Item 1. Financial Statements.
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| |
| | | |
| | |
| |
March 31, 2022 | | |
June 30, 2021 | |
ASSETS | |
| | | |
| | |
Current Assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 831,585 | | |
$ | 861,650 | |
Accounts receivable, net of allowance for doubtful accounts of $253,633 at March 31, 2022 and $251,383 at June 30, 2021 | |
| 3,347,692 | | |
| 1,878,755 | |
Inventories | |
| 2,965,220 | | |
| 1,885,395 | |
Prepaid expenses | |
| 318,551 | | |
| 150,635 | |
Total current assets | |
| 7,463,048 | | |
| 4,776,435 | |
| |
| | | |
| | |
Fixed Assets: | |
| | | |
| | |
Machinery and equipment | |
| 3,196,585 | | |
| 3,084,511 | |
Leasehold improvements | |
| 812,283 | | |
| 792,723 | |
Furniture and fixtures | |
| 216,810 | | |
| 178,640 | |
Total Fixed Assets | |
| 4,225,678 | | |
| 4,055,874 | |
Less: Accumulated depreciation and amortization | |
| 3,599,491 | | |
| 3,461,622 | |
Net fixed assets | |
| 626,187 | | |
| 594,252 | |
| |
| | | |
| | |
Operating lease right-to-use asset | |
| 140,607 | | |
| 61,247 | |
Patents, net | |
| 212,952 | | |
| 141,702 | |
Goodwill | |
| 8,824,210 | | |
| 687,664 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 17,267,004 | | |
$ | 6,261,300 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Current Liabilities: | |
| | | |
| | |
Current portion of capital lease obligation | |
$ | 40,102 | | |
$ | 38,347 | |
Current maturities of long-term debt | |
| 367,714 | | |
| – | |
Current portion of acquisition earn out liability | |
| 898,855 | | |
| 166,667 | |
Accounts payable | |
| 2,538,040 | | |
| 1,205,149 | |
Customer advances | |
| 1,018,275 | | |
| 450,084 | |
Accrued compensation and other | |
| 862,496 | | |
| 589,616 | |
Operating lease liability | |
| 45,405 | | |
| 61,247 | |
Total current liabilities | |
| 5,770,887 | | |
| 2,511,110 | |
| |
| | | |
| | |
Capital lease obligation, net of current portion | |
| 122,096 | | |
| 152,397 | |
Long-term debt, net of current maturities | |
| 2,053,070 | | |
| – | |
Acquisition earn out liability, net of current portion | |
| 697,408 | | |
| 166,666 | |
Operating lease liability, net of current portion | |
| 95,202 | | |
| – | |
| |
| | | |
| | |
Stockholders’ Equity: | |
| | | |
| | |
Common stock, $0.01 par value: 50,000,000 shares authorized; issued and outstanding 16,887,840 shares at March 31, 2022 and 13,282,476 at June 30, 2021 | |
| 168,878 | | |
| 132,825 | |
Additional paid-in capital | |
| 56,723,154 | | |
| 50,464,280 | |
Accumulated deficit | |
| (48,363,691 | ) | |
| (47,165,978 | ) |
Total stockholders’ equity | |
| 8,528,341 | | |
| 3,431,127 | |
| |
| | | |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 17,267,004 | | |
$ | 6,261,300 | |
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, 2022 AND 2021
(UNAUDITED)
| |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended March 31, | | |
Nine Months Ended March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenues | |
$ | 4,651,352 | | |
$ | 2,458,290 | | |
$ | 10,884,737 | | |
$ | 8,001,641 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of goods sold | |
| 2,923,143 | | |
| 1,640,266 | | |
| 7,397,914 | | |
| 5,353,999 | |
Gross profit | |
| 1,728,209 | | |
| 818,024 | | |
| 3,486,823 | | |
| 2,647,642 | |
| |
| | | |
| | | |
| | | |
| | |
Research and development expenses, net | |
| 214,898 | | |
| 146,063 | | |
| 433,248 | | |
| 443,609 | |
Selling, general and administrative expenses | |
| 1,574,432 | | |
| 927,979 | | |
| 3,974,824 | | |
| 2,671,176 | |
Business
acquisition expenses | |
| – | | |
| – | | |
| 172,174 | | |
| – | |
Total operating expenses | |
| 1,789,330 | | |
| 1,074,042 | | |
| 4,580,246 | | |
| 3,114,785 | |
| |
| | | |
| | | |
| | | |
| | |
Operating loss | |
| (61,121 | ) | |
| (256,018 | ) | |
| (1,093,423 | ) | |
| (467,143 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (52,778 | ) | |
| (666 | ) | |
| (104,290 | ) | |
| (2,202 | ) |
Gain on forgiveness of bank
note | |
| – | | |
| 808,962 | | |
| – | | |
| 808,962 | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
$ | (113,899 | ) | |
$ | 552,278 | | |
$ | (1,197,713 | ) | |
$ | 339,617 | |
| |
| | | |
| | | |
| | | |
| | |
Income (loss) per share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.01 | ) | |
$ | 0.04 | | |
$ | (0.08 | ) | |
$ | 0.03 | |
Fully diluted | |
$ | (0.01 | ) | |
$ | 0.04 | | |
$ | (0.08 | ) | |
