SEC Form 10-Q filed by Precision Optics Corporation Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(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 |
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.
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).
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 | ☐ | |
| ☒ | 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 issuer’s common stock, par value $0.01 per share, at November 12, 2024 was shares.
PRECISION OPTICS CORPORATION, INC.
Table of Contents
| 2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
PRECISION OPTICS CORPORATION, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| September 30, | June 30, | |||||||
| 2024 | 2024 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Fixed Assets: | ||||||||
| Machinery and equipment | ||||||||
| Leasehold improvements | ||||||||
| Furniture and fixtures | ||||||||
| Total fixed assets | ||||||||
| Less—accumulated depreciation and amortization | ||||||||
| Net fixed assets | ||||||||
| Operating lease right-to-use asset | ||||||||
| Patents, net | ||||||||
| Goodwill | ||||||||
| Total other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Revolving line of credit | $ | $ | ||||||
| Current portion of capital lease obligation | ||||||||
| Current maturities of long-term debt | ||||||||
| Accounts payable | ||||||||
| Contract liabilities | ||||||||
| Accrued compensation and other | ||||||||
| Operating lease liability | ||||||||
| Total current liabilities | ||||||||
| Capital lease obligation, net of current portion | ||||||||
| Long-term debt, net of current maturities and debt issuance costs | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Total liabilities | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock, $ par value: shares authorized; issued and outstanding – shares at September 30, 2024 and at June 30, 2024 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated interim financial statements.
| 3 |
PRECISION OPTICS CORPORATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2024 AND 2023
(UNAUDITED)
| Three Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Revenues | $ | $ | ||||||
| Cost of Goods Sold | ||||||||
| Gross Profit | ||||||||
| Research and Development Expenses | ||||||||
| Selling, General and Administrative Expenses | ||||||||
| Total Operating Expenses | ||||||||
| Operating Loss | ( | ) | ( | ) | ||||
| Interest Expense | ( | ) | ( | ) | ||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Loss Per Share: | ||||||||
| Basic & Fully Diluted | $ | ) | $ | ) | ||||
| Weighted Average Common Shares Outstanding: | ||||||||
| Basic & Fully Diluted | ||||||||
The accompanying notes are an integral part of these consolidated interim financial statements.
| 4 |
PRECISION OPTICS CORPORATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED
sEPTEMBER 30, 2024 AND 2023
(UNAUDITED)
| Three Month Period Ended September 30, 2024 | ||||||||||||||||||||
| Number of Shares | Common | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||
| Balance, July 1, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Issuance of common stock in registered direct offering | ||||||||||||||||||||
| Proceeds from exercise of stock option | ||||||||||||||||||||
| Stock-based compensation | – | |||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Three Month Period Ended September 30, 2023 | ||||||||||||||||||||
| Number of Shares | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||
| Balance, July 1, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation | – | |||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these consolidated interim financial statements.
| 5 |
PRECISION OPTICS CORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
September 30, 2024 AND 2023
(UNAUDITED)
| Three Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in by operating activities - | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation expense | ||||||||
| Non-cash interest expense | ||||||||
| Changes in operating assets and liabilities - | ||||||||
| Accounts receivable, net | ( | ) | ||||||
| Inventories, net | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Contract liabilities | ( | ) | ||||||
| Accrued compensation and other | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of fixed assets | ( | ) | ( | ) | ||||
| Additional patent costs | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Payments of capital lease obligations | ( | ) | ( | ) | ||||
| Payments of long-term debt | ( | ) | ( | ) | ||||
| Payment of debt modification costs | ( | ) | ||||||
| Payment on revolving line of credit | ( | ) | ||||||
| Proceeds from registered direct sale of common stock, net | ||||||||
| Gross proceeds from the exercise of stock options | ||||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase(decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
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 first three months of the Company’s fiscal year 2025. 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, 2024, together with the Report of Independent Registered Public Accounting Firm filed under cover of the Company’s 2024 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 30, 2024.
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.
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, 2024 and 2023, potentially dilutive securities outstanding have been excluded from the computations of weighted-average shares outstanding because such securities have an antidilutive impact due to the net loss reported during those periods. The number of shares issuable upon the exercise of outstanding stock options that were excluded from the computation of fully dilutive weighted average shares outstanding was approximately for the three months ended September 30, 2024 and for the three months ended September 30, 2023.
