UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2021
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)
| Massachusetts | 04-2795294 |
| (State or other jurisdiction | (I.R.S. Employer |
| of incorporation or organization) | Identification No.) |
22 East Broadway
Gardner, Massachusetts 01440
(Address of principal executive offices) (Zip Code)
(978) 630-1800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| Common stock, $0.01 par value | PEYE | OTCQB |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on December 31, 2020 was approximately $15,147,628 based on a total of 10,098,419 shares of the registrant’s common stock held by non-affiliates on December 31, 2020, at the closing price of $1.50 per share as reported on the OTCQB market on December 31, 2020.
The number of shares of outstanding common stock of the registrant as of September 21, 2021 was 13,282,476.
Documents incorporated by reference: None.
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PRECISION OPTICS CORPORATION, INC.
FORM 10-K
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This Annual Report contains forward-looking statements as defined under the federal securities laws. All statements other than statements of historical facts included in this Annual Report on Form 10-K regarding our financial performance, business strategy and plans and objectives of management for future operations and any other future events are forward-looking statements and based on our beliefs and assumptions. When used in this report, the words “anticipate,” “suggest,” “estimate,” “plan,” “project,” “continue,” “ongoing,” “potential,” “expect,” “predict,” “believe,” “intend,” “may,” “will,” “should,” “could,” “would” and other similar words are one way to identify such forward-looking statements. You should not place undue reliance on these forward-looking statements. Actual results could vary materially from these forward-looking statements. Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties, and assumptions including, without limitation, those risks and uncertainties contained in the Risk Factors section of this Annual Report on Form 10-K and our other filings made with the SEC. Although we believe that our expectations are reasonable, we can give no assurance that such expectations will prove to be correct. Based upon changing conditions, any one or more of these events described herein as anticipated, believed, estimated, expected or intended may not occur. All prior and subsequent written and oral forward-looking statements attributable to our Company or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement. We do not intend to update any of the forward-looking statements after the date of this Annual Report to conform these statements to actual results or to changes in our expectations, except as required by law.
ITEM 1. BUSINESS.
Overview
We have been a developer and manufacturer of advanced optical instruments since 1982. Our medical instrumentation line includes traditional endoscopes and endocouplers as well as other custom imaging and illumination products for use in minimally invasive surgical procedures. Our core efforts are targeted at the development of next generation endoscopes. Through internal research and development and working in partnership with our customers, we continuously develop next generation capabilities for designing and manufacturing 3D endoscopes and very small Microprecision™ lenses, anticipating future requirements as the surgical community continues to demand smaller and more enhanced imaging systems for minimally invasive surgery. Our unique proprietary technology in these areas, combined with recent developments in the areas of 3D displays and millimeter sized CMOS image sensors, has allowed us to begin commercialization of these technologies. The products we design and build based on these technologies are providing enhanced imaging for existing surgical procedures and oftentimes represent critical imaging products, components and technology which enable the development of new medical device products and related medical procedures.
The COVID-19 world-wide pandemic and the domestic and international impact of policy decisions being made in major countries around the world has had, and may continue to have, an adverse impact on various aspects of our business. We have taken various actions to augment our operating and human resource policies and procedures to guard against the potential health hazards of COVID-19. Some of those augmented procedures can have a negative impact on our operational efficiencies. Given the uncertainty surrounding the continuation of economic slow-downs domestically and abroad, we cannot predict with certainty at this time what the future impact of COVID-19 and resulting business and economic policies in the US and abroad will be on our up-coming financial operating results.
Effective June 1, 2019 we acquired the operating assets of Ross Optical Industries, Inc. of El Paso, Texas, which we began operating as a division of our Company beginning on that date. The accompanying financial statements include the results of operations of the Ross Optical division for fiscal years ended June 30, 2021 and 2020, and the assets and liabilities of the division as of June 30, 2021 and 2020. The Ross Optical division expands our optics components and assemblies’ business to include custom and catalog optics, which are sourced through Ross Optical’s extensive domestic and worldwide network of optical fabrication companies. Most systems make use of optical lenses, prisms, mirrors and windows and range from individual optical components to complex mechano-optical assemblies. Products often include thin film optical coatings that are applied using the in-house coating department. Over 70% of the Ross Optical division sales are in the United States, with the majority being specialized optical components for industrial applications and the remainder being assemblies. The balance of sales is split between military and medical device products.
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Approximately 54% of our total revenues in fiscal year 2021 were derived from optical components we design, manufacture and assemble as well as custom components we source, qualify and resell to our customers. Approximately 26% of our revenues in fiscal year 2021 were derived from optical engineering and design services, and the remaining 20% from the assembly and manufacture of endoscopic medical devises, sub-assemblies and optical components ordered by our customers and typically developed from the engineering and design services we perform for them. During fiscal year 2021, approximately 60% of our revenues were medical products related, 33% industrial, and 7% related to military and defense. The allocation of sales revenues between service offerings and industries was similar in fiscal year 2020 to those allocations in fiscal year 2021 described above. We expect sales revenue increases to result from assembly and manufacturing orders received from our customers for the products we assist them in designing using our unique optical product design and manufacturing capabilities.
By combining the unique capabilities of our company with the Ross Optical division we are experiencing opportunities for expanded sales of each division products and services throughout the combined customer base. Additionally, Ross’ expanded worldwide vendor relationships are benefiting our traditional efforts to source materials at competitive prices for our development projects and manufacturing activities.
History
We incorporated in Massachusetts in December 1982 and have been publicly-owned since November 1990. References to our Company contained herein include our two wholly-owned subsidiaries, Precise Medical, Inc. and Wood’s Precision Optics Corporation, Limited, except where the context otherwise requires. Effective June 1, 2019 we acquired the operating assets of Ross Optical Industries, Inc. of El Paso, Texas, which we began operating as a division of our Company beginning on that date. The accompanying financial statements include the results of operations of the Ross division for the fiscal years ended June 30, 2021 and 2020 and its assets and liabilities as of June 30, 2021 and 2020.
Our websites are www.poci.com and www.rossoptical.com. Information contained on our websites does not constitute part of this report.
Principal Products and Services
Our Current Core Business: Since 1982, we have manufactured medical products such as endoscopes and endocouplers. We have developed and sold endoscopes incorporating various optical technologies including our proprietary Lenslock™ technology, for use in a variety of minimally invasive surgical and diagnostic procedures. Today, we produce endoscopes for various applications, which are CE marked and therefore certified for sale throughout the European Economic Area. Since 1985, we have developed, manufactured and sold a proprietary product line of endocouplers. We also design and manufacture custom optical medical devices to satisfy our customers’ specific requirements. In addition to medical devices, we also manufacture and sell components and assemblies specially designed for industrial and military use.
The acquisition of the assets of Ross Optical Industries effective June 1, 2019 expanded our optics components and assemblies business. All products supplied by Ross Optical include a custom or catalog optic, which is sourced through Ross Optical’s extensive domestic and worldwide network of optical fabrication companies. Most systems make use of optical lenses, prisms, mirrors and windows and range from individual optical components to complex mechano-optical assemblies. Products often include thin film optical coatings that are applied by the Ross Optical division in-house coating department.
Microprecision™ Lenses and Micro Medical Cameras: While the size of endoscopes has gradually decreased over time, the widespread use of very small endoscopes, with diameters of one millimeter or smaller, has been limited, in part, we believe, by the inability of traditional lens fabrication methods to support these smaller sizes with good image quality and acceptable manufacturing costs. We believe our Microprecision™ optics technology provides a solution to this problem. Combined with recent advances by other companies in complementary metal-oxide-semiconductor, or CMOS, image sensor fabrication techniques, our Microprecision™ lenses and proprietary manufacturing techniques enable the manufacture of micro medical cameras at low prices and with sizes on the order of one millimeter or less, characteristics that make them well suited to medical applications.
We are currently engaged in development projects with numerous customers to design and produce even smaller CMOS based camera modules together with customized illumination using various technologies to match the needs of the medical device endoscopes. We are also currently designing disposable versions of our camera modules and assemblies designed for single-use and reduced risk of contamination from repeated use. We believe these on-going improvements are significant to the continued evolution and acceptance of our Microprecision™ technology platform.
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We have been engaged by various customers for an increasing amount of development work relating to the design of endoscopes and camera assemblies that utilize our Microprecision™ technology. We previously received production orders each exceeding $1M and follow-on orders from multiple customers for their custom designed products fulfillment of which is ongoing. We believe we will receive additional production orders from other customers currently in our engineering and design pipeline.
3D Endoscopes: Our 3D endoscopes provide next generation optical imaging for minimally invasive surgical procedures that utilize hand-held rigid endoscopes by using the brain’s natural ability to perceive depth, which is the third dimension, by viewing one’s environment through two eyes. Utilizing our proprietary technology to provide independent images to right and left eyes, surgeons can view the operative field with 3D perception.
Competition and Markets
We sell our products in highly competitive markets and we compete for business with both foreign and domestic manufacturers. Many of our current competitors are larger than us and have substantially greater resources than we do. In addition, there is an ongoing risk that other domestic or foreign companies who do not currently service or manufacture products for our target markets, some with greater experience in the optics industry and greater financial resources than we have, may seek to produce products or services that compete directly with ours.
While our resources are substantially more limited than those of some of our competitors, we believe that we can compete successfully in this market on the basis of product quality, price, delivery and innovation tailored to our customers’ specifications. Our success will depend, in part, on our ability to maintain a technological advantage over our competitors and to effectively incorporate that technology into our custom designs. To this end, we intend to continue to aggressively support and augment our internal engineering, research and development resources and to aggressively pursue patent protection for existing and new technology. We believe that our unique technical capabilities in the areas of Microprecision™ optics, micro medical cameras and illumination, as well as 3D endoscopes currently represent competitive advantages for us in the minimally invasive surgical device market.
The competitive advantage of our Ross Optical division is its ability to provide difficult-to-find optics, and, increasingly, to provide a broader range of services based on its ability to source optics worldwide and augmented by its ability to provide thin-film coatings and assembly.
Market Opportunities
Microprecision™ Lenses and Micro Medical Cameras: While other approaches exist for the manufacture of camera lenses, we design custom camera module assemblies with the combined objectives of low cost, small size, range of optical specifications and high image quality required by our customer’s precise medical device specifications. By enabling the production of millimeter sized and smaller cameras with low manufacturing costs, we believe our Microprecision™ technology opens the possibility to replace existing re-sterilizable endoscopes with a single-use alternative. Also, the small size of our Microprecision™ lenses and micro medical cameras combined with our proprietary illumination techniques can provide visualization for existing procedures that are currently performed blind or with sub-optimal imaging, and we believe can facilitate the development of new surgical procedures that are currently impractical without sub-millimeter visualization instrumentation.
3D Endoscopes and Robotic Surgery Systems: 3D endoscopes have been used for many years as part of robotic surgery systems partly because the market price of robotic surgery systems is high enough to support the cost of a high-quality custom 3D display. Competition amongst medical device companies, many of which are our customers for other products, in the area of 3D robotic surgery systems is increasing, and various companies are now pursuing less expensive, procedure specific robotic systems. We believe our experience and expertise in 3D endoscopes for medical applications could be a benefit to various companies in this area that could provide us with new product development and manufacturing opportunities.
Sales and Marketing
Current sales and marketing activities are intended to broaden awareness of the benefits of our new technology platforms and our successful application of these new technologies to medical device projects requiring surgery-grade visualization from sub-millimeter sized devices and 3D endoscopy, including single-use products and assemblies. We market directly to established medical device companies primarily in the United States that we believe could benefit from our advanced endoscopy visualization systems. Through this direct marketing, referrals, attendance at trade shows and a presence in online professional association websites, we have expanded our on-going pipeline of projects to significant medical device companies and to well-funded emerging technology companies. We expect our customer pipeline to continue to expand as development projects transition to production orders and new customer projects enter the development phase. Our Ross Optical division markets through existing customers and trade shows, in addition to proactive online marketing strategies executed primarily through its website. Through the gradual integration of the sales and marketing resources of the two operations we have begun to realize both expanded sales opportunities of the Ross component products and our micro optics engineering services, as well as benefits from utilizing Ross’ worldwide vendor relationships for optical components.
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International Business
Other than the Ross Optical division international sales described below, we have had negligible direct export sales to date. However, our medical products have received the CE mark certification, which permits sales into the European Economic Area and which benefits our customers as they market their products manufactured by us or containing our sub-assemblies into markets outside the United States. In the future, we may establish or use additional production facilities overseas to produce key components for our business, such as lenses. From the 1990s through approximately 2014, we maintained a physical presence in Asia to support business and quality control activities throughout the region as needed. We continue to acquire various optical components from overseas to meet the needs of custom device designs. We believe that the availability of specialized components and cost savings from various overseas production resources is essential to our ability to deliver complex and unique device designs and to compete on a price basis in the medical products area particularly and to our profitability generally.
The addition of Ross Optical adds an expanded network of overseas suppliers of various types and sizes of optical components and assemblies that will enhance our ability to meet the material demands of our customers’ unique optical and medical device designs. During fiscal year 2021, 13% of the Ross Optical division sales were to customers outside of the United States and Canada, with the balance of sales primarily split between Western Europe and Singapore.
Research and Development
We believe that our future success depends, to a large degree, on our ability to continue to conceive and develop new optical products and technologies to enhance the performance characteristics and methods of manufacture of existing and new products. Although development work on behalf of customers is almost entirely performed under revenue generating contracts and customer purchase orders, research and development expenses are incurred on our own proprietary products and technology, such as Microprecision™ optics, micro medical cameras and 3D endoscopes. Accordingly, we treat engineering expenses not consumed in customer contracted development and our investment of funds and resources in internal product and intellectual property development as research and development expense in the accompanying statement of operations. For the years ended June 30, 2021 and 2020, research and development expenses were $624,253 and $886,129, respectively.
Raw Materials and Principal Suppliers
A key raw material component for our products is precision grade optical glass, which we obtain from a few suppliers, principally SCHOTT North America, Inc. and Ohara Corporation.
We obtain CMOS sensors used in our development of endoscope products for our customers from various suppliers such as OmniVision Technologies, Inc. We believe that while the number of sources of supply is limited for the CMOS sensors with the specifications used in medical device endoscopes we develop; the manufacturing capacities of those suppliers is adequate to meet our demand in the next twelve months.
We have experienced supply disruptions and customer delays from certain vendors and customers that we believe were the result of the COVID-19 pandemic and related economic slow-down. Although we are not currently experiencing vendor supply issues as a result of COVID-19, we cannot predict with certainty at this time what the future impact of COVID-19 and resulting business and economic policies in the US and abroad will be on our vendors and principal suppliers.
Patents and Trademarks
We rely, in part, upon patents, trade secrets and proprietary knowledge as well as personnel policies and employee confidentiality agreements concerning inventions and other creative efforts to develop and maintain our competitive position. We plan to file for patents, copyrights and trademarks in the United States and in other appropriate countries to protect our intellectual property rights to the greatest extent practicable. We currently hold rights to various United States patents, and have patent applications pending, including applications for our new generation of micro medical cameras. Our current patent portfolio includes patents, rights to patents and patent applications that cover various aspects of our technology in the following areas:
| — | Medical devices; | |
| — | 3-D endoscopes; | |
| — | Microprecision™ lenses and micro medical cameras; | |
| — | Defense products. |
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The patents contained in our current patent portfolio have various expiration dates through May 2036. We are not aware of any infringements of these patents. While we believe that our pending applications relate to patentable devices or concepts, these patents may not ultimately be issued and we may not be able to successfully defend these patents or effectively limit the development of competitive products and services.
In July 2011, we entered into an asset purchase agreement with Intuitive Surgical Operations, Inc., in which we assigned to Intuitive Surgical all of the issued and non-expired patents and pending patent applications that we held at that time, and in return, Intuitive Surgical granted us a royalty-free, worldwide license to these patents in fields outside of medical robotics.
We intend to continue to innovate and extend our technological capabilities in the areas of 3-D endoscopy Microprecision™ optics, micro medical cameras, and related illumination techniques, and to aggressively pursue patent protection for such developments.
Employees
As of June 30, 2021, we had 52 employees, 50 of which were full-time employees. There were 28 employees in manufacturing, 9 in engineering/research and development, 6 in sales, and 9 in finance and administration. We are not a party to any collective bargaining agreements. We believe our relations with our employees are very good.
Customers
During fiscal year 2021 we sold product and services to over 326 customers and no customer accounted for 10% or more of our total revenues during the fiscal years ended June 30, 2021, and 2020.