$ | 0.02 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 16,803,040 | | |
| 13,243,595 | | |
| 15,545,869 | | |
| 13,208,805 | |
Fully diluted | |
| 16,803,040 | | |
| 14,068,459 | | |
| 15,545,869 | | |
| 13,841,700 | |
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, 2022 AND 2021
(UNAUDITED)
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
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 | |
| 13,282,476 | | |
$ | 132,825 | | |
$ | 50,464,280 | | |
$ | – | | |
$ | (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 | |
| 13,282,476 | | |
| 132,825 | | |
| 50,614,351 | | |
| 1,030,000 | | |
| (47,742,779 | ) | |
| 4,034,397 | |
Stock-based compensation | |
| – | | |
| – | | |
| 330,451 | | |
| – | | |
| – | | |
| 330,451 | |
Proceeds from private placement of common stock | |
| 937,500 | | |
| 9,375 | | |
| 1,490,625 | | |
| (1,030,000 | ) | |
| – | | |
| 470,000 | |
Issuance of common stock in business acquisition | |
| 2,500,000 | | |
| 25,000 | | |
| 4,800,000 | | |
| – | | |
| – | | |
| 4,825,000 | |
Proceeds from exercise of stock option | |
| 15,000 | | |
| 150 | | |
| 16,500 | | |
| – | | |
| – | | |
| 16,650 | |
Exercise of stock options net of 1,435 shares withheld | |
| 2,625 | | |
| 26 | | |
| (26 | ) | |
| – | | |
| – | | |
| – | |
Issuance of common stock for employee services | |
| 9,095 | | |
| 91 | | |
| 19,909 | | |
| – | | |
| – | | |
| 20,000 | |
Net loss | |
| – | | |
| – | | |
| – | | |
| – | | |
| (507,013 | ) | |
| (507,013 | ) |
Balance, December 31, 2021 | |
| 16,746,696 | | |
| 167,467 | | |
| 57,271,810 | | |
| – | | |
| (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 | |
| 43,200 | | |
| 432 | | |
| 46,208 | | |
| – | | |
| – | | |
| 46,640 | |
Exercise of stock options net of 96,056 shares withheld | |
| 97,944 | | |
| 979 | | |
| (979 | ) | |
| – | | |
| – | | |
| – | |
Net loss | |
| – | | |
| – | | |
| – | | |
| – | | |
| (113,899 | ) | |
| (113,899 | ) |
Balance, March 31, 2022 | |
| 16,887,840 | | |
$ | 168,878 | | |
$ | 56,723,154 | | |
$ | – | | |
$ | (48,363,691 | ) | |
$ | 8,528,341 | |
| |
Nine Month Period Ended March 31, 2021 | |
| |
Number
of Shares | | |
Common
Stock | | |
Additional
Paid-in Capital | | |
Common Stock
Subscribed | | |
Accumulated
Deficit | | |
Total
Stockholders’ Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance, July 1, 2020 | |
| 13,191,789 | | |
$ | 131,918 | | |
$ | 49,702,986 | | |
$ | – | | |
$ | (47,063,143 | ) | |
$ | 2,771,761 | |
Stock-based compensation | |
| – | | |
| – | | |
| 71,146 | | |
| – | | |
| – | | |
| 71,146 | |
Net income | |
| – | | |
| – | | |
| – | | |
| – | | |
| 793 | | |
| 793 | |
Balance, September 30, 2020 | |
| 13,191,789 | | |
| 131,918 | | |
| 49,774,132 | | |
| – | | |
| (47,062,350 | ) | |
| 2,843,700 | |
Stock-based compensation | |
| – | | |
| – | | |
| 157,079 | | |
| – | | |
| – | | |
| 157,079 | |
Net loss | |
| – | | |
| – | | |
| – | | |
| – | | |
| (213,454 | ) | |
| (213,454 | ) |
Balance, December 31, 2020 | |
| 13,191,789 | | |
| 131,918 | | |
| 49,931,211 | | |
| – | | |
| (47,275,804 | ) | |
| 2,787,325 | |
Stock-based compensation | |
| – | | |
| – | | |
| 86,027 | | |
| – | | |
| – | | |
| 86,027 | |
Proceeds from exercise of stock options | |
| 72,000 | | |
| 720 | | |
| 27,551 | | |
| – | | |
| – | | |
| 28,271 | |
Net income | |
| – | | |
| – | | |
| – | | |
| – | | |
| 552,278 | | |
| 552,278 | |
Balance, March 31, 2021 | |
| 13,263,789 | | |
$ | 132,638 | | |
$ | 50,044,789 | | |
$ | – | | |
$ | (46,723,526 | ) | |
$ | 3,453,901 | |
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, 2022 AND 2021
(UNAUDITED)
| |
| | |
| |
| |
Nine Months Ended March 31, | |
| |
2022 | | |
2021 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net income (loss) | |
$ | (1,197,713 | ) | |
$ | 339,617 | |
Adjustments to Reconcile Net Loss to Net Cash Used In Operating Activities - | |
| | | |
| | |
Depreciation and amortization | |
| 137,869 | | |
| 104,379 | |
Stock-based compensation expense | |
| 741,637 | | |
| 314,252 | |
Gain on forgiveness of bank note | |
| – | | |
| (808,962 | ) |
Changes in Operating Assets and Liabilities, net of effects of business acquisition - | |
| | | |
| | |
Non-cash interest expense | |
| 36,018 | | |
| – | |
Accounts receivable, net | |
| (791,959 | ) | |
| (52,344 | ) |
Inventories, net | |
| (623,817 | ) | |
| 247,963 | |
Due from related party | |
| 84,210 | | |
| – | |
Prepaid expenses | |
