The following discussion of our financial condition and results of operations
should be read in conjunction with the unaudited condensed consolidated
financial statements and notes to those statements included elsewhere in this
Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 and with
our audited consolidated financial statements for the year ended June 30, 2021
included in our Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on September 28, 2021.
This Quarterly Report on Form 10-Q contains forward-looking statements. When
used in this report, the words "anticipate," "suggest," "estimate," "plan,"
"project," "continue," "ongoing," "potential," "expect," "predict," "believe,"
"intend," "may," "will," "should," "could," "would" and similar expressions are
intended to identify forward-looking statements. You should not place undue
reliance on these forward-looking statements. Our actual results could differ
materially from those anticipated in the forward-looking statements for many
reasons, including the risks described in this report, the risks described in
our Annual Report on Form 10-K for the year ended June 30, 2021 and other
reports we file with the Securities and Exchange Commission. Although we believe
the expectations reflected in the forward-looking statements are reasonable,
they relate only to events as of the date on which the statements are made. We
do not intend to update any of the forward-looking statements after the date of
this report to conform these statements to actual results or to changes in our
expectations, except as required by law.
Overview
We have been a developer and manufacturer of advanced optical instruments since
1982. Our medical instrumentation line includes traditional endoscopes and
endocouplers as well as other custom imaging and illumination products for use
in minimally invasive surgical procedures. Much of our recent development
efforts have been targeted at the development of next generation endoscopes. We
selectively execute internal research and development programs to develop next
generation capabilities for designing and manufacturing 3D endoscopes and very
small Microprecision™ lenses, anticipating future requirements as the surgical
community continues to demand smaller and more enhanced imaging systems for
minimally invasive surgery.
As Ross Optical Industries of El Paso, Texas we also operate as a supplier of
custom optical components and assemblies for military and defense, medical and
various other industrial applications. All products sold by us under the Ross
Optical name include a custom or catalog optic, which is sourced through our
extensive domestic and worldwide network of optical fabrication companies. Most
systems make use of optical lenses, prisms, mirrors and windows and range from
individual optical components to complex mechano-optical assemblies. Products
often include thin film optical coatings that are applied using our in-house
coating department.
As Lighthouse Imaging of Windham, Maine we also operate as a manufacturer of
advanced optical imaging systems and accessories. We have a strong expertise in
electrical engineering and development of end to end medical visualization
devices. Product development competencies at Lighthouse Imaging include Systems,
Optical, Mechanical, Electrical and Process Development Engineering. Our product
development team has extensive experience developing visualization systems that
are used in a variety of clinical applications. Lighthouse Imaging is an
industry leader in chip on tip visualization systems.
Approximately 87% of our business during the three months ended September 30,
2021 is from the design and manufacture of high-quality medical devices.
Approximately 8% of our revenue during the same period is from the design,
manufacture and resale of optical products for military and defense, and 5% is
from other industrial, non-medical products. Our proprietary medical
instrumentation line and unique custom design and manufacturing capabilities
include traditional endoscopes and endocouplers as well as other custom imaging
and illumination products for use in minimally invasive surgical procedures. We
design and manufacture 3D endoscopes and very small Microprecision™ lenses,
assemblies and complete medical devices to meet the surgical community's
continuing demand for smaller, disposable, and more enhanced imaging systems for
minimally invasive surgery.
We are registered to the ISO 9001:2015 and ISO 13485:2016 Quality Standards and
comply with the FDA Good Manufacturing Practices and the European Union Medical
Device Directive for CE marking of our medical products.
Our internet websites are www.poci.com and www.rossoptical.com. Information on
our websites is not intended to be integrated into this report. Investors and
others should note that we announce material financial information using our
company websites (www.poci.com; www.rossoptical.com), our investor relations
website, SEC filings, press releases, public conference calls and webcasts.
Information about Precision Optics, our business, and our results of operations
may also be announced by social media posts on our Ross Optical LinkedIn page
(www.linkedin.com/company/ross-optical-industries/) and Twitter feed
(http://twitter.com/rossoptical).
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The information that we post on these social media channels could be deemed to
be material information. Therefore, we encourage investors, the media, and
others interested in Precision Optics to review the information that we post on
these social media channels. These social media channels may be updated from
time to time on Precision Optics' investor relations website. The information
on, or accessible through, our websites and social media channels is not
incorporated by reference in this Quarterly Report on Form 10-Q.
The markets in which we do business are highly competitive and include both
foreign and domestic competitors. Many of our competitors are larger and have
substantially greater resources than we do. Furthermore, other domestic or
foreign companies, some with greater financial resources than we have, may seek
to produce products or services that compete with ours. We routinely outsource
specialized production efforts as required to obtain the most cost-effective
production. Over the years we have developed extensive experience collaborating
with other optical specialists worldwide.
