PRECISION OPTICS CORPORATION, INC. 10-Q

Item 1. Financial Statements. PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, June 30, 2023 2023 ASSETS Current Assets: Cash and cash equivalents $ 1,370,469 $ 2,925,852 Accounts receivable, net of allowance for doubtful accounts of $ 690,097 at September 30, 2023 and $ 606,715 at June 30, 2022 4,533,126 3,907,407 Inventories 2,971,211 2,776,216 Prepaid expenses 361,801 249,681 Total current assets 9,236,607 9,859,156 Fixed Assets: Machinery and equipment 3,243,496 3,227,481 Leasehold improvements 842,455 825,752 Furniture and fixtures 240,917 242,865 Total fixed assets 4,326,868 4,296,098 Less—Accumulated depreciation and amortization 3,914,142 3,862,578 Net fixed assets 412,726 433,520 Operating lease right-to-use asset 317,083 358,437 Patents, net 277,858 265,111 Goodwill 8,824,210 8,824,210 TOTAL ASSETS $ 19,068,484 $ 19,740,434 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Current portion of capital lease obligation $ 43,859 $ 43,209 Current maturities of long-term debt 513,259 513,259 Accounts payable 1,733,661 2,432,264 Customer advances 1,424,983 1,174,690 Accrued compensation and other 1,239,781 927,521 Operating lease liability 171,075 168,677 Total current liabilities 5,126,618 5,259,620 Capital lease obligation, net of current portion 57,270 68,482 Long-term debt, net of current maturities and debt issuance costs 2,047,665 2,175,980 Operating lease liability, net of current portion 146,008 189,760 Stockholders’ Equity: Common stock, $ 0.01 par value: 50,000,000 shares authorized; issued and outstanding – 6,066,518 shares at September 30, 2023 and June 30, 2023 60,665 60,665 Additional paid-in capital 60,333,680 60,224,934 Accumulated deficit ( 48,703,422 ) ( 48,239,007 ) Total stockholders’ equity 11,690,923 12,046,592 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 19,068,484 $ 19,740,434 The accompanying notes are an integral part of these consolidated interim financial statements. 3 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) Three Months Ended September 30, 2023 2022 Revenues $ 4,321,255 $ 5,085,301 Cost of Goods Sold 2,857,644 3,445,860 Gross Profit 1,463,611 1,639,441 Research and Development Expenses 212,758 245,477 Selling, General and Administrative Expenses 1,656,146 1,495,766 Total Operating Expenses 1,868,904 1,741,243 Operating Loss ( 405,293 ) ( 101,802 ) Interest Expense ( 59,122 ) ( 56,922 ) Net Loss $ ( 464,415 ) $ ( 158,724 ) Loss Per Share: Basic and Fully Diluted $ ( 0.08 ) $ ( 0.03 ) Weighted Average Common Shares Outstanding: Basic & Fully Diluted 6,066,518 5,638,363 The accompanying notes are an integral part of these consolidated interim financial statements. 4 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED SEPTEMBER 30 , 2023 AND 2022 (UNAUDITED) Three Month Period Ended September 30, 2023 Number of Shares Common Stock Additional Paid-in Capital Common Stock Subscribed Accumulated Deficit Total Stockholders’ Equity Balance, July 1, 2023 6,066,518 $ 60,665 $ 60,224,934 $ – $ ( 48,239,007 ) $ 12,046,592 Stock-based compensation – – 108,746 – – 108,746 Net loss – – – – ( 464,415 ) ( 464,415 ) Balance, September 30, 2023 6,066,518 $ 60,665 $ 60,333,680 $ – $ ( 48,703,422 ) $ 11,690,923 Three Month Period Ended September 30, 2022 Number of Shares Common Stock Additional Paid-in Capital Common Stock Subscribed Accumulated Deficit Total Stockholders’ Equity Balance, July 1, 2022 5,683,363 $ 56,834 $ 57,009,055 $ – $ ( 48,094,394 ) $ 8,971,495 Stock-based compensation – – 74,990 – – 74,990 Net loss – – – – ( 158,724 ) ( 158,724 ) Balance, September 30, 2022 5,683,363 $ 56,834 $ 57,084,045 $ – $ ( 48,253,118 ) $ 8,887,761 The accompanying notes are an integral part of these consolidated interim financial statements. 5 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30 , 2023 AND 2022 (UNAUDITED) Three Months Ended September 30, 2023 2022 Cash Flows from Operating Activities: Net Loss $ ( 464,415 ) $ ( 158,724 ) Adjustments to reconcile net loss to net cash used in by operating activities - Depreciation and amortization 51,564 52,411 Stock-based compensation expense 108,746 74,990 Non-cash interest expense 4,376 9,412 Changes in operating assets and liabilities - Accounts receivable, net ( 625,719 ) ( 750,813 ) Inventories, net ( 194,995 ) 266,487 Prepaid expenses ( 112,120 ) 25,950 Accounts payable ( 698,603 ) 151,945 Customer advances 250,293 127,778 Accrued compensation and other 307,884 400,298 Net cash (used in) provided by operating activities ( 1,372,989 ) 199,734 Cash Flows from Investing Activities: Purchases of fixed assets ( 30,770 ) ( 16,019 ) Additional patent costs ( 12,747 ) ( 13,155 ) Net cash used in investing activities ( 43,517 ) ( 29,174 ) Cash Flows from Financing Activities: Payment of capital lease obligation ( 10,562 ) ( 9,950 ) Payments of long-term debt ( 128,315 ) ( 92,857 ) Net cash used in financing activities ( 138,876 ) ( 102,807 ) Net (decrease) increase in cash and cash equivalents ( 1,555,383 ) 67,753 Cash and cash equivalents, beginning of period 2,925,852 605,749 Cash and cash equivalents, end of period $ 1,370,469 $ 673,502 The accompanying notes are an integral part of these consolidated interim financial statements. 