UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30,December 31, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-10647
PRECISION OPTICS CORPORATION, INC.
(Exact name of registrant as specified in its charter)
| Massachusetts | 04-2795294 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
22 East Broadway, Gardner, Massachusetts 01440-3338
(Address of principal executive offices) (Zip Code)
(978) 630-1800
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.01 par value |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the issuers common stock, par value $0.01 per share, at NovemberFebruary 14, 20222023 was shares.
PRECISION OPTICS CORPORATION, INC.
Table of Contents
| 2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| September 30, | June 30, | December 31, | June 30, | |||||||||||||
| 2022 | 2022 | 2022 | 2022 | |||||||||||||
| ASSETS | ||||||||||||||||
| Current Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 673,502 | $ | 605,749 | $ | 381,318 | $ | 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 | ||||||||||||||
| Accounts receivable, net of allowance for doubtful accounts of $72,343 at December 31, 2022 and $44,135 at June 30, 2022 | 4,032,522 | 2,663,872 | ||||||||||||||
| Inventories | 2,755,660 | 3,022,147 | 2,846,975 | 3,079,938 | ||||||||||||
| Prepaid expenses | 187,498 | 213,448 | 213,177 | 213,448 | ||||||||||||
| Total current assets | 7,031,345 | 6,505,216 | 7,473,992 | 6,563,007 | ||||||||||||
| Fixed Assets: | ||||||||||||||||
| Machinery and equipment | 3,222,406 | 3,215,412 | 3,222,406 | 3,215,412 | ||||||||||||
| Leasehold improvements | 847,363 | 843,903 | 795,572 | 786,112 | ||||||||||||
| Furniture and fixtures | 225,564 | 219,999 | 227,599 | 219,999 | ||||||||||||
| Total Fixed Assets | 4,295,333 | 4,279,314 | ||||||||||||||
| Total fixed assets | 4,245,577 | 4,221,523 | ||||||||||||||
| Less—Accumulated depreciation and amortization | 3,704,254 | 3,651,843 | 3,756,593 | 3,651,843 | ||||||||||||
| Net fixed assets | 591,079 | 627,471 | 488,984 | 569,680 | ||||||||||||
| Operating lease right-to-use asset | 478,645 | 517,725 | 439,074 | 517,725 | ||||||||||||
| Patents, net | 242,553 | 229,398 | 242,981 | 229,398 | ||||||||||||
| Goodwill | 8,824,210 | 8,824,210 | 8,824,210 | 8,824,210 | ||||||||||||
| TOTAL ASSETS | $ | 17,167,832 | $ | 16,704,020 | $ | 17,469,241 | $ | 16,704,020 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current Liabilities: | ||||||||||||||||
| Current portion of capital lease obligation | $ | 41,318 | $ | 40,705 | ||||||||||||
| Current portion of financing lease obligation | $ | 41,938 | $ | 40,705 | ||||||||||||
| Current maturities of long-term debt | 371,429 | 367,714 | 371,429 | 367,714 | ||||||||||||
| Current portion of acquisition earn out liability | 166,667 | 166,667 | ||||||||||||||
| Current portion of acquisition earn out liabilities | 889,525 | 166,667 | ||||||||||||||
| Accounts payable | 2,305,907 | 2,239,175 | 2,244,270 | 2,239,175 | ||||||||||||
| Customer advances | 1,032,891 | 905,113 | ||||||||||||||
| Contract liabilities | 794,981 | 905,113 | ||||||||||||||
| Accrued compensation and other | 1,117,000 | 716,702 | 971,864 | 716,702 | ||||||||||||
| Operating lease liability | 160,923 | 150,565 | 163,984 | 150,565 | ||||||||||||
| Total current liabilities | 5,196,135 | 4,586,641 | 5,477,991 | 4,586,641 | ||||||||||||
| Capital lease obligation, net of current portion | 101,128 | 111,691 | ||||||||||||||
| Financing lease obligation, net of current portion | 90,409 | 111,691 | ||||||||||||||
| Long-term debt, net of current maturities and debt issuance costs | 1,865,498 | 1,961,141 | 1,773,571 | 1,961,141 | ||||||||||||
| Acquisition earn out liability, net of current portion | 714,375 | 705,892 | – | 705,892 | ||||||||||||
| Operating lease liability, net of current portion | 317,722 | 367,160 | 275,090 | 367,160 | ||||||||||||
| Stockholders’ Equity: | ||||||||||||||||
| Common stock, $ par value: shares authorized; issued and outstanding – shares at September 30, 2022 and June 30, 2022 | 169,150 | 169,150 | ||||||||||||||
| Common stock, $ par value: shares authorized; issued and outstanding – shares at December 31, 2022 and June 30, 2022 | 56,383 | 56,383 | ||||||||||||||
| Additional paid-in capital | 56,971,729 | 56,896,739 | 57,329,282 | 57,009,506 | ||||||||||||
| Accumulated deficit | (48,167,905 | ) | (48,094,394 | ) | (47,533,485 | ) | (48,094,394 | ) | ||||||||
| Total stockholders’ equity | 8,972,974 | 8,971,495 | 9,852,180 | 8,971,495 | ||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 17,167,832 | $ | 16,704,020 | $ | 17,469,241 | $ | 16,704,020 | ||||||||
The accompanying notes are an integral part of these consolidated interim financial statements.
