Part I [Business](index=4&type=section&id=Item%201.%20Business) Precision Optics Corporation develops and manufactures advanced optical instruments, specializing in medical devices and custom optical components, expanded through strategic acquisitions - The company operates as a developer and manufacturer of advanced optical instruments, with a focus on medical devices for minimally invasive surgery, including 3D endoscopes and Microprecision™ lenses[12](index=12&type=chunk) - Strategic acquisitions have expanded the company's capabilities: Ross Optical Industries (acquired June 2019) for custom optical components and defense applications, and Lighthouse Imaging (acquired October 2021) for end-to-end medical visualization systems[13](index=13&type=chunk)[14](index=14&type=chunk) Revenue Breakdown by Business Segment (FY 2023 vs. FY 2022) | Business Segment | FY 2023 Revenue % | FY 2022 Revenue % | | :--- | :--- | :--- | | Engineering Services | 32% | 34% | | Optical Components | 50% | 41% | | Medical Device Manufacturing | 18% | 25% | - The company holds various U.S. patents and has pending applications covering medical devices, 3D endoscopes, Microprecision™ lenses, and defense products, with expiration dates through March 2043[33](index=33&type=chunk) - In fiscal year 2023, the company served 361 customers, with one customer accounting for **11.4% of total revenues**; in fiscal year 2022, it served 377 customers with no single customer exceeding **10% of revenues**[35](index=35&type=chunk) [Risk Factors](index=9&type=section&id=Item%201A.%20Risk%20Factors) The company is exempt from providing detailed risk factor information due to its status as a smaller reporting company - The company is not required to provide risk factor information as it qualifies as a smaller reporting company[46](index=46&type=chunk) [Properties](index=9&type=section&id=Item%202.%20Properties) The company operates from five facilities across Massachusetts, Texas, and Maine, with its primary Gardner facility leased from an entity partially owned by its CEO - The company conducts operations at three facilities in Gardner, MA, one in El Paso, TX, and one in Windham, ME[47](index=47&type=chunk) - The primary facility in Gardner, MA is leased from Equity Assets, Inc. (EAI) on a tenant-at-will basis, and the company's CEO, Joseph N. Forkey, holds a **20% interest in EAI**[47](index=47&type=chunk) [Legal Proceedings](index=10&type=section&id=Item%203.%20Legal%20Proceedings) No material pending or threatened legal proceedings are currently known to impact the company's operations or finances - There are no current legal proceedings that are expected to have a material adverse effect on the company's business or financial condition[51](index=51&type=chunk) [Mine Safety Disclosures](index=10&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This disclosure item is not applicable to the company's operations - Not applicable[52](index=52&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=11&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on Nasdaq (POCI), with no dividends declared recently, and a June 2023 private placement raised **$2.52 million** - The company's common stock is listed on the Nasdaq Stock Market under the symbol **POCI**[55](index=55&type=chunk) - No dividends have been declared in the last two fiscal years, with earnings intended for reinvestment into the business[57](index=57&type=chunk) - On June 20, 2023, the company closed a stock issuance of **420,000 shares at $6.00 per share**, generating **$2.52 million** in gross proceeds[58](index=58&type=chunk) [Selected Financial Data](index=11&type=section&id=Item%206.%20Selected%20Financial%20Data) This section is reserved, and no selected financial data is provided - This section is marked as [RESERVED], indicating no data is provided[59](index=59&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=12&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) FY2023 saw a **34.2%** revenue increase to **$21.0 million**, improved gross profit and narrowed operating loss, supported by enhanced liquidity from a private placement and credit line increase [Results of Operations](index=12&type=section&id=Results%20of%20Operations) FY2023 revenues grew **34.2%** to **$21.0 million**, driven by optical component and engineering sales, with gross profit up **56.9%** to **$7.7 million**, partly from a one-time technology rights sale Comparison of Operations (FY 2023 vs. FY 2022) | Metric | FY 2023 | FY 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $21,044,467 | $15,678,248 | +34.2% | | Gross Profit | $7,734,136 | $4,928,187 | +56.9% | | Gross Margin | 36.8% | 31.4% | +5.4 pts | | R&D Expenses | $809,877 | $666,479 | +21.5% | | SG&A Expenses | $7,740,562 | $5,613,473 | +37.9% | - The increase in revenue was largely driven by large orders from defense/aerospace customers for optical components[62](index=62&type=chunk) - Gross profit was benefited by a one-time sale of technology rights amounting to **$600,000**[63](index=63&type=chunk) [Liquidity and Capital Resources](index=13&type=section&id=Liquidity%20and%20Capital%20Resources) Cash and equivalents significantly increased to **$2.9 million** by June 30, 2023, bolstered by a **$2.29 million** private placement and new debt facilities, despite ongoing net losses Key Liquidity Metrics (as of June 30, 2023) | Metric | Amount | | :--- | :--- | | Cash and cash equivalents | $2,925,852 | | Accounts receivable | $3,907,407 | | Current liabilities | $5,259,620 | | Operating Loss (FY 2023) | ($638,548) | - In June 2023, the company raised **$2,288,000** net through a private placement of **420,000** common shares[69](index=69&type=chunk) - The company secured a new **$750,000** term loan and increased its line of credit to **$1,250,000** in June 2023, with no outstanding balance on the line of credit at June 30, 2023[69](index=69&type=chunk) Contractual Cash Commitments (Post June 30, 2023) | Commitment | Fiscal 2024 | Thereafter | Total | | :--- | :--- | :--- | :--- | | Capital lease for equipment | $48,619 | $71,923 | $120,542 | | Minimum operating lease payments | $182,652 | $195,252 | $377,904 | | Open purchase orders | $1,981,592 | - | $1,981,592 | [Quantitative and Qualitative Disclosures About Market Risk](index=14&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is not required to provide market risk disclosures due to its status as a smaller reporting company - The company is electing scaled disclosure reporting obligations and is not required to provide this information[74](index=74&type=chunk) [Financial Statements and Supplementary Data](index=14&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents audited consolidated financial statements for FY2023 and FY22, with an unqualified auditor opinion, detailing revenue growth and a narrowed net loss [Report of Independent Registered Public Accounting Firm](index=15&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) The independent auditor issued an unqualified opinion on the consolidated financial statements, identifying revenue recognition as a critical audit matter due to its complexity - The auditor issued an unqualified (clean) opinion on the consolidated financial statements[79](index=79&type=chunk) - Revenue Recognition was identified as a Critical Audit Matter due to the complexity and significant judgment involved in interpreting customer contracts[84](index=84&type=chunk)[85](index=85&type=chunk) [Consolidated Financial Statements](index=17&type=section&id=Consolidated%20Financial%20Statements) Consolidated financial statements show asset growth to **$19.7 million**, increased stockholders' equity to **$12.0 million**, and a narrowed net loss of **$144,613** for FY2023 Consolidated Balance Sheet Highlights (at June 30) | Account | 2023 | 2022 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $2,925,852 | $605,749 | | Total current assets | $9,859,156 | $6,505,216 | | Goodwill | $8,824,210 | $8,824,210 | | Total Assets | $19,740,434 | $16,704,020 | | **Liabilities & Equity** | | | | Total current liabilities | $5,259,620 | $4,586,641 | | Long-term debt, net | $2,175,980 | $1,961,141 | | Total Stockholders' Equity | $12,046,592 | $8,971,495 | Consolidated Statement of Operations Highlights (for the Year Ended June 30) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Revenues | $21,044,467 | $15,678,248 | | Gross Profit | $7,734,136 | $4,928,187 | | Operating Loss | ($638,548) | ($1,513,890) | | Net Loss | ($144,613) | ($928,416) | | Loss per Share (Basic & Diluted) | ($0.03) | ($0.18) | Consolidated Statement of Cash Flows Highlights (for the Year Ended June 30) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($81,090) | ($933,371) | | Net cash used in investing activities | ($52,497) | ($407,802) | | Net cash provided by financing activities | $2,453,690 | $1,085,272 | | Net increase (decrease) in cash | $2,320,103 | ($255,901) | [Notes to Consolidated Financial Statements](index=21&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail accounting policies, including a 1-for-3 reverse stock split, revenue growth by segment, the Lighthouse acquisition, new financing, and significant NOL carryforwards with a full valuation