The following is the calculation of income (loss) per share for the three months ended September 30, 2024 and 2023:
| Three Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net Income (Loss) Basic and Fully Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted Average Shares Outstanding | ||||||||
| Basic & Fully Diluted | ||||||||
| Loss Per Share – Basic & Fully Diluted | $ | ) | ) | |||||
| 7 |
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 the 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.
| 2. | INVENTORIES |
Inventories are stated at the lower of cost (first-in, first-out) or market and consisted of the following:
| September 30, 2024 | June 30, 2024 | |||||||
| Raw Materials | $ | $ | ||||||
| Work-In-Progress | ||||||||
| Finished Goods | ||||||||
| Total Inventories | $ | $ | ||||||
| 3. | BANK FINANCING ACTIVITIES |
Bank Line of Credit
| 8 |
The Company’s Loan Agreement with the Lender contains a minimum annual debt service coverage ratio covenant of 1.2x, for the period ending June 30, 2024. The Company did not meet this annual debt service coverage ratio as of such fiscal year end date. The Company’s Lender has agreed to waive compliance with such debt service ratio covenant for the period ending June 30, 2024. In addition to such waiver, the Lender and the Company have entered into an amendment dated September 30, 2024 to that certain Term Loan dated October 4, 2021, as amended and that certain Promissory Note dated June 2, 2023 (collectively, the “Notes”) which amendments provide for a six month period of interest only payments from October 15, 2024 through March 15, 2025 for the Notes. The Company will begin to pay principal and interest under the Notes beginning with the payments due on April 15, 2025, with a new amortization schedule for the remaining term for such Notes through their maturity date. There were no other changes to or modifications to the Loan Agreement or the Notes.
Long-Term Debt
Long-term debt consists of the following at September 30, 2024:
| Amount | ||||
| Term Loan Note payable to Main Street Bank with | $ | |||
| Permanent Working Capital Loan payable to Main Street Bank with | ||||
| Less current maturities | ( | ) | ||
| Less debt issuance and modification costs, net of accumulated amortization of $ | ( | ) | ||
| Long-term debt, net of current maturities and debt issuance costs | $ | |||
At September 30, 2024 principal payments due on the Term Loan Note payable are as follows:
| Fiscal Year Ending June 30: | ||||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Total long-term debt | $ | |||
| 9 |
| 4. | LEASE OBLIGATIONS |
In March 2021 the Company entered into a five-year capital lease in
the amount of $
On July 1, 2019, the Company entered into a three-year
operating lease for its facility in El Paso, Texas, and in February 2022 extended the lease through June 2025. Remaining minimum lease
payments at September 30, 2024 total $
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
on September 30, 2024 total $
At September 30, 2024 future minimum lease payments under the capital lease and operating lease obligations are as follows:
| Fiscal Year Ending June 30: | Capital Leases | Operating Lease | ||||||
| 2025 | $ | $ | ||||||
| 2026 | ||||||||
| Total Minimum Payments | ||||||||
| Less: amount representing interest | ||||||||
| Present value of minimum lease payments | ||||||||
| Less: current portion | ||||||||
| Lease Obligation, net of current portion | $ | $ | ||||||
The Company’s four facilities in Gardner,
Massachusetts which are used for offices, production and storage spaces are leased primarily on a tenant-at-will basis. Rent expense on
these operating leases was $
| 5. | STOCK-BASED COMPENSATION |
Stock Options
The following table summarizes stock-based compensation
expense for the three months ended September 30, 2024 and 2023. The share amounts and prices shown below reflect adjustment for a
| Three Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cost of Goods Sold | $ | $ | ||||||
| Selling, General and Administrative | ||||||||
| Stock Based Compensation Expense | $ | $ | ||||||
No compensation has been capitalized because such amounts would have been immaterial.
| 10 |
The following tables summarize stock option activity for the three months ended September 30, 2024:
| Options Outstanding | ||||||||||||
| Number of Shares | Weighted Average Exercise Price | Weighted Average Contractual Life | ||||||||||
| Outstanding at June 30, 2024 | $ | years | ||||||||||
| Exercised | ( | ) | – | |||||||||
| Cancelled, forfeited, or expired | ( | ) | ||||||||||
| Outstanding at September 30, 2024 | $ | years | ||||||||||
The aggregate intrinsic value of the Company’s in-the-money outstanding and exercisable options as of September 30, 2024 were $ and $, respectively.
| 6. | REVENUE RECOGNITION |
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,” or ASC 606, by performing the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the Company satisfies the performance obligations. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within the contract and determine those that are performance obligations and assess whether each promised good or service is distinct based on the contract.