Our largest customer account receivable balance at June 30, 2021, was 16% of total accounts receivable. At June 30, 2020, our largest customer account receivable balance was 14% of total accounts receivable. No other accounts accounted for more than 10% of accounts receivable at June 30, 2021, or 2020.
Environmental Matters
Our operations are subject to a variety of federal, state and local laws and regulations relating to the discharge of materials into the environment or otherwise relative to the protection of the environment. From time to time, we use a small amount of hazardous materials in our operations. We believe that we currently comply with all applicable environmental laws and regulations and intend to do our best efforts to remain in compliance.
Government Regulations
Domestic Regulation. We currently develop, manufacture and sell several medical products, the marketing of which is subject to governmental regulation in the United States. Medical devices are regulated in the United States by the Food and Drug Administration, or FDA, and, in some cases, by certain state agencies. The FDA regulates the research, design, testing, manufacture, safety, effectiveness, labeling, promotion and distribution of medical devices in the United States. Generally, medical devices require clearance or approval prior to commercial distribution. Additionally, certain material changes to, and changes in, intended uses of, medical devices are also subject to FDA review and clearance or approval. Non-compliance with applicable requirements can result in failure of the FDA to grant pre-market clearance or approval, withdrawal or suspension of approval, suspension of production, or the imposition of various other penalties.
We previously notified the FDA of our intent to market our endoscopes, image couplers, beamsplitters, adapters and video ophthalmoscopes, and the FDA has determined that we may market such devices, subject to the general control provisions of the Food, Drug and Cosmetic Act. We obtained this FDA permission without the need to undergo a lengthy and expensive approval process due to the FDA’s determination that such devices met the regulatory standard of being substantially equivalent to existing FDA-approved devices.
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In the future, we plan to market additional medical devices that may require the FDA’s permission to market such products. We may also develop additional products or seek to sell some of our current or future medical products in a manner that requires us to obtain the permission of the FDA to market such products, as well as the regulatory approval or license of other federal, state and local agencies or similar agencies in other countries. The FDA has authority to conduct detailed inspections of manufacturing plants in order to assure that “good manufacturing practices” are being followed in the manufacture of medical devices including medical devices or components of medical devices manufactured for other medical device companies, to require periodic reporting of product defects to the FDA, and to prohibit the sale of devices which do not comply with law.
We design and manufacture components for the defense industry, and our Ross Optical division imports, exports and manufactures optical products for the defense industry, some of which is controlled by U.S. regulations. Generally, these regulations require strict control over technical data in documented form and as embodied in products, both within our company and as part of exported shipments. In particular, we maintain a technology control plan, we are ISO certified and ITAR (International Traffic in Arms Regulations) registered with the U.S. State Department and we maintain a number of technology assistance agreements with overseas suppliers that have been approved by the U.S. State Department. Non-compliance with applicable requirements can result in U.S. actions that may result in withdrawal or suspension of approvals, suspension of company imports, exports or production, or the imposition of fines or various other penalties.
Foreign Requirements. Sales of medical device products outside the United States are subject to foreign regulatory requirements that may vary from country to country. Our failure to comply with foreign regulatory requirements would jeopardize our ability to market and sell our products in foreign jurisdictions. The regulatory environment in the European Union member countries of the European Economic Area for medical device products differs from that in the United States. Medical devices sold in the European Economic Area must bear the Conformité Européenne, or CE mark. Devices are classified by manufacturers according to the risks they represent, with a classification of Class III representing the highest risk devices and Class I representing the lowest risk devices. Once a device has been classified, the manufacturer can follow one of a series of conformity assessment routes, typically through a registered quality system, and demonstrate compliance to a “European Notified Body.” The CE mark may then be applied to the device. Maintenance of the system is ensured through annual on-site audits by the notified body and a post-market surveillance system requiring the manufacturer to submit serious complaints to the appropriate governmental authority. All of our medical products are manufactured in conformity with the CE mark requirements.
RISKS RELATED TO OUR BUSINESS
In addition to the other information set forth in this annual report, you should carefully consider the following factors, which could materially affect our business, financial condition or results of operations in future periods. The risks described below are not the only risks facing our Company. The following information should be read together and in conjunction with “Forward-Looking Statements,” “Item 1. Business,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the accompanying notes thereto. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations in future periods.
We have a history of losses, we may continue to incur losses and not achieve profitability in the near term; and we may need to raise additional funds.
During the years ended June 30, 2021, and 2020, we incurred operating losses of $905,583 and $1,422,983, respectively. Our accumulated deficit at June 30, 2021, amounted to $47,165,978. We had working capital of $2,265,325 and $1,797,705 as of June 30, 2021, and 2020, respectively. We may continue incurring losses for the foreseeable future and not achieve sustained profitability in the near term. We must generate sufficient cash flow or raise additional capital to pursue our product development initiatives, and penetrate markets for the sale of our products. If required we believe that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations, strategic alliances, or other means. However, if we are unable to secure adequate additional capital when needed, we may be required to curtail our research and development initiatives and take additional measures to reduce costs to conserve our cash in amounts sufficient to sustain operations and meet our obligations.
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We depend on the availability of certain key supplies and services that are available from only a few sources and we may experience difficulty with certain suppliers due to the COVID-19 world-wide pandemic and we may have difficulty finding alternative sources of these supplies or services.
We source certain key supplies to develop and manufacture our products, particularly our precision grade optical glass, which is available from only a few sources, in China. During the early stages of the COVID-19 world-wide pandemic, we experienced difficulties with certain suppliers in China. Until the pandemic is sufficiently under control, we may experience further difficulties with suppliers. Our business could be affected if we become unable to procure these essential materials and services in adequate quantities and at acceptable prices. We are always evaluating our suppliers and alternative sources. If we experience a shortage of certain supplies and are unable to find an alternative source, our financial condition and results of operations could be adversely affected.
The COVID-19 world-wide pandemic and the economic effects of governmental entities and commercial business policy decisions relating to it could cause disruptions with our sources of supply and customer orders and their ability to pay amounts owed us.
The COVID-19 world-wide pandemic that began during the quarter ended March 31, 2020, and the domestic and international impact of policy decisions being made in major countries around the world has had, and is expected to have, an adverse impact on our sources of supply, supply chain logistics, current and future orders from our customers, collection of amounts owed to us from our customers, our internal operating procedures, and our overall financial condition. We have taken various actions to augment our operating and human resource policies and procedures to guard against the potential health hazards of COVID-19. These augmented procedures can have a negative impact on our operational efficiencies. We source various components from overseas suppliers throughout Asia including China. We have experienced supply chain and supplier disruptions as well as customer order delays and slow-downs, which we believe was the result of the COVID-19 pandemic and related economic slow-down. Given the uncertainty surrounding the continuation of supply chain disruptions, customer delays, and overall economic slow-downs domestically and abroad, we cannot predict with certainty at this time what the future impact of COVID-19 and resulting business and economic policies in the US and abroad will be on our future operating results.
We rely on a small number of customers who may not consistently purchase our products in the future and if we lose any one of these customers, our revenues may decline.
In the fiscal year ended June 30, 2021, and 2020, our largest customer represented approximately 9% of our total revenues. No other customer accounted for more than 10% of our revenues during those periods. At June 30, 2021, our largest customer account receivable balance was 16% of total accounts receivable. At June 30, 2020, our largest customer account receivable balance was 14% of total accounts receivable. No other customer accounted form more than 10% of total accounts receivable at June 30, 2021, or 2020.
In the future, a small number of customers may continue to represent a significant portion of our total revenues in any given period. These customers may not consistently purchase our products at a particular rate over any subsequent period. A loss of any of these customers could adversely affect our revenues.
We could suffer unrecoverable losses on our customers’ accounts receivable, which would adversely affect our financial results.
At June 30, 2021, our largest customer account receivable balance was 16% of total accounts receivable. While we believe we have a varied customer base and have experienced strong collections in the past, we may experience changes in our customer base, including reductions in purchasing commitments, which could also have a material adverse effect on our revenues and liquidity. Additionally, our customers could become unable or unwilling to pay amounts owed to us. During fiscal 2018, we recorded a $227,500 reserve against accounts receivable amounts owed to us by one customer that has not been able to pay us for design services we provided. We have not had significant accounts receivable write-offs or additions to the accounts receivable reserve since then. We have not purchased insurance on our accounts receivable balances. Large uncollectible accounts receivable balances could have a material adverse effect on our financial condition.
We rely heavily upon the talents of our Chief Executive Officer and our President of the Ross Optical Division, the loss of whom could damage our business.
Our performance depends, to a large extent, on a small number of key scientific, technical, managerial and manufacturing personnel. In particular, we believe our success is highly dependent upon the services and reputation of our Chief Executive Officer, Dr. Joseph N. Forkey and our President of the Ross Optical division, Mr. Divaker Mangadu. The loss of Dr. Forkey’s services could damage our business. Dr. Forkey provides highly valuable contributions to our capabilities in optical instrument development, in management of new technology and in potentially significant longer-term Company initiatives. The loss of Mr. Mangadu could damage the operations of the Ross Optical division as Mr. Mangadu provides highly valuable contributions to the effective operation of Ross including its sales, customer and vendor relationships, production activities and overall administration. We do not carry key-man life insurance on Dr. Forkey or Mr. Mangadu.
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We must continue to be able to attract employees with the scientific and technical skills that our business requires and if we are unable to attract and retain such individuals, our business could be severely damaged.
Our ability to attract employees with a high degree of scientific and technical talent is crucial to the success of our business. There is intense competition for the services of such persons, and we cannot guarantee that we will be able to attract and retain individuals possessing the necessary qualifications. If we cannot attract such individuals, we may not be able to perform the necessary design services for our customers or produce our products causing damage to our business or an inability to meet customer demand or increase revenues.
We are subject to a high degree of regulatory oversight and, if we do not continue to receive the necessary regulatory approvals, our revenues may decline.
The FDA has granted us clearance to manufacture and market the medical products we currently sell in the United States. However, prior FDA approval may be required before we can market additional medical products that we may develop in the future. We may also seek to sell current or future medical products in a manner that requires us to obtain FDA permission to market such products. We may also require the regulatory approval or license of other federal, state or local agencies or comparable agencies in other countries.
We may lose the FDA’s permission to manufacture and market our current products or may not obtain the necessary regulatory permission, approvals or licenses for the manufacturing or marketing of any of our future products. Also, we cannot predict the impact on our business of FDA regulations or determinations arising from future legislation or administrative action. If we lose the FDA’s permission to manufacture and market our current products or we do not obtain regulatory permission to manufacture and market our future products, our revenues may decline and our business may be harmed.
We face risks inherent in product development and production under fixed-price purchase orders and these purchase orders may not be profitable over time.
A portion of our business has been devoted to research, development and production under fixed-price purchase orders. For our purposes, a fixed-price purchase order is any purchase order under which we will provide products or services for a fixed-price over an extended period of time, usually six months or longer. Fixed-price purchase orders have represented as much as 50% of our total revenues during periods in the last several years. We expect that revenues from fixed-price purchase orders will continue to represent a significant portion of our total revenues in future fiscal years.
Because they involve performance over time, we cannot predict with certainty the expenses involved in meeting our obligations under fixed-price purchase orders. Therefore, we can never be sure at the time we enter into any single fixed-price purchase order that such purchase order will continue to be profitable for us throughout the fixed-price period.
We primarily perform engineering and manufacturing services for our customers who could decide to use another vendor for these services in the future.
A significant portion of our revenues are derived from engineering and manufacturing services that we perform to design and fabricate medical device products or sub-assemblies of medical device products for our customers who in turn sell the products to the end users. Our customers typically own the proprietary rights to and control commercial distribution of the final products. Therefore, in many of these cases we do not own the proprietary rights to the medical device products that we manufacture or that our sub-assemblies are made a part of. Our customers could decide to use other suppliers for these services based on cost, quality, delivery time, production capacities, competitive and regulatory considerations or other factors. Thus, revenues from our customers and the products and services we provide them are subject to significant fluctuation on a product to product basis from period to period.
We resell products we purchase from third parties and our customers could decide to use another vendor for to acquire those products.
Our division Ross Optical, which we acquired effective June 1, 2019, primarily acquires specialized optical components and assemblies from third parties pursuant to specifications provided from its customers, inspects and sometimes further processes those products before reselling them to its customers. Because Ross Optical does not manufacture the optical components and assemblies or owns the intellectual property rights to the products its customers could choose to obtain those products and services from other sources or could apply pressure to Ross Optical to lower its prices resulting in reduced future gross margins and operating results.
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Third parties may infringe on our intellectual property and, as a result, we could incur significant expense in protecting our patents or not have sufficient resources to protect them.
We utilize numerous licensed patents that are important to our business. In July 2011, we entered into an asset purchase agreement with Intuitive Surgical Operations, Inc. in which we assigned to Intuitive Surgical all the issued and non-expired patents and pending patent applications we held at that time and, in return, Intuitive Surgical granted to us a royalty-free, worldwide license to these patents in fields outside of medical robotics.
Although we are not currently aware of any past or present infringements of our patents, we plan, jointly with Intuitive Surgical, to protect these patents from infringement and obtain additional patents whenever feasible. To this end, we have obtained confidentiality agreements from our employees and consultants and others who have access to the design of our products and other proprietary information. Protecting and obtaining patents, however, is both time consuming and expensive. We therefore may not have the resources necessary to assert all potential patent infringement claims or pursue all patents that might be available to us. If our competitors or other third parties infringe on our patents, our business may be harmed.
Third parties may claim that we have infringed on their patents and, as a result, we could be prohibited from using all or part of any technology used in our products.
Should third parties claim a proprietary right to all or part of any technology that we use in our products, such a claim, regardless of its merit, could involve us in costly litigation. If successful, such a claim could also result in us being unable to freely use the technology that was the subject of the claim, or sell products embodying such technology. If we engage in litigation, our expenses may increase and our business may be harmed. If we are prohibited from using a particular technology in our products, our revenues may decline and our business may be harmed.
We depend on the availability of certain key supplies and services that are available from only a few sources and if we experience difficulty with a supplier, we may have difficulty finding alternative sources of these supplies or services.
We require certain key supplies to develop and manufacture our products, particularly our precision grade optical glass, which is available from only a few sources, each of which is located outside of the United States. Additionally, we rely on outside vendors to grind and polish certain of our lenses and other optical components, such as prisms and windows. We also rely on a limited number of suppliers for specialized CMOS sensors and the electronic wiring of those sensors. Based upon our ordering experience to date, we believe the materials and services required for the production of our products are currently available in sufficient quantities to meet our needs. Our requirements are small relative to the total supply, and we are not currently encountering problems with availability. However, this does not mean that we will continue to have timely access to adequate supplies of essential materials and services in the future or that supplies of these materials and services will be available on satisfactory terms when the need arises. Our business could be severely damaged if we become unable to procure these essential materials and services in adequate quantities and at acceptable prices.
From time to time, subcontractors may produce some of our products for us, and our business is subject to the risk that these subcontractors fail to make timely delivery. Our products and services are also used as components of the products and services of other manufacturers. We are therefore subject to the risk that manufacturers who integrate our products or services into their own products or services are unable to acquire essential supplies and services from third parties in a timely fashion. If this occurs, we may not be able to deliver our products on a timely basis and our revenues may decline.
Our customers may claim that the products we sold them were defective and if our insurance is not sufficient to cover such a claim, we would be liable for the excess.
Like any manufacturer, we are and always have been exposed to liability claims resulting from the use of products we assist in developing, manufacture and supply to our customers. Additionally, the products we supply could be used in conjunction with other products in medical device applications, such as certain endoscope products claimed to be associated with surgical suite contamination resulting from their intended re-use and re-sterilization. We maintain product liability insurance to cover us in the event of liability claims, and as of September 24, 2021, no such claims have been asserted or threatened against us. However, our insurance may not be sufficient to cover all possible future product claims, costs and any resulting liabilities.
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We would be liable if our business operations harmed the environment and a failure to maintain compliance with environmental laws could severely damage our business.
Our operations are subject to a variety of federal, state and local laws and regulations relating to the protection of the environment. From time to time, we use hazardous materials in our operations. Although we believe that we comply with all applicable environmental laws and regulations, our business could be severely damaged by any failure to maintain such compliance.
Our quarterly financial results vary quarter to quarter and depend on many factors. As a result, we cannot predict with a high degree of certainty our operating results in any particular fiscal quarter.