allowance - A **1-for-3 reverse stock split** was effected on November 1, 2022, and all share and per-share amounts have been retroactively adjusted[99](index=99&type=chunk)[100](index=100&type=chunk) Revenue by Type (for the Year Ended June 30) | Revenue Type | 2023 | 2022 | | :--- | :--- | :--- | | Engineering Design Services | $6,728,867 | $5,371,483 | | Optical Components | $10,523,806 | $6,481,896 | | Medical Device Products and Assemblies | $3,791,794 | $3,824,869 | | **Total Revenues** | **$21,044,467** | **$15,678,248** | - The **$1,500,000** earn-out liability associated with the Lighthouse acquisition was written off to other income as the division did not achieve the required gross margin targets[133](index=133&type=chunk) - As of June 30, 2023, the company had federal and state net operating loss (NOL) carryforwards of approximately **$12.5 million** and **$6.1 million**, respectively, which begin to expire in fiscal year 2024[164](index=164&type=chunk) - A full valuation allowance of **$3,271,000** has been provided against the company's net deferred tax assets, as realization is not considered 'more likely than not'[163](index=163&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=35&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reported no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None reported[167](index=167&type=chunk) [Controls and Procedures](index=35&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were ineffective as of June 30, 2023, due to a material weakness in internal control over financial reporting - Management concluded that disclosure controls and procedures were not effective as of June 30, 2023[168](index=168&type=chunk) - The ineffectiveness was attributed to a material weakness in internal controls over financial reporting[168](index=168&type=chunk)[171](index=171&type=chunk) [Other Information](index=35&type=section&id=Item%209B.%20Other%20Information) No other information is reported for this item - None[173](index=173&type=chunk) Part III [Items 10-14](index=36&type=section&id=Item%2010-14) Information for Items 10 through 14 is incorporated by reference from the company's 2023 Annual Meeting of Stockholders Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Stockholders[175](index=175&type=chunk)[176](index=176&type=chunk)[177](index=177&type=chunk)[178](index=178&type=chunk)[179](index=179&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=37&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists documents filed as part of the Form 10-K, including financial statements and a comprehensive list of exhibits, with all financial statement schedules omitted - Lists the financial statements filed under Part II, Item 8[182](index=182&type=chunk) - All financial statement schedules have been omitted because they are not required, not applicable, or the information is included elsewhere[183](index=183&type=chunk) - A detailed list of exhibits, including asset purchase agreements, equity incentive plans, loan agreements, and officer certifications, is provided[184](index=184&type=chunk)[185](index=185&type=chunk)[186](index=186&type=chunk)[187](index=187&type=chunk) [Form 10-K Summary](index=40&type=section&id=Item%2016.%20Form%2010-K%20Summary) No information is reported for this item - None[190](index=190&type=chunk)

Revenue Performance - Total revenues for the quarter ended March 31, 2023, were $5,048,065, an increase of 8.5% compared to $4,651,352 for the same period last year [73]. - Total revenues for the nine months ended March 31, 2023, were $16,020,327, reflecting a 47.2% increase from $10,884,737 in the prior year, partly due to the acquisition of the Lighthouse division [74]. - The company generated revenues from 318 unique customers during the nine months ended March 31, 2023, with no single customer exceeding 10% of total revenue [75]. Gross Profit - Gross profit for the quarter ended March 31, 2023, was $1,736,098, with a gross profit margin of 34.4%, down from 37.2% in the prior year [77]. - Gross profit for the nine months ended March 31, 2023, was $5,975,011, representing a 71.4% increase from $3,486,823 in the prior year, with a gross profit margin of 37.3% [77]. Expenses - Research and development expenses for the quarter ended March 31, 2023, were $206,375, a decrease of 4.0% from $214,898 in the prior year, while for the nine months, expenses increased by 52.5% to $660,518 [79]. - Selling, general and administrative expenses for the quarter ended March 31, 2023, were $2,022,991, an increase of 28.4% from $1,574,432 in the prior year [80]. Operating Losses - Operating