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 the three months ended September 30, 2024 and 2023:
| Three Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Engineering Design Services | $ | $ | ||||||
| Optical Components | ||||||||
| Medical Device Products and Assemblies | ||||||||
| Total Revenues | $ | $ | ||||||
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.
| 11 |
Revenue recognition policies for each of the four product and service types appear below.
Engineering Design Services
The Company enters into contractual agreements with its 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 the Company has 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 its customers and requires purchase orders for all purchased optical components, finished devices and assemblies. Revenue is recognized at the time title passes to the Company’s customers based on its review of the customer contract, generally at the time of shipment from its facilities. Occasionally the Company may enter into “bill and hold” contractual arrangements where title is held by its 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 September 30, 2024, 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’s inception date.
Contract liabilities, which are recorded in the Company’s Consolidated Balance Sheets, and unearned revenue are comprised of the following:
| Three Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Contract liabilities, beginning of period | $ | $ | ||||||
| Unearned revenue received from customers | ||||||||
| Revenue recognized | ( | ) | ( | ) | ||||
| Contract liabilities, end of period | $ | $ | ||||||
| 12 |
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, 2024 and with our audited consolidated financial statements for the year ended June 30, 2024 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 30, 2024.
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, 2024 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 proprietary medical instrumentation line, unique custom design and manufacturing capabilities, and expert engineering and development has generated traditional proprietary endoscopes and endocouplers as well as other custom imaging and illumination products for our customers’ use in minimally invasive surgical procedures. We design and manufacture 3D endoscopes and very small Microprecision lenses, assemblies and complete medical devices to meet the surgical community’s continuing demand for smaller, disposable, and more enhanced imaging systems for minimally invasive surgery.
Effective June 1, 2019 we acquired the operating assets of Ross Optical Industries, Inc. of El Paso, Texas. As Ross Optical Industries 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 suppliers. 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.
Effective October 1, 2021 we acquired the operating assets of Lighthouse Imaging, LLC of Windham, Maine. Our Lighthouse Imaging division supplements our operations as a manufacturer of advanced optical imaging systems and accessories and has provided further 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. Since the purchase we have integrated these acquired engineering and operational capabilities to provide an expanded, unified offering to our customers. 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.
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. Over the years we have developed extensive experience collaborating with other optical specialists worldwide.
| 13 |
The markets for our products have increasingly been driven by the demand for smaller and more enhanced imaging systems by the needs of the surgical community, including applications for the brain, eye, ear, urology, cardiology/angiography and the spine. 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.
We produce micro-precision optics, which are millimeter-sized and smaller cameras with low manufacturing costs. The small size provides visualization for new procedures in new parts of the body and for existing procedures that are currently performed blind or with sub-optimal imaging, facilitating the development of new surgical procedures that are currently impractical. We use patented and patent-pending approaches to fabricating opto-mechanical and opto-electronic systems. We have developed and helped commercialize applications for numerous customers in the medical device and defense/aerospace industries.
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. Competition among medical device companies is increasing with multiple companies now pursuing less expensive, procedure specific robotic systems. 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. We are one of only a handful of companies in the world to design and provide 3D endoscopes. By designing systems with low manufacturing costs, we have also begun to penetrate the single-use endoscope market. Single-use endoscopes virtually eliminate the potential for patient cross-contamination and support a number of additional operational benefits for hospitals and surgeons. We estimate this segment of the overall minimally invasive surgical market is growing at two to three times the rate of the overall market.
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 millimeter sized devices and 3D endoscopy, including single-use products and assemblies.
We are registered to the ISO 9001:2015 and ISO 13485:2016 Quality Standards and comply with the FDA Good Manufacturing Practices.
Our websites are www.poci.com, www.rossoptical.com, and www.lighthouseoptics.com. The information contained on our websites does not constitute part of this report.
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 and related disclosures. 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 under different assumptions or conditions and any such differences may be material.
