[PART I FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This section covers the company's financial statements, management's discussion, market risk, and internal controls [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) The company's financial statements for the period ended December 31, 2022, show significant revenue growth, a shift to net income, and an increase in total assets [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) The consolidated balance sheets show an increase in total assets and stockholders' equity, while total liabilities slightly decreased Consolidated Balance Sheet Highlights (Unaudited) | Account | Dec 31, 2022 | June 30, 2022 | Change | | :--- | :--- | :--- | :--- | | **Total Assets** | **$17,469,241** | **$16,704,020** | **+4.6%** | | Total Current Assets | $7,473,992 | $6,563,007 | +13.9% | | Goodwill | $8,824,210 | $8,824,210 | 0.0% | | **Total Liabilities** | **$7,617,061** | **$7,732,525** | **-1.5%** | | Total Current Liabilities | $5,477,991 | $4,586,641 | +19.4% | | **Total Stockholders' Equity** | **$9,852,180** | **$8,971,495** | **+9.8%** | - The increase in total assets was primarily driven by a significant rise in accounts receivable, which grew from **$2,660,000 to $4,030,000**[12](index=12&type=chunk) - The increase in current liabilities is mainly due to a rise in the current portion of acquisition earn out liabilities, from **$166,667 to $889,525**[12](index=12&type=chunk) [Consolidated Statements of Operations](index=6&type=section&id=Consolidated%20Statements%20of%20Operations) The consolidated statements of operations reflect substantial revenue growth and a transition from net loss to net income for both the three and six-month periods Statement of Operations Summary (Unaudited) | Metric | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Revenues | $5,886,961 | $3,897,041 | +51.1% | | Gross Profit | $2,725,224 | $1,119,582 | +143.4% | | Operating Income (Loss) | $696,817 | $(460,350) | N/A | | Net Income (Loss) | $634,420 | $(507,013) | N/A | | Diluted EPS | $0.11 | $(0.09) | N/A | | **Metric** | **Six Months Ended Dec 31, 2022** | **Six Months Ended Dec 31, 2021** | **YoY Change** | | Revenues | $10,972,262 | $6,233,385 | +76.0% | | Gross Profit | $4,449,878 | $1,758,614 | +153.0% | | Operating Income (Loss) | $680,228 | $(1,032,302) | N/A | | Net Income (Loss) | $560,909 | $(1,083,814) | N/A | | Diluted EPS | $0.09 | $(0.22) | N/A | [Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) The consolidated statements of stockholders' equity show an increase primarily driven by net income and stock-based compensation - For the six months ended December 31, 2022, total stockholders' equity increased from **$8,971,495 to $9,852,180**[18](index=18&type=chunk) - The increase in stockholders' equity was primarily driven by a net income of **$634,420** in the second quarter and stock-based compensation of **$319,776** for the six-month period[18](index=18&type=chunk)[20](index=20&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) The consolidated statements of cash flows indicate a net decrease in cash, primarily due to reduced financing activities compared to the prior year Cash Flow Summary for the Six Months Ended December 31 (Unaudited) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash Provided By (Used In) Operating Activities | $17,110 | $(715,163) | | Net Cash Used In Investing Activities | $(37,637) | $(293,155) | | Net Cash (Used In) Provided By Financing Activities | $(203,904) | $1,409,866 | | **Net (Decrease) Increase in Cash** | **$(224,431)** | **$401,548** | | **Cash and Cash Equivalents, End of Period** | **$381,318** | **$1,263,198** | - The significant decrease in cash from financing activities in 2022 was due to the absence of proceeds from private placements, which amounted to **$1.5 million** in the prior year period[20](index=20&type=chunk) [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide crucial context on the company's accounting policies, significant transactions like the reverse stock split, and the impact of the Lighthouse Imaging acquisition on financial comparisons - The company effected a **1-for-3 reverse stock split** on November 1, 2022, with all prior year share and per-share amounts restated to reflect this split[24](index=24&type=chunk)[25](index=25&type=chunk)[26](index=26&type=chunk) - The acquisition of Lighthouse Imaging, LLC on October 4, 2021, significantly impacts year-over-year financial comparisons, with pro forma revenue for the six months ended Dec 31, 2021, estimated at **$7,677,722** if the acquisition occurred on July 1, 2021[33](index=33&type=chunk)[36](index=36&type=chunk) Revenue by Type (Six Months Ended Dec 31) | Revenue Type | 2022 | 2021 | | :--- | :--- | :--- | | Engineering Design Services | $3,344,578 | $2,127,253 | | Optical Components | $5,232,821 | $2,945,332 | | Medical Device Products and Assemblies | $1,794,863 | $1,160,800 | | Technology Rights | $600,000 | $0 | | **Total Revenues** | **$10,972,262** | **$6,233,385** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management's discussion highlights significant revenue growth driven by the Lighthouse acquisition and a one-time technology rights sale, alongside improved gross margins and increased operating expenses [Overview](index=16&type=section&id=Overview) The overview describes the company's core business in advanced optical instruments and its diversified operations through its Ross Optical and Lighthouse Imaging divisions - The company develops and manufactures advanced optical instruments, including endoscopes and custom imaging products for minimally invasive surgery[54](index=54&type=chunk) - Business operations are diversified through its divisions: Ross Optical Industries (custom optical components for defense and medical) and Lighthouse Imaging (advanced optical imaging systems with expertise in 'chip on tip' visualization)[55](index=55&type=chunk)[56](index=56&type=chunk) - For the six months ended Dec 31, 2022, revenue was generated from engineering services (**31%**), optical components (**48%**), and optical assemblies (**16%**)[57](index=57&type=chunk) [Results of Operations](index=17&type=section&id=Results%20of%20Operations) Results of operations detail the drivers behind the substantial revenue and gross profit increases, alongside the rise in selling, general, and administrative expenses Revenue and Gross Profit Analysis | Period | Revenue | YoY Revenue Growth | Gross Profit | YoY Gross Profit Growth | Gross Margin | | :--- | :--- | :--- | :--- | :--- | :--- | | **Q2 FY23** | $5,886,961 | 51.1% | $2,725,224 | 143% | 46.3% | | **H1 FY23** | $10,972,262 | 76.0% | $4,449,878 | 153% | 40.6% | - The **51.1%** revenue increase in Q2 FY23 was driven by higher component sales to a large defense contractor and a **$600,000** one-time sale of technology rights[66](index=66&type=chunk) - The increase in gross profit and margin was due to the inclusion of the Lighthouse division, higher revenues, greater production utilization, and the recognition of high-margin technology rights revenue[71](index=71&type=chunk) - Selling, general and administrative (SG&A) expenses increased by **38.1%** for the six-month period, primarily due to the Lighthouse acquisition, increased headcount, incentive bonuses, and sales commissions[73](index=73&type=chunk) [Liquidity and Capital Resources](index=19&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity position is characterized by limited cash and significant current liabilities, with management focused on achieving profitability through revenue growth and expense control - As of December 31, 2022, the company had cash of **$381,318** and current liabilities of **$5,477,991**, despite achieving net income in the current period, it has a history of recurring net losses[74](index=74&type=chunk) - The company funds its working capital through product sales, stock offerings, debt, and customer advances, having secured a **$2.6 million** term loan and a **$500,000** line of credit for the Lighthouse acquisition[76](index=76&type=chunk)[77](index=77&type=chunk) - Management believes profitable results can be achieved through a combination of higher revenue, realized gross profits, and controlled operating expenses[75](index=75&type=chunk) - As of December 31, 2022, the company has contractual cash commitments of approximately **$3.55 million** related to open purchase orders[79](index=79&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=20&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Precision Optics Corporation is not required to provide the information requested by this item - The company has elected scaled disclosure reporting obligations available to smaller reporting companies and is therefore not required to provide quantitative and qualitative disclosures about market risk[81](index=81&type=chunk) [Controls and Procedures](index=20&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of December 31, 2022, with no material changes to internal controls, alongside a CFO transition in January 2023 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[82](index=82&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[83](index=83&type=chunk) - The company hired E. Kevin Dahill as its Interim Chief Financial Officer, beginning January 7, 2023, replacing Daniel Habhegger[84](index=84&type=chunk) [PART II OTHER INFORMATION](index=21&type=section&id=PART%20II%20OTHER%20INFORMATION) This section addresses legal proceedings, risk factors, equity sales, and other miscellaneous disclosures and exhibits [Legal Proceedings](index=21&type=section&id=Item%201.%20Legal%20Proceedings) The company is not aware of any pending or threatened litigation that could have a material impact on its operations or finances - The company may occasionally be involved in legal matters in the ordinary course of business, but management currently believes such matters are insignificant[87](index=87&type=chunk) [Risk Factors](index=21&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended June 30, 2022 - No material changes to risk factors have occurred since the company's last annual report filed on September 27, 2022[88](index=88&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=21&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities during the period - None[89](index=89&type=chunk) [Defaults Upon Senior Securities](index=21&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) Not applicable - Not applicable[89](index=89&type=chunk) [Mine Safety Disclosures](index=21&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Not applicable - Not applicable[90](index=90&type=chunk) [Other Information](index=21&type=section&id=Item%205.%20Other%20Information) Not applicable - Not applicable[91](index=91&type=chunk) [Exhibits](index=22&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with or incorporated by reference into this Quarterly Report on Form 10-Q, including articles of organization, bylaws, material contracts, and officer certifications - The report lists numerous exhibits, including asset purchase agreements, equity incentive plans, loan agreements, and certifications required by the Sarbanes-Oxley Act[93](index=93&type=chunk)[94](index=94&type=chunk)[97](index=97&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-10647 PRECISION OPTICS CORPORATION, INC. (Exact name of registrant as specified in its charter) (State or other juri ...

Precision Optics Corporation, Inc. (PEYE) Q4 2022 Earnings Conference Call September 27, 2022 5:00 PM ET Company Participants Robert Blum - Lytham Partners, LLC, IR Dr. Joe Forkey - Chief Executive Officer Dan Habhegger - Chief Financial Officer Conference Call Participants Operator Good day. And welcome to the Precision Optics Reports Fourth Quarter Fiscal Year 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there w ...

Part I [Business](index=4&type=section&id=Item%201.%20Business) The company develops advanced optical instruments, driving growth through diversified revenue streams and strategic acquisitions - The company operates as a developer and manufacturer of advanced optical instruments, including endoscopes and custom imaging products for minimally invasive surgery[13](index=13&type=chunk) - Acquired Lighthouse Imaging, LLC on October 4, 2021, to expand expertise in electrical engineering and end-to-end medical visualization devices, particularly **chip-on-tip systems**[16](index=16&type=chunk) - The company's core technologies include **Microprecision™ lenses**, which enable the manufacturing of micro medical cameras (1mm or less), and **3D endoscopes** for enhanced surgical perception[23](index=23&type=chunk)[26](index=26&type=chunk) - The company has a diversified customer base with **over 377 customers** in fiscal year 2022, and **no single customer accounted for 10% or more of total revenues** in fiscal years 2022 or 2021[43](index=43&type=chunk) FY 2022 Revenue Breakdown | Revenue Source | Percentage of Business | | :--- | :--- | | Engineering Services | 34% | | Sale of Optical Components | 41% | | Manufacture of Optical Assemblies | 25% | Research and Development Expenses | Fiscal Year | R&D Expense | | :--- | :--- | | 2022 | $666,479 | | 2021 | $624,253 | [Risk Factors](index=10&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from operating losses, supply chain dependencies, acquisition integration, and its "penny stock" status - The COVID-19 pandemic poses risks of disruption to supply chains, customer orders, and operational efficiencies[57](index=57&type=chunk) - The company depends on a limited number of suppliers for key materials, such as **precision-grade optical glass** and **specialized CMOS sensors**, which could impact operations if procurement is disrupted[54](index=54&type=chunk)[73](index=73&type=chunk) - The business is highly dependent on the talents of its CEO, **Dr. Joseph N. Forkey**, and the President of the Ross Optical division, **Mr. Divaker Mangadu**[61](index=61&type=chunk) - The company's common stock is quoted on the OTCQB market under the symbol PEYE and is subject to the SEC's **"penny stock" rules**, which may limit liquidity and affect the stock price[84](index=84&type=chunk)[85](index=85&type=chunk) History of Operating Losses | Fiscal Year Ended June 30 | Operating Loss | | :--- | :--- | | 2022 | $1,513,890 | | 2021 | $905,583 | [Properties](index=16&type=section&id=Item%202.%20Properties) The company operates from three leased facilities in Massachusetts, Texas, and Maine, which are deemed adequate for current needs - The company operates from three primary locations: Gardner, MA; El Paso, TX; and Windham, ME, with all facilities being leased[88](index=88&type=chunk) [Legal Proceedings](index=16&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently involved in any material pending or threatened litigation - As of the report date, there are **no material pending or threatened legal proceedings** against the company[90](index=90&type=chunk) [Mine Safety Disclosures](index=16&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is not applicable to the company's operations - Not applicable[91](index=91&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=17&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on the OTCQB, with earnings retained for growth and equity compensation plans in place - The company's common stock is traded on the **OTCQB market** with the ticker symbol **PEYE**[94](index=94&type=chunk) - **No dividends were declared** in the last two fiscal years, and the company plans to retain future earnings for business growth[96](index=96&type=chunk) Equity Compensation Plan Information (as of June 30, 2022) | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 44,698 | $0.77 | – | | Equity compensation plans not approved by security holders | 2,669,302 | $1.34 | 1,206,403 | | **Total** | **2,714,000** | **$1.33** | **1,206,403** | [Selected Financial Data](index=18&type=section&id=Item%206.