losses for the quarter ended March 31, 2023, were $493,268, with cumulative operating losses of $1,513,890 and $905,583 for the years ended June 30, 2022, and 2021, respectively [81]. Investment and Financing - The company anticipates continued investment in research and development, particularly in Microprecision optics, micro medical cameras, and 3D endoscopes [69]. - The company has secured a $2,600,000 bank term loan and raised $1,500,000 through common stock sales in connection with the acquisition of Lighthouse Imaging [84]. Capital Expenditures and Commitments - Capital equipment expenditures and additional patent costs for the nine months ended March 31, 2023, totaled $52,411 [85]. - Future capital equipment and patent expenditures will depend on future sales and ongoing research and development success [85]. - Contractual cash commitments for fiscal 2023 include financing lease for equipment of $12,155 and minimum operating lease payments of $45,389, totaling $57,544 [86]. - Total contractual cash commitments thereafter amount to $498,468, including $120,564 for financing leases and $377,904 for operating leases [86]. - Open purchase orders as of March 31, 2023, represent approximately $2,923,320 in contractual cash commitments [86]. Financial Condition - The company currently has no off-balance sheet arrangements that could materially affect its financial condition or results [87]. - As a smaller reporting company, the company is electing scaled disclosure reporting obligations and is not required to provide certain market risk information [88].

Financial Data and Key Metrics Changes - Revenue for Q2 2023 was a record $5.9 million, up 51% from $3.9 million in the same quarter a year ago. Excluding a one-time $600,000 technology rights revenue, total revenue would have been $5.3 million, corresponding to a 38% year-over-year increase [31][34] - Gross margin reached 46% for Q2 2023 compared to 29% in the same quarter last year. Excluding the technology rights revenue, gross margin was 40%, marking an 11% improvement year-over-year [27][31] - Net income was $634,000, a significant improvement from a loss of $507,000 in the same quarter a year ago. Adjusted EBITDA was positive at $993,000 compared to a loss of $72,000 in the same quarter last year [28][34] Business Line Data and Key Metrics Changes - Production revenue for Q2 2023 was $3.6 million, a 59% increase from $2.3 million in Q2 2022, driven by increased orders for spinal products and a new defense aerospace contract [16][18] - Engineering revenue was $1.7 million for Q2 2023, a 4% increase compared to the same quarter of the previous fiscal year [24] Market Data and Key Metrics Changes - The total addressable market for single-use medical imaging devices is estimated at $500 million per year, growing at a rate of 15% to 20% annually [5] - The company has seen increased customer interest in single-use products, indicating a shift in market demand towards single-use medical devices [12] Company Strategy and Development Direction - The company completed its uplisting to NASDAQ, which has increased investor interest and trading volume [10] - A technology licensing and royalty agreement was finalized, aimed at enhancing access to the single-use medical device market and supporting long-term growth [11][14] - The company is focusing on transitioning products from reusable to single-use designs, which requires adjustments in the supply chain and production processes [12][51] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future, citing a robust development pipeline with several programs poised to enter production within the next 12 to 18 months [42] - The company expects solid revenue growth in the range of 20% for the fiscal year overall, despite some anticipated fluctuations in individual production programs [35][36] Other Important Information - The company achieved operating profitability for the first time in many years, with a focus on maintaining a high level of utilization of engineering resources [28][34] - The company is actively searching for a new permanent CFO following the resignation of the previous CFO [29][30] Q&A Session Summary Question: Can you provide more color on accounts receivable? - Management indicated that accounts receivable is broad, with a few long-term customers being slow-paying, but the majority is spread across many customers due to heavy deliveries at the end of the quarter [40] Question: What guidance can you provide going forward? - Management did not provide specific guidance beyond mentioning a strong pipeline of opportunities [41] Question: Can you elaborate on the pipeline and expected commercial launches? - Management noted that there are 7 to 8 programs ready to go into production in the next 12 to 18 months, with several poised for imminent launch pending customer funding and FDA approvals [42][43] Question: Why choose the royalty route for the licensing agreement? - The royalty arrangement allows the company to benefit from the growth in the single-use market without fully utilizing its production resources, providing a steady income stream [44][51] Question: Are there plans for more acquisitions? - Management confirmed that they are looking at acquisitions on an opportunistic basis, given the fragmented nature of the optics industry [52] Question: How does the company view its performance compared to three years ago? - Management believes the company is performing as well or better than expected [53] Question: Does the single-use program bring relationships with larger customers? - Management confirmed that they are seeing larger opportunities, with many current programs involving established medical device companies [67] Question: Are these programs replacing existing devices? - Yes, larger companies are moving from reusable to single-use devices, which lowers the risk of program success due to established markets [72]

[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)

Financial Data and Key Metrics Changes - Revenue for Q3 2022 was $4.7 million, an increase of 89% year-over-year, and organic revenue was up 37% year-over-year excluding the Lighthouse acquisition [11][44] - Consolidated gross margins were 37%, the highest since September 2019, with historical business gross margins over 40% excluding Lighthouse [12][45] - Adjusted EBITDA was positive at $218,000, marking a new record for the company [13][53] Business Line Data and Key Metrics Changes - Production revenue was $3.1 million, up 38% from the previous quarter and $1.2 million higher than the same quarter last year [16][44] - Engineering revenue was $1.5 million, compared to $550,000 in Q3 of the previous year [35][44] - Lighthouse contributed approximately $250,000 to production revenue, with organic production revenue increasing by 50% year-over-year [17][44] Market Data and Key Metrics Changes - The company reported a significant rebound in orders for spinal surgery products, totaling approximately $2.5 million from a major customer [22] - A new defense aerospace production contract contributed to Q3 production revenue, with initial deliveries of about $100,000 [18] - The company expects ongoing orders from the defense aerospace sector to reach a run rate of approximately $3 million per year [19] Company Strategy and Development Direction - The company aims to uplift its stock onto the NASDAQ Capital Market Exchange and has received shareholder approval for a reverse split if needed [14] - The strategic plan includes growing sales capabilities, investing in technical resources, and updating production capabilities [56][58] - The acquisition of Lighthouse is seen as a significant event that enhances the company's capabilities in both medical optics and digital imaging [59] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about ongoing revenue growth, driven by strong demand in both medical device and defense aerospace markets [43][60] - The company is actively recruiting additional engineers to increase the size of the engineering pipeline and improve project execution speed [36] - Management acknowledged supply chain challenges but emphasized proactive measures to mitigate risks [70][75] Other Important Information - The cash balance as of March 31, 2022, was $832,000, with accounts receivable increasing due to higher revenue [55] - Operating expenses for the quarter were $1.8 million, reflecting investments in sales and marketing initiatives [51][52] Q&A Session Summary Question: What is the company's capacity to meet growing demands? - Management indicated that there is still room for growth in manufacturing capacity and is actively hiring new personnel [65][66] Question: Are there any supply chain issues impacting production? - Management confirmed supply chain concerns, particularly with electronic components and glass supply, but noted effective management strategies are in place [71][74] Question: Is there an increased focus on aerospace and defense projects? - Management acknowledged a growing interest in aerospace and defense opportunities, particularly following the Lighthouse acquisition, which enhances capabilities in this sector [76][78]

[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]