| 3 |
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED
SEPTEMBER 30,DECEMBER 31, 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 | $ | ) | $ | ) | ||||
| Weighted Average Common Shares Outstanding: | ||||||||
| Basic | 16,915,089 | 13,282,476 | ||||||
| Fully Diluted | 16,915,089 | 13,282,476 | ||||||
| Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | 5,886,961 | $ | 3,897,041 | $ | 10,972,262 | $ | 6,233,385 | ||||||||
| Cost of goods sold | 3,161,737 | 2,777,459 | 6,522,384 | 4,474,771 | ||||||||||||
| Gross Profit | 2,725,224 | 1,119,582 | 4,449,878 | 1,758,614 | ||||||||||||
| Research and Development Expenses | 208,666 | 113,164 | 454,143 | 218,350 | ||||||||||||
| Selling, General and Administrative Expenses | 1,819,741 | 1,466,768 | 3,315,507 | 2,400,392 | ||||||||||||
| Business Acquisition Expenses | – | – | – | 172,174 | ||||||||||||
| Total Operating Expenses | 2,028,407 | 1,579,932 | 3,769,650 | 2,790,916 | ||||||||||||
| Operating Income (Loss) | 696,817 | (460,350 | ) | 680,228 | (1,032,302 | ) | ||||||||||
| Interest (Expense) Income, net | (62,397 | ) | (46,663 | ) | (119,319 | ) | (51,512 | ) | ||||||||
| Net Income (Loss) | $ | 634,420 | $ | (507,013 | ) | $ | 560,909 | $ | (1,083,814 | ) | ||||||
| Income (Loss) Per Share: | ||||||||||||||||
| Basic | $ | 0.11 | $ | (0.09 | ) | $ | 0.10 | $ | (0.22 | ) | ||||||
| Fully Diluted | $ | 0.11 | $ | (0.09 | ) | $ | 0.09 | $ | (0.22 | ) | ||||||
| Weighted Average Common Shares Outstanding: | ||||||||||||||||
| Basic | 5,638,302 | 5,526,413 | 5,638,302 | 4,976,923 | ||||||||||||
| Fully Diluted | 5,935,911 | 5,526,413 | 5,937,471 | 4,976,923 | ||||||||||||
The accompanying notes are an integral part of these consolidated interim financial statements.
| 4 |
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREESIX MONTHS ENDED
SEPTEMBER 30December 31, 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 | ||||||||||||
| Six Month Period Ended December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Common Stock | Additional Paid-in Capital | Common Stock Subscribed | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||
| Balance, July 1, 2022 | 5,638,302 | $ | 56,383 | $ | 57,009,506 | $ | – | $ | (48,094,394 | ) | $ | 8,971,495 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | – | – | 74,990 | – | – | 74,990 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | (73,511 | ) | (73,511 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | 5,638,302 | 56,383 | 57,084,496 | – | (48,167,905 | ) | 8,972,974 | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | – | – | 244,786 | – | – | 244,786 | ||||||||||||||||||||||||||||||||||||||||||
| Net Income | – | – | – | – | 634,420 | 634,420 | ||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | 5,638,302 | $ | 56,383 | $ | 57,329,282 | $ | – | $ | (47,533,485 | ) | $ | 9,852,180 | ||||||||||||||||||||||||||||||||||||
| Three Month Period Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Common Stock | Additional Paid-in Capital | Common Stock Subscribed | Accumulated Deficit | Total Stockholders’ Equity | Six Month Period Ended December 31, 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 | 4,427,432 | $ | 44,274 | $ | 50,552,831 | $ | – | $ | (47,165,978 | ) | $ | 3,431,127 | ||||||||||||||||||||||||
| Stock-based compensation | – | – | 160,071 | – | – | 160,071 | – | – | 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 | – | – | (10,000 | ) | 1,030,000 | – | 1,020,000 | ||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | (576,801 | ) | (576,801 | ) | – | – | – | – | (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 | 4,427,432 | 44,274 | 50,702,902 | 1,030,000 | (47,742,779 | ) | 4,034,397 | |||||||||||||||||||||||||||||
| Stock-based compensation | – | – | 330,451 | – | – | 330,451 | ||||||||||||||||||||||||||||||||||||||||||
| Proceeds from private placement of common stock | 312,500 | 3,125 | 1,496,875 | (1,030,000 | ) | – | 470,000 | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in business acquisition | 833,333 | 8,333 | 4,816,667 | – | – | 4,825,000 | ||||||||||||||||||||||||||||||||||||||||||
| Proceeds from exercise of stock option | 5,000 | 50 | 16,600 | – | – | 16,650 | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options net of 478 shares withheld | 875 | 9 | (9 | ) | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for employee services | 3,031 | 30 | 19,970 | – | – | 20,000 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | (507,013 | ) | (507,013 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 5,582,171 | $ | 55,821 | $ | 57,383,456 | $ | – | $ | (48,249,792 | ) | $ | 9,189,485 | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated interim financial statements.
