The following discussion and analysis should be read in conjunction with the
Financial Statements and Notes thereto, and other financial information included
elsewhere in this Annual Report on Form 10-K. This Management's Discussion and
Analysis of Financial Condition and Results of Operations contains descriptions
of our expectations regarding future trends affecting our business. The
following discussion sets forth certain factors we believe could cause actual
results to differ materially from those contemplated by the forward-looking
statements.
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.
14
Approximately 60% of our business during the fiscal year ended June 30, 2021 was
from the design and manufacture of high-quality medical devices. Approximately
7% of our revenue during the same period was from the design, manufacture and
resale of optical products for military and defense, and 33% was 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 websites are
www.poci.com and www.rossoptical.com. Information contained on our websites does
not constitute part of this report.
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 achieved extensive experience collaborating
with other optical specialists worldwide.
We believe that competition for sales of our medical products and services,
which have been principally sold to original equipment manufacturers, or OEM,
customers, is based on our ability to design and produce technical features,
performance, engineering service and production scheduling, on-time delivery,
quality control and product reliability, and competitive pricing.
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 and future
products fully or partially enabled by our technologies and capabilities.
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, and 3D endoscopes.
The Ross Optical division sales are primarily optical components and assemblies
for industrial applications in addition to medical and military uses. By
combining the unique capabilities of our Company with the Ross Optical division
we believe there are opportunities for expanded sales of each division's
products and services throughout the combined customer base. For example, we
believe that our extensive engineering and design services may benefit Ross'
customer base and that Ross' expanded worldwide vendor relationships may benefit
our traditional efforts to source materials at competitive prices for our
development projects and manufacturing activities.
During the fiscal year ended June 30, 2021, we sold products and services to 326
different customers and no single customer represented 10% or more of
consolidated sales. Except for effect of potentially receiving future
significant production orders, we expect this trend to continue since
consolidated sales now include those of the Ross Optical division.
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. We believe there are opportunities to
expand the reach of sales activities of our business and that of our new
division, Ross Optical, through the gradual integration of some of the sales and
marketing resources of the two operations.
Critical Accounting Policies and Estimates
Our critical accounting policies are included in the Notes to our Financial
Statements contained in this Annual Report on Form 10-K.
15
Results of Operations for the Fiscal Year Ended June 30, 2021 as Compared to the
Fiscal Year Ended June 30, 2020
Total revenues for the fiscal year ended June 30, 2021 were $10,674,907, an
increase of $751,552, or 7.6%, from revenues for fiscal year 2020 of $9,923,355.
Engineering services increased approximately $1,380,000 in fiscal year 2021
compared to fiscal year 2020, while product and assembly production revenues
decreased approximately $607,000, and optical component revenues were virtually
unchanged during the same period.
The $1,380,000 increase in engineering service revenues in fiscal year 2021
compared to fiscal year 2020 was the result of personnel additions in the
engineering group thereby raising revenue earning capacity, and the addition of
two significant engineering projects during fiscal year 2021. One engineering
project relates to optical spectroscopic measurements and the other relates to a
single-use ophthalmic endoscope. We believe increased engineering service
capacity and the continued addition of quality engineering projects generates
opportunities for production purchase orders from these customers as the
products advance to clinical evaluation and commercialization.
The $607,000 decrease in product and assembly production revenues in fiscal year
2021 compared to fiscal year 2020 resulted primarily from reductions of sales to
various production category customers which we believe are the result of the
COVID-19 pandemic described below as well as cyclical and product life sales
patterns periodically experienced with certain traditional product customers.
Two products with reduced sales revenue in fiscal year 2021 considered temporary
and the result of the market impact of the COVID-19 pandemic are flexible
endoscope for a cardiovascular surgical procedure and a Microprecision™ CMOS
scanning device for a diagnostic ENT procedure. The third product with notably
reduced sales revenue in fiscal year 2021 relates to a reusable visualization
instrument used in spine surgery which experiences fluctuations in periodic
revenues caused by product demand for new surgical sites and replacements for
existing sites.