| (85,791 | ) | |
| 1,551 | |
Accounts payable | |
| 1,118,149 | | |
| (41,394 | ) |
Customer advances | |
| (258,487 | ) | |
| (184,175 | ) |
Accrued compensation and other | |
| (40,083 | ) | |
| 3,693 | |
Net Cash Used In Operating Activities | |
| (879,967 | ) | |
| (75,420 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Additional patent costs | |
| (23,098 | ) | |
| (40,307 | ) |
Purchases of property and equipment | |
| (59,562 | ) | |
| (49,160 | ) |
Acquisition of businesses | |
| (421,729 | ) | |
| (166,667 | ) |
Net Cash Used In Investing Activities | |
| (504,389 | ) | |
| (256,134 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Payment of capital lease obligations | |
| (28,546 | ) | |
| (49,569 | ) |
Payments of long-term debt | |
| (154,453 | ) | |
| – | |
Payment of debt issuance costs | |
| (26,000 | ) | |
| – | |
Gross proceeds from private placement of common stock | |
| 1,500,000 | | |
| – | |
Gross proceeds from exercise of stock options | |
| 63,290 | | |
| 28,271 | |
Net Cash Provided By (Used in) Financing Activities | |
| 1,354,291 | | |
| (21,298 | ) |
| |
| | | |
| | |
NET DECREASE IN CASH AND CASH EQUIVALENTS | |
| (30,065 | ) | |
| (352,852 | ) |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | |
| 861,650 | | |
| 1,134,697 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | |
$ | 831,585 | | |
$ | 781,845 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: | |
| | | |
| | |
Offering costs included in accrued compensation and other | |
$ | 10,000 | | |
$ | – | |
Acquisition of business financed with long-term debt | |
$ | 2,600,000 | | |
$ | – | |
Acquisition of Manufacturing Equipment Under Capital Lease | |
$ | – | | |
$ | 161,977 | |
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 2022. 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, 2021, together
with the Report of Independent Registered Public Accounting Firm filed under cover of the Company’s 2021 Annual Report on Form 10-K,
filed with the Securities and Exchange Commission on September 28, 2021.
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.
Revision of the Second Quarter 2022 Unaudited
Consolidated Financial Statements
The Company identified an error in the valuation
of 2,500,000 shares of common stock issued on October 4, 2021 in the business acquisition described in Note 2 resulting in an $825,000
overstatement of Additional Paid-In Capital and Goodwill in the December 31, 2021 balance sheet presented in the quarterly report on Form
10-Q for the quarter ended December 31, 2021. This change does not impact the number of shares issued as part of the transaction; it only
changes the imputed value of the common stock issued. The financial statements for the prior interim fiscal quarter ended December 31,
2021 have been revised by an $825,000 adjustment to the opening balance of Additional Paid-In Capital in the accompanying Statement of
Stockholders Equity for the quarter ended March 31, 2022, and by an adjustment of Goodwill at the acquisition date as described in Note
2. No profit and loss accounts in the current or prior interim periods are affected by this revision.
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, 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, 2022 and 2021:
Schedule of earnings per share | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended March 31, | | |
Nine Months Ended March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Net Income (Loss) - Basic and Diluted | |
$ | (113,899 | ) | |
$ | 552,278 | | |
$ | (1,197,713 | ) | |
$ | 339,617 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average Shares Outstanding | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 16,803,040 | | |
| 13,243,595 | | |
| 15,545,869 | | |
| 13,208,805 | |
Fully Diluted | |
| 16,803,040 | | |
| 14,068,459 | | |
| 15,545,869 | | |
| 13,841,700 | |
| |
| | | |
| | | |
| | | |
| | |
Income (Loss) Per Share | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.01 | ) | |
$ | 0.04 | | |
$ | (0.08 | ) | |
$ | 0.03 | |
Fully Diluted | |
$ | (0.01 | ) | |
$ | 0.04 | | |
$ | (0.08 | ) | |
$ | 0.02 | |
The number of shares issuable upon the exercise
of outstanding stock options that were excluded from the computation as their effect was antidilutive was 2,817,500 for the three and
nine months ended March 31, 2022, and 15,000 and 260,000 for the three and nine months ended March 31, 2021, respectively.