| 5 |
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREESIX MONTHS ENDED
SEPTEMBER 30DECEMBER 31, 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 | ||||
| Six Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Income (Loss) | $ | 560,909 | $ | (1,083,814 | ) | |||
| Adjustments to Reconcile Net Loss to Net Cash Used In Operating Activities - | ||||||||
| Depreciation and amortization | 104,750 | 107,680 | ||||||
| Stock-based compensation expense | 319,776 | 510,522 | ||||||
| Non-cash interest expense | 16,966 | – | ||||||
| Changes in Operating Assets and Liabilities, net of effects of business acquisition - | ||||||||
| Accounts receivable, net | (1,368,650 | ) | 339,671 | |||||
| Inventories, net | 232,963 | (161,987 | ) | |||||
| Prepaid expenses | 271 | (66,093 | ) | |||||
| Accounts payable | 5,095 | (167,139 | ) | |||||
| Customer advances | (110,132 | ) | (139,292 | ) | ||||
| Accrued compensation and other | 255,162 | (54,711 | ) | |||||
| Net Cash Provided By (Used In) Operating Activities | 17,110 | (715,163 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Additional patent costs | (13,583 | ) | (8,853 | ) | ||||
| Purchases of fixed assets | (24,054 | ) | (29,239 | ) | ||||
| Acquisition of business | – | (255,063 | ) | |||||
| Net Cash Used In Investing Activities | (37,637 | ) | (293,155 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payment of financing lease obligation | (20,049 | ) | (18,879 | ) | ||||
| Payments of long-term debt | (183,855 | ) | (61,905 | ) | ||||
| 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 | – | 16,650 | ||||||
| Net Cash (Used In) Provided By Financing Activities | (203,904 | ) | 1,409,866 | |||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (224,431 | ) | 401,548 | |||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 605,749 | 861,650 | ||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 381,318 | $ | 1,263,198 | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: | ||||||||
| Offering costs included in accrued compensation and other | $ | – | $ | 10,000 | ||||
| Issuance of common stock for services | $ | – | $ | 20,000 | ||||
| Acquisition of business financed with long-term debt | $ | – | $ | 2,600,000 | ||||
The accompanying notes are an integral part of these consolidated interim financial statements.
| 6 |
PRECISION OPTICS CORPORATION, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation and Operations
The accompanying consolidated financial statements include the accounts of Precision Optics Corporation, Inc. and its wholly-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.
These consolidated financial statements have been prepared by the Company, without audit, and reflect normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the results of the firstsecond quarter and six months of the Company’s fiscal year 2023. These consolidated financial statements do not include all disclosures associated with annual consolidated financial statements and, accordingly, should be read in conjunction with footnotes contained in the Company’s consolidated financial statements for the year ended June 30, 2022, together with the Report of Independent Registered Public Accounting Firm filed under cover of the Company’s 2022 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 27, 2022.
Reclassifications
Certain reclassifications have been made to conform the prior period consolidated financial statements to the current period.
Reverse Stock Split
The Company’s Board of Directors authorized a reverse split of the Company’s outstanding shares of common stock within a stated range of 1:1.5 to 1:3, which was subsequently approved by stockholders holding more than a majority of the outstanding shares of Common Stock at the Company’s Annual Meeting on April 8, 2022. The Company effected the reverse stock split on a one-for-three basis on November 1, 2022 as reported by the Company on Form 8-K filed with the Securities and Exchange Commission on November 2, 2022.
As a result of the reverse stock split, every three shares of issued and outstanding common stock were automatically combined into one issued and outstanding share of common stock, without any change in the par value per share or the number of the Company’s authorized shares. The reverse stock split reduced the number of shares of common stock outstanding from on November 1, 2022 to approximately shares, after reduction for the elimination of fractional shares.
Unless otherwise noted, all prior year share amounts and per share calculations throughout this Form 10-Q have been restated to reflect the impact of this 1:3 reverse stock split and to provide data on a comparable basis. Such restatements include calculations regarding the Company’s weighted-average shares, and earnings per share, as well as disclosures regarding the Company’s stock-based compensation plans.
Use of Estimates
The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
| 7 |
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 six months ended September 30, 2022,December 31, 2021, 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 six months ended September 30,December 31, 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 | ||||||||
| Loss Per Share - Basic and Fully Diluted | $ | ) | $ | ) | ||||
| Schedule of earnings per share | ||||||||||||||||
| Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net Income (Loss) | $ | 634,420 | $ | (507,013 | ) | $ | 560,909 | $ | (1,083,814 | ) | ||||||
| Basic Weighted Average Shares Outstanding | 5,638,302 | 5,526,413 | 5,638,302 | 4,976,923 | ||||||||||||
| Fully Diluted Weighted Average Shares Outstanding | 5,935,911 | 5,526,413 | 5,937,471 | 4,976,923 | ||||||||||||
| Income (Loss) Per Share | ||||||||||||||||
| Basic | $ | 0.11 | $ | (0.09 | ) | $ | 0.10 | $ | (0.22 | ) | ||||||
| Fully Diluted | $ | 0.11 | $ | (0.09 | ) | $ | 0.09 | $ | (0.22 | ) | ||||||
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
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,December 31, 2022.
