PRECISION OPTICS CORPORATION, INC. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB No. 577 ) F-1 Consolidated Balance Sheets at June 30, 2023 and 2022 F-3 Consolidated Statements of Operations for the Years Ended June 30, 2023 and 2022 F-4 Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2023 and 2022 F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 2023 and 2022 F-6 Notes to Consolidated Financial Statements F-7 11 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Precision Optics Corporation, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Precision Optics Corporation, Inc. (the Company) as of June 30, 2023 and 2022, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two year period ended June 30, 2023, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two year period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition — Refer to Note A to the Consolidated Financial Statements Critical Audit Matter Description The Company recognizes revenue upon transfer of control of promised products to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products. The Company may enter into certain customer contracts that contain unique, customer-specific terms and conditions, variable consideration, as well as multiple performance obligations. For such contracts, significant interpretation may be required to determine the appropriate accounting, including the identification of performance obligations, the allocation of the transaction price to performance obligations in the arrangement, the timing of the transfer of control of promised goods for each of those performance obligations, estimates of variable consideration and agent versus principal consideration. F- 1 Our assessment of managements’ evaluation of the above referenced matters related to proper revenue recognition is significant to our audit because the amounts are material to the financial statements, the assessment process involves significant judgment, and the application of U.S. generally accepted accounting principles in this area is complex. How the Critical Audit Matter Was Addressed in the Audit Our principal audit procedures related to the Company’s revenue recognition for customer contracts included the following: · We evaluated the appropriateness of management’s revenue recognition policies. · We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the consolidated financial statements. · We selected a sample of revenue transactions and performed the following procedures: o Obtained and read source documents for each selection, including master agreements, purchase orders and other documents that evidenced the customer arrangement. o Tested management’s identification and treatment of the key contract terms, including performance obligations and variable consideration. o Assessed the terms in the customer agreement and evaluated the appropriateness of management's application of the Company’s accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. /s/ Stowe & Degon LLC We have served as the Company’s auditor since 2008 Westborough, Massachusetts September 28, 2023 F- 2 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES Consolidated Balance Sheets at June 30, 2023 and 2022 2023 2022 ASSETS Current Assets: Cash and cash equivalents $ 2,925,852 $ 605,749 Accounts receivable, net of allowance for doubtful accounts of $ 606,715 at June 30, 2023 and $ 44,135 at June 30, 2022 3,907,407 2,663,872 Inventories 2,776,216 3,022,147 Prepaid expenses 249,681 213,448 Total current assets 9,859,156 6,505,216 Fixed Assets: Machinery and equipment 3,227,481 3,215,412 Leasehold improvements 825,752 843,903 Furniture and fixtures 242,865 219,999 Total fixed assets 4,296,098 4,279,314 Less—Accumulated depreciation and amortization 3,862,578 3,651,843 Net fixed assets 433,520 627,471 Operating lease right-to-use asset 358,437 517,725 Patents, net 265,111 229,398 Goodwill 8,824,210 8,824,210 TOTAL ASSETS $ 19,740,434 $ 16,704,020 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Current portion of capital lease obligation $ 43,209 $ 40,705 Current maturities of long-term debt 513,259 367,714 Current portion of acquisition earn out liability – 166,667 Accounts payable 2,432,264 2,239,175 Customer advances 1,174,690 905,113 Accrued compensation and other 927,521 716,702 Operating lease liability 168,677 150,565 Total current liabilities 5,259,620 4,586,641 Capital lease obligation, net of current portion 68,482 111,691 Long-term debt, net of current maturities 2,175,980 1,961,141 Acquisition earn out liability, net of current portion – 705,892 Operating lease liability, net of current portion 189,760 367,160 Stockholders’ Equity: Common stock, $ 0.01 par value: 50,000,000 shares authorized; issued and outstanding – 6,066,518 shares at June 30, 2023 and 5,638,302 shares at June 30, 2022 60,665 56,383 Additional paid-in capital 60,224,934 57,009,506 Accumulated deficit ( 