2011, sales are down 24% or $439,528. We currently expect second quarter sales to be approximately $1,900,000. Sales seem to have rebounded from recent lows. We look for
an increase in sales of conductive coated instrument panels and improved sales in all our major markets. Nevertheless, international financial concerns combined with political unrest in the Middle East (resulting in higher oil prices) may affect aircraft users and purchasers by inhibiting their ability to finance and their desire to purchase new airplanes and their ability and desire to upgrade existing aircraft. During the first quarter of 2012, the Company booked $1,703,000 in new orders compared to $2,137,000 in new orders booked for the fourth quarter of 2011 and $1,369,000 in new orders booked in the first quarter of 2011. Our backlog of unshipped orders was approximately $2,782,000 at the end of first quarter, up $316,000 from the end of the fourth quarter of 2011 and up $826,000 from the first quarter of 2011.
Even though we have experienced a significant increase in backlog recently, a substantial portion of that backlog is scheduled for delivery in later periods of this Fiscal Year. 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 make shipments. Since the Company has two customers that together represent over 60% of sales, any significant change in the requirements of either of those customers has a direct impact on our revenue for the quarter.
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RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JANUARY 28, 2012 COMPARED WITH THIRTEEN WEEKS ENDED JANUARY
29, 2011
Net Sales
Net sales for the first quarter ended January 28, 2012 were $1,386,614 which is $439,528 and 24% less than the net sales of $1,826,142 for the same quarter last year. As earlier reported, sales during the comparable period of Fiscal Year 2011 were unusually high because of a substantial inventory accumulation at that time by a principal customer in anticipation of transition of its manufacturing operations from Japan to Taiwan. The recent quarter did not benefit from sales of that type.
Cost of Sales
Cost of sales for the quarter ended January 28, 2012 decreased $187,639 or 16% to $1,020,881 or 74% of sales, compared to 562,372 or 66% of sales, for the first quarter last year. 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. The reduction in costs of sales is directly related to reduced sales of our products.
Gross Profit
Gross profit for the quarter ended January 28, 2012 decreased $251,889 to $365,733 or 26% of sales from $617,622 or 34% of sales reported for the same quarter last year, primarily because of the decrease of sales and reduced operating efficiencies at lower levels of production.
Operating Expenses
Operating expenses increased $295 to $230,845 from $230,550 for the same quarter last year. 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 $134,888 or 10% of sales, for the quarter ended January 28, 2012, compared to an operating income of $387,072 or 21% of sales, for the same quarter last year. This decrease was due to the decrease in sales and reduced operating efficiencies at lower levels of production.
Other Income
Other income of $104,795 for the first quarter of fiscal year 2012 increased by $89,024 from $15,771 for the same quarter last year. Other income increased primarily because of higher yields resulting from increases in our new investment portfolio of income securities, which we
purchased in the second quarter of Fiscal Year 2011.
Provisions for Income Taxes
Income tax expense for the quarter ended January 28, 2012 was $98,300 and 41% of pre tax income compared to $165,200 and 41% of pre tax income for the comparable prior period.
Net Income
There was net income for the first quarter ended January 28, 2012 of $ 141,383 or $0.18 per share compared to $237,643 or $0.31 per share for first quarter ended January 29, 2011 for the reasons outlined above.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a "smaller reporting Company" as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by Item 3.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Based on an evaluation conducted as
of January 28, 2012 by our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), he has concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) are effective to reasonably ensure that information required to be disclosed in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls.
There were no changes in our internal controls during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
OSHA Matter. OSHA has concluded its audit of the Company facilities. We await the receipt of the audit report and the determinations contained therein.
ITEM 1A. RISK FACTORS
Smaller reporting companies are not required to provide the information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. (Removed and Reserved)
ITEM 5. OTHER INFORMATION
The registrant does not have in place procedures by which stockholders may recommend nominees to the registrant's Board of Directors.
ITEM 6. EXHIBITS
(a) EXHIBITS
31.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Opt-Sciences Corporation
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/s/ Anderson L. McCabe
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Anderson L. McCabe
Chief Executive Officer &
Chief Financial Officer
March 13, 2012
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