%20Selected%20Financial%20Data) This item has been reserved and no information is provided - This item is marked as **[RESERVED]**[106](index=106&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=19&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) FY2022 revenue grew 46.9% due to the Lighthouse acquisition, but higher operating expenses led to an increased operating loss - The operating loss for FY2022 was **$1,513,890**, an increase from the **$905,583 loss** in FY2021[128](index=128&type=chunk) - The cash portion of the Lighthouse acquisition was financed via a **$2.6 million bank term loan** and the sale of common stock for **$1.5 million** in gross proceeds[131](index=131&type=chunk) FY 2022 vs. FY 2021 Performance | Metric | FY 2022 | FY 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $15,678,248 | $10,674,907 | +$5,003,341 | +46.9% | | Gross Profit | $4,928,187 | $3,433,585 | +$1,494,602 | +43.5% | | Gross Margin | 31.4% | 32.2% | -0.8% | N/A | FY 2022 vs. FY 2021 Operating Expenses | Expense Category | FY 2022 | FY 2021 | % Change | | :--- | :--- | :--- | :--- | | Research & Development | $666,479 | $624,253 | +6.8% | | Selling, General & Administrative | $5,613,473 | $3,714,915 | +51.1% | [Quantitative and Qualitative Disclosures About Market Risk](index=22&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exempt from this disclosure requirement as a smaller reporting company - The company is **exempt from this disclosure requirement** as a smaller reporting company[136](index=136&type=chunk) [Financial Statements and Supplementary Data](index=23&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents audited financial statements, with the Lighthouse acquisition significantly impacting the balance sheet and P&L [Report of Independent Registered Public Accounting Firm](index=24&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) The auditor's report identifies Revenue Recognition and Goodwill Impairment as Critical Audit Matters (CAMs) - The auditor identified **Revenue Recognition** as a Critical Audit Matter due to the significant interpretation required for contracts with unique terms, variable consideration, and multiple performance obligations[145](index=145&type=chunk) - The **Goodwill Impairment Assessment** for the Lighthouse Imaging Division was identified as a Critical Audit Matter because of the high degree of judgment in estimating the reporting unit's fair value[147](index=147&type=chunk)[148](index=148&type=chunk) [Consolidated Financial Statements](index=26&type=section&id=Consolidated%20Financial%20Statements) Financials show significant asset and liability growth due to the Lighthouse acquisition, alongside a wider net loss in FY2022 Consolidated Balance Sheet Data (at June 30) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Total Current Assets | $6,505,216 | $4,776,435 | | Goodwill | $8,824,210 | $687,664 | | **Total Assets** | **$16,704,020** | **$6,261,300** | | Total Current Liabilities | $4,586,641 | $2,511,110 | | Long-term Debt | $1,961,141 | $– | | **Total Liabilities** | **$7,732,525** | **$2,830,173** | | **Total Stockholders' Equity** | **$8,971,495** | **$3,431,127** | Consolidated Statement of Operations Data (for year ended June 30) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Revenues | $15,678,248 | $10,674,907 | | Gross Profit | $4,928,187 | $3,433,585 | | Operating Loss | ($1,513,890) | ($905,583) | | **Net Loss** | **($928,416)** | **($102,835)** | | Loss Per Share | ($0.06) | ($0.01) | Consolidated Statement of Cash Flows Data (for year ended June 30) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($933,371) | $46,550 | | Net cash used in investing activities | ($407,802) | ($122,397) | | Net cash provided by (used in) financing activities | $1,085,272 | ($197,200) | | **Net decrease in cash** | **($255,901)** | **($273,047)** | [Notes to Consolidated Financial Statements](index=30&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail the Lighthouse acquisition terms, financing, and the company's significant net operating loss carryforwards - On October 4, 2021, the company acquired Lighthouse Imaging for a total purchase price of **$8,165,670**, which included cash, stock, and contingent consideration, resulting in **$8,136,546 of goodwill**[186](index=186&type=chunk)[188](index=188&type=chunk) - The company secured a **$2.6 million term loan** and a **$500,000 revolving line of credit** to finance the Lighthouse acquisition and for working capital[196](index=196&type=chunk)[197](index=197&type=chunk) - As of June 30, 2022, the company had federal and state **net operating loss carryforwards** of approximately **$11.0 million** and **$4.8 million**, respectively[221](index=221&type=chunk) Revenue by Product and Service Type | Revenue Type | 2022 | 2021 | | :--- | :--- | :--- | | Engineering Design Services | $5,371,483 | $2,770,481 | | Optical Components | $6,481,896 | $5,751,212 | | Medical Device Products and Assemblies | $3,824,869 | $2,153,214 | | **Total Revenues** | **$15,678,248** | **$10,674,907** | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=42&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) No changes in or disagreements with the company's accountants were reported - None reported[224](index=224&type=chunk) [Controls and Procedures](index=42&type=section&id=Item%209A.%20Controls%20and%20Procedures) A material weakness in inventory control at the Lighthouse division rendered disclosure controls ineffective as of June 30, 2022 - Management concluded that **disclosure controls and procedures were not effective** as of June 30, 2022[225](index=225&type=chunk) - A **material weakness** was identified related to the failure to perform procedures to verify inventory quantities at the Lighthouse division prior to the audit[230](index=230&type=chunk) - Remediation efforts include performing a **total physical inventory count** at the Lighthouse division and improving its perpetual inventory systems[231](index=231&type=chunk) [Other Information](index=43&type=section&id=Item%209B.%20Other%20Information) No other information was reported in this section - None[235](index=235&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=44&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) The company details its board composition, executive officers, and the recent establishment of Audit and Compensation Committees - The Board of Directors consists of five members: Peter V. Anania, Dr. Joseph N. Forkey, Andrew J. Miclot, Dr. Richard B. Miles, and **Peter H. Woodward (Chairman)**[238](index=238&type=chunk) - The executive officers are **Dr. Joseph N. Forkey (CEO, President, Treasurer)** and **Daniel S. Habhegger (CFO, Secretary)**[245](index=245&type=chunk) - The **Audit Committee** was established in July 2022, with Mr. Woodward qualifying as the audit committee financial expert[259](index=259&type=chunk)[261](index=261&type=chunk) - The **Compensation Committee** was established in May 2022, with members Miclot (Chair) and Woodward[262](index=262&type=chunk) [Executive Compensation](index=49&type=section&id=Item%2011.