48,239,007 ) ( 48,094,394 ) Total stockholders’ equity 12,046,592 8,971,495 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 19,740,434 $ 16,704,020 The accompanying notes are an integral part of these consolidated financial statements. F- 3 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Operations for the Years Ended June 30, 2023 and 2022 2023 2022 Revenues $ 21,044,467 $ 15,678,248 Cost of goods sold 13,310,331 10,750,061 Gross profit 7,734,136 4,928,187 Research and development expenses, net 992,375 666,479 Selling, general and administrative expenses 7,380,309 5,613,473 Business acquisition expenses – 162,125 Total operating expenses 8,372,684 6,442,077 Operating loss ( 638,548 ) ( 1,513,890 ) Other income (expense) Interest expense ( 218,927 ) ( 155,658 ) Gain on forgiveness of bank note – – Gain on revaluation of contingent earn-out liability 714,798 742,084 Loss before provision for income taxes ( 142,677 ) ( 927,464 ) Provision for income taxes 1,936 952 Net loss $ ( 144,613 ) $ ( 928,416 ) Loss per share: Basic and fully diluted $ ( 0.03 ) $ ( 0.18 ) Weighted average common shares outstanding: Basic and fully diluted 5,666,034 5,295,720 The accompanying notes are an integral part of these consolidated financial statements. F- 4 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2023 and 2022 Number of Shares Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Balance, June 30, 2021 4,427,432 $ 44,275 $ 50,552,830 $ ( 47,165,978 ) $ 3,431,127 Issuance of common stock in private placement 312,500 3,125 1,486,875 – 1,490,000 Issuance of common stock in business acquisition 833,333 8,333 3,991,667 – 4,000,000 Proceeds from exercise of stock option 19,400 194 63,096 – 63,290 Exercise of stock options net of 109,682 shares withheld 42,606 426 ( 426 ) – – Issuance of common stock for employee services 3,031 30 19,970 – 20,000 Stock-based compensation – – 895,494 – 895,494 Net loss – – – ( 928,416 ) ( 928,416 ) Balance, June 30, 2022 5,638,302 $ 56,383 $ 57,009,506 $ ( 48,094,394 ) $ 8,971,495 Issuance of common stock in private placement 420,000 4,200 2,284,082 – 2,288,282 Proceeds from exercise of stock option 8,216 82 12,314 – 12,396 Stock-based compensation – – 919,032 – 919,032 Net loss – – – ( 144,613 ) ( 144,613 ) Balance, June 30, 2023 6,066,518 $ 60,665 $ 60,224,934 $ ( 48,239,007 ) $ 12,046,592 The accompanying notes are an integral part of these consolidated financial statements. F- 5 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended June 30, 2023 and 2022 2023 2022 Cash Flows from Operating Activities: Net loss $ ( 144,613 ) ( 928,416 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities- Gain on revaluation of contingent earn-out liability ( 705,892 ) ( 742,084 ) Depreciation and amortization 210,735 190,221 Stock-based compensation expense 919,032 915,494 Non-cash interest expense 4,087 55,017 Changes in operating assets and liabilities, net of effects of business acquisition- Accounts receivable, net ( 1,243,535 ) ( 108,140 ) Due from related party – 84,210 Inventories 245,931 ( 680,744 ) Prepaid expenses ( 36,233 ) 19,312 Accounts payable 193,089 819,284 Customer advances 269,577 ( 371,650 ) Accrued compensation and other 206,732 ( 185,875 ) Net cash (used in) provided by operating activities ( 81,090 ) ( 933,371 ) Cash Flows from Investing Activities: Acquisition of businesses – ( 255,062 ) Additional patent costs ( 35,713 ) ( 39,543 ) Purchases of property and equipment ( 16,784 ) ( 113,197 ) Net cash used in investing activities ( 52,497 ) ( 407,802 ) Cash Flows from Financing Activities: Payment of capital lease obligations ( 40,705 ) ( 38,349 ) Payments of long-term debt ( 367,341 ) ( 247,002 ) Issuance of long-term debt 750,000 – Payment of debt issuance costs ( 22,275 ) ( 26,000 ) Payment of acquisition earn-out liability ( 166,667 ) ( 166,667 ) Gross proceeds from private placements of common stock 2,288,281 1,500,000 Gross proceeds from exercise of stock options 12,397 63,290 Net cash provided by (used in) financing activities 2,453,690 1,085,272 Net increase (decrease) in cash and cash equivalents 2,320,103 ( 255,901 ) Cash and cash equivalents, beginning of year 605,749 861,650 Cash and cash equivalents, end of year $ 2,925,852 $ 605,749 Supplemental disclosure of cash flow information: Cash paid during the year for income taxes $ 1,936 $ 912 Supplemental disclosure of non-cash financing activities: Issuance of common stock for services $ – $ 20,000 Acquisition of business financed with long-term debt $ – $ 2,600,000 Common stock issued in business acquisition $ – $ 4,000,000 The accompanying notes are an integral part of these consolidated financial statements. F- 6 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of Business Precision Optics Corporation, Inc. (the “Company”) designs, develops, manufactures and sells specialized optical and illumination systems and related components. The Company