What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-14 compared with 2023-05-15 · 120 added, 165 removed, 65 unchanged (81% of the section changed)

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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 March 31, 2032 and with our audited consolidated

statements included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 and with our audited consolidated

financial statements for the year ended June 30, 2023 included in our Annual Report on Form 10-K, filed with the Securities and Exchange

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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 TM 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.

Our proprietary medical instrumentation line, unique custom design and manufacturing capabilities, and

expert 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.

Effective June 1, 2019 we acquired the operating

assets of Ross Optical Industries, Inc.

of El Paso, Texas.

As Ross Optical Industries 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 suppliers.

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.

Effective October 1, 2021 we acquired the operating

assets of Lighthouse Imaging, LLC of Windham, Maine.

Our Lighthouse Imaging division supplements our operations as a manufacturer of advanced

optical imaging systems and accessories and has provided further 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.

Since the purchase we have integrated these acquired engineering and operational capabilities to provide an expanded,

unified offering to our customers.

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 30% our business during the nine

months ended March 31, 2023 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 18% 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 services have generated orders for traditional proprietary

endoscopes and endocouplers as well as for custom imaging and illumination products for use in minimally invasive surgical procedures.

We design and manufacture 3D endoscopes and very small Microprecision TM 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

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 Quarterly Report on Form 10-Q.

The markets in which we do business are highly

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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 developed extensive experience collaborating with other optical specialists worldwide.

Over the years we have developed extensive experience collaborating with other optical specialists

The markets for our products have increasingly

been driven by the demand for smaller and more enhanced imaging systems by the needs of the surgical community, including applications

for the brain, eye, wear, urology, cardiology/angiography and the spine.

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

We produce micro-precision optics, which are millimeter

sized and smaller cameras with low manufacturing costs.

The small size provides visualization for new procedures in new parts of the body

and for existing procedures that are currently performed blind or with sub-optimal imaging, facilitating the development of new surgical

procedures that are currently impractical.

We use patented and patent-pending approaches to fabricating opto-mechanical and opto-electronic

We have developed and helped commercialize applications for numerous customers in the medical device and defense/aerospace industries.

We believe that our future success depends to

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of existing products.

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

Competition amongst medical device companies is increasing with multiple companies now pursuing less expensive,

procedure specific robotic systems.

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 TM optics,

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

We are one of only a handful of companies in the world

to design and provide 3D endoscopes.

By designing systems with low manufacturing costs, we have also begun to penetrate the single-use

endoscope market.

Single-use endoscopes virtually eliminate the potential for patient cross-contamination and support a number of additional

operational benefits for hospitals and surgeons.

We estimate this segment of the overall minimally invasive surgical market is growing

at two to three times the rate of the overall market.

Current sales and marketing activities are intended

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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.

We are registered to the ISO 9001:2015 and ISO

13485:2016 Quality Standards and comply with the FDA Good Manufacturing Practices.

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

and www.lighthouseoptics.com.

The information contained on our websites does not constitute part of this report.

This management’s discussion and analysis

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Results of Operations

Our total revenues for the quarter ended March

31, 2023, were $5,048,065, as compared to $4,651,352 for the same period in the prior year, an increase of $396,713, or 8.5%, primarily

due to an increase in component revenue to a large defense contractor.

Other fluctuations in revenue categories were considered customary

during the quarter ended March 31, 2023 when compared to the same quarter of the prior fiscal year.

Our total revenues for the nine months ended March 31,

2023 were $16,020,327, as compared to $10,884,737 for the same period in the prior year, an increase of $5,135,590, or 47.2% due in part

to the inclusion of the Lighthouse division since its acquisition on October 4, 2021, increases in component sales in the El Paso and

Gardner locations, an increase in engineering revenues, and one-time technology rights revenue in the quarter ended December 31, 2022.

Our two largest customers accounted for 13.0%

and 8.4% of our revenue during the quarter ended March 31, 2023, and 8.0% and 13.1%, respectively, of our revenue during the nine months

ended March 31, 2023.

