PRECISION OPTICS CORPORATION, INC. 10-Q

Item 1. Financial Statements. PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) December 31, June 30, 2023 2023 ASSETS Current Assets: Cash and cash equivalents $ 987,044 $ 2,925,852 Accounts receivable, net of allowance for doubtful accounts of $ 731,256 at December 31, 2023 and $ 606,715 at June 30, 2023 3,511,544 3,907,407 Inventories 3,099,986 2,776,216 Prepaid expenses 234,121 249,681 Total current assets 7,832,695 9,859,156 Fixed Assets: Machinery and equipment 3,253,746 3,227,481 Leasehold improvements 832,305 825,752 Furniture and fixtures 362,287 242,865 Total fixed assets 4,448,338 4,296,098 Less—Accumulated depreciation and amortization 3,966,839 3,862,578 Net fixed assets 481,499 433,520 Operating lease right-to-use asset 275,329 358,437 Patents, net 283,643 265,111 Goodwill 8,824,210 8,824,210 TOTAL ASSETS $ 17,697,376 $ 19,740,434 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Current portion of capital lease obligation $ 44,519 $ 43,209 Current maturities of long-term debt 513,259 513,259 Accounts payable 1,675,742 2,432,264 Customer advances 1,158,242 1,174,690 Accrued compensation and other 747,793 927,521 Operating lease liability 173,503 168,677 Total current liabilities 4,313,058 5,259,620 Capital lease obligation, net of current portion 45,890 68,482 Long-term debt, net of current maturities and debt issuance costs 1,919,350 2,175,980 Operating lease liability, net of current portion 101,826 189,760 Stockholders’ Equity: Common stock, $ 0.01 par value: 50,000,000 shares authorized; issued and outstanding – 6,067,518 shares at December 31, 2023 and 6,066,518 at June 30, 2023 60,675 60,665 Additional paid-in capital 60,718,801 60,224,934 Accumulated deficit ( 49,462,224 ) ( 48,239,007 ) Total stockholders’ equity 11,317,252 12,046,592 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 17,697,376 $ 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 SIX MONTHS ENDED DECEMBER 31, 2023 AND 2022 (UNAUDITED) Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 Revenues $ 4,824,289 $ 5,886,961 $ 9,145,544 $ 10,972,262 Cost of Goods Sold 3,373,313 3,287,489 6,230,957 6,733,349 Gross Profit 1,450,976 2,599,472 2,914,587 4,238,913 Research and Development Expenses 221,728 155,264 434,486 365,891 Selling, General and Administrative Expenses 1,933,410 1,873,143 3,589,556 3,403,759 – Total Operating Expenses 2,155,138 2,028,407 4,024,042 3,769,650 Operating Income (Loss) ( 704,162 ) 571,065 ( 1,109,455 ) 469,263 Interest Expense ( 54,640 ) ( 62,397 ) ( 113,762 ) ( 119,319 ) Net Income (Loss) $ ( 758,802 ) $ 508,668 $ ( 1,223,217 ) $ 349,944 Income (Loss) Per Share: Basic $ ( 0.13 ) $ 0.09 $ ( 0.20 ) $ 0.06 Fully Diluted $ ( 0.13 ) $ 0.09 $ ( 0.20 ) $ 0.06 Weighted Average Common Shares Outstanding: Basic 6,066,572 5,638,302 6,066,545 5,638,302 Fully Diluted 6,066,572 5,935,911 6,066,545 5,937,471 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 SIX MONTHS ENDED DECEMBER 31 , 2023 AND 2022 (UNAUDITED) Six Month Period Ended December 31, 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 Stock-based compensation – – 382,431 – – 382,431 Proceeds from the exercise of stock options 1,000 10 2,690 – – 2,700 Net loss – – – – ( 758,802 ) ( 758,802 ) Balance, December 31, 2023 6,067,518 $ 60,675 $ 60,718,801 $ – $ ( 49,462,224 ) $ 11,317,252 Six Month Period Ended December 31, 2022 Number of Shares Common Stock Additional Paid-in Capital Common Stock Subscribed Accumulated Deficit Total Stockholders’ Equity Balance, July 1, 2022 5,683,302 $ 56,834 $ 57,009,506 $ – $ ( 48,094,394 ) $ 8,971,946 Stock-based compensation – – 74,990 – – 74,990 Net loss – – – – ( 158,724 ) ( 158,724 ) Balance, September 30, 2022 5,683,302 56,834 $ 57,084,496 – ( 48,253,118 ) 8,888,212 Stock-based compensation – – 244,786 – – 244,786 Net income – – – – 508,668 508,668 Balance, December 31, 2022 5,683,302 $ 56,834 $ 57,329,282 $ – $ ( 47,744,450 ) $ 9,641,666 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 SIX MONTHS ENDED DECEMBER 31 , 2023 AND 2022 (UNAUDITED) Six Months Ended December 31, 2023 2022 Cash Flows from Operating Activities: Net Income (Loss) $ ( 1,223,217 ) $ 349,944 Adjustments to reconcile net loss to net cash used in by operating activities - Depreciation and amortization 104,261 104,750 Stock-based compensation expense 491,177 319,776 Non-cash interest expense 8,752 16,966 Changes in operating assets and liabilities - Accounts receivable, net 395,863 ( 1,368,650 ) Inventories, net ( 323,770 ) 232,963 Prepaid expenses 15,560 271 Accounts payable ( 756,522 ) 216,060 Customer advances ( 16,448 ) ( 110,132 ) Accrued compensation and other ( 188,480 ) 255,162 Net cash (used in) provided by operating activities ( 1,492,824 ) 17,110 Cash Flows from Investing Activities: Purchases of fixed assets ( 