PRECISION OPTICS CORPORATION, INC. 10-Q

Item 1. Financial Statements. PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, 2021 June 30, 2021 ASSETS Current Assets: Cash and cash equivalents $ 1,669,569 $ 861,650 Accounts receivable (net of allowance for doubtful accounts of $ 252,133 at September 30, 2021 and $ 251,383 at June 30, 2021) 1,711,192 1,878,755 Inventories 2,120,890 1,885,395 Prepaid expenses 142,326 150,635 Total current assets 5,643,977 4,776,435 Fixed Assets: Machinery and equipment 3,108,023 3,084,511 Leasehold improvements 793,536 792,723 Furniture and fixtures 178,640 178,640 4,080,199 4,055,874 Less—Accumulated depreciation and amortization 3,503,902 3,461,622 Net fixed assets 576,297 594,252 Operating lease right-to-use asset 46,244 61,247 Patents, net 147,743 141,702 Goodwill 687,664 687,664 TOTAL ASSETS $ 7,101,925 $ 6,261,300 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Current portion of capital lease obligation $ 38,923 $ 38,347 Current portion of acquisition earn out liability 166,667 166,667 Accounts payable 1,286,240 1,205,149 Customer advances 336,572 450,084 Accrued compensation and other 883,770 589,616 Operating lease liability 46,244 61,247 Total current liabilities 2,758,416 2,511,110 Capital lease obligation, net of current portion 142,446 152,397 Acquisition earn out liability, net of current portion 166,666 166,666 Operating lease liability, net of current portion – – Stockholders’ Equity: Common stock, $ 0.01 par value: 50,000,000 shares authorized; issued and outstanding – 13,282,476 shares at September 30, 2021 and at June 30, 2021 132,825 132,825 Additional paid-in capital 50,614,351 50,464,280 Common stock subscribed 1,030,000 – Accumulated deficit ( 47,742,779 ) ( 47,165,978 ) Total stockholders’ equity 4,034,397 3,431,127 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 7,101,925 $ 6,261,300 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 MONTHS ENDED SEPTEMBER 30 , 2021 AND 2020 (UNAUDITED) Three Months Ended September 30, 2021 2020 Revenues $ 2,336,344 $ 2,757,901 Cost of Goods Sold 1,697,312 1,782,723 Gross Profit 639,032 975,178 Research and Development Expenses, net 105,186 151,576 Selling, General and Administrative Expenses 933,624 822,002 Business acquisition expenses 172,174 – Total Operating Expenses 1,210,984 973,578 Operating Income (Loss) ( 571,952 ) 1,600 Interest Expense ( 4,849 ) ( 807 ) Net Income (Loss) $ ( 576,801 ) $ 793 Loss Per Share: Basic and Fully Diluted $ ( 0.04 ) $ 0.00 Weighted Average Common Shares Outstanding: Basic 13,282,476 13,191,789 Fully Diluted 13,282,476 13,684,233 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 THREE MONTHS ENDED SEPTEMBER 30 , 2021 AND 2020 (UNAUDITED) Three Month Period Ended September 30, 2021 Number of Shares Common Stock Additional Paid-in Capital Common Stock Subscribed Accumulated Deficit Total Stockholders’ Equity Balance, July 1, 2021 13,282,476 $ 132,825 $ 50,464,280 $ – $ ( 47,165,978 ) $ 3,431,127 Stock-based compensation – – 160,071 – – 160,071 Proceeds from private placement of common stock subscribed, net of estimated issuance costs of $ 10,000 – – ( 10,000 ) 1,030,000 – 1,020,000 Net loss – – – – ( 576,801 ) ( 576,801 ) Balance, September 30, 2021 13,282,476 $ 132,825 $ 50,614,351 $ 1,030,000 $ ( 47,742,779 ) $ 4,034,397 Three Month Period Ended September 30, 2020 Number of Shares Common Stock Additional Paid-in Capital Common Stock Subscribed Accumulated Deficit Total Stockholders’ Equity Balance, July 1, 2020 13,191,789 $ 131,918 $ 49,702,986 $ – $ ( 47,063,143 ) $ 2,771,761 Stock-based compensation – – 71,146 – – 71,146 Net income – – – – 793 793 Balance, September 30, 2020 13,191,789 $ 131,918 $ 49,774,132 $ – $ ( 47,062,350 ) $ 2,843,700 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 THREE MONTHS ENDED September 30 , 2021 AND 2020 (UNAUDITED) Three Months Ended September 30, 2021 2020 Cash Flows from Operating Activities: Net Income (Loss) $ ( 576,801 ) $ 793 Adjustments to reconcile net loss to net cash used in by operating activities - Depreciation and amortization 42,280 35,086 Stock-based compensation expense 160,071 71,146 Changes in operating assets and liabilities - Accounts receivable, net 167,563 ( 103,564 ) Inventories, net ( 235,495 ) 58,854 Prepaid