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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2023

 

or

 

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission File Number: 001-10647

 

PRECISION OPTICS CORPORATION, INC.

(Exact name of registrant as specified in its charter)

 

Massachusetts 04-2795294
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

22 East Broadway, Gardner, Massachusetts 01440-3338

(Address of principal executive offices) (Zip Code)

 

(978) 630-1800

(Registrants telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Securities registered pursuant to Section 12(g) of the Act:

 

Title of each class Trading symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value POCI The Nasdaq Stock Market LLC

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐   Accelerated filer ☐
Non-accelerated filer ☒   Smaller reporting company ☒
      Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

The number of shares outstanding of the issuers common stock, par value $0.01 per share, at May 15, 2023 was 5,640,995 shares.

 

 

   

 

 

PRECISION OPTICS CORPORATION, INC.

 

Table of Contents

 

  Page
PART I FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Balance Sheets at March 31, 2023 and June 30, 2022 3
Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2023 and 2022 4
Consolidated Statements of Stockholders’ Equity for the Nine Months Ended March 31, 2023 and 2022 5
Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2023 and 2022 6
Notes to Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
   
PART II OTHER INFORMATION 21
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Mine Safety Disclosures (Not applicable.) 21
Item 5. Other Information 21
Item 6. Exhibits 22

 

 

 

 

 

 

 

 

 2 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

         
   March 31,   June 30, 
   2023   2022 
ASSETS          
Current Assets:          
Cash and cash equivalents  $612,095   $605,749 
Accounts receivable, net of allowance for doubtful accounts of $74,593 at March 31, 2023 and $44,135 at June 30, 2022   4,389,907    2,663,872 
Inventories   2,959,732    3,079,938 
Prepaid expenses   307,663    213,448 
Total current assets   8,269,397    6,563,007 
           
Fixed Assets:          
Machinery and equipment   3,225,483    3,215,412 
Leasehold improvements   794,894    786,112 
Furniture and fixtures   233,547    219,999 
Total fixed assets   4,253,924    4,221,523 
Less—Accumulated depreciation and amortization   3,809,303    3,651,843 
Net fixed assets   444,621    569,680 
           
Operating lease right-to-use asset   399,007    517,725 
Patents, net   249,408    229,398 
Goodwill   8,824,210    8,824,210 
           
TOTAL ASSETS  $18,186,643   $16,704,020 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities:          
Current portion of financing lease obligation  $42,397   $40,705 
Current maturities of long-term debt   371,429    367,714 
Current portion of acquisition earn out liabilities   571,838    166,667 
Accounts payable   2,649,248    2,239,175 
Contract liabilities   1,387,806    905,113 
Accrued compensation and other   1,305,678    716,702 
Operating lease liability   166,316    150,565 
Total current liabilities   6,494,712    4,586,641 
           
Financing lease obligation, net of current portion   79,701    111,691 
Long-term debt, net of current maturities and debt issuance costs   1,681,642    1,961,141 
Acquisition earn out liability, net of current portion   –    705,892 
Operating lease liability, net of current portion   232,691    367,160 
           
Stockholders’ Equity:          
Common stock, $0.01 par value: 50,000,000 shares authorized; issued and outstanding – 5,640,995 shares at March 31, 2023 and 5,638,302 June 30, 2022   56,410    56,383 
Additional paid-in capital   57,784,369    57,009,506 
Accumulated deficit   (48,142,882)   (48,094,394)
Total stockholders’ equity   9,697,897    8,971,495 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $18,186,643   $16,704,020 

 

The accompanying notes are an integral part of these consolidated interim financial statements.

 

 3 

 

 

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED

MARCH 31, 2023 AND 2022

(UNAUDITED)

 

                     
   Three Months
Ended March 31,		   Nine Months
Ended March 31,		 
   2023   2022   2023   2022 
Revenues  $5,048,065   $4,651,352   $16,020,327   $10,884,737 
                     
Cost of goods sold   3,311,967    2,923,143    10,045,316    7,397,914 
Gross profit   1,736,098    1,728,209    5,975,011    3,486,823 
                     
Research and development expenses, net   206,375    214,898    660,518    433,248 
Selling, general and administrative expenses   2,022,991    1,574,432    5,338,498    3,974,824 
Business acquisition expenses   –    –    –    172,174 
Total operating expenses   2,229,366    1,789,330    5,999,016    4,580,246 
                     
Operating income (loss)   (493,268)   (61,121)   (24,005)   (1,093,423)
                     
Other income (expense)                    
Interest expense   (48,124)   (52,778)   (167,443)   (104,290)
Gain on revaluation of contingent earn-out liability   142,960    –    142,960    – 
                     
Net income (loss)  $(398,432)  $(113,899)  $(48,488)  $(1,197,713)
                     
Income (loss) per share:                    
Basic and fully diluted  $(0.07)  $(0.02)  $(0.01)  $(0.23)
                     
Weighted average common shares outstanding:                    
Basic and fully diluted   5,640,473    5,600,953    5,639,015    5,181,896 

 

The accompanying notes are an integral part of these consolidated interim financial statements.

 

 

 

 

 4 

 

 

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED

march 31, 2023 AND 2022

(UNAUDITED)

                         
       Nine Month Period Ended March 31, 2023     
   Number of
Shares		   Common
Stock		   Additional
Paid-in
Capital		   Common
Stock
Subscribed		   Accumulated
Deficit		   Total
Stockholders’
Equity		 
Balance, July 1, 2022   5,638,302   $56,383   $57,009,506   $–   $(48,094,394)  $8,971,495 
Stock-based compensation   –    –    74,990    –    –    74,990 
Net loss   –    –    –    –    (158,724)   (158,724)
Balance, September 30, 2022   5,638,302    56,383    57,084,496    –    (48,253,118)   8,887,761 
Stock-based compensation   –    –    244,786    –    –    244,786 
Net Income   –    –    –    –    508,668    508,668 
Balance, December 31, 2022   5,638,302    56,383    57,329,282    –    (47,744,450)   9,641,215 
Stock-based compensation   –    –    450,014    –    –    450,014 
Proceeds from exercise of stock option   2,000    20    5,080    –    –    5,100 
Exercise of stock options net of 307 shares withheld   693    7    (7)   –    –    – 
Net loss   –    –    –    –    (398,432)   (398,432)
Balance, March 31, 2023   5,640,995   $56,410   $57,784,369   $–   $(48,142,882)  $9,697,897 
                         
