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.
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.
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.
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.
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.
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:
Schedule of earnings per share | |
| | | |
| | | |
| | | |
| | |
| |
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.
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 | ) |
| |
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. |
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.
Schedule of consolidated pro forma results | |
| | |
| | |
| | |
| |
| |
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.
Inventories are stated at the lower of cost (first-in,
first-out) or market and consisted of the following:
Schedule of inventory | |
| | |
| |
| |
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:
Schedule of long-term debt | |
| |
| |
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:
Schedule of principal payments due term loan note payable | |
| |
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 | |
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:
Future minimum lease payments | |
| | |
| |
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.
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:
Schedule of stock-based compensation expense | |
| | | |
| | | |
| | | |
| | |
| |
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:
Schedule of stock option activity | |
| | |
| | |
| |
| |
| 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 | |
Information related to the stock options outstanding
as of March 31, 2023 is as follows:
Schedule of stock options outstanding by exercise price range | | |
| | |
| | |
| | |
| | |
| |
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.
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.
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:
Schedule of disaggregation of revenues | |
| | | |
| | | |
| | | |
| | |
| |
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:
Schedule of contract liabilities |
|
| | | |
| | | |
| | | |
|
| |
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 |
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.
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.
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.
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.
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.