Precision Optics (POCI) - 2024 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements The company's financial statements for the period ended December 31, 2023, show a decrease in total assets and net losses, driven by lower revenues and reduced gross margins, leading to a significant decrease in cash and cash equivalents Consolidated Balance Sheets As of December 31, 2023, total assets decreased to $17.70 million from $19.74 million, primarily due to a reduction in cash and cash equivalents, while total liabilities and stockholders' equity also declined Consolidated Balance Sheet Highlights (Unaudited) | Account | Dec 31, 2023 ($) | June 30, 2023 ($) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | 987,044 | 2,925,852 | | Total current assets | 7,832,695 | 9,859,156 | | Total Assets | 17,697,376 | 19,740,434 | | Liabilities & Equity | | | | Total current liabilities | 4,313,058 | 5,259,620 | | Total Liabilities | 6,380,124 | 7,693,842 | | Total stockholders' equity | 11,317,252 | 12,046,592 | | Total Liabilities & Equity | 17,697,376 | 19,740,434 | Consolidated Statements of Operations For the three and six months ended December 31, 2023, the company reported net losses of $758,802 and $1,223,217 respectively, a significant reversal from prior-year net incomes, driven by decreased revenue and gross profit Statement of Operations Summary (Unaudited) | Metric | Three Months Ended Dec 31, 2023 ($) | Three Months Ended Dec 31, 2022 ($) | Six Months Ended Dec 31, 2023 ($) | Six Months Ended Dec 31, 2022 ($) | | :--- | :--- | :--- | :--- | :--- | | Revenues | 4,824,289 | 5,886,961 | 9,145,544 | 10,972,262 | | Gross Profit | 1,450,976 | 2,599,472 | 2,914,587 | 4,238,913 | | Operating Income (Loss) | (704,162) | 571,065 | (1,109,455) | 469,263 | | Net Income (Loss) | (758,802) | 508,668 | (1,223,217) | 349,944 | | Diluted EPS | (0.13) | 0.09 | (0.20) | 0.06 | Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from $12.05 million to $11.32 million, primarily due to a net loss of $1.22 million, partially offset by stock-based compensation - For the six months ended December 31, 2023, total stockholders' equity decreased by $729,340, from $12,046,592 to $11,317,252[15] - The primary drivers of the change in equity were a net loss of $1,223,217 (reported in two tranches of $464,415 and $758,802) and stock-based compensation totaling $491,177[15] Consolidated Statements of Cash Flows Net cash used in operating activities for the six months ended December 31, 2023, was $1.49 million, leading to a $1.94 million decrease in cash and cash equivalents, ending the period at $987,044 Cash Flow Summary (Unaudited) | Cash Flow Activity | Six Months Ended Dec 31, 2023 ($) | Six Months Ended Dec 31, 2022 ($) | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | (1,492,824) | 17,110 | | Net cash used in investing activities | (170,772) | (37,637) | | Net cash used in financing activities | (275,212) | (203,904) | | Net (decrease) increase in cash | (1,938,808) | (224,431) | | Cash and cash equivalents, end of period | 987,044 | 381,318 | Notes to Consolidated Financial Statements Key notes detail accounting policies, inventory composition, debt structure, lease obligations, stock-based compensation, and revenue breakdown, showing increased inventories and available credit amidst declining optical and medical device revenues Inventories Breakdown | Category | Dec 31, 2023 ($) | June 30, 2023 ($) | | :--- | :--- | :--- | | Raw Materials | 1,532,752 | 1,142,816 | | Work-In-Progress | 483,960 | 322,538 | | Finished Goods | 1,083,274 | 1,310,862 | | Total Inventories | 3,099,986 | 2,776,216 | - As of December 31, 2023, the company had long-term debt, net of current maturities, of $1,919,350. A revolving line of credit for $1,250,000 was unutilized and fully available[29][30] Disaggregated Revenues (Six Months Ended Dec 31) | Revenue Type | 2023 ($) | 2022 ($) | | :--- | :--- | :--- | | Engineering Design Services | 4,166,216 | 3,344,578 | | Optical Components | 3,883,186 | 5,232,821 | | Medical Device Products and Assemblies | 1,096,142 | 1,794,863 | | Technology Rights | – | 600,000 | | Total Revenues | 9,145,544 | 10,972,262 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 16.6% decrease in six-month revenue to lower demand and a non-recurring technology rights sale, impacting gross margin and increasing operating expenses, while the company's cash position decreased significantly despite available credit Overview Precision Optics develops and manufactures advanced optical instruments, including endoscopes and custom imaging systems, expanding capabilities through acquisitions to focus on micro-precision optics and single-use devices for minimally invasive surgery - The company designs and manufactures 3D endoscopes, Microprecision lenses, and complete medical devices for minimally invasive surgery[48] - Acquisitions of Ross Optical Industries (2019) and Lighthouse Imaging (2021) added capabilities in custom optical components and end-to-end medical visualization, including chip-on-tip systems[49][50] - Strategic focus is on developing new optical products, particularly in Microprecision™ optics, micro medical cameras, single-use endoscopes, and 3D endoscopes to penetrate a market segment growing at 2-3 times the rate of the overall market[54] Results of Operations Total revenue for the six months ended December 31, 2023, decreased by 16.6% to $9.1 million, primarily due to declines in Optical Components and Finished Products, and the absence of a prior-year technology rights sale, leading to a gross margin reduction to 31.9% Revenue by Segment (Six Months Ended Dec 31) | Segment | 2023 ($) | 2022 ($) | % Change | | :--- | :--- | :--- | :--- | | Engineering Design Services | 4,166,216 | 3,344,578 | +24.6% | | Optical Components | 3,883,186 | 5,232,821 | -25.8% | | Finished Products and Assemblies | 1,096,142 | 1,794,863 | -38.9% | | Technology Rights | – | 600,000 | -100.0% | | Total Revenues | 9,145,544 | 10,972,262 | -16.6% | - The decrease in Optical Components revenue was attributed to customers rebalancing inventories that had grown due to supply chain concerns[61] - Gross margin for the six months ended Dec 31, 2023, decreased to 31.9% from 38.6% in the prior year, primarily due to changes in product sales mix and the non-recurrence of a $600,000 technology rights sale which had no associated cost of sales[64] - For the six months ended Dec 31, 2023, R&D expenses increased by $68,595 and SG&A expenses increased by $185,797, primarily due to higher personnel-related costs[65][66] Liquidity and Capital Resources The company's cash and cash equivalents decreased by $1.94 million to $0.99 million, driven by net loss, increased inventory, and decreased accounts payable, though a $1.25 million line of credit remains fully available - Cash and cash equivalents decreased from $2,925,852 at June 30, 2023, to $987,044 at December 31, 2023, a decrease of $1,938,808[67] - The company has a $1,250,000 line of credit which was fully available with no borrowings outstanding as of December 31, 2023[68] - As of December 31, 2023, the company had contractual cash commitments of approximately $3,163,000 related to open purchase orders[71] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Precision Optics is not required to provide information for this item - The company is electing scaled disclosure reporting obligations as a smaller reporting company and is not required to provide the information requested by this Item[73] Controls and Procedures The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2023, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[74] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[75] PART II OTHER INFORMATION Legal Proceedings The company is not aware of any pending or threatened litigation that could materially impact its operations or finances, occasionally engaging in insignificant legal matters in the ordinary course of business - The company is not aware of any pending or threatened litigation that could have a material impact on its operations or finances[78] Risk Factors As a smaller reporting company, Precision Optics is not required to provide the information for this item - Smaller reporting companies are not required to provide the information required by this item[79] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the period - None[80] Defaults Upon Senior Securities Not applicable - Not applicable[80] Mine Safety Disclosures Not applicable - Not applicable[81] Other Information The company disclosed its process for director nominations, relying on independent director recommendations, and reported no director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the quarter - The company's policy is for the Board to seek recommendations from independent directors for director nominations[83] - During the quarter, no director or officer adopted or terminated a Rule 10b5-1 trading arrangement[84] Exhibits The report lists several exhibits, including the company's Restated Articles of Organization, Amended and Restated Bylaws, and certifications from the CEO and CFO as required by the Sarbanes-Oxley Act of 2002, along with Inline XBRL documents - Key exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[86]