We believe that our future success depends to a large degree on our ability to
develop new optical products and services to enhance the performance
characteristics and methods of manufacture of existing products. Accordingly, we
expect to continue to seek and obtain product-related design and development
contracts with customers and to selectively invest our own funds on research and
development, particularly in the areas of Microprecision™ optics, micro medical
cameras, illumination, single-use endoscopes and 3D endoscopes.
Our largest customer during the three months ended September 30, 2021 accounted
for 9.7% of our revenue and represented assembly revenues for a medical
diagnostic system. During the three months ended September 30, 2021 we had
revenue from another one hundred sixty-five customers, and none of those
customers accounted for more than 10% of our total revenue.
Current sales and marketing activities are intended to broaden awareness of the
benefits of our new technology platforms and our successful application of these
new technologies to medical device projects requiring surgery-grade
visualization from sub-millimeter sized devices and 3D endoscopy, including
single-use products and assemblies. We market directly to established medical
device companies primarily in the United States that we believe could benefit
from our advanced endoscopy visualization systems. Through this direct
marketing, referrals, attendance at trade shows and a presence in online
professional association websites, we have expanded our on-going pipeline of
projects to significant medical device companies as well as well-funded emerging
technology companies. We expect our customer pipeline to continue to expand as
development projects transition to production orders and new customer projects
enter the development phase. Our Ross Optical division markets through existing
customers and trade shows, in addition to proactive online marketing strategies
executed primarily through its website.
General
This management's discussion and analysis of financial condition and results of
operations is based upon our unaudited consolidated financial statements, which
have been prepared without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The preparation of these consolidated
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates.
There have been no significant changes in our critical accounting policies as
disclosed in the Notes to our Financial Statements contained in our Annual
Report on Form 10-K for the year ended June 30, 2021 filed with the Securities
and Exchange Commission on September 28, 2021.
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Results of Operations
Our total revenues for the quarter ended September 30, 2021, were $2,336,344, as
compared to $2,757,901 for the same period in the prior year, a decrease of
$421,557, or 15.3%. Engineering revenue during the quarter ended September 30,
2021 decreased approximately $216,000 compared to the same fiscal quarter of the
prior year due primarily to the change in mix of engineering projects.
Production revenue had a decrease year-over-year of approximately $268,000 due
primarily to COVID-19 related slow-downs instituted by our existing customers.
Other revenue changes between the quarter ended September 30, 2021 and the same
period of the prior year were considered customary fluctuations with existing
customers and project progressions.
We generated revenues from 166 unique customers during the quarter ended
September 30, 2021, and no single customer accounted for 10% or more of our
revenue for the quarter ended September 30, 2021 or the fiscal years ended June
30, 2021, or 2020.
The COVID-19 world-wide pandemic that began during the quarter ended March 31,
2020 and the domestic and international impact of policy decisions being made in
major countries around the world has had, and could continue to have, an adverse
impact on our sources of supply, current and future orders from our customers,
collection of amounts owed to us from our customers, our internal operating
procedures, and our overall financial condition. Given the uncertainty
surrounding the continuation of economic impacts both domestically and abroad,
we cannot predict with certainty at this time what the future impact of COVID-19
and resulting business and economic policies in the US and abroad will be on our
up-coming quarterly fiscal operating results.
Gross profit for the quarter ended September 30, 2021 was $639,032, compared to
$975,178 for the same period in the prior year, reflecting a decrease of
$336,146. Gross profit for the quarter ended September 30, 2021 as a percentage
of our revenues was 27.4%, a decrease from the gross profit percentage of 35.4%
for the same period in the prior year. Quarterly gross profit and gross profit
percentage depend on a number of factors, including overall sales volume,
facility utilization, product sales mix, the costs of engineering services, and
production start-up costs and challenges in connection with new products, the
effects of COVID-19 pandemic policy decisions on various economies and our
suppliers and customers, as well as the effects on production efficiencies due
to the augmented policies we have incorporated into our operations as a result
of the COVID-19 pandemic.
Our gross margin on individual engineering projects is dependent on a number of
factors and is expected to fluctuate from quarter to quarter based on the nature
and status of engineering projects, unanticipated cost over-runs, design
challenges and changes, start-up production activities or other customer-imposed
project changes or delays. Our decrease in gross margin from 35.4% to 27.4%
during the fiscal quarter ended September 30, 2021 compared to 2020 was
primarily the result of a gross margin decrease in one engineering project due
to cost over-runs, plus a decrease in higher margin production revenues with
customers due to COVID-19 factors. The remainder of our production, engineering
and component revenues resulted in margins within our targeted range with
reasonably expected fluctuations.