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 the Company's sources of supply, current and future orders from our
customers, collection of amounts owed to the Company from its customers, our
internal operating procedures, and the Company's 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 its up-coming quarterly fiscal operating results.
We generated revenues from 326 unique customers during fiscal year 2021, and no
single customer accounted for 10% or more of our revenue for the fiscal years
ended June 30, 2021, or 2020.
Gross profit for fiscal year ended June 30, 2021 of $3,433,585, reflected an
increase of $71,009, or 2.1%, as compared to gross profit for fiscal year 2020
of $3,362,576. Gross profit, as a percentage of revenues for fiscal year 2021,
was 32.2% as compared to gross profit, as a percentage of revenues for fiscal
year 2020, of 33.9%. Gross profit and gross profit percentage for any given
fiscal period depend on a number of factors, including overall sales volume,
facility utilization, product sales mix, the nature and costs of engineering
services, design challenges and changes, production start-up costs,
customer-imposed project changes or delays, and 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 decrease in gross margin from 33.9% to 32.2% during the fiscal year ended
June 30, 2021 compared to 2020 was primarily the result of a gross margin
decrease in one engineering project due to cost over-runs, a decrease in higher
margin production revenues with customers due to COVID-19 factors, and a lower
realized margin on a large volume recurring component product produced for a
catalogue reselling customer. 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 $624,253 for fiscal year 2021 as compared
to $886,129 for fiscal year 2020. The decrease of $261,876, or 29.6%, in fiscal
year 2021 compared to fiscal year 2020 was due primarily to an increased amount
of internal engineering related development projects in fiscal year 2020 that we
believe will enhance our technology platform of capabilities and our overall
competitiveness in providing unique optical and illumination solutions for
medical device endoscopes, offset by a lesser amount of increased stock based
compensation expense recognized in fiscal year 2021.
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Selling, general and administrative expenses decreased by $184,515, or 4.7%, to
$3,714,915 for fiscal year 2021 as compared to $3,899,430 for fiscal year 2020.
The decrease in SG&A expenses in fiscal year 2021 is primarily driven by
decreases in travel and trade shows due to the pandemic, sales salaries, and
lower investor relations costs, all of which were offset by a lesser amount by
increases in stock based compensation and general insurance expense.
The income tax provisions in fiscal years 2021 and 2020 represent the minimum
statutory state income tax liability.
Liquidity and Capital Resources
We have sustained recurring net losses for several years. During the years ended
June 30, 2021 and 2020 we incurred operating losses of $905,583 and $1,422,983,
respectively. At June 30, 2021, our cash and cash equivalents were $861,650,
accounts receivable were $1,878,755, and current liabilities were $2,511,110,
including $450,084 of advances paid against open purchase orders by our
customers.
Although our sales revenue has increased and 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 is recorded as other income in the
accompanying Consolidated Statements of Operations for the three and nine month
periods ended March 31, 2021.
Capital equipment expenditures during fiscal year 2021 and fiscal year 2020 were
$237,901 and $232,363, respectively, $161,977 and $113,213 of which in fiscal
years 2021 and 2020, respectively, were funded by leasing agreements with
monthly payment obligations. Patent application expenditures during fiscal year
2021 and fiscal year 2020 were $46,473 and $41,142, respectively. 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 years subsequent to June 30, 2021,
are summarized as follows:
Fiscal 2022 Thereafter Total
Capital lease for equipment, including
interest $ 48,619 $ 169,140 $ 217,759
Minimum operating lease payments - Ross
Optical division $ 62,822 $ 0 $ 62,822
We have contractual cash commitments related to open purchase orders as of June
30, 2021 of approximately $660,380.
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Material Trends and Uncertainties
We currently have no material trends or uncertainties 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.
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. 