Precision Optics Corporation, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three months ended September 30, 2021, the company’s first quarter of fiscal 2022. The request metadata labels the period “2021 Q1,” but the filing identifies the period as fiscal Q1 2022. Comparisons below are with the three months ended September 30, 2020. Financial statements are unaudited.
Business context
Precision Optics develops and manufactures optical instruments, medical imaging products and assemblies, and custom optical components. Management reported that approximately 87% of quarterly revenue was medical, 8% military and defense, and 5% other industrial. The Lighthouse Imaging acquisition described below closed after quarter-end and is not included in the quarter’s operating results.
Financial performance
| Metric | Quarter ended Sep. 30, 2021 | Prior-year quarter |
|---|---|---|
| Revenue | $2,336,344 | $2,757,901 |
| Gross profit / margin | $639,032 / 27.4% | $975,178 / 35.4% |
| Operating income (loss) | $(571,952) | $1,600 |
| Net income (loss) | $(576,801) | $793 |
| Loss per share, basic and diluted | $(0.04) | $0.00 |
| Net cash used in operating activities | $(182,340) | $(172,636) |
Revenue decreased $421,557, or 15.3%. Engineering Design Services revenue fell to $373,316 from $589,232; Optical Components revenue rose to $1,538,932 from $1,476,085; and Medical Device Products and Assemblies revenue declined to $424,096 from $692,584. Management attributed lower engineering revenue primarily to project mix and lower production revenue primarily to COVID-19-related customer slowdowns.
Gross profit fell $336,146. Management cited cost overruns on one engineering project and reduced higher-margin production revenue as the primary reasons for the margin decline. Research and development expense was $105,186, down 30.6%, while selling, general and administrative expense was $933,624, up 13.6%. The company also recorded $172,174 of Lighthouse acquisition expenses.
Financial position and liquidity
- At September 30, 2021, cash and cash equivalents were $1,669,569; accounts receivable was $1,711,192; inventory was $2,120,890; and current liabilities were $2,758,416.
- Total assets were $7,101,925 and stockholders’ equity was $4,034,397. Cash increased from $861,650 at June 30, 2021, including $1,030,000 received in a stock placement and recorded as common stock subscribed.
- Operating cash use was $182,340. Investing cash use was $30,366, principally for equipment and patent costs. Financing provided $1,020,625, primarily from the stock placement, net of costs, partly offset by capital lease payments.
- At quarter-end, capital lease obligations totaled $181,369, including $38,923 current; acquisition earn-out liabilities totaled $333,333. No bank term loan or revolving line is reported as a quarter-end balance; those were obtained in October.
- Management reported approximately $500,922 of open-purchase-order commitments at September 30, 2021. The company continued to report recurring operating losses and said break-even depends on revenue, gross margins, expense control, and timely collection of receivables.
Material developments, outlook and risks
- Lighthouse Imaging acquisition: On October 4, 2021, the company acquired substantially all operating assets of Lighthouse Imaging for $2,855,000 cash at closing, up to $1,500,000 in performance-based earn-out consideration over two years, and 2,500,000 shares issued to the sellers. Lighthouse develops medical optics and digital imaging systems. Acquisition financial statements and pro forma information were to be filed by amendment by December 20, 2021.
- Acquisition financing: The company obtained a $2,600,000 term loan from Main Street Bank, completed a $1,500,000 private placement of 937,500 shares at $1.60 per share, and secured a revolving credit line of up to $250,000 for working capital. Investors had provided $1,030,000 of the placement proceeds by September 30. The acquisition and financing are subsequent events, not quarter-end operating results.
- Outlook: No numerical revenue or earnings guidance was provided. Management expects to pursue product-development opportunities and believes revenue growth, adequate gross margins, and expense control could support break-even or profitable operations. It also described a pipeline of customer projects but did not quantify expected conversion or timing.
- Risks: Management said COVID-19 may adversely affect supply, customer orders, collections, operations, and financial condition, and that its future impact was uncertain. Other stated challenges include customer pricing pressure, engineering cost overruns, production delays, and dependence on customer order levels.
- Controls and contingencies: Management concluded disclosure controls and internal control over financial reporting were not effective at September 30, 2021, citing material weaknesses involving segregation of accounting duties and inventory valuation. The company said it was continuing remediation efforts. Management reported no pending or threatened litigation believed likely to have a material impact and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the Lighthouse acquisition produces the expected operating contribution, and the ultimate amount and timing of its contingent earn-out.
- The term loan’s interest rate, repayment schedule, covenants, and collateral terms, and whether the revolving credit line is drawn.
- Whether revenue and gross margins recover from the reported declines, particularly given project cost overruns and COVID-19-related customer slowdowns.
- Progress in remediating the two material weaknesses in financial reporting controls.
- Whether the company can sustain liquidity and fund operations while continuing to incur operating losses and meet debt, lease, and purchase-order commitments.