What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-09-29 compared with 2024-09-30 · 121 added, 102 removed, 43 unchanged (84% of the section changed)

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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.

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

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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.

We are subject to credit risk primarily

in our trade accounts receivable.

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,

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A 1% increase in the accounts receivable reserve would increase our costs by approximately $44,000.

We recognized bad debt expense

We recognized bad debt expenses

of $38,000 and $202,000 for the years ending June 30, 2025, and June 30, 2024, 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.

Reserve for Excess and Obsolete

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 value.

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

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.

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 $39,000.

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

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Engineering Design Services

Optical Components

Finished Products and Assemblies

Systems Manufacturing

MicroOptics Lab

Ross Optical Industries

Total Revenues

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30, 2025 were $19,091,269, as compared to $19,104,350 for the same period in the prior year, a decrease of $13,081, or 0.1%.

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

Revenue from Engineering Design Services decreased

42.0% during the year ending June 30, 2025 from the prior year ending June 30, 2024.

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

Revenue decreases in the engineering category resulted

from decreased demand for services, primarily from the transfer of our single-use cystoscope program from development (Engineering Design

Services) to production (Systems Manufacturing), and increases in internal research and development.

Engineering revenue in the year was

reduced due to unplanned increases in non-billable sustaining engineering activity to support manufacturing scale up along with delayed

revenue opportunities within the product development pipeline.

Revenue from Systems Manufacturing increased 122.2%

during the year ending June 30, 2025 from the prior year ending June 30, 2024.

Revenue increases in this category resulted from increased

demand for manufacturing services as design services engagements concluded and progressed to manufacturing.

Revenue from the MicroOptics Lab decreased 21.5%

during the year ending June 30, 2025 from the prior year ending June 30, 2024, primarily due to reorder timing.

Revenue from Ross Optical Industries decreased

9.8% for the year ending June 30, 2025 from the prior year ending June 30, 2024.

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.

We believe the decrease continues to be attributable

to a general, industry-wide slowdown, coupled with uncertainty driven by evolving tariff costs, which has led customers to postpone deliveries.

Gross margin decreased to 17.8% during the year

ended June 30, 2025, compared to 30.3% for the year ended June 30, 2024.

Gross profit decreased to $3,404,433 during the year ended June

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.

30, 2025, compared to $5,797,777 for the year ended June 30, 2024, primarily driven by yield issues associated with new manufacturing

lines, lower utilization of billable engineering resources, and the decreases in revenue discussed above.

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

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

R&D expenses increased $176,182 to $1,157,963

during the year ended June 30, 2025, compared to $981,781 during the year ended June 30, 2024.

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.

R&D expenses for the period primarily

represent employee-related expenses to support product improvements, the development of new technologies and standardized approaches to

address the opportunities for an evolving single-use medical device environment.

Selling, General and Administrative Expenses

SG&A expenses increased $257,432, or 3.4%

to $7,797,761 during the year ended June 30, 2025, compared to $7,540,329 during the year ended June 30, 2024.

The increase in SG&A

for the year was primarily due to increased personnel costs, most related to stock-based compensation and recruiting expense.

Liquidity and Capital Resources

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

Based on our current plans and business conditions,

management believes that the Company’s available cash and cash equivalents, the cash generated from operations, availability on

our line of credit, and our ability to raise funds in the capital markets will be sufficient to provide for the Company’s working

capital and capital expenditure requirements for at least 12 months from the date of this filing.

However, our cash on hand and cash generated

solely from operations may be insufficient to meet working capital needs for such period and we may be required to raise external financing

in the short-term.

Net Cash Used in Operating Activities

During the year ended June 30, 2025, net cash

used in operating activities totaled $3,547,400 as compared to $2,683,012 during the year ended June 30, 2024.

The increase in net cash

used in operating activities was primarily due to the increase in net loss, accounts receivable and inventory during the year ended June

30, 2025, partially offset by the increase in accounts payable and customer advances during such period.

Net Cash Used in Investing Activities

During the year ended June 30, 2025, net cash

used in investing activities was $233,473, consisting of purchases of property and equipment net of adjustments in patent costs.

the year ended June 30, 2024, net cash used in investing activities was $293,883, consisting of purchases of property and equipment and

patent costs.

Net Cash Provided by Financing Activities

During the year ended June 30, 2025, we made payments

of $321,554 on term notes and capital leases and repaid $1,000,000 on our revolving line of credit.

We raised a net of $6,270,136 from

two registered direct offerings made in August 2024 and February 2025 pursuant to our shelf registration statement.

During the year ended

June 30, 2024, we made payments of $556,468 on term notes and capital leases offset by borrowings on the line of credit of $1,000,000.

On October 4, 2021, the Company entered into a

Loan Agreement with Main Street Bank of Marlborough, Massachusetts (the “Lender”), 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

There were no borrowings under the Revolver at June 30, 2025.

The Company’s Loan Agreement with the Lender

contains a minimum annual debt service coverage ratio covenant of 1.2x.

As the Company did not meet this annual debt service coverage

ratio for the fiscal year ended June 30, 2024, the Company’s Lender had 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 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 commenced payments of 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.

On February 14, 2025, the

lender agreed to waive compliance with the annual debt service coverage ratio covenant for the fiscal year ending June 30, 2025, subject

to a $30,000 waiver fee and the completion of an equity raise of at least $4,500,000 by February 24, 2025, which the Company satisfied

on February 21, 2025.

Any future advances are contingent on the Company achieving a minimum Debt Service Coverage ratio of 1.20x based

on quarterly testing which the company was not in compliance with as of June 30, 2025.

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

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.

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periods subsequent to June 30, 2025, are summarized as follows:

Fiscal Year 2026

Capital lease for equipment, including interest

Minimum operating lease payments

We have contractual cash commitments related to open

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

Material Trends and Uncertainties

We currently have no material trends or uncertainties

that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition,

revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

We have contractual cash commitments related to

open purchase orders as of June 30, 2025, of approximately $6,260,000.

Off-Balance Sheet Arrangements

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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 not required to provide the information requested by this

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 Item.

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