conducts business in one industry segment only and its customers are primarily domestic. The Company performs advanced optical and illumination system design, development, assembly and manufacturing services, and sources for resale specialized optical components for products that fall into two principal areas: (i) medical products for use by hospitals and physicians; and (ii) products used by defense contractors and industrial customers. (b) Reverse Stock Split In February 2022, the Company’s Board of Directors authorized a reverse split of the Company’s outstanding shares of common stock within a stated range of 1:1.5 to 1:3, which was subsequently approved by stockholders holding more than a majority of the outstanding shares of Common Stock at the Company’s Annual Meeting on April 8, 2022. The Company effected the reverse stock split on a one-for-three basis on November 1, 2022 as reported by the Company on Form 8-K filed with the Securities and Exchange Commission on November 2, 2022. As a result of the reverse stock split, every three shares of issued and outstanding common stock were automatically combined into one issued and outstanding share of common stock, without any change in the par value per share or the number of the Company’s authorized shares. The reverse stock split reduced the number of shares of common stock outstanding from 16,915,089 on November 1, 2022 to approximately 5,638,302 shares, after reduction for the elimination of fractional shares. Unless otherwise noted, all prior year share amounts and per share calculations throughout these financial statements have been restated to reflect the impact of this 1:3 reverse stock split and to provide data on a comparable basis. Such restatements include calculations regarding the Company’s weighted-average shares, and earnings per share, as well as disclosures regarding the Company’s stock-based compensation plans. (c) Revenues 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 with approximately 85% of sales to customers 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. Other selling costs to obtain and fulfill contracts are expensed as incurred due to the short-term nature of most of its 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. F- 7 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 fiscal years ended June 30, 2023 and 2022: Schedule of disaggregation of revenues 2023 2022 Engineering Design Services $ 6,728,867 $ 5,371,483 Optical Components 10,523,806 6,481,896 Medical Device Products and Assemblies 3,791,794 3,824,869 Total Revenues $ 21,044,467 $ 15,678,248 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 June 30, 2023, there were no contract assets recorded in the Company’s Consolidated Balance Sheets. 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 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: Schedule of contract liabilities Fiscal Year Ended June 30, 2023 2022 Contract liabilities, beginning of period $ 905,113 $ 450,084 Unearned revenue received from customers 2,545,317 3,780,215 Revenue recognized ( 2,275,740 ) ( 3,325,186 ) Contract liabilities, end of period $ 1,174,690 $ 905,113 (d) Cash and Cash Equivalents The Company includes in cash equivalents all highly liquid investments with original maturities of three months or less at the time of acquisition. Cash and cash equivalents of $ 2,925,852 and $ 605,749 on June 30, 2023 and 2022, respectively, consist primarily of cash at banks and money market funds. The Company maintains its cash and cash equivalents in bank deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on its cash and cash equivalents. F- 8 (e) Inventories Inventories are stated at the lower of cost (first-in, first-out) and net realizable value and include material, labor and manufacturing overhead. The components of inventories on June 30, 2023 and 2022 are as follows: Schedule of inventory 2023 2022 Raw material $ 1,142,816 $ 1,414,996 Work-in-progress 322,538 460,460 Finished goods 1,310,862 1,146,691 Total Inventories $ 2,776,216 $ 3,022,147 The Company provides for estimated obsolescence on unmarketable inventory based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Inventory, once written down, is not subsequently written back up, as these adjustments are considered permanent adjustments to the carrying value of the inventory. (f) Fixed Assets Fixed assets are recorded at cost. Maintenance and repair items are expensed as incurred. The Company provides for depreciation and amortization by charges to operations, using the straight-line and declining-balance methods, which allocate the cost of fixed assets over the following estimated useful lives: Schedule of estimated useful lives Asset Classification Estimated Useful Life Machinery and equipment 2-7 years Leasehold improvements Shorter of lease term or estimated useful life Furniture and fixtures 5 years Vehicles 3 years Depreciation and amortization