6 PRECISION OPTICS CORPORATION, INC. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Operations The accompanying consolidated financial statements include the accounts of Precision Optics Corporation, Inc. and its wholly-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation. These consolidated financial statements have been prepared by the Company, without audit, and reflect normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the results of the first quarter of the Company’s fiscal year 2024. These consolidated financial statements do not include all disclosures associated with annual consolidated financial statements and, accordingly, should be read in conjunction with footnotes contained in the Company’s consolidated financial statements for the year ended June 30, 2023, together with the Report of Independent Registered Public Accounting Firm filed under cover of the Company’s 2023 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 28, 2023. Use of Estimates The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Income (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 (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. For the three months ended September 30, 2023 and 2022, the following potentially dilutive securities outstanding have been excluded from the computations of weighted-average shares outstanding because such securities have an antidilutive impact due to the net loss reported during those periods. The following is the calculation of income (loss) per share for the three months ended September 30, 2023 and 2022: Schedule of income (loss) per share Three Months Ended September 30, 2023 2022 Net Income (Loss) Basic and Fully Diluted $ ( 464,415 ) $ ( 158,724 ) Weighted Average Shares Outstanding Basic and Fully Diluted 6,066,518 5,638,363 Loss Per Share - Basic and Fully Diluted $ ( 0.08 ) $ ( 0.03 ) The number of shares issuable upon the exercise of outstanding stock options that were excluded from the computation as their effect was antidilutive was approximately 1,123,140 and 904,667 for the three months ended September 30, 2023 and 2022, respectively. 7 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 carryforwards. 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. Based on this evaluation, a full valuation reserve has been provided for the deferred tax assets. 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 as of September 30, 2023. 2. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market and consisted of the following: Schedule of inventories September 30, 2023 June 30, 2023 Raw Materials $ 1,375,717 $ 1,142,816 Work-In-Progress 326,846 322,538 Finished Goods 1,268,648 1,310,862 Total Inventories $ 2,971,211 $ 2,776,216 3. 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 September 30, 2023. Borrowings under the line of credit would 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 would be limited to the borrowing base comprised of a percentage of accounts receivable and inventory and are secured by all the assets of the Company. 8 Long-Term Debt Long-term debt consists of the following at September 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 a fixed rate of 7.0 % per annum. Secured by all assets of the Company, and subject to certain periodic reporting to the bank and other conditions including an annual minimum EBITDA plus stock-based compensation to debt service coverage ratio of 1.20:1 commencing with the fiscal year ending June 30, 2023. The Term Loan Note matures on October 15, 2028 . $ 1,888,095 Permanent Working Capital Loan payable to Main Street Bank with monthly principal payments of $ 12,500 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 and other conditions including an annual minimum EBITDA plus stock-based compensation to debt service coverage ratio of 1.20:1 commencing with the fiscal year ending June 30, 2023. The Permanent Working Capital Loan matures on June 15, 2028 . $ 712,500 Less current maturities ( 513,259 ) Less debt issuance costs, net of accumulated amortization of $ 8,233 ( 39,671 ) Long-term debt, net of current maturities and debt issuance costs $ 2,047,665 At September 30, 2023 principal payments due on the Term Loan Note payable are as follows: Schedule of principal payments due on the term loan note payable Fiscal Year Ending June 30: 2024 $ 384,944 2025 513,259 2026 513,259 2027 513,259 2028 513,259 Thereafter 162,615 Total long term debt $ 2,600,595 4. LEASE OBLIGATIONS 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 September 30, 2023 is $ 42,572 . 