Item 7. Management’s Discussion and Analysis
ITEM 7. 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
of our expectations regarding future trends affecting our business. The following discussion sets forth certain factors we believe could
cause actual results to differ materially from those contemplated by the forward-looking statements.
Critical Accounting Policies and Estimates
Allowance for Credit Losses
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,
our customers may be adversely impacted by economic factors beyond our understanding and control, and which are difficult to foresee or
estimate. A 1% increase in the accounts receivable reserve would increase our costs by approximately $55,000. We recognized bad debt expenses
of $38,000 for the years ending June 30, 2026, and June 30, 2025.
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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 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
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 $42,000.
Other significant accounting policies are included in the
Notes to our Financial Statements contained elsewhere in this Annual Report on Form 10-K.
IEEPA Tariff Refund Claims and Related Customer Refunds
In February 2026, the Supreme Court of the United States
determined that certain tariffs imposed pursuant to the International Emergency Economic Powers Act (“IEEPA”) were not authorized
by law. Subsequent rulings by the U.S. Court of International Trade have directed the U.S. Customs and Border Protection to establish
processes to effect refunds of certain tariffs previously collected. Based on these judicial determinations, we concluded that the company
has been legally released from the obligation underlying the invalidated tariffs in accordance with the legal release model within the
scope of Accounting Standards Codification 405, Liabilities, and that we have a present right to repayment of amounts previously paid.
Accordingly, during the year ended
June 30, 2026, the Company recorded a receivable of $880,598 within accounts receivable in the balance sheet, representing recovery of
IEEPA tariffs previously paid, with a corresponding offset to cost of goods sold. In addition, the Company recorded a $558,266 liability
within accrued compensation and other in the balance sheet as a result of its decision to refund IEEPA tariff surcharges collected from
customers, with a corresponding reduction of revenue in the statement of operations. In the year ended June 30, 2026, we received $37,576
in IEEPA tariff refund proceeds, resulting in outstanding IEEPA tariff refund claims receivable of $843,022 within accounts receivable
in the balance sheet, representing a recovery of IEEPA tariffs previously paid.
Results of Operations for the Fiscal Year Ended
June 30, 2026 as Compared to the Fiscal Year Ended June 30, 2025
Revenue
Year
Ended June 30,
2026
Percent of Sales
2025
Percent of Sales
Increase
(Decrease)
Percent Change
Engineering Design Services
3,473,640
11.0
4,938,158
25.9
(1,464,518 )
(29.7 )
Systems Manufacturing
22,628,047
71.8
8,290,225
43.4
14,337,822
172.9
MicroOptics Lab
519,540
1.6
2,135,562
11.2
(1,616,022 )
(75.7 )
Ross Optical Industries
4,910,538
15.6
3,727,324
19.5
1,183,214
31.7
Total Revenues
31,531,765
100.0
19,091,269
100.0
12,440,496
65.2
19
Total revenues for the fiscal year ended June
30, 2026 were $31,531,765, as compared to $19,091,269 for the same period in the prior year, an increase of $12,440,496, or 65.2%.
Revenue from Engineering Design Services decreased
29.7% during the year ending June 30, 2026 from the prior year ending June 30, 2025. 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). Engineering revenue in the year was reduced due to increases in non-billable sustaining
engineering activity to support manufacturing scale up along with insufficient product development engagements.
Revenue from Systems Manufacturing increased 172.9%
during the year ending June 30, 2026 from the prior year ending June 30, 2025. Revenue increases in this category resulted from significant
increases in customer demand and the resultant scaling of manufacturing capabilities.
Revenue from the MicroOptics Lab decreased 75.7%
during the year ending June 30, 2026 from the prior year ending June 30, 2025, primarily due to delays in receiving new production orders
from a defense contractor, which is the primary customer for this line of business.
Revenue from Ross Optical Industries increased
31.7% for the year ending June 30, 2026 from the prior year ending June 30, 2025. We believe a portion of the increase is attributable
to the inability of our customers to continue to postpone deliveries that had previously been delayed due to the uncertainty of new tariffs
and the passthrough of these tariff costs which increased revenue.
Gross Profit
Gross margin decreased to 17.2% during the year
ended June 30, 2026, compared to 17.8% for the year ended June 30, 2025. Gross profit increased to $5,431,220 during the year ended June
30, 2026, compared to $3,404,433 for the year ended June 30, 2025, primarily driven by increased volume in Systems Manufacturing.
Research & Development
R&D expenses decreased $124,807 to $1,033,156
during the year ended June 30, 2026, compared to $1,157,963 during the year ended June 30, 2025. 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 $108,911, or 1.4%
to $7,906,672 during the year ended June 30, 2026, compared to $7,797,761 during the year ended June 30, 2025. The decrease in SG&A
for the year was primarily due to decreased stock-based compensation and recruiting expenses, partially offset by consulting and bonus
expense.
Liquidity and Capital Resources
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.
20
Net Cash Used in Operating Activities
During the year ended June 30, 2026, net cash
used in operating activities totaled $1,550,219 as compared to $3,395,702 during the year ended June 30, 2025. The decrease in net cash
used in operating activities was primarily due to the decrease in net loss, inventory and accrued expense during the year ended June 30,
2026, partially offset by the increase in accounts payable and accounts receivable during such period.
Net Cash Used in Investing Activities
During the year ended June 30, 2026, net cash
used in investing activities was $429,350, consisting of purchases of property and equipment and additional patent costs. 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.
Net Cash Provided by Financing Activities
During the year ended June 30, 2026, we made payments
of $623,701 on term notes and capital leases. We raised a net of $10,630,678 from a public offering of common stock made in March 2026
pursuant to our shelf registration statement. 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.
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
upon demand. There were no borrowings under the Revolver at June 30, 2026.
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 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 provided 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, 2026. On September 25, 2026, the lender agreed to waive
the Company’s minimum annual debt service coverage ratio covenant for the fiscal year ended June 30, 2026 and modified the Company’s
credit arrangements to eliminate the debt service coverage ratio covenant and replace it with a minimum liquidity covenant of $2.0 million,
retain the existing term note, and provide the Company access to $750,000 of availability under its revolving line of credit, subject
to borrowing-base requirements and a $5,000 waiver fee. The lender further agreed to expand availability under the revolving line of credit
to $1,250,000 upon attaining a DSCR of 1.2x. There were no other changes to or modifications to the Loan Agreement or the Notes.
Contractual cash commitments for the fiscal
periods subsequent to June 30, 2026, are summarized as follows:
Fiscal Year 2027
Thereafter
Total
Minimum operating lease payments
$ 555,198
$ 3,088,613
$ 3,643,811
We have contractual cash commitments related to
open purchase orders as of June 30, 2026, of approximately $5,050,000.
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Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
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 Item.