Precision Optics Corporation, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended June 30, 2021, compared with fiscal 2020. The request metadata says “2020 Q4,” but this filing reports the full fiscal year ended June 30, 2021. Filed September 28, 2021. The company designs and manufactures optical components, assemblies, and medical imaging products, including endoscopes and Microprecision lenses; its Ross Optical division supplies sourced and coated optics.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $10.675 million | $9.923 million |
| Gross profit / margin | $3.434 million / 32.2% | $3.363 million / 33.9% |
| Operating loss | $905,583 | $1.423 million |
| Net loss | $102,835 | $1.426 million |
| Loss per share | $0.01 | $0.11 |
| Cash from operations | $46,550 | $(592,492) |
| Cash and cash equivalents at year-end | $861,650 | $1.135 million |
| Working capital | $2.265 million | $1.798 million |
Revenue rose 7.6%. Engineering services increased about $1.38 million, optical component revenue was nearly unchanged, and product and assembly revenue fell about $607,000. Revenue mix was approximately 54% optical components, 26% engineering and design services, and 20% medical devices, subassemblies, and components. By end market, approximately 60% was medical, 33% industrial, and 7% military and defense.
Gross profit increased 2.1%, but margin declined 1.7 percentage points. Management attributed the lower margin to cost overruns on an engineering project, reduced higher-margin production revenue, and lower realized margins on a large recurring component product. R&D expense fell 29.6% to $624,253; selling, general and administrative expense fell 4.7% to $3.715 million.
Operating cash flow turned positive, but cash declined $273,047 after $289,064 of investing outflows and $30,533 of financing outflows. The company reported $2.511 million of current liabilities, including $450,084 in customer advances. Current and long-term capital lease obligations totaled $190,744; the Ross Optical acquisition earn-out liability totaled $333,333. The $808,962 Paycheck Protection Program loan was forgiven in March 2021 and recognized as income, materially reducing the reported net loss; excluding this forgiveness, the company remained loss-making.
Changes, outlook, and risks
- Revenue growth was driven by additional engineering capacity and two significant engineering projects, including work on optical spectroscopic measurements and a single-use ophthalmic endoscope. Management expects engineering programs may lead to production orders, but provided no quantified revenue or earnings guidance.
- Management said COVID-19 contributed to supply-chain disruptions, customer order delays, and lower production revenue, and created uncertainty around future demand, collections, suppliers, and operating efficiency. Some procedures introduced to protect employees may reduce operating efficiency.
- The company reported recurring losses, an accumulated deficit of $47.166 million, and a need to achieve break-even or better quarterly performance and collect receivables promptly. Management said additional capital might be needed; availability and terms are not assured.
- Key risks include dependence on a limited number of suppliers for optical glass and specialized sensors; customer concentration in receivables (largest customer was 16% of receivables); fixed-price contract overruns; competition; medical-device and defense-industry regulation; and potential dilution from outstanding options and future equity issuance.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at June 30, 2021, citing material weaknesses in segregation of accounting duties and inventory valuation. Management described review procedures and ongoing remediation but gave no assurance the weaknesses will be remedied.
- The independent auditor issued an unqualified opinion. Revenue recognition was identified as a critical audit matter because customer-specific terms, multiple performance obligations, variable consideration, and timing judgments require significant interpretation.
- No material litigation, off-balance-sheet arrangements, or material trends identified by management were reported. The company pays no dividends and intends to retain any earnings for the business.
Important facts for investors to verify
- Whether engineering projects convert to production orders, and whether production revenue recovers from FY2021 declines.
- Whether gross margin stabilizes after project overruns and product-mix pressures.
- Cash burn, receivable collections, customer advances, purchase-order commitments, and any need for additional financing.
- Progress in remediating the disclosed internal-control material weaknesses, particularly inventory valuation and segregation of duties.
- Supplier continuity and the continuing effects of COVID-19, including on customer orders and operating efficiency.
- Potential dilution: 2,578,200 options were outstanding at June 30, 2021, with 731,498 shares available for future grants under the 2021 Equity Incentive Plan.