Precision Optics Corporation, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2020; filed February 16, 2021. The company develops and manufactures optical instruments, medical imaging products, and custom optical components and assemblies, including through its Ross Optical division.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Six months ended Dec. 31, 2020 | Six months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Revenue | $2.785 million | $2.797 million | $5.543 million | $5.312 million |
| Gross profit (margin) | $854,440 (30.7%) | $917,939 (32.8%) | $1.830 million (33.0%) | $1.892 million (35.6%) |
| Operating expenses | $1.067 million | $1.470 million | $2.041 million | $2.530 million |
| Operating loss | $(212,725) | $(551,598) | $(211,125) | $(637,480) |
| Net loss | $(213,454) | $(550,825) | $(212,661) | $(636,935) |
| Basic and diluted loss per share | $(0.02) | $(0.04) | $(0.02) | $(0.05) |
- Quarterly revenue was down 0.4% year over year; six-month revenue increased 4.4%. Engineering design services rose to $847,988 for the quarter and $1.437 million for six months, while production declines offset some of the growth.
- For the quarter, selling, general and administrative expense fell 25.8% year over year to $921,195; research and development expense fell 36.1% to $145,970. Management attributed lower expenses mainly to reduced stock compensation, shareholder relations, travel, and internal R&D activity.
- Cash used in operating activities was $217,440 for the six months, compared with $469,283 in the prior-year period. Investing activities used $59,033 and financing activities used $41,961. Cash declined $318,434 to $816,263.
- At December 31, 2020, current assets were $4.499 million and current liabilities were $2.680 million. Total assets were $5.863 million and stockholders’ equity was $2.787 million.
Liquidity, debt, and commitments
- The company reported recurring losses, including a $1.426 million net loss and $592,492 of operating cash use for the fiscal year ended June 30, 2020. It states that reaching quarterly break-even or better results and collecting receivables on time are important to maintaining its financial condition.
- Current liabilities included an $808,962 unsecured PPP note bearing 1% interest. Principal and interest payments were scheduled to begin August 16, 2021; the note matures May 6, 2022 if not forgiven. The company had started the forgiveness application and expected full forgiveness, but said it could not be assured of full or partial forgiveness.
- Other obligations included a $500,000 acquisition earn-out liability and capital and operating lease liabilities. Open purchase orders represented approximately $696,000 of commitments; remaining minimum payments were $51,515 under capital leases and $93,711 under the Ross Optical facility operating lease.
- Management reported no off-balance-sheet arrangements with a current or reasonably likely material effect.
Changes, outlook, and risks
- Management attributed six-month revenue growth primarily to approximately $549,000 of added engineering revenue from two new projects. Quarterly engineering revenue increased approximately $370,000, while production revenue decreased approximately $246,000, mainly due to COVID-19-related slowdowns among existing customers.
- Gross margin declined year over year in both periods. Management cited cost overruns on one engineering project and lower higher-margin production revenue, with COVID-related operating and customer effects also contributing.
- Management expects its engineering pipeline and production projects to have potential to increase revenue and support profitability, and anticipates projects may transition into production orders. The filing provides no specific numerical guidance or timetable.
- COVID-19 could adversely affect supply, customer orders, collections, operating procedures, and financial condition; management said future effects on quarterly results could not be predicted with certainty. Other stated risks include competitive pressure, customer pricing pressure, project cost overruns, and fluctuating sales mix and project timing.
- Approximately 61% of six-month revenue came from medical-device-related business, 9% from military and defense optical products, and 30% from other industrial products. The largest customer represented 13.3% of six-month revenue.
- Management concluded internal control over financial reporting was not effective as of December 31, 2020 and identified material weaknesses relating to segregation of accounting duties and inventory valuation. The filing says no material control changes occurred during the quarter and describes remediation procedures, but does not state that the weaknesses were fully remediated.
- The company reported no material change to previously disclosed risk factors and no known pending or threatened litigation expected to have a material impact.
Important facts for investors to verify
- Whether the PPP loan was forgiven, and the amount, timing, and terms of any repayment required.
- Whether new engineering projects convert into production revenue, and whether customer COVID-related slowdowns persist.
- Whether gross margins recover as project cost overruns, production mix, and operating efficiencies change.
- The company’s cash runway, receivable collections, and ability to fund operations while continuing to report losses and use operating cash.
- Progress in remediating the disclosed material weaknesses in internal controls, especially inventory valuation and segregation of duties.