Item 1. Financial Statements.
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| |
| | | |
| | |
| |
September 30, | | |
June 30, | |
| |
2022 | | |
2022 | |
ASSETS | |
| | | |
| | |
Current Assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 673,502 | | |
$ | 605,749 | |
Accounts receivable, net of allowance for doubtful accounts of $50,114 at September 30, 2022 and $44,135 at June 30, 2022 | |
| 3,414,685 | | |
| 2,663,872 | |
Inventories | |
| 2,755,660 | | |
| 3,022,147 | |
Prepaid expenses | |
| 187,498 | | |
| 213,448 | |
Total current assets | |
| 7,031,345 | | |
| 6,505,216 | |
| |
| | | |
| | |
Fixed Assets: | |
| | | |
| | |
Machinery and equipment | |
| 3,222,406 | | |
| 3,215,412 | |
Leasehold improvements | |
| 847,363 | | |
| 843,903 | |
Furniture and fixtures | |
| 225,564 | | |
| 219,999 | |
Total Fixed Assets | |
| 4,295,333 | | |
| 4,279,314 | |
Less—Accumulated depreciation and amortization | |
| 3,704,254 | | |
| 3,651,843 | |
Net fixed assets | |
| 591,079 | | |
| 627,471 | |
| |
| | | |
| | |
Operating lease right-to-use asset | |
| 478,645 | | |
| 517,725 | |
Patents, net | |
| 242,553 | | |
| 229,398 | |
Goodwill | |
| 8,824,210 | | |
| 8,824,210 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 17,167,832 | | |
$ | 16,704,020 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Current Liabilities: | |
| | | |
| | |
Current portion of capital lease obligation | |
$ | 41,318 | | |
$ | 40,705 | |
Current maturities of long-term debt | |
| 371,429 | | |
| 367,714 | |
Current portion of acquisition earn out liability | |
| 166,667 | | |
| 166,667 | |
Accounts payable | |
| 2,305,907 | | |
| 2,239,175 | |
Customer advances | |
| 1,032,891 | | |
| 905,113 | |
Accrued compensation and other | |
| 1,117,000 | | |
| 716,702 | |
Operating lease liability | |
| 160,923 | | |
| 150,565 | |
Total current liabilities | |
| 5,196,135 | | |
| 4,586,641 | |
| |
| | | |
| | |
Capital lease obligation, net of current portion | |
| 101,128 | | |
| 111,691 | |
Long-term debt, net of current maturities and debt issuance costs | |
| 1,865,498 | | |
| 1,961,141 | |
Acquisition earn out liability, net of current portion | |
| 714,375 | | |
| 705,892 | |
Operating lease liability, net of current portion | |
| 317,722 | | |
| 367,160 | |
| |
| | | |
| | |
Stockholders’ Equity: | |
| | | |
| | |
Common stock, $0.01 par value: 50,000,000 shares authorized; issued and outstanding – 16,915,089 shares at September 30, 2022 and June 30, 2022 | |
| 169,150 | | |
| 169,150 | |
Additional paid-in capital | |
| 56,971,729 | | |
| 56,896,739 | |
Accumulated deficit | |
| (48,167,905 | ) | |
| (48,094,394 | ) |
Total stockholders’ equity | |
| 8,972,974 | | |
| 8,971,495 | |
| |
| | | |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 17,167,832 | | |
$ | 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 MONTHS ENDED
SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
| |
| | |
| |
| |
Three Months Ended September 30, | |
| |
2022 | | |
2021 | |
Revenues | |
$ | 5,085,301 | | |
$ | 2,336,344 | |
| |
| | | |
| | |
Cost of Goods Sold | |
| 3,360,647 | | |
| 1,697,312 | |
Gross Profit | |
| 1,724,654 | | |
| 639,032 | |
| |
| | | |
| | |
Research and Development Expenses, net | |
| 245,477 | | |
| 105,186 | |
| |
| | | |
| | |
Selling, General and Administrative Expenses | |
| 1,495,766 | | |
| 933,624 | |
Business acquisition expenses | |
| – | | |
| 172,174 | |
Total Operating Expenses | |
| 1,741,243 | | |
| 1,210,984 | |
| |
| | | |
| | |
Operating Loss | |
| (16,589 | ) | |
| (571,952 | ) |
| |
| | | |
| | |
Interest Expense | |
| (56,922 | ) | |
| (4,849 | ) |
| |
| | | |
| | |
Net Loss | |
$ | (73,511 | ) | |