%20Executive%20Compensation) This section outlines compensation for named executives and directors, including salaries, bonuses, and equity awards - CEO Dr. Joseph Forkey has a compensation agreement with a base salary of **$250,000 per year**[269](index=269&type=chunk) Summary Executive Compensation Table (FY 2022) | Name and Principal Position | Salary ($) | Bonus ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Dr. Joseph N. Forkey, CEO | 250,000 | 0 | 0 | 250,000 | | Daniel S. Habhegger, CFO | 193,630 | 20,000 | 0 | 213,630 | | Jeffrey L. DiRubio, SVP Sales & Marketing | 168,002 | 29,316 | 31,818 | 229,136 | Director Compensation (FY 2022) | Name | Fees earned or paid in cash ($) | Option awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | Andrew J. Miclot | 5,000 | 32,740 | 37,740 | | Dr. Richard B. Miles | 5,000 | 32,740 | 37,740 | | Peter V. Anania | 3,750 | 32,740 | 36,490 | | Peter H. Woodward (Chairman) | 40,000 | 49,103 | 89,103 | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=52&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Details significant stockholders owning over 5% and reports that management collectively owns 17.2% of common stock - All directors and executive officers as a group beneficially owned 3,116,761 shares, representing **17.2% of the company's common stock**[292](index=292&type=chunk) Stockholders with Over 5% Ownership (as of Sept 20, 2022) | Name of Beneficial Owner | Percent of Shares Beneficially Owned | | :--- | :--- | | Sandra F., Norman H. and Brian L. Pessin | 15.2% | | Dolphin Offshore Partners LP | 12.2% | | Hershey Strategic Capital, LP | 5.8% | | Stuart L Sternberg | 5.2% | | MHW Partners, L.P. | 5.0% | [Certain Relationships and Related Transactions, and Director Independence](index=56&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) A private placement transaction with a significant shareholder is disclosed, and three directors are identified as independent - In an October 2021 private placement, a related party (Sandra Pessin, a >5% owner) acquired **468,750 shares of common stock for $750,000**[294](index=294&type=chunk)[295](index=295&type=chunk) - The Board has determined that directors **Peter H. Woodward, Dr. Richard B. Miles, and Andrew J. Miclot are independent**[296](index=296&type=chunk) [Principal Accounting Fees and Services](index=57&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Total fees paid to the independent accounting firm Stowe & Degon LLC increased to $117,915 in FY2022 - All services provided by the independent registered public accounting firm were **pre-approved by the Board of Directors**[298](index=298&type=chunk) Independent Accountant Fees | Fee Type | 2022 | 2021 | | :--- | :--- | :--- | | Audit Fees | $96,815 | $94,125 | | Audit Related Fees | $4,420 | $– | | Business Acquisition Related Fees | $6,680 | $– | | Tax Fees | $10,000 | $9,850 | | **Total Fees** | **$117,915** | **$103,975** | Part IV [Exhibits, Financial Statement Schedules](index=58&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all financial statements and exhibits filed with the Form 10-K - Lists the financial statements and all exhibits filed with or incorporated by reference into the report[301](index=301&type=chunk)[303](index=303&type=chunk) - All financial statement schedules have been omitted as they are not required or not applicable[302](index=302&type=chunk) [Form 10-K Summary](index=60&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable and no summary is provided - None[307](index=307&type=chunk)

Precision Optics Corporation, Inc. (PEYE) Q3 2022 Earnings Conference Call May 16, 2022 5:00 PM ET Company Participants Robert Blum - Lytham Partners, LLC Joseph Forkey - President and CEO Conference Call Participants Operator Good day and welcome to the Precision Optics Reports Third Quarter of Fiscal Year 2022 Financial Results. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please n ...

[PART I FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) The unaudited consolidated financial statements for March 31, 2022, reflect significant asset growth and revenue increases, primarily due to an acquisition, despite reporting a net loss [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) Total assets significantly increased to $17.27 million by March 31, 2022, driven by an acquisition, alongside growth in liabilities and stockholders' equity Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2022 | June 30, 2021 | | :--- | :--- | :--- | | **Total Assets** | **$17,267,004** | **$6,261,300** | | Cash and cash equivalents | $831,585 | $861,650 | | Accounts receivable, net | $3,347,692 | $1,878,755 | | Inventories | $2,965,220 | $1,885,395 | | Goodwill | $8,824,210 | $687,664 | | **Total Liabilities** | **$8,738,663** | **$2,830,173** | | Total current liabilities | $5,770,887 | $2,511,110 | | Long-term debt, net | $2,053,070 | $– | | **Total Stockholders' Equity** | **$8,528,341** | **$3,431,127** | [Consolidated Statements of Operations](index=6&type=section&id=Consolidated%20Statements%20of%20Operations) Revenues significantly increased for both the three and nine-month periods ended March 31, 2022, though the company reported a net loss for both periods Three Months Ended March 31, (Unaudited) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Revenues | $4,651,352 | $2,458,290 | | Gross Profit | $1,728,209 | $818,024 | | Operating Loss | ($61,121) | ($256,018) | | Net Income (Loss) | ($113,899) | $552,278 | | Basic EPS | ($0.01) | $0.04 | Nine Months Ended March 31, (Unaudited) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Revenues | $10,884,737 | $8,001,641 | | Gross Profit | $3,486,823 | $2,647,642 | | Operating Loss | ($1,093,423) | ($467,143) | | Net Income (Loss) | ($1,197,713) | $339,617 | | Basic EPS | ($0.08) | $0.03 | [Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity) Stockholders' equity significantly increased to $8.53 million by March 31, 2022, driven by share issuances for an acquisition and private placement, despite a net loss - Stockholders' equity increased to **$8.53 million** at March 31, 2022, from **$3.43 million** at July 1, 2021[18](index=18&type=chunk) - Key equity activities included issuing **2.5 million shares** for a business acquisition, a private placement of **937,500 shares**, and stock-based compensation, offset by a net loss of approximately **$1.2 million** over the nine months[18](index=18&type=chunk) - A correction was made for an **$825,000** overstatement of Additional Paid-In Capital and Goodwill related to the valuation of stock issued in the business acquisition[18](index=18&type=chunk)[24](index=24&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating and investing activities increased for the nine months ended March 31, 2022, partially offset by cash provided by financing activities Cash Flow Summary for Nine Months Ended March 31, (Unaudited) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash Used In Operating Activities | ($879,967) | ($75,420) | | Net Cash Used In Investing Activities | ($504,389) | ($256,134) | | Net Cash Provided By (Used in) Financing Activities | $1,354,291 | ($21,298) | | **Net Decrease in Cash** | **($30,065)** | **($352,852)** | | **Cash and Cash Equivalents, End of Period** | **$831,585** | **$781,845** | [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail significant accounting policies, including the acquisition of Lighthouse Imaging, LLC, its financing, and disaggregated revenue by service type - On October 4, 2021, the Company acquired substantially all assets of Lighthouse Imaging, LLC, a medical optics and digital imaging business[31](index=31&type=chunk) - The acquisition was financed via a **$2.6 million** term loan from Main Street Bank and the sale of **937,500 shares** of common stock for **$1.5 million** in a private placement[32](index=32&type=chunk) Revenue by Type (Nine Months Ended March 31) | Revenue Type | 2022 | 2021 | | :--- | :--- | :--- | | Engineering Design Services | $3,659,667 | $1,986,856 | | Optical Components | $4,873,294 | $4,330,511 | | Medical Device Products and Assemblies | $2,351,776 | $1,684,274 | | **Total Revenues** | **$10,884,737** | **$8,001,641** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=17&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses significant revenue growth driven by the Lighthouse acquisition, alongside a slight gross margin decrease, increased operating expenses, and a net loss - The company operates through three main business lines: advanced optical instruments (Precision Optics), custom optical components (Ross Optical), and advanced optical imaging systems (Lighthouse Imaging)[60](index=60&type=chunk)[61](index=61&type=chunk)[62](index=62&type=chunk) - For the nine months ended March 31, 2022, revenue was composed of **34%** engineering services, **45%** optical components, and **21%** medical device assemblies[63](index=63&type=chunk) Revenue and Gross