Critical Accounting Policies and 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, 2024 filed with the Securities and Exchange Commission on September 30, 2024.
| 14 |
Results of Operations
Revenue
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2024 | Percent of Sales | 2023 | Percent of Sales | Increase (Decrease) | Percent Change | |||||||||||||||||||
| Engineering Design Services | $ | 1,851,371 | 44.1 | $ | 1,900,999 | 44.0 | $ | (49,628 | ) | (2.6 | ) | |||||||||||||
| Optical Components | 2,080,188 | 49.6 | 1,903,311 | 44.0 | 176,877 | 9.3 | ||||||||||||||||||
| Finished Products and Assemblies | 265,494 | 6.3 | 516,945 | 12.0 | (251,451 | ) | (48.6 | ) | ||||||||||||||||
| Total Revenues | $ | 4,197,053 | 100.0 | $ | 4,321,255 | 100.0 | $ | 124,202 | (2.9 | ) | ||||||||||||||
Total revenues for the quarter ending September 30, 2024 were $4,197,053, as compared to $4,321,255 for the same period in the prior year, a decrease of $124,202. Revenue from Engineering Design Services decreased 2.6% during the quarter ending September 30, 2024 from the prior year period ending September 30, 2023. During the quarter ending September 30, 2024 engineering capacity, and therefore billable revenues, was reduced as a result of increased research and development activities.
Revenue from Optical Components increased 9.3% during the three-month period ending September 30, 2024 from the prior year period ending September 30, 2023. The market for Optical Components was impacted beginning in the period ending September 30, 2023, as we noted lower order volumes as customers sought to rebalance their inventories, and we believe a recovery is now underway.
Revenue from Finished Products and Assemblies decreased 48.6% during the quarter ending September 30, 2024 from the prior year quarter ending September 30, 2023. The decrease in revenue from Finished Products and Assemblies was primarily attributable to a manufacturing pause for a defense/aerospace customer that was occasioned by a change in specification finalized late in the quarter ending September 30, 2024.
Gross Profit
Gross margin decreased to 26.6% during the quarter ending September 30, 2024, compared to 33.9% for the quarter ending September 30, 2023. Gross profit decreased to $1,117,330 during the three months ended September 30, 2024, compared to $1,463,611 for the three months ended September 30, 2023, primarily driven by changes in the product sales mix and the decreases in revenue discussed above.
Research & Development
R&D expenses increased $187,901 to $400,659 during the quarter ending September 30, 2024, compared to $212,758 during the quarter ending September 30, 2023. R&D expenses for the period represent employee-related expenses to support product improvements, the development of new technologies and standardized approaches to address the opportunities for an evolving single-use medical device environment.
Selling, General and Administrative Expenses
SG&A expenses increased $307,466, or 18.6% to $1,963,612 during the three months ended September 30, 2024, compared to $1,656,146 during the three months ended September 30, 2023. The increase in SG&A for the three-month period was primarily due to increased recruitment costs, bad debt expense, consulting expenses and information technology expenses.
| 15 |
Liquidity and Capital Resources
Based on our current plans and business conditions, management believes that the Company’s available cash and cash equivalents, the cash generated from operations, availability on our line of credit, and our ability to raise funds in the capital markets will be sufficient to provide for the Company’s working capital and capital expenditure requirements for at least 12 months from the date of this filing. However, our cash on hand and cash generated solely from operations may be insufficient to meet working capital needs for such period and we may be required to raise external financing in the short-term.
Net Cash Used in Operating Activities
During the three months ending September 30, 2024, net cash used in operating activities totaled $318,622 and included a net loss of $1,311,247, increases in inventory of $592,521, offset by increases in accounts payable and accrued expenses of $1,016,135, decreases in accounts receivable net of decreased customer deposit liabilities of $356,092, and non-cash items totaling $202,030.
During the three months ending September 30, 2023, net cash used in operating activities totaled $1,372,989 and included a net loss of $464,515, increases in inventory of $194,995, increases in accounts receivable net of increased customer deposit liabilities of $375,426, decreases in accounts payable and accrued expenses of $390,719, and non-cash items totaling $164,886.
Net Cash Used in Investing Activities
During the three months ending September 30, 2024, net cash used in investing activities was $28,099, consisting of purchases of property and equipment and patent costs. During the three months ended September 30, 2023, net cash used in investing activities was $43,517, consisting of purchases of property and equipment and patent costs.
Net Cash Provided by Financing Activities
During the three months ending September 30, 2024, we made payments of $139,527 on term notes and capital leases and repaid $500,000 on our revolving line of credit. We raised a net of $1,204,542 through the issuance of new shares in a registered direct common stock offering. During the three months ending September 30, 2023, we made payments of $138,876 on term notes and capital leases.
Indebtedness
In October 2021 we entered a $2,600,000 term loan with a commercial bank. In June 2023 we added a second term loan in the amount of $750,000. We secured a $250,000 line of credit from the same bank in October 2021 for working capital needs, which was increased to $500,000 in May 2022 and to $1,250,000 in June 2023. There were $500,000 in borrowings outstanding on the line of credit on September 30, 2024 and additional availability in the amount of $750,000.