Research and development expenses were $105,186 for the quarter ended September
30, 2021, compared to $151,576 for the same period in the prior year, a decrease
of $46,390, or 30.6%. In-house research and development and certain internal
functions not directly related to customer engagements are classified as
research and development expenses with the majority of our engineering, research
and development activities being consumed in revenue generating engagements with
our customers for the development of their products. During the quarter
September 30, 2021 we had a greater amount of our engineering personnel time
consumed in customer focused activities causing decreased research and
development expense compared to the quarter ended September 30, 2020.
Selling, general and administrative expenses were $933,624 for the quarter ended
September 30, 2021, compared to $822,002 for the same period in the prior year,
an increase of $111,622, or 13.6%. The increase in the three months ended
September 30, 2021, compared to the same period of the prior fiscal year was due
to increased stock compensation and marketing related expense. We also incurred
$172,174 of business acquisition expenses related to the Lighthouse Imaging
transaction during the quarter ended September 30, 2021.
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Liquidity and Capital Resources
We have sustained recurring net losses from operations for several years. During
the year ended June 30, 2021, we incurred an operating loss of $905,583 and
generated cash from operating activities of $46,550. During the three months
ended September 30, 2021 we had a net loss of $576,801 and used cash in
operating activities of $182,340. At September 30, 2021, cash was $1,669,569,
accounts receivables were $1,711,192 and current liabilities were $2,758,416,
including $336,572 of customer advances received for future order deliveries. We
also raised $1,030,000 during the quarter ended September 30, 2021 in
conjunction with the Lighthouse Imaging transaction. This amount was part of the
full raise which was completed on October 4, 2021. For the full raise, we issued
937,500 shares of common stock at a purchase price of $1.60 per share to
accredited investors in a private placement totaling $1,500,000.
Although we have experienced improved financial performance in certain recent
fiscal quarters, our operating expenses have also increased and we continue to
experience pricing pressure from our customers and challenges in engineering
projects and production orders that result in cost over-runs and depressed gross
margins. We also experience added uncertainty related to our vendors ability to
supply materials and our customers future order levels as a result of the
economic impact the COVID-19 world-wide pandemic and related jurisdictional
policies and regulations. Consequently, critical to our ability to maintain our
financial condition is achieving and maintaining a level of quarterly revenues
that generate break even or better financial performance as well as timely
collection of accounts receivable from our customers. We believe profitable
operating results can be achieved through a combination of revenue levels,
realized gross margins and controlling operating expense increases, all of which
are subject to periodic fluctuations resulting from sales mix and the stage of
completion of varying engineering service projects as they progress towards and
into production level revenues
We have traditionally funded working capital needs through product sales,
management of working capital components of our business, cash received from
public and private offerings of our common stock, warrants to purchase shares of
our common stock or convertible notes, manufacturing equipment leases, and by
customer advances paid against purchase orders by our customers and recorded in
the current liabilities section of the accompanying financial statements. We
have incurred year to year and quarter to quarter operating losses during our
efforts to develop current products including Microprecision™ optical elements,
micro medical camera assemblies and 3D endoscopes. Our management believes that
the opportunities represented by these technical capabilities and related
products have the potential to generate sales increases to achieve breakeven and
profitable results.
On May 6, 2020, we received loan proceeds in the amount of $808,962 under the
Paycheck Protection Program, or PPP, from Bank of America. The PPP, established
as part of the Coronavirus Aid, Relief and Economic Security Act, or CARES Act,
provides for loans to qualifying businesses that are forgivable provided the
loan proceeds are used for eligible purposes, including payroll, benefits, rent
and utilities. The unsecured loan dated May 6, 2020 was forgiven on March 30,
2021 by the Small Business Administration pursuant to the CARES Act. The
forgiveness of the Promissory Note was recorded as other income in the
Consolidated Statements of Operations for the quarter ended March 31, 2021.
In October 2021 we acquired the assets of Lighthouse Imaging, LLC as described
in note 8. Subsequent Event-Business Acquisition to the accompanying financial
statements in this Form 10-Q. To finance that acquisition we entered into a
$2,600,000 bank term loan, sold shares of our common stock for gross proceeds of
$1,500,000, and secured a $250,000 bank line of credit.
Capital equipment expenditures and additional patent costs during the three
months ended September 30, 2021 were $30,366. Future capital equipment and
patent expenditures will be dependent upon future sales and success of on-going
research and development efforts.
Contractual cash commitments for the fiscal periods subsequent to September 30,
2021, are summarized as follows:
Fiscal 2022 Thereafter Total
Capital lease for equipment, including
interest $ 36,464 $ 169,161 $ 205,625
Minimum operating lease payments - Ross
Optical division $ 47,116 $ 0 $ 47,116We have contractual cash commitments related to open purchase orders as of
September 30, 2021 of approximately $500,922.
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Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future material effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
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PRECISION OPTICS CORPORATION, INC. 
