Precision Optics (POCI) - 2023 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION This section covers the company's financial statements, management's discussion, market risk, and internal controls Financial Statements The company's financial statements for the period ended December 31, 2022, show significant revenue growth, a shift to net income, and an increase in total assets Consolidated Balance Sheets The consolidated balance sheets show an increase in total assets and stockholders' equity, while total liabilities slightly decreased Consolidated Balance Sheet Highlights (Unaudited) | Account | Dec 31, 2022 | June 30, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $17,469,241 | $16,704,020 | +4.6% | | Total Current Assets | $7,473,992 | $6,563,007 | +13.9% | | Goodwill | $8,824,210 | $8,824,210 | 0.0% | | Total Liabilities | $7,617,061 | $7,732,525 | -1.5% | | Total Current Liabilities | $5,477,991 | $4,586,641 | +19.4% | | Total Stockholders' Equity | $9,852,180 | $8,971,495 | +9.8% | - The increase in total assets was primarily driven by a significant rise in accounts receivable, which grew from $2,660,000 to $4,030,000[12] - The increase in current liabilities is mainly due to a rise in the current portion of acquisition earn out liabilities, from $166,667 to $889,525[12] Consolidated Statements of Operations The consolidated statements of operations reflect substantial revenue growth and a transition from net loss to net income for both the three and six-month periods Statement of Operations Summary (Unaudited) | Metric | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Revenues | $5,886,961 | $3,897,041 | +51.1% | | Gross Profit | $2,725,224 | $1,119,582 | +143.4% | | Operating Income (Loss) | $696,817 | $(460,350) | N/A | | Net Income (Loss) | $634,420 | $(507,013) | N/A | | Diluted EPS | $0.11 | $(0.09) | N/A | | Metric | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | YoY Change | | Revenues | $10,972,262 | $6,233,385 | +76.0% | | Gross Profit | $4,449,878 | $1,758,614 | +153.0% | | Operating Income (Loss) | $680,228 | $(1,032,302) | N/A | | Net Income (Loss) | $560,909 | $(1,083,814) | N/A | | Diluted EPS | $0.09 | $(0.22) | N/A | Consolidated Statements of Stockholders' Equity The consolidated statements of stockholders' equity show an increase primarily driven by net income and stock-based compensation - For the six months ended December 31, 2022, total stockholders' equity increased from $8,971,495 to $9,852,180[18] - The increase in stockholders' equity was primarily driven by a net income of $634,420 in the second quarter and stock-based compensation of $319,776 for the six-month period[18][20] Consolidated Statements of Cash Flows The consolidated statements of cash flows indicate a net decrease in cash, primarily due to reduced financing activities compared to the prior year Cash Flow Summary for the Six Months Ended December 31 (Unaudited) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash Provided By (Used In) Operating Activities | $17,110 | $(715,163) | | Net Cash Used In Investing Activities | $(37,637) | $(293,155) | | Net Cash (Used In) Provided By Financing Activities | $(203,904) | $1,409,866 | | Net (Decrease) Increase in Cash | $(224,431) | $401,548 | | Cash and Cash Equivalents, End of Period | $381,318 | $1,263,198 | - The significant decrease in cash from financing activities in 2022 was due to the absence of proceeds from private placements, which amounted to $1.5 million in the prior year period[20] Notes to Consolidated Financial Statements The notes provide crucial context on the company's accounting policies, significant transactions like the reverse stock split, and the impact of the Lighthouse Imaging acquisition on financial comparisons - The company effected a 1-for-3 reverse stock split on November 1, 2022, with all prior year share and per-share amounts restated to reflect this split[24][25][26] - The acquisition of Lighthouse Imaging, LLC on October 4, 2021, significantly impacts year-over-year financial comparisons, with pro forma revenue for the six months ended Dec 31, 2021, estimated at $7,677,722 if the acquisition occurred on July 1, 2021[33][36] Revenue by Type (Six Months Ended Dec 31) | Revenue Type | 2022 | 2021 | | :--- | :--- | :--- | | Engineering Design Services | $3,344,578 | $2,127,253 | | Optical Components | $5,232,821 | $2,945,332 | | Medical Device Products and Assemblies | $1,794,863 | $1,160,800 | | Technology Rights | $600,000 | $0 | | Total Revenues | $10,972,262 | $6,233,385 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights significant revenue growth driven by the Lighthouse acquisition and a one-time technology rights sale, alongside improved gross margins and increased operating expenses Overview The overview