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, 2022.
On October 4, 2021, the Company entered into an
asset purchase agreement to acquire substantially all of the assets of Lighthouse Imaging, LLC, a medical optics and digital imaging business,
as described in Forms 8-K and 8-K/A that the Company filed with the Securities and Exchange Commission on October 8, 2021 and December
20, 2021, respectively. The aggregate cash purchase price consisted of $2,855,063 in cash at closing, $1,500,000 as earn-out consideration
over the subsequent two year period, and 2,500,000 unregistered shares of common stock issued to the seller at closing. The effective
date of the acquisition was October 4, 2021, and the actual results of operations of the Lighthouse division since that date are included
in the accompanying consolidated financial statements as of, and for the three and nine months ended, March 31, 2022.
The Company financed the cash portion of the acquisition
by securing a $2,600,000 term loan from Main Street Bank on October 4, 2021, and by selling 937,500 shares of its common stock for $1,500,000
of gross proceeds in a private placement closed on October 1, 2021.
The earn-out consideration will be paid at a rate
of $750,000 per annum from October 1, 2021 to September 30, 2023 if certain levels of gross profit are earned by the Lighthouse division.
Purchase Price Allocation and Goodwill |
The total purchase price of $8,990,670
as previously disclosed in the quarterly report on Form 10-Q for the quarter ended December 31, 2021 has been restated for a revision
of the valuation of the common stock issued to the sellers as described in Note 1. Revision of the Second Quarter 2022 Unaudited Consolidated
Financial Statements. The allocation of the revised purchase price is preliminary and subject to change based on future payments
made for the earn-out contingent liability. Any unearned portions of the earn-out liability will be recognized in earnings. The acquired
assets including the revised Goodwill, contingent consideration and assumed liabilities at the effective date of acquisition include
the following:
Schedule of acquired assets, contingent consideration and assumed liabilities | |
| |
At Acquisition Effective Date October 4, 2021 | |
Amount | |
Trade accounts receivable, net | |
$ | 676,977 | |
Inventories | |
| 456,008 | |
Other current assets | |
| 82,125 | |
Fixed assets | |
| 110,243 | |
Patents | |
| 48,153 | |
Total Assets Acquired | |
| 1,373,506 | |
| |
| | |
Accounts payable | |
| 214,742 | |
Customer advances | |
| 826,679 | |
Accrued compensation and other | |
| 302,961 | |
Total Liabilities Assumed | |
| 1,344,382 | |
Net assets acquired | |
| 29,124 | |
Goodwill | |
| 8,136,546 | |
Total Purchase Price-Initial and Contingent Consideration | |
$ | 8,165,670 | |
Consolidated Pro Forma Results
Consolidated unaudited pro forma results of operations
for the Company are presented below assuming that the acquisition of the Lighthouse division had occurred on July 1, 2020. Pro forma operating
results include net adjustments resulting from the acquisition transaction during the three and nine months ended March 31, 2022 and 2021.
Schedule of consolidated pro forma results | |
| | |
| | |
| | |
| |
| |
Three Months Ended March 31, | | |
Nine Months Ended March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
(Actual) | | |
(Pro Forma) | | |
(Pro Forma) | | |
(Pro Forma) | |
Revenues | |
$ | 4,651,352 | | |
$ | 3,600,498 | | |
$ | 12,329,074 | | |
$ | 11,597,530 | |
Net income (loss) | |
| (113,899 | ) | |
| 593,668 | | |
| (1,140,418 | ) | |
| 382,681 | |
Net income (loss) per share | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.01 | ) | |
$ | (0.04 | ) | |
$ | (0.07 | ) | |
$ | (0.02 | ) |
Fully diluted | |
$ | (0.01 | ) | |
$ | (0.03 | ) | |
$ | (0.07 | ) | |
$ | (0.02 | ) |
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, 2022 | | |
June 30, 2021 | |
Raw Materials | |
$ | 1,292,861 | | |
$ | 626,255 | |
Work-In-Progress | |
| 426,771 | | |
| 453,117 | |
Finished Goods | |
| 1,245,588 | | |
| 806,023 | |
Total Inventories | |
$ | 2,965,220 | | |
$ | 1,885,395 | |
4. |
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. The $250,000 line of credit is due on demand and had zero borrowings outstanding at March 31, 2022. Borrowings
under the line of credit bear interest payable monthly at the prime lending rate plus 1.5% per annum 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 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, 2022:
Schedule of long-term debt | |
| |
| |
Amount | |
Term Loan Note payable to Main Street Bank with monthly principal payments of $30,952.38 plus interest at the prime lending rate plus 1.5% per annum. Secured by all assets of the Company, and subject to certain periodic reporting to the bank, an annual minimum debt service coverage ratio of 1.20:1, and other conditions. The Term Loan Note matures on October 15, 2028. | |
$ | 2,445,238 | |
| |
| | |
Less current maturities | |
| (367,714 | ) |
Less debt issuance costs, net of accumulated amortization of $1,548 | |
| (24,454 | ) |
Long-term debt, net of current portion of debt issuance costs | |
$ | 2,053,070 | |
At March 31, 2022 principal payments
due on the Term Loan Note payable are as follows:
Schedule of future minimum note payable | |
| |
Fiscal Year Ending June 30: | |
| |
2022 | |
$ | 92,857 | |
2023 | |
| 371,429 | |
2024 | |
| 371,429 | |
2025 | |
| 371,429 | |
2026 | |
| 371,429 | |
Thereafter | |
| 866,665 | |
| |
| | |
| |
$ | 2,445,238 | |
In March 2021, the Company entered into a five-year
capital lease in the amount of $161,977 for manufacturing equipment. In January 2020, the Company entered into a five-year capital lease
in the amount of $47,750 for manufacturing equipment. The net book value of fixed assets under capital lease obligations as of March 31,
2022 is $156,640.