One of our two largest customers is a defense/aerospace company and the other is a medical device company.

revenues from 318 unique customers during the nine months ended March 31, 2023, and no other customer represented over 10% of our revenue

during the three and nine months ended March 31, 2023.

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.

Gross profit for the quarter ended March 31, 2023

was $1,736,098, compared to $1,728,209 for the same period in the prior year, an increase of $7,889.

Gross profit for the quarter ended

March 31, 2023 as a percentage of our revenues was 34.4%, an decrease from the gross profit percentage of 37.2% for the same period in

the prior year.

Gross profit for the nine months ended March 31, 2023 was $5,975,011 as compared to $3,486,823 for the same period in

the prior year, an increase of $2,488,188 or 71.4%.

Gross profit for the nine months ended March 31, 2023 as a percentage of our

revenues was 37.3%, an increase from the gross profit percentage of 32.0% 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 pandemic.

Our gross profit on individual engineering projects

is dependent on a number of factors and is expected to fluctuate from quarter to quarter based on the number of new engineering projects,

the nature and status of engineering projects, unanticipated cost over-runs, design challenges and changes, start-up production activities,

or other customer-imposed project changes or delays.

Our increase in gross profit dollars during nine months ended March 31, 2023 compared

to the same periods in the previous years was primarily due to inclusion of the Lighthouse division since its acquisition on October 4,

2021, Other fluctuations in gross profit dollars and margins in the quarter and nine months ended March 31, 2023 when compared to the

same periods of the prior fiscal year are considered customary considering the factors impacting variability as previously described.

Total revenues for the quarter ended September

30, 2023 were $4,321,255, as compared to $5,085,301 for the same period in the prior year, a decrease of $764,046, or 15.0%.

three months ended September 30, 2023, approximately 44% our business was from engineering services primarily relating to the design of

medical device optical assemblies, 44% from the sale of both internally manufactured and purchased optical components, and 12% from the

manufacture of optical assemblies and sub-assemblies primarily for medical device instrument.

During the three months ended September

30, 2022, approximately 32% our business was from engineering services primarily relating to the design of medical device optical assemblies,

52% from the sale of both internally manufactured and purchased optical components, and 16% from the manufacture of optical assemblies

and sub-assemblies primarily for medical device instrument applications.

During the quarter ended September 30, 2023, compared

to the same period in the prior year, optical component revenue decreased approximately $749,000, assembly production revenues decreased

$273,000, while engineering revenue increased approximately $258,000 to $1,901,000 from $1,643,000.

We believe the decreases in optical

components were largely driven by lower order volumes as customers sought to rebalance their inventories, which had previously grown beyond

sustainable levels due to increased ordering in response to concerns about supply chain disruptions.

The decreases in medical device products

and assemblies was attributable to timing differences between the exit of certain mature customer programs, reorders for ongoing products

and the introduction of new customer programs, primarily in the areas of medical endoscopes, including single-use devices and new defense

/ aerospace commitments.

Revenue increases in the engineering category were driven by efforts to complete design engagements on these

very same products in preparation for commercial production later in our fiscal year.

Gross profit for the quarter ended September 30,

2023 of $1,463,611 reflected a decrease of $175,830, or 10.7%, as compared to gross profit for the same period in the prior year and was

primarily driven by the decrease in revenue discussed above.

Gross profit, as a percentage of revenues for the quarter ended September

30, 2023, was 33.9% as compared to gross profit, as a percentage of revenues for the same period in the prior year, of 32.2%, due in part

to improved utilization of our engineering resources.

Gross profit and the gross profit percentage for any given fiscal period depend

on many 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.

Research and development expenses were $212,758,

for the quarter ended March 31, 2023, compared to $214,898 for the same period in the prior year, a decrease of $8,523, or 4.0%.

and development expenses were $660,518 for the nine months ended March 31, 2023, compared to $433,248 for the same period in the

prior year, an increase of $227,270, or 52.5%.