expenses 8,309 21,692 Accounts payable 81,091 ( 43,202 ) Customer advances ( 113,512 ) ( 210,394 ) Accrued compensation and other 284,154 ( 3,047 ) Net cash used in operating activities ( 182,340 ) ( 172,636 ) Cash Flows from Investing Activities: Purchases of fixed assets ( 24,325 ) ( 30,951 ) Additional patent costs ( 6,041 ) ( 9,658 ) Net cash used in investing activities ( 30,366 ) ( 40,609 ) Cash Flows from Financing Activities: Payment of capital lease obligation ( 9,375 ) ( 20,942 ) Gross Proceeds from private placement of common stock subscribed 1,030,000 – Net cash provided by (used in) financing activities 1,020,625 ( 20,942 ) Net increase (decrease) in cash and cash equivalents 807,919 ( 234,187 ) Cash and cash equivalents, beginning of period 861,650 1,134,697 Cash and cash equivalents, end of period $ 1,669,569 $ 900,510 Supplemental disclosure of non-cash financing activities: Offering costs included in accrued compensation and other $ 10,000 $ 22,250 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 quarter of the Company’s fiscal year 2022. These consolidated financial statements do not include all disclosures associated with annual consolidated financial statements and, accordingly, should be read in conjunction with footnotes contained in the Company’s consolidated financial statements for the year ended June 30, 2021, together with the Report of Independent Registered Public Accounting Firm filed under cover of the Company’s 2021 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 28, 2021. Use of Estimates The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Income (Loss) Per Share Basic income (loss) per share is computed by dividing net income or net loss by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period, plus the number of potentially dilutive securities outstanding during the period such as stock options. For the three months ended September 30, 2021, the effect of such securities was antidilutive and not included in the fully diluted calculation because of the net loss generated in that period. The following is the calculation of income (loss) per share for the three months ended September 30, 2021 and 2020: Loss Per Share Three Months Ended September 30, 2021 2020 Net Income (Loss) – Basic and Fully Diluted $ ( 576,801 ) $ 793 Weighted Average Shares Outstanding Basic 13,282,476 13,191,789 Fully Diluted 13,282,476 13,684,233 Loss Per Share - Basic and Fully Diluted $ ( 0.04 ) $ 0.00 7 The number of shares issuable upon the exercise of outstanding stock options that were excluded from the computation as their effect was antidilutive was approximately 2,563,200 and 893,200 for the three months ended September 30, 2021 and 2020, respectively. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the likelihood of utilization of existing deferred tax assets, management has considered historical results of operations and the current operating environment. Based on this evaluation, a full valuation reserve has been provided for the deferred tax assets. Goodwill and Patents Long-lived assets such as goodwill and patents are capitalized when acquired and reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. Impairment of the carrying value of long-lived assets such as goodwill and patents would be indicated if the best estimate of future undiscounted cash flows expected to be generated by the asset grouping is less than its carrying value. If an impairment is indicated, any loss is measured as the difference between estimated fair value and carrying value and is recognized in operating income or loss. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No such impairments of goodwill or patents have been estimated by management as of September 30, 2021. 2. 