       Nine Month Period Ended March 31, 2022     
   Number of
Shares		   Common
Stock		   Additional
Paid-in
Capital		   Common
Stock
Subscribed		   Accumulated
Deficit		   Total
Stockholders’
Equity		 
Balance, July 1, 2021   4,427,432   $44,274   $50,552,831   $–   $(47,165,978)  $3,431,127 
Stock-based compensation   –    –    160,071    –    –    160,071 
Proceeds from private placement of common stock subscribed, net of estimated issuance costs of $10,000   –    –    (10,000)   1,030,000    –    1,020,000 
Net loss   –    –    –    –    (576,801)   (576,801)
Balance, September 30, 2021   4,427,432    44,274    50,702,902    1,030,000    (47,742,779)   4,034,397 
Stock-based compensation   –    –    330,451    –    –    330,451 
Proceeds from private placement of common stock   312,500    3,125    1,496,875    (1,030,000)   –    470,000 
Issuance of common stock in business acquisition   833,333    8,333    4,816,667    –    –    4,825,000 
Proceeds from exercise of stock option   5,000    50    16,600    –    –    16,650 
Exercise of stock options net of 478 shares withheld   875    9    (9)   –    –    – 
Issuance of common stock for employee services   3,031    30    19,970    –    –    20,000 
Net loss   –    –    –    –    (507,013)   (507,013)
Balance, December 31, 2021   5,582,171    55,821    57,383,456    –    (48,249,792)   9,189,485 
Correction of error in valuation of stock issued in business acquisition   –    –    (825,000)   –    –    (825,000)
Stock-based compensation   –    –    231,115    –    –    231,115 
Proceeds from exercise of stock options   14,400    144    46,496    –    –    46,640 
Exercise of stock options net of 32,018 shares withheld   32,648    327    (327)   –    –    – 
Net loss   –    –    –    –    (113,899)   (113,899)
Balance, March 31, 2022   5,629,219   $56,292   $56,835,740   $–   $(48,363,691)  $8,528,341 

 

The accompanying notes are an integral part of these consolidated interim financial statements.

 

 5 

 

 

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED

mARCH 31, 2023 AND 2022

(UNAUDITED)

 

          
    Nine Months Ended
March 31,		 
    2023   2022 
CASH FLOWS FROM OPERATING ACTIVITIES:           
Net Loss   $(48,488)  $(1,197,713)
Adjustments to Reconcile Net Loss to Net Cash Used In Operating Activities -           
Gain on revaluation of contingent earn-out liability    (142,960)   – 
Depreciation and amortization    157,460    173,887 
Stock-based compensation expense    769,790    741,637 
Non-cash interest expense    8,906    – 
Changes in Operating Assets and Liabilities, net of effects of business acquisition -           
Accounts receivable, net    (1,726,035)   (791,959)
Inventories, net    120,206    (623,817)
Due from related party    –    84,210 
Prepaid expenses    (94,215)   (85,791)
Accounts payable    410,073    1,118,149 
Customer advances    482,693    (258,487)
Accrued compensation and other    588,976    (40,083)
Net Cash Provided By (Used In) Operating Activities    526,406    (879,967)
            
CASH FLOWS FROM INVESTING ACTIVITIES:           
Additional patent costs    (20,010)   (23,098)
Purchases of fixed assets    (32,401)   (59,562)
Acquisition of business    –    (421,729)
Net Cash Used In Investing Activities    (52,411)   (504,389)
            
CASH FLOWS FROM FINANCING ACTIVITIES:           
Payment of financing lease obligation    (30,298)   (28,546)
Payments of long-term debt    (275,784)   (154,453)
Payment of debt issuance costs    –    (26,000)
Payment of acquisition earn-out liability    (166,667)   – 
Gross proceeds from private placement of common stock    –    1,500,000 
Gross proceeds from exercise of stock options    5,100    63,290 
Net Cash (Used In) Provided By Financing Activities    (467,649)   1,354,291 
            
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS    6,346    (30,065)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD    605,749    861,650 
            
CASH AND CASH EQUIVALENTS, END OF PERIOD   $612,095   $831,585 
            
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:           
Offering costs included in accrued compensation and other   $–   $10,000 
Issuance of common stock for services   $–   $– 
Acquisition of business financed with long-term debt   $–   $2,600,000 

 

The accompanying notes are an integral part of these consolidated interim financial statements.

  

 

 

 6 

 

 

PRECISION OPTICS CORPORATION, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation and Operations

 

The accompanying consolidated financial statements include the accounts of Precision Optics Corporation, Inc. and its wholly-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

These consolidated financial statements have been prepared by the Company, without audit, and reflect normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the results of the third quarter and nine months of the Company’s fiscal year 2023. These consolidated financial statements do not include all disclosures associated with annual consolidated financial statements and, accordingly, should be read in conjunction with footnotes contained in the Company’s consolidated financial statements for the year ended June 30, 2022, together with the Report of Independent Registered Public Accounting Firm filed under cover of the Company’s 2022 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 27, 2022.

 

Reclassifications

 

Certain reclassifications have been made to conform the prior period consolidated financial statements to the current period.

 

Reverse Stock Split

 

The Company’s Board of Directors authorized a reverse split of the Company’s outstanding shares of common stock within a stated range of 1:1.5 to 1:3, which was subsequently approved by stockholders holding more than a majority of the outstanding shares of Common Stock at the Company’s Annual Meeting on April 8, 2022. The Company effected the reverse stock split on a one-for-three basis on November 1, 2022 as reported by the Company on Form 8-K filed with the Securities and Exchange Commission on November 2, 2022.

 

As a result of the reverse stock split, every three shares of issued and outstanding common stock were automatically combined into one issued and outstanding share of common stock, without any change in the par value per share or the number of the Company’s authorized shares. The reverse stock split reduced the number of shares of common stock outstanding from 16,915,089 on November 1, 2022 to approximately 5,638,302 shares, after reduction for the elimination of fractional shares.