Our quarterly operating results may vary significantly depending upon factors such as:
| — | the timing of completion of significant customer orders; |
| — | the timing and amount of our research and development expenditures; |
| — | the costs of initial product production in connection with new products; |
| — | the timing of new product introductions—both by us and by our competitors; |
| — | the timing and level of market acceptance of new products or enhanced versions of our existing products; |
| — | our ability to retain existing customers and customers’ continued demand for our products and services; |
| — | our customers’ inventory levels, and levels of demand for our customers’ products and services; and |
| — | competitive pricing pressures. |
We may not be able to grow or sustain revenues or achieve or maintain profitability on a quarterly or annual basis and levels of revenue and/or profitability may vary from one such period to another.
Some of our competitors are large, well-financed companies who have research and marketing capabilities that are superior to ours.
The industries in which we operate are highly competitive. Many of our existing and potential competitors have greater financial resources and manufacturing capabilities, more established and larger marketing and sales organizations and larger technical staffs than we have. Other companies, some with greater experience in the optics, semiconductor or medical products industries, are seeking to produce products and services that compete with our products and services.
Ross Optical is subject to tariffs and regulatory scrutiny, and it faces the risk of changes to this regulatory environment and business in the future.
Ross Optical is ISO and ITAR registered and currently imports, exports, and manufactures optical products for the defense industry, some of which are controlled by regulations promulgated by the U.S. Departments of State and Commerce. If Ross Optical fails to comply with the terms of these regulations and registrations, it may lose its ITAR registration or suffer other consequences, such as the withdrawal or suspension of approvals, suspension of imports, exports or production, or the imposition of fines or other penalties.
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There is also the risk that new laws or regulations or changes in enforcement practices applicable to the business of Ross Optical could be imposed, which may adversely affect its ability to compete effectively with other institutions that are not affected in the same way, or which may impact its supplier and customers. In addition, regulation imposed on market participants generally, such as foreign tariff increases could negatively affect the overall profitability of Ross Optical’s international business.
These developments could impact Ross Optical’s profitability, or even make it uneconomical for Ross Optical to continue to conduct all or certain of its business, or could cause Ross Optical to incur significant costs associated with adjusting its business to these changes.
RISKS RELATED TO OUR STOCK
Trading in our common stock is limited and the price of our common stock may be subject to substantial volatility.
Our common stock is quoted on OTCQB, the OTC market tier for companies that report to the SEC, under the symbol PEYE. We expect our common stock to continue to be quoted on the OTCQB for the foreseeable future. Broker-dealers may decline to trade in OTCQB stocks given the market for such securities is often limited, the stocks are more volatile and the risk to investors is greater. These factors may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of their shares. This could cause our stock price to decline.
Additionally, the price of our common stock may be volatile as a result of a number of factors, including, but not limited to, the following:
| — | our ability to successfully conceive and to develop new products and services to enhance the performance characteristics and methods of manufacture of existing products; |
| — | our ability to retain existing customers and customers’ continued demand for our products and services; |
| — | the timing of our research and development expenditures and of new product introductions; |
| — | the timing and level of acceptance of new products or enhanced versions of our existing products; and |
| — | price and volume fluctuations in the stock market at large which do not relate to our operating performance. |
“Penny stock” rules may make buying or selling our securities difficult which may make our stock less liquid and make it harder for investors to buy and sell our securities.
Trading in our securities is subject to the SEC’s “penny stock” rule and we anticipate that trading in our securities will continue to be subject to the penny stock rules for the foreseeable future. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by these requirements may discourage broker-dealers from recommending transactions in our securities, which could severely limit the liquidity of our securities and consequently adversely affect the market price for our securities.
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We are contractually obligated to issue shares in the future, diluting your interest in us.
As of June 30, 2021, there were 2,578,200 shares of our common stock issuable upon exercise of stock options outstanding, at a weighted average exercise price of $1.13 per share. As of June 30, 2021, a total of 731,498 shares of our common stock are reserved for issuance under our 2021 Equity Incentive Plan. Additionally, we issued 90,687 shares of our common stock during fiscal year 2021 for stock option exercises, which brought our total common shares outstanding to 13,282,476 at June 30, 2021. Moreover, we expect to issue additional shares and options to purchase shares of our common stock to compensate employees, consultants and directors, and we may issue additional shares to raise capital. Any such issuances will have the effect of further diluting the interest of the holders of our securities.
We conduct our domestic operations at three facilities in Gardner, Massachusetts and one facility in El Paso, Texas. We are currently a tenant-at-will, paying rent of $9,000 per month for our main Gardner facility. We rent three other smaller Gardner facilities on a month-to-month basis. Our Ross Optical division rents a facility in El Paso, Texas from an unrelated party pursuant to an operating lease through May 2022 at monthly base rates beginning at $3,392 and increasing to $3,563 per month during the term of the lease.
We believe these facilities are adequate for our current operations and are adequately covered by insurance. Significant increases in production or the addition of significant equipment additions or manufacturing capabilities in connection with the production of our line of endoscopes and other products may, however, require improvements to existing facilities or the acquisition or lease of additional facilities. We may establish production facilities domestically or overseas to produce key assemblies or components, such as lenses, for our products. Overseas facilities may subject us to the political and economic risks associated with overseas operations. The loss of or inability to establish or maintain such additional domestic or overseas facilities could materially adversely affect our competitive position and profitability.
Our Company, on occasion, may become involved in legal matters arising in the ordinary course of our business, which could have a material adverse effect on our business, financial condition or results of operations. We are currently not aware of any pending or threatened litigation against us or our officers and directors in their capacity as such that could have a material impact on our operations or finances.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is quoted on OTCQB, the OTC market tier for companies that report to the SEC, under the symbol PEYE.
Holders
As of September 26, 2021, we had approximately 55 holders of record of our common stock. Holders of record include nominees who may hold shares on behalf of multiple owners.
Dividends
We have not declared any dividends during the last two fiscal years. At present, we intend to retain our earnings, if any, to finance research and development and the expansion of our business.
Recent Sales of Unregistered Securities
We have not issued any unregistered securities since March 31, 2021.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes information about our equity compensation plans as of June 30, 2021.
| 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 (excluding securities reflected in column (a)) | |||||||||
| Equity compensation plans approved by security holders | 69,698 | $ | 0.69 | – | ||||||||
| Equity compensation plans not approved by security holders | 2,508,502 | $ | 1.14 | 731,498 | ||||||||
| Total | 2,578,200 | $ | 1.13 | 731,498 | ||||||||
2006 Equity Incentive Plan
On November 28, 2006, our stockholders approved the Precision Optics Corporation, Inc. 2006 Equity Incentive Plan, referred to as the 2006 Plan, which succeeded the Precision Optics Corporation, Inc. Amended and Restated 1997 Equity Incentive Plan, referred to as the 1997 Plan. No further awards have been or will be granted under the 1997 Plan. The 2006 Plan allowed for the granting of stock options to selected employees, directors and other persons who provide services to us or our affiliates. No further awards will be granted under the 2006 Plan.
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2011 Equity Incentive Plan
The Precision Optics Corporation, Inc. 2011 Equity Incentive Plan, referred to as the 2011 Plan, was adopted by our Board of Directors on October 13, 2011. The 2011 Plan allows for the granting of stock options to selected employees, directors and other persons who provide services to us or our affiliates.
On April 16, 2015, the Board of Directors approved an amendment to the 2011 Equity Incentive Plan which increased the maximum number of shares of our common stock that may be awarded under the Plan from 325,000 to 1,825,000, an increase of 1,500,000 shares. In connection therewith, on April 20, 2015, we filed a registration statement on Form S-8 to register the 1,500,000 shares of common stock.
On May 1, 2019, the Board of Directors approved an amendment to the 2011 Equity Incentive Plan to update the Plan for the latest changes to the tax laws and increase the maximum number of shares of our common stock that may be awarded under the Plan from 1,825,000 to 2,825,000, an increase of 1,000,000 shares. In connection therewith, on September 6, 2019, we filed a registration statement on Form S-8 to register the 1,000,000 shares of common stock.
2021 Equity Incentive Plan
The Precision Optics Corporation, Inc. 2021 Equity Incentive Plan, referred to as the 2021 Plan, was adopted by our Board of Directors on May 10, 2021. The 2021 Plan allows for the granting of stock options to selected employees, directors and other persons who provide services to us or our affiliates for up to a total of 1,000,000 shares of the Company’s common stock. In connection therewith, we filed a registration statement on Form S-8 to register the 1,000,000 shares of common stock.
ITEM 6. SELECTED FINANCIAL DATA.
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the Financial Statements and Notes thereto, and other financial information included elsewhere in this Annual Report on Form 10-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains descriptions of our expectations regarding future trends affecting our business. The following discussion sets forth certain factors we believe could cause actual results to differ materially from those contemplated by the forward-looking statements.
Overview
We have been a developer and manufacturer of advanced optical instruments since 1982. Our medical instrumentation line includes traditional endoscopes and endocouplers as well as other custom imaging and illumination products for use in minimally invasive surgical procedures. Much of our recent development efforts have been targeted at the development of next generation endoscopes. We selectively execute internal research and development programs to develop next generation capabilities for designing and manufacturing 3D endoscopes and very small Microprecision™ lenses, anticipating future requirements as the surgical community continues to demand smaller and more enhanced imaging systems for minimally invasive surgery.
As Ross Optical Industries of El Paso, Texas we also operate as a supplier of custom optical components and assemblies for military and defense, medical and various other industrial applications. All products sold by us under the Ross Optical name include a custom or catalog optic, which is sourced through our extensive domestic and worldwide network of optical fabrication companies. Most systems make use of optical lenses, prisms, mirrors and windows and range from individual optical components to complex mechano-optical assemblies. Products often include thin film optical coatings that are applied using our in-house coating department.
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Approximately 60% of our business during the fiscal year ended June 30, 2021 was from the design and manufacture of high-quality medical devices. Approximately 7% of our revenue during the same period was from the design, manufacture and resale of optical products for military and defense, and 33% was from other industrial, non-medical products. Our proprietary medical instrumentation line and unique custom design and manufacturing capabilities include traditional endoscopes and endocouplers as well as other custom imaging and illumination products for use in minimally invasive surgical procedures. We design and manufacture 3D endoscopes and very small Microprecision™ lenses, assemblies and complete medical devices to meet the surgical community’s continuing demand for smaller, disposable, and more enhanced imaging systems for minimally invasive surgery.
We are registered to the ISO 9001:2015 and ISO 13485:2016 Quality Standards and comply with the FDA Good Manufacturing Practices and the European Union Medical Device Directive for CE marking of our medical products. Our websites are www.poci.com and www.rossoptical.com. Information contained on our websites does not constitute part of this report.
The markets in which we do business are highly competitive and include both foreign and domestic competitors. Many of our competitors are larger and have substantially greater resources than we do. Furthermore, other domestic or foreign companies, some with greater financial resources than we have, may seek to produce products or services that compete with ours. We routinely outsource specialized production efforts as required to obtain the most cost-effective production. Over the years we have achieved extensive experience collaborating with other optical specialists worldwide.
We believe that competition for sales of our medical products and services, which have been principally sold to original equipment manufacturers, or OEM, customers, is based on our ability to design and produce technical features, performance, engineering service and production scheduling, on-time delivery, quality control and product reliability, and competitive pricing.
We believe that our future success depends, to a large degree, on our ability to develop new optical products and services to enhance the performance characteristics and methods of manufacture of existing products and future products fully or partially enabled by our technologies and capabilities. Accordingly, we expect to continue to seek and obtain product-related design and development contracts with customers and to selectively invest our own funds on research and development, particularly in the areas of Microprecision™ optics, micro medical cameras, illumination, and 3D endoscopes.
The Ross Optical division sales are primarily optical components and assemblies for industrial applications in addition to medical and military uses. By combining the unique capabilities of our Company with the Ross Optical division we believe there are opportunities for expanded sales of each division’s products and services throughout the combined customer base. For example, we believe that our extensive engineering and design services may benefit Ross’ customer base and that Ross’ expanded worldwide vendor relationships may benefit our traditional efforts to source materials at competitive prices for our development projects and manufacturing activities.
During the fiscal year ended June 30, 2021, we sold products and services to 326 different customers and no single customer represented 10% or more of consolidated sales. Except for effect of potentially receiving future significant production orders, we expect this trend to continue since consolidated sales now include those of the Ross Optical division.
Current sales and marketing activities are intended to broaden awareness of the benefits of our new technology platforms and our successful application of these new technologies to medical device projects requiring surgery-grade visualization from sub-millimeter sized devices and 3D endoscopy, including single-use products and assemblies. We market directly to established medical device companies primarily in the United States that we believe could benefit from our advanced endoscopy visualization systems. Through this direct marketing, referrals, attendance at trade shows and a presence in online professional association websites, we have expanded our on-going pipeline of projects to significant medical device companies as well as well-funded emerging technology companies. We expect our customer pipeline to continue to expand as development projects transition to production orders and new customer projects enter the development phase. Our Ross Optical division markets through existing customers and trade shows, in addition to proactive online marketing strategies executed primarily through its website. We believe there are opportunities to expand the reach of sales activities of our business and that of our new division, Ross Optical, through the gradual integration of some of the sales and marketing resources of the two operations.
Critical Accounting Policies and Estimates
Our critical accounting policies are included in the Notes to our Financial Statements contained in this Annual Report on Form 10-K.
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Results of Operations for the Fiscal Year Ended June 30, 2021 as Compared to the Fiscal Year Ended June 30, 2020
Total revenues for the fiscal year ended June 30, 2021 were $10,674,907, an increase of $751,552, or 7.6%, from revenues for fiscal year 2020 of $9,923,355. Engineering services increased approximately $1,380,000 in fiscal year 2021 compared to fiscal year 2020, while product and assembly production revenues decreased approximately $607,000, and optical component revenues were virtually unchanged during the same period.
The $1,380,000 increase in engineering service revenues in fiscal year 2021 compared to fiscal year 2020 was the result of personnel additions in the engineering group thereby raising revenue earning capacity, and the addition of two significant engineering projects during fiscal year 2021. One engineering project relates to optical spectroscopic measurements and the other relates to a single-use ophthalmic endoscope. We believe increased engineering service capacity and the continued addition of quality engineering projects generates opportunities for production purchase orders from these customers as the products advance to clinical evaluation and commercialization.
The $607,000 decrease in product and assembly production revenues in fiscal year 2021 compared to fiscal year 2020 resulted primarily from reductions of sales to various production category customers which we believe are the result of the COVID-19 pandemic described below as well as cyclical and product life sales patterns periodically experienced with certain traditional product customers. Two products with reduced sales revenue in fiscal year 2021 considered temporary and the result of the market impact of the COVID-19 pandemic are flexible endoscope for a cardiovascular surgical procedure and a Microprecision™ CMOS scanning device for a diagnostic ENT procedure. The third product with notably reduced sales revenue in fiscal year 2021 relates to a reusable visualization instrument used in spine surgery which experiences fluctuations in periodic revenues caused by product demand for new surgical sites and replacements for existing sites.
The COVID-19 world-wide pandemic that began during the quarter ended March 31, 2020 and the domestic and international impact of policy decisions being made in major countries around the world has had, and could continue to have, an adverse impact on the Company’s sources of supply, current and future orders from our customers, collection of amounts owed to the Company from its customers, our internal operating procedures, and the Company’s overall financial condition. Given the uncertainty surrounding the continuation of economic impacts both domestically and abroad, we cannot predict with certainty at this time what the future impact of COVID-19 and resulting business and economic policies in the US and abroad will be on its up-coming quarterly fiscal operating results.
We generated revenues from 326 unique customers during fiscal year 2021, and no single customer accounted for 10% or more of our revenue for the fiscal years ended June 30, 2021, or 2020.
Gross profit for fiscal year ended June 30, 2021 of $3,433,585, reflected an increase of $71,009, or 2.1%, as compared to gross profit for fiscal year 2020 of $3,362,576. Gross profit, as a percentage of revenues for fiscal year 2021, was 32.2% as compared to gross profit, as a percentage of revenues for fiscal year 2020, of 33.9%. Gross profit and gross profit percentage for any given fiscal period depend on a number of factors, including overall sales volume, facility utilization, product sales mix, the nature and costs of engineering services, design challenges and changes, production start-up costs, customer-imposed project changes or delays, and the effects of COVID-19 pandemic policy decisions on various economies and our suppliers and customers, as well as the effects on production efficiencies due to the augmented policies we have incorporated into our operations as a result of the COVID-19 pandemic.
Our decrease in gross margin from 33.9% to 32.2% during the fiscal year ended June 30, 2021 compared to 2020 was primarily the result of a gross margin decrease in one engineering project due to cost over-runs, a decrease in higher margin production revenues with customers due to COVID-19 factors, and a lower realized margin on a large volume recurring component product produced for a catalogue reselling customer. The remainder of our production, engineering and component revenues resulted in margins within our targeted range with reasonably expected fluctuations.
