What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-14 compared with 2021-11-15 · 120 added, 116 removed, 123 unchanged (66% of the section changed)

Management’s Discussion and Analysis of Financial

Condition and Results of Operations.

Managements 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, 2021 and with our audited consolidated

statements included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended December 31, 2021 and with our audited consolidated

financial statements for the year ended June 30, 2021 included in our Annual Report on Form 10-K, filed with the Securities and Exchange

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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, 2021 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

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, 2021 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.

We have been a developer and manufacturer of advanced

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We selectively execute internal research and development programs to develop

next generation capabilities for designing and manufacturing 3D endoscopes and very small Microprecision™ lenses, anticipating future

requirements as the surgical community continues to demand smaller and more enhanced imaging systems for minimally invasive surgery.

next generation capabilities for designing and manufacturing 3D endoscopes and very small Microprecision 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

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Lighthouse Imaging is an industry leader in chip on tip visualization systems.

Approximately 87% of our business during the three

months ended September 30, 2021 is from the design and manufacture of high-quality medical devices.

Approximately 8% of our revenue during

the same period is from the design, manufacture and resale of optical products for military and defense, and 5% is from other industrial,

non-medical products.

Our proprietary medical instrumentation line and unique custom design and manufacturing capabilities include traditional

endoscopes and endocouplers as well as other custom imaging and illumination products for 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.

Approximately 32% our business during the six

months ended December 31, 2021 is from engineering services primarily relating to the design of medical device optical assemblies, 49%

from the sale of both internally manufactured and purchased optical components, and 19% 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 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.

We are registered to the ISO 9001:2015 and ISO

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CE marking of our medical products.

Our internet websites are www.poci.com and www.rossoptical.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), 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 LinkedIn page (www.linkedin.com/company/ross-optical-industries/) and Twitter feed

(http://twitter.com/rossoptical).

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

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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 Microprecision™ optics, micro

medical cameras, illumination, single-use endoscopes and 3D endoscopes.

Our largest customer during the three months ended

September 30, 2021 accounted for 9.7% of our revenue and represented assembly revenues for a medical diagnostic system.

During the three

months ended September 30, 2021 we had revenue from another one hundred sixty-five customers, and none of those customers accounted for

more than 10% of our total revenue.

and to selectively invest our own funds on research and development, particularly in the areas of Microprecision optics, micro medical

cameras, illumination, single-use endoscopes and 3D endoscopes.

Current sales and marketing activities are intended

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Results of Operations

Our total revenues for the quarter ended September

30, 2021, were $2,336,344, as compared to $2,757,901 for the same period in the prior year, a decrease of $421,557, or 15.3%.

revenue during the quarter ended September 30, 2021 decreased approximately $216,000 compared to the same fiscal quarter of the prior

year due primarily to the change in mix of engineering projects.

Production revenue had a decrease year-over-year of approximately $268,000

due primarily to COVID-19 related slow-downs instituted by our existing customers.

Other revenue changes between the quarter ended September

30, 2021 and the same period of the prior year were considered customary fluctuations with existing customers and project progressions.

We generated revenues from 166 unique customers

during the quarter ended September 30, 2021, and no single customer accounted for 10% or more of our revenue for the quarter ended September

30, 2021 or the fiscal years ended June 30, 2021, or 2020.

Our total revenues for the quarter ended December

31, 2021, were $3,897,041, as compared to $2,785,450 for the same period in the prior year, an increase of $1,111,591, or 39.9%, primarily

due to inclusion of the Lighthouse division since its acquisition on October 4, 2021.

Excluding the effect of the Lighthouse acquisition,

engineering revenue experienced a slight quarter-over-quarter decrease with component and production revenues relatively unchanged from

the quarter ended December 31, 2020 to 2021.

Our total revenues for the six months ended December 31,

2021 were $6,233,385, as compared to $5,543,351 for the same period in the prior year, an increase of $690,034, or 12.4% primarily due

to inclusion of the Lighthouse division since its acquisition on October 4, 2021.

Excluding the effect of the Lighthouse acquisition,

engineering revenue during the six months ended December 31, 2021 decreased approximately $241,000 compared to the same period of the

prior year due primarily to a change in mix of engineering projects.

Component revenues increased during the six months ended December

31, 2021 compared to the same period of the prior year, and production revenue decreased on a quarter-over-quarter basis due primarily

from various customer slow-downs due to the effects of COVID.