 

Unless otherwise noted, all prior year share amounts and per share calculations throughout this Form 10-Q have been restated to reflect the impact of this 1:3 reverse stock split and to provide data on a comparable basis. Such restatements include calculations regarding the Company’s weighted-average shares, and earnings per share, as well as disclosures regarding the Company’s stock-based compensation plans.

 

 

 

 

 7 

 

 

Use of Estimates

 

The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its 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.

 

Income (Loss) Per Share

 

Basic income (loss) per share is computed by dividing net income or net loss by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period, plus the number of potentially dilutive securities outstanding during the period such as stock options. For the three and nine months ended March 31, 2023 and 2022, the effect of such securities was antidilutive and not included in the fully diluted calculation because of the net loss generated during those periods.

 

The following is the calculation of income (loss) per share for the three and nine months ended March 31, 2023 and 2022: 

                    
   Three Months
Ended March 31,		   Nine Months
Ended March 31,		 
   2023   2022   2023   2022 
Net Income (Loss) - Basic and Diluted  $(398,432)  $(113,899)  $(48,488)  $(1,197,713)
                     
Weighted Average Shares Outstanding                    
Basic and Fully Diluted   5,640,473    5,600,953    5,639,015    5,181,896 
                     
Income (Loss) Per Share                    
Basic and Fully Diluted  $(0.07)  $(0.02)  $(0.01)  $(0.23)

 

The number of shares issuable upon the exercise of outstanding stock options that were excluded from the computation as their effect was antidilutive was 1,058,630 for the three and nine months ended March 31, 2023, respectively, and 939,166 for the three and nine months ended March 31, 2022.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

  

In assessing the likelihood of utilization of existing deferred tax assets, management has considered historical results of operations and the current operating environment. Based on this evaluation, a full valuation reserve has been provided for the deferred tax assets.

 

 

 

 8 

 

 

Goodwill and Patents

 

Long-lived assets such as goodwill and patents are capitalized when acquired and reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. Impairment of the carrying value of long-lived assets such as goodwill and patents would be indicated if the best estimate of future undiscounted cash flows expected to be generated by the asset grouping is less than its carrying value. If an impairment is indicated, any loss is measured as the difference between estimated fair value and carrying value and is recognized in operating income or loss. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No such impairments of goodwill or patents have been estimated by management as of March 31, 2023.

 

2. REVISION OF THE FIRST AND SECOND QUARTER FISCAL YEAR 2023 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

During the third quarter of fiscal year 2023, the Company identified errors in the accrual of certain costs for the fiscal quarters ended September 30, 2022 and December 31, 2022, which resulted in an understatement of accounts payable and costs of goods sold for those two quarters. The corrections of these errors impacted the unaudited condensed consolidated financial statements for the first and second quarters of fiscal year 2023. The Company assessed the applicable guidance issued by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) and concluded these misstatements were not material, individually or in the aggregate, to its unaudited condensed consolidated financial statements for the aforementioned interim periods. However, because of the significance of these items, and to facilitate comparisons among periods, the Company decided to revise the previously issued first and second quarter unaudited condensed consolidated financial information by increasing accounts payable and cost of goods sold by $85,213 and 125,752 in the quarters ended September 30, 2022 and December 31, 2022, respectively. These quarterly and year to date financial statements will be revised in subsequent filings with the Securities and Exchange Commission that include such statements, including when the first and second quarter Form 10-Q’s are filed for fiscal year 2024.

 

Accumulated deficit at January 1, 2023 in the accompanying statement of stockholders’ equity for the quarter ended March 31, 2023 was made larger by $210,965 due to the effects of the increased expense accruals for the first and second quarters of fiscal year 2023.

 

The following are selected line items from the financial statements illustrating the effect of the error corrections for the quarters ended September 30, 2022 and December 31, 2022:

Schedule of error corrections  Quarter Ended September 30, 2022 
   As Previously Reported   Adjustment(1)   As Revised 
Revenues  $5,085,301   $–   $5,085,301 
Cost of goods sold   3,360,647    85,213    3,445,860 
Gross Profit   1,724,654    (85,213)   1,639,441 
Operating loss   (16,589)   (85,213)   (101,802)
Net loss   (73,511)   (85,213)   (158,724)
Net loss per share, basic and fully diluted   (0.01)   (0.02)   (0.03)

 

 

 

 

 9 
 

 

   Quarter Ended December 31, 2022 
   As Previously Reported   Adjustment(1)   As Revised 
Revenues  $5,886,961   $–   $5,886,961 
Cost of goods sold   3,161,737    125,752    3,287,489 
Gross Profit   2,725,224    (125,752)   2,599,472 
Operating income   696,817    (125,752)   571,065 
Net income   634,420    (125,752)   508,668 
Net income per share, basic   0.11    (0.02)   0.09 
Net income per share, fully diluted   0.11    (0.02)   0.09 

 

(1) The errors in each of the two fiscal quarters resulted from the omission of invoices from a small identifiable group of outside contractors used for certain services relating to research and development activities. In addition to the above adjustments, trade accounts payable will be increased in future filings by $85,213 and $210,965 as of September 30, 2022 and December 31, 2022, respectively.

 

 

3. BUSINESS ACQUISITION

 

On October 4, 2021, the Company acquired substantially all of the assets of Lighthouse Imaging, LLC, of Windham, Maine, a medical optics and digital imaging business operating as a designer and manufacturer of advanced optical imaging systems and accessories with a strong expertise in electrical engineering and development of end-to-end medical visualization devices. The actual results of operations of the Lighthouse division are included in the accompanying consolidated financial statements as of, and for the three and nine months ended, March 31, 2023, and for the six months ended March 31, 2022.

 

The purchase price for Lighthouse Imaging included $1,500,000 as potential earn-out consideration over the subsequent two year period, contingent on the Lighthouse division meeting specified annual gross profit targets. The Lighthouse division did not meet the target for the first $750,000 portion of the earn-out, and the contingent liability associated with that portion was reversed and recognized as other income in the fiscal quarter ended June 30, 2022.