describes the company's core business in advanced optical instruments and its diversified operations through its Ross Optical and Lighthouse Imaging divisions - The company develops and manufactures advanced optical instruments, including endoscopes and custom imaging products for minimally invasive surgery[54] - Business operations are diversified through its divisions: Ross Optical Industries (custom optical components for defense and medical) and Lighthouse Imaging (advanced optical imaging systems with expertise in 'chip on tip' visualization)[55][56] - For the six months ended Dec 31, 2022, revenue was generated from engineering services (31%), optical components (48%), and optical assemblies (16%)[57] Results of Operations Results of operations detail the drivers behind the substantial revenue and gross profit increases, alongside the rise in selling, general, and administrative expenses Revenue and Gross Profit Analysis | Period | Revenue | YoY Revenue Growth | Gross Profit | YoY Gross Profit Growth | Gross Margin | | :--- | :--- | :--- | :--- | :--- | :--- | | Q2 FY23 | $5,886,961 | 51.1% | $2,725,224 | 143% | 46.3% | | H1 FY23 | $10,972,262 | 76.0% | $4,449,878 | 153% | 40.6% | - The 51.1% revenue increase in Q2 FY23 was driven by higher component sales to a large defense contractor and a $600,000 one-time sale of technology rights[66] - The increase in gross profit and margin was due to the inclusion of the Lighthouse division, higher revenues, greater production utilization, and the recognition of high-margin technology rights revenue[71] - Selling, general and administrative (SG&A) expenses increased by 38.1% for the six-month period, primarily due to the Lighthouse acquisition, increased headcount, incentive bonuses, and sales commissions[73] Liquidity and Capital Resources The company's liquidity position is characterized by limited cash and significant current liabilities, with management focused on achieving profitability through revenue growth and expense control - As of December 31, 2022, the company had cash of $381,318 and current liabilities of $5,477,991, despite achieving net income in the current period, it has a history of recurring net losses[74] - The company funds its working capital through product sales, stock offerings, debt, and customer advances, having secured a $2.6 million term loan and a $500,000 line of credit for the Lighthouse acquisition[76][77] - Management believes profitable results can be achieved through a combination of higher revenue, realized gross profits, and controlled operating expenses[75] - As of December 31, 2022, the company has contractual cash commitments of approximately $3.55 million related to open purchase orders[79] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Precision Optics Corporation is not required to provide the information requested by this item - The company has elected scaled disclosure reporting obligations available to smaller reporting companies and is therefore not required to provide quantitative and qualitative disclosures about market risk[81] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2022, with no material changes to internal controls, alongside a CFO transition in January 2023 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[82] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[83] - The company hired E. Kevin Dahill as its Interim Chief Financial Officer, beginning January 7, 2023, replacing Daniel Habhegger[84] PART II OTHER INFORMATION This section addresses legal proceedings, risk factors, equity sales, and other miscellaneous disclosures and exhibits Legal Proceedings The company is not aware of any pending or threatened litigation that could have a material impact on its operations or finances - The company may occasionally be involved in legal matters in the ordinary course of business, but management currently believes such matters are insignificant[87] Risk Factors There have been no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended June 30, 2022 - No material changes to risk factors have occurred since the company's last annual report filed on September 27, 2022[88] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[89] Defaults Upon Senior Securities Not applicable - Not applicable[89] Mine Safety Disclosures Not applicable - Not applicable[90] Other Information Not applicable - Not applicable[91] Exhibits This section lists all exhibits filed with or incorporated by reference into this Quarterly Report on Form 10-Q, including articles of organization, bylaws, material contracts, and officer certifications - The report lists numerous exhibits, including asset purchase agreements, equity incentive plans, loan agreements, and certifications required by the Sarbanes-Oxley Act[93][94][97]