$ | (576,801 | ) |
| |
| | | |
| | |
Loss Per Share: | |
| | | |
| | |
Basic and Fully Diluted | |
$ | (0.00 | ) | |
$ | (0.04 | ) |
| |
| | | |
| | |
Weighted Average Common Shares Outstanding: | |
| | | |
| | |
Basic | |
| 16,915,089 | | |
| 13,282,476 | |
Fully Diluted | |
| 16,915,089 | | |
| 13,282,476 | |
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 THREE MONTHS ENDED
SEPTEMBER
30, 2022 AND 2021
(UNAUDITED)
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
| | |
Three Month Period Ended September 30, 2022 | | |
| |
| |
Number of Shares | | |
Common Stock | | |
Additional Paid-in Capital | | |
Common Stock Subscribed | | |
Accumulated Deficit | | |
Total Stockholders’ Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance, July 1, 2022 | |
| 16,915,089 | | |
$ | 169,150 | | |
$ | 56,896,739 | | |
$ | – | | |
$ | (48,094,394 | ) | |
$ | 8,971,495 | |
Stock-based compensation | |
| – | | |
| – | | |
| 74,990 | | |
| – | | |
| – | | |
| 74,990 | |
Net loss | |
| – | | |
| – | | |
| – | | |
| – | | |
| (73,511 | ) | |
| (73,511 | ) |
Balance, September 30, 2022 | |
| 16,915,089 | | |
$ | 169,150 | | |
$ | 56,971,729 | | |
$ | – | | |
$ | (48,167,905 | ) | |
$ | 8,972,974 | |
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
| | |
Three Month Period Ended September 30, 2021 | | |
| |
| |
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 | |
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 THREE MONTHS ENDED
SEPTEMBER
30, 2022 AND 2021
(UNAUDITED)
| |
| | |
| |
| |
Three Months Ended September 30, | |
| |
2022 | | |
2021 | |
Cash Flows from Operating Activities: | |
| | | |
| | |
Net Loss | |
$ | (73,511 | ) | |
$ | (576,801 | ) |
Adjustments to reconcile net loss to net cash used in by operating activities - | |
| | | |
| | |
Depreciation and amortization | |
| 52,411 | | |
| 42,280 | |
Stock-based compensation expense | |
| 74,990 | | |
| 160,071 | |
Non-cash interest expense | |
| 9,412 | | |
| – | |
Changes in operating assets and liabilities - | |
| | | |
| | |
Accounts receivable, net | |
| (750,813 | ) | |
| 167,563 | |
Inventories, net | |
| 266,487 | | |
| (235,495 | ) |
Prepaid expenses | |
| 25,950 | | |
| 8,309 | |
Accounts payable | |
| 66,732 | | |
| 81,091 | |
Customer advances | |
| 127,778 | | |
| (113,512 | ) |
Accrued compensation and other | |
| 400,298 | | |
| 284,154 | |
Net cash provided by (used in) operating activities | |
| 199,734 | | |
| (182,340 | ) |
| |
| | | |
| | |
Cash Flows from Investing Activities: | |
| | | |
| | |
Purchases of fixed assets | |
| (16,019 | ) | |
| (24,325 | ) |
Additional patent costs | |
| (13,155 | ) | |
| (6,041 | ) |
Net cash used in investing activities | |
| (29,174 | ) | |
| (30,366 | ) |
| |
| | | |
| | |
Cash Flows from Financing Activities: | |
| | | |
| | |
Payment of capital lease obligation | |
| (9,950 | ) | |
| (9,375 | ) |
Payments of long-term debt | |
| (92,857 | ) | |
| – | |
Gross Proceeds from private placement of common stock subscribed | |
| – | | |
| 1,030,000 | |
Net cash (used in) provided by financing activities | |
| (102,807 | ) | |
| 1,020,625 | |
| |
| | | |
| | |
Net increase in cash and cash equivalents | |
| 67,753 | | |
| 807,919 | |
Cash and cash equivalents, beginning of period | |
| 605,749 | | |
| 861,650 | |
| |
| | | |
| | |
Cash and cash equivalents, end of period | |
$ | 673,502 | | |
$ | 1,669,569 | |
| |
| | | |
| | |
Supplemental disclosure of non-cash financing activities: | |
| | | |
| | |
Offering costs included in accrued compensation and other | |
$ | – | | |
$ | 10,000 | |
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 first quarter 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.
