Precision Optics Corporation, Inc. — Form 10-Q
Reporting period: Three and nine months ended March 31, 2022 (fiscal 2022 third quarter); filed May 16, 2022. The filing covers Precision Optics and its consolidated subsidiaries.
Business context and material developments
The company develops and manufactures optical instruments, components, and medical imaging systems. Its businesses include Precision Optics, Ross Optical, and Lighthouse Imaging, acquired October 4, 2021. Lighthouse’s results are included from the acquisition date, so reported year-over-year growth reflects both the acquisition and changes in existing operations.
The company reported that, for the nine-month period, approximately 34% of revenue came from engineering services, 45% from optical components, and 21% from medical-device products and assemblies. It issued 2.5 million shares to the Lighthouse sellers and sold 937,500 shares in a private placement to help fund the acquisition.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $4.65 million vs. $2.46 million; up 89.2% | $10.88 million vs. $8.00 million; up 36.0% |
| Gross profit and margin | $1.73 million; 37.2%, vs. $0.82 million; 33.3% | $3.49 million; 32.0%, vs. $2.65 million; 33.1% |
| Operating loss | $61,121 vs. $256,018 | $1.09 million vs. $467,143 |
| Net income (loss) | $(113,899) vs. $552,278 | $(1.20) million vs. $339,617 |
| Basic loss/income per share | $(0.01) vs. $0.04 | $(0.08) vs. $0.03 |
Quarterly revenue and gross profit increased substantially, primarily reflecting Lighthouse and higher medical-device manufacturing activity. Management also cited higher production and component revenue in the legacy business. For the nine months, management said legacy engineering revenue declined about $287,000, while component revenue increased about $543,000 and production revenue about $161,000. The prior-year comparison is affected by an $808,962 gain from forgiveness of a bank note, recorded in 2021; accordingly, prior-year net income is not a like-for-like operating comparison.
Quarterly selling, general and administrative expense rose 69.7% to $1.57 million; nine-month expense rose 48.8% to $3.97 million, primarily due to Lighthouse, stock-based compensation, and marketing. Research and development expense was $214,898 for the quarter and $433,248 for nine months.
Cash, liquidity, and debt
- Cash was $831,585 at March 31, 2022, down from $861,650 at June 30, 2021. Nine-month operating cash use was $879,967; investing cash use was $504,389; financing provided $1.35 million.
- Current assets were $7.46 million and current liabilities $5.77 million, implying working capital of approximately $1.69 million. Receivables were $3.35 million and inventory $2.97 million. Customer advances of $1.02 million are included in current liabilities.
- The Main Street Bank term loan had $2.445 million of principal outstanding, with $367,714 classified as current and $2.053 million as long-term debt net of issuance costs. It bears interest at prime plus 1.5%, requires monthly principal payments, is secured by company assets, and matures October 2028. The company must meet an annual minimum debt-service coverage ratio of 1.20:1.
- A $250,000 revolving credit facility was undrawn at March 31, 2022. The company also had an acquisition earn-out liability of approximately $1.60 million, subject to Lighthouse gross-profit targets.
Outlook, risks, and unusual items
No quantified revenue or earnings guidance is provided. Management said it believes profitability can be achieved through sufficient revenue, gross margins, and expense control, and expects its customer pipeline to expand as development projects move into production. It emphasized that these outcomes fluctuate with sales mix and project timing.
Management cited recurring operating losses, customer pricing pressure, engineering and production cost overruns, supply-chain constraints, and uncertainty over customer orders and collections related to COVID-19 and its economic effects. It stated that maintaining quarterly revenue sufficient to reach break-even and collecting receivables on time are critical to the company’s financial condition. The filing reports no known pending or threatened litigation expected to have a material impact and no material changes to previously disclosed risk factors.
The company revised its prior-quarter acquisition accounting after identifying an $825,000 overstatement of additional paid-in capital and goodwill related to the value assigned to shares issued to Lighthouse’s sellers. It said the revision did not affect profit-and-loss accounts. The purchase-price allocation remains preliminary and contingent on earn-out payments; unearned earn-out amounts will be recognized in earnings.
Important facts for investors to verify
- Whether revenue growth and gross-margin performance continue as Lighthouse is fully incorporated, and whether legacy engineering activity recovers.
- Cash conversion and working-capital trends, particularly receivables, inventory, customer advances, and operating cash use.
- Compliance with the bank’s debt-service covenant, future debt service, and availability of the undrawn credit line.
- Earn-out performance conditions, cash payments, and final acquisition purchase-price allocation and goodwill.
- The filing contains a numerical inconsistency in stock-based compensation: the cash-flow statement reports $741,637 for nine months, while the stock-based compensation note reports $721,637. Verify the correct amount against the underlying filing or company disclosures.