Precision Optics Corporation, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2021. The financial statements are unaudited.
Business context and reporting period
Precision Optics develops and manufactures optical instruments, components, and medical imaging products. Its operations include Precision Optics, Ross Optical, and Lighthouse Imaging, acquired on October 4, 2021. The quarter’s results include Lighthouse for the period after acquisition.
Financial performance and position
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2021 | Six months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Revenue | $3.897 million | $2.785 million | $6.233 million | $5.543 million |
| Gross profit | $1.120 million | $854,440 | $1.759 million | $1.830 million |
| Gross margin | 28.7% | 30.7% | 28.2% | 33.0% |
| Operating loss | $(460,350) | $(212,725) | $(1.032) million | $(211,125) |
| Net loss | $(507,013) | $(213,454) | $(1.084) million | $(212,661) |
| Loss per share | $(0.03) | $(0.02) | $(0.07) | $(0.02) |
- For the six months, operating cash flow was $(715,163), investing cash flow $(293,155), and financing cash flow $1.410 million. Cash increased $401,548 to $1.263 million.
- At December 31, 2021, current assets were $6.366 million and current liabilities $4.566 million. Accounts receivable was $2.216 million; inventory was $2.503 million.
- Long-term debt was incurred to finance the acquisition: the term loan had $2.538 million principal outstanding, including $367,714 current maturities. The $250,000 revolving credit facility had no borrowings outstanding. Debt is secured by company assets and includes a minimum debt-service-coverage covenant.
- Stockholders’ equity was $9.189 million. Shares outstanding increased from 13.282 million at June 30 to 16.747 million at December 31.
Material changes versus the prior comparable period
- Quarterly revenue rose 39.9%, primarily from Lighthouse; six-month revenue rose 12.4%. Excluding Lighthouse, management reported lower six-month engineering revenue, higher component revenue, and lower production revenue.
- Quarterly gross profit increased, but gross margin declined. Six-month gross profit and margin also declined. Management cited engineering-project cost overruns, lower production revenue amid COVID-related customer slowdowns, and Lighthouse’s lower margins relative to Ross Optical.
- Quarterly and six-month SG&A increased 59.2% and 37.7%, respectively, primarily due to Lighthouse, higher stock compensation, and marketing costs. R&D expense declined as more engineering time was devoted to customer projects.
- The Lighthouse transaction included $2.855 million cash at closing, 2.5 million shares valued at $4.825 million, and up to $1.5 million in earn-out consideration tied to gross-profit targets. Preliminary purchase accounting recorded $8.962 million of goodwill; the allocation remains subject to change.
Outlook, risks, contingencies, and unusual items
- No specific financial guidance was provided. Management says reaching break-even or better depends on sufficient quarterly revenue, gross margins, expense control, and timely collections.
- Management reports recurring operating losses and operating cash use, and identifies customer pricing pressure, engineering overruns, production challenges, supply availability, and uncertain customer orders as concerns.
- COVID-19 and related policies may continue to affect supply, customer orders and collections, operations, and financial condition. The company says the impact on upcoming results cannot be predicted with certainty.
- The $1.5 million Lighthouse earn-out is payable over two years only if specified gross-profit levels are achieved; unearned portions are to be recognized in earnings. Open purchase-order commitments were approximately $1.794 million.
- Disclosure controls and internal control over financial reporting were determined to be ineffective at December 31, 2021. The filing identifies material weaknesses relating to segregation of accounting duties and inventory valuation; management says remediation efforts continue but cannot guarantee success.
- The company reported no known pending or threatened litigation expected to have a material impact and no material changes to the risk factors in its latest annual report.
Important facts for investors to verify
- Whether Lighthouse meets the operating and gross-profit targets underpinning the earn-out, and whether the preliminary purchase-price allocation changes.
- Whether revenue growth translates into improved margins and reduced operating losses, particularly as acquisition-related expenses and debt service continue.
- Cash generation, collections, inventory levels, customer advances, and available borrowing capacity relative to near-term obligations.
- Compliance with the term-loan covenant and the company’s ability to service debt while funding operations.
- Progress in remediating the disclosed material weaknesses and improving financial-reporting controls.
- The effects of share issuance and outstanding options on dilution; the filing reports 2.670 million options outstanding at December 31, 2021.