Profit (Nine Months Ended March 31) | Metric | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $10,884,737 | $8,001,641 | +36.0% | | Gross Profit | $3,486,823 | $2,647,642 | +31.7% | | Gross Margin | 32.0% | 33.1% | -1.1 p.p. | - The increase in SG&A expenses for the nine months ended March 31, 2022 was primarily due to the inclusion of the Lighthouse division, plus increased stock-based compensation and marketing expenses[79](index=79&type=chunk) - The company acknowledges risks from the COVID-19 pandemic, including potential impacts on supply chain, customer orders, and overall financial condition[75](index=75&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=21&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Precision Optics Corporation is not required to provide quantitative and qualitative disclosures about market risk - The company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[88](index=88&type=chunk) [Controls and Procedures](index=21&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes in internal control over financial reporting - Management, including the CEO and CFO, evaluated disclosure controls and procedures and concluded they were effective as of March 31, 2022[89](index=89&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[90](index=90&type=chunk) [PART II OTHER INFORMATION](index=22&type=section&id=PART%20II%20OTHER%20INFORMATION) [Legal Proceedings](index=22&type=section&id=Item%201.%20Legal%20Proceedings) The company is not aware of any pending or threatened litigation that would materially impact its operations or finances - The company is not aware of any pending or threatened litigation that would have a material impact on its operations or finances[93](index=93&type=chunk) [Risk Factors](index=22&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors have occurred since the last annual report on Form 10-K - No material changes to risk factors have occurred since the last annual report on Form 10-K filed on September 28, 2021[94](index=94&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=22&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company did not issue any unregistered securities during the quarter ended March 31, 2022 - No unregistered securities were issued during the quarter ended March 31, 2022[95](index=95&type=chunk) [Defaults Upon Senior Securities](index=22&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable to the company - Not applicable[96](index=96&type=chunk) [Mine Safety Disclosures](index=22&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[97](index=97&type=chunk) [Other Information](index=22&type=section&id=Item%205.%20Other%20Information) The Board of Directors determined to hold annual 'say on pay' votes and declassify its board structure, alongside amending company bylaws - The board of directors has determined to hold future 'say on pay' advisory votes on an annual basis[98](index=98&type=chunk) - On May 13, 2022, the board elected to declassify its structure, resulting in all directors standing for election at each annual meeting of stockholders[99](index=99&type=chunk)[103](index=103&type=chunk) - The company's bylaws were amended on May 13, 2022, with material changes affecting stockholder meetings, board of directors' powers, officer titles, and stock certificate procedures[100](index=100&type=chunk)[103](index=103&type=chunk) [Exhibits](index=24&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including bylaws amendments, CEO/CFO certifications, and incorporated by reference documents - Lists exhibits filed with the report, including an amendment to the bylaws (3.5), CEO and CFO certifications (31.1, 31.2, 32.1), and various other corporate documents incorporated by reference[104](index=104&type=chunk)[112](index=112&type=chunk)

Financial Data and Key Metrics Changes - Overall revenue for Q2 was $3.9 million, up 40% year-over-year and 67% quarter-over-quarter [15][42] - Production revenue was $2.3 million, while engineering revenue was $1.6 million, marking the highest production revenue in the last five quarters [42] - Gross margin was 29% for Q2 compared to 27% in the previous quarter and 31% a year ago [42] - The company reported a GAAP net loss of $507,000 during Q2 with an adjusted EBITDA loss of $73,000 [45] Business Line Data and Key Metrics Changes - Organic growth was up 16% sequentially, with approximately $1.2 million recognized from the newly acquired Lighthouse Imaging division [15] - Overall production revenue increased by 22% quarter-over-quarter and 17% year-over-year, excluding Lighthouse contributions, production revenue was up 4% and 9% respectively [30] - Engineering revenue levels were up 93% year-over-year and 233% quarter-over-quarter, reflecting a strong pipeline of new opportunities [32] Market Data and Key Metrics Changes - The company received a $1.5 million production order from a major defense aerospace customer, expected to lead to a $3 million annual run rate [19][58] - The FDA granted 510(k) clearance for a five-camera colonoscope, with production orders anticipated shortly [21][55] Company Strategy and Development Direction - The company plans to uplist to the NASDAQ Capital Market, which is expected to improve liquidity and broaden the investor base [10][11] - Integration of Lighthouse Imaging is progressing well, with combined capabilities expected to enhance project opportunities in medical devices and defense aerospace [25][29] - The strategic plan includes growing sales capacity, investing in technical resources, updating production capabilities, and pursuing external partnerships or acquisitions [47][48] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism for significant growth in the second half of fiscal 2022, driven by new contracts and recovering production levels [23][49] - The company is confident in its ability to navigate labor shortages and production capacity challenges, having successfully recruited new talent [63][65] Other Important Information - The company filed a preliminary proxy for its annual meeting scheduled for April 8, which includes a motion for a potential reverse stock split to meet NASDAQ listing requirements [12][13] - The company will participate in the Lytham Spring 2022 Investor Conference from April 4 to 7 [50] Q&A Session Summary Question: Follow-up on single-use projects - Management confirmed two projects moving forward, one from POC and one from Lighthouse, with additional single-use projects in discussion [54] Question: Anticipated production order from FDA-approved product - Management expects to receive a production order shortly after discussing detailed requirements with the customer [55] Question: Concerns regarding labor shortages and production capacity - Management acknowledged concerns but reported successful recruitment efforts despite a tight labor market [63][64] Question: Status of uplisting to NASDAQ - Management indicated no significant roadblocks to uplisting, with ongoing communication with NASDAQ and completion of necessary requirements [67]

