PRECISION OPTICS CORPORATION, INC. 10-K

ITEM 1. BUSINESS. Overview We have been a developer and manufacturer of advanced optical instruments since 1982, and we operate primarily in two key market segments: medical devices and advanced defense/aerospace products. Within our proprietary optical and imaging technology, our unique custom designs, expert manufacturing capabilities, and advanced engineering and development capabilities have generated traditional endoscopes and endocouplers, digital imaging endoscopes using CMOS sensor technology, some designed and manufactured for single-use, as well as other, more advanced, custom imaging and illumination products for our customers’ use in minimally invasive surgical procedures. We design and manufacture ultra-high precision 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 also apply our unique technologies to applications in the Defense / Aerospace markets including applications supporting satellite network communications. To support these two critical market categories, our business operations are conducted in four areas: systems manufacturing, engineering and product development, Ross Optical components and assemblies, and our micro-optics laboratory. Our systems manufacturing operations assemble and manufacture components and systems for both medical device and advanced aerospace customers who choose to outsource these services based on our ability to handle high complexity components, specific optical technologies, micro-optical assemblies and other advanced manufacturing challenges. Our engineering and product development team assesses specific customer product needs, designs devices to solve those needs, and creates manufacturing processes that enable higher volume production of these devices and assemblies that can then be executed by our manufacturing operations group. Effective June 1, 2019, we acquired the operating assets of Ross Optical Industries, Inc. of El Paso, Texas. This acquisition expanded our optics components and assemblies’ business. As Ross Optical Industries we 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,which expanded our electrical engineering capabilities in the development of end-to-end medical visualization devices. 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. The operations of Lighthouse Imaging have been integrated with other operations of the company, which continue under the POC brand, so that the company now operates with single systems manufacturing and engineering departments, each of which includes historical POC and Lighthouse Imaging resources. 1 During the fiscal year ended June 30, 2025, approximately 43% of our business was from systems manufacturing, 26% was from engineering services primarily relating to the design of medical device optical assemblies, 20% was from Ross Optical, and 11% from our micro-optics laboratory. During the fiscal year ended June 30, 2024, approximately 45% of our business was from engineering services primarily relating to the design of medical device optical assemblies, 19% from systems manufacturing, 22% from Ross Optical, and 14% from our micro-optics laboratory. We generally expect revenue to increase over time as the engineering design phase of new product programs 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. 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. 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 a couple millimeters 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™ lens technology and proprietary design and manufacturing techniques enable the manufacture of micro medical cameras and digital endoscopes at previously unobtainable prices, with sizes on the order of a couple millimeters or less and image quality superior to most previously available endoscopes, characteristics that make them perfectly suited for medical imaging applications, particularly single-use or disposable endoscopes. 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, particularly those required for satellite network communications. The Unity Platform . In January 2025, we launched our Unity Imaging Platform (“Unity”), comprising a standard baseline CMOS endoscopic system with customization options based on existing or newly designed modular sub-components. Unity represents the culmination of many years of research, development, and collaboration with key industry players. By leveraging insights from many previous projects, Unity incorporates proven design architectures to meet the unique needs of today’s medical imaging devices. Customers benefit from a modular, adaptable solution that simplifies every stage of the development process, from prototyping to production using the latest technologies. The consolidation of common design elements offers flexible, modular architecture, appropriate for both re-usable and single-use endoscopic systems. Unity provides customers with a functional video pipeline early in the development process. This accelerates their system integration efforts and allows them to gather feedback from stakeholders much sooner, ultimately shortening the time to market and enhancing overall project efficiency. Unity is the embodiment of our on-going improvements to the evolution and acceptance of our Microprecision™ and digital imaging technology platforms. 2 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 pursue patent protection for existing and new technology. We believe that our unique technical capabilities in the areas of Microprecision™ optics, micro medical cameras, digital imaging, and illumination represent competitive advantages for us in the minimally invasive surgical device market. The competitive advantage of our Ross Optical division is its ability to quickly provide design-for-manufacturability feedback and 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 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 cameras with low manufacturing costs and high image quality, we believe our Microprecision™ and digital imaging technologies open the possibility to replace existing re-sterilizable endoscopes with single-use alternatives. 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 millimeter-sized visualization instrumentation. 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 Ultra HD Precision systems, 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 direct marketing, referrals, attendance at trade shows and an online presence with our corporate websites as well as professional association websites, we continually seek to expand 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. Due to our expertise and growing OEM trends of outsourcing complex projects, 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. 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 domestic and 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. 3 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 and the Unity platform. 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 and manufacture 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 precision-grade optical glass and CMOS sensors with the specifications used in the products we produce, the manufacturing capacities of those suppliers are 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: — Medical devices; — 3-D endoscopes; — Microprecision™ lenses and micro medical cameras; — Defense/aerospace 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 Microprecision™ optics, digital imaging, micro medical cameras, related illumination techniques, and associated design and manufacturing technology and to aggressively pursue patent protection for such developments. Employees As of June 30, 2025, we had 90 employees, all of which were full-time employees. There were 51 employees in manufacturing, 18 in engineering/research and development, 8 in sales and marketing, and 13 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 ending June 30, 2025, we sold products and services to 278 customers with one customer accounting for approximately 22% of total revenues and another customer accounting for 20% of our total revenues. The loss of these customers would have a material impact on our business. For the fiscal year ended June 30, 2024, we sold products and services to 325 customers with one product development customer accounting for approximately 19% of total revenues and another customer accounting for approximately 14% of our total revenues for that year. Two customer accounts receivable balances accounted for 32.1% and 17.9% of total receivables on June 30, 2025. Two customer accounts receivable balances accounted for 15.4% and 12.1% of total receivables on June 30, 2024. 4 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. We do not believe the costs associated with our compliance with environmental laws are material. 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 may 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. 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 to 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. 5 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.