PRECISION OPTICS CORPORATION, INC. 10-Q

Item 1. Financial Statements. PRECISION OPTICS CORPORATION, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, June 30, 2024 2024 ASSETS Current Assets: Cash and cash equivalents $ 635,572 $ 405,278 Accounts receivable, net of allowance for doubtful accounts of $ 103,224 at September 30, 2024 and $ 118,872 at June 30, 2024 3,123,595 3,545,491 Inventories 3,460,621 2,868,100 Prepaid expenses 288,475 299,364 Total current assets 7,508,263 7,118,233 Fixed Assets: Machinery and equipment 3,346,694 3,341,194 Leasehold improvements 819,954 810,914 Furniture and fixtures 426,234 416,425 Total fixed assets 4,592,882 4,568,533 Less—accumulated depreciation and amortization 4,123,250 4,074,960 Net fixed assets 469,632 493,573 Operating lease right-to-use asset 146,247 189,999 Patents, net 290,309 286,559 Goodwill 8,824,210 8,824,210 Total other assets 9,260,766 9,300,768 TOTAL ASSETS $ 17,238,661 $ 16,912,574 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Revolving line of credit $ 500,000 $ 1,000,000 Current portion of capital lease obligation 38,886 41,113 Current maturities of long-term debt 285,901 276,928 Accounts payable 2,143,351 1,397,313 Contract liabilities 1,106,546 1,172,350 Accrued compensation and other 1,115,135 840,662 Operating lease liability 146,247 178,450 Total current liabilities 5,336,066 4,906,816 Capital lease obligation, net of current portion 18,384 27,369 Long-term debt, net of current maturities and debt issuance costs 1,746,764 1,899,052 Operating lease liability, net of current portion – 11,549 Total liabilities 7,101,214 6,844,786 Stockholders’ Equity: Common stock, $ 0.01 par value: 50,000,000 shares authorized; issued and outstanding – 6,350,170 shares at September 30, 2024 and 6,073,939 at June 30, 2024 63,502 60,739 Additional paid-in capital 62,575,576 61,197,433 Accumulated deficit ( 52,501,631 ) ( 51,190,384 ) Total stockholders’ equity 10,137,447 10,067,788 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 17,238,661 $ 16,912,574 The accompanying notes are an integral part of these consolidated interim financial statements. 3 PRECISION OPTICS CORPORATION, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023 (UNAUDITED) Three Months Ended September 30, 2024 2023 Revenues $ 4,197,053 $ 4,321,255 Cost of Goods Sold 3,079,723 2,857,644 Gross Profit 1,117,330 1,463,611 Research and Development Expenses 400,659 212,758 Selling, General and Administrative Expenses 1,963,612 1,656,146 Total Operating Expenses 2,364,271 1,868,904 Operating Loss ( 1,246,941 ) ( 405,293 ) Interest Expense ( 64,306 ) ( 59,122 ) Net Loss $ ( 1,311,247 ) $ ( 464,415 ) Loss Per Share: Basic & Fully Diluted $ ( 0.21 ) $ ( 0.08 ) Weighted Average Common Shares Outstanding: Basic & Fully Diluted 6,216,630 6,066,518 The accompanying notes are an integral part of these consolidated interim financial statements. 4 PRECISION OPTICS CORPORATION, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED sEPTEMBER 30, 2024 AND 2023 (UNAUDITED) Three Month Period Ended September 30, 2024 Number of Shares Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Balance, July 1, 2024 6,073,939 $ 60,739 $ 61,197,433 $ ( 51,190,384 ) $ 10,067,788 Issuance of common stock in registered direct offering 265,868 2,659 1,201,883 – 1,204,542 Proceeds from exercise of stock option 10,363 104 26,896 – 27,000 Stock-based compensation – – 149,364 – 149,364 Net loss – – – ( 1,311,247 ) ( 1,311,247 ) Balance, September 30, 2024 6,350,170 $ 63,502 $ 62,575,576 $ ( 52,501,631 ) $ 10,137,447 Three Month Period Ended September 30, 2023 Number of Shares Common Stock Additional Paid-in Capital 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 The accompanying notes are an integral part of these consolidated interim financial statements. 5 PRECISION OPTICS CORPORATION, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED September 30, 2024 AND 2023 (UNAUDITED) Three Months Ended September 30, 2024 2023 Cash Flows from Operating Activities: Net Loss $ ( 1,311,247 ) $ ( 464,415 ) Adjustments to reconcile net loss to net cash used in by operating activities - Depreciation and amortization 48,290 51,564 Stock-based compensation expense 149,364 108,746 Non-cash interest expense 4,376 4,376 Changes in operating assets and liabilities - Accounts receivable, net 421,896 ( 625,719 ) Inventories, net ( 592,521 ) ( 194,995 ) Prepaid expenses 10,889 ( 112,120 ) Accounts payable 746,038 ( 698,603 ) Contract