Precision Optics Corporation, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2020 (the third quarter of fiscal 2020). This differs from the request metadata label “2019 Q3.” Figures below are in U.S. dollars.
Business context
Precision Optics designs and manufactures optical instruments, medical devices, and optical components. Results include Ross Optical, acquired effective June 1, 2019; Ross sells sourced optical components and assemblies for industrial, medical, and military applications.
Financial performance and liquidity
| Metric | Three months ended March 31, 2020 | Year-over-year | Nine months ended March 31, 2020 | Year-over-year |
|---|---|---|---|---|
| Revenue | $2.375 million | Up 71.3% | $7.686 million | Up 73.8% |
| Gross profit / margin | $817,019 / 34.4% | 32.9% margin in 2019 | $2.709 million / 35.2% | 28.8% margin in 2019 |
| Operating loss | $465,447 | Loss of $80,179 in 2019 | $1.103 million | Loss of $504,566 in 2019 |
| Net loss | $466,130; $0.04 per share | Loss of $80,483; $0.01 per share | $1.103 million; $0.09 per share | Loss of $505,716; $0.04 per share |
- Revenue growth was primarily attributable to Ross Optical: $1.213 million in the quarter and $3.454 million in the nine-month period. Non-Ross revenue declined year over year by $224,675 in the quarter and $191,926 over nine months.
- Ross Optical’s gross margin was approximately 48–50%, compared with 24.0% for non-Ross revenue over nine months. A non-Ross engineering project’s cost overruns and delayed milestones reduced quarterly consolidated gross margin by 3.3 percentage points, according to management.
- Operating expenses increased: quarterly R&D was $319,875 and SG&A was $962,591; nine-month R&D was $700,605 and SG&A was $3.111 million. Management attributed increases to Ross expenses, staffing and other costs, and greater internal R&D activity.
- Cash and cash equivalents were $632,131 at March 31, 2020, down from $2.288 million at June 30, 2019. Current assets were $4.410 million and current liabilities $2.454 million. Accounts receivable was $1.479 million; inventory was $2.168 million.
- Operating cash use was $84,421 for the nine months, versus $954,132 in the prior-year period. Investing cash use was $1.586 million, including $1.443 million paid for the Ross acquisition. Financing provided $14,300; ending cash was $632,131.
- Reported obligations included $108,437 of capital lease liabilities, $131,? of operating lease liabilities ($56,196 current and $75,804 long-term), and a $500,000 acquisition earn-out liability. The filing also disclosed approximately $830,402 of open purchase-order commitments and $139,791 of remaining facility lease payments. The filing reports no other off-balance-sheet arrangements.
Changes, outlook, and risks
- Revenue and gross profit rose substantially year over year, substantially reflecting the Ross acquisition. Despite better gross margins, losses widened as operating expenses increased and COVID-19 disruptions affected non-Ross sales and operations.
- Management provided no quantified company-wide earnings or revenue guidance. It said profitability depends on achieving sufficient revenue and gross margins while controlling expenses, and noted uncertainty about COVID-19’s effects on suppliers, customer orders, collections, and operating efficiency.
- One major endoscope customer reduced deliveries from 75 to 20 units per month from May 1, 2020 through February 28, 2021. The company estimated a revenue impact of approximately $190,000 per quarter and anticipated deliveries returning to 75 monthly units in fiscal Q3 2021; the purchase-order unit total was unchanged.
- After quarter-end, the company raised $250,000 gross through a private placement of 200,000 shares at $1.25 per share. The agreement includes additional-share protection if a lower-priced offering closes before April 14, 2021.
- On May 6, 2020, the company received an $808,962 PPP loan at 1% interest, due May 6, 2022. Forgiveness is conditional on eligible use and payroll requirements; the company said it could not assure full or any forgiveness.
- Management reported disclosure controls and internal control over financial reporting were not effective as of March 31, 2020. It identified material weaknesses involving segregation of accounting duties and inventory valuation controls; remediation efforts were ongoing.
- The company reported recurring losses and dependence on revenue growth, gross margins, timely collections, customer advances, and external financing. It also cited competition, engineering-project cost overruns, overseas supply exposure, and COVID-19-related disruptions. Management reported no pending or threatened litigation expected to have a material impact.
Important facts for investors to verify
- Whether COVID-19-related supply interruptions, customer delays, and the reduced endoscope delivery schedule persist, and how they affect revenue, cash collections, and margins.
- Whether the business can reach break-even while operating expenses remain elevated and non-Ross project costs fluctuate.
- Cash runway and working-capital needs, including open purchase orders, lease commitments, and the acquisition earn-out.
- Use of PPP proceeds and the amount, if any, ultimately eligible for forgiveness; also review the private placement’s potential dilution provisions.
- Progress in remediating the disclosed material weaknesses in financial reporting controls.