expense was $ 210,735 and $ 245,238 for the years ended June 30, 2023 and 2022, respectively. (g) Significant Customers and Concentration of Credit Risk Financial instruments that subject the Company to credit risk consist primarily of cash equivalents and trade accounts receivable. The Company places its investments with highly rated financial institutions. The Company has not experienced any losses on these investments to date. At June 30, 2023 and 2022, two individual customer accounted for more 10 % of the Company’s total accounts receivable. The allowance for doubtful accounts receivable was $ 606,715 at June 30, 2023, and $ 44,135 at June 30, 2022. In 2023, the Company increased the allowance for doubtful accounts to cover potential losses due to the insolvency of one customer. The Company generally does not require collateral or other security as a condition of sale, rather it relies on credit approval, balance limitation and monitoring procedures to control credit risk in trade account financial instruments. Management believes the allowance for doubtful accounts, which is established based upon review of specific account balances and historical experience, is adequate at June 30, 2023. F- 9 (h) 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 or net 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 and warrants. For the year ended June 30, 2023 and 2022, the effect of such securities was antidilutive and not included in the diluted calculation because of the net loss generated in those periods. The following is the calculation of loss per share for the years ended June 30, 2023 and 2022: Schedule of earnings per share Year Ended June 30 2023 2022 Net Loss– Basic and Diluted $ ( 144,613 ) $ ( 928,416 ) Basic and diluted weighted average shares outstanding 5,666,034 5,295,720 Loss per share Basic and fully diluted $ ( 0.03 ) $ ( 0.18 ) The number of shares issuable upon the exercise of outstanding stock options and warrants that were excluded from the computation as their effect was antidilutive was approximately 1,017,041 and 904,666 for the years ended June 30, 2023 and 2022, respectively. (i) Stock-Based Compensation The measurement and recognition of compensation costs for all stock-based awards made to employees and the Board of Directors are based upon fair value over the requisite service period for awards expected to vest. The Company estimates the fair value of share-based awards on the date of grant using the Black-Scholes option-pricing model. Stock-based compensation costs recognized for the years ended June 30, 2023, and 2022 amounted to $ 919,032 and $ 895,494 , respectively. (j) 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 during the years ended June 30, 2023 or 2022. F- 10 (k) Fair Value of Financial Instruments Financial instruments consist principally of cash and cash equivalents, accounts receivable and accounts payable. The estimated fair value of these financial instruments approximates their carrying value due to their short-term nature. (l) Research and Development Research and development expenses are charged to operations as incurred. The Company groups development and prototype costs and related reimbursements in research and development. There were no reimbursements for research and development recorded in research and development for the years ended June 30, 2023, and 2022. (m) Comprehensive Income Comprehensive income or loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s comprehensive loss or income for the years ended June 30, 2023 and 2022 was equal to its net loss for the same periods. (n) 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 carry-forwards. 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. (o) Segment Reporting Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions about how to allocate resources and assess performance. The Company’s chief decision-maker is its Chief Executive Officer. To date, the Company has viewed its operations and manages its business as principally one segment. (p) Use of Estimates The preparation of financial statements in conformity with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F- 11 (2) BUSINESS ACQUISITION On October 4, 2021, the Company entered into an asset purchase agreement to acquire substantially all of the assets of Lighthouse Imaging, LLC, a medical optics and digital imaging business, as described in Forms 8-K and 8-K/A that the Company filed with the Securities and Exchange Commission on October 8, 2021 and December 20, 2021, respectively. The aggregate cash purchase price consisted of $ 2,855,063 in cash at closing, $ 1,500,000 as earn-out consideration over the subsequent two-year period, and 833,333 unregistered shares of common stock issued to the seller at closing. The effective date of the acquisition was October 4, 2021, and the actual results of operations of the Lighthouse division since that date are