PART I FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for Precision Optics Corporation, Inc. and its subsidiaries, including the Balance Sheets, Statements of Operations, Stockholders' Equity, and Cash Flows for the periods ended December 31, 2021, and June 30, 2021 (Balance Sheet) or December 31, 2020 (Income Statement, Cash Flow, Equity) [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets%20at%20December%2031%2C%202021%20and%20June%2030%2C%202021) Consolidated Balance Sheet Highlights | Metric | December 31, 2021 | June 30, 2021 | | :-------------------------------- | :------------------ | :------------------ | | **ASSETS** | | | | Cash and cash equivalents | $1,263,198 | $861,650 | | Accounts receivable, net | $2,216,061 | $1,878,755 | | Inventories | $2,503,392 | $1,885,395 | | Total current assets | $6,365,716 | $4,776,435 | | Net fixed assets | $644,062 | $594,252 | | Goodwill | $9,649,210 | $687,664 | | **TOTAL ASSETS** | **$16,888,747** | **$6,261,300** | | **LIABILITIES** | | | | Total current liabilities | $4,566,314 | $2,511,110 | | Long-term debt, net of current maturities | $2,145,000 | $0 | | Acquisition earn out liability, net of current portion | $855,591 | $166,666 | | **STOCKHOLDERS' EQUITY** | | | | Total stockholders' equity | $9,189,485 | $3,431,127 | | **TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY** | **$16,888,747** | **$6,261,300** | - Total assets significantly increased from **$6.26 million** at June 30, 2021, to **$16.89 million** at December 31, 2021, primarily driven by a substantial increase in Goodwill to **$9.65 million**, reflecting the Lighthouse Imaging acquisition[12](index=12&type=chunk) - Total current liabilities increased from **$2.51 million** to **$4.57 million**, largely due to increases in current maturities of long-term debt, current portion of acquisition earn-out liability, and customer advances[12](index=12&type=chunk) - Stockholders' equity more than doubled from **$3.43 million** to **$9.19 million**, influenced by additional paid-in capital and common stock issuance related to the acquisition and private placement[12](index=12&type=chunk) [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations%20for%20the%20Three%20and%20Six%20Months%20Ended%20December%2031%2C%202021%20and%202020) Consolidated Statements of Operations Highlights | Metric | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2020 | | :---------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Revenues | $3,897,041 | $2,785,450 | $6,233,385 | $5,543,351 | | Cost of goods sold | $2,777,459 | $1,931,010 | $4,474,771 | $3,713,733 | | Gross profit | $1,119,582 | $854,440 | $1,758,614 | $1,829,618 | | Research and development expenses, net | $113,164 | $145,970 | $218,350 | $297,546 | | Selling, general and administrative expenses | $1,466,768 | $921,195 | $2,400,392 | $1,743,197 | | Operating loss | $(460,350) | $(212,725) | $(1,032,302) | $(211,125) | | Net loss | $(507,013) | $(213,454) | $(1,083,814) | $(212,661) | | Loss Per Share (Basic and Fully Diluted) | $(0.03) | $(0.02) | $(0.07) | $(0.02) | - Revenues increased by **39.9%** for the three months ended December 31, 2021, to **$3,897,041**, and by **12.4%** for the six months ended December 31, 2021, to **$6,233,385**, primarily due to the inclusion of the Lighthouse division[14](index=14&type=chunk)[75](index=75&type=chunk)[76](index=76&type=chunk) - Gross profit increased by **31.0%** for the three-month period but decreased by **3.9%** for the six-month period, with gross profit percentage declining from **30.7% to 28.7%** (3-month) and **33.0% to 28.2%** (6-month) due to cost over-runs on an engineering project, decreased higher-margin production revenues, and lower margins from the Lighthouse division[14](index=14&type=chunk)[79](index=79&type=chunk)[80](index=80&type=chunk) - Net loss significantly widened to **$(507,013)** for the three months and **$(1,083,814)** for the six months ended December 31, 2021, compared to the prior year periods, driven by increased operating expenses, particularly selling, general and administrative expenses, and business acquisition expenses[14](index=14&type=chunk)[82](index=82&type=chunk) [Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity%20for%20the%20Three%20and%20Six%20Months%20Ended%20December%2031%2C%202021%20and%202020) Changes in Stockholders' Equity (Six Months Ended December 31, 2021) | Item | Impact on Total Stockholders' Equity | | :------------------------------------------ | :----------------------------------- | | Balance, July 1, 2021 | $3,431,127 | | Stock-based compensation | $490,522 | | Proceeds from private placement of common stock | $1,490,625 | | Issuance of common stock in business acquisition | $4,825,000 | | Net loss | $(1,083,814) | | Balance, December 31, 2021 | $9,189,485 | - Total stockholders' equity increased from **$3,431,127** at July 1, 2021, to **$9,189,485** at December 31, 2021, primarily due to the issuance of common stock for the Lighthouse Imaging acquisition (**$4,825,000**) and proceeds from a private placement of common stock (**$1,500,000** gross proceeds)[17](index=17&type=chunk)[48](index=48&type=chunk)[50](index=50&type=chunk) - Stock-based compensation expense recognized during the six-month period was **$490,522**[17](index=17&type=chunk)[43](index=43&type=chunk) [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20Three%20and%20Six%20Months%20Ended%20December%2031%2C%202021%20and%202020) Consolidated Statements of Cash Flows Highlights (Six Months Ended December 31) | Cash Flow Activity | 2021 | 2020 | | :----------------------------------- | :----------- | :----------- | | Net Cash Used In Operating Activities | $(715,163) | $(217,440) | | Net Cash Used In Investing Activities | $(293,155) | $(59,033) | | Net Cash Provided By (Used in) Financing Activities | $1,409,866 | $(41,961) | | NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | $401,548 | $(318,434) | | CASH AND CASH EQUIVALENTS, END OF PERIOD | $1,263,198 | $816,263 | - Net cash used in operating activities increased significantly to **$(715,163)** for the six months ended December 31, 2021, compared to **$(217,440)** in the prior year, primarily due to a larger net loss[19](index=19&type=chunk) - Net cash used in investing activities increased to **$(293,155)**, mainly due to the cash portion of the Lighthouse Imaging business acquisition (**$255,063**)[19](index=19&type=chunk)[29](index=29&type=chunk) - Net cash provided by financing activities was **$1,409,866**, a substantial increase from a net use of **$(41,961)** in the prior year, driven by gross proceeds from a private placement of common stock (**$1,500,000**) and a new long-term debt financing for the acquisition[19](index=19&type=chunk)[30](index=30&type=chunk)[48](index=48&type=chunk) [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide essential details on the company's accounting practices, the significant business acquisition of Lighthouse Imaging, inventory valuation, new bank financing, lease obligations, and various stock-based compensation activities. They also disaggregate revenue streams and discuss the ongoing impact of the COVID-19 pandemic [1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=8&type=section&id=1.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) - The financial statements are unaudited and include normal recurring adjustments, prepared in accordance with GAAP, requiring management estimates and judgments[21](index=21&type=chunk)[22](index=22&type=chunk) - Basic and diluted loss per share calculations exclude potentially dilutive securities (stock options) due to the net loss generated, making their effect antidilutive[23](index=23&type=chunk)[25](index=25&type=chunk) - A full valuation reserve has been provided for deferred tax assets, and no impairment of goodwill or patents was estimated as of December 31, 2021[27](index=27&type=chunk)[28](index=28&type=chunk) [2. BUSINESS ACQUISITION](index=9&type=section&id=2.%20BUSINESS%20ACQUISITION) - On October 4, 2021, the Company acquired substantially all assets of Lighthouse Imaging, LLC, a medical optics and digital imaging business[29](index=29&type=chunk) - The aggregate purchase price included **$2,855,063** in cash, **$1,500,000** in earn-out consideration over two years, and **2,500,000** unregistered shares of common stock[29](index=29&type=chunk) - The acquisition was financed by a **$2,600,000** term loan from Main Street Bank and **$1,500,000** gross proceeds from a private placement of common stock[30](index=30&type=chunk) Lighthouse Imaging Acquisition Purchase Price Allocation (Preliminary) | Item | Amount | | :------------------------------------ | :------------- | | Total Assets Acquired | $1,373,506 | | Total Liabilities Assumed | $1,344,382 | | Net assets acquired | $29,124 | | Goodwill | $8,961,546 | | Total Purchase Price-Initial and Contingent Consideration | $8,990,670 | - Pro forma revenues for the six months ended December 31, 2021, assuming the acquisition occurred on July 1, 2020, would have been **$7,677,722**, compared to actual reported revenues of **$6,233,385**[34](index=34&type=chunk) [3. INVENTORIES](index=11&type=section&id=3.