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, 2022 total $150,504. Total rent expense including base rent
and common area expenses was $15,705 and $21,438 during the three months ended March 31, 2022 and 2021, respectively. Included in the
accompanying balance sheet at March 31, 2022 is a right-of-use asset of $140,607 and current and long-term right-of-use operating lease
liabilities of $45,405 and $95,202, respectively.
At March 31, 2022 future minimum lease payments
under the capital lease and operating lease obligations are as follows:
Future minimum lease payments | |
| | | |
| | |
Fiscal Year Ending June 30: | |
Capital Leases | | |
Operating Lease | |
2022 | |
$ | 12,155 | | |
$ | 15,705 | |
2023 | |
| 48,619 | | |
| 43,828 | |
2024 | |
| 48,619 | | |
| 44,924 | |
2025 | |
| 43,917 | | |
| 46,047 | |
2026 | |
| 28,006 | | |
| – | |
Total Minimum Payments | |
| 181,316 | | |
$ | 150,504 | |
Less: amount representing interest | |
| 19,118 | | |
| | |
Present value of minimum lease payments | |
| 162,198 | | |
| | |
Less: current portion | |
| 40,102 | | |
| | |
| |
$ | 122,096 | | |
| | |
The Company’s operating leases for its Gardner,
Massachusetts office, production and storage spaces plus an equipment lease as well as the Windham, Maine office and production space
have expired and are continuing on a month-to-month tenant at will basis. Rent expense on these operating leases was $222,112 and $124,848
for the nine months ended March 31, 2022 and 2021, respectively.
6. |
STOCK-BASED COMPENSATION |
Stock Options
The following table summarizes stock-based compensation
expense for the three and nine months ended March 31, 2022 and 2021:
Schedule of stock-based compensation expense | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended March 31, | | |
Nine Months Ended March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Cost of Goods Sold | |
$ | 34,712 | | |
$ | 11,233 | | |
$ | 91,542 | | |
$ | 33,699 | |
Research and Development | |
| 70,237 | | |
| 19,435 | | |
| 164,036 | | |
| 55,795 | |
Selling, General and Administrative | |
| 126,166 | | |
| 55,359 | | |
| 466,059 | | |
| 224,758 | |
Stock Based Compensation Expense | |
$ | 231,115 | | |
$ | 86,027 | | |
$ | 721,637 | | |
$ | 314,252 | |
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, 2022:
Schedule of stock option activity | |
| | |
| | |
| |
| |
| Options Outstanding | |
| |
| Number of Shares | | |
| Weighted Average Exercise Price | | |
| Weighted Average Contractual Life | |
Outstanding at July 1, 2021 | |
| 2,578,200 | | |
$ | 1.13 | | |
| 6.73 years | |
Exercised | |
| (255,700 | ) | |
$ | 1.10 | | |
| | |
Granted | |
| 584,500 | | |
$ | 1.74 | | |
| | |
Cancelled | |
| (89,500 | ) | |
$ | 0.99 | | |
| | |
Outstanding at March 31, 2022 | |
| 2,817,500 | | |
$ | 1.35 | | |
| 7.35 years | |
Information related to the stock options outstanding
as of March 31, 2022 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 | |
$ | 0.48 | | |
| 60,000 | | |
| 4.00 | | |
$ | 0.48 | | |
| 60,000 | | |
$ | 0.48 | |
$ | 0.50 | | |
| 80,000 | | |
| 4.22 | | |
$ | 0.50 | | |
| 80,000 | | |
$ | 0.50 | |
$ | 0.55 | | |
| 15,000 | | |
| 6.01 | | |
$ | 0.55 | | |
| 15,000 | | |
$ | 0.55 | |
$ | 0.70 | | |
| 100,000 | | |
| 6.35 | | |
$ | 0.70 | | |
| 100,000 | | |
$ | 0.70 | |
$ | 0.73 | | |
| 670,000 | | |
| 4.81 | | |
$ | 0.73 | | |
| 670,000 | | |
$ | 0.73 | |
$ | 0.85 | | |
| 6,000 | | |
| 0.76 | | |
$ | 0.85 | | |
| 6,000 | | |
$ | 0.85 | |
$ | 0.90 | | |
| 36,000 | | |
| 2.19 | | |
$ | 0.90 | | |
| 36,000 | | |
$ | 0.90 | |
$ | 1.25 | | |
| 45,000 | | |
| 7.97 | | |
$ | 1.25 | | |
| 30,000 | | |
$ | 1.25 | |
$ | 1.30 | | |
| 441,000 | | |
| 7.20 | | |
$ | 1.30 | | |
| 291,520 | | |
$ | 1.30 | |
$ | 1.40 | | |
| 70,000 | | |
| 8.64 | | |
$ | 1.40 | | |
| 70,000 | | |
$ | 1.40 | |
$ | 1.42 | | |
| 100,000 | | |
| 7.45 | | |
$ | 1.42 | | |
| 66,667 | | |
$ | 1.42 | |
$ | 1.45 | | |
| 5,000 | | |
| 8.94 | | |
$ | 1.45 | | |
| 1,667 | | |
$ | 1.45 | |
$ | 1.50 | | |
| 70,000 | | |
| 7.69 | | |
$ | 1.50 | | |
| 70,000 | | |
$ | 1.50 | |
$ | 1.68 | | |
| 540,000 | | |
| 9.18 | | |
$ | 1.68 | | |
| 270,000 | | |
$ | 1.68 | |
$ | 2.00 | | |
| 140,000 | | |
| 9.36 | | |
$ | 2.00 | | |
| – | | |
$ | – | |
$ | 2.09 | | |
| 249,500 | | |
| 9.86 | | |