included in the accompanying consolidated financial statements as of, and for the fiscal year ended June 30, 2023 and the nine months ended, June 30, 2022. The Company financed the cash portion of the acquisition by securing a $ 2,600,000 term loan from Main Street Bank on October 4, 2021, and by selling shares of its common stock for $ 1,500,000 of gross proceeds in a private placement closed on October 1, 2021. The earn-out consideration of $1,500,000, which would have been paid at a rate of $750,000 per annum from October 1, 2021 to September 30, 2023 was and will not be paid as the required levels of gross profit will not be attained. (a) Purchase Price Allocation and Goodwill The allocation of purchase price is preliminary and subject to change based on future payments made for the earn-out contingent liability. Any unearned portions of the earn-out liability will be recognized in earnings. The acquired assets, contingent consideration and assumed liabilities at the effective date of acquisition include the following: Schedule of acquired assets, contingent consideration and assumed liabilities At Acquisition Effective Date October 4, 2021 Amount Trade accounts receivable, net 676,977 Inventories 456,008 Other current assets 82,125 Fixed assets 110,243 Patents 48,153 Total Assets Acquired 1,373,506 Accounts payable 214,742 Customer advances 826,679 Accrued compensation and other 302,961 Total Liabilities Assumed 1,344,382 Net assets acquired 29,124 Goodwill 8,136,546 Total Purchase Price-Initial and Contingent Consideration $ 8,165,670 F- 12 (b) Consolidated Pro Forma Results Consolidated unaudited pro forma results of operations for the Company are presented below for the years ended June 30, 2022 assuming that the acquisition of the Lighthouse division has occurred on July 1, 2021. Pro forma revenues and net loss for the fiscal year ended June 30, 2022 include operating results of Lighthouse during the three months ended September 30, 2021 before its acquisition and approximately $70,200 of pro forma operating expense adjustments relating to interest, depreciation, management fees, and grant reimbursements. Schedule of consolidated pro forma results June 30, 2022 Pro-Forma Revenues $ 17,122,585 Net (loss) income $ ( 871,121 ) Earnings (loss) per share Basic and fully diluted $ ( 0.16 ) Pro forma financial information is not necessarily indicative of the Company’s actual results of operations if the acquisition had been completed at the date indicated, nor is it necessarily an indication of future operating results. Amounts do not include any operating efficiencies or cost saving that the Company believes are achievable. (3) COMMITMENTS (a) Related Party Transactions Transactions with Stockholders Known by the Company to Own 5% or More of the Company’s Common Stock On October 4, 2021, the Company entered into agreements with accredited investors for the sale and purchase of 312,500 shares of our common stock, $0.01 par value, at a per unit price of $4.80 per share. We received $ 1,500,000 in gross proceeds from the offering. The placement proceeds were used to partially fund the business acquisition of the Lighthouse division. In compliance with the registration rights agreement entered into with the investors, on January 31, 2022 the Company filed a registration statement for the shares with the Securities and Exchange Commission which became effective on February 11, 2022. Ms. Sandra Pessin acquired 156,250 shares in this placement for $ 750,000 or $4.80 per share, and at that time Ms. Pessin was an owner of more than 5% of the Company’s outstanding common stock. Acquisition Earn Out Obligations As partial consideration for the July 2019 acquisition of the Ross Optical division the Company agreed to pay $ 500,000 as an earn-out contingent upon the satisfaction of certain financial thresholds consisting of mutually agreed upon revenue and gross margin targets of the Ross Optical division over a term of three years, beginning on July 1, 2019, at a rate of up to $166,667 per year. As of June 30, 2023 the full $ 500,000 has been paid. As of June 30, 2023, the earn-out liabilities of $ 1,500,000 associated with the Lighthouse acquisition were written off to other income due to the Lighthouse division not achieving the minimum gross margin targets. F- 13 (b) Bank Financing Activities Bank Line of Credit On October 4, 2021, the Company entered into a Loan Agreement with Main Street Bank of Marlborough, Massachusetts, which provided for a $ 2,600,000 Term Loan and a $ 250,000 Revolving Line of Credit Loan Facility, which was increased to $500,000 effective May 17, 2022, and $ 1,250,000 effective June 2, 2023. The $ 1,250,000 line of credit is due on demand and had no borrowings outstanding at June 30, 2023. Borrowings under the line of credit bear interest payable monthly at the prime lending rate plus 1.5% per annum and shall not be less than 4.75% per