152,240 ) ( 13,583 ) Additional patent costs ( 18,532 ) ( 24,054 ) Net cash used in investing activities ( 170,772 ) ( 37,637 ) Cash Flows from Financing Activities: Payments of capital lease obligations ( 21,282 ) ( 20,049 ) Payments of long-term debt ( 256,630 ) ( 183,855 ) Gross proceeds from the exercise of stock options 2,700 – Net cash used in financing activities ( 275,212 ) ( 203,904 ) Net (decrease) increase in cash and cash equivalents ( 1,938,808 ) ( 224,431 ) Cash and cash equivalents, beginning of period 2,925,852 605,749 Cash and cash equivalents, end of period $ 987,044 $ 381,318 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 six months 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 and six months ended December 31, 2023, 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 number of shares issuable upon the exercise of outstanding stock options that were excluded from the computation of fully dilutive weighted average shares outstanding was approximately 1,256,141 for the three and six months ended December 31, 2023. 7 The following is the calculation of income (loss) per share for the three months and six months ended December 31, 2023 and 2022: Schedule of income (loss) per share Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 Net Income (Loss) Basic and Fully Diluted $ ( 758,802 ) $ 508,668 $ ( 1,223,217 ) $ 349,944 Weighted Average Shares Outstanding Basic 6,066,572 5,638,302 6,066,545 5,638,302 Fully Diluted 6,066,572 5,935,911 6,066,545 5,937,471 Income (Loss) Per Share – Basic $ ( 0.13 ) $ 0.09 $ ( 0.20 ) $ 0.06 Income (Loss) Per Share - Fully Diluted $ ( 0.13 ) $ 0.09 $ ( 0.20 ) $ 0.06 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 December 31, 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 December 31, 2023 June 30, 2023 Raw Materials $ 1,532,752 $ 1,142,816 Work-In-Progress 483,960 322,538 Finished Goods 1,083,274 1,310,862 Total Inventories $ 3,099,986 $ 2,776,216 8 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 (the “Revolver”), which was increased to $500,000 effective May 17, 2022 and $ 1,250,000 effective June 2, 2023. Borrowings under the Revolver are limited by the borrowing base comprised of a percentage of accounts receivable and inventory and secured by all assets of the Company. Borrowings under the Revolver will 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 Revolver are due upon demand. At December 31, 2023 the Revolver was unutilized and fully available to the Company. Long-Term Debt Long-term debt consists of the following at December 31, 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 . $ 1,795,238 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 . 675,000 Less current maturities ( 513,259 ) Less debt issuance costs, net of accumulated amortization of $ 10,275 ( 37,629 ) Long-term debt, net of current maturities and debt issuance costs $ 1,919,350 At December 31, 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 $ 256,630 2025 513,259 2026 513,259 2027 513,259 2028 513,259 Thereafter 160,573 Total long term debt $ 2,470,238 9 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 December 31, 2023 is $ 83,535 . 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 December 31, 2023 total $ 66,087 . Total rent expense including base rent and common area expenses was $ 36,288 and $ 35,589 during the six months ended December 31, 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 December 31, 2023 total $ 209,242 . Total rent expense including base rent and common area expenses was $ 68,864 and 70,034 during the six months ended December 31, 2023 and 2022, respectively. Included in the accompanying balance sheet at December 31, 2023 is a right-of-use asset of $ 275,329 and current and long-term right-of-use operating lease liabilities of $ 173,503 and $ 101,826 , respectively. At December 31, 2023 future minimum lease payments under the capital lease and operating lease obligations are as follows: Schedule of future minimum lease payments Fiscal Year Ending June 30: Capital Leases Operating Lease 2024 $ 24,309 $ 85,330 2025 43,918 178,569 2026 28,028 11,430 2027 – – Total Minimum Payments 96,255 $ 275,329 Less: amount representing interest 5,846 Present value of minimum lease payments 90,409 Less: current portion 44,519 Lease Obligation, net of current portion $ 45,890 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 $ 97,581 and $ 95,511 for the six months ended December 31, 2023 and 2022, respectively. 