$ | 2.09 | | |
| – | | |
$ | – | |
$ | 2.26 | | |
| 190,000 | | |
| 9.64 | | |
$ | 2.26 | | |
| 90,000 | | |
$ | 2.26 | |
$ | 1.35 | | |
| 2,817,500 | | |
| 7.35 | | |
$ | 1.35 | | |
| 1,856,854 | | |
$ | 1.10 | |
The aggregate intrinsic value of the Company’s
in-the-money outstanding and exercisable options as of March 31, 2022 was $1,913,350 and $1,689,898, respectively.
7. |
SALE OF STOCK IN OCTOBER 2021 |
On October 1, 2021, the Company entered into agreements
with accredited investors for the sale and purchase of 937,500 unregistered shares of its common stock, $0.01 par value at a purchase
price of $1.60 per share. The Company used the net proceeds from this placement to partially fund the October 4, 2021, acquisition of
the operating assets of Lighthouse Imaging, LLC with an effective date of October 4, 2021.
In conjunction with the placement, the Company also entered into a registration rights agreement with the investors, whereby it is obligated
to file a registration statement with the Securities and Exchange Commission on or before 120 calendar days after October 4, 2021 to register
the resale by the investors of 937,500 shares of its common stock purchased in the placement. The registration statement was filed on
January 31, 2022 and became effective on February 11, 2022.
8. |
ISSUANCE OF COMMON STOCK IN BUSINESS ACQUISITION |
On October 4, 2021, the Company issued 2,500,000
unregistered shares of its common stock to the sellers of Lighthouse Imaging, LLC, valued on that date at $1.60 per share or $4,000,000,
as shown in the accompanying statement of stockholders’ equity for the nine months ended March 31, 2022.
In conjunction with the issuance, the Company
agreed to use reasonable efforts to effectuate within a reasonable period after the October 4, 2021 business acquisition date a registration
statement with the Securities and Exchange Commission to register the resale by the sellers of 2,500,000 shares of its common stock issued
in the business acquisition.
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 almost exclusively 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.
Revenues represent the amount of consideration
the Company expects to receive from customers in exchange for transferring products and services. Other selling costs to obtain and fulfill
contracts are expensed as incurred due to the short-term nature of a majority of its revenues. 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 revenues.
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. Revenues are comprised of the following for the three and nine months ended March 2022 and 2021:
Schedule of disaggregation of revenues | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended March 31, | | |
Nine Months Ended March 31, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Engineering Design Services | |
$ | 1,532,414 | | |
$ | 549,636 | | |
$ | 3,659,667 | | |
$ | 1,986,856 | |
Optical Components | |
| 1,927,963 | | |
| 1,456,213 | | |
| 4,873,294 | | |
| 4,330,511 | |
Medical Device Products and Assemblies | |
| 1,190,975 | | |
| 452,441 | | |
| 2,351,776 | | |
| 1,684,274 | |
Total Revenues | |
$ | 4,651,352 | | |
$ | 2,458,290 | | |
$ | 10,884,737 | | |
$ | 8,001,641 | |
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,
2022, 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, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Contract Liabilities, Beginning of Period | |
$ | 1,137,470 | | |
$ | 151,877 | | |
$ | 450,084 | | |
$ | 417,059 | |
Assumed in Business Acquisition | |
| – | | |
| – | | |
| 826,679 | | |
| – | |
Unearned Revenue Received from Customers | |
| 774,316 | | |
| 442,681 | | |
| 1,388,700 | | |
| 614,384 | |
Revenue Recognized | |
| (893,511 | ) | |
| (361,674 | ) | |
| (1,647,188 | ) | |
| (798,559 | ) |
Contract Liabilities, End of Period | |
$ | 1,018,275 | | |
$ | 232,884 | | |
$ | 1,018,275 | | |
$ | 232,884 | |
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. Given the uncertainty surrounding the continuation of economic impacts both domestically and abroad, the
Company cannot predict with certainty at this time what the future impact of COVID-19 and resulting business and economic policies in
the US and abroad will be on its up-coming quarterly fiscal operating results.