Research and development expenses were $624,253 for fiscal year 2021 as compared to $886,129 for fiscal year 2020. The decrease of $261,876, or 29.6%, in fiscal year 2021 compared to fiscal year 2020 was due primarily to an increased amount of internal engineering related development projects in fiscal year 2020 that we believe will enhance our technology platform of capabilities and our overall competitiveness in providing unique optical and illumination solutions for medical device endoscopes, offset by a lesser amount of increased stock based compensation expense recognized in fiscal year 2021.
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Selling, general and administrative expenses decreased by $184,515, or 4.7%, to $3,714,915 for fiscal year 2021 as compared to $3,899,430 for fiscal year 2020. The decrease in SG&A expenses in fiscal year 2021 is primarily driven by decreases in travel and trade shows due to the pandemic, sales salaries, and lower investor relations costs, all of which were offset by a lesser amount by increases in stock based compensation and general insurance expense.
The income tax provisions in fiscal years 2021 and 2020 represent the minimum statutory state income tax liability.
Liquidity and Capital Resources
We have sustained recurring net losses for several years. During the years ended June 30, 2021 and 2020 we incurred operating losses of $905,583 and $1,422,983, respectively. At June 30, 2021, our cash and cash equivalents were $861,650, accounts receivable were $1,878,755, and current liabilities were $2,511,110, including $450,084 of advances paid against open purchase orders by our customers.
Although our sales revenue has increased and we have experienced improved financial performance in certain recent fiscal quarters, our operating expenses have also increased and we continue to experience pricing pressure from our customers and challenges in engineering projects and production orders that result in cost over-runs and depressed gross margins. We also experience added uncertainty related to our vendors ability to supply materials and our customers future order levels as a result of the economic impact the COVID-19 world-wide pandemic and related jurisdictional policies and regulations. Consequently, critical to our ability to maintain our financial condition is achieving and maintaining a level of quarterly revenues that generate break even or better financial performance as well as timely collection of accounts receivable from our customers. We believe profitable operating results can be achieved through a combination of revenue levels, realized gross margins and controlling operating expense increases, all of which are subject to periodic fluctuations resulting from sales mix and the stage of completion of varying engineering service projects as they progress towards and into production level revenues.
We have traditionally funded working capital needs through product sales, management of working capital components of our business, cash received from public and private offerings of our common stock, warrants to purchase shares of our common stock or convertible notes, manufacturing equipment leases, and by customer advances paid against purchase orders by our customers and recorded in the current liabilities section of the accompanying financial statements. We have incurred year to year and quarter to quarter operating losses during our efforts to develop current products including Microprecision™ optical elements, micro medical camera assemblies and 3D endoscopes. Our management believes that the opportunities represented by these technical capabilities and related products have the potential to generate sales increases to achieve breakeven and profitable results.
On May 6, 2020, we received loan proceeds in the amount of $808,962 under the Paycheck Protection Program, or PPP, from Bank of America. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, provides for loans to qualifying businesses that are forgivable provided the loan proceeds are used for eligible purposes, including payroll, benefits, rent and utilities. The unsecured loan dated May 6, 2020 was forgiven on March 30, 2021 by the Small Business Administration pursuant to the CARES Act. The forgiveness of the Promissory Note is recorded as other income in the accompanying Consolidated Statements of Operations for the three and nine month periods ended March 31, 2021.
Capital equipment expenditures during fiscal year 2021 and fiscal year 2020 were $237,901 and $232,363, respectively, $161,977 and $113,213 of which in fiscal years 2021 and 2020, respectively, were funded by leasing agreements with monthly payment obligations. Patent application expenditures during fiscal year 2021 and fiscal year 2020 were $46,473 and $41,142, respectively. Future capital equipment and patent expenditures will be dependent upon future sales and success of on-going research and development efforts.
Contractual cash commitments for the fiscal years subsequent to June 30, 2021, are summarized as follows:
| Fiscal 2022 | Thereafter | Total | ||||||||||
| Capital lease for equipment, including interest | $ | 48,619 | $ | 169,140 | $ | 217,759 | ||||||
| Minimum operating lease payments - Ross Optical division | $ | 62,822 | $ | 0 | $ | 62,822 | ||||||
We have contractual cash commitments related to open purchase orders as of June 30, 2021 of approximately $660,380.
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Material Trends and Uncertainties
We currently have no material trends or uncertainties that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Precision Optics Corporation, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Precision Optics Corporation, Inc. (the Company) as of June 30, 2021 and 2020, and the related statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two year period ended June 30, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two year period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition—Refer to Note A to the Consolidated Financial Statements
Critical Audit Matter Description
The Company recognizes revenue upon transfer of control of promised products to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products. The Company may enter into certain customer contracts that contain unique, customer-specific terms and conditions, variable consideration, as well as multiple performance obligations. For such contracts, significant interpretation may be required to determine the appropriate accounting, including the identification of performance obligations, the allocation of the transaction price to performance obligations in the arrangement, the timing of the transfer of control of promised goods for each of those performance obligations, estimates of variable consideration and agent versus principal consideration.
Our assessment of managements’ evaluation of the above referenced matters related to proper revenue recognition is significant to our audit because the amounts are material to the financial statements, the assessment process involves significant judgment, and the application of U.S. generally accepted accounting principles in this area is complex.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company’s revenue recognition for customer contracts included the following:
| · | We evaluated the appropriateness of management’s revenue recognition policies. | |
| · | We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the consolidated financial statements. | |
| · | We selected a sample of revenue transactions and performed the following procedures: |
| o | Obtained and read source documents for each selection, including master agreements, purchase orders and other documents that evidenced the customer arrangement. | |
| o | Tested management’s identification and treatment of the key contract terms, including performance obligations and variable consideration. | |
| o | Assessed the terms in the customer agreement and evaluated the appropriateness of management's application of the Company’s accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. |
/s/ Stowe & Degon LLC
We have served as the Company’s auditor since 2008
Westborough, Massachusetts
September 28, 2021
| F-1 |
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets at June 30, 2021 and 2020
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 861,650 | $ | 1,134,697 | ||||
| Accounts receivable (net of allowance for doubtful accounts of $251,383 at June 30, 2021 and $248,450 at June 30, 2020) | 1,878,755 | 1,481,437 | ||||||
| Inventories | 1,885,395 | 2,197,244 | ||||||
| Prepaid expenses | 150,635 | 133,707 | ||||||
| Total current assets | 4,776,435 | 4,947,085 | ||||||
| Fixed Assets: | ||||||||
| Machinery and equipment | 3,084,511 | 2,907,533 | ||||||
| Leasehold improvements | 792,723 | 731,801 | ||||||
| Furniture and fixtures | 178,640 | 178,640 | ||||||
| 4,055,874 | 3,817,974 | |||||||
| Less—Accumulated depreciation and amortization | 3,461,622 | 3,314,824 | ||||||
| Net fixed assets | 594,252 | 503,150 | ||||||
| Operating lease right-to-use asset | 61,247 | 118,403 | ||||||
| Patents, net | 141,702 | 95,229 | ||||||
| Goodwill | 687,664 | 687,664 | ||||||
| TOTAL ASSETS | $ | 6,261,300 | $ | 6,351,531 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Current portion of capital lease obligation | $ | 38,347 | $ | 51,761 | ||||
| Current portion of acquisition earn out liability | 166,667 | 166,667 | ||||||
| Note payable to bank | – | 808,962 | ||||||
| Accounts payable | 1,205,149 | 1,066,005 | ||||||
| Customer advances | 450,084 | 417,059 | ||||||
| Accrued compensation and other | 589,616 | 581,770 | ||||||
| Operating lease liability | 61,247 | 57,156 | ||||||
| Total current liabilities | 2,511,110 | 3,149,380 | ||||||
| Capital lease obligation, net of current portion | 152,397 | 35,810 | ||||||
| Acquisition earn out liability | 166,666 | 333,333 | ||||||
| Operating lease liability | – | 61,247 | ||||||
| Stockholders’ Equity: | ||||||||
| Common stock, $0.01 par value: 50,000,000 shares authorized; issued and outstanding – 13,282,476 shares at June 30, 2021 and 13,191,789 shares at June 30, 2020 | 132,825 | 131,918 | ||||||
| Additional paid-in capital | 50,464,280 | 49,702,986 | ||||||
| Accumulated deficit | (47,165,978 | ) | (47,063,143 | ) | ||||
| Total stockholders’ equity | 3,431,127 | 2,771,761 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 6,261,300 | $ | 6,351,531 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-2 |
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the Years Ended June 30, 2021 and 2020
| 2021 | 2020 | |||||||
| Revenues | $ | 10,674,907 | $ | 9,923,355 | ||||
| Cost of goods sold | 7,241,322 | 6,560,779 | ||||||
| Gross profit | 3,433,585 | 3,362,576 | ||||||
| Research and development expenses, net | 624,253 | 886,129 | ||||||
| Selling, general and administrative expenses | 3,714,915 | 3,899,430 | ||||||
| Total operating expenses | 4,339,168 | 4,785,559 | ||||||
| Operating loss | (905,583 | ) | (1,422,983 | ) | ||||
| Interest expense | (5,302 | ) | (1,002 | ) | ||||
| Gain on forgiveness of bank note | 808,962 | – | ||||||
| Loss before provision for income taxes | (101,923 | ) | (1,423,985 | ) | ||||
| Provision for income taxes | 912 | 2,165 | ||||||
| Net loss | $ | (102,835 | ) | $ | (1,426,150 | ) | ||
| Loss per share: | ||||||||
| Basic and fully diluted | $ | (0.01 | ) | $ | (0.11 | ) | ||
| Weighted average common shares outstanding: | ||||||||
| Basic and fully diluted | 13,281,351 | 12,998,915 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
for the Years Ended June 30, 2021 and 2020
| Number of Shares | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||
| Balance, July 1, 2019 | 12,071,139 | $ | 120,712 | $ | 48,893,172 | $ | (45,636,993 | ) | $ | 3,376,891 | ||||||||||
| Issuance of common stock in private placement | 760,000 | 7,600 | 17,400 | – | 25,000 | |||||||||||||||
| Proceeds from exercise of stock options | 12,500 | 125 | 8,550 | – | 8,675 | |||||||||||||||
| Exercise of stock options net of 11,850 shares withheld | 23,150 | 231 | (231 | ) | – | – | ||||||||||||||
| Issuance of common stock for consultant services | 25,000 | 250 | 44,750 | – | 45,000 | |||||||||||||||
| Issuance of common stock for employee services | 100,000 | 1,000 | (1,000 | ) | – | – | ||||||||||||||
| Proceeds from private placement of common stock, net of issuance costs of $10,000 | 200,000 | 2,000 | 238,000 | – | 240,000 | |||||||||||||||
| Stock-based compensation | – | – | 502,345 | – | 502,345 | |||||||||||||||
| Net loss | – | – | – | (1,426,150 | ) | (1,426,150 | ) | |||||||||||||
| Balance, June 30, 2020 | 13,191,789 | 131,918 | 49,702,986 | (47,063,143 | ) | 2,771,761 | ||||||||||||||
| Proceeds from exercise of stock options | 72,000 | 720 | 27,551 | – | 28,271 | |||||||||||||||
| Exercise of stock options net of 21,313 shares withheld | 18,687 | 187 | (187 | ) | – | – | ||||||||||||||
| Stock-based compensation | – | – | 733,930 | – | 733,930 | |||||||||||||||
| Net loss | – | – | – | (102,835 | ) | (102,835 | ) | |||||||||||||
| Balance, June 30, 2021 | 13,282,476 | $ | 132,825 | $ | 50,464,280 | $ | (47,165,978 | ) | $ | 3,431,127 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2021 and 2020
| 2021 | 2020 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (102,835 | ) | $ | (1,426,150 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities- | ||||||||
| Depreciation and amortization | 146,799 | 112,219 | ||||||
| Provision for doubtful accounts receivable | 2,933 | 1,497 | ||||||
| Stock-based compensation expense | 733,930 | 502,345 | ||||||
| Non-cash consulting expense | – | 45,000 | ||||||
| Gain on forgiveness of bank note | (808,962 | ) | – | |||||
| Changes in operating assets and liabilities, net of effects of business acquisition- | ||||||||
| Accounts receivable | (400,251 | ) | 682,173 | |||||
| Inventories | 311,849 | (462,640 | ) | |||||
| Prepaid expenses | (16,928 | ) | 46,629 | |||||
| Accounts payable | 139,144 | (108,258 | ) | |||||
| Customer advances | 33,025 | (33,133 | ) | |||||
| Accrued compensation and other | 7,846 | 47,826 | ||||||
| Net cash provided by (used in) operating activities | 46,550 | (592,492 | ) | |||||
| Cash Flows from Investing Activities: | ||||||||
| Cash paid for business acquisition | (166,667 | ) | (1,443,341 | ) | ||||
| Additional patent costs | (46,473 | ) | (41,142 | ) | ||||
| Purchases of fixed assets | (75,924 | ) | (119,150 | ) | ||||
| Net cash used in investing activities | (289,064 | ) | (1,603,633 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Payment of capital lease obligation | (58,804 | ) | (40,241 | ) | ||||
| Gross proceeds from private placements of common stock | – | 265,000 | ||||||
| Gross proceeds from exercise of stock options | 28,271 | 8,675 | ||||||
| Proceeds from Paycheck Protection Program bank loan | – | 808,962 | ||||||
| Net cash (used in) provided by financing activities | (30,533 | ) | 1,042,396 | |||||
| Net decrease in cash and cash equivalents | (273,047 | ) | (1,153,729 | ) | ||||
| Cash and cash equivalents, beginning of year | 1,134,697 | 2,288,426 | ||||||
| Cash and cash equivalents, end of year | $ | 861,650 | $ | 1,134,697 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the year for income taxes | $ | 2,165 | $ | 912 | ||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Issuance of common stock for services | $ | – | $ | 45,000 | ||||
| Offering costs included in accrued liabilities | $ | – | $ | 22,250 | ||||
| Acquisition of manufacturing equipment under capital lease | $ | 161,976 | $ | 113,213 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| (1) | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| (a) | Nature of Business |
Precision Optics Corporation, Inc. (the “Company”) designs, develops, manufactures and sells specialized optical and illumination systems and related components. The Company conducts business in one industry segment only and its customers are primarily domestic. The Company performs advanced optical and illumination system design, development, assembly and manufacturing services, and sources for resale specialized optical components for products that fall into two principal areas: (i) medical products for use by hospitals and physicians; and (ii) products used by defense contractors and industrial customers.
| (b) | Principles of Consolidation |
The accompanying consolidated financial statements include the accounts of the Company and its two wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
| (c) | Revenues |
Revenues are recognized as the performance obligations to deliver products or services are satisfied and are recorded based on the amount of consideration the Company expects to receive in exchange for satisfying the performance obligations. Most of the Company’s products and services are marketed to medical device companies with approximately 85% of sales to customers in the United States. Products and services are primarily transferred to customers at a point in time based upon when services are performed or product is shipped. Other selling costs to obtain and fulfill contracts are expensed as incurred due to the short-term nature of a majority of its contracts. The Company extends terms of payment to its customers based on commercially reasonable terms for the markets of its customers, while also considering their credit quality. Shipping and handling costs charged to customers are included in revenues.
The Company disaggregates revenues by product and service types as it believes it best depicts how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors. Revenues are comprised of the following for the fiscal years ended June 30, 2021 and 2020:
| 2021 | 2020 | |||||||
| Engineering Design Services | $ | 2,770,481 | $ | 1,390,324 | ||||
| Optical Components | 5,751,212 | 5,773,068 | ||||||
| Medical Device Products and Assemblies | 2,153,214 | 2,759,963 | ||||||
| Total Revenues | $ | 10,674,907 | $ | 9,923,355 | ||||
Contract Assets and Liabilities
The nature of the Company’s products and services does not generally give rise to contract assets as it typically does not incur costs to fulfill a contract before a product or service is provided to a customer. The Company’s costs to obtain contracts are typically in the form of sales commissions paid to employees. The Company has elected to expense sales commissions associated with obtaining a contract as incurred as the amortization period is generally less than one year. These costs have been recorded in selling, general and administrative expenses. As of June 30, 2021, there were no contract assets recorded in the Company’s Consolidated Balance Sheets.
| F-6 |
The Company’s contract liabilities arise as a result of unearned revenue received from customers at inception of contracts or where the timing of billing for services precedes satisfaction of performance obligations. The Company generally satisfies performance obligations within one year from the contract inception date.
