Item 1. Business
ITEM 1. BUSINESS.
Overview
We have been a developer and manufacturer of advanced
optical instruments since 1982. Our proprietary medical instrumentation line, unique custom design and manufacturing capabilities, and
expert engineering and development has generated traditional proprietary endoscopes and endocouplers as well as other custom imaging and
illumination products for our customers’ 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.
Effective June 1, 2019, we acquired the operating
assets of Ross Optical Industries, Inc. of El Paso, Texas. As Ross Optical Industries 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 suppliers. 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 applied using our in-house coating department.
Effective October 1, 2021, we acquired the operating
assets of Lighthouse Imaging, LLC of Windham, Maine. Our Lighthouse Imaging division supplements our operations as a manufacturer of advanced
optical imaging systems and accessories and has provided further expertise in electrical engineering and development of end-to-end medical
visualization devices. Product development competencies at Lighthouse Imaging include Systems, Optical, Mechanical, Electrical and Process
Development Engineering. Our product development team has extensive experience developing visualization systems that are used in a variety
of clinical applications. Lighthouse Imaging is an industry leader in chip-on-tip visualization systems.
During the fiscal year ended June 30, 2024, approximately
44% our business was from engineering services primarily relating to the design of medical device optical assemblies, 44% from the sale
of both internally manufactured and purchased optical components, and 12% from the manufacture of optical assemblies and sub-assemblies.
During the fiscal year ended June 30, 2023, approximately 32% our business was from engineering services primarily relating to the design
of medical device optical assemblies, 50% from the sale of both internally manufactured and purchased optical components, and 18% from
the manufacture of optical assemblies and sub-assemblies primarily for medical device instrument applications. We generally expect revenue
increases over time as the engineering design phase is completed and products transition to the commercial phase, leveraging our unique
manufacturing capabilities. Much of the technology we have developed for making smaller medical devices is also used in defense and aerospace
systems where smaller size and weight is crucial.
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History
We incorporated in Massachusetts in December 1982,
have been publicly held since November 1990, and have no subsidiaries.
Principal Products and Services
We have been manufacturing medical products such as
endoscopes and endocouplers since our formation in 1982. In 1985 we introduced a proprietary product line of endocouplers. We also design
and manufacture custom optical medical devices to satisfy our customers’ specific requirements, incorporating various optical technologies,
servicing a variety of minimally invasive surgical and diagnostic procedures, using both reusable and single-use medical devices. In addition
to medical devices, we also manufacture and sell components and assemblies specially designed for defense/aerospace and industrial uses.
The acquisition of the assets of Ross Optical Industries
in 2019 expanded our optics components and assemblies business. All products supplied by Ross Optical include a custom or catalog optic,
sourced through Ross Opticals’ extensive domestic and worldwide network of optical fabrication suppliers. 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’s in-house coating department.
The acquisition of the assets of Lighthouse Imaging
LLC in 2021 expanded our electrical engineering capabilities in the development of end-to-end medical visualization devices. Product development
competencies acquired include systems, optical, mechanical, electrical and process development engineering. The acquisition represented
a vertical integration of our established product development capabilities with a team with extensive experience developing visualization
systems that we believe provides our customers with single-source value-added development services and product offerings.
Microprecision™ Lenses and Micro Medical
Cameras: While the size of endoscopes has gradually decreased over time, we believe the widespread use of very small endoscopes, with
diameters of one millimeter or smaller, has been limited due in part to the limitations of traditional lens fabrication methods to combine
smaller sizes with acceptable image quality at reasonable manufacturing costs. We believe our Microprecision™ optics technology
provides a solution to this challenge. Combined with recent advances by our supply chain partners 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 previously unobtainable prices with sizes on the order of one millimeter or less, characteristics that make
them perfectly suited for medical applications. We believe the technology developed to support the design, fabrication and manufacturing
of Microprecision™ lenses and associated assemblies can also be used to satisfy the needs of defense and aerospace systems that
require small size and weight.
We are currently engaged in development projects 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 have now completed and are currently designing, disposable versions of our camera modules and
assemblies designed for single use, reducing the 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.
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.
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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 more limited than those of
some of our competitors, we believe that we compete successfully in this market through 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, augmented by its ability to provide thin-film coatings and assembly.
Market Opportunities
Microprecision™ Lenses and Micro Medical
Cameras: 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. 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 in 3D robotic surgery
systems has increased. Various companies are now pursuing less expensive, procedure specific robotic systems. We believe our experience
and expertise in 3D endoscopes for medical applications will benefit companies in this area.
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, as well as defense, aerospace and other industrial applications, 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 established medical device companies as well as to emerging medical device companies, and to a growing number of major
defense / aerospace companies. We expect our revenues and customer base to continue to expand as development projects transition to production
orders and new customer projects enter the development phase.
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International Business
We acquire various optical components from overseas
as necessary 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. We have an expanded network of overseas suppliers
of various types and sizes of optical components and assemblies that enhance our ability to meet the material demands of our customers’
unique optical and medical device designs.
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 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.
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 the 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.
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:
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Medical devices;
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3-D endoscopes;
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Microprecision™ lenses and micro medical cameras;
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Defense products.
The patents contained in our current patent portfolio
have various expiration dates through March 2043. 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. 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.
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Employees
As of June 30, 2024, we had 84 employees, 83 of which
were full-time employees. There were 41 employees in manufacturing, 22 in engineering/research and development, 9 in sales and marketing,
and 12 in finance and administration. We are not a party to any collective bargaining agreements. We believe our relations with our employees
are very good.
C ustomers
During the fiscal year ended June 30, 2024, we sold
product and services to 325 customers with one product development customer accounting for 19.1% of total revenues and with one optical
components customer accounting for 13.8% of our total revenues. The loss of these customers would have a material impact on our business.
For the fiscal year ended June 30, 2023, we sold products and services to 361 customers and one customer accounted for 11.4% of our total
revenues for that year.
Two customer accounts receivable balances accounted
for 15.4% and 12.1% of total receivables on June 30, 2024. Two customer accounts receivable balances accounted for 14.0% and 13.7% of
total receivables on June 30, 2023.
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. We believe that we currently comply with all applicable environmental laws and regulations. We use limited amounts
of hazardous materials in our operations, and as such, compliance does not entail significant expense to us.
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.
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 or our customers 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.
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We design and manufacture components for the defense
industry, and import, export and manufacture 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. All our medical products
are manufactured in conformity with ISO 13485:2016, using a comprehensive Quality Management System (QMS) that helps meet both international
and EU regulatory standards. ISO 13485 is an internationally recognized standard that emphasizes risk management throughout the product
lifecycle, from design to post-market surveillance, and aligns with the European Union Medical Device Regulation (“EU MDR”)
focus on ensuring the safety and performance of medical devices. ISO 13485 provides a solid foundation for meeting the QMS requirements
of the EU MDR. It ensures that manufacturers maintain detailed documentation and traceability of their devices, which is required for
compliance with the EU MDR’s requirements. Conformity with ISO 13485 conveys our commitment to maintaining a robust QMS specifically
for medical device manufacturing, and consistent quality and regulatory compliance, which is essential helping our customers achieve compliance
with the EU MDR and other international regulatory standards. Our failure to comply with ISO 13485 or other applicable regulatory requirements
would jeopardize our ability to sell our products to certain customers who place their product on the EU and other international markets.
Available Information
Our website is www.poci.com. We make available on
our website, free of charge, copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such materials to the U.S.
Securities and Exchange Commission (SEC). Our website and the information contained therein or connected thereto are not intended to be
incorporated into this report.
The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
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