| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business Precision Optics Corporation, Inc. (the “Company”)
designs, develops, manufactures and sells specialized optical and illumination systems and related components. The Company conducts business
in one industry segment only and its customers are primarily domestic. The Company performs advanced optical and illumination system design,
development, assembly and manufacturing services, and sources for resale specialized optical components for products that fall into two
principal areas: (i) medical products for use by hospitals and physicians; and (ii) products used by defense contractors and industrial
customers.
(b) Reverse Stock Split In February 2022, 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 As a result of the reverse stock split, every three
shares of issued and outstanding common stock were automatically combined into one issued and outstanding share of common stock, without
any change in the par value per share or the number of the Company’s authorized shares. The reverse stock split reduced the number
of shares of common stock outstanding from 16,915,089 5,638,302 Unless otherwise noted, all prior year share amounts
and per share calculations throughout these financial statements 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.
(c) Revenues The Company determines revenue recognition for arrangements
that we determine are within the scope of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers The Company disaggregates revenues by product and
service types as it believes 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 year ended June 30, 2024, and 2023:
Schedule of disaggregation of revenues
Year Ended June 30,
2024 2023
Engineering Design Services $ 8,323,433 $ 6,728,867
Optical Components 8,384,140 10,523,806
Medical Device Products and Assemblies 2,396,777 3,791,794
Total Revenues $ 19,104,350 $ 21,044,467 Other selling costs to obtain and fulfill contracts
are expensed as incurred due to the short-term nature of a majority of contracts. The Company extends terms of payment to its customers
based on commercially reasonable terms for the markets of its customers, while also considering their credit quality. Shipping and handling
costs charged to customers are included in revenue. Revenue recognition policies for each of the three
product and service types appear below. Engineering Design Services The Company enters into contractual
agreements with our customers, including design services agreements, statements of work and receive purchase orders for development projects.
These agreements provide costs on an estimated basis for the services we have agreed to provide. Engineering Design Services are rendered
on a time and materials basis. The Company recognizes revenue as customers are invoiced for the actual engineering services provided in
the period. Revenue is also recognized on materials purchased for development projects at the time of receipt. Engineering Design Services
are provided on a best-efforts basis; no warranty is provided as there is no guarantee that the work will result in the attainment of
the customer’s project objectives. The Company may obtain customer deposits in advance of rendering engineering design services.
Customer deposits are treated as contractual liabilities until the terms of customer agreements are satisfied and are not a component
of revenue. Optical Components, Finished Products and Assemblies The Company provides fixed price
quotations to our customers and requires purchase orders for all purchased optical components, finished devices and assemblies. Revenue
is recognized at the time title passes to our customer based on our review of the customer contract, generally at the time of shipment
from our facilities. Occasionally the Company may enter into “bill and hold” contractual arrangements where title is held
by our customers while goods are stored at our facilities for their convenience. Technology Rights and Royalties The Company may recognize revenue
for the sale of technology rights and through the receipt of royalties obtained under a license of our intellectual property. These revenues
are recognized in the period in which, in our judgment, they are earned and no longer contingent under the terms and conditions of the
relevant customer contract. 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 June 30, 2024 and 2023, there
were no contract assets recorded in the Company’s Consolidated Balance Sheets. The Company’s contract liabilities arise as
a result of unearned revenue received from customers at inception of contracts or where the timing of billing for services precedes satisfaction
of 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
Year Ended June 30,
2024 2023
Contract liabilities, beginning of period $ 1,174,690 $ 905,113
Unearned revenue received from customers 1,946,946 2,545,317
Revenue recognized (1,949,286 ) (2,275,740 )
Contract liabilities, end of period $ 1,172,350 $ 1,174,690
(d) Cash and Cash Equivalents The Company includes in cash equivalents all highly
liquid investments with original maturities of three months or less at the time of acquisition. Cash and cash equivalents of $ 405,278 2,925,852
(e) Inventories Inventories are stated at the lower of cost (first-in,
first-out) and net realizable value and include material, labor and manufacturing overhead. The components of inventories on June 30,
2024 and 2023 are as follows:
Schedule of inventory
2024 2023
Raw material $ 1,570,135 $ 1,142,816
Work-in-progress 157,406 322,538
Finished goods 1,140,559 1,310,862
Total Inventories $ 2,868,100 $ 2,776,216 The Company provides for estimated obsolescence on
unmarketable inventory based upon assumptions about future demand and market conditions. If actual demand and market conditions are less
favorable than those projected by management, additional inventory write-downs may be required. Inventory, once written down, is not subsequently
written back up, as these adjustments are considered permanent adjustments to the carrying value of the inventory.