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, 2021 June 30, 2021 Raw Materials $ 639,274 $ 626,255 Work-In-Progress 566,263 453,117 Finished Goods 915,353 806,023 Total Inventories $ 2,120,890 $ 1,885,395 8 3. LEASE OBLIGATION In March 2021, the Company entered into a five-year capital lease in the amount of $ 161,977 for manufacturing equipment. In January 2020, the Company entered into a five-year capital lease for $ 47,750 for manufacturing equipment. The net book value of fixed assets under capital lease obligations as of September 30, 2021 is $ 220,164 . On July 1, 2019 the Company entered into a three-year operating lease for its facility in El Paso, Texas with total remaining minimum lease payments of $ 47,116 at September 30, 2021. Total rent expense including base rent and common area expenses was $ 13,997 and $ 15,445 during the three months ended September 30, 2021 and 2020, respectively. Included in the accompanying balance sheet at September 30, 2021 is a right-of-use asset of $ 46,244 and current and long-term right-of-use operating lease liabilities of $ 46,244 and $ 0 , respectively. At September 30, 2021, future minimum lease payments under the capital lease and operating lease obligations are as follows: Future minimum lease payments Fiscal Year Ending June 30: Capital Leases Operating Lease 2022 $ 36,464 $ 47,116 2023 48,619 – 2024 48,619 – 2025 43,917 – 2026 28,006 – Total Minimum Payments 205,625 $ 47,116 Less: amount representing interest 24,256 Present value of minimum lease payments 181,369 Less: current portion 38,923 $ 142,446 The Company’s operating leases for its Gardner, Massachusetts office, production and storage spaces plus an equipment lease have expired and are continuing on a month-to-month tenant at will basis. Rent expense on these operating leases was $ 50,826 and $ 41,616 for the three months ended September 30, 2021 and 2020, respectively. 4. STOCK-BASED COMPENSATION The following table summarizes stock-based compensation expense for the three months ended September 30, 2021 and 2020: Schedule of stock-based compensation expense Three Months Ended September 30, 2021 2020 Cost of Goods Sold $ 28,415 $ 11,233 Research and Development Expenses 43,489 16,925 Selling, General and Administrative Expenses 88,167 42,988 $ 160,071 $ 71,146 No compensation has been capitalized because such amounts would have been immaterial. 9 The following tables summarize stock option activity for the three months ended September 30, 2021: Stock option activity Options Outstanding Number of Shares Weighted Average Exercise Price Weighted Average Contractual Life Outstanding at June 30, 2021 2,578,200 $ 1.13 6.73 years Cancelled ( 15,000 ) $ 1.80 Outstanding at September 30, 2021 2,563,200 $ 1.13 6.46 years Information related to the stock options outstanding as of September 30, 2021 is as follows: Stock options outstanding by exercise price range Range of Exercise Prices Number of Shares Weighted- Average Remaining Contractual Life (years) Weighted- Average Exercise Price Exercisable Number of Shares Exercisable Weighted- Average Exercise Price $ 0.48 60,000 4.50 $ 0.48 60,000 $ 0.48 $ 0.50 80,000 4.72 $ 0.50 80,000 $ 0.50 $ 0.55 40,000 2.67 $ 0.55 40,000 $ 0.55 $ 0.70 100,000 6.84 $ 0.70 100,000 $ 0.70 $ 0.73 758,000 5.09 $ 0.73 758,000 $ 0.73 $ 0.85 6,000 1.26 $ 0.85 6,000 $ 0.85 $ 0.90 36,000 2.69 $ 0.90 36,000 $ 0.90 $ 1.20 200,200 0.42 $ 1.20 200,200 $ 1.20 $ 1.25 45,000 8.47 $ 1.25 15,000 $ 1.25 $ 1.30 453,000 7.70 $ 1.30 266,522 $ 1.30 $ 1.40 70,000 9.13 $ 1.40 70,000 $ 1.40 $ 1.42 100,000 7.95 $ 1.42 66,667 $ 1.42 $ 1.45 5,000 9.44 $ 1.45 – $ – $ 1.50 70,000 8.19 $ 1.50 70,000 $ 1.50 $ 1.68 540,000 9.68 $ 1.68 270,000 $ 1.68 0.48–1.68 2,563,200 6.46 $ 1.13 2,038,389 $ 1.13 The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisable options as of September 30, 2021 was $ 1,564,100 and $ 1,355,063 , respectively. 10 5. SALE OF STOCK IN OCTOBER 2021 On October 1, 2021, the Company entered into agreements with accredited investors for the sale and purchase of 937,500 unregistered shares of its common stock, $0.01 par value at a purchase price of $ 1.60 per share. The Company received $ 1,500,000 in gross proceeds from the offering, $ 1,030,000 of which was received as of September 30, 2021, and is included in cash in the accompanying balance sheet and in the accompanying statement of stockholders’ equity as common stock subscriptions. The Company used the net proceeds from this placement to partially fund the October 4, 2021, acquisition of the operating assets of Lighthouse Imaging, LLC with an effective date of October 1, 2021. See Note 8. Subsequent Event-Business Acquisition below. In conjunction with the placement, we also entered into a registration rights agreement with the investors, whereby we are obligated to file a registration statement with the Securities Exchange Commission on or before 120 calendar days after October 4, 2021 to register the resale by the investors of 937,500 shares of our common stock purchased in the placement. 