5. STOCK-BASED COMPENSATION Stock Options The following table summarizes stock-based compensation expense for the three months ended December 31, 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. The following table summarizes stock-based compensation expense for the three and six months ended December 31, 2022 and 2021: Schedule of stock-based compensation expense Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 Cost of Goods Sold $ 21,876 $ 9,556 $ 44,502 $ 15,854 Research and Development – 50,302 – 81,058 Selling, General and Administrative 360,555 184,928 446,675 222,864 Stock Based Compensation Expense $ 382,431 $ 244,786 $ 491,177 $ 319,776 No compensation has been capitalized because such amounts would have been immaterial. 10 The following tables summarize stock option activity for the three months ended December 31, 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 Granted 135,000 5.95 – Exercised ( 1,000 ) 2.70 – Cancelled, forfeited, or expired ( 4,999 ) 6.00 Outstanding at December 31, 2023 1,256,141 $ 4.65 6.98 years Information related to the stock options outstanding as of December 31, 2023 is as follows: The aggregate intrinsic value of the Company’s in-the-money outstanding and exercisable options as of December 31, 2023 was $ 1,874,731 and $ 1,872,040 , respectively. 6. REVENUE RECOGNITION The Company determines revenue recognition for arrangements that we determine are within the scope of Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” or ASC 606, by performing the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, we satisfy the performance obligations. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within the contract and determine those that are performance obligations and assess whether each promised good or service is distinct based on the contract. The Company disaggregates revenues by product and service types as it believes 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 and six months ended December 31, 2023 and 2022: Schedule of disaggregation revenues Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 Engineering Design Services $ 2,265,217 $ 1,701,611 $ 4,166,216 $ 3,344,578 Optical Components 1,979,875 2,580,140 3,883,186 5,232,821 Medical Device Products and Assemblies 579,197 1,005,210 1,096,142 1,794,863 Technology Rights – 600,000 – 600,000 Total Revenues $ 4,824,289 $ 5,886,961 $ 9,145,544 $ 10,972,262 Other selling costs to obtain and fulfill contracts are expensed as incurred due to the short-term nature of a majority of 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. Revenue recognition policies for each of the four product and service types appear below. 11 Engineering Design Services The Company enters into contractual agreements with our customers, including design services agreements, statements of work and receive purchase orders for development projects. These agreements provide costs on an estimated basis for the services we have agreed to provide. Engineering Design Services are rendered on a time and materials basis. The Company recognizes revenue as customers are invoiced for the actual engineering services provided in the period. Revenue is also recognized on materials purchased for development projects at the time of receipt. Engineering Design Services are provided on a best-efforts basis; no warranty is provided as there is no guarantee that the work will result in the attainment of the customer’s project objectives. The Company may obtain customer deposits in advance of rendering engineering design services. Customer deposits are treated as contractual liabilities until the terms of customer agreements are satisfied and are not a component of revenue. Optical Components, Finished Products and Assemblies The Company provides fixed price quotations to our customers and requires purchase orders for all purchased optical components, medical devices and assemblies. Revenue is recognized at the time title passes to our customer based on our review of the customer contract, generally at the time of shipment from our facilities. Occasionally the Company may enter into “bill and hold” contractual arrangements where title is held by our customers while goods are stored at our facilities for their convenience. Technology Rights and Royalties The Company may recognize revenue for the sale of technology rights and through the receipt of royalties obtained under a license of our intellectual property. These revenues are recognized in the period in which, in our judgment, they are earned and no longer contingent under the terms and conditions of the relevant customer contract. 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 December 31, 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’s 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 December 31, Six Months Ended December 31, 2023 2022 2023 2022 Contract liabilities, beginning of period $ 1,424,983 $ 1,032,891 $ 1,174,690 $ 905,113 Unearned revenue received from customers 272,572 441,493 705,691 897,106 Revenue recognized ( 539,313 ) ( 679,403 ) ( 722,139 ) ( 1,007,238 ) Contract liabilities, end of period $ 1,158,242 $ 794,981 $ 1,158,242 $ 794,981 12