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Item 7. Management’s Discussion and Analysis

2024-09-30 compared with 2023-09-28 · 126 added, 59 removed, 19 unchanged (91% of the section changed)

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should

be read in conjunction with the Financial Statements and Notes thereto, and other financial information included elsewhere in this Annual

Report on Form 10-K.

MANAGEMENT’S DISCUSSION

AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read

in conjunction with the Financial Statements and Notes thereto, and other financial information included elsewhere in this Annual Report

on Form 10-K.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains descriptions

2 unchanged sentences

cause actual results to differ materially from those contemplated by the forward-looking statements.

Critical Accounting Policies

and Estimates

Our critical accounting policies

are included in the Notes to our Financial Statements contained elsewhere in this Annual Report on Form 10-K.

Results of Operations for the Fiscal Year

Ended June 30, 2023 as Compared to the Fiscal Year Ended June 30, 2022

Critical Accounting Policies and Estimates

Allowance for Credit Losses

We are subject to credit risk primarily in our trade accounts

We generally do not require collateral or other security as a condition of sale, rather we rely on credit approval, balance

limitation and monitoring procedures to control credit risk in trade account financial instruments.

Our customer base includes many large

medical device and defense/aerospace companies, as well as newly incorporated entities pursuing emerging technologies.

In those cases

when we cannot determine the creditworthiness of our customer, we obtain prepayments and deposits that we judge will be sufficient to

mitigate the risk of a significant financial loss.

We establish reserves against losses that include both a review of specific account

balances and current payment characteristics which are monitored contemporaneously to determine the adequacy of our reserve.

Nevertheless,

our customers may be adversely impacted by economic factors beyond our understanding and control, and which are difficult to foresee or

A 1% increase in the accounts receivable reserve would increase our costs by approximately $37,000.

We recognized bad debt expense

of $202,000 and $488,000 for the years ending June 30, 2024, and June 30, 2023, respectively.

Reserve for Excess and Obsolete Inventory

Inventories, consisting of raw materials, work in process and

finished goods, are primarily accounted for using the first-in first-out method, and are valued at the lower of cost and net realizable

This valuation requires us to make judgments, based on currently available information, regarding product demand and the potential

for a future financial loss resulting from the liquidation and disposal of unusable or unsaleable inventory.

These assumptions about the

future disposition of inventory are inherently uncertain, and changes in our estimates and assumptions may require us to realize write-downs.

In addition, we enter into binding supplier commitments which are based on forecasted customer demand.

If our customers reduce their forecasts,

we may incur additional costs.

An increase in the calculation of the reserve for excess and obsolete inventory equivalent to 1% of gross

inventory value would increase our costs by approximately $35,000.

Other significant accounting policies are included in the Notes

to our Financial Statements contained elsewhere in this Annual Report on Form 10-K.

Results of Operations for the Fiscal Year Ended

June 30, 2024 as Compared to the Fiscal Year Ended June 30, 2023

Ended June 30,

Percent of Sales

Percent Change

Engineering Design Services

Optical Components

Finished Products and Assemblies

Total Revenues

Total revenues for the fiscal year ended June 30,

30, 2023 were $21,044,467, as compared to $15,678,248 for the same period in the prior year, an increase of $5,366,219, or 34.2%.

component revenue increased approximately $4,042,000 in fiscal year 2023 compared to fiscal year 2022, while engineering revenue increased

approximately $1,357,000, and assembly production revenues were virtually unchanged during the same period.

The increases in optical

components were largely driven by large orders from defense/aerospace customers.

Increases in the engineering revenue year over year

are primarily due to improved timing of certain programs while the pipeline for these revenue sources remains strong.

Gross profit for fiscal year ended June 30, 2023

of $7,734,136, reflected an increase of $2,805,949, or 56.9%, as compared to gross profit for fiscal year 2022 of $4,928,187, and was

benefited from a one-time sale of technology rights in the amount of $600,000 as well as overall increased revenue.

