PRECISION OPTICS CORPORATION, INC. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Financial Statements Page Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets at June 30, 2021 and 2020 F-2 Consolidated Statements of Operations for the Years Ended June 30, 2021 and 2020 F-3 Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2021 and 2020 F-4 Consolidated Statements of Cash Flows for the Years Ended June 30, 2021 and 2020 F-5 Notes to Consolidated Financial Statements F-6 18 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.