Contract liabilities, which were recorded as customer advances in the Company’s Consolidated Balance Sheets, and unearned revenue are comprised of the following:
| Fiscal Year Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Contract liabilities, beginning of period | $ | 417,059 | $ | 450,192 | ||||
| Unearned revenue received from customers | 1,322,005 | 554,314 | ||||||
| Revenue recognized | (1,288,980 | ) | (587,447 | ) | ||||
| Contract liabilities, end of period | $ | 450,084 | $ | 417,059 | ||||
| (d) | Cash and Cash Equivalents |
The Company includes in cash equivalents all highly liquid investments with original maturities of three months or less at the time of acquisition. Cash and cash equivalents of $861,650 and $1,134,697 at June 30, 2021 and 2020, respectively, consist primarily of cash at banks and money market funds. The Company maintains its cash and cash equivalents in bank deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on its cash and cash equivalents.
| (e) | Inventories |
Inventories are stated at the lower of cost (first-in, first-out) and net realizable value and include material, labor and manufacturing overhead. The components of inventories at June 30, 2021 and 2020 are as follows:
| 2021 | 2020 | |||||||
| Raw material | $ | 626,255 | $ | 653,678 | ||||
| Work-in-progress | 453,117 | 665,593 | ||||||
| Finished goods | 806,023 | 877,973 | ||||||
| $ | 1,885,395 | $ | 2,197,244 | |||||
The Company provides for estimated obsolescence on unmarketable inventory based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Inventory, once written down, is not subsequently written back up, as these adjustments are considered permanent adjustments to the carrying value of the inventory.
| (f) | Fixed Assets |
Fixed assets are recorded at cost. Maintenance and repair items are expensed as incurred. The Company provides for depreciation and amortization by charges to operations, using the straight-line and declining-balance methods, which allocate the cost of fixed assets over the following estimated useful lives:
| Asset Classification | Estimated Useful Life | |
| Machinery and equipment | 2-7 years | |
| Leasehold improvements | Shorter of lease term or estimated useful life | |
| Furniture and fixtures | 5 years | |
| Vehicles | 3 years |
Depreciation and amortization expense was $146,799 and $112,219 for the years ended June 30, 2021 and 2020, respectively.
| F-7 |
| (g) | Significant Customers and Concentration of Credit Risk |
Financial instruments that subject the Company to credit risk consist primarily of cash equivalents and trade accounts receivable. The Company places its investments with highly rated financial institutions. The Company has not experienced any losses on these investments to date. At June 30, 2021, the Company’s largest customer account receivable balance was 16% of total accounts receivable. At June 30, 2020, the Company’s largest customer account receivable balance was 14% of total accounts receivable. No other accounts accounted for more than 10% of the accounts receivable balance at June 30, 2021, or 2020.
The allowance for doubtful accounts receivable was $251,383 at June 30, 2021, and $248,450 at June 30, 2020. $227,500 of the reserve at June 30, 2021, and 2020 was established in fiscal year 2018 relating to one specific customer. Other than these doubtful accounts receivable, the Company has not experienced any material losses related to accounts receivable from individual customers. The Company generally does not require collateral or other security as a condition of sale, rather it relies on credit approval, balance limitation and monitoring procedures to control credit risk in trade account financial instruments. Management believes the allowance for doubtful accounts, which is established based upon review of specific account balances and historical experience, is adequate at June 30, 2021.
The Company had revenues from 326 unique customers during fiscal year 2021, and no single customer accounted for 10% or more of the Company’s revenue for the fiscal years ended June 30, 2021, or 2020.
| (h) | Loss per Share |
Basic income (loss) per share is computed by dividing net income or net loss by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share is computed by dividing net income or net loss by the weighted average number of shares of common stock outstanding during the period, plus the number of potentially dilutive securities outstanding during the period such as stock options and warrants. For the year ended June 30, 2021 and 2020, the effect of such securities was antidilutive and not included in the diluted calculation because of the net loss generated in those periods.
The following is the calculation of loss per share for the years ended June 30, 2021 and 2020:
| Year Ended June 30 | ||||||||
| 2021 | 2020 | |||||||
| Net Loss– Basic and Diluted | $ | (102,835 | ) | $ | (1,426,150 | ) | ||
| Basic and diluted weighted average shares outstanding | 13,281,351 | 12,998,915 | ||||||
| Loss per share | ||||||||
| Basic and fully diluted | $ | (0.01 | ) | $ | (0.11 | ) | ||
The number of shares issuable upon the exercise of outstanding stock options and warrants that were excluded from the computation as their effect was antidilutive was approximately 2,578,200 and 2,065,200 for the years ended June 30, 2021, and 2020, respectively.
| (i) | Stock-Based Compensation |
The measurement and recognition of compensation costs for all stock-based awards made to employees and the Board of Directors are based upon fair value over the requisite service period for awards expected to vest. The Company estimates the fair value of share-based awards on the date of grant using the Black-Scholes option-pricing model. Stock-based compensation costs recognized for the years ended June 30, 2021, and 2020 amounted to $733,930 and $502,345, respectively.
| F-8 |
| (j) | Goodwill and Patents |
Long-lived assets such as goodwill and patents are capitalized when acquired and reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. Impairment of the carrying value of long-lived assets such as goodwill and patents would be indicated if the best estimate of future undiscounted cash flows expected to be generated by the asset grouping is less than its carrying value. If an impairment is indicated, any loss is measured as the difference between estimated fair value and carrying value and is recognized in operating income or loss. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No such impairments of goodwill or patents have been estimated by management during the years ended June 30, 2021 or 2020.
| (k) | Fair Value of Financial Instruments |
Financial instruments consist principally of cash and cash equivalents, accounts receivable and accounts payable. The estimated fair value of these financial instruments approximates their carrying value due to their short-term nature.
| (l) | Warranty Costs |
The Company does not incur future performance obligations in the normal course of business other than providing a standard one-year warranty on materials and workmanship to its customers (except in certain unusual and infrequently occurring situations where extended warranty terms beyond one year are negotiated with the customer). The Company provides for estimated warranty costs at the time product revenue is recognized. Warranty costs have been included as a component of cost of goods sold in the accompanying consolidated statements of operations. The following tables summarize warranty reserve activity for the years ended June 30, 2021 and 2020:
| 2021 | 2020 | |||||||
| Balance at beginning of period | $ | 25,000 | $ | 25,000 | ||||
| Provision for warranty claims | 7,611 | 12,940 | ||||||
| Warranty claims incurred | (7,611 | ) | (12,940 | ) | ||||
| Balance at end of period | $ | 25,000 | $ | 25,000 | ||||
| (m) | Research and Development |
Research and development expenses are charged to operations as incurred. The Company groups development and prototype costs and related reimbursements in research and development. There were no reimbursements for research and development recorded in research and development for the years ended June 30, 2021, and 2020.
| (n) | Comprehensive Income |
Comprehensive income or loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s comprehensive loss or income for the years ended June 30, 2021 and 2020 was equal to its net loss for the same periods.
| (o) | Income Taxes |
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the likelihood of utilization of existing deferred tax assets, management has considered historical results of operations and the current operating environment.
| F-9 |
| (p) | Segment Reporting |
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions about how to allocate resources and assess performance. The Company’s chief decision-maker is its Chief Executive Officer. To date, the Company has viewed its operations and manages its business as principally one segment. For all periods presented, over 85% of the Company’s sales have been to customers in the United States.
| (q) | Use of Estimates |
The preparation of financial statements in conformity with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| (2) | COMMITMENTS |
| (a) | Related Party Transactions |
Transactions with Stockholders Known by the Company to Own 5% or More of the Company’s Common Stock
At June 30, 2019 the Company had received payments for common stock subscriptions totaling $925,000 at $1.25 per share. On July 1, 2019 the Company received an additional $25,000 and closed the placement on that date by issuing 760,000 unregistered common shares. The placement proceeds were used to partially fund the business acquisition of the Ross Optical division. In compliance with the registration rights agreement entered into with the investors, on October 29, 2019 the Company filed a registration statement for the shares with the Securities and Exchange Commission which became effective on November 22, 2019. Ms. Sandra Pessin acquired 200,000 shares in this placement for $250,000 or $1.25 per share, and at that time Ms. Pessin was an owner of more than 5% of the Company’s outstanding common stock.
On April 14, 2020 the Company sold 200,000 shares of its common stock for cash at $1.25 per share or $250,000 to be used for general working capital needs. In compliance with the registration rights agreement entered into with the investors, on August 14, 2020 the Company filed a registration statement for the shares with the Securities and Exchange Commission which became effective on November 4, 2020. Hershey Strategic Capital, LP acquired 20,000 shares in this placement for $25,000 or $1.25 per share, and at that time Hershey Strategic Capital, LP was an owner of more than 5% of the Company’s outstanding common stock.
Acquisition Earn Out Obligation
As partial consideration for the July 2019 acquisition of the Ross Optical division the Company agreed to pay $500,000 as an earn-out contingent upon the satisfaction of certain financial thresholds consisting of mutually agreed upon revenue and gross margin targets of the Ross Optical division over a term of three years, beginning on July 1, 2019, at a rate of up to $166,667 per year. As of June 30, 2021 the first year portion of $166,667 has been paid and the remainder of the obligation recorded as $166,667 as a short-term liability in the accompanying balance sheet at June 30, 2021 and $166,666 as a long-term liability at June 30, 2021.
| (b) | Note Payable to Bank |
The Company executed an unsecured Promissory Note with a bank on May 6, 2020 and received $808,962 of loan proceeds pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On March 30, 2021, the Small Business Administration forgave the Promissory Note held by the Company in full, including any accrued interest at that date. The forgiveness of the Promissory Note is recorded as other income in the accompanying Consolidated Statements of Operations for the fiscal year ended June 30, 2021.
| F-10 |
| (c) | Lease Obligation |
In March 2021, the Company entered into a five-year capital lease in the amount of $161,977 for manufacturing equipment. In January 2020, the Company entered into a five-year capital lease for $47,750 for manufacturing equipment. The net book value of fixed assets under capital lease obligations as of June 30, 2021 is $233,923.
On July 1, 2019 the Company entered into a three-year operating lease for its facility in El Paso, Texas with total remaining minimum lease payments of $62,822 at June 30, 2021. Total rent expense including base rent and common area expenses was $62,717 during each of the fiscal years ended June 30, 2021 and 2020. Included in the accompanying balance sheet at June 30, 2021 is a right-of-use asset of $61,247 and current and long-term right-of-use operating lease liabilities of $61,247 and $0, respectively.
At June 30, 2021, future minimum lease payments under the capital lease and operating lease obligations are as follows:
| Fiscal Year Ending June 30: | Capital Leases | Operating Lease | ||||||
| 2022 | $ | 48,619 | $ | 62,822 | ||||
| 2023 | 48,619 | – | ||||||
| 2024 | 48,619 | – | ||||||
| 2025 | 43,917 | – | ||||||
| 2026 | 27,985 | – | ||||||
| Total Minimum Payments | 217,759 | $ | 62,822 | |||||
| Less: amount representing interest | 27,015 | |||||||
| Present value of minimum lease payments | 190,744 | |||||||
| Less: current portion | 38,347 | |||||||
| $ | 152,397 | |||||||
The Company’s operating leases for its three Gardner, Massachusetts office, production and storage spaces plus an equipment lease have expired and are continuing on a month to month tenant at will basis. Rent expense on these operating leases was $172,903 and $145,655 for the years ended June 30, 2021, and 2020, respectively.
| (3) | STOCKHOLDERS’ EQUITY |
| (a) | Stock-Based Compensation Expense |
The following table summarizes stock-based compensation expense for the years ended June 30:
| 2021 | 2020 | |||||||
| Cost of Goods Sold | $ | 113,659 | $ | 44,932 | ||||
| Research and Development Expenses | 171,447 | 68,061 | ||||||
| Selling, General and Administrative Expenses | 448,824 | 389,352 | ||||||
| Stock Based Compensation Expense | $ | 733,930 | $ | 502,345 | ||||
As of June 30, 2021, the unrecognized compensation costs related to options vesting in the future is $636,093. No compensation has been capitalized because such amounts would have been immaterial. There was no net income tax benefit recognized related to such compensation for the years ended June 30, 2021, or 2020, as the Company is currently in a loss position. There were 630,000 stock options granted during the year ended June 30, 2021, and 315,000 stock options granted during the year ended June 30, 2020.
| F-11 |
The Company uses the Black-Scholes option-pricing model as the most appropriate method for determining the estimated fair value for the stock awards. The Black-Scholes method of valuation requires several assumptions: (1) the expected term of the stock award; (2) the expected future stock volatility over the expected term; and (3) risk-free interest rate. The expected term represents the expected period of time the Company believes the options will be outstanding based on historical information. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common stock and the risk-free interest rate is based on the U.S. Zero-Bond rate. The Company utilizes a forfeiture rate based on an analysis of the Company’s actual experience. The fair value of options at date of grant was estimated with the following assumptions for options granted in fiscal year 2021:
| Year Ended | ||||
| June 30, 2021 | ||||
| Assumptions: | ||||
| Option life | 5.3 years | |||
| Risk-free interest rate | 3.0% | |||
| Weighted average stock volatility | 100% | |||
| Dividend yield | 0 | |||
| Weighted average fair value of grants | $ | 1.65 | ||
(b) Stock Option Plans
The type of share-based payments currently utilized by the Company is stock options.
The Company has various stock option and other compensation plans for directors, officers and employees. The Company has the following stock option plans outstanding as of June 30, 2021: The Precision Optics Corporation, Inc. 2021 Equity Incentive Plan (the “2021 Plan”), the Precision Optics Corporation, Inc. 2011 Equity Incentive Plan (the “2011 Plan”) and the Precision Optics Corporation, Inc. 2006 Equity Incentive Plan (the “2006 Plan”). Vesting periods under each of the Plans are at the discretion of the Board of Directors and typically average three years and in some instances are subject to future performance criteria. Options under these Plans are granted at fair market value on the date of grant and typically have an initial term of ten years from the date of grant, subject to certain cancellation provisions including employment termination. As of June 30, 2021, all shares of the Company’s common stock issuable pursuant to exercise of stock options granted pursuant to the three plans have been registered by filing of Registration Statements on Form S-8 with the Securities and Exchange Commission.
On May 10, 2021, the Board of Directors approved the 2021 Plan which provides eligible participants (certain employees, directors, consultants, etc.) the opportunity to receive a broad variety of equity based and cash awards. Options granted vest and are exercisable for periods determined by the Board of Directors, not to exceed 10 years from the date of grant. A maximum 1,000,000 shares of the Company’s common stock may be issued under the 2021 Plan. At June 30, 2021, a total of 268,502 stock options are outstanding and 731,498 shares of common stock were available for future grants under the 2021 Plan.
The 2011 Plan provides eligible participants (certain employees, directors, consultants, etc.) the opportunity to receive a broad variety of equity based and cash awards. Options granted vest and are exercisable for periods determined by the Board of Directors, not to exceed 10 years from the date of grant. On April 16, 2015, the Board of Directors approved an amendment to the 2011 Equity Incentive Plan which increased the maximum number of shares of the Company’s common stock that may be awarded and issued under the Plan from 325,000 to 1,825,000, an increase of 1,500,000 shares. On May 1, 2019, the Board of Directors approved an amendment to the 2011 Equity Incentive Plan which increased the maximum number of shares of our common stock that may be awarded and issued under the Plan from 1,825,000 to 2,825,000, an increase of 1,000,000 shares. At June 30, 2021, a total of 2,240,000 stock options are outstanding and no shares of common stock were available for future grants under the 2011 Plan.