Our largest customer during the three and six

months ended December 31, 2021 accounted for 8.8% and 7.6%, respectively, of our revenue and represented manufacturing assembly revenues

for a medical diagnostic system.

We generated revenues from 250 unique customers during the six months ended December 31, 2021, and no

single customer accounted for 10% or more of our revenue for the quarter and six months ended December 31, 2021 or the fiscal years ended

June 30, 2021, or 2020.

The COVID-19 world-wide pandemic that began during

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operating results.

Gross profit for the quarter ended September 30,

2021 was $639,032, compared to $975,178 for the same period in the prior year, reflecting a decrease of $336,146.

Gross profit for the quarter ended December 31,

2021 was $1,119,582, compared to $854,440 for the same period in the prior year, an increase of $265,142, or 31.0%.

Gross profit for the

quarter ended September 30, 2021 as a percentage of our revenues was 27.4%, a decrease from the gross profit percentage of 35.4% for the

quarter ended December 31, 2021 as a percentage of our revenues was 28.7%, a decrease from the gross profit percentage of 30.7% 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

Gross profit for the six months ended December 31, 2021 was $1,758,614, as compared to $1,829,618

for the same period in the prior year, a decrease of $71,004 or 3.9%.

Gross profit for the six months ended December 31, 2021 as

a percentage of our revenues was 28.2%, a decrease from the gross profit percentage of 33.0% for the same period in the prior year.

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 margin on individual engineering projects

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changes or delays.

Our decrease in gross margin from 35.4% to 27.4% during the fiscal quarter ended September 30, 2021 compared to 2020

was primarily the result of a gross margin decrease in one engineering project due to cost over-runs, plus a decrease in higher margin

production revenues with customers due to COVID-19 factors.

The remainder of our production, engineering and component revenues resulted

in margins within our targeted range with reasonably expected fluctuations.

Our increase in gross margin dollars during the quarter ended December 31, 2021 was primarily due to inclusion of the

Lighthouse division since its acquisition on October 4, 2021.

Our decrease in gross margin from 30.7% to 28.7% during the fiscal quarter

ended December 31, 2020 compared to 2021 and from 33.0% to 28.2% during the six months ended December 31, 2020 and 2021 was the result

of a gross margin decrease in one engineering project due to cost over-runs, a decrease in higher margin production revenues with customers

due to COVID-19 factors, and inclusion of the Lighthouse division revenues representing engineering and production activity at overall

margins lower than the Ross Optical division revenues.

The remainder of our production, engineering and component revenues resulted in

margins within our targeted range with reasonably expected fluctuations.

Research and development expenses were $113,164

for the quarter ended September 30, 2021, compared to $151,576 for the same period in the prior year, a decrease of $46,390, or 30.6%.

In-house research and development and certain internal functions not directly related to customer engagements are classified as research

and development expenses with the majority of our engineering, research and development activities being consumed in revenue generating

engagements with our customers for the development of their products.

During the quarter September 30, 2021 we had a greater amount of

our engineering personnel time consumed in customer focused activities causing decreased research and development expense compared to

the quarter ended September 30, 2020.

for the quarter ended December 31, 2021, compared to $145,970 for the same period in the prior year, a decrease of $32,806, or 22.5%.

Research and development expenses were $218,350 for the six months ended December 31, 2020, compared to $297,546 for the same period

in the prior year, a decrease of $79,196, or 26.6%.

In-house research and development and certain internal functions not directly related

to customer engagements are classified as research and development expenses with the majority of our engineering, research and development

activities being consumed in revenue generating engagements with our customers for the development of their products.

During the quarter

and six months ended December 31, 2021 we had a greater amount of our engineering personnel time consumed in customer focused activities

causing decreased research and development expense compared to the same periods of the prior fiscal year.

Selling, general and administrative expenses were

$933,624 for the quarter ended September 30, 2021, compared to $822,002 for the same period in the prior year, an increase of $111,622,

The increase in the three months ended September 30, 2021, compared to the same period of the prior fiscal year was due to increased

stock compensation and marketing related expense.

We also incurred $172,174 of business acquisition expenses related to the Lighthouse

Imaging transaction during the quarter ended September 30, 2021.