| 8 |
| 2. | BUSINESS ACQUISITION |
On October 4, 2021, the Company acquired substantially all of the assets of Lighthouse Imaging, LLC, of Windham, Maine, a medical optics and digital imaging business operating as a designer and manufacturer of advanced optical imaging systems and accessories with a strong expertise in electrical engineering and development of end-to-end medical visualization devices. The actual results of operations of the Lighthouse division are included in the accompanying consolidated financial statements as of, and for the three and six months ended, September 30, 2022.December 31, 2022, and for the three months ended December 31, 2021.
The purchase price for Lighthouse Imaging included $1,500,000$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$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$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 actual and pro forma results of operations for the Company are presented below assuming that the acquisition of the Lighthouse division had occurred on July 1, 2021. Pro forma operating results include net adjustments resulting from the acquisition transaction during the three months ended September 30, 2021.
| Schedule of consolidated pro forma results | ||||||||
| Three Months Ended 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 | ) | ||
| Schedule of consolidated pro forma results | ||||||||||||||||
| Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (Actual) | (Actual) | (Actual) | (Pro Forma) | |||||||||||||
| Revenues | $ | 5,886,961 | $ | 3,897,041 | $ | 10,972,262 | $ | 7,677,722 | ||||||||
| Net income (loss) | 634,420 | (507,013 | ) | 560,909 | (1,026,519 | ) | ||||||||||
| Net income (loss) per share: | ||||||||||||||||
| Basic | $ | $ | ) | $ | $ | ) | ||||||||||
| Fully diluted | $ | $ | ) | $ | $ | ) | ||||||||||
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.
| 3. | INVENTORIES |
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 | December 31, 2022 | June 30, 2022 | |||||||||||||
| Raw Materials | $ | 1,075,948 | $ | 1,414,996 | $ | 1,155,104 | $ | 1,414,996 | ||||||||
| Work-In-Progress | 469,647 | 460,460 | 598,691 | 518,251 | ||||||||||||
| Finished Goods | 1,210,065 | 1,146,691 | 1,093,180 | 1,146,691 | ||||||||||||
| Total Inventories | $ | 2,755,660 | $ | 3,022,147 | $ | 2,846,975 | $ | 3,079,938 | ||||||||
| 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,December 31, 2022. Borrowings under the line of credit bear interest payable monthly at the prime lending rate plus 1.5% per annum, or 7.759.00% as of September 30,December 31, 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 eligible accounts receivable and inventory and are secured by all the assets of the Company.
Long-Term Debt
Long-term debt consists of the following at 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 | ||
| 9 |
Long-Term Debt
Long-term debt consists of the following at December 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 rate of 9.00% as of December 31, 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. | $ | 2,166,667 | ||
| Less current maturities | (371,429 | ) | ||
| Less debt issuance costs, net of accumulated amortization of $1,859 | (21,667 | ) | ||
| Long-term debt, net of current portion of debt issuance costs | $ | 1,773,571 | ||
At September 30,December 31, 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 | $ | 186,715 | ||||
| 2024 | 371,429 | 371,429 | ||||||
| 2025 | 371,429 | 371,429 | ||||||
| 2026 | 371,429 | 371,429 | ||||||
| 2027 | 371,429 | 371,429 | ||||||
| Thereafter | 495,236 | 495,236 | ||||||
| Total long term debt | $ | 2,259,524 | $ | 2,167,667 | ||||
| 5. | LEASE OBLIGATIONS |
In March 2021 the Company entered into a five-year capitalfinancing lease in the amount of $161,977 for manufacturing equipment. In January 2020, the Company entered into a five-year capitalfinancing lease for $47,750 for manufacturing equipment. The net book value of fixed assets under capitalfinancing lease obligations as of September 30,December 31, 2022 is $135,667125,181.
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,December 31, 2022 total $123,842112,885. Total rent expense including base rent and common area expenses was $11,6307,986 and $13,99715,705 during the fiscal quartersthree months ended September 30,December 31, 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,December 31, 2022 total $390,229355,797. Total rent expense including base rent and common area expenses was $35,017 during the fiscal quarterthree months ended September 30,December 31, 2022. Included in the accompanying balance sheet at September 30,December 31, 2022 is a right-of-use asset of $478,645439,074 and current and long-term right-of-use operating lease liabilities of $160,924163,984 and $317,722275,090, respectively.
