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 March 31, 2021 and with our
audited consolidated financial statements for the year ended June 30, 2020
included in our Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on September 24, 2020.
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, 2020 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.
Approximately 60% of our business during the nine months ended March 31, 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 32% 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 nine months ended March 31, 2021 accounted for
11.3% of our revenue and represented engineering, design and assembly revenues
for a medical diagnostic system. During the nine months ended March 31, 2021 we
had revenue from another two hundred seventy-nine 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, 2020 filed with the Securities
and Exchange Commission on September 24, 2020.
Results of Operations
Our total revenues for the quarter ended March 31, 2021, were $2,458,290, as
compared to $2,374,584 for the same period in the prior year, an increase of
$83,706, or 3.5%. Engineering revenue during the quarter ended March 31, 2021
increased approximately $340,000 compared to the same fiscal quarter of the
prior year due primarily to the addition of projects with two new customers.
Production revenue had a decrease in quarter-over-quarter revenue of
approximately $232,756 due primarily to COVID-19 related slow-downs instituted
by our existing customers. Other revenue changes between the quarter ended March
31, 2021 and the same period of the prior year were considered customary
fluctuations with existing customers and project progressions.
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Our total revenues for the nine months ended March 31, 2021 were $8,001,641, as
compared to $7,686,330 for the same period in the prior year, an increase of
$315,311, or 4.1%. Similar to the quarter ended March 31, 2021, revenues
increased during the nine months ended March 31, 2021 compared to the same
period of the prior year due to a $889,000 increase in engineering revenue
caused by the addition of two new projects, offset by a smaller amount from
decreases in production revenue from various customers experiencing slow-downs
due to the effects of COVID-19.
Gross profit for the quarter ended March 31, 2021 was $818,024, compared to
$817,019 for the same period in the prior year, reflecting an increase of
$1,005. Gross profit for the quarter ended March 31, 2021 as a percentage of our
revenues was 33.3%, a decrease from the gross profit percentage of 34.4% for the
same period in the prior year. Gross profit for the nine months ended March 31,
2021 was $2,647,642, as compared to $2,709,075 for the same period in the prior
year, which reflects a decrease of $61,433 or 2.3%. Gross profit for the nine
months ended March 31, 2021 as a percentage of our revenues was 33.1%, a
decrease from the gross profit percentage of 35.2% 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 34.4% to 33.3%
during the fiscal quarter ended March 31, 2021 compared to 2020 and from 35.2%
to 33.1% during the nine months ended March 31, 2021 and 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 $146,063 for the quarter ended March 31,
2021, compared to $319,875 for the same period in the prior year, a decrease of
$173,812, or 54.3%. Research and development expenses were $443,609 for the nine
months ended March 31, 2021, compared to $700,605 for the same period in the
prior year, a decrease of $256,996, or 36.7%. 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 and nine months ended December 31, 2019 and March 31, 2020 we
had a greater amount of our engineering personnel time consumed in internal
research and development activities causing increased research and development
expense compared to the quarter and nine months ended March 31, 2021.
Selling, general and administrative expenses were $2,671,176 for the nine months
ended March 31, 2021, compared to $3,111,397 for the same period in the prior
year, a decrease of $440,221, or 14.1%. The decrease in the nine months ended
March 31, 2021, compared to the same period of the prior fiscal year was due to
decreased recruiting, shareholder relations, stock compensation and
administrative travel costs offset by increases in consulting, professional
accounting and insurance expenses.
Selling, general and administrative expenses were $927,979 for the quarter ended
March 31, 2021, compared to $962,591 for the same period in the prior year, a
decrease of $34,612, or 3.6%. The decrease in the quarter ended March 31, 2021,
compared to the same quarter of the prior fiscal year was due to decreased
shareholder relations, stock compensation and administrative travel costs offset
by increases in consulting, professional accounting and insurance expenses.
Liquidity and Capital Resources
We have sustained recurring net losses from operations for several years. During
the year ended June 30, 2020, we incurred a net loss of 1,426,150 and used cash
in operating activities of $592,492. During the nine months ended March 31, 2021
we had a net loss from operations of $467,143 and used cash in operating
activities of $75,420. At March 31, 2021, cash was $781,845, accounts
receivables were $1,533,781 and current liabilities were $2,107,535, including
$232,884 of customer advances received for future order deliveries.
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Although our sales levels have increased, our financial performance has shown
signs of periodic improvement during certain recent fiscal quarters, and our
operating expenses have decreased, however, we continue to experience pricing
pressure from our customers and challenges in engineering projects and
production orders that result in cost over-runs and lower gross margins, and
decreased orders from customers experiencing COVID-19 related slowdowns.
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, and by customer advances paid against
purchase orders and recorded in the current liabilities section of the
accompanying financial statements. Our management believes that the
opportunities represented by our current production projects and engineering
pipeline of Microprecision™ optical projects have the potential to generate
increasing revenues and profitable financial 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 and additional patent costs during the nine
months ended March 31, 2021 were $89,467. Future capital equipment expenditures
will be dependent upon the type and amount of future sales revenue and the needs
of on-going research and development efforts.
We have contractual cash commitments related to open purchase orders as of March
31, 2021 of approximately $440,000, plus a $229,914 commitment remaining under
three capital lease obligations for the acquisition of equipment and $78,266
commitment remaining under a three-year facility lease relating the Ross Optical
division in El Paso, Texas (see Note 3. Lease Obligations). We have no other
contractual cash commitments since other leased facilities are currently on a
month-to-month basis.
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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