Our loan agreement contains a minimum annual debt service coverage ratio covenant of 1.2x, for the period ending June 30, 2024. We did not meet this annual debt service coverage ratio as of June 30, 2024. Our lender has agreed to waive compliance with the debt service ratio covenant for the period ending June 30, 2024. In addition to the waiver, we have entered into amendments dated September 30, 2024 with our lender to both term loans which provide for a six month period of interest only payments from October 15, 2024 through March 15, 2025. We will begin to pay principal and interest under the Notes beginning with the payments due on April 15, 2025, with a new amortization schedule for the remaining term for such Notes through their maturity date. There were no other changes to or modifications to the Loan Agreement or the Notes.
On August 14. 2024 we entered into securities purchase agreements with institutional and accredited investors in addition to certain directors and officers of the Company for the purchase and sale of 265,868 shares of the Company’s common stock resulting in gross proceeds of approximately $1.4 million before deducting placement agent commissions and other estimated offering expenses. Net proceeds were $1,204,542.
Capital equipment expenditures and additional patent costs during the three months ended September 30, 2024 and in the same period in the prior year were $28,099 and $43,517, respectively.
| 16 |
Contractual cash commitments for the fiscal periods subsequent to September 30, 2024, are summarized as follows:
| Fiscal 2025 | Thereafter | Total | ||||||||||
| Capital lease for equipment, including interest | $ | 31,764 | $ | 28,004 | $ | 59,768 | ||||||
| Minimum operating lease payments | $ | 137,950 | $ | 11,478 | $ | 149,428 | ||||||
We have contractual cash commitments related to open purchase orders as of September 30, 2024 of approximately $4,549,000.
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.
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, who is our principal executive officer, and our Chief Financial Officer, who is our principal 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, 2024, 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.
Material Weaknesses Previously Identified and Remediation Status
As disclosed in our Form 10-k for the fiscal year ending June 30, 2024 we did not properly value our raw material and work-in-process inventory resulting in an overstatement of inventory and an understatement of cost of goods sold in the amount of $320,000. We used a manually updated spreadsheet to maintain our records of quantities and costs in inventory, prior to transitioning to a new ERP system. The new ERP system was not properly updated to reflect current costs, and proper units of measure for certain items in inventory. During the quarter ending September 30, 2024, we conducted a thorough review of inventory item costs, updating incorrect item costs and units of measure in the new ERP system and established a methodology to continually monitor changes in costs through an analysis of purchase price variances and customer margin analysis.
Additionally, we realized during the preparation of the financial statements for the fiscal year ending June 30, 2024 that we did not properly expense certain research and development costs totaling $147,000, which was corrected prior to the filing of our financial statements on Form 10-K for the fiscal year ending June 30, 2024. We erroneously believed certain research and development costs were allowed to be capitalized under GAAP. The remediation of this material weakness has now been completed.
Changes in Internal Control over Financial Reporting
Except for the material weaknesses and remediation discussed above, there was no change in our internal control over financial reporting that occurred during the period 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.
| 17 |
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.
For information regarding factors that could affect our results of operations, financial condition and liquidity, refer to the section entitled “Risk Factors” in Part I, Item 1A in our annual report on Form 10-K for the year ended June 30, 2024. There have been no material changes from the risk factors previously disclosed in our annual report on Form 10-K for the year ended June 30, 2024 as filed with the SEC.
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.
During the period covered by this Quarterly Report
on Form 10-Q, no director or officer of the Company
| 18 |
Item 6. Exhibits.
| Exhibit | Description | |
| 10.1 | Form of Securities Purchase Agreement from August 13, 2024 offering (incorporated by reference to exhibit 10.1 of the Form 8-K dated August 14, 2024) | |
| 10.2 | Placement Agency Agreement between Precision Optics Corporation, Inc and A.G.P./Alliance Global Partners dated August 13, 2024 (incorporated by reference to exhibit 10.2 of the Form 8-K dated August 14, 2024) | |
| 31.1* | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1* | Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS* | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104* | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| * | Filed Herewith. |
| 19 |
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: November 14, 2024 | By: | /s/ Joseph N. Forkey |
| Joseph N. Forkey | ||
|
Chief Executive Officer (Principal Executive Officer) | ||
| Date: November 14, 2024 | By: | /s/ Wayne M. Coll |
| Wayne M. Coll | ||
|
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||
| 20 |