Precision Optics Corporation, Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited report covers the three and six months ended December 31, 2022, the second quarter and first half of fiscal 2023. Precision Optics develops and manufactures optical components, medical imaging systems and related engineering services, operating through its Precision Optics, Ross Optical and Lighthouse Imaging businesses. The Lighthouse acquisition closed in October 2021. More than 90% of revenue is from U.S. customers. Share and per-share data reflect a one-for-three reverse stock split effective November 1, 2022.
Financial performance and position
| Metric | Three months ended Dec. 31 | Six months ended Dec. 31 |
|---|---|---|
| Revenue, 2022 | $5.887 million | $10.972 million |
| Revenue, 2021 | $3.897 million | $6.233 million |
| Gross profit / margin, 2022 | $2.725 million / 46.3% | $4.450 million / 40.6% |
| Gross profit / margin, 2021 | $1.120 million / 28.7% | $1.759 million / 28.2% |
| Operating income (loss), 2022 | $696,817 | $680,228 |
| Net income (loss), 2022 | $634,420 | $560,909 |
| Net income (loss), 2021 | $(507,013) | $(1.084) million |
| Basic EPS, 2022 | $0.11 | $0.10 |
- Growth and costs: Revenue increased 51.1% for the quarter and 76.0% for the half year. Six-month R&D expense was $454,143 and SG&A was $3.316 million; both were higher year over year. There were no business acquisition expenses in the 2022 half year, versus $172,174 in 2021.
- Cash flow: Operating cash flow was $17,110 for the six months, compared with cash used of $715,163 in 2021. Investing cash use was $37,637 and financing cash use was $203,904. Cash declined $224,431 to $381,318.
- Liquidity: At December 31, current assets were $7.474 million and current liabilities were $5.478 million, including $794,981 in customer advances. Accounts receivable was $4.033 million. The $500,000 revolving credit facility had no borrowings outstanding.
- Debt and leases: Term-loan principal was approximately $2.167 million, bearing interest at 9.00% at period end and maturing October 2028. The loan is secured by company assets and includes a minimum 1.20:1 EBITDA-plus-stock-compensation-to-debt-service covenant starting with fiscal 2023. Financing lease obligations totaled $132,347 net of interest. Acquisition earn-out liabilities were $889,525 current and no amount classified as long term.
Material changes, outlook and risks
- Management attributed quarterly revenue growth primarily to higher optical-component sales to a large defense contractor and a one-time $600,000 technology-rights sale. The half-year increase also reflects Lighthouse being included for the full period, higher component and engineering revenue, and the technology-rights sale.
- Management attributed improved gross profit and margins to Lighthouse, increased engineering, component and production revenue, better production and personnel utilization, and technology-rights revenue with no associated direct incremental costs. Margins may fluctuate with sales mix, facility utilization, project costs, start-up challenges and delays.
- Revenue by category for the six months was $5.233 million from optical components, $3.345 million from engineering design services, $1.795 million from medical device products and assemblies, and $600,000 from technology rights. The two largest customers represented 14.2% and 18.1% of quarterly revenue and 15.3% and 11.8% of half-year revenue.
- Management said it has sustained recurring operating losses in prior years and stressed that maintaining financial condition depends on reaching quarterly break-even or better results and collecting receivables promptly. The reported half-year profit includes the one-time $600,000 technology-rights revenue. No numerical revenue or earnings guidance was provided.
- Risks discussed include pricing pressure, project cost overruns and engineering challenges, dependence on customer order levels and timely collections, supply-chain uncertainty and potential continuing COVID-19 effects. The company had approximately $3.547 million of contractual commitments related to open purchase orders at December 31, 2022, in addition to lease commitments.
- The remaining Lighthouse earn-out depends on meeting a gross-profit target for October 1, 2022–September 30, 2023. Management reported no estimated goodwill or patent impairment and no material change to previously disclosed risk factors. Management stated disclosure controls and internal control over financial reporting were effective at December 31, 2022.
- After quarter end, the company appointed an interim CFO effective January 7, 2023; the prior CFO’s full-time employment ended January 6 and he continued part-time through February 14, 2023.
Important facts for investors to verify
- Whether revenue and gross-margin gains persist after excluding the one-time $600,000 technology-rights sale, and how much growth is attributable to Lighthouse and customer or product concentration.
- Receivables collection and cash conversion: operating cash flow was only $17,110 despite reported half-year net income, while cash fell to $381,318.
- The status and calculation of the $889,525 current earn-out liability, and whether the Lighthouse division will meet the remaining earn-out target.
- Compliance with the term-loan covenant beginning in fiscal 2023, debt service at the stated 9.00% rate, and the company’s liquidity needs relative to purchase-order and lease commitments.
- Whether operating results can reach sustainable break-even without reliance on non-recurring revenue, and any effects from the CFO transition or supply-chain and customer-order risks.