The 2006 Plan provides eligible participants (certain employees, directors, consultants, etc.) the opportunity to receive a broad variety of equity based and cash awards. Options granted vest and are exercisable for periods determined by the Board of Directors, not to exceed 10 years from the date of grant. At June 30, 2021 a total of 69,698 stock options are outstanding, and no shares of common stock were available for future grants under the 2006 Plan.
| F-12 |
The following tables summarize stock option activity for the years ended June 30, 2021 and 2020:
| Options Outstanding | ||||||||||||
| Number of Shares | Weighted Average Exercise Price | Weighted Average Contractual Life | ||||||||||
| Outstanding at July 1, 2019 | 1,819,500 | $ | 0.87 | 7.05 years | ||||||||
| Grants | 315,000 | $ | 1.38 | |||||||||
| Exercised | (47,500 | ) | $ | 0.62 | ||||||||
| Cancellations | (21,800 | ) | $ | 0.96 | ||||||||
| Outstanding at June 30, 2020 | 2,065,200 | $ | 0.95 | 6.59 years | ||||||||
| Grants | 630,000 | $ | 1.65 | |||||||||
| Exercised | (112,000 | ) | $ | 0.57 | ||||||||
| Cancellations | (5,000 | ) | $ | 1.30 | ||||||||
| Outstanding at June 30, 2021 | 2,578,200 | $ | 1.13 | 6.73 years | ||||||||
Information related to the stock options outstanding as of June 30, 2021 is as follows:
| Range of Exercise Prices | Number of Shares | Weighted- Average Remaining Contractual Life (years) | Weighted- Average Exercise Price | Exercisable Number of Shares | Exercisable Weighted- Average Exercise Price | |||||||||||||||||
| $ | 0.48 | 60,000 | 4.75 | $ | 0.48 | 60,000 | $ | 0.48 | ||||||||||||||
| $ | 0.50 | 80,000 | 4.98 | $ | 0.50 | 80,000 | $ | 0.50 | ||||||||||||||
| $ | 0.55 | 40,000 | 2.92 | $ | 0.55 | 40,000 | $ | 0.55 | ||||||||||||||
| $ | 0.70 | 100,000 | 7.10 | $ | 0.70 | 100,000 | $ | 0.70 | ||||||||||||||
| $ | 0.73 | 758,000 | 5.36 | $ | 0.73 | 758,000 | $ | 0.73 | ||||||||||||||
| $ | 0.85 | 6,000 | 1.51 | $ | 0.85 | 6,000 | $ | 0.85 | ||||||||||||||
| $ | 0.90 | 36,000 | 2.94 | $ | 0.90 | 36,000 | $ | 0.90 | ||||||||||||||
| $ | 1.20 | 200,200 | 0.67 | $ | 1.20 | 200,200 | $ | 1.20 | ||||||||||||||
| $ | 1.25 | 45,000 | 8.72 | $ | 1.25 | 15,000 | $ | 1.25 | ||||||||||||||
| $ | 1.30 | 453,000 | 7.95 | $ | 1.30 | 266,522 | $ | 1.30 | ||||||||||||||
| $ | 1.40 | 70,000 | 9.39 | $ | 1.40 | 70,000 | $ | 1.40 | ||||||||||||||
| $ | 1.42 | 100,000 | 8.20 | $ | 1.42 | 33,334 | $ | 1.42 | ||||||||||||||
| $ | 1.45 | 5,000 | 9.69 | $ | 1.45 | – | $ | – | ||||||||||||||
| $ | 1.50 | 70,000 | 8.44 | $ | 1.50 | 70,000 | $ | 1.50 | ||||||||||||||
| $ | 1.68 | 540,000 | 9.93 | $ | 1.68 | 270,000 | $ | 1.68 | ||||||||||||||
| $ | 1.795 | 15,000 | 9.62 | $ | 1.795 | – | $ | – | ||||||||||||||
| $ | 0.48–1.795 | 2,578,200 | 6.73 | $ | 1.13 | 2,005,056 | $ | 1.03 | ||||||||||||||
The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisable options as of June 30, 2021, was $1,077,196 and $974,951, respectively.
| F-13 |
| (c) | Sale of Stock in July 2019 |
On July 1, 2019, the Company entered into agreements with accredited investors for the sale and purchase of 760,000 unregistered shares of its common stock, $0.01 par value at a purchase price of $1.25 per share. The Company received $950,000 in gross proceeds from the offering, $925,000 of which was received as of June 30, 2019, and is included in the accompanying statement of stockholders’ equity as common stock subscriptions. The Company used the net proceeds from this placement to partially fund the July 1, 2019, acquisition of the operating assets of Ross Optical Industries, Inc. with an effective date of June 1, 2019.
In connection with the placement, the Company also entered into a registration rights agreement with the investors, whereby the Company is obligated to file a registration statement with the Securities Exchange Commission on or before 120 calendar days after July 1, 2019, to register the resale by the investors of 760,000 shares of our common stock purchased in the placement. The registration statement was filed with the Securities and Exchange Commission on October 29, 2019, and Amendment No. 1 to the registration statement was filed with the Securities and Exchange Commission on November 22, 2019. The registration statement became effective on November 26, 2019.
| (d) | Sale of Stock in April 2020 |
On April 14, 2020, the Company entered into agreements with accredited investors for the sale and purchase of 200,000 unregistered shares of its common stock, $0.01 par value at a purchase price of $1.25 per share. The Company received $250,000 in gross proceeds from the offering. The Company is using the net proceeds from this placement for general working capital purposes.
In connection with the placement, the Company also entered into a registration rights agreement with the investors, whereby the Company was obligated to file a registration statement with the Securities Exchange Commission on or before 120 calendar days after April 14, 2020, to register the resale by the investors of 200,000 shares of our common stock purchased in the placement. The registration statement was filed with the Securities and Exchange Commission on August 14, 2020, and became effective on November 4, 2020.
| (4) | INCOME TAXES |
The Company has identified its federal tax return and its state tax return in Massachusetts as “major” tax jurisdictions. The periods subject to examination for its federal and state income tax returns are the years ended in 2017 and thereafter. The Company believes its income tax filing positions and deductions will be sustained on audit and it does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no liabilities for uncertain income tax positions have been recorded.
The provision for income taxes in the accompanying consolidated statements of operations consists of the state income tax liability of $912 and $2,165 for the years ended June 30, 2021, and 2020, respectively.
A reconciliation of the federal statutory rate to the Company’s effective tax rate for the fiscal years ended June 30, 2021 and 2020 is as follows:
| 2021 | 2020 | |||
| Income tax expense (benefit) at federal statutory rate | (21.0)% | (21.0)% | ||
| Increase (decrease) in tax resulting from: | ||||
| State taxes, net of federal benefit | (145.8)% | (7.1)% | ||
| Change in valuation allowance | 182.8% | 17.9% | ||
| Stock based compensation | 195.0% | 9.6% | ||
| Forgiveness of bank note | (214.9)% | – | ||
| Nondeductible items | 3.0% | 0.4% | ||
| Effective tax rate | (0.9)% | (0.2)% |
| F-14 |
The components of deferred tax assets and liabilities at June 30, 2021 and 2020 are approximately as follows:
| 2021 | 2020 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forwards | $ | 2,403,000 | $ | 2,328,000 | ||||
| Tax credit carry forwards | 186,000 | 259,000 | ||||||
| Reserves and accruals not yet deducted for tax purposes | 668,000 | 612,000 | ||||||
| Total deferred tax assets | 3,257,000 | 3,199,000 | ||||||
| Valuation allowance | (3,257,000 | ) | (3,199,000 | ) | ||||
| Net deferred tax asset | $ | – | $ | – | ||||
The Company has provided a valuation allowance to reduce the net deferred tax asset to an amount the Company believes is “more likely than not” to be realized.
At June 30, 2021, the Company had federal and state net operating loss carry forwards of approximately $10,205,000 and $3,354,000, respectively, which will, if not used, expire at various dates beginning in fiscal year 2022. In addition, the Company had net operating loss carry forwards from its Hong Kong operations of approximately $2,252,000, which carry forward indefinitely.
| (5) | PROFIT SHARING PLAN |
The Company has a defined contribution 401(k) profit sharing plan. Employer profit sharing and matching contributions to the plan are discretionary. No employer profit sharing or matching contributions were made to the plan in fiscal years 2021 and 2020.
| F-15 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Management’s Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures, including internal control over financial reporting, were not effective, as of June 30, 2021, to ensure the information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended (i) is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are intended to be designed to provide reasonable assurance that such information is accumulated and communicated to our management.
Management’s Annual Report on Internal Control Over Financial Reporting
Our disclosure controls and procedures include components of our internal control over financial reporting. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, with our Company have been detected.
A “material weakness” is defined as a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A “significant deficiency” is a control deficiency, or a combination of control deficiencies, that adversely affects a company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the annual or interim financial statements that is more than inconsequential will not be prevented or detected.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of June 30, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our evaluation, our management concluded that our internal control over financial reporting was not effective as of June 30, 2021.
The following is a description of two material weaknesses in our internal control over financial reporting:
Segregation of Duties: As previously disclosed in our Annual Reports on Form 10-K for the fiscal years ended June 30, 2008-2020, our management identified a control deficiency during the 2008 fiscal year because we lacked sufficient staff to segregate accounting duties. We believe the control deficiency resulted primarily because we have the equivalent of six persons performing all accounting-related on-site duties at two locations. As a result, we did not maintain adequate segregation of duties within our critical financial reporting applications, the related modules and financial reporting processes. This control deficiency could result in a misstatement of balance sheet and income statement accounts in our interim or annual consolidated financial statements that would not be detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
To address and remediate the material weakness in internal control over financial reporting described above, beginning with the quarter ended September 30, 2008, we instituted a procedure whereby our Chief Executive Officer, our Chief Financial Officer and other members of our Board of Directors perform a higher level review of the quarterly and annual reports on Form 10-Q and Form 10-K prior to filing.
| 19 |
We believe that the step outlined above strengthens our internal control over financial reporting and mitigates the material weakness described above. As part of our 2021 assessment of internal control over financial reporting, our management has evaluated this additional control and has determined that it is operating effectively.
Inventory Valuation: As previously disclosed in our Annual Reports on Form 10-K for the fiscal years ended June 30, 2009-2020, we reported a material weakness with respect to the valuation of our inventories. Specifically, the amounts used to value our inventory at June 30, 2009 with respect to overhead rates and purchased items were often inconsistent with the supporting documentation, due to year-to-year changes in overhead rates and costs of purchased items that were not properly reflected in inventory valuation. Accordingly, management had determined that this control deficiency constituted a material weakness as of June 30, 2009. One audit adjustment of approximately $58,000 to our audited financial statements as of June 30, 2011 was necessary as a result of this condition.
To address and remediate the material weakness in internal control over financial reporting described above, beginning in the quarter ended September 30, 2009 and continuing through the year ended June 30, 2021, we implemented procedures to improve our inventory controls and documentation surrounding inventory valuation for overhead rates, and performed procedures to ensure that the pricing of inventory items was consistent with the supporting documentation. We believe that the step outlined above strengthens our internal control over financial reporting and mitigates the material weakness described above.
We intend to continue to remediate material weaknesses and enhance our internal controls but cannot guarantee that our efforts will result in remediation of our material weaknesses or that new issues will not be exposed in this process.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the fourth quarter of our fiscal year covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None
| 20 |
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Identification of Directors
Set forth below is certain information with respect to the individuals who are our directors as of September 21, 2021.
| Name | Age | Position(s) or Office(s) Held | ||||
| Dr. Joseph N. Forkey | 53 | Chief Executive Officer, President, Treasurer and Director | ||||
| Andrew J. Miclot | 65 | Director | ||||
| Dr. Richard B. Miles | 78 | Director | ||||
| Peter H. Woodward | 48 | Chairman of the Board of Directors | ||||
Board Composition. Our Board of Directors is divided into three classes that are as nearly equal in number as possible, with each class serving for a staggered term of office. Only one class is elected each year. Each director serves a three-year term and until his or her successor has been duly elected and qualified. Our Board currently consists of four directors. Our Class I director is Peter H. Woodward. Our Class II director is Andrew J. Miclot. Our Class III directors are Joseph N. Forkey and Richard B. Miles.
Biographies and Qualifications of Our Directors. The biographies of our directors and certain information regarding each director’s experience, attributes, skills and/or qualifications that led to the conclusion that the individual should be serving as a director of our Company are as follows:
Dr. Joseph N. Forkey
Dr. Joseph N. Forkey has served as our Chief Executive Officer, President and Treasurer since February 8, 2011. Dr. Forkey has been a member of our Board of Directors since 2006. He served as our Chairman of our Board of Directors from February 2011 to July 2014. He served as our Executive Vice President and Chief Scientific Officer from April 2006 to February 2011, and held the position of our Chief Scientist from September 2003 to April 2006. Since joining us, he has been involved in general technical and management activities of our Company, as well as investigations of opportunities that leverage our newly developed technologies. Dr. Forkey holds B.A. degrees in Mathematics and Physics from Cornell University, and a Ph.D. in Mechanical and Aerospace Engineering from Princeton University. Prior to joining us, Dr. Forkey spent seven years at the University of Pennsylvania Medical School as a postdoctoral fellow and research staff member. Dr. Forkey is a valuable member of our Board due to his depth of scientific, operating, strategic, transactional, and senior management experience in our industry. Additionally, Dr. Forkey has held positions of increasing responsibility at our Company and holds an intimate knowledge of our Company due to his longevity in the industry and with us.
Andrew J. Miclot
Mr. Miclot was appointed to our Board on March 2, 2016. Mr. Miclot has more than 35 years of leadership experience with medical device suppliers and brings substantial global industry knowledge to our Company. Since September 2020, Mr. Miclot was President of Electromedical Products International, Inc., a medical device company treating Anxiety, Insomnia, Depression and Pain. Mr. Miclot was the President and Vice Chairman and Director of WishBone Medical, Inc., a pediatric orthopedic company dedicated to the unmet needs of children suffering from orthopedic challenges from October 2017 to January 2019. He has been on the Indiana University Alumni Association Advisory Board since October 2016. From October 2015 to January 2018, Mr. Miclot served as President, CEO and Director of Micro Machine Co., a supplier of medical products for the orthopedic and spinal industries. Prior to joining Micro Machine Co., from May 2013 to September 2014, Mr. Miclot was Executive Vice President of MicroTechnologies, Inc., a medical device supplier. Mr. Miclot was General Manager and Senior Vice President of ArthroCare Corporation from June 2009 to March 2013. From January 2008 to March 2009, Mr. Miclot was President, CEO and Director of Ascension Orthopedics, Inc. He was Vice President of Marketing for the orthopedic global business unit at Orthofix, Inc. from April 2007 to January 2008, and from March 1994 to April 2007, he served as Senior Vice President with Symmetry Medical Inc., a medical device supplier and was also the Investor Relations Officer, after the NYSE IPO in December 2004 until April 2007. Mr. Miclot has a BA degree in Speech and Hearing and a MA degree in Audiology from Indiana University and an MBA from the Lake Forest Graduate School of Management, earned in 1991.
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Dr. Richard B. Miles
Professor Richard B. Miles was appointed to our Board of Directors in November 2005. He was a member of the Mechanical and Aerospace Engineering faculty at Princeton University from 1972 until 2013, at which time he retired from his Princeton academic appointment and became Professor Emeritus and Senior Scholar. From 1980 to 1996 he served as Chairman of Engineering Physics at Princeton. In 2017 he joined Texas A&M University and was appointed TEES Eminent Professor of Aerospace Engineering. In 2019 he was named Distinguished University Professor and O’Donnell Foundation Chair V. He is a member of the National Academy of Engineering and a Fellow of the National Academy of Inventors. He serves on the Board of Directors of the Hertz Foundation and the Board of Trustees of Pacific University, Oregon and is a Fellow of the Optical Society of America (OSA) and the American Institute Aeronautics and Astronautics (AIAA). Professor Miles is a valuable member of our Board due to his depth of scientific experience and familiarity with the field of our technologies, insight into the academic community, and familiarity with the latest developments and innovations in science and technology.
Peter H. Woodward
Mr. Woodward was appointed to our Board effective July 9, 2014 and as chairman of the Board in connection with the sale and purchase agreement we entered into in July 2014. Mr. Woodward is the founder of MHW Capital Management, LLC, or MHW, a position he has held since September 2005. MHW specializes in large equity investments in public companies implementing operating strategies to significantly improve their profitability. From 1996 to 2005, Mr. Woodward was the Managing Director for Regan Fund Management, LLC. He served as the President and Chief Executive Officer and Director of Cartesian, Inc. from June 2015 to July 2018, and currently serves as Chairman of the Board and Chairman of the Audit Committee for TSS, Inc., and as the CEO of Innoative Power, LLC. Mr. Woodward holds a BA in economics from Colgate University and a Masters of International Affairs with a concentration in international economics and finance from Columbia University. He is also a Chartered Financial Analyst.
Identification of Executive Officers
Set forth below is certain information with respect to the individuals who are our executive officers as of September 20, 2021.
| Name | Age | Position(s) or Office(s) Held | ||||
| Dr. Joseph N. Forkey | 53 | Chief Executive Officer, President, Treasurer and Director | ||||
| Daniel S. Habhegger | 52 | Chief Financial Officer and Secretary | ||||
Biographies and Qualifications of Our Executive Officers. The biographies of our executive officers and certain information regarding each officer’s experience, attributes, skills and/or qualifications that led to the conclusion that the individual should be serving as an executive officer of our Company are as follows:
Dr. Joseph N. Forkey
For Dr. Forkey’s full biography, please refer to the section entitled “Biographies and Qualifications of Our Directors.”
