PRECISION OPTICS CORPORATION, INC. 10-K

ITEM 7. MANAGEMENT’S 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 Report on Form 10-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains descriptions of our expectations regarding future trends affecting our business. The following discussion sets forth certain factors we believe could cause actual results to differ materially from those contemplated by the forward-looking statements. 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, 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%. Optical 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 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 pandemic. Research and development expenses were $809,877, 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 21.5%. 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 and 2022 represent the minimum statutory state income tax liability. 9 Liquidity and Capital Resources We have sustained recurring net losses for several years. During the years ended June 30, 2023 and 2022 we incurred operating losses of $638,548 and $1,513,890, respectively. At June 30, 2023, our cash and cash equivalents were $2,925,852, accounts receivable were $3,907,407, and current liabilities were $5,259,620, including $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 May 2022. 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. There 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 subsequent to June 30, 2023, are summarized as follows: Fiscal 2024 Thereafter Total Capital lease for equipment, including interest $ 48,619 $ 71,923 $ 120,542 Minimum operating lease payments $ 182,652 $ 195,252 $ 377,904 We have contractual cash commitments related to open purchase orders as of June 30, 2023 of approximately $1,981,592. Material Trends and Uncertainties We currently have no material trends or uncertainties 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. 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. 10 ITEM 7A. 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.