Item 2. Managements 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, 2022 and with our audited consolidated
financial statements for the year ended June 30, 2021 included in our Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on September 28, 2021.
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, 2021 and other reports we file with the Securities and Exchange Commission. Although we believe
the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of
the date on which the statements are made. We do not intend to update any of the forward-looking statements after the date of this report
to conform these statements to actual results or to changes in our expectations, except as required by law.
Overview
We have been a developer and manufacturer of advanced
optical instruments since 1982. Our medical instrumentation line includes traditional endoscopes and endocouplers as well as other custom
imaging and illumination products for use in minimally invasive surgical procedures. Much of our recent development efforts have been
targeted at the development of next generation endoscopes. We selectively execute internal research and development programs to develop
next generation capabilities for designing and manufacturing 3D endoscopes and very small Microprecision lenses, anticipating future requirements
as the surgical community continues to demand smaller and more enhanced imaging systems for minimally invasive surgery.
As Ross Optical Industries of El Paso, Texas we
also operate as a supplier of custom optical components and assemblies for military and defense, medical and various other industrial
applications. All products sold by us under the Ross Optical name include a custom or catalog optic, which is sourced through our extensive
domestic and worldwide network of optical fabrication companies. Most systems make use of optical lenses, prisms, mirrors and windows
and range from individual optical components to complex mechano-optical assemblies. Products often include thin film optical coatings
that are applied using our in-house coating department.
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 34% our business during the nine
months ended March 31, 2022 is from engineering services primarily relating to the design of medical device optical assemblies, 45% from
the sale of both internally manufactured and purchased optical components, and 21% 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 has generated traditional proprietary endoscopes and endocouplers as well
as other custom imaging and illumination products for our customers’ use in minimally invasive surgical procedures. We design and
manufacture 3D endoscopes and very small Microprecision lenses, assemblies and complete medical devices to meet the surgical community’s
continuing demand for smaller, disposable, and more enhanced imaging systems for minimally invasive surgery.
We are registered to the ISO 9001:2015 and ISO
13485:2016 Quality Standards and comply with the FDA Good Manufacturing Practices and the European Union Medical Device Directive for
CE marking of our medical products.
Our internet websites are www.poci.com, 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 Microprecision 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. Our Ross Optical division markets through existing customers
and trade shows, in addition to proactive online marketing strategies executed primarily through its website.
General
This management’s discussion and analysis
of financial condition and results of operations is based upon our unaudited consolidated financial statements, which have been prepared
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The preparation of these consolidated
financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates.
There have been no significant changes in our
critical accounting policies as disclosed in the Notes to our Financial Statements contained in our Annual Report on Form 10-K for
the year ended June 30, 2021 filed with the Securities and Exchange Commission on September 28, 2021.
Results of Operations
Our total revenues for the quarter ended March
31, 2022, were $4,651,352, as compared to $2,458,290 for the same period in the prior year, an increase of $2,193,062, or 89.2%, primarily
due to inclusion of the Lighthouse division since its acquisition on October 4, 2021 and an increase in medical devise manufacturing revenue.
Excluding the effect of the Lighthouse acquisition, engineering revenue experienced a slight quarter-over-quarter decrease while production
revenue was up 106% and component revenue increased 32% from the quarter ended March 31, 2021 to 2022.
Our total revenues for the nine months ended March 31,
2022 were $10,884,737, as compared to $8,001,641 for the same period in the prior year, an increase of $2,883,096, or 36.0% primarily
due to inclusion of the Lighthouse division since its acquisition on October 4, 2021. Excluding the effect of the Lighthouse acquisition,
engineering revenue during the nine months ended March 31, 2022 decreased approximately $287,000 compared to the same period of the prior
year due primarily to a change in mix of engineering projects. Component revenues increased approximately $543,000 during the nine months
ended March 31, 2022 compared to the same period of the prior year, and production revenue increased approximately $161,000 over the same
period as production on some products began to return to pre-pandemic levels.
Our largest customer during the three and nine
months ended March 31, 2022 accounted for 10.9% and 9.0%, respectively, of our revenue and represented manufacturing assembly revenues
for a medical diagnostic system. We generated revenues from 193 unique customers during the nine months ended March 31, 2022, and one
single customer accounted for slightly more than 10% or more of our revenue for the quarter and no single customer accounted for 10% or
more of our revenue for the nine months ended March 31, 2022 or the fiscal year ended June 30, 2021.