Daniel S. Habhegger
Mr. Habhegger started with us in September 2019 as Director of Finance and became our Chief Financial Officer and Secretary effective December 1, 2019. Prior to joining our Company, he was the Director of Financial Planning and Analysis of SmartBear Software, Inc. from 2015 to August 2019 and of AgaMatrix, Inc. from 2010 to 2015. From 2005 to 2009 he was the Chief Financial Officer of Weather Services International, now The Weather Company, where he led the implementation of the PeopleSoft financial system and the SalesLogix CRM solution and the financial due diligence for two large acquisitions. He earned his Bachelor of Science in Finance from Western International University in 1994 and an MBA in Global Management from the University of Phoenix in 2005.
| 22 |
Other Involvement in Certain Legal Proceedings
None of our directors or executive officers has been involved in any bankruptcy or criminal proceedings, nor have there been any judgments or injunctions brought against any of our directors or executive officers during the last ten years that we consider material to the evaluation of the ability and integrity of any director or executive officer.
DELINQUENT SECTION 16(a) REPORTS
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and persons who own more than 10% of a registered class of our securities to file reports of beneficial ownership and changes in beneficial ownership with the Securities and Exchange Commission on Forms 3 (Initial Statement of Beneficial Ownership), 4 (Statement of Changes of Beneficial Ownership of Securities) and 5 (Annual Statement of Beneficial Ownership of Securities). Officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely upon a review of reports provided to us by our officers and directors, we believe that, during the fiscal year ended June 30, 2021, no person required to file reports under Section 16(a) of the Securities Exchange Act of 1934 failed to file such reports on a timely basis during such fiscal year, except for four reports by four of our employees, including our Chief Executive Officer, Dr. Forkey, our Chief Financial Officers, Daniel Habhegger, and Divaker Mangadu, for one transaction each, filed late by one day each. We are also aware that Dolphin Offshore Partners LP which owns approximately 20% of our common stock based on available public records as of September 21, 2021 has not filed a Form 3 to date. Dolphin Offshore Partners LP is not affiliated with our Company.
Code of Ethics
We adopted a Corporate Code of Ethics and Conduct that applies to all employees, officers and directors of our Company, including our principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions, a copy of which was filed as Exhibit 14.1 to our Annual Report on Form 10-K for the Fiscal Year Ended June 30, 2008 with the Securities and Exchange Commission on September 28, 2008. A copy of our Corporate Code of Ethics and Conduct can be obtained free of charge by contacting our Secretary, c/o Precision Optics Corporation, Inc., 22 East Broadway, Gardner, Massachusetts 01440.
Procedure for Nominating Directors
There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.
The Board of Directors will consider candidates for director positions that are recommended by any of our stockholders. Any such recommendation should be provided to our Secretary. The recommended candidate should be submitted to us in writing addressed to our Secretary, c/o Precision Optics Corporation, Inc., 22 East Broadway, Gardner, Massachusetts 01440. The recommendation should include the following information: name of candidate; address, phone and fax number of candidate; a statement signed by the candidate certifying that the candidate wishes to be considered for nomination to our Board of Directors and stating why the candidate believes that he or she would be a valuable addition to our Board of Directors; a summary of the candidate’s work experience for the prior five years and the number of shares of our stock beneficially owned by the candidate.
The Board will evaluate the recommended candidate and shall determine whether or not to proceed with the candidate in accordance with our procedures. We reserve the right to change our procedures at any time to comply with the requirements of applicable laws.
Committees of the Board of Directors
The Board of Directors has the responsibility for establishing broad corporate policies and reviewing our overall performance rather than day-to-day operations. The Board’s primary responsibility is to oversee management of our Company and, in so doing, serve the best interests of our Company and our stockholders.
Our Board of Directors has the ability to establish, or disband, such committees as necessary or appropriate to serve the needs of our Company. In February 2012, our Board of Directors made the determination to restructure and unanimously voted to disband its committees, including its Audit Committee. Our full Board of Directors performs all of the functions normally designated to an audit committee, compensation committee and nominating committee.
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Audit Committee and Audit Committee Financial Expert
As of February 2012, the Board of Directors no longer has a separately designated audit committee. The functions of the audit committee are conducted by the entire Board, whose members are named above. We do not currently have an “audit committee financial expert,” as defined in Item 407(d)(5)(ii) of Regulation S-K.
We believe that each member of our Board is financially literate and possesses sufficient experience, both professionally and by virtue of his service on our Board, to be fully capable of discharging his duties as a member of our Board performing audit committee functions.
ITEM 11. EXECUTIVE COMPENSATION.
Executive Compensation
Summary Executive Compensation
The following table sets forth all compensation for our fiscal years ended June 30, 2021, and 2020 awarded to, earned by, or paid to our Principal Executive Officer, our most highly compensated executive officer and our most highly compensated employees, all of which are referred to herein as the “Named Executive Officers”.
Summary Executive Compensation Table for the Fiscal Years Ended June 30, 2021 and 2020
| Name and Principal Position | Year June 30, | Salary ($) | Bonus ($) | Option Awards ($) (2) | Total ($) | |||||||||||||
| Dr. Joseph N. Forkey | 2021 | 250,000 | 0 | 190,909 | (3) | 440,909 | ||||||||||||
| Director, Chief Executive Officer, President and Treasurer | 2020 | 235,385 | 0 | 0 | 235,385 | |||||||||||||
| Daniel S. Habhegger | 2021 | 176,879 | 0 | 101,818 | (4) | 278,697 | ||||||||||||
| Chief Financial Officer, Secretary | 2020 | 131,003 | 0 | 126,157 | (5) | 257,160 | ||||||||||||
| Divaker Mangadu | 2021 | 140,000 | 40,000 | (6) | 31,818 | (7) | 211,818 | |||||||||||
| President, Ross Optical Division | 2020 | 140,000 | 40,000 | (6) | 115,496 | (8) | 295,496 | |||||||||||
| (1) | Represents the aggregate grant date fair value of stock awards granted in the respective fiscal year as computed in accordance with FASB ASC Topic 718, Compensation — Stock Compensation. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option valuation model. A discussion of the assumptions used in calculating the amounts in this column may be found in the Notes to our audited consolidated financial statements for the year ended June 30, 2021 set forth in this Annual Report on Form 10-K. These amounts do not represent the actual amounts paid to or realized by the executives during the fiscal years presented. |
| (2) | Represents the aggregate grant date fair value of stock option awards granted in the respective fiscal year as computed in accordance with FASB ASC Topic 718, Compensation — Stock Compensation. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model. A discussion of the assumptions used in calculating the amounts in this column may be found in the Notes to our audited consolidated financial statements for the year ended June 30, 2021 set forth in this Annual Report on Form 10-K. These amounts do not represent the actual amounts paid to or realized by the executives during the fiscal years presented. |
| (3) | We granted Dr. Forkey a stock option to purchase up to 150,000 shares of our common stock at an exercise price of $1.68 per share, the closing price of our common stock on June 4, 2021. 75,000 options vested on the date of grant, and provided Dr. Forkey remains eligible under the plan on the future vesting date, the remaining 75,000 options vest on June 4, 2022. |
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| (4) | We granted Mr. Habhegger a stock option to purchase up to 80,000 shares of our common stock at an exercise price of $1.68 per share, the closing price of our common stock on June 4, 2021. 40,000 options vested on the date of grant, and provided Mr. Habhegger remains eligible under the plan on the future vesting date, the remaining 40,000 options vest on June 4, 2022. |
| (5) | We granted Mr. Habhegger a stock option to purchase up to 100,000 shares of our common stock at an exercise price of $1.42 per share, the closing price of our common stock on September 9, 2019. Provided Mr. Habhegger remains eligible under the plan on these dates, the options vest on September 9, 2020, 2021 and 2022 in amounts of 33,334, 33,333 and 33,333 options, respectively. |
| (6) | Represents performance bonus awards for the respective fiscal year. |
| (7) | We granted Mr. Mangadu a stock option to purchase up to 25,000 shares of our common stock at an exercise price of $1.68 per share, the closing price of our common stock on June 4, 2021. 12,500 options vested on the date of grant, and provided Mr. Mangadu remains eligible under the plan on the future vesting date, the remaining 12,500 options vest on June 4, 2022. |
| (8) | We granted Mr. Mangadu a stock option to purchase up to 100,000 shares of our common stock at an exercise price of $1.30 per share, the closing price of our common stock on September 5, 2019. Provided Mr. Mangadu remains eligible under the plan on these dates, the options vest on September 5, 2020, 2021 and 2022 in amounts of 33,000, 33,000 and 34,000 options, respectively. |
Employment Contracts
Agreement with Dr. Forkey
On July 27, 2018, our Board of Directors approved a new compensation agreement with our Chief Executive Officer, Dr, Joseph Forkey effective August 2, 2018. Pursuant to the agreement, we agreed to pay Dr. Forkey a base salary of $200,000 per year beginning retroactively on July 1, 2018. Effective October 1, 2019, our Board of Directors approved an increase of Dr. Forkey’s base salary to $250,000 per year. On August 2, 2018, we also granted Dr. Forkey a stock option to purchase up to 350,000 shares of our common stock at an exercise price of $0.73 per share. The options vested as follows: (i) one–half of the options vest if we achieved revenues of $1.5 million or higher for two consecutive fiscal quarters, based on the reported revenues in our Form 10-Ks or 10-Qs; and (ii) one-half of the options vested if our common stock was trading at $1.00 per share or higher for fifteen consecutive trading days. In the event of a change of control all unvested options will vest. As of June 30, 2020, all 350,000 options are vested. We also granted Dr. Forkey 300,000 shares of common stock at a rate of 50,000 shares per fiscal quarter retroactively starting January 1, 2017 and through the quarter ended June 30, 2018. As of June 30, 2020, all 300,000 of such shares have been issued to Dr. Forkey.
Agreement with Mr. Habhegger
Effective December 1, 2019 we entered into an employment agreement with Mr. Habhegger to serve as our Chief Financial Officer and Secretary pursuant to which we agreed to pay Mr. Habhegger a base salary of $170,000 per year. In the event that Mr. Habhegger is terminated within six months of a change of control he will receive six months’ notice or pay in lieu of notice at his then current salary rate.
Agreement with Mr. Mangadu
In connection with the acquisition of the Ross Optical division we entered into an employment agreement on July 1, 2019 with Divaker (Divi) Mangadu to serve as President of Ross Optical Industries (a division of Precision Optics Corporation). The agreement covers a period of five years unless terminated sooner under certain conditions by the parties and may be renewed beyond the initial and subsequent terms for additional one-year periods. Mr. Mangadu was also granted a stock option to purchase up to 100,000 shares of our common stock at an exercise price of $1.30 per share, the closing price of our common stock on September 5, 2019. Provided Mr. Mangadu remains eligible under the plan on these dates, the options vest on September 5, 2020, 2021 and 2023 in amounts of 33,000, 33,000 and 34,000 options, respectively. If Mr. Mangadu is terminated without cause by the Company during the initial five year term of the agreement, he shall receive a lump-sum $75,000 cash severance payment and all unexercised stock options shall vest immediately and be exercisable for the remainder of their term. If Mr. Mangadu is terminated without cause subsequent to the initial five-year term, he shall receive a lump-sum cash severance payment equal to one-half his then current annual salary. The agreement also provides that for a period of five years after July 1, 2019 Mr. Mangadu agrees not to compete with the Company, solicit employees, vendors or customers for purposes that do not directly benefit the Company or to interfere in any way with the Company’s relationship with any vendors or customers.
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Apart from the agreements described above, we have no other employment contracts in place with any Named Executive Officer or any compensatory plan or arrangement with respect to any Named Executive Officer where such plan or arrangement will result in payments to such Named Executive Officer upon or following his resignation, or other termination of employment with us and our subsidiaries, or as a result of a change-in-control of our Company or a change in the Named Executive Officers’ responsibilities following a change-in-control.
Outstanding Equity Awards at Fiscal Year-End Table for the Fiscal Year Ended June 30, 2021
The following table shows grants of options outstanding on June 30, 2021, the last day of our fiscal year, to each of the Named Executive Officers included in the Summary Executive Compensation Table.
| Name | Number of securities Exercisable | Number of securities underlying unexercised options Unexercisable | Option exercise price ($) | Option expiration date | |||||||||||
| Dr. Joseph N. Forkey | 150,000 | 0 | 1.20 | 03/02/2022 | |||||||||||
| 350,000 | 0 | 0.73 | 08/02/2028 | ||||||||||||
| 75,000 | (1) | 75,000 | (1) | 1.68 | 06/04/2031 | ||||||||||
| Daniel S. Habhegger | 33,334 | 66,666 | 1.42 | 09/09/2029 | |||||||||||
| 40,000 | (1) | 40,000 | (1) | 1.68 | 06/04/2031 | ||||||||||
| Divaker Mangadu | 34,000 | 66,000 | 1.30 | 09/05/2029 | |||||||||||
| 12,500 | (1) | 12,500 | (1) | 1.68 | 06/04/2031 | ||||||||||
| (1) | The options were granted on June 4, 2021 with vesting of one-half of the options on the grant date and one-half on June 4, 2022, subject to the holders’ eligibility under the Equity Incentive Plan on that date. |
Profit Sharing and 401(k) Plan
We have a defined contribution 401(k) profit sharing plan. Employer profit sharing and matching contributions to the plan are discretionary. No employer profit sharing contributions were made to the plan in fiscal years 2021 and 2020. No employer matching contributions were made to the plan in fiscal years 2021 and 2020.
Director Compensation
The following table sets forth cash amounts and the value of other compensation paid to our directors, but does not include the compensation of Dr. Joseph N. Forkey, our Chief Executive Officer, President, and Treasurer, as his compensation is reflected in the Summary Executive Compensation Table. During the fiscal year ended June 30, 2021, our Board of Directors determined that Dr. Joseph N. Forkey was our employee director and, therefore, would not earn any fees related to service on our Board.
Director Compensation Table for the Fiscal Year Ended June 30, 2021
| Name | Fees earned or paid in cash ($)(1) | Option awards ($)(3) | Total ($) | |||||||||
| Andrew J. Miclot | 5,000 | 23,835 | 28,835 | |||||||||
| Dr. Richard B. Miles | 5,000 | 23,835 | 28,835 | |||||||||
| Peter H. Woodward | 40,000 | (2) | 35,753 | 75,753 | ||||||||
| (1) | Under our director compensation plan, each non-management, non-Chairman board member shall receive $5,000 annually paid in quarterly amounts of $1,250. The board of directors also approved that each. We also reimburse our directors for travel expenses. |
| (2) | Mr. Woodward serves as our Chairman and performs various management services. In March 2019 the Company’s board of directors approved the payment of $10,000 per quarter to Mr. Woodward for the performance of certain management services. |
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| (3) | In December 2019 the Company’s board of directors approved annual grants of common stock options each year beginning in December 2019 of 20,000 and 30,000 options to each non-management board members and the Chairman, respectively. On November 16, 2020, 20,000 options to purchase the Company’s common stock were granted to Mr. Moclot and Dr. Miles and 30,000 to Mr. Woodward at an exercise price of $1.40 per share. The options are exercisable at the date of grant and expire on November 16, 2031. |
As of June 30, 2021, the following outstanding stock options were held by each of our directors: Andrew J. Miclot – 100,000, Dr. Richard B. Miles – 113,600, Peter H. Woodward – 150,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following tables set forth information regarding our common stock owned as of the close of business on September 20, 2021 by the following persons: (i) each person who is known by us to own beneficially more than 5% of our common stock, (ii) each of our directors who beneficially owns our common stock, (iii) each of our Named Executive Officers who beneficially own our common stock and (iv) all executive officers and directors, as a group, who beneficially own our common stock. The information on beneficial ownership in the table and footnotes thereto is based upon data furnished to us by, or on behalf of, the persons listed in the table.
We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.
In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options held by that person or group that are currently exercisable or exercisable within 60 days after September 20, 2021. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person or group.