 

The second $750,000 portion of the earn-out contingent liability was renegotiated in March 2023 and adjusted to $600,000 in return for modifications to the target level of gross profit for the second earnout period. The $150,000 reduction in the contingent earn-out liability was recognized as other income in the fiscal quarter ended March 31, 2023. The second portion of the contingent earn-out liability of $600,000 will be paid if the adjusted target level of gross profit is earned by the Lighthouse division for the period from October 1, 2022 through September 30, 2023.

 

Consolidated unaudited actual and pro forma results of operations for the Company are presented below assuming that the acquisition of the Lighthouse division had occurred on July 1, 2021. Pro forma operating results include net adjustments resulting from the acquisition transaction during the three months ended September 30, 2021.

                 
   Three Months
Ended March 31,		   Nine Months
Ended March 31,		 
   2023   2022   2023   2022 
   (Actual)   (Actual)   (Actual)   (Pro Forma) 
Revenues  $5,048,065   $4,651,352   $16,020,327   $12,329,074 
Net loss   (398,432)   (113,899)   (48,488)   (1,140,418)
Net loss per share:                    
Basic and fully diluted  $(0.07)  $(0.02)  $(0.01)  $(0.20)

 

Pro forma financial information is not necessarily indicative of the Company’s actual results of operations if the acquisition had been completed at the date indicated, nor is it necessarily an indication of future operating results. Amounts do not include any operating efficiencies or cost saving that the Company believes may be achievable.

 

 

 

 

 

 10 

 

 

4. INVENTORIES

 

Inventories are stated at the lower of cost (first-in, first-out) or market and consisted of the following:

         
   March 31,
2023		   June 30,
2022		 
Raw Materials  $1,402,292   $1,414,996 
Work-In-Progress   393,078    518,251 
Finished Goods   1,164,362    1,146,691 
Total Inventories  $2,959,732   $3,079,938 

 

 

5. BANK FINANCING ACTIVITIES

 

Bank Line of Credit

 

On October 4, 2021, the Company entered into a Loan Agreement with Main Street Bank of Marlborough, Massachusetts, which provided for a $2,600,000 Term Loan and a $250,000 Revolving Line of Credit Loan Facility, which was increased to $500,000 effective May 17, 2022. The $500,000 line of credit is due on demand and had no borrowings outstanding at March 31, 2023. Borrowings under the line of credit bear interest payable monthly at the prime lending rate plus 1.5% per annum, or 9.50% as of March 31, 2023, and shall not be less than 4.75% per annum. Borrowings under the line of credit are limited to the borrowing base comprised of a percentage of eligible accounts receivable and inventory and are secured by all the assets of the Company.

 

Long-Term Debt

 

Long-term debt consists of the following at March 31, 2023:

     
   Amount 
Term Loan Note payable to Main Street Bank with monthly principal payments of $30,952 plus interest at the rate of 7.00% as of March 31, 2023 is secured by all assets of the Company, and subject to certain periodic reporting to the bank, an annual minimum EBITDA plus stock based compensation to debt service coverage ratio of 1.20:1 commencing with the fiscal year ending June 30, 2023, and other conditions. The Term Loan Note matures on October 15, 2028.  $2,073,808 
      
Less current maturities   (371,429)
Less debt issuance costs, net of accumulated amortization of $2,789   (20,737)
Long-term debt, net of current portion of debt issuance costs  $1,681,642 

 

At March 31, 2023 principal payments due on the Term Loan Note payable are as follows:

     
Fiscal Year Ending June 30:    
2023  $92,856 
2024   371,429 
2025   371,429 
2026   371,429 
2027   371,429 
Thereafter    495,236 
Total long term debt  $2,073,808 

 

 

 

 11 

 

 

6. LEASE OBLIGATIONS

 

In March 2021 the Company entered into a five-year financing lease in the amount of $161,977 for manufacturing equipment. In January 2020, the Company entered into a five-year financing lease for $47,750 for manufacturing equipment. The net book value of fixed assets under financing lease obligations as of March 31, 2023 is $114,695.

  

On July 1, 2019 the Company entered into a three-year operating lease for its facility in El Paso, Texas, and in February 2022 the Company entered into an extension of the lease for an additional three years through June 2025. Remaining minimum lease payments at March 31, 2023 total $101,928. Total rent expense including base rent and common area expenses was $15,973 and $15,705 during the three months ended March 31, 2023 and 2022, respectively.

 

On October 4, 2021 the Company assumed the remaining term of the Windham, Maine lease as part of the Lighthouse acquisition. The lease expires on July 31, 2025. Remaining minimum lease payments at March 31, 2023 total $321,365. Total rent expense including base rent and common area expenses was $36,495 during the three months ended March 31, 2023.

 

Included in the accompanying balance sheet at March 31, 2023 is a right-of-use asset of $399,007 and current and long-term right-of-use operating lease liabilities of $166,316 and $232,691, respectively.

 

At March 31, 2023 future minimum lease payments under the financing lease and operating lease obligations are as follows: 

         
Fiscal Year Ending June 30:  Financing Leases   Operating Lease 
2023  $12,155   $45,389 
2024   48,619    182,652 
2025   43,917    183,775 
2026   28,028    11,477 
Total Minimum Payments   132,719   $423,293 
Less: amount representing interest   10,621      
Present value of minimum lease payments   122,098      
Less: current portion   42,397      
   $79,701      

 

The Company’s operating leases for its Gardner, Massachusetts office, production and storage spaces plus an equipment lease have expired and are continuing on a month-to-month tenant at will basis. Rent expense on these operating leases was $150,862 and $152,078 for the nine months ended March 31, 2023 and 2022, respectively.

 

 

 

 

 12 

 

 

7. STOCK-BASED COMPENSATION

 

Stock Options

 

The following table summarizes stock-based compensation expense for the three and nine months ended March 31, 2023 and 2022: 

                    
   Three Months
Ended March 31,		   Nine Months
Ended March 31,		 
   2023   2022   2023   2022 
Cost of Goods Sold  $9,556   $34,712   $25,410   $91,542 
Research and Development   41,140    70,237    122,198    164,036 
Selling, General and Administrative   399,318    126,166    622,182    466,059 
Stock Based Compensation Expense  $450,014   $231,115   $769,790   $721,637 

 

No compensation has been capitalized because such amounts would have been immaterial.