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 September 30, 2023 total $ 79,740 . Total rent expense including base rent and common area expenses was $ 15,973 and $ 11,630 during the fiscal quarters ended September 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 on September 30, 2023 total $ 252,501 . Total rent expense including base rent and common area expenses was $ 34,432 during the fiscal quarter ended September 30, 2023. Included in the accompanying balance sheet at September 30, 2023 is a right-of-use asset of $ 317,083 and current and long-term right-of-use operating lease liabilities of $ 171,075 and $ 146,008 , respectively. 9 At September 30, 2023 future minimum lease payments under the capital lease and operating lease obligations are as follows: Schedule of minimum lease payments Fiscal Year Ending June 30: Capital Leases Operating Lease 2024 $ 36,486 $ 127,204 2025 43,919 178,331 2026 28,004 11,548 2027 – – Total Minimum Payments 108,409 $ 317,083 Less: amount representing interest 7,280 Present value of minimum lease payments 101,129 Less: current portion 43,859 Lease Obligation, net of current portion $ 57,270 The Company’s operating leases for its Gardner, Massachusetts office, production and storage spaces plus an equipment lease have expired and continue on a month-to-month tenant-at-will basis. Rent expense on these operating leases was $ 48,799 and $ 50,826 for the fiscal quarter ended September 30, 2023 and 2022, respectively. 5. STOCK-BASED COMPENSATION Stock Options The following table summarizes stock-based compensation expense for the three months ended September 30, 2023 and 2022. The share amounts and prices shown below reflect adjustment for a 1-for-3 reverse stock split that took effect after the close of business on November 1, 2022. Schedule of stock-based compensation expense Three Months Ended September 30, 2023 2022 Cost of Goods Sold $ 22,625 $ 6,298 Research and Development Expenses – 30,756 Selling, General and Administrative Expenses 86,121 37,936 $ 108,746 $ 74,990 No compensation has been capitalized because such amounts would have been immaterial. The following tables summarize stock option activity for the three months ended September 30, 2023: Schedule of stock option activity Options Outstanding Number of Shares Weighted Average Exercise Price Weighted Average Contractual Life Outstanding at June 30, 2023 1,127,140 $ 4.54 6.88 years Exercised, Granted and Cancelled ( 4,000 ) 5.93 – Outstanding at September 30, 2023 1,023,140 $ 4.49 6.31 years Information related to the stock options outstanding as of September 30, 2023 is as follows: The aggregate intrinsic value of the Company’s in-the-money outstanding and exercisable options as of September 30, 2023 was $ 1,810,767 and $ 1,810,242 , respectively. 10 6. REVENUE RECOGNITION 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. 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 a majority 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 revenues. 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 three months ended September 30, 2023 and 2022: Schedule of disaggregation of revenues Three Months Ended September 30, 2023 2022 Engineering Design Services $ 1,900,999 $ 1,642,967 Optical Components 1,903,311 2,652,681 Medical Device Products & Assemblies 516,945 789,653 $ 4,321,255 $ 5,085,301 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 September 30, 2023, there were no contract assets recorded in the Company’s Consolidated Balance Sheets. The Company’s contract liabilities arise from unearned revenue received from customers at inception of contracts or where the timing of billing for services precedes satisfaction of our 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 Three Months Ended September 30, 2023 2022 Contract liabilities, beginning of period $ 1,174,690 $ 905,113 Unearned revenue received from customers 433,119 455,613 Revenue recognized ( 182,826 ) ( 327,835 ) Contract liabilities, end of period $ 1,424,983 $ 1,032,891 11