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Item 7. Management’s Discussion and Analysis

2023-09-28 compared with 2022-09-27 · 47 added, 182 removed, 31 unchanged (88% of the section changed)

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be

read in conjunction with the Financial Statements and Notes thereto, and other financial information included elsewhere in this Annual

The following discussion and analysis should

be read in conjunction with the Financial Statements and Notes thereto, and other financial information included elsewhere in this Annual

Report on Form 10-K.

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cause actual results to differ materially from those contemplated by the forward-looking statements.

We have been a developer and manufacturer of advanced

optical instruments since 1982.

Our medical instrumentation line includes traditional endoscopes and endocouplers as well as other custom

imaging and illumination products for use in minimally invasive surgical procedures.

Much of our recent development efforts have been

targeted at the development of next generation endoscopes.

We selectively execute internal research and development programs to develop

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

also operate as a supplier of custom optical components and assemblies for military and defense, medical and various other industrial

applications.

All products sold by us under the Ross Optical name include a custom or catalog optic, which is sourced through our extensive

domestic and worldwide network of optical fabrication companies.

Most systems make use of optical lenses, prisms, mirrors and windows

and range from individual optical components to complex mechano-optical assemblies.

Products often include thin film optical coatings

that are applied using our in-house coating department.

As Lighthouse Imaging of Windham, Maine we also

operate as a manufacturer of advanced optical imaging systems and accessories.

We have a strong expertise in electrical engineering and

development of end-to-end medical visualization devices.

Product development competencies at Lighthouse Imaging include Systems, Optical,

Mechanical, Electrical and Process Development Engineering.

Our product development team has extensive experience developing visualization

systems that are used in a variety of clinical applications.

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

Approximately 34% of our business during the fiscal

year ended June 30, 2022 is from engineering services primarily relating to the design of medical device optical assemblies, 41% from

the sale of both internally manufactured and purchased optical components, and 25% 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

13485:2016 Quality Standards and comply with the FDA Good Manufacturing Practices and the European Union Medical Device Directive for

CE marking of our medical products.

Our internet websites are www.poci.com, www.rossoptical.com,

and www.lighthouseoptics.com.

Information on our websites is not intended to be integrated into this report.

Investors and others

should note that we announce material financial information using our company websites (www.poci.com;

www.rossoptical.com;

www.lighthouseoptics.com),

our investor relations website, SEC filings, press releases, public conference calls and webcasts.

Information about Precision Optics,

our business, and our results of operations may also be announced by social media posts on our Ross Optical and Lighthouse LinkedIn pages

(www.linkedin.com/company/ross-optical-industries/) (https://www.linkedin.com/company/lighthouse-imaging-corporation/) and Twitter feed

(http://twitter.com/rossoptical) and on our Lighthouse Facebook page (https://www.facebook.com/lighthouseoptics/).

The information that we post on these social media

channels could be deemed to be material information.

Therefore, we encourage investors, the media, and others interested in Precision

Optics to review the information that we post on these social media channels.

These social media channels may be updated from time to

time on Precision Optics investor relations website.

The information on, or accessible through, our websites and social media channels

is not incorporated by reference in this Annual Report on Form 10-K.

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

Furthermore, other domestic or foreign companies, some with greater financial resources than we have, may seek to produce

products or services that compete with ours.

We routinely outsource specialized production efforts as required to obtain the most cost-effective

Over the years we have achieved extensive experience collaborating with other optical specialists worldwide.

We believe that our future success depends to

a large degree on our ability to develop new optical products and services to enhance the performance characteristics and methods of manufacture

of existing products.

Accordingly, we expect to continue to seek and obtain product-related design and development contracts with customers

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

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

Current sales and marketing activities are intended

to broaden awareness of the benefits of our new technology platforms and our successful application of these new technologies to medical

device projects requiring surgery-grade visualization from sub-millimeter sized devices and 3D endoscopy, including single-use products

and assemblies.

We market directly to established medical device companies primarily in the United States that we believe could benefit

from our advanced endoscopy visualization systems.

Through this direct marketing, referrals, attendance at trade shows and a presence

in online professional association websites, we have expanded our on-going pipeline of projects to significant medical device companies

as well as well-funded emerging technology companies.

We expect our customer pipeline to continue to expand as development projects transition

to production orders and new customer projects enter the development phase.

Our Ross Optical division markets through existing customers

and trade shows, in addition to proactive online marketing strategies executed primarily through its website.

Critical Accounting Policies and Estimates

Our critical accounting policies are included

in the Notes to our Financial Statements contained in this Annual Report on Form 10-K.