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 nine

months ended March 31, 2023 compared to the same periods of the prior year we had an increase in personnel, and an increase in research

and development costs incurred in the development of internal research and development efforts and projects.

or 4.9% of revenue for the quarter ended September 30, 2023, as compared to $245,477, or 4.8% of revenue for the same period in the prior

year, a decrease of $32,719, or 13.3%.

Selling, general and administrative expenses were

$2,022,991 for the quarter ended March 31, 2023, compared to $1,574,432 for the same period in the prior year, an increase of $448,559,

Selling, general and administrative expenses were $5,338,498 for the nine months ended March 31, 2023, compared to $3,974,824

for the same period in the prior year, an increase of $1,363,674, or 34.3%.

The increase in selling, general and administrative expense

in the three months ended March 31, 2023 compared to the same period of the prior fiscal year was primarily the result of increased compensation

due to expanded headcount, incentive bonuses and sales commissions resulting from increased revenues, increased sales conference and show

costs, and increased stock based compensation.

The increase in selling, general and administrative expenses in the nine months ended March

31, 2023 compared to the same periods of the prior fiscal year was primarily due to inclusion of the Lighthouse division since its acquisition

in October, 2021, plus increased compensation due to expanded headcount, incentive bonuses and sales commissions resulting from increased

revenues, and increased sales conference and show costs.

$1,656,146 for the quarter ended September 30, 2023, compared to $1,495,766 for the same period in the prior year, an increase of $160,380

The increase in selling, general and administrative expenses in the three months ended September 30, 2023 was primarily due to

increased marketing-related expenses, increased personnel costs and increased professional fees associated with public company expenses.

Liquidity and Capital Resources

We have sustained recurring net losses from operations

for several years.

During the quarter ended and nine months ended March 31, 2023 we incurred operating losses of $493,268 and 24,005,

respectively.

During the years ended June 30, 2022 and 2021 we incurred operating losses of $1,513,890 and $905,583, respectively.

March 31, 2023, cash was $612,095, accounts receivables were $4,389,907 and current liabilities were $6,494,885, including $1,387,806

of customer advances received for future order deliveries.

Although our revenue and gross margin have increased,

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 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 revenue levels, realized gross profits 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 TM

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.

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

There were no borrowings outstanding on the line of credit at March 31, 2023.

During the quarter ended September 30, 2023, cash

on hand funded increases in accounts receivable of $625,719, offset by increased customer advances of $250,293, increases in inventory

of $194,995, increases in prepaid expenses of $112,120, and a net decrease in accounts payable, accrued expenses and other of $390,720.

During the quarter ended September 30, 2023 we also made payments of $138,876 on our term notes and capital leases.

These items, in addition

to the impact of the quarterly net loss, net of depreciation, amortization, stock-based compensation and other non-cash items, resulted

in a decrease of $1,555,383 in our cash and cash equivalents at September 30 2023 from $2,925,852 at June 30, 2023 to $1,370,769 at September

In October 2021 we entered a $2,600,000 term loan

with a commercial bank.

In June 2023 we added a second term loan in the amount of $750,000.

We secured a $250,000 line of credit from

the same bank in October 2021 for working capital needs, which was increased to $500,000 in May 2022 and to $1,250,000 in June 2023.

June 20, 2023, we also raised $2,288,000, net of expenses, through a private placement of 420,000 shares of our common stock.

There were no borrowings outstanding on the line

of credit on September 30, 2023 and full availability in the amount of $1,250,000.

Capital equipment expenditures and additional

patent costs during the nine months ended March 31, 2023 were $52,411.

Future capital equipment and patent expenditures will be dependent

upon future sales and success of on-going research and development efforts.

patent costs during the quarter ended September 30, 2023 and the same period in the prior year were $43,517 and $29,174, respectively.

Contractual cash commitments for the fiscal periods

subsequent to March 31, 2023, are summarized as follows:

Financing lease for equipment, including interest

subsequent to September 30, 2023, are summarized as follows:

Capital lease for equipment, including interest

Minimum operating lease payments

We have contractual cash commitments related to

open purchase orders as of March 31, 2023 of approximately $2,923,320.

open purchase orders as of September 30, 2023 of approximately $2,060,000.

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