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 months ended September
30, 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 months ended September 30, 2022 and 2021:
Schedule of earnings per share | |
| | |
| |
| |
Three Months Ended September 30, | |
| |
2022 | | |
2021 | |
Net Income (Loss) Basic and Fully Diluted | |
$ | (73,511 | ) | |
$ | (576,801 | ) |
| |
| | | |
| | |
Weighted Average Shares Outstanding | |
| | | |
| | |
Basic and Fully Diluted | |
| 16,915,089 | | |
| 13,282,476 | |
| |
| | | |
| | |
Loss Per Share - Basic and Fully Diluted | |
$ | (0.00 | ) | |
$ | (0.04 | ) |
The number of shares issuable upon the exercise
of outstanding stock options that were excluded from the computation as their effect was antidilutive was approximately 2,714,000 and
2,563,200 for the three months ended September 30, 2022 and 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 September 30, 2022.
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 months ended, September 30, 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 will be paid if the target level of gross profit is earned by the Lighthouse division
for the period from October 1, 2022 through September 30, 2023.
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, 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 September 30, | |
| |
2022 | | |
2021 | |
| |
(Actual) | | |
(Pro Forma) | |
| |
| | |
| |
Revenues | |
$ | 5,085,301 | | |
$ | 3,780,681 | |
Net Loss | |
$ | (73,511 | ) | |
$ | (519,506 | ) |
Loss per Share | |
| | | |
| | |
Basic and diluted | |
$ | (0.00 | ) | |
$ | (0.03 | ) |
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 | |
| | |
| |
| |
September 30, 2022 | | |
June 30, 2022 | |
Raw Materials | |
$ | 1,075,948 | | |
$ | 1,414,996 | |
Work-In-Progress | |
| 469,647 | | |
| 460,460 | |
Finished Goods | |
| 1,210,065 | | |
| 1,146,691 | |
Total Inventories | |
$ | 2,755,660 | | |
$ | 3,022,147 | |
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, 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 September 30, 2022. Borrowings under the line of credit bear interest payable monthly at the prime lending
rate plus 1.5% per annum, or 7.75% as of September 30, 2022, 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 September
30, 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 rate of 7.00% as of September 30, 2022. 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. | |
$ | 2,259,524 | |
| |
| | |
Less current maturities | |
| (371,429 | ) |
Less debt issuance costs, net of accumulated amortization of $929 | |
| (22,597 | ) |
Long-term debt, net of current portion of debt issuance costs | |
$ | 1,865,498 | |
At September 30, 2022 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 | |
$ | 278,572 | |
2024 | |
| 371,429 | |
2025 | |
| 371,429 | |
2026 | |
| 371,429 | |
2027 | |
| 371,429 | |
Thereafter | |
| 495,236 | |
| |
| | |
Total long term debt | |
$ | 2,259,524 | |
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
for $47,750 for manufacturing equipment. The net book value of fixed assets under capital lease obligations as of September 30, 2022 is
$135,667.
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 September 30, 2022 total $123,842. Total rent expense including base
rent and common area expenses was $11,630 and $13,997 during the fiscal quarters ended September 30, 2022 and 2021, 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 September 30, 2022 total $390,229. Total rent expense including base rent and common
area expenses was $35,017 during the fiscal quarter ended September 30, 2022. Included in the accompanying balance sheet at September
30, 2022 is a right-of-use asset of $478,645 and current and long-term right-of-use operating lease liabilities of $160,924 and $317,722,
respectively.
At September 30, 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 | |
2023 | |
$ | 36,464 | | |
$ | 136,167 | |
2024 | |
| 48,619 | | |
| 182,652 | |
2025 | |
| 43,917 | | |
| 183,775 | |
2026 | |
| 28,028 | | |
| 11,477 | |
Total Minimum Payments | |
| 157,028 | | |
$ | 514,071 | |
Less: amount representing interest | |
| 14,582 | | |
| | |
Present value of minimum lease payments | |
| 142,446 | | |
| | |
Less: current portion | |
| 41,318 | | |
| | |
| |
$ | 101,128 | | |
| | |
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 $50,826 and $51,277 for the fiscal quarter ended September 30, 2022 and 2021,
respectively.
6. |
STOCK-BASED COMPENSATION |
Stock Options
The following table summarizes stock-based compensation
expense for the three months ended September 30, 2022 and 2021: The share amounts and prices shown below do not reflect adjustment for
a 1-for-3 reverse stock split that took effect after the close of business on November 1, 2022.