At September 30,December 31, 2022 future minimum lease payments under the capitalfinancing lease and operating lease obligations are as follows:
| Future minimum lease payments | ||||||||||||||||
| Fiscal Year Ending June 30: | Capital Leases | Operating Lease | Financing Leases | Operating Lease | ||||||||||||
| 2023 | $ | 36,464 | $ | 136,167 | $ | 24,285 | $ | 90,778 | ||||||||
| 2024 | 48,619 | 182,652 | 48,619 | 182,652 | ||||||||||||
| 2025 | 43,917 | 183,775 | 43,917 | 183,775 | ||||||||||||
| 2026 | 28,028 | 11,477 | 28,028 | 11,477 | ||||||||||||
| Total Minimum Payments | 157,028 | $ | 514,071 | 144,849 | $ | 468,682 | ||||||||||
| Less: amount representing interest | 14,582 | 12,502 | ||||||||||||||
| Present value of minimum lease payments | 142,446 | 132,347 | ||||||||||||||
| Less: current portion | 41,318 | 41,938 | ||||||||||||||
| $ | 101,128 | $ | 90,409 | |||||||||||||
| 10 |
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 $50,826101,156 and $51,277101,727 for the fiscal quartersix months ended September 30,December 31, 2022 and 2021, respectively.
| 6. | STOCK-BASED COMPENSATION |
Stock Options
The following table summarizes stock-based compensation expense for the three and six months ended September 30,December 31, 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, | Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Cost of Goods Sold | $ | 6,298 | $ | 28,415 | $ | 9,556 | $ | 28,415 | $ | 15,854 | $ | 56,830 | ||||||||||||
| Research and Development Expenses | 30,756 | 43,489 | ||||||||||||||||||||||
| Selling, General and Administrative Expenses | 37,936 | 88,167 | ||||||||||||||||||||||
| $ | 74,990 | $ | 160,071 | |||||||||||||||||||||
| Research and Development | 50,302 | 50,310 | 81,058 | 93,799 | ||||||||||||||||||||
| Selling, General and Administrative | 184,928 | 251,726 | 222,864 | 339,893 | ||||||||||||||||||||
| Stock Based Compensation Expense | $ | 244,786 | $ | 330,451 | $ | 319,776 | $ | 490,522 | ||||||||||||||||
No compensation has been capitalized because such amounts would have been immaterial.
The following tables summarize stock option activity for the threesix months ended September 30December 31, 2022:
| Schedule of stock option activity | ||||||||||||||||||||||||
| Options Outstanding | Options Outstanding | |||||||||||||||||||||||
| Number of Shares | Weighted Average Exercise Price | Weighted Average Contractual Life | Number of Shares | Weighted Average Exercise Price | Weighted Average Contractual Life | |||||||||||||||||||
| Outstanding at June 30, 2022 | 2,714,000 | $ | 1.33 | years | 904,626 | $ | 4.00 | years | ||||||||||||||||
| Exercised, Granted and Cancelled | – | |||||||||||||||||||||||
| Outstanding at September 30, 2022 | 2,714,000 | $ | 1.33 | years | ||||||||||||||||||||
| Exercised | – | – | – | |||||||||||||||||||||
| Granted | 105,001 | 5.97 | – | |||||||||||||||||||||
| Cancelled | (666 | ) | 3.90 | – | ||||||||||||||||||||
| Outstanding at December 31, 2022 | 1,008,961 | $ | 4.21 | years | ||||||||||||||||||||
| 11 |
Information related to the stock options outstanding as of September 30,December 31, 2022 is as follows:
| Schedule of stock options outstanding by exercise price range | Schedule of stock options outstanding by exercise price range | |||||||||||||||||||||||||||||||||||||||||||
| Range of Exercise Prices | 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 | 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 | $ | 0.48 | 60,000 | $ | 0.48 | 1.44 | 20,000 | $ | 1.44 | 20,000 | $ | 1.44 | ||||||||||||||||||||||||||||||
| $ | 0.50 | 80,000 | $ | 0.50 | 80,000 | $ | 0.50 | 1.50 | 26,666 | $ | 1.50 | 26,666 | $ | 1.50 | ||||||||||||||||||||||||||||||
| $ | 0.55 | 15,000 | $ | 0.55 | 15,000 | $ | 0.55 | 1.65 | 5,000 | $ | 1.65 | 5,000 | $ | 1.65 | ||||||||||||||||||||||||||||||
| $ | 0.70 | 100,000 | $ | 0.70 | 100,000 | $ | 0.70 | 2.10 | 33,333 | $ | 2.10 | 33,333 | $ | 2.10 | ||||||||||||||||||||||||||||||
| $ | 0.73 | 630,000 | $ | 0.73 | 630,000 | $ | 0.73 | 2.19 | 209,996 | $ | 2.19 | 209,996 | $ | 2.19 | ||||||||||||||||||||||||||||||
| $ | 0.85 | 6,000 | $ | 0.85 | 6,000 | $ | 0.85 | 2.55 | 2,000 | $ | 2.55 | 2,000 | $ | 2.55 | ||||||||||||||||||||||||||||||
| $ | 0.90 | 36,000 | $ | 0.90 | 36,000 | $ | 0.90 | 2.70 | 12,000 | $ | 2.70 | 12,000 | $ | 2.70 | ||||||||||||||||||||||||||||||
| $ | 1.25 | 45,000 | $ | 1.25 | 30,000 | $ | 1.25 | 3.75 | 15,000 | $ | 3.75 | 10,000 | $ | 3.75 | ||||||||||||||||||||||||||||||
| $ | 1.30 | 441,000 | $ | 1.30 | 431,500 | $ | 1.30 | 3.90 | 146,325 | $ | 3.90 | 146,325 | $ | 3.90 | ||||||||||||||||||||||||||||||
| $ | 1.40 | 70,000 | $ | 1.40 | 70,000 | $ | 1.40 | 4.20 | 23,332 | $ | 4.20 | 23,332 | $ | 4.20 | ||||||||||||||||||||||||||||||
| $ | 1.42 | 100,000 | $ | 1.42 | 100,000 | $ | 1.42 | 4.26 | 33,333 | $ | 4.26 | 33,333 | $ | 4.26 | ||||||||||||||||||||||||||||||