annum. Borrowings under the line of credit are limited to the borrowing base comprised of a percentage of accounts receivable and inventory and are secured by all the assets of the Company. Long-Term Debt Long-term debt consists of the following at June 30, 2023: Schedule of long-term debt Amount Term Loan Note payable to Main Street Bank with monthly principal payments of $ 30,952 .38 plus interest at the prime lending rate plus 1.5 % per annum. Secured by all assets of the Company, and subject to certain periodic reporting to the bank, an annual minimum debt service coverage ratio of 1.20:1 commencing with the fiscal year ending June 30, 2023, and other conditions. The Term Loan Note matures on October 15, 2028 $ 1,980,952 Permanent Working Capital Loan payable to Main Street Bank with monthly principal payments of $ 12,500 .00 plus interest at a fixed rate of 8.625 % per annum. Secured by all assets of the Company, and subject to certain periodic reporting to the bank, an annual minimum debt service coverage ratio of 1.20:1 commencing with the fiscal year ending June 30, 2023, and other conditions. The Term Loan Note matures on June 15, 2028 750,000 Less current maturities ( 513,259 ) Less debt issuance costs, net of accumulated amortization of $ 6,190 .75 ( 41,713 ) Long-term debt, net of current portion of debt issuance costs $ 2,175,980 At June 30, 2023 principal payments due on Long Term Debt are as follows: Schedule of principal payments due term loan note payable Fiscal Year Ending June 30: 2024 $ 513,259 2025 513,259 2026 513,259 2027 513,259 2028 513,259 Thereafter 164,657 Total long term debt $ 2,730,952 F- 14 (c) 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 June 30, 2023 is $ 104,208 . On July 1, 2019 the Company entered into a three-year operating lease for its facility in El Paso, Texas, and in February 2022 the Company entered into an extension of the lease for an additional three years through June 2025. Remaining minimum lease payments at June 30, 2023 total $ 86,480 . Total rent expense including base rent and common area expenses was $ 67,534 and $ 62,822 during the fiscal years ended June 30, 2023 and 2022, respectively. 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 at June 30, 2023 total $ 271,957 . Total rent expense including base rent and common area expenses was $ 141,351 and $ 105,051 during the fiscal year ended June 30, 2023 and 2022, respectively. Included in the accompanying balance sheet at June 30, 2023 is a right-of-use asset of $ 358,437 and current and long-term right-of-use operating lease liabilities of $ 168,677 and $ 189,760 , respectively. At June 30, 2023 future minimum lease payments under the capital lease and operating lease obligations are as follows: Schedule of future minimum lease payments under the capital lease and operating lease obligations Fiscal Year Ending June 30: Capital Leases Operating Lease 2024 $ 48,619 $ 182,652 2025 43,920 183,775 2026 28,024 11,477 Total Minimum Payments 120,563 $ 377,904 Less: amount representing interest 8,872 Present value of minimum lease payments 111,691 Less: current portion 43,209 $ 68,482 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 $ 191,088 and $ 203,355 for the fiscal years ended June 30, 2023 and 2022, respectively. (4) STOCKHOLDERS’ EQUITY (a) Stock-Based Compensation Expense The following table summarizes stock-based compensation expense for the years ended June 30: Schedule of stock-based compensation expense 2023 2022 Cost of Goods Sold $ 34,966 $ 115,021 Research and Development Expenses 182,498 218,847 Selling, General and Administrative Expenses 701,568 561,626 Stock Based Compensation Expense $ 919,032 $ 895,494 F- 15 As of June 30, 2023, the unrecognized compensation costs related to options vesting in the future is $ 330,611 . No compensation has been capitalized because such amounts would have been immaterial. There was no net income tax benefit recognized related to such compensation for the years ended June 30, 2023, or 2022, as the Company is currently in a loss position. There were 267,336 stock options granted during the year ended June 30, 2023, and 204,833 stock options granted during the year ended June 30, 2022. The Company uses the Black-Scholes option-pricing model as the most appropriate method for determining the estimated fair value for the stock awards. The Black-Scholes method of valuation requires several assumptions: (1) the expected term of the stock award; (2) the expected future stock volatility over the expected term; and (3) risk-free interest rate. The expected term represents the expected period of time the Company believes the options will be outstanding based on historical information. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common stock and the risk-free interest rate is based on the U.S. Zero-Bond rate. The Company utilizes a forfeiture rate based on an analysis of the Company’s actual experience. The fair value of options at date of grant was estimated with the following assumptions for options granted in fiscal year 2023: Schedule of fair value of option assumptions Year Ended June 30, 2023 Assumptions: Option life 5.3 years Risk-free interest rate 3.0 - 7.0 % Weighted average stock volatility 101.9 % Dividend yield 0 Weighted average fair value of grants $ 4.77 (b) Common Stock Issued for Services In December 2021, the Company issued 3,031 shares of its common stock to its Chief Financial Officer as compensation for services performed. The company recognized $ 20,000 of stock-based compensation expense during the three months ended December 31, 2021 relating to these common stock shares. (c) Stock Option Plans The type of share-based payments currently utilized by the Company is stock options. The Company has four stock option plans outstanding as of June 30, 2023, namely the Precision Optics Corporation, Inc. 2022 Equity Incentive Plan (the “2022 Plan”), the Precision Optics Corporation, Inc. 2021 Equity Incentive Plan (the “2021 Plan”), the Precision Optics Corporation, Inc. 2011 Equity Incentive Plan (the “2011 Plan”) and the Precision Optics Corporation, Inc. 2006 Equity Incentive Plan (the “2006 Plan”). Vesting periods under each of the Plans are at the discretion of the Board of Directors and typically average three years and in some instances are subject to future performance criteria. Options under these Plans are granted at fair market value on the date of grant and typically have an initial term of ten years from the date of grant, subject to certain cancellation provisions such as upon employment termination. . The Company has filed Registration Statements on Form S-8 with the Securities and Exchange Commission to register all shares of common stock issuable under the 2021, 2011, and 2006 Plans. The Company has not yet registered shares of common stock issuable under the 2022 Plan. F- 16 On April 8, 2022, the Shareholders approved the 2022 Plan which provides eligible participants (certain employees, directors, consultants, etc.) the opportunity to receive a broad variety of equity based and cash awards. A maximum of 333,333 shares of the Company’s common stock may be issued pursuant to stock options or other awards under the 2022 Plan. At June 30, 2023, options for a total of 210,668 shares of common stock were outstanding and 122,665 shares of common stock were available for future grants under the 2022 Plan. On May 10, 2021, the Board of Directors approved the 2021 Plan which likewise authorizes a broad variety of equity based and cash awards. A maximum of 333,333 shares of the Company’s common stock may be issued under the 2021 Plan. At June 30, 2023, options for a a total of 280,323 shares of common stock were outstanding under the 2021 Plan and 47,789 shares of common stock were available for future grants under the 2021 Plan. The 2011 Plan and 2006 Plan likewise provided for a broad variety of equity based and cash awards, but terminated in 2021 and 2016, respectively. At June 30, 2023, options for a total of 623,250 shares of common stock were still outstanding under the 2011 Plan. At June 30, 2023, options for a total of 12,899 shares of common stock were still outstanding under the 2006 Plan. The following tables summarize stock option activity for the years ended June 30, 2023 and 2022: Schedule of stock option activity Options Outstanding Number of Shares Weighted Average Exercise Price Weighted Average Contractual Life Outstanding at July 1, 2021 859,400 $ 3.39 6.73 years Grants 204,833 $ 5.22 Exercised ( 98,566 ) $ 3.15 Cancellations ( 61,000 ) $ 4.80 Outstanding at June 30, 2022 904,667 $ 3.99 7.08 years Grants 294,003 $ 6.27 Exercised ( 8,523 ) $ 3.05 Cancellations ( 63,007 ) $ 5.87 Outstanding at June 30, 2023 1,127,140 $ 4.54 6.88 years F- 17 Information related to the stock options outstanding as of June 30, 2023 is as follows: Schedule of 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 $ 1.44 20,000 2.75 $ 1.44 20,000 $ 1.44 $ 1.50 26,666 2.98 $ 1.50 26,666 $ 1.50 $ 1.65 5,000 4.76 $ 1.65 5,000 $ 1.65 $ 2.10 33,333 5.10 $ 2.10 33,333 $ 2.10 $ 2.19 205,663 3.70 $ 2.19 205,663 $ 2.19 $ 2.70 12,000 0.94 $ 2.70 12,000 $ 2.70 $ 3.75 15,000 6.72 $ 3.75 15,000 $ 3.75 $ 3.90 146,325 5.95 $ 3.90 146,325 $ 3.90 $ 4.20 23,332 7.39 $ 4.20 23,332 $ 4.20 $ 4.26 33,333 6.20 $ 4.26 33,333 $ 4.26 $ 4.35 1,666 7.69 $ 4.35 1,666 $ 4.35 $ 4.50 23,332 6.44 $ 4.50 23,332 $ 4.50 $ 5.04 178,173 7.93 $ 5.04 178,173 $ 5.04 $ 5.43 10,000 8.26 $ 5.43 10,000 $ 5.43 $ 5.61 10,000 8.87 $ 5.61 2,500 $ 5.61 $ 5.85 23,335 8.51 $ 5.85 2,224 $ 5.85 $ 5.93 4,000 9.53 $ 5.93 4,000 $ 5.93 $ 6.00 26,664 8.72 $ 6.00 13,334 $ 6.00 $ 6.78 90,000 9.50 $ 6.78 90,000 $ 6.26 $ 6.27 77,654 8.61 $ 6.27 25,885 $ 6.27 $ 6.78 46,664 8.39 $ 6.78 35,553 $ 6.78 $ 6.40 65,000 9.82 $ 6.40 2,500 $ 6.40 $ 6.94 50,000 9.96 $ 6.94 – $ – $ 1.44 – 6.94 1,127,140 6.85 $ 4.54 909,819 $ 4.04 The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisable options as of June 30, 2023, was $ 1,968,998 and $ 1,195,615 , respectively. F- 18 (d) Sale of Stock in October 2021 On October 1, 2021, the Company entered into agreements with accredited investors for the sale and purchase of 312,500 unregistered shares of its common stock, $0.01 par value at a purchase price of $4.80 per share. 