Results of Operations for the Fiscal Year Ended

June 30, 2022 as Compared to the Fiscal Year Ended June 30, 2021

Critical Accounting Policies

and Estimates

Our critical accounting policies

are included in the Notes to our Financial Statements contained elsewhere in this Annual Report on Form 10-K.

Results of Operations for the Fiscal Year

Ended June 30, 2023 as Compared to the Fiscal Year Ended June 30, 2022

Total revenues for the fiscal year ended June

30, 2022 were $15,678,248, as compared to $10,674,907 for the same period in the prior year, an increase of $5,003,341, or 46.9%, primarily

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

Excluding the effect of the Lighthouse acquisition,

assembly production revenue increased approximately $801,000 in fiscal year 2021 compared to fiscal year 2020, optical component revenue

increased approximately $731,000 while engineering revenue decreased approximately $404,000, and optical component revenues were virtually

unchanged during the same period.

The increases in assembly production revenue were driven primarily by a large reorder from a large medical

device company for a spinal surgery application, while the increases in optical components were largely driven by a large order from a

large defense/aerospace customer.

Decreases in the engineering revenue year over year are primarily due to timing of certain programs

while the pipeline for these revenue sources remains strong.

Our largest customer during the fiscal year ended

June 30, 2022 accounted for 9.4% of our revenue and represented manufacturing assembly revenues for a medical diagnostic system.

revenues from 377 unique customers during the year ended June 30, 2022, and no single customer accounted for 10% or more of our revenue

for the fiscal years ended June 30, 2022, or 2021.

The COVID-19 world-wide pandemic that began during

the quarter ended March 31, 2020 and the domestic and international impact of policy decisions being made in major countries around the

world has had, and could continue to have, an adverse impact on our sources of supply, current and future orders from our customers, collection

of amounts owed to us from our customers, our internal operating procedures, and our overall financial condition.

Given the uncertainty

surrounding the continuation of economic impacts both domestically and abroad, we 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 our up-coming quarterly fiscal

operating results.

30, 2023 were $21,044,467, as compared to $15,678,248 for the same period in the prior year, an increase of $5,366,219, or 34.2%.

component revenue increased approximately $4,042,000 in fiscal year 2023 compared to fiscal year 2022, while engineering revenue increased

approximately $1,357,000, and assembly production revenues were virtually unchanged during the same period.

The increases in optical

components were largely driven by large orders from defense/aerospace customers.

Increases in the engineering revenue year over year

are primarily due to improved timing of certain programs while the pipeline for these revenue sources remains strong.

Gross profit for fiscal year ended June 30, 2023

of $7,734,136, reflected an increase of $2,805,949, or 56.9%, as compared to gross profit for fiscal year 2022 of $4,928,187, and was

principally the result of inclusion of the Lighthouse division since its acquisition in October 2021.

Gross profit, as a percentage of

revenues for fiscal year 2022, was 31.4% as compared to gross profit, as a percentage of revenues for fiscal year 2021, of 32.2%.

profit and gross profit percentage for any given fiscal period depend on a number of factors, including overall sales volume, facility

utilization, product sales mix, the nature and costs of engineering services, design challenges and changes, production start-up costs,

customer-imposed project changes or delays, and 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 decrease in gross margin from 32.2% to 31.4%

during the fiscal year ended June 30, 2022 compared to 2021 was primarily the result of a gross margin decrease in one engineering project

due to cost over-runs, lower than target margins on manufacturing programs at our Lighthouse division due to slower than expected transfer

of projects from engineering to production and a lower realized margin on a large volume recurring component product produced for a catalog

reselling customer.

The remainder of our production, engineering and component revenues resulted in margins within our targeted range

with reasonably expected fluctuations.

benefited from a one-time sale of technology rights in the amount of $600,000 as well as overall increased revenue.

Gross profit, as

a percentage of revenues for fiscal year 2023, was 36.8% as compared to gross profit, as a percentage of revenues for fiscal year 2022,

of 31.4%, due in part to improved utilization of our engineering and manufacturing resources.

Gross profit and gross profit percentage

for any given fiscal period depend on a number of factors, including overall sales volume, facility utilization, product sales mix, the

nature and costs of engineering services, design challenges and changes, production start-up costs, customer-imposed project changes

or delays, and 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

Research and development expenses were $809,877,

for fiscal year 2022 as compared to $624,253 for fiscal year 2021.