  

The following tables summarize stock option activity for the nine months ended March 31, 2023:

             
    Options Outstanding 
    Number of
Shares		    Weighted Average
Exercise Price		    Weighted Average
Contractual Life		 
Outstanding at June 30, 2022   904,626   $4.00    7.08 years 
Exercised   (3,000)   2.55    – 
Granted   179,003    6.03    – 
Cancelled   (21,999)   5.84    – 
Outstanding at March 31, 2023   1,058,630   $4.31    6.79 years 

 

 

 

 

 

 

 

 

 

 

 

 

 

 13 

 

 

Information related to the stock options outstanding as of March 31, 2023 is as follows:

                      
Range of
Exercise Prices		   Number of
Shares		   Weighted-
Average
Remaining
Contractual Life
(years)		   Weighted-
Average
Exercise Price		   Exercisable
Number of
Shares		   Exercisable
Weighted-
Average
Exercise Price		 
$1.44    20,000    3.00   $1.44    20,000   $1.44 
$1.50    26,666    3.22   $1.50    26,666   $1.50 
$1.65    5,000    5.01   $1.65    5,000   $1.65 
$2.10    33,333    5.35   $2.10    33,333   $2.10 
$2.19    208,996    3.92   $2.19    208,996   $2.19 
$2.70    12,000    1.19   $2.70    12,000   $2.70 
$3.75    15,000    6.97   $3.75    15,000   $3.75 
$3.90    146,325    6.20   $3.90    146,325   $3.90 
$4.20    23,332    7.64   $4.20    23,332   $4.20 
$4.26    33,333    6.45   $4.26    33,333   $4.26 
$4.35    1,666    7.94   $4.35    1,666   $4.35 
$4.50    23,332    6.69   $4.50    23,332   $4.50 
$5.04    179,997    8.18   $5.04    179,997   $5.04 
$5.43    10,000    8.51   $5.43    10,000   $5.43 
$5.61    10,000    9.12   $5.61    –   $– 
$5.85    58,336    8.76   $5.85    2,780   $5.85 
$5.93    4,000    9.78   $5.93    4,000   $5.93 
$6.00    29,997    7.97   $6.00    10,000   $6.00 
$6.26    90,000    9.75   $6.26    90,000   $6.26 
$6.27    80,653    8.86   $6.27    26,884   $6.27 
$6.78    46,664    8.64   $6.78    35,554   $6.78 
 1.44–6.78    1,058,630    6.79   $4.31    908,198   $4.02 

 

The aggregate intrinsic value of the Company’s in-the-money outstanding and exercisable options as of March 31, 2023 was $2,623,768 and $2,515,877, respectively.

 

   

8. REVENUE RECOGNITION

 

Revenues are recognized as the performance obligations to deliver products or services are satisfied and are recorded based on the amount of consideration the Company expects to receive in exchange for satisfying the performance obligations. Most of the Company’s products and services are marketed to medical device companies with over 93% of all revenues to customers in the United States. Products and services are primarily transferred to customers at a point in time based upon when services are performed or product is shipped. Other selling costs to obtain and fulfill contracts are expensed as incurred due to the short-term nature of a majority of its contracts. The Company extends terms of payment to its customers based on commercially reasonable terms for the markets of its customers, while also considering their credit quality. Shipping and handling costs charged to customers are included in revenue.

 

 

 

 

 14 

 

 

The Company disaggregates revenues by product and service types as it believes it best depicts how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors. Technology rights revenue represents amounts paid by customers for rights to use the Company’s intellectual property including product designs, patents, and know-how to manufacture and commercialize their products under specified contractual conditions. Revenues are comprised of the following for the three and nine months ended March 31, 2023 and 2022: 

                    
   Three Months
Ended March 31,		   Nine Months
Ended March 31,		 
   2023   2022   2023   2022 
Engineering Design Services  $1,400,780   $1,532,414   $4,745,358   $3,659,667 
Optical Components   2,609,983    1,927,963    7,842,804    4,873,294 
Medical Device Products and Assemblies   1,037,302    1,190,975    2,832,165    2,351,776 
Technology Rights   –    –    600,000    – 
Total Revenues  $5,048,065   $4,651,352   $16,020,327   $10,884,737 

 

Contract Assets and Liabilities

 

The nature of the Company’s products and services does not generally give rise to contract assets as it typically does not incur costs to fulfill a contract before a product or service is provided to a customer. The Company’s costs to obtain contracts are typically in the form of sales commissions paid to employees. The Company has elected to expense sales commissions associated with obtaining a contract as incurred as the amortization period is generally less than one year. These costs have been recorded in selling, general and administrative expenses. As of March 31, 2023, there were no contract assets recorded in the Company’s Consolidated Balance Sheets.

  

The Company’s contract liabilities arise from unearned revenue received from customers at inception of contracts or where the timing of billing for services precedes satisfaction of our performance obligations. The Company generally satisfies performance obligations within one year from the contract inception date.

  

Contract liabilities, which were recorded as customer advances in the Company’s Consolidated Balance Sheets, and unearned revenue are comprised of the following: 

                  
   Three Months
Ended March 31,		   Nine Months
Ended March 31,
   2023   2022   2023   2022
Contract Liabilities, Beginning of Period   $794,981   $1,137,470   $905,113   $450,084
Assumed in Business Acquisition    –    –    –   826,679
Unearned Revenue Received from Customers    1,020,669    774,316    1,917,775   1,388,700
Revenue Recognized    (427,844)   (893,511)   (1,435,082)  (1,647,188)
Contract Liabilities, End of Period   $1,387,806   $1,018,275   $1,387,806   $1,018,275

 

 

9. COVID-19 PANDEMIC

 

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 its customers, collection of amounts owed to the Company from its customers, its internal operating procedures, and the Company’s overall financial condition.