Stockholders Known by Us to Own Over 5% of Our Common Stock
| Amount of beneficial ownership (1) | Percent of | |||||||||||||||
| Name and Address of Beneficial Owner | Shares Owned | Shares – Rights to Acquire | Total Number | Shares Beneficially Owned (2) | ||||||||||||
| Dolphin Offshore Partners LP (3) 4828 First Coast Highway, STE 5 Fernandina, FL 32034 | 2,070,625 | 0 | 2,070,625 | 15.6% | ||||||||||||
| Stuart L Sternberg (4) 85 Bellevue Ave Rye, NY 10580 | 884,467 | 0 | 884,467 | 6.7% | ||||||||||||
| Sandra F. and Norman H. Pessin (5) 500 Fifth Avenue, Suite 2240 New York, NY 10110 | 1,196,595 | 0 | 1,196,595 | 9.0% | ||||||||||||
Hershey Strategic Capital, LP (6) 888 7th Ave., 17th Floor New York, New York 10019 | 986,480 | 0 | 986,480 | 7.4% | ||||||||||||
MHW Partners, L.P. (7) 150 East 52nd Street 30th Fl. New York, New York 10022 | 674,013 | 150,000 | 824,013 | 5.0% | ||||||||||||
_______________________
| (1) | Represents shares with respect to which each beneficial owner listed has or will have, upon acquisition of such shares upon exercise or conversion of options, warrants, conversion privileges or other rights exercisable within 60 sixty days, sole voting and investment power. For the purposes of this table, we have not assumed the limitations on exercise set forth in certain options, which limit the number of shares of common stock that the holder, together with all other shares of common stock beneficially owned by such person, does not exceed 4.999% of the total outstanding shares of common stock. |
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| (2) | As of September 20, 2021, there were 13,282,476 issued shares of our common stock issued and outstanding. Percentages are calculated on the basis of the amount of issued and outstanding common stock plus, for each person or group, any securities that such person or group has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights. |
| (3) | We relied, in part, on the Schedule 13D/A filed jointly by Dolphin Offshore Partners, L.P., Dolphin Mgmt. Services, Inc. and Peter E. Salas on December 27, 2017 for this information.
Dolphin Offshore Partners, L.P., a Delaware limited partnership, is an investment manager. Dolphin Mgmt. Services, Inc., a Delaware corporation, is the managing general partner of Dolphin Offshore Partners, L.P. Peter E. Salas is the President, sole shareholder and controlling person of Dolphin Mgmt. Services, Inc. Peter Salas is a U.S. citizen.
|
| Dolphin Offshore Partners, L.P., Dolphin Mgmt. Services, Inc. and Peter E. Salas each may be deemed to beneficially own an aggregate of 2,070,625 shares of common stock. Dolphin Offshore Partners, L.P., Dolphin Mgmt. Services, Inc. and Peter E. Salas each may be deemed to have shared power to vote or direct the vote, and dispose or direct the disposition, of all such shares of common stock. |
| (4) | We relied, in part, on a Schedule 13G/A filed with the SEC by Stuart Sternberg on February 26, 2021, for this information. |
| (5) | We relied, in part, on a Schedule 13D/A filed jointly with the SEC on July 5, 2019 by Sandra F. Pessin and Norman H. Pessin. Mr. and Mrs. Pessin are married and considered to beneficially hold each other’s shares. Ms. Pessin owns 963,334 shares and Mr. Pessin owns 233,625 shares for a combined beneficial ownership of 1,196,959 shares. |
| (6) | We relied, in part, on the Schedule 13D/A jointly filed by Hershey Strategic Capital, LP, Hershey Management I, LLC and Hershey Strategic Capital GP, LLC on October 10, 2017 for this information.
Hershey Management I, LLC, a Delaware limited liability company, is the investment advisor of Hershey Strategic Capital, LP, a Delaware limited partnership. Hershey Strategic Capital GP, LLC, a Delaware limited liability company, is the general partner of Hershey Strategic Capital, LP. Adam Hershey is the sole managing member of both Hershey Management I, LLC and Hershey Strategic Capital GP, LLC. As the investment advisor, Hershey Management I, LLC has the voting and dispositive power with respect to all of the shares of common stock owned by Hershey Strategic Capital, LP. On July 9, 2014, Richard E. Forkey resigned as a director and Hershey Strategic Capital, LP designated Peter H. Woodward and Dr. Kenneth S. Schwartz to our Board of Directors and such designees were so appointed.
Hershey Strategic Capital, LP beneficially owns 986,480 shares of common stock. Hershey Strategic Capital, LP is managed by Adam Hershey, and in such capacity, Mr. Hershey holds the power to vote and direct the disposition of all shares of common stock owned by Hershey Strategic Capital, LP. Hershey Management I disclaims beneficial ownership in the shares. |
| (7) | We relied, in part, on a Form 4 filed with the SEC on December 1, 2016 by Peter H. Woodward, on a Schedule 13D/A jointly filed with the SEC on November 3, 2015 by MHW Partners, L.P., MHW Capital, LLC, MHW Capital Management, LLC, on a Form 4 filed with the SEC by Peter H. Woodward on December 31, 2019, and on a Form 4 filed with the SEC by Peter H. Woodward on November 16, 2020 for this information..
MHW Partners, L.P. is a Delaware limited partnership. MHW Capital, LLC is a Delaware limited liability company. MHW Capital Management, LLC is a Delaware limited liability company. MHW Capital, LLC is the general partner of MHW Partners, L.P. Mr. Woodward is the principal of MHW Capital Management, LLC and MHW Capital, LLC and in such capacity, Mr. Woodward holds the power to vote and direct the disposition of all shares of common stock owned by MHW Partners, L.P. MHW Partners, L.P., MHW Capital, LLC, MHW Capital Management, LLC and Mr. Woodward share the power to vote and direct the disposition of all shares of common stock owned by MHW Partners, L.P. Mr. Woodward is a citizen of the United States and our current Chairman of our Board of Directors. |
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| MHW Partners, L.P. beneficially owns 674,013 shares of common stock, and 150,000 shares that may be acquired upon the exercise of outstanding stock options by Mr. Woodward. 90,000 options vested in three installments: one-third vested immediately on the date of grant; one-third vested on May 18, 2016; the remaining one-third vested on May 18, 2017. The options have an exercise price of $0.73 and expire on May 18, 2025. 30,000 options became immediately exercisable upon their grant on December 6, 2019, have an exercise price of $1.50 per share, and expire on December 6, 2029. The remaining 30,000 options became immediately exercisable upon their grant on November 16, 2020, have an exercise price of $1.40 per share, and expire on November 16, 2030. However, the aggregate number of shares of common stock into which such warrants and options are exercisable, and which MHW Partners, L.P. has the right to acquire beneficial ownership, is limited to the number of shares of common stock that, together with all other shares of common stock beneficially owned by MHW Partners, L.P., does not exceed 4.999% of the total outstanding shares of common stock. Accordingly, such warrants and options are not currently exercisable into common stock until the actual shares of common stock held by MHW Partners, L.P. is less than 4.999% of the total outstanding shares of common stock. MHW Partners, L.P. may waive this 4.999% restriction with 61 days’ notice to us. |
Officers and Directors
| Amount of beneficial ownership (2) | Percent of | |||||||||||||||||
| Name and address of beneficial owner (1) | Nature of beneficial ownership | Shares Owned | Shares – Rights to Acquire | Total Number | Shares Beneficially Owned (3) | |||||||||||||
| Dr. Joseph N. Forkey (4) | Chief Executive Officer, President, Treasurer and Director | 333,620 | 650,000 | 983,620 | 7.1% | |||||||||||||
| Peter H. Woodward (5) | Chairman of the Board of Directors | 674,013 | 150,000 | 824,013 | 6.1% | |||||||||||||
| Dr. Richard B. Miles (6) | Director | 15,112 | 113,600 | 128,712 | * | |||||||||||||
| Andrew J. Miclot (7) | Director | 0 | 100,000 | 100,000 | * | |||||||||||||
| Daniel S. Habhegger (8) | Chief Financial Officer, Secretary | 0 | 180,000 | 180,000 | 1.3% | |||||||||||||
| Divaker Mangadu (9) | President, Ross Optical Division | 0 | 125,000 | 125,000 | * | |||||||||||||
| All directors and executive officers as a group | 1,022,745 | 1,318,600 | 2,341,345 | 16.0% | ||||||||||||||
* Percentage of shares beneficially owned does not exceed one percent of issued and outstanding shares of stock.
_______________________
| (1) | Unless otherwise stated, the address of each beneficial owners listed on the table is c/o Precision Optics Corporation, Inc., 22 East Broadway, Gardner, MA 01440. |
| (2) | Represents shares with respect to which each beneficial owner listed has or will have, upon acquisition of such shares upon exercise or conversion of options, warrants, conversion privileges or other rights exercisable within 60 sixty days, sole voting and investment power. |
| (3) | As of September 20, 2021, we had 13,282,476 shares of our common stock issued and outstanding. Percentages are calculated on the basis of the amount of issued and outstanding common stock plus, for each person or group, any securities that such person or group has the right to acquire within 60 days of September 20, 2021 pursuant to options, warrants, conversion privileges or other rights. |
| (4) | Dr. Forkey is a member of our Board of Directors and serves as our Chief Executive Officer, President and Treasurer. Dr. Forkey’s beneficial ownership consists of (a) 333,620 shares of common stock held in joint ownership with his wife, Heather Forkey, with whom he shares voting and dispositive control, and (b) 650,000 shares of common stock that may be acquired upon the exercise of outstanding stock options. |
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| (5) | Mr. Peter Woodward is the Chairman of our Board of Directors. Mr. Woodward is the managing member and general partner of MHW Partners and in such capacity, Mr. Woodward holds the power to vote and direct the disposition of all shares of common stock owned by MHW Partners. On September 28, 2012, MHW Partners purchased 222,223 shares of our common stock, and warrants to purchase up to 168,386 shares of our common stock at an exercise price of $1.11 per share, subject to adjustment and a call provision if certain market price targets are reached, and an expiration date of September 28, 2017. On July 2, 2014, MHW Partners purchased 125,000 shares of common stock. On October 19, 2015, MHW Partners purchased 100,000 shares of common stock. On November 22, 2016 MHW Partners purchased 156,667 shares of common stock, and warrants to purchase 78,333 shares of common stock at an exercise at a variable exercise price subject to the Companies achievement of certain performance criteria. Mr. Woodward exercised the 78,333 November 22, 2016 warrants on October 16, 2017 at $0.01 per share. Mr. Woodward’s beneficial ownership consists of (a) 674,013 shares of common stock held through MHW Partners, L.P., and (b) 150,000 shares of common stock which may be acquired upon the exercise of outstanding stock options. |
| (6) | Dr. Miles is a member of our Board of Directors. Dr. Miles’ beneficial ownership consists of (a) 15,112 shares of common stock, and (b) 113,600 shares of common stock that may be acquired upon the exercise of outstanding stock options. |
| (7) | Mr. Andrew Miclot is a member of our Board of Directors. Mr. Miclot’s beneficial ownership consists of 100,000 shares that may be acquired upon the exercise of outstanding stock options. |
| (8) | Mr. Habhegger became our Chief Financial Officer and Secretary effective December 1, 2019. Mr. Habhegger’s beneficial ownership consists of 180,000 shares of common stock that may be acquired upon the exercise of outstanding stock options. |
| (9) | Mr. Mangadu became our President, Ross Optical Division upon our acquisition of Ross Optical, Inc. effective July 1, 2019. Mr. Mangadu’s beneficial ownership consists of 125,000 shares of common stock that may be acquired upon the exercise of outstanding stock options. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Certain Relationships and Related Transactions
Since the beginning of the last fiscal year ended June 30, 2021 we had the following related party transactions.
At June 30, 2019, we had received payments for common stock subscriptions totaling $925,000 at $1.25 per share. On July 1, 2019 we received an additional $25,000 and closed the private placement on that date by issuing 760,000 unregistered common shares. The placement proceeds were used to partially fund the business acquisition of the Ross Optical division. In compliance with the registration rights agreement entered into with the investors, on October 29, 2019 we filed a registration statement for the shares with the Securities and Exchange Commission which became effective on November 22, 2019. Ms. Sandra Pessin acquired 200,000 shares in this placement for $250,000 or $1.25 per share, and at that time Ms. Pessin was an owner of more than 5% of our outstanding common stock.
On April 14, 2020 we sold 200,000 shares of common stock for cash at $1.25 per share or $250,000 to be used for general working capital needs. In compliance with the registration rights agreement entered into with the investors, on August 14, 2020 we filed a registration statement for the shares with the Securities and Exchange Commission which became effective on November 4, 2020. Hershey Strategic Capital, LP acquired 20,000 shares in this placement for $25,000 or $1.25 per share, and at that time Hershey Strategic Capital, LP was an owner of more than 5% of our outstanding common stock.
Director Independence
During the fiscal year ended June 30, 2021, the Board of Directors determined that Dr. Richard B. Miles, and Andrew J. Miclot were “independent” as defined under the standards of independence set forth in the Nasdaq Listing Rules and the rules under the Securities Exchange Act of 1934.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Independent Registered Public Accounting Firm Fees
Our principal and sole independent registered public accounting firm for the fiscal years ending June 30, 2021 and 2020 is Stowe & Degon LLC, referred to as Stowe. The following table presents fees for professional audit services and other services rendered by Stowe, for the fiscal years ended June 30, 2021 and 2020:
| 2021 | 2020 | |||||||
| Audit Fees (1) | $ | 94,125 | $ | 92,337 | ||||
| Audit Related Fees (2) | – | 1,850 | ||||||
| Total Audit and Audit Related Fees | 94,125 | 94,187 | ||||||
| Tax Fees (3) | 9,850 | 9,850 | ||||||
| Total Fees | $ | 103,975 | $ | 104,037 | ||||
_______________________
| (1) | Audit fees for fiscal year 2021 are comprised of fees for professional services performed for the audit of our annual financial statements and review of our quarterly financial statements of $94,125, including direct out-of-pocket expenses in the amount of $75. Audit fees for fiscal year 2020 are comprised of fees for professional services performed for the audit of our annual financial statements and review of our quarterly financial statements of $92,337, including direct out-of-pocket expenses in the amount of $3,337. |
| (2) | Audit-related fees are comprised of fees for assurance and related attestation services that are reasonably related to the performance of the audit of our annual financial statements, or the review thereof, and fees for due diligence services. |
| (3) | Tax fees for fiscal 2021 and 2020 are comprised of fees for professional services performed with respect to corporate tax compliance, tax return preparation and filing, tax planning and tax advice. |
Pre-Approval Policies
Under the direction of our Chief Executive Officer, our Board of Directors pre-approves all services provided by our independent registered public accounting firm. 100% of the above services and fees were reviewed and approved by the Board of Directors either before or after the respective services were rendered. The Board of Directors has considered the nature and amount of fees billed by Stowe and believes that the provision of services for activities unrelated to the audit is compatible with maintaining the firm’s independence.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
| a. | Documents filed as part of this report |
The following documents are filed as part of this Annual Report on 10-K:
| 1. | FINANCIAL STATEMENTS |
The following documents are filed in Part II, Item 8 of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at June 30, 2021 and 2020
Consolidated Statements of Operations for the years ended June 30, 2021 and 2020
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended June 30, 2021 and 2020
Notes to Consolidated Financial Statements
| 2. | FINANCIAL STATEMENT SCHEDULES |
All financial statement schedules have been omitted as they are not required, not applicable, or the required information is otherwise included.
| b. | Exhibits |
The exhibits listed below are filed with or incorporated by reference in this report.
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| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |
| * | Filed herewith. |
| † | Certain portions of the agreement have been omitted to preserve the confidentiality of such information. The Company will furnish copies of any such information to the SEC upon request. |
| + | The schedules to agreement have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish copies of any such schedules to the SEC upon request. |
Copies of above exhibits not contained herein are available to any stockholder, upon written request to: Chief Financial Officer, Precision Optics Corporation, Inc., 22 East Broadway, Gardner, MA 01440.
None.
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Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PRECISION OPTICS CORPORATION, INC. | ||
| Date: September 28, 2021 | By: | /s/ Joseph N. Forkey |
Joseph N. Forkey President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: September 28, 2021 | By: | /s/ Daniel S. Habhegger |
Daniel S. Habhegger Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Capacity | Date |
/s/ Joseph N. Forkey Joseph N. Forkey | Chief Executive Officer, President, Treasurer and Director (Principal Executive Officer) | September 28, 2021 |
/s/ Daniel S. Habhegger Daniel S. Habhegger | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | September 28, 2021 |
| /s/ Andrew J. Miclot | Director | September 28, 2021 |
| Andrew J. Miclot | ||
| /s/ Peter H. Woodward | Director, Chairman | September 28, 2021 |
| Peter H. Woodward | ||
| /s/ Richard B. Miles | Director | September 28, 2021 |
| Richard B. Miles |
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