Precision Optics Corporation, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2021, three months ended September 30, 2020; comparisons are to the three months ended September 30, 2019 unless stated otherwise. The filing was signed November 12, 2020.
Business context
The company develops and manufactures optical instruments, including medical endoscopes and imaging products, and supplies custom optical components and assemblies through its Ross Optical division. Approximately 60% of quarterly revenue was medical-device related, 9% military and defense, and 31% other industrial products. Its largest customer represented 11.3% of sales.
Financial performance and liquidity
| Metric | Quarter ended Sep. 30, 2020 | Prior-year quarter |
|---|---|---|
| Revenue | $2.758 million | $2.515 million |
| Gross profit / margin | $975,178 / 35.4% | $974,117 / 38.7% |
| Operating income (loss) | $1,600 | ($85,882) |
| Net income (loss) | $793 | ($86,110) |
| Cash used in operating activities | $172,636 | Cash provided of $1,347 |
| Cash and cash equivalents at period-end | $900,510 | $849,135 |
- Revenue increased 9.7%, while gross profit was nearly unchanged. Management attributed lower gross margin primarily to cost overruns on an engineering project and a less favorable production-product mix.
- Research and development expense was $151,576, compared with $152,154. Selling, general and administrative expense fell 9.5% to $822,002.
- Cash declined $234,187 during the quarter. Operating cash use included a $210,394 reduction in customer advances and a $103,564 increase in accounts receivable, partly offset by lower inventory.
- At September 30, current assets were $4.736 million and current liabilities were $2.875 million, including $206,665 of customer advances; working capital was approximately $1.861 million. Accounts receivable was $1.585 million and inventory was $2.138 million.
- The company reported an $808,962 unsecured PPP bank note at 1% interest. It is recorded as a current liability; if not forgiven, it converts to a term loan due May 6, 2022. Capital lease obligations totaled $66,629, and acquisition earn-out liability totaled $500,000.
Changes, outlook, and risks
- Engineering design-services revenue rose to $589,232 from $409,728, reflecting projects from two new customers, partly offset by a normal decline from a customer moving through development. Optical-component revenue was $1.476 million; medical-device products and assemblies were $692,584.
- Production revenue increased slightly, with higher sales of an ENT scanning-device product partly offset by lower cardiovascular-product revenue. Management said some customer sales were adversely affected by COVID-19.
- Management expects its engineering pipeline and production projects to have potential to increase revenue and support profitable results, but provided no specific financial guidance. It said break-even or better performance depends on revenue, gross margins, expense control, project mix, and timely collection of receivables.
- COVID-19-related supply disruptions, customer delays, overseas sourcing constraints, collection risks, and operating procedures that may reduce efficiency create uncertainty; management could not predict the impact on upcoming quarters.
- The company has sustained recurring losses, including a $1.426 million net loss and $592,492 of operating cash use in fiscal 2020. The quarter’s $793 net income was close to break-even, while operating cash flow remained negative.
- Management concluded disclosure controls and internal control over financial reporting were not effective at September 30, 2020. Disclosed material weaknesses concern insufficient segregation of accounting duties and inventory valuation controls. Management described remediation steps but did not report that the weaknesses were resolved.
- Management expected the PPP loan to qualify for full forgiveness but stated it could not be assured of forgiveness in whole or in part. Open purchase orders were approximately $656,850; remaining commitments included $74,119 under capital leases and $109,156 under the El Paso facility lease.
- The filing reported no known pending or threatened litigation expected to have a material impact and no material changes to the risk factors from the fiscal 2020 Form 10-K.
Important facts for investors to verify
- Whether PPP loan forgiveness was approved, and the resulting repayment obligation if any amount was not forgiven.
- Subsequent revenue, gross margins, operating cash flow, receivable collections, and customer-advance trends, especially under continuing COVID-19 effects.
- Progress in remediating the segregation-of-duties and inventory-valuation material weaknesses.
- Whether engineering projects move into production as management anticipates, and whether project cost overruns or product mix continue to pressure margins.
- Liquidity relative to recurring operating cash use, contractual purchase commitments, lease payments, and the company’s history of recurring losses.