liabilities ( 65,804 ) 250,293 Accrued compensation and other 270,097 307,884 Net cash used in operating activities ( 318,622 ) ( 1,372,989 ) Cash Flows from Investing Activities: Purchases of fixed assets ( 24,349 ) ( 30,770 ) Additional patent costs ( 3,750 ) ( 12,747 ) Net cash used in investing activities ( 28,099 ) ( 43,517 ) Cash Flows from Financing Activities: Payments of capital lease obligations ( 11,212 ) ( 10,562 ) Payments of long-term debt ( 128,315 ) ( 128,315 ) Payment of debt modification costs ( 15,000 ) – Payment on revolving line of credit ( 500,000 ) – Proceeds from registered direct sale of common stock, net 1,204,542 – Gross proceeds from the exercise of stock options 27,000 – Net cash provided by (used in) financing activities 577,015 ( 138,876 ) Net increase(decrease) in cash and cash equivalents 230,294 ( 1,555,383 ) Cash and cash equivalents, beginning of period 405,278 2,925,852 Cash and cash equivalents, end of period $ 635,572 $ 1,370,469 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 three months of the Company’s fiscal year 2025. 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, 2024, together with the Report of Independent Registered Public Accounting Firm filed under cover of the Company’s 2024 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 30, 2024. 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, 2024 and 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 1,329,236 for the three months ended September 30, 2024 and 1,123,140 for the three months ended September 30, 2023. The following is the calculation of income (loss) per share for the three months ended September 30, 2024 and 2023: Schedule of income loss per share Three Months Ended September 30, 2024 2023 Net Income (Loss) Basic and Fully Diluted $ ( 1,311,247 ) $ ( 464,415 ) Weighted Average Shares Outstanding Basic & Fully Diluted 6,216,630 6,066,518 Loss Per Share – Basic & Fully Diluted $ ( 0.21 ) ( 0.08 ) 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 the 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, 2024. 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, 2024 June 30, 2024 Raw Materials $ 1,965,096 $ 1,570,135 Work-In-Progress 153,223 157,406 Finished Goods 1,342,302 1,140,559 Total Inventories $ 3,460,621 $ 2,868,100 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. Borrowings under the Revolver at September 30, 2024 were $ 500,000 , with $ 750,000 remaining available for use. 8 The Company’s Loan Agreement with the Lender contains a minimum annual debt service coverage ratio covenant of 1.2x, for the period ending June 30, 2024. The Company did not meet this annual debt service coverage ratio as of such fiscal year end date. The Company’s Lender has agreed to waive compliance with such debt service ratio covenant for the period ending June 30, 2024. In addition to such waiver, the Lender and the Company have entered into an amendment dated September 30, 2024 to that certain Term Loan dated October 4, 2021, as amended and that certain Promissory Note dated June 2, 2023 (collectively, the “Notes”) which amendments provide for a six month period of interest only payments from October 15, 2024 through March 15, 2025 for the Notes. The Company will begin to pay principal and interest under the Notes beginning with the payments due on April 15, 2025, with a new amortization schedule for the remaining term for such Notes through their maturity date. There were no other changes to or modifications to the Loan Agreement or the Notes. Long-Term Debt Long-term debt consists of the following at September 30, 2024: Schedule of long-term debt Amount Term Loan Note payable to Main Street Bank with monthly principal payments of $ 35,173 , excluding six months in Fiscal 2025, 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 . $ 1,516,667 Permanent Working Capital Loan payable to Main Street Bank with monthly principal payments of $ 14,375 , excluding six months in Fiscal 2025, 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 . 