$1,466,768 for the quarter ended December 31, 2021, compared to $921,195 for the same period in the prior year, an increase of $545,573,

Selling, general and administrative expenses were $2,400,392 for the six months ended December 31, 2021, compared to $1,743,197

for the same period in the prior year, an increase of $657,195, or 37.7%.

The increase in selling, general and administrative expenses

in the three and six months ended December 31, 2021 compared to the same periods of the prior fiscal year was primarily due to inclusion

of the Lighthouse division since its acquisition on October 4, 2021, plus increased stock based compensation and marketing related expenses.

Liquidity and Capital Resources

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for several years.

During the year ended June 30, 2021, we incurred an operating loss of $905,583 and generated cash from operating activities

During the three months ended September 30, 2021 we had a net loss of $576,801 and used cash in operating activities of $182,340.

At September 30, 2021, cash was $1,669,569, accounts receivables were $1,711,192 and current liabilities were $2,758,416, including $336,572

of customer advances received for future order deliveries.

We also raised $1,030,000 during the quarter ended September 30, 2021 in conjunction

with the Lighthouse Imaging transaction.

This amount was part of the full raise which was completed on October 4, 2021.

For the full raise,

we issued 937,500 shares of common stock at a purchase price of $1.60 per share to accredited investors in a private placement totaling

Although we have experienced improved financial performance in certain

recent fiscal quarters, 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 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.

Consequently, critical to our ability to

maintain our financial condition is achieving and maintaining a level of quarterly revenues that generate break even or better financial

performance as well as timely collection of accounts receivable from our customers.

We believe profitable operating results can be achieved

through a combination of revenue levels, realized gross margins and controlling operating expense increases, all of which are subject

to periodic fluctuations resulting from sales mix and the stage of completion of varying engineering service projects as they progress

towards and into production level revenues

During the six months ended December 31, 2021, we had a net loss of $1,083,814 and used cash in operating activities

At December 31, 2021, cash was $1,263,198, accounts receivables were $2,216,061 and current liabilities were $4,566,314,

including $1,137,470 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

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

We believe profitable operating results can be achieved through a combination of revenue levels, realized gross margins and

controlling operating expense increases, all of which are subject to periodic fluctuations resulting from sales mix and the stage of completion

of varying engineering service projects as they progress towards and into production level revenues.

We have traditionally funded working capital needs

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technical capabilities and related products have the potential to generate sales increases to achieve breakeven and profitable results.

On May 6, 2020, we received loan proceeds in the

amount of $808,962 under the Paycheck Protection Program, or PPP, from Bank of America.

The PPP, established as part of the Coronavirus

Aid, Relief and Economic Security Act, or CARES Act, provides for loans to qualifying businesses that are forgivable provided the loan

proceeds are used for eligible purposes, including payroll, benefits, rent and utilities.

The unsecured loan dated May 6, 2020 was forgiven

on March 30, 2021 by the Small Business Administration pursuant to the CARES Act.

The forgiveness of the Promissory Note was recorded

as other income in the Consolidated Statements of Operations for the quarter ended March 31, 2021.

In October 2021 we acquired the assets of Lighthouse

On October 4, 2021 we acquired the assets of Lighthouse

Imaging, LLC as described in note 2.

Subsequent Event-Business Acquisition to the accompanying financial statements in this Form 10-Q.

To finance that acquisition we entered into a $2,600,000 bank term loan, sold shares of our common stock for gross proceeds of $1,500,000,

and secured a $250,000 bank line of credit.

Business Acquisition to the accompanying financial statements in this Form 10-Q.

To finance the cash

portion of the acquisition price we entered into a $2,600,000 bank term loan, 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 on October 4, 2021 for working capital needs, upon which no borrowings

are outstanding as of December 31, 2021.

Capital equipment expenditures and additional

patent costs during the three months ended September 30, 2021 were $30,366.

patent costs during the six months ended December 31, 2021 were $38,092.

Future capital equipment and patent expenditures will be dependent

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Contractual cash commitments for the fiscal periods

subsequent to September 30, 2021, are summarized as follows:

subsequent to December 31, 2021, are summarized as follows:

Capital lease for equipment, including interest

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We have contractual cash commitments related to

open purchase orders as of September 30, 2021 of approximately $500,922.

open purchase orders as of December 31, 2021 of approximately $1,793,652.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis