PRECISION OPTICS CORPORATION, INC. 10-K

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. 13 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. 14 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. 15 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. 16 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. 17 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.