562,500 Less current maturities ( 285,901 ) Less debt issuance and modification costs, net of accumulated amortization of $ 18,736 ( 46,502 ) Long-term debt, net of current maturities and debt issuance costs $ 1,746,764 At September 30, 2024 principal payments due on the Term Loan Note payable are as follows: Schedule of principal payments due on term loan note payable Fiscal Year Ending June 30: 2025 $ 148,644 2026 594,578 2027 594,578 2028 594,578 2029 146,789 Total long-term debt $ 2,079,167 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 September 30, 2024 is $ 51,776 . On July 1, 2019, the Company entered into a three-year operating lease for its facility in El Paso, Texas, and in February 2022 extended the lease through June 2025. Remaining minimum lease payments at September 30, 2024 total $ 34,060 . Total rent expense including base rent and common area expenses was $ 16,340 and $ 15,973 during the three months ended September 30, 2024 and 2023, 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, 2024 total $ 112,187 . Total rent expense including base rent and common area expenses was $ 34,432 during both the three months ended September 30, 2024 and 2023. Included in the accompanying balance sheet at September 30, 2024 is a right-of-use asset of $ 146,247 and current right-of-use operating lease liabilities of $ 146,247 . At September 30, 2024 future minimum lease payments under the capital lease and operating lease obligations are as follows: Schedule of future minimum lease payments under capital lease and operating lease obligations Fiscal Year Ending June 30: Capital Leases Operating Lease 2025 $ 31,764 $ 137,950 2026 28,004 11,478 Total Minimum Payments 59,768 149,428 Less: amount representing interest 2,498 3,181 Present value of minimum lease payments 57,270 146,247 Less: current portion 38,886 146,247 Lease Obligation, net of current portion $ 18,384 $ – The Company’s four facilities in Gardner, Massachusetts which are used for offices, production and storage spaces are leased primarily on a tenant-at-will basis. Rent expense on these operating leases was $ 51,797 and $ 48,799 for the three months ended September 30, 2024 and 2023, respectively. 5. STOCK-BASED COMPENSATION Stock Options The following table summarizes stock-based compensation expense for the three months ended September 30, 2024 and 2023. 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, 2024 2023 Cost of Goods Sold $ 39,226 $ 22,625 Selling, General and Administrative 110,138 86,121 Stock Based Compensation Expense $ 149,364 $ 108,746 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 September 30, 2024: Schedule of stock option activity Options Outstanding Number of Shares Weighted Average Exercise Price Weighted Average Contractual Life Outstanding at June 30, 2024 1,357,735 $ 4.72 6.60 years Exercised ( 10,999 ) 2.81 – Cancelled, forfeited, or expired ( 17,500 ) 4.62 Outstanding at September 30, 2024 1,329,236 $ 4.72 6.35 years The aggregate intrinsic value of the Company’s in-the-money outstanding and exercisable options as of September 30, 2024 were $ 1,533,439 and $ 1,511,239 , 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, the Company satisfies the performance obligations. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses 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 months ended September 30, 2024 and 2023: Schedule of disaggregation of revenues Three Months Ended September 30, 2024 2023 Engineering Design Services $ 1,851,371 $ 1,900,999 Optical Components 2,080,188 1,903,311 Medical Device Products and Assemblies 265,494 516,945 Total Revenues $ 4,197,053 $ 4,321,255 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. 11 Revenue recognition policies for each of the four product and service types appear below. Engineering Design Services The Company enters into contractual agreements with its 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 the Company has 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 its customers and requires purchase orders for all purchased optical components, finished devices and assemblies. Revenue is recognized at the time title passes to the Company’s customers based on its review of the customer contract, generally at the time of shipment from its facilities. Occasionally the Company may enter into “bill and hold” contractual arrangements where title is held by its 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 September 30, 2024, 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 are recorded in the Company’s Consolidated Balance Sheets, and unearned revenue are comprised of the following: Schedule of contract liabilities Three Months Ended September 30, 2024 2023 Contract liabilities, beginning of period $ 1,172,350 $ 1,174,690 Unearned revenue received from customers 471,617 433,119 Revenue recognized ( 537,421 ) ( 182,826 ) Contract liabilities, end of period $ 1,106,546 $ 1,424,983 12