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. Given the uncertainty
surrounding the continuation of economic impacts both domestically and abroad, we cannot predict with certainty at this time what the
future impact of COVID-19 and resulting business and economic policies in the US and abroad will be on our up-coming quarterly fiscal
operating results.
Gross profit for the quarter ended March 31, 2022
was $1,728,209, compared to $818,024 for the same period in the prior year, an increase of $910,185, or 111.3%. Gross profit for the quarter
ended March 31, 2022 as a percentage of our revenues was 37.2%, an increase from the gross profit percentage of 33.3% for the same period
in the prior year. Gross profit for the nine months ended March 31, 2022 was $3,486,823, as compared to $2,647,642 for the same period
in the prior year, an increase of $839,181 or 31.7%. Gross profit for the nine months ended March 31, 2022 as a percentage of our
revenues was 32.0%, a decrease from the gross profit percentage of 33.1% for the same period in the prior year. Quarterly gross profit
and gross profit percentage depend on a number of factors, including overall sales volume, facility utilization, product sales mix, the
costs of engineering services, and production start-up costs and challenges in connection with new products, the effects of COVID-19 pandemic
policy decisions on various economies and our suppliers and customers, as well as the effects on production efficiencies due to the augmented
policies we have incorporated into our operations as a result of the COVID-19 pandemic.
Our gross margin on individual engineering projects
is dependent on a number of factors and is expected to fluctuate from quarter to quarter based on the nature and status of engineering
projects, unanticipated cost over-runs, design challenges and changes, start-up production activities or other customer-imposed project
changes or delays. Our increase in gross margin dollars during the quarter ended March 31, 2022 was due to inclusion of the Lighthouse
division since its acquisition on October 4, 2021, an increase in medical devise manufacturing revenue, and improved efficiencies in engineering
projects, which is partially offset by inclusion of the Lighthouse division engineering and production revenues at overall margins lower
than the Ross Optical division revenues. The remainder of our production, engineering and component revenues resulted in margins within
our targeted range with reasonably expected fluctuations.
Research and development expenses were $214,898
for the quarter ended March 31, 2022, compared to $146,063 for the same period in the prior year, an increase of $68,835, or 47.1%. Research
and development expenses were $433,248 for the nine months ended March 31, 2022, compared to $443,609 for the same period in the
prior year, a decrease of $10,361, or 2.3%. In-house research and development and certain internal functions not directly related to customer
engagements are classified as research and development expenses with the majority of our engineering, research and development activities
being consumed in revenue generating engagements with our customers for the development of their products. During the quarter and nine
months ended March 31, 2022 we had an increase in research and development costs due to the inclusion of the Lighthouse division offset
by a greater amount of our engineering personnel time consumed in customer focused compared to the same periods of the prior fiscal year.
Selling, general and administrative expenses were
$1,574,432 for the quarter ended March 31, 2022, compared to $927,979 for the same period in the prior year, an increase of $646,453,
or 69.7%. Selling, general and administrative expenses were $3,974,824 for the nine months ended March 31, 2022, compared to $2,671,176
for the same period in the prior year, an increase of $1,303,648, or 48.8%. The increase in selling, general and administrative expenses
in the three and nine months ended March 31, 2022 compared to the same periods of the prior fiscal year was primarily due to inclusion
of the Lighthouse division since its acquisition on October 4, 2021, plus increased stock-based compensation and marketing related expenses.
Liquidity and Capital Resources
We have sustained recurring net losses from operations
for several years. During the nine months ended March 31, 2022, we had a net loss of $1,197,713 and used cash in operating activities
of $879,967. At March 31, 2022, cash was $831,585, accounts receivables were $3,347,692 and current liabilities were $5,770,887, including
$1,018,275 of customer advances received for future order deliveries.
Although our revenue and gross margin have increased
due to the acquisition of the Lighthouse division, 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 margins and
controlling operating expense increases, all of which are subject to periodic fluctuations resulting from sales mix and the stage of completion
of varying engineering service projects as they progress towards and into production level revenues.
We have traditionally funded working capital needs
through product sales, management of working capital components of our business, cash received from public and private offerings of our
common stock, warrants to purchase shares of our common stock or convertible notes, 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 Microprecision
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.
On October 4, 2021 we acquired the assets of Lighthouse
Imaging, LLC as described in note 2. Business Acquisition to the accompanying financial statements in this Form 10-Q. To finance the cash
portion of the acquisition price we entered into a $2,600,000 bank term loan, 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 on October 4, 2021 for working capital needs, upon which no borrowings
are outstanding as of December 31, 2021.
Capital equipment expenditures and additional
patent costs during the nine months ended March 31, 2022 were $82,660. 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, 2022, are summarized as follows:
| |
Fiscal 2022 | | |
Thereafter | | |
Total | |
Capital lease for equipment, including interest | |
$ | 12,155 | | |
$ | 171,161 | | |
$ | 183,316 | |
Minimum operating lease payments - Ross Optical division | |
$ | 15,705 | | |
$ | 134,799 | | |
$ | 150,504 | |
We have contractual cash commitments related to
open purchase orders as of March 31, 2022 of approximately $1,263,003.
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.