Gross profit, as

a percentage of revenues for fiscal year 2023, was 36.8% as compared to gross profit, as a percentage of revenues for fiscal year 2022,

of 31.4%, due in part to improved utilization of our engineering and manufacturing resources.

Gross profit and gross profit percentage

for any given fiscal period depend on a number of factors, including overall sales volume, facility utilization, product sales mix, the

nature and costs of engineering services, design challenges and changes, production start-up costs, customer-imposed project changes

or delays, and the effects of COVID-19 pandemic policy decisions on various economies and our suppliers and customers, as well as the

effects on production efficiencies due to the augmented policies we have incorporated into our operations as a result of the COVID-19

Research and development expenses were $809,877,

or 3.8% of revenue for fiscal year 2023 as compared to $666,479, or 4.3% of revenue for fiscal year 2022, and increase of $143,398, or

2024 were $19,104,350, as compared to $21,044,467 for the same period in the prior year, a decrease of $1,940,117, or 9.2%.

Of this decrease,

$600,000 was attributable to the sale of one-time technology rights sold in December 2022 with the remaining decrease of 6.6% attributable

to the factors discussed below.

Revenue from Engineering Design Services increased

23.7% during the year ending June 30, 2024 from the prior year ending June 30, 2023.

Revenue increases in the engineering design services

resulted from increasing demand for services and continued expansion of engineering capacity.

Engineering sales were driven by customer

design engagements that will be transitioning into the later manufacture of new Finished Products and Assemblies.

Revenue from Optical Components decreased 20.3% during

the year ending June 30, 2024 from the prior year ending June 30, 2023, due in large part to reduced industry demand, which we believe

to be temporary.

We believe the decreases in optical components were driven by lower order volumes and delayed deliveries as customers

rebalance their inventories, which had grown beyond sustainable levels due to increased ordering in response to concerns about supply

chain disruptions initially driven by the Covid 19 pandemic.

Revenue from Finished Products and Assemblies decreased

36.8% for the year ending June 30, 2024 from the prior year ending June 30, 2023.

The decreases in Finished Products and Assemblies were

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

the introduction of new customer programs, primarily single-use medical devices and new defense / aerospace opportunities.

Gross margin decreased to 30.3% during the year ended

June 30, 2024, compared to 36.8% for the year ended June 30, 2023.

Gross profit decreased to $5,797,777 during the year ended June 30,

2024, compared to $7,734,136 for the year ended June 30, 2023, primarily driven by changes in the product sales mix and underutilization

of fixed cost resources due to the decreases in revenue discussed above.

The $600,000 one-time technology rights revenue in December 2022

of the prior year had a significant impact on gross margin as it did not have any cost of sales associated with it.

Excluding that revenue

from both sales and gross profit for comparison purposes, the gross margin would have been 34.9% for the year ending June 30, 2023.

Research & Development

R&D expenses decreased $10,594 to $981,781 during

the year ended June 30, 2024, compared to $992,375 during the year ended June 30, 2023.

R&D expenses for the period primarily represent

employee-related expenses to support product improvements and the development of new technologies.

Selling, General and Administrative Expenses

were $7,740,562 for the fiscal year ended June 30, 2023, compared to $5,613,473 for the same period in the prior year, an increase of

$2,127,089, or 37.9%.

The increase in selling, general and administrative expenses in the year ended June 30, 2023 was primarily due

to increased marketing related expenses, additions to our sales and administrative teams due to the growth of the overall organization

and higher bad debt expense.

The income tax provisions in fiscal years 2023

and 2022 represent the minimum statutory state income tax liability.

SG&A expenses increased $160,020, or 2.2% to $7,540,329

during the year ended June 30, 2024, compared to $7,380,909 during the year ended June 30, 2023.