Schedule of stock-based compensation expense | |
| | |
| |
| |
Three Months Ended September 30, | |
| |
2022 | | |
2021 | |
Cost of Goods Sold | |
$ | 6,298 | | |
$ | 28,415 | |
Research and Development Expenses | |
| 30,756 | | |
| 43,489 | |
Selling, General and Administrative Expenses | |
| 37,936 | | |
| 88,167 | |
| |
$ | 74,990 | | |
$ | 160,071 | |
No compensation has been capitalized because such
amounts would have been immaterial.
The following tables summarize stock option activity
for the three months ended September 30 2022:
Schedule of stock option activity | |
| | | |
| | | |
| | |
| |
| Options Outstanding | |
| |
| Number of Shares | | |
| Weighted Average Exercise Price | | |
| Weighted Average Contractual Life | |
Outstanding at June 30, 2022 | |
| 2,714,000 | | |
$ | 1.33 | | |
| 7.08 years | |
Exercised, Granted and Cancelled | |
| – | | |
| – | | |
| – | |
Outstanding at September 30, 2022 | |
| 2,714,000 | | |
$ | 1.33 | | |
| 6.83 years | |
Information related to the stock options outstanding
as of September 30, 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 |
|
|
|
3.50 |
|
|
$ |
0.48 |
|
|
|
60,000 |
|
|
$ |
0.48 |
|
$ |
0.50 |
|
|
|
80,000 |
|
|
|
3.72 |
|
|
$ |
0.50 |
|
|
|
80,000 |
|
|
$ |
0.50 |
|
$ |
0.55 |
|
|
|
15,000 |
|
|
|
5.51 |
|
|
$ |
0.55 |
|
|
|
15,000 |
|
|
$ |
0.55 |
|
$ |
0.70 |
|
|
|
100,000 |
|
|
|
5.84 |
|
|
$ |
0.70 |
|
|
|
100,000 |
|
|
$ |
0.70 |
|
$ |
0.73 |
|
|
|
630,000 |
|
|
|
4.41 |
|
|
$ |
0.73 |
|
|
|
630,000 |
|
|
$ |
0.73 |
|
$ |
0.85 |
|
|
|
6,000 |
|
|
|
0.26 |
|
|
$ |
0.85 |
|
|
|
6,000 |
|
|
$ |
0.85 |
|
$ |
0.90 |
|
|
|
36,000 |
|
|
|
1.69 |
|
|
$ |
0.90 |
|
|
|
36,000 |
|
|
$ |
0.90 |
|
$ |
1.25 |
|
|
|
45,000 |
|
|
|
7.47 |
|
|
$ |
1.25 |
|
|
|
30,000 |
|
|
$ |
1.25 |
|
$ |
1.30 |
|
|
|
441,000 |
|
|
|
6.70 |
|
|
$ |
1.30 |
|
|
|
431,500 |
|
|
$ |
1.30 |
|
$ |
1.40 |
|
|
|
70,000 |
|
|
|
8.13 |
|
|
$ |
1.40 |
|
|
|
70,000 |
|
|
$ |
1.40 |
|
$ |
1.42 |
|
|
|
100,000 |
|
|
|
6.95 |
|
|
$ |
1.42 |
|
|
|
100,000 |
|
|
$ |
1.42 |
|
$ |
1.45 |
|
|
|
5,000 |
|
|
|
8.44 |
|
|
$ |
1.45 |
|
|
|
1,667 |
|
|
$ |
1.45 |
|
$ |
1.50 |
|
|
|
70,000 |
|
|
|
7.19 |
|
|
$ |
1.50 |
|
|
|
70,000 |
|
|
$ |
1.50 |
|
$ |
1.68 |
|
|
|
540,000 |
|
|
|
8.68 |
|
|
$ |
1.68 |
|
|
|
540,000 |
|
|
$ |
1.68 |
|
$ |
1.87 |
|
|
|
30,000 |
|
|
|
9.61 |
|
|
$ |
1.87 |
|
|
|
– |
|
|
$ |
– |
|
$ |
2.00 |
|
|
|
100,000 |
|
|
|
8.57 |
|
|
$ |
2.00 |
|
|
|
10,000 |
|
|
$ |
2.00 |
|
$ |
2.09 |
|
|
|
246,000 |
|
|
|
9.36 |
|
|
$ |
2.09 |
|
|
|
– |
|
|
$ |
– |
|
$ |
2.26 |
|
|
|
140,000 |
|
|
|
9.14 |
|
|
$ |
2.26 |
|
|
|
90,000 |
|
|
$ |
2.26 |
|
$ |
0.48–2.26 |
|
|
|
2,714,000 |
|
|
|
6.83 |
|
|
$ |
1.33 |
|
|
|
2,270,167 |
|
|
$ |
1.20 |
|
The aggregate intrinsic value of the Company’s
in-the-money outstanding and exercisable options as of September 30, 2022 was $1,982,850 and $1,951,825, 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 approximately 85% of sales 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 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 months ended September 30, 2022 and 2021:
Schedule of disaggregation of revenues | |
| | |
| |
| |
Three Months Ended September 30, | |
| |
2022 | | |
2021 | |
Engineering Design Services | |
$ | 1,642,967 | | |
$ | 373,316 | |
Optical Components | |
| 2,652,681 | | |
| 1,538,932 | |
Medical Device Products & Assemblies | |
| 789,653 | | |
| 424,096 | |
| |
$ | 5,085,301 | | |
$ | 2,336,344 | |
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 September
30, 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 September 30, | |
| |
2022 | | |
2021 | |
Contract liabilities, beginning of period | |
$ | 905,113 | | |
$ | 450,084 | |
Unearned revenue received from customers | |
| 455,613 | | |
| 205,389 | |
Revenue recognized | |
| (327,835 | ) | |
| (318,901 | ) |
Contract liabilities, end of period | |
$ | 1,032,891 | | |
$ | 336,572 | |