 

 

 

 

 15 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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, 2032 and with our audited consolidated financial statements for the year ended June 30, 2022 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 27, 2022.

 

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, 2022 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 MicroprecisionTM 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 30% our business during the nine months ended March 31, 2023 is from engineering services (primarily relating to the design of medical device optical assemblies), 49% from the sale of both internally manufactured and purchased optical components, and 18% from the manufacture of optical assemblies and sub-assemblies (primarily for medical device instrument applications). Our proprietary medical instrumentation line, unique custom design and manufacturing capabilities, and expert electrical engineering and development services have generated orders for traditional proprietary endoscopes and endocouplers as well as for custom imaging and illumination products for use in minimally invasive surgical procedures. We design and manufacture 3D endoscopes and very small MicroprecisionTM 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.

 

 

 

 

 16 

 

 

Our internet websites are www.poci.com, www.rossoptical.com, and www.lighthouseoptics.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; www.lighthouseoptics.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 and Lighthouse LinkedIn pages (www.linkedin.com/company/ross-optical-industries/) (https://www.linkedin.com/company/lighthouse-imaging-corporation/) and Twitter feed (http://twitter.com/rossoptical) and on our Lighthouse Facebook page (https://www.facebook.com/lighthouseoptics/).

 

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 MicroprecisionTM optics, micro medical cameras, illumination, single-use endoscopes and 3D endoscopes.

    

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.

 

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, 2022 filed with the Securities and Exchange Commission on September 27, 2022.

 

Results of Operations

 

Our total revenues for the quarter ended March 31, 2023, were $5,048,065, as compared to $4,651,352 for the same period in the prior year, an increase of $396,713, or 8.5%, primarily due to an increase in component revenue to a large defense contractor. Other fluctuations in revenue categories were considered customary during the quarter ended March 31, 2023 when compared to the same quarter of the prior fiscal year.

 

 

 

 17 

 

 

Our total revenues for the nine months ended March 31, 2023 were $16,020,327, as compared to $10,884,737 for the same period in the prior year, an increase of $5,135,590, or 47.2% due in part to the inclusion of the Lighthouse division since its acquisition on October 4, 2021, increases in component sales in the El Paso and Gardner locations, an increase in engineering revenues, and one-time technology rights revenue in the quarter ended December 31, 2022.

  

Our two largest customers accounted for 13.0% and 8.4% of our revenue during the quarter ended March 31, 2023, and 8.0% and 13.1%, respectively, of our revenue during the nine months ended March 31, 2023. One of our two largest customers is a defense/aerospace company and the other is a medical device company. We generated revenues from 318 unique customers during the nine months ended March 31, 2023, and no other customer represented over 10% of our revenue during the three and nine months ended March 31, 2023.

 

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.

 

Gross profit for the quarter ended March 31, 2023 was $1,736,098, compared to $1,728,209 for the same period in the prior year, an increase of $7,889. Gross profit for the quarter ended March 31, 2023 as a percentage of our revenues was 34.4%, an decrease from the gross profit percentage of 37.2% for the same period in the prior year. Gross profit for the nine months ended March 31, 2023 was $5,975,011 as compared to $3,486,823 for the same period in the prior year, an increase of $2,488,188 or 71.4%. Gross profit for the nine months ended March 31, 2023 as a percentage of our revenues was 37.3%, an increase from the gross profit percentage of 32.0% 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 profit on individual engineering projects is dependent on a number of factors and is expected to fluctuate from quarter to quarter based on the number of new engineering projects, 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 increase in gross profit dollars during nine months ended March 31, 2023 compared to the same periods in the previous years was primarily due to inclusion of the Lighthouse division since its acquisition on October 4, 2021, Other fluctuations in gross profit dollars and margins in the quarter and nine months ended March 31, 2023 when compared to the same periods of the prior fiscal year are considered customary considering the factors impacting variability as previously described.

  

Research and development expenses were $206,375 for the quarter ended March 31, 2023, compared to $214,898 for the same period in the prior year, a decrease of $8,523, or 4.0%. Research and development expenses were $660,518 for the nine months ended March 31, 2023, compared to $433,248 for the same period in the prior year, an increase of $227,270, or 52.5%. 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 nine months ended March 31, 2023 compared to the same periods of the prior year we had an increase in personnel, and an increase in research and development costs incurred in the development of internal research and development efforts and projects. 

 

Selling, general and administrative expenses were $2,022,991 for the quarter ended March 31, 2023, compared to $1,574,432 for the same period in the prior year, an increase of $448,559, or 28.4%. Selling, general and administrative expenses were $5,338,498 for the nine months ended March 31, 2023, compared to $3,974,824 for the same period in the prior year, an increase of $1,363,674, or 34.3%. The increase in selling, general and administrative expense in the three months ended March 31, 2023 compared to the same period of the prior fiscal year was primarily the result of increased compensation due to expanded headcount, incentive bonuses and sales commissions resulting from increased revenues, increased sales conference and show costs, and increased stock based compensation. The increase in selling, general and administrative expenses in the nine months ended March 31, 2023 compared to the same periods of the prior fiscal year was primarily due to inclusion of the Lighthouse division since its acquisition in October, 2021, plus increased compensation due to expanded headcount, incentive bonuses and sales commissions resulting from increased revenues, and increased sales conference and show costs.

 

 

 

 18 

 

 

Liquidity and Capital Resources

 

We have sustained recurring net losses from operations for several years. During the quarter ended and nine months ended March 31, 2023 we incurred operating losses of $493,268 and 24,005, respectively. During the years ended June 30, 2022 and 2021 we incurred operating losses of $1,513,890 and $905,583, respectively. At March 31, 2023, cash was $612,095, accounts receivables were $4,389,907 and current liabilities were $6,494,885, including $1,387,806 of customer advances received for future order deliveries.

 

Although our revenue and gross margin have increased, 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 can 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 and lingering supply-chain issues. 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 profits 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 MicroprecisionTM 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.