The increase in SG&A for the year

was primarily due to increased salaries and benefits, increased travel and marketing-related expenses and increased insurance expense,

partially offset by decreases in our reserve for doubtful accounts.

Liquidity and Capital Resources

We have sustained recurring net losses for several

During the years ended June 30, 2023 and 2022 we incurred operating losses of $638,548 and $1,513,890, respectively.

2023, our cash and cash equivalents were $2,925,852, accounts receivable were $3,907,407, and current liabilities were $5,259,620, including

$1,174,690 of customer advances received for future order deliveries.

In connection with our October 2021 acquisition

of Lighthouse Imaging, we entered into a $2,600,000 bank term loan, and sold shares of our common stock for gross proceeds of $1,500,000.

We also secured a $250,000 bank line of credit from the same bank in October 2021 for working capital needs, which was increased to $500,000

In June 2023 we added a second term loan in the amount of $750,000 and increased our line of credit to $1,250,000.

were no borrowings outstanding on the line of credit on June 30, 2023.

On June 20, 2023, we raised $2,288,000 net of expenses through

a private placement of 420,000 shares of our common stock.

Capital equipment expenditures and additional

patent costs during fiscal year 2023 and fiscal year 2022 were $52,497 and $152,740, respectively.

The level of future capital equipment

and patent expenditures will depend on future sales and success of on-going research and development efforts.

Contractual cash commitments for the fiscal years

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

During the year ended June 30, 2024, cash on hand

funded a net decrease in accounts payable and accrued expenses of $1,139,314 and an increase in inventory of $91,884, partially offset

by a decrease of accounts receivable of $361,916.

Capital equipment expenditures and additional patent costs during the year ended June

30, 2024, and in the same period in the prior year were $272,435 and $21,448, respectively.

The increase was primarily attributable to

the implementation of new computer-based ERP and IT systems.

We also made payments of $556,468 on our term notes and capital leases and

borrowed $1,000,000 on our revolving line of credit.

These items, in addition to the impact of the net loss, net of depreciation, amortization,

stock-based compensation and other non-cash items, resulted in a decrease of $2,520,574 in our cash and cash equivalents at June 30, 2024,

from $2,925,852 at June 30, 2023, to $405,278 at June 30, 2024.

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.

were $1,000,000 in borrowings outstanding on the line of credit on June 30, 2024, and additional availability in the amount of $250,000.

Our loan agreement contains a minimum annual debt service coverage ratio

covenant of 1.2x, for the period ending June 30, 2024.

We did not meet this annual debt service coverage ratio as of June 30, 2024.

lender has agreed to waive compliance with the debt service ratio covenant for the period ending June 30, 2024.

In addition to the waiver,

we have entered into amendments dated September 30, 2024 with our lender to both term loans which provide for a six month period of interest

only payments from September 15, 2024 through February 15, 2025.

We will begin to pay principal and interest under the Notes beginning

with the payments due on March 15, 2025, with a new amortization schedule for the remaining term for such Notes through their maturity

There were no other changes to or modifications to the Loan Agreement or the Notes.

On August 14.

2024 we entered into securities purchase

agreements with institutional and accredited investors in addition to certain directors and officers of the Company for the purchase and

sale of 265,868 shares of the Company’s common stock resulting in gross proceeds of approximately $1.4 million before deducting

placement agent commissions and other estimated offering expenses.

Net proceeds were approximately $1.2 million.

Contractual cash commitments for the fiscal

periods subsequent to June 30, 2024, 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 June 30, 2023 of approximately $1,981,592.

We have contractual cash commitments related to open

purchase orders as of June 30, 2024, of approximately $6,250,000.

Material Trends and Uncertainties

8 unchanged sentences

ABOUT MARKET RISK.

As a smaller reporting company, as defined by

Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations

and therefore are not required to provide the information requested by this Item.

As a smaller reporting company, as defined by Rule 12b-2

of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are not required to provide the information requested by this

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-K

Item 7. Management’s Discussion and Analysis