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 September 30, 2022 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 32% our business during the three
months ended September 30, 2022 is from engineering services (primarily relating to the design of medical device optical assemblies),
52% from the sale of both internally manufactured and purchased optical components, and 16% 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. 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, 2022 filed with the Securities and Exchange Commission on September 27, 2022.
Results of Operations
Our total revenues for the quarter ended September
30, 2022, were $5,085,301, as compared to $2,336,344 for the same period in the prior year, an increase of $2,748,957, or 118%, primarily
due to inclusion of the Lighthouse division since its acquisition in October, 2021 and an increase in medical device manufacturing and
optical component revenue. Excluding the effect of the Lighthouse acquisition, component revenue increased 82%, production increased 37%
and engineering revenue increased 18% from the quarter ended September 30, 2021 to 2022.
Our largest customer during the three months ended
September 30, 2022 accounted for 16.6% of our revenue and represented component revenue for a defense/aerospace customer. We generated
revenues from 194 unique customers during the three months ended September 30, 2022.
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 September 30,
2022 was $1,724,654, compared to $639,032 for the same period in the prior year, an increase of $1,085,622, or 170%. Gross profit for
the quarter ended September 30, 2022 as a percentage of our revenues was 33.9%, an increase from the gross profit percentage 27.4% 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, 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 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 September 30, 2022 was due to inclusion of the Lighthouse
division since its acquisition on October 4, 2021, an increase in both medical device manufacturing revenue and optical component 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 $245,477
for the quarter ended September 30, 2022, compared to $105,186 for the same period in the prior year, an increase of $140,291, or 133%.
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 ended September 30, 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
$1,495,766 for the quarter ended September 30, 2022, compared to $933,624 for the same period in the prior year, an increase of $562,142,
or 60.2%. The increase in selling, general and administrative expenses in the three months ended September 30, 2022 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 and marketing related expenses.
Liquidity and Capital Resources
We have sustained recurring net losses from operations
for several years. During the quarter ended September 30, 2022, and the years ended June 30, 2022 and 2021 we incurred operating losses
of $16,589, $1,513,890 and $905,583, respectively. At September 30, 2022, cash was $673,502, accounts receivables were $3,414,685 and
current liabilities were $5,192,420, including $1,032,891 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 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 September 30, 2022.
Capital equipment expenditures and additional
patent costs during the three months ended September 30, 2022 were $29,174. 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 September 30, 2022, are summarized as follows:
|
|
Fiscal 2023 |
|
Thereafter |
|
Total |
Capital lease for equipment, including interest |
|
$ |
36,464 |
|
|
$ |
120,564 |
|
|
$ |
157,028 |
|
Minimum operating lease payments |
|
$ |
136,167 |
|
|
$ |
377,904 |
|
|
$ |
514,071 |
|
We have contractual cash commitments related to
open purchase orders as of September 30, 2022 of approximately $3,252,770.
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.