 

In connection with our October 2021 acquisition of Lighthouse Imaging, we entered into a $2,600,000 bank term loan, and sold shares of our common stock for gross proceeds of $1,500,000. We also secured a $250,000 bank line of credit from the same bank in October 2021 for working capital needs, which was increased to $500,000 in May 2022. There were no borrowings outstanding on the line of credit at March 31, 2023.

 

Capital equipment expenditures and additional patent costs during the nine months ended March 31, 2023 were $52,411. 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 March 31, 2023, are summarized as follows:

 

   Fiscal 2023   Thereafter   Total 
Financing lease for equipment, including interest  $12,155   $120,564   $132,719 
Minimum operating lease payments  $45,389   $377,904   $423,293 

 

We have contractual cash commitments related to open purchase orders as of March 31, 2023 of approximately $2,923,320.

  

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.

 

 

 

 

 19 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

  

Item 4. Controls and Procedures.

 

Management’s Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2023, because of a material weakness in our internal controls over financial reporting described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

Material Weakness Identified; Remedial Steps Being Taken

 

During our review of the results for the fiscal quarter ended March 31, 2023, errors were identified in the Company’s accruals of costs associated with services provided by third-party contractors on certain development projects. Those errors caused an understatement of costs of goods sold for the quarters ended September 30, 2022 and December 31, 2022, for which we have concluded such error is not material to those previously reported financial statements. However, because of the significance of these items, and to facilitate comparisons among periods, the Company decided to revise the previously issued first and second quarter unaudited condensed consolidated financial information by increasing accounts payable and cost of goods sold by $85,213 and $125,752 in the quarters ended September 30, 2022 and December 31, 2022, respectively. Such quarterly and year to date financial statements will be revised in subsequent filings with the Securities and Exchange Commission that include such statements.

 

To address and remediate the material weakness in internal control over financial reporting described above, we have implemented processes to improve our accounts payable controls and documentation for the recognition of costs incurred for services performed by outside contractors and matching those costs, when applicable, to fiscal periods in which those services are billed to our customers. Specifically, we have implemented procedures to document the receipt of non-physical work product by our outside contractors, accrue for services performed by outside contractors when vendor invoices for such services have not yet been received, and to review billings to customers to ensure related contractor billings are expensed in the same period. Our Chief Executive Officer and our Chief Financial Officer will monitor such accruals in future quarters to confirm that these steps have properly remediated the material weakness in the timing of third-party expense accruals. We believe that the steps outlined above strengthen our internal control over financial reporting and mitigate the material weakness described above.

    

Changes in Internal Control over Financial Reporting

 

Except for the material weakness disclosed above, there has been no change in our internal control over financial reporting that occurred during the quarter of our fiscal year covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 20 

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Our Company, on occasion, may be involved in legal matters arising in the ordinary course of our business. While management believes that such matters are currently insignificant, matters arising in the ordinary course of business for which we are or could become involved in litigation may have a material adverse effect on our business, financial condition or results of operations. We are not aware of any pending or threatened litigation against us or our officers and directors in their capacity as such that could have a material impact on our operations or finances.

 

Item 1A. Risk Factors.

 

There have been no material changes from the risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended June 30, 2022, as filed with the Securities and Exchange Commission on September 27, 2022.

  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3. Defaults Upon Senior Securities.

 

Not applicable.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

  

Item 5. Other Information.

 

Not applicable.

 

 

 

 

 

 

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Item 6. Exhibits.

 

Exhibit   Description
     
2.1   Asset Purchase Agreement between the Company and Optometrics Corporation, dated January 18, 2008 (included as Exhibit 2.1 to the Form 8-K filed January 25, 2008 and incorporated herein by reference).
     
3.1   Articles of Organization of Precision Optics Corporation, Inc., as amended (included as Exhibit 3.1 to the Form SB-2 filed March 16, 2007, and incorporated herein by reference).
     
3.2   Bylaws of Precision Optics Corporation, Inc. (included as Exhibit 3.2 to the Form S-1 filed December 18, 2008, and incorporated herein by reference).
     
3.3   Articles of Amendment to the Articles of Organization of Precision Optics Corporation, Inc., dated November 25, 2008 and effective December 11, 2008 (included as Exhibit 3.1 to the Form 8-K filed December 11, 2008, and incorporated herein by reference).
     
3.4   Amended and Restated Bylaws of Precision Optics Corporation, Inc. (included as Exhibit 3.1 to the Current Report on Form 8-K filed July 11, 2014, and incorporated herein by reference).
     
3.5  

Amendment to the Amended and Restated Bylaws of Precision Optics Corporation, Inc. effective May 13, 2022 (included as exhibit 3.5 to the Form 10-Q filed May 16, 2022, and incorporated herein by reference).

 

3.6   Articles of Amendment to the Articles of Organization of Precision Optics Corporation, Inc., dated October 24, 2022; and Articles of Amendment to the Articles of Organization of Precision Optics Corporation, Inc., dated October 26, 2022 (included as Exhibit 3.1 to the Form 8-K filed November 2, 2022, and incorporated herein by reference).
     
3.7   Articles of Amendment to the Articles of Organization of Precision Optics Corporation, Inc., dated October 27, 2022 (included as Exhibit 3.2 to the Form 8-K filed November 2, 2022, and incorporated herein by reference).
     
10.1   Precision Optics Corporation, Inc. 2011 Equity Incentive Plan, dated October 13, 2011 (included as Exhibit 10.2 to Form S-8 filed October 14, 2011, and incorporated herein by reference.)
     
10.2   Precision Optics Corporation, Inc. Amended 2011 Equity Incentive Plan, dated October 14, 2011, as amended on April 16, 2015 (included as Exhibit 10.1 to the Company’s Registration Statement on Form S-8 filed April 20, 2015, and incorporated herein by reference).
     
10.3   Compensation Agreement, by and among Precision Optics Corporation, Inc. and Joseph N. Forkey, dated August 2, 2018 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 3, 2018, and incorporated herein by reference).
     
10.4†+   Asset Purchase Agreement dated July 1, 2019, between Precision Optics Corporation, Inc. and Ross Optical Industries, Inc. and the shareholders (included as Exhibit 10.1 to the Form 8-K filed on July 8, 2019, and incorporated herein by reference).
     
10.5   Form of Purchase Agreement, by and among Precision Optics Corporation, Inc. and several Investors, dated July 1, 2019 (included as Exhibit 10.2 to the Form 8-K filed on July 8, 2019, and incorporated herein by reference).
     
10.6   Form of Registration Rights Agreement, by and among Precision Optics Corporation, Inc. and several Investors, dated July 1, 2019 (included as Exhibit 10.3 to the Form 8-K filed on July 8, 2019, and incorporated herein by reference).

 

 

 

 

 22 

 

 

10.7   Employment Agreement, by and among Precision Optics Corporation. Inc. and Divaker Mangadu, dated July 1, 2019 (included as Exhibit 10.4 to the Form 8-K filed on July 8, 2019, and incorporated herein by reference).
     
10.8†   Employment agreement, by and among Precision Optics Corporation, Inc. and Jeff DiRubio, dated April 26, 2019 (included as Exhibit 10.16 to the annual report on Form 10-K filed on September 26, 2019, and incorporated herein by reference).
     
10.9+   Lease Agreement, by and among Precision Optics Corporation, Inc. and Texzona Industries Ltd. dated July 1, 2019 (included as Exhibit 10.17 to the annual report on Form 10-K filed on September 26, 2019, and incorporated herein by reference).
     
10.10   Employment Offer Letter Daniel S. Habhegger, dated December 2, 2019 (included as Exhibit 10.18 to the quarterly report on Form 10-Q filed on February 13, 2020, and incorporated herein by reference).
     
10.11   Form of Securities Purchase Agreement, by and among Precision Optics Corporation, Inc. and several Investors, dated April 14, 2020 (included as Exhibit 10.1 to the current report on Form 8-K filed on May 7, 2020, and incorporated herein by reference).
     
10.12   Form of Registration Rights Agreement, by and among Precision Optics Corporation, Inc. and several Investors, dated April 14, 2020 (included as Exhibit 10.2 to the current report on Form 8-K filed on May 7, 2020, and incorporated herein by reference).
     
10.13†+   Asset Purchase Agreement, dated October 4, 2021, by and among Precision Optics Corporation, Inc. and Lighthouse Imaging, LLC and Anania & Associates Investment Company, LLC (included as Exhibit 10.1 to the current report on Form 8-K filed on October 8, 2021, and incorporated herein by reference).
     
10.14   Form of Securities Purchase Agreement, by and among Precision Optics Corporation, Inc. and several Investors, dated October 4, 2021 (included as Exhibit 10.2 to the current report on Form 8-K filed on October 8, 2021, and incorporated herein by reference).
     
10.15   Form of Registration Rights Agreement, by and among Precision Optics Corporation, Inc. and several Investors, dated October 4, 2021 (included as Exhibit 10.3 to the current report on Form 8-K filed on October 8, 2021, and incorporated herein by reference).
     
10.16+   Loan Agreement dated October 4, 2021, by and among Precision Optics Corporation, Inc. and Main Street Bank (included as Exhibit 10.4 to the current report on Form 8-K filed on October 8, 2021, and incorporated herein by reference).
     
10.17   $250,000 Revolving Line of Credit Note dated October 4, 2021 (included as Exhibit 10.5 to the current report on Form 8-K filed on October 8, 2021, and incorporated herein by reference).
     
10.18   $2,600,000 Term Loan Note dated October 4, 2021 (included as Exhibit 10.6 to the current report on Form 8-K filed on October 8, 2021, and incorporated herein by reference).
     
10.19   Security Agreement dated October 4, 2021, by and among Precision Optics Corporation, Inc. and Main Street Bank (included as Exhibit 10.7 to the current report on Form 8-K filed on October 8, 2021, and incorporated herein by reference).
     
10.20   Director side letter agreement dated October 4, 2021 (included as Exhibit 10.8 to the current report on Form 8-K filed on October 8, 2021, and incorporated herein by reference).
     
10.21   Precision Optics Corporation, Inc. 2022 Equity Incentive Plan (included as Appendix B to the proxy statement on Form DEF14A filed on February 24, 2022, and incorporated herein by reference).

 

 

 

 

 23 

 

 

10.22

  

Employment offer letter dated January 5, 2023 between Precision Optics Corporation, Inc. and Daniel S. Habhegger (included as Exhibit 10.1 to the current report on Form 8-K filed on January 5, 2023, and incorporated herein by reference).

     

10.23

  

Employment offer letter dated January 5, 2023 between Precision Optics Corporation, Inc. and E. Kevin Dahill (included as Exhibit 10.2 to the current report on Form 8-K filed on January 5, 2023, and incorporated herein by reference).

     
14.1   Precision Optics Corporation, Inc. Corporate Code of Ethics and Conduct (included as Exhibit 14.1 to the Form 10-K filed September 28, 2008, and incorporated herein by reference).
     
21.1   Subsidiaries of the Registrant (included as Exhibit 21.1 to the Form 10-K filed September 26, 2008, and incorporated herein by reference).
     
31.1*   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS*   Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
     
101.SCH*   Inline XBRL Taxonomy Extension Schema Document
     
101.CAL*   Inline XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   Inline XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB*   Inline XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*   Inline XBRL Taxonomy Extension Presentation Linkbase Document
     
104*  

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

*   Filed Herewith.
†   Certain portions of the agreement have been omitted to preserve the confidentiality of such information. The Company will furnish copies of any such information to the SEC upon request.
+   The schedules to agreement have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K.  The Company will furnish copies of any such schedules to the SEC upon request.

 

Copies of above exhibits not contained herein are available to any stockholder, upon written request to: Chief Financial Officer, Precision Optics Corporation, Inc., 22 East Broadway, Gardner, MA 01440.

 

 

 

 

 24 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  PRECISION OPTICS CORPORATION, INC.
     
Date: May 15, 2023 By: /s/ Joseph N. Forkey
    Joseph N. Forkey
   

Chief Executive Officer

(Principal Executive Officer)

     
     
Date: May 15, 2023 By: /s/ E. Kevin Dahill
   

E. Kevin Dahill

Chief Financial Officer

    (Principal Financial Officer and Principal Accounting Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 25 

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