The increase of $42,226, or 6.8%, in fiscal year 2022 compared to fiscal

year 2021 is considered to be a customary change resulting from the normal course of business and reflects a similar level of engineering

related development projects in fiscal year 2022 compared to 2021.

We believe research and development activities enhance our technology

platform of capabilities and our overall competitiveness in providing unique optical and illumination solutions for medical device endoscopes.

Selling, general and administrative expenses were

$5,613,473 for the fiscal year ended June 30, 2022, compared to $3,714,915 for the same period in the prior year, an increase of $1,898,558,

The increase in selling, general and administrative expenses in the year ended June 30, 2022 was primarily due to inclusion

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

as well as additions to our administrative team due to the growth of the overall organization.

or 3.8% of revenue for fiscal year 2023 as compared to $666,479, or 4.3% of revenue for fiscal year 2022, and increase of $143,398, or

Selling, general and administrative expenses

were $7,740,562 for the fiscal year ended June 30, 2023, compared to $5,613,473 for the same period in the prior year, an increase of

$2,127,089, or 37.9%.

The increase in selling, general and administrative expenses in the year ended June 30, 2023 was primarily due

to increased marketing related expenses, additions to our sales and administrative teams due to the growth of the overall organization

and higher bad debt expense.

The income tax provisions in fiscal years 2023

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2023, our cash and cash equivalents were $2,925,852, accounts receivable were $3,907,407, and current liabilities were $5,259,620, including

$905,113 of advances paid against open purchase orders by our customers.

Although our revenue and gross margin have increased

due to new business from our acquisition of Lighthouse Imaging, our operating expenses have also increased, and we continue to experience

pricing pressure from our customers and challenges in engineering projects and production orders that can result in cost over-runs and

depressed gross margins.

We also continue to experience added uncertainty related to our vendors ability to supply materials and our customers

future order levels as a result of the economic impact the COVID-19 world-wide pandemic and related jurisdictional policies and regulations

and lingering supply-chain issues.

Consequently, critical to our ability to maintain our financial condition is achieving and maintaining

a level of quarterly revenues that generate break even or better financial performance as well as timely collection of accounts receivable

from our customers.

We believe profitable operating results can be achieved through a combination of sales growth, 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

through product sales, management of working capital components of our business, cash received from public and private offerings of our

common stock, warrants to purchase shares of our common stock or convertible notes, manufacturing equipment leases, and by customer advances

paid against purchase orders by our customers and recorded in the current liabilities section of the accompanying financial statements.

We have incurred year to year and quarter to quarter operating losses during our efforts to develop current products including Microprecision

optical elements, micro medical camera assemblies and 3D endoscopes.

Our management believes that the opportunities represented by these

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

On October 4, 2021 we acquired the assets of Lighthouse

Imaging, LLC as described in note 2.

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

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 for working capital needs, upon which no borrowings were outstanding

as of June 30, 2022.

Capital equipment expenditures during fiscal year

2022 and fiscal year 2021 were $113,197 and $237,900, respectively, $161,976 of which in fiscal year 2021, was funded by leasing agreements

with monthly payment obligations.

Patent application expenditures during fiscal year 2022 and fiscal year 2021 were $39,543 and $46,473,

respectively.

The level of future capital equipment and patent expenditures will depend on future sales and success of on-going research

and development efforts.

$1,174,690 of customer advances received for future order deliveries.

In connection with our October 2021 acquisition

of Lighthouse Imaging, we entered into a $2,600,000 bank term loan, and sold shares of our common stock for gross proceeds of $1,500,000.

We also secured a $250,000 bank line of credit from the same bank in October 2021 for working capital needs, which was increased to $500,000

In June 2023 we added a second term loan in the amount of $750,000 and increased our line of credit to $1,250,000.

were no borrowings outstanding on the line of credit on June 30, 2023.

On June 20, 2023, we raised $2,288,000 net of expenses through

a private placement of 420,000 shares of our common stock.

Capital equipment expenditures and additional

patent costs during fiscal year 2023 and fiscal year 2022 were $52,497 and $152,740, respectively.

The level of future capital equipment

and patent expenditures will depend on future sales and success of on-going research and development efforts.

Contractual cash commitments for the fiscal years

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Minimum operating lease payments

We have contractual cash commitments related to

open purchase orders as of June 30, 2022 of approximately $1,557,582.

We have contractual cash commitments related

to open purchase orders as of June 30, 2023 of approximately $1,981,592.

Material Trends and Uncertainties

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revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK.

As a smaller reporting company, as defined by

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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-K

Item 7. Management’s Discussion and Analysis