| $ | 1.45 | 5,000 | $ | 1.45 | 1,667 | $ | 1.45 | 4.35 | 1,666 | $ | 4.35 | 1,666 | $ | 4.35 | ||||||||||||||||||||||||||||||
| $ | 1.50 | 70,000 | $ | 1.50 | 70,000 | $ | 1.50 | 4.50 | 23,332 | $ | 4.50 | 23,332 | $ | 4.50 | ||||||||||||||||||||||||||||||
| $ | 1.68 | 540,000 | $ | 1.68 | 540,000 | $ | 1.68 | 5.04 | 179,997 | $ | 5.04 | 179,997 | $ | 5.04 | ||||||||||||||||||||||||||||||
| $ | 1.87 | 30,000 | $ | 1.87 | – | $ | – | 5.61 | 10,000 | $ | 5.61 | – | $ | – | ||||||||||||||||||||||||||||||
| $ | 2.00 | 100,000 | $ | 2.00 | 10,000 | $ | 2.00 | 5.85 | 75,003 | $ | 5.85 | – | $ | – | ||||||||||||||||||||||||||||||
| $ | 2.09 | 246,000 | $ | 2.09 | – | $ | – | 6.00 | 33,330 | $ | 6.00 | 10,000 | $ | 6.00 | ||||||||||||||||||||||||||||||
| $ | 2.26 | 140,000 | $ | 2.26 | 90,000 | $ | 2.26 | 6.26 | 29,998 | $ | 6.26 | 29,998 | $ | 6.26 | ||||||||||||||||||||||||||||||
| $ | – | 2,714,000 | $ | 1.33 | 2,270,167 | $ | 1.20 | 6.27 | 81,986 | $ | 6.27 | – | $ | – | ||||||||||||||||||||||||||||||
| $ | 6.78 | 46,664 | $ | 6.78 | 35,553 | $ | 6.78 | |||||||||||||||||||||||||||||||||||||
| $ | – | 1,008,961 | $ | 4.21 | 802,531 | $ | 3.74 | |||||||||||||||||||||||||||||||||||||
The aggregate intrinsic value of the Company’s in-the-money outstanding and exercisable options as of September 30,December 31, 2022 was $ and $, respectively.
| 7. | REVENUE RECOGNITION |
Revenues are recognized as the performance obligations to deliver products or services are satisfied and are recorded based on the amount of consideration the Company expects to receive in exchange for satisfying the performance obligations. Most of the Company’s products and services are marketed to medical device companies with approximately 85%over 90% of salesall revenues to customers in the United States. Products and services are primarily transferred to customers at a point in time based upon when services are performed or product is shipped. Other selling costs to obtain and fulfill contracts are expensed as incurred due to the short-term nature of a majority of its contracts. The Company extends terms of payment to its customers based on commercially reasonable terms for the markets of its customers, while also considering their credit quality. Shipping and handling costs charged to customers are included in revenues.
| 12 |
The Company disaggregates revenues by product and service types as it believes it best depicts how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors. Technology rights revenue represent amounts paid by customers for rights to use the Company’s intellectual property including product designs, patents, and know-how to manufacture and commercialize their products under specified contractual conditions. Revenues are comprised of the following for the three and six months ended September 30,December 31, 2022 and 2021:
| Schedule of disaggregation of revenues | ||||||||||||||||||||||||
| Three Months Ended September 30, | Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Engineering Design Services | $ | 1,642,967 | $ | 373,316 | $ | 1,701,611 | $ | 1,636,482 | $ | 3,344,578 | $ | 2,127,253 | ||||||||||||
| Optical Components | 2,652,681 | 1,538,932 | 2,580,140 | 1,486,006 | 5,232,821 | 2,945,332 | ||||||||||||||||||
| Medical Device Products & Assemblies | 789,653 | 424,096 | ||||||||||||||||||||||
| $ | 5,085,301 | $ | 2,336,344 | |||||||||||||||||||||
| Medical Device Products and Assemblies | 1,005,210 | 774,553 | 1,794,863 | 1,160,800 | ||||||||||||||||||||
| Technology Rights | 600,000 | – | 600,000 | – | ||||||||||||||||||||
| Total Revenues | $ | 5,886,961 | $ | 3,897,041 | $ | 10,972,262 | $ | 6,233,385 | ||||||||||||||||
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,December 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 September 30, | Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Contract liabilities, beginning of period | $ | 905,113 | $ | 450,084 | $ | 1,032,891 | $ | 336,572 | $ | 905,113 | $ | 450,084 | ||||||||||||
| Assumed in business acquisition | – | 826,679 | – | 826,679 | ||||||||||||||||||||
| Unearned revenue received from customers | 455,613 | 205,389 | 441,493 | 537,137 | 897,106 | 742,526 | ||||||||||||||||||
| Revenue recognized | (327,835 | ) | (318,901 | ) | (679,403 | ) | (562,918 | ) | (1,007,238 | ) | (881,819 | ) | ||||||||||||
| Contract liabilities, end of period | $ | 1,032,891 | $ | 336,572 | $ | 794,981 | $ | 1,137,470 | $ | 794,981 | $ | 1,137,470 | ||||||||||||
| 8. | COVID-19 PANDEMIC |
The COVID-19 world-wide pandemic that began during the quarter ended March 31, 2020 and the domestic and international impact of policy decisions being made in major countries around the world has had, and could continue to have, an adverse impact on the Company’s sources of supply, current and future orders from its customers, collection of amounts owed to the Company from its customers, its internal operating procedures, and the Company’s overall financial condition.
| 13 |
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,December 31, 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%31% our business during the threesix months ended September 30,December 31, 2022 is from engineering services (primarily relating to the design of medical device optical assemblies), 52%48% 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.
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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,December 31, 2022, were $5,085,301,$5,886,961, as compared to $2,336,344$3,897,041 for the same period in the prior year, an increase of $2,748,957,$1,989,920, or 118%51.1%, primarily due to an increase in component revenue to a large defense contractor, and a $600,000 one-time sale of technology rights relating to a medical device instrument developed for a customer.
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Our total revenues for the six months ended December 31, 2022 were $10,972,262, as compared to $6,233,385 for the same period in the prior year, an increase of $4,738,877, or 76.0% due in part to the inclusion of the Lighthouse division since its acquisition on October 4, 2021, increases in October, 2021component sales in the El Paso and Gardner locations, an increase in medical device manufacturingengineering revenues, and optical component revenue. Excluding the effect of the Lighthouse acquisition, componentone-time technology rights revenue increased 82%, production increased 37% and engineering revenue increased 18% fromin the quarter ended September 30, 2021 toDecember 31, 2022.
Our two largest customer during the three months ended September 30, 2022customers accounted for 16.6%14.2% and 18.1% of our revenue during the quarter ended December 31, 2022, and represented component15.3% and 11.8% of our revenue forduring the six months ended December 31, 2022. One of our two largest customers is a defense/aerospace customer.company and the other is developing a medical device instrument. We generated revenues from 194207 unique customers during the threesix months ended September 30,December 31, 2022, and no other customer represented over 10% of our revenue during the three and six months ended December 31, 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,December 31, 2022 was $1,724,654,$2,725,224, compared to $639,032$1,119,582 for the same period in the prior year, an increase of $1,085,622,$1,605,642, or 170%143%. Gross profit for the quarter ended September 30,December 31, 2022 as a percentage of our revenues was 33.9%46.3%, an increase from the gross profit percentage 27.4%of 28.7% for the same period in the prior year. Gross profit for the six months ended December 31, 2022 was $4,449,878, as compared to $1,758,614 for the same period in the prior year, an increase of $2,691,264 or 153%. Gross profit for the six months ended December 31, 2022 as a percentage of our revenues was 40.6%, an increase from the gross profit percentage of 28.2% for the same period in the prior year. Quarterly gross profit and gross profit percentage depend on a number of factors, including overall sales volume, facility utilization, product sales mix, the costs of engineering services, and production start-up costs and challenges in connection with new products, the effects of COVID-19 pandemic policy decisions on various economies and our suppliers and customers, as well as the effects on production efficiencies due to the augmented policies we have incorporated into our operations as a result of the COVID-19 pandemic.
Our gross profit on individual engineering projects is dependent on a number of factors and is expected to fluctuate from quarter to quarter based on the nature and status of engineering projects, unanticipated cost over-runs, design challenges and changes, start-up production activities, or other customer-imposed project changes or delays. Our increase in gross profit dollars and margin dollars during three and six months ended December 31, 2022 compared to the quarter ended September 30, 2022same periods in the previous years 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 efficienciesincreases in engineering, projects, which is partially offset by inclusion of the Lighthouse division engineeringcomponent and production revenues, at overall margins lower than the Ross Optical division revenues. The remaindergreater production and personnel utilization, and recognition of our production, engineering and component revenues resulted in margins within our targeted rangetechnology rights revenue with reasonably expected fluctuations.no associated direct incremental costs.
Research and development expenses were $245,477$208,666 for the quarter ended September 30,December 31, 2022, compared to $105,186$113,164 for the same period in the prior year, an increase of $140,291,$95,502, or 133%84.4%. Research and development expenses were $454,143 for the six months ended December 31, 2022, compared to $218,350 for the same period in the prior year, an increase of $235,793, or 108%. 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 quarterthree and six months ended September 30,December 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.year we had an increase in personnel, and an increase in research and development costs incurred in the development of internal research and development efforts and projects.
Selling, general and administrative expenses were $1,495,766$1,819,741 for the quarter ended September 30,December 31, 2022, compared to $933,624$1,466,768 for the same period in the prior year, an increase of $562,142,$352,973, or 60.2%24.1%. Selling, general and administrative expenses were $3,315,507 for the six months ended December 31, 2022, compared to $2,400,392 for the same period in the prior year, an increase of $915,115, or 38.1%. The increase in selling, general and administrative expenses in the threesix months ended September 30,December 31, 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, incentive bonuses and sales commissions resulting from increased revenues, and marketing related expenses.expenses, offset by a decreased amount of stock-based compensation expense.
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Liquidity and Capital Resources
WeWith the exception of the current period ended December 31, 2022, during which net income was 560,909, which includes one-time technology rights revenue of $600,000, 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,December 31, 2022, cash was $673,502,$381,318, accounts receivables were $3,414,685$4,032,522 and current liabilities were $5,192,420,$5,477,991, including $1,032,891$794,981 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 marginsprofits 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,December 31, 2022.
Capital equipment expenditures and additional patent costs during the threesix months ended September 30,December 31, 2022 were $29,174.$37,637. 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,December 31, 2022, are summarized as follows:
| Fiscal 2023 | Thereafter | Total | Fiscal 2023 | Thereafter | Total | |||||||||||||||||||
| Capital lease for equipment, including interest | $ | 36,464 | $ | 120,564 | $ | 157,028 | ||||||||||||||||||
| Financing lease for equipment, including interest | $ | 24,285 | $ | 120,564 | $ | 144,849 | ||||||||||||||||||
| Minimum operating lease payments | $ | 136,167 | $ | 377,904 | $ | 514,071 | $ | 90,778 | $ | 377,904 | $ | 468,682 | ||||||||||||
We have contractual cash commitments related to open purchase orders as of September 30,December 31, 2022 of approximately $3,252,770.$3,547,236.
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
Item 4. Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures, including internal control over financial reporting, were effective as of September 30,December 31, 2022, to ensure the information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended (i) is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are intended to be designed to provide reasonable assurance that such information is accumulated and communicated to our management. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of September 30,December 31, 2022.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter of our fiscal year covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Beginning on January 7, 2023, the Company hired E. Kevin Dahill as its Interim Chief Financial Officer. January 6, 2023 was Daniel Habhegger’s last day as a full-time employee of the Company. Mr. Habhegger was Chief Financial Officer of the Company from December 2, 2019 through January 6, 2023. Mr. Habhegger has taken a position with another company but has agreed to continue on a part-time basis with the Company through February 14, 2023, retaining responsibility as the Company’s principal accounting officer and principal financial officer through that date. Further information about this transition in roles is set forth in the Company’s report on Form 8-K filed on January 5, 2023.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Our Company, on occasion, may be involved in legal matters arising in the ordinary course of our business. While management believes that such matters are currently insignificant, matters arising in the ordinary course of business for which we are or could become involved in litigation may have a material adverse effect on our business, financial condition or results of operations. We are not aware of any pending or threatened litigation against us or our officers and directors in their capacity as such that could have a material impact on our operations or finances.
Item 1A. Risk Factors.
There have been no material changes from the risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended June 30, 2022, as filed with the Securities and Exchange Commission on September 27, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
As previously reported, the Company effected a 1-for-3 reverse split of its Common Stock as of 11:59 p.m. Eastern Time on Tuesday, November 1, 2022. The reverse stock split reduced the outstanding Common Stock from 16,915,089 shares to 5,638,302 shares, including the reduction for elimination of fractional shares. The total number of shares of Common Stock authorized under the Company’s Articles of Organization remains unchanged, at 50,000,000 shares, $.01 par value per share. The Common Stock began trading on a reverse stock split-adjusted basis on the OTCQB on November 2, 2022. The new CUSIP number for the Common Stock following the Reverse Stock Split is: 740294400.Not applicable.
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Item 6. Exhibits.
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| * | Filed Herewith. | |
| † | Certain portions of the agreement have been omitted to preserve the confidentiality of such information. The Company will furnish copies of any such information to the SEC upon request. | |
| + | The schedules to agreement have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish copies of any such schedules to the SEC upon request. |
Copies of above exhibits not contained herein are available to any stockholder, upon written request to: Chief Financial Officer, Precision Optics Corporation, Inc., 22 East Broadway, Gardner, MA 01440.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PRECISION OPTICS CORPORATION, INC. | ||
| Date: | By: | /s/ Joseph N. Forkey |
| Joseph N. Forkey | ||
Chief Executive Officer (Principal Executive Officer) | ||
| Date: | By: | /s/ Daniel S. Habhegger |
| Daniel S. Habhegger | ||
(Principal Financial Officer and Principal Accounting Officer) | ||
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