6. 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 almost exclusively in the United States. Products and services are primarily transferred to customers at a point in time based upon when services are performed or product is shipped. Revenues represent the amount of consideration the Company expects to receive from customers in exchange for transferring products and services. Other selling costs to obtain and fulfill contracts are expensed as incurred due to the short-term nature of a majority of its revenues. The Company extends terms of payment to its customers based on commercially reasonable terms for the markets of its customers, while also considering their credit quality. Shipping and handling costs charged to customers are included in revenues. The Company disaggregates revenues by product and service types as it believes it best depicts how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors. Revenues are comprised of the following for the three and nine months ended September 30, 2021 and 2020: Disaggregation of revenues Three Months Ended September 30, 2021 2020 Engineering Design Services $ 373,316 $ 589,232 Optical Components 1,538,932 1,476,085 Medical Device Products & Assemblies 424,096 692,584 $ 2,336,344 $ 2,757,901 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, 2021, there were no contract assets recorded in the Company’s Consolidated Balance Sheets. 11 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 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: Contract Liabilities Three Months Ended September 30, 2021 2020 Contract liabilities, beginning of period $ 450,084 $ 417,059 Unearned revenue received from customers 205,389 44,132 Revenue recognized ( 318,901 ) ( 254,526 ) Contract liabilities, end of period $ 336,572 $ 206,665 7. 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. Given the uncertainty surrounding the continuation of economic impacts both domestically and abroad, the Company cannot predict with certainty at this time what the future impact of COVID-19 and resulting business and economic policies in the US and abroad will be on its up-coming quarterly fiscal operating results. 8. SUBSEQUENT EVENT – BUSINESS ACQUISITION On October 4, 2021, the Company closed on an asset purchase agreement with an effective date of October 1, 2021 with Lighthouse Imaging, LLC and Anania & Associates Investment Company, LLC for substantially all of the assets of Lighthouse Imaging, LLC, a Maine limited liability company operating a medical optics and digital imaging business, as more fully described in Form 8-K filed with the Securities and Exchange Commission on October 10, 2021. The aggregate cash purchase price consisted of $2,855,000 in cash at closing and $1,500,000 as earn-out consideration contingent on certain performance criteria over a period of two years. The Company also issued 2,500,000 unregistered shares of its common stock to the sellers at the closing date. The wife of the Company’s VP of sales and marketing Jeffrey Di Rubio participated in the private placement by purchasing 12,500 shares of common stock for $20,000. The Company financed the acquisition in October 2021 by taking on a $2,600,000 term loan from Main Street Bank, and by closing a $1,500,000 private placement for the sale and purchase of 937,500 of its common stock, $0.01 par value, at a purchase price of $1.60 per share. Gross proceeds from the offering totaling $1,030,000 were received from investors prior to September 30, 2021 and are included in common stock subscribed in the accompanying Consolidated Statements of Stockholders Equity. The Company also secured a revolving line of credit not to exceed $250,000 for general working capital purposes. The financial statements of Lighthouse Imaging, LLC and pro forma financial information required to be filed by Items 9.01(a) and (b) of Form 8-K will be filed by amendment no later than the required 71 calendar days after the October 10, 2021 filing of the Form 8-K, or by December 20, 2021. 12