%20INVENTORIES) Inventory Composition | Category | December 31, 2021 | June 30, 2021 | | :--------------- | :------------------ | :------------------ | | Raw Materials | $1,013,788 | $626,255 | | Work-In-Progress | $640,514 | $453,117 | | Finished Goods | $849,090 | $806,023 | | **Total Inventories** | **$2,503,392** | **$1,885,395** | - Total inventories increased by **32.8%** from **$1,885,395** at June 30, 2021, to **$2,503,392** at December 31, 2021[35](index=35&type=chunk) [4. BANK FINANCING ACTIVITIES](index=11&type=section&id=4.%20BANK%20FINANCING%20ACTIVITIES) - On October 4, 2021, the Company secured a **$2,600,000** Term Loan and a **$250,000** Revolving Line of Credit from Main Street Bank[36](index=36&type=chunk) - The Term Loan has monthly principal payments of **$30,952.38** plus interest (prime + 1.5%, not less than 4.75%) and matures on October 15, 2028[37](index=37&type=chunk) - The line of credit had zero borrowings outstanding at December 31, 2021, and is secured by all company assets[36](index=36&type=chunk) Term Loan Note Principal Payments Due | Fiscal Year Ending June 30 | Amount | | :------------------------- | :----------- | | 2021 | $185,714 | | 2022 | $371,429 | | 2023 | $371,429 | | 2024 | $371,429 | | 2025 | $371,429 | | Thereafter | $866,665 | | **Total** | **$2,538,095** | [5. LEASE OBLIGATIONS](index=12&type=section&id=5.%20LEASE%20OBLIGATIONS) - The Company has capital leases for manufacturing equipment with a net book value of **$167,126** as of December 31, 2021[40](index=40&type=chunk) - An operating lease for its El Paso, Texas facility has remaining minimum lease payments of **$31,411** at December 31, 2021[41](index=41&type=chunk) Future Minimum Lease Payments (December 31, 2021) | Fiscal Year Ending June 30 | Capital Leases | Operating Lease | | :------------------------- | :------------- | :-------------- | | 2022 | $24,309 | $31,054 | | 2023 | $48,619 | $0 | | 2024 | $48,619 | $0 | | 2025 | $43,917 | $0 | | 2026 | $28,006 | $0 | | **Total Minimum Payments** | **$193,470** | **$31,054** | - Operating leases for Gardner, MA, and Windham, ME facilities are on a month-to-month tenant at will basis, with rent expense of **$136,744** for the six months ended December 31, 2021[42](index=42&type=chunk) [6. STOCK-BASED COMPENSATION](index=13&type=section&id=6.%20STOCK-BASED%20COMPENSATION) Stock-Based Compensation Expense | Category | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2021 | | :-------------------------------- | :------------------------------ | :---------------------------- | | Cost of Goods Sold | $28,415 | $56,830 | | Research and Development | $50,310 | $93,799 | | Selling, General and Administrative | $251,726 | $339,893 | | **Total Stock Based Compensation Expense** | **$330,451** | **$490,522** | - Stock options outstanding at December 31, 2021, totaled **2,669,700** shares with a weighted average exercise price of **$1.22** and a contractual life of **6.58 years**[44](index=44&type=chunk) - The aggregate intrinsic value of in-the-money outstanding and exercisable options was **$2,564,065** and **$2,119,321**, respectively, as of December 31, 2021[45](index=45&type=chunk) - **50,000** shares of restricted common stock were granted to an employee from the Lighthouse acquisition, with **$9,417** recognized as compensation expense for the three months ended December 31, 2021[46](index=46&type=chunk) - **9,045** shares of common stock were issued to the CFO for services, resulting in **$20,000** of stock-based compensation expense[47](index=47&type=chunk) [7. SALE OF STOCK IN OCTOBER 2021](index=15&type=section&id=7.%20SALE%20OF%20STOCK%20IN%20OCTOBER%202021) - On October 1, 2021, the Company sold **937,500** unregistered shares of common stock at **$1.60** per share, generating **$1,500,000** in gross proceeds[48](index=48&type=chunk) - Net proceeds from this private placement were used to partially fund the acquisition of Lighthouse Imaging, LLC[48](index=48&type=chunk) - A registration statement for the resale of these shares was filed on January 31, 2022[49](index=49&type=chunk) [8. ISSUANCE OF COMMON STOCK IN BUSINESS ACQUISITION](index=15&type=section&id=8.%20ISSUANCE%20OF%20COMMON%20STOCK%20IN%20BUSINESS%20ACQUISITION) - On October 4, 2021, **2,500,000** unregistered shares of common stock were issued to the sellers of Lighthouse Imaging, LLC, valued at **$1.93** per share, totaling **$4,825,000**[50](index=50&type=chunk) - The Company agreed to use reasonable efforts to register the resale of these shares[51](index=51&type=chunk) [9. REVENUE RECOGNITION](index=15&type=section&id=9.%20REVENUE%20RECOGNITION) - Revenues are recognized when performance obligations are satisfied, primarily for products and services marketed to medical device companies in the United States[52](index=52&type=chunk) Disaggregated Revenues by Product and Service Type | Revenue Type | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2020 | | :-------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Engineering Design Services | $1,636,482 | $847,988 | $2,127,253 | $1,437,220 | | Optical Components | $1,486,006 | $1,398,213 | $2,945,332 | $2,874,298 | | Medical Device Products and Assemblies | $774,553 | $539,249 | $1,160,800 | $1,231,833 | | **Total Revenues** | **$3,897,041** | **$2,785,450** | **$6,233,385** | **$5,543,351** | - Contract liabilities (customer advances) increased significantly from **$151,877** at December 31, 2020, to **$1,137,470** at December 31, 2021, largely due to **$826,679** assumed in the business acquisition[57](index=57&type=chunk) [10. COVID-19 PANDEMIC](index=16&type=section&id=10.%20COVID-19%20PANDEMIC) - The COVID-19 pandemic continues to pose an adverse impact on the Company's supply sources, customer orders, collections, internal operations, and overall financial condition[58](index=58&type=chunk) - The Company cannot predict with certainty the future impact of COVID-19 and related economic policies on its upcoming quarterly fiscal operating results[58](index=58&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=17&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance and condition, highlighting the impact of the Lighthouse Imaging acquisition on revenues and expenses. It details the company's business segments, strategic focus on advanced optical instruments for medical and defense applications, and discusses liquidity challenges, capital resources, and the ongoing effects of the COVID-19 pandemic [Overview](index=17&type=section&id=Overview) - Precision Optics Corporation, Inc. develops and manufactures advanced optical instruments, including endoscopes, endocouplers, and custom imaging/illumination products for minimally invasive surgical procedures[62](index=62&type=chunk) - The company operates Ross Optical Industries, supplying custom optical components for military, defense, medical, and industrial applications, and Lighthouse Imaging, manufacturing advanced optical imaging systems with expertise in electrical engineering and medical visualization devices[63](index=63&type=chunk)[64](index=64&type=chunk) - Revenue breakdown for the six months ended December 31, 2021: **32%** from engineering services, **49%** from optical components, and **19%** from medical device products and assemblies[65](index=65&type=chunk) - Future success depends on developing new optical products and services, with investments in Microprecision optics, micro medical cameras, illumination, single-use endoscopes, and 3D endoscopes[71](index=71&type=chunk) [Results of Operations](index=19&type=section&id=Results%20of%20Operations) - Total revenues for the quarter ended December 31, 2021, increased by **39.9%** to **$3,897,041**, and for the six months increased by **12.4%** to **$6,233,385**, primarily due to the Lighthouse