(f) Fixed Assets Fixed assets are recorded at cost. Maintenance and
repair items are expensed as incurred. The Company provides for depreciation and amortization by charges to operations, using the straight-line
and declining-balance methods, which allocate the cost of fixed assets over the following estimated useful lives:
Schedule of estimated useful lives
Asset Classification Estimated Useful Life
Machinery and equipment 2-7 years
Leasehold improvements Shorter of lease term or estimated useful life
Furniture and fixtures 5 years
Vehicles 3 years Depreciation and amortization expense was $ 212,382 210,735
(g) Significant Customers and Concentration of Credit Risk Financial instruments that subject the Company to
credit risk consist primarily of cash equivalents and trade accounts receivable. The Company places its investments with highly rated
financial institutions. The Company has not experienced any losses on these investments to date. At June 30, 2024, and 2023, two
individual customers accounted for more than 10 The allowance for credit losses was $ 118,872
606,715
Schedule of allowance for credit losses
Year Ended June 30,
2024 2023
Allowance for credit losses, beginning of period $ 606,715 $ 44,135
Change in the provision for expected credit losses (23,541 ) 567,066
Writeoffs charged against the allowance (464,302 ) (4,847 )
Allowance for credit losses, end of period $ 118,872 $ 606,715 In the year ended June 30, 2023, the Company increased
the credit loss reserve to cover potential losses due to the insolvency of one customer and wrote off the receivable against the reserve
during the year ended June 30, 2024. The Company generally does not require collateral or other security as a condition of sale, rather
it relies on credit approval, balance limitation and monitoring procedures to control credit risk in trade account financial instruments.
Management believes the allowance for credit losses, which is established based upon review of specific account balances and historical
experience, is adequate at June 30, 2024.
(h) 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 or net 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 and warrants. For the years ended
June 30, 2024 and 2023, the effect of such securities was antidilutive and not included in the diluted calculation because of the net
loss generated in those periods. The following is the calculation of loss per share
for the years ended June 30, 2024 and 2023:
Schedule of loss per share
Year Ended June 30,
2024 2023
Net Loss– Basic and Diluted $ (2,951,377 ) $ (144,613 )
Basic and diluted weighted average shares outstanding 6,068,329 5,666,034
Loss per share
Basic and fully diluted $ (0.49 ) $ (0.03 ) The number of shares issuable upon the exercise of
outstanding stock options and warrants that were excluded from the computation as their effect was antidilutive was approximately 1,357,735 1,017,041
(i) Stock-Based Compensation The measurement and recognition of compensation costs
for all stock-based awards made to employees and the Board of Directors are based upon fair value over the requisite service period for
awards expected to vest. The Company estimates the fair value of share-based awards on the date of grant using the Black-Scholes option-pricing
model. Stock-based compensation costs recognized for the years ended June 30, 2024, and 2023 amounted to $ 959,784 919,032
(j) 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
(k) Fair Value of Financial Instruments Financial instruments consist principally of cash
and cash equivalents, accounts receivable and accounts payable. The estimated fair value of these financial instruments approximates their
carrying value due to their short-term nature.
(l) Research and Development Research and development expenses are charged to operations
as incurred. The Company groups development and prototype costs and related reimbursements in research and development. There were no
reimbursements for research and development recorded in research and development for the years ended June 30, 2024, and 2023.
(m) Comprehensive Income Comprehensive income or loss is defined as the change
in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s
comprehensive loss or income for the years ended June 30, 2024 and 2023 was equal to its net loss for the same periods.
(n) 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 carry-forwards. 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.
(o) Segment Reporting Operating segments are identified as components of
an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or
decision-making group, in making decisions about how to allocate resources and assess performance. The Company’s chief decision-maker
is its Chief Executive Officer. To date, the Company has viewed its operations and manages its business as principally one segment.
(p) Use of Estimates The preparation of financial statements in conformity
with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(q) Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the existing incurred loss
impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net
amount expected to be collected. Public business entities classified as smaller reporting companies were required to apply the provision
of ASU 2016-13 with annual reporting periods after December 15, 2022. The Company adopted the standard as of July 1, 2023, and the adoption
of this guidance did not have a material impact on its consolidated financial statements and related disclosures. |