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 4, 2021. In conjunction with the placement, the Company also entered into a registration rights agreement with the investors, whereby it is obligated to file a registration statement with the Securities and Exchange Commission on or before 120 calendar days after October 4, 2021 to register the resale by the investors of 312,500 shares of its common stock purchased in the placement. The registration statement was filed on January 31, 2022 and became effective on February 11, 2022. (e) Issuance of Common Stock in Business Acquisition On October 4, 2021, the Company issued 833,333 unregistered shares of its common stock to the sellers of Lighthouse Imaging, LLC, valued on that date at $4.80 per share or $ 4,000,000 , as shown in the accompanying statement of stockholders’ equity for the fiscal year ended June 30, 2022. In conjunction with the issuance, the Company agreed to use reasonable efforts to effectuate within a reasonable period after the October 4, 2021 business acquisition date a registration statement with the Securities and Exchange Commission to register the resale by the sellers of 833,333 shares of its common stock issued in the business acquisition. The registration statement was filed on June 13, 2022 and became effective on July 14, 2022. (f) Sale of Stock in June 2023 On June 15, 2023, the Company entered into agreements with certain institutional and accredited investors for the sale and purchase of 420,000 unregistered shares of its common stock, $ 0.01 par value at a purchase price of $ 6.00 per share. The Company expects to use the net proceeds from this placement for general working capital needs. In conjunction with the placement, the Company also entered into a registration rights agreement with the investors, whereby it is obligated to register the resale by the investors of 420,000 shares of its common stock purchased in the placement. (5) INCOME TAXES The Company has identified its federal tax return and its state tax return in Massachusetts as “major” tax jurisdictions. The periods subject to examination for its federal and state income tax returns are the years ended in 2018 and thereafter. The Company believes its income tax filing positions and deductions will be sustained on audit and it does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no liabilities for uncertain income tax positions have been recorded. The provision for income taxes in the accompanying consolidated statements of operations consists of the state income tax liability of $ 1,936 and $ 952 for the years ended June 30, 2023, and 2022, respectively. F- 19 A reconciliation of the federal statutory rate to the Company’s effective tax rate for the fiscal years ended June 30, 2023 and 2022 is as follows: Schedule of effective income tax rate reconciliation 2023 2022 Income tax expense (benefit) at federal statutory rate ( 21.0 )% ( 21.0 )% Increase (decrease) in tax resulting from: State taxes, net of federal benefit ( 5.8 )% ( 7.1 )% Change in valuation allowance ( 23.3 )% 22.6 % Stock based compensation 176.0 % 26.9 % Net Operating Loss Utilization 5.0 % – Revaluation of contingent earn out liability ( 135.2 )% ( 21.8 )% Nondeductible items 5.6 % 0.3 % Effective tax rate 1.3 % ( 0.1 )% The components of deferred tax assets and liabilities at June 30, 2023 and 2022 are approximately as follows: Schedule of deferred tax assets and liabilities 2023 2022 Deferred tax assets: Net operating loss carry forwards $ 2,617,000 $ 2,640,000 Tax credit carry forwards 247,000 164,000 Reserves and accruals not yet deducted for tax purposes 407,000 512,000 Total deferred tax assets 3,271,000 3,316,000 Valuation allowance ( 3,271,000 ) ( 3,316,000 ) Net deferred tax asset $ – $ – The Company has provided a valuation allowance to reduce the net deferred tax asset to an amount the Company believes is “more likely than not” to be realized. At June 30, 2023, the Company had federal and state net operating loss carry forwards of approximately $ 12,461,000 and $ 6,076,000 , respectively, which will, if not used, expire at various dates beginning in fiscal year 2024. (6) PROFIT SHARING PLAN The Company has a defined contribution 401(k) profit sharing plan. Employer profit sharing and matching contributions to the plan are discretionary. No employer profit sharing or matching contributions were made to the plan in fiscal years 2023 and 2022. F- 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.