division acquisition[75](index=75&type=chunk)[76](index=76&type=chunk) - Gross profit percentage decreased from **30.7% to 28.7%** for the quarter and from **33.0% to 28.2%** for the six months, attributed to cost over-runs on an engineering project, decreased higher-margin production revenues due to COVID-19, and lower margins from the Lighthouse division[79](index=79&type=chunk)[80](index=80&type=chunk) - Research and development expenses decreased by **22.5%** for the quarter and **26.6%** for the six months, as more engineering personnel time was consumed in customer-focused activities[81](index=81&type=chunk) - Selling, general and administrative expenses increased by **59.2%** for the quarter and **37.7%** for the six months, mainly due to the Lighthouse acquisition, increased stock-based compensation, and marketing expenses[82](index=82&type=chunk) [Liquidity and Capital Resources](index=20&type=section&id=Liquidity%20and%20Capital%20Resources) - The Company sustained recurring net losses, with a net loss of **$1,083,814** and cash used in operating activities of **$715,163** for the six months ended December 31, 2021[83](index=83&type=chunk) - At December 31, 2021, cash was **$1,263,198**, accounts receivables were **$2,216,061**, and current liabilities were **$4,566,314**, including **$1,137,470** of customer advances[83](index=83&type=chunk) - The Company believes profitable operating results require achieving and maintaining sufficient quarterly revenues, realized gross margins, and controlled operating expenses, all subject to fluctuations[84](index=84&type=chunk) - Working capital needs have been funded through product sales, working capital management, stock offerings, equipment leases, and customer advances. The Lighthouse acquisition was financed by a **$2.6 million** bank term loan and **$1.5 million** from common stock sales[85](index=85&type=chunk)[86](index=86&type=chunk) Contractual Cash Commitments (Subsequent to December 31, 2021) | Commitment Type | Fiscal 2022 | Thereafter | Total | | :------------------------------------ | :---------- | :--------- | :-------- | | Capital lease for equipment, including interest | $24,309 | $169,161 | $193,470 | | Minimum operating lease payments - Ross Optical division | $31,054 | $0 | $31,054 | | Open purchase orders | | | ~$1,793,652 | [Off-Balance Sheet Arrangements](index=21&type=section&id=Off-Balance%20Sheet%20Arrangements) - The Company currently has no off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on its financial condition or results of operations[89](index=89&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=21&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Precision Optics Corporation, Inc. is electing scaled disclosure reporting obligations and is not required to provide the information requested by this Item - The Company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[90](index=90&type=chunk) [Item 4. Controls and Procedures](index=21&type=section&id=Item%204.%20Controls%20and%20Procedures) This section addresses the effectiveness of the company's disclosure controls and procedures, identifying material weaknesses related to segregation of duties and inventory valuation. It also outlines the remediation efforts undertaken to mitigate these weaknesses [Management's Evaluation of Disclosure Controls and Procedures](index=21&type=section&id=Managements%20Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) - The CEO and CFO concluded that disclosure controls and procedures, including internal control over financial reporting, were not effective as of December 31, 2021[91](index=91&type=chunk) - A material weakness exists due to insufficient staff for segregation of accounting duties, potentially leading to misstatements in financial statements[92](index=92&type=chunk) - Another material weakness relates to inventory valuation inconsistencies, where overhead rates and purchased item costs were not properly reflected, leading to periodic audit adjustments[95](index=95&type=chunk) - Remediation efforts include a higher-level review of financial reports by the CEO, CFO, and Board of Directors, and improved processes for inventory controls and documentation[93](index=93&type=chunk)[97](index=97&type=chunk) [Changes in Internal Control over Financial Reporting](index=22&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) - There were no changes in internal control over financial reporting during the second quarter of the fiscal year that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[96](index=96&type=chunk) PART II OTHER INFORMATION [Item 1. Legal Proceedings](index=23&type=section&id=Item%201.%20Legal%20Proceedings) The Company may be involved in legal matters in the ordinary course of business, but management believes current matters are insignificant and is not aware of any pending or threatened litigation that could materially impact operations or finances - The Company is not aware of any pending or threatened litigation that could have a material adverse effect on its business, financial condition, or results of operations[101](index=101&type=chunk) [Item 1A. Risk Factors](index=23&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the Company's annual report on Form 10-K for the fiscal year ended June 30, 2021 - No material changes have occurred from the risk factors disclosed in the annual report on Form 10-K for the fiscal year ended June 30, 2021[102](index=102&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=23&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Since October 4, 2021, the Company has not issued any unregistered securities, except as previously disclosed in the report, primarily related to the Lighthouse Imaging acquisition and a private placement - No unregistered securities were issued since October 4, 2021, other than those previously disclosed (e.g., for the Lighthouse Imaging acquisition and private placement)[103](index=103&type=chunk) [Item 3. Defaults Upon Senior Securities](index=23&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable to the Company - This item is not applicable[104](index=104&type=chunk) [Item 4. Mine Safety Disclosures](index=23&type=section&id=Item%204.%20Mine%20Safety%20Disclosures%20%28Not%20applicable.%29) This item is not applicable to the Company - This item is not applicable[106](index=106&type=chunk) [Item 5. Other Information](index=23&type=section&id=Item%205.%20Other%20Information%20%28Not%20applicable.%29) This item is not applicable to the Company - This item is not applicable[107](index=107&type=chunk) [Item 6. Exhibits](index=24&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including various agreements, organizational documents, equity incentive plans, and certifications. Key exhibits include the Asset Purchase Agreement for Lighthouse Imaging, financing agreements with Main Street Bank, and certifications under the Sarbanes-Oxley Act - Key exhibits include the Asset Purchase Agreement for Lighthouse Imaging, LLC (Exhibit 10.13), various financing agreements with Main Street Bank (Exhibits 10.16, 10.17, 10.18, 10.19), and certifications of officers under the Sarbanes-Oxley Act (Exhibits 31.1, 31.2, 32.1)[109](index=109&type=chunk)[112](index=112&type=chunk)[114](index=114&type=chunk)[115](index=115&type=chunk)[116](index=116&type=chunk)[119](index=119&type=chunk)[121](index=121&type=chunk)

Precision Optics Corporation, Inc. (PEYE) Q1 2022 Earnings Conference Call November 15, 2021 5:00 PM ET Company Participants Robert Blum - Investor Relations, Lytham Partners Joe Forkey - Chief Executive Officer Conference Call Participants Operator Good day and welcome to the Precision Optics Reports First Quarter of Fiscal Year 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask ques ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2021 Commission File Number: 001-10647 PRECISION OPTICS CORPORATION, INC. (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 22 East Broadway, Gardner, Massachusetts 01440-3 ...