Precision Optics (POCI) - 2022 Q4 - Annual Report

Part I Business The company develops advanced optical instruments, driving growth through diversified revenue streams and strategic acquisitions - The company operates as a developer and manufacturer of advanced optical instruments, including endoscopes and custom imaging products for minimally invasive surgery[13] - Acquired Lighthouse Imaging, LLC on October 4, 2021, to expand expertise in electrical engineering and end-to-end medical visualization devices, particularly chip-on-tip systems[16] - The company's core technologies include Microprecision™ lenses, which enable the manufacturing of micro medical cameras (1mm or less), and 3D endoscopes for enhanced surgical perception[23][26] - The company has a diversified customer base with over 377 customers in fiscal year 2022, and no single customer accounted for 10% or more of total revenues in fiscal years 2022 or 2021[43] FY 2022 Revenue Breakdown | Revenue Source | Percentage of Business | | :--- | :--- | | Engineering Services | 34% | | Sale of Optical Components | 41% | | Manufacture of Optical Assemblies | 25% | Research and Development Expenses | Fiscal Year | R&D Expense | | :--- | :--- | | 2022 | $666,479 | | 2021 | $624,253 | Risk Factors The company faces risks from operating losses, supply chain dependencies, acquisition integration, and its "penny stock" status - The COVID-19 pandemic poses risks of disruption to supply chains, customer orders, and operational efficiencies[57] - The company depends on a limited number of suppliers for key materials, such as precision-grade optical glass and specialized CMOS sensors, which could impact operations if procurement is disrupted[54][73] - The business is highly dependent on the talents of its CEO, Dr. Joseph N. Forkey, and the President of the Ross Optical division, Mr. Divaker Mangadu[61] - The company's common stock is quoted on the OTCQB market under the symbol PEYE and is subject to the SEC's "penny stock" rules, which may limit liquidity and affect the stock price[84][85] History of Operating Losses | Fiscal Year Ended June 30 | Operating Loss | | :--- | :--- | | 2022 | $1,513,890 | | 2021 | $905,583 | Properties The company operates from three leased facilities in Massachusetts, Texas, and Maine, which are deemed adequate for current needs - The company operates from three primary locations: Gardner, MA; El Paso, TX; and Windham, ME, with all facilities being leased[88] Legal Proceedings The company is not currently involved in any material pending or threatened litigation - As of the report date, there are no material pending or threatened legal proceedings against the company[90] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[91] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the OTCQB, with earnings retained for growth and equity compensation plans in place - The company's common stock is traded on the OTCQB market with the ticker symbol PEYE[94] - No dividends were declared in the last two fiscal years, and the company plans to retain future earnings for business growth[96] Equity Compensation Plan Information (as of June 30, 2022) | 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 | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 44,698 | $0.77 | – | | Equity compensation plans not approved by security holders | 2,669,302 | $1.34 | 1,206,403 | | Total | 2,714,000 | $1.33 | 1,206,403 | Selected Financial Data This item has been reserved and no information is provided - This item is marked as [RESERVED][106] Management's Discussion and Analysis of Financial Condition and Results of Operations FY2022 revenue grew 46.9% due to the Lighthouse acquisition, but higher operating expenses led to an increased operating loss - The operating loss for FY2022 was $1,513,890, an increase from the $905,583 loss in FY2021[128] - The cash portion of the Lighthouse acquisition was financed via a $2.6 million bank term loan and the sale of common stock for $1.5 million in gross proceeds[131] FY 2022 vs. FY 2021 Performance | Metric | FY 2022 | FY 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $15,678,248 | $10,674,907 | +$5,003,341 | +46.9% | | Gross Profit | $4,928,187 | $3,433,585 | +$1,494,602 | +43.5% | | Gross Margin | 31.4% | 32.2% | -0.8% | N/A | FY 2022 vs. FY 2021 Operating Expenses | Expense Category | FY 2022 | FY 2021 | % Change | | :--- | :--- | :--- | :--- | | Research & Development | $666,479 | $624,253 | +6.8% | | Selling, General & Administrative | $5,613,473 | $3,714,915 | +51.1% | Quantitative and Qualitative Disclosures About Market Risk The company is exempt from this disclosure requirement as a smaller reporting company - The company is exempt from this disclosure requirement as a smaller reporting company[136] Financial Statements and Supplementary Data This section presents audited financial statements, with the Lighthouse acquisition significantly impacting the balance sheet and P&L Report of Independent Registered Public Accounting Firm The auditor's report identifies Revenue Recognition and Goodwill Impairment as Critical Audit Matters (CAMs) - The auditor identified Revenue Recognition as a Critical Audit Matter due to the significant interpretation required for contracts with unique terms, variable consideration, and multiple performance obligations[145] - The Goodwill Impairment Assessment for the Lighthouse Imaging Division was identified as a Critical Audit Matter because of the high degree of judgment in estimating the reporting unit's fair value[147][148] Consolidated Financial Statements Financials show significant asset and liability growth due to the Lighthouse acquisition, alongside a wider net loss in FY2022 Consolidated Balance Sheet Data (at June 30) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Total Current Assets | $6,505,216 | $4,776,435 | | Goodwill | $8,824,210 | $687,664 | | Total Assets | $16,704,020 | $6,261,300 | | Total Current Liabilities | $4,586,641 | $2,511,110 | | Long-term Debt | $1,961,141 | $– | | Total Liabilities | $7,732,525 | $2,830,173 | | Total Stockholders' Equity | $8,971,495 | $3,431,127 | Consolidated Statement of Operations Data (for year ended June 30) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Revenues | $15,678,248 | $10,674,907 | | Gross Profit | $4,928,187 | $3,433,585 | | Operating Loss | ($1,513,890) | ($905,583) | | Net Loss | ($928,416) | ($102,835) | | Loss Per Share | ($0.06) | ($0.01) | Consolidated Statement of Cash Flows Data (for year ended June 30) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($933,371) | $46,550 | | Net cash used in investing activities | ($407,802) | ($122,397) | | Net cash provided by (used in) financing activities | $1,085,272 | ($197,200) | | Net decrease in cash | ($255,901) | ($273,047) | Notes to Consolidated Financial Statements Notes detail the Lighthouse acquisition terms, financing, and the company's significant net operating loss carryforwards - On October 4, 2021, the company acquired Lighthouse Imaging for a total purchase price of $8,165,670, which included cash, stock, and contingent consideration, resulting in $8,136,546 of goodwill[186][188] - The company secured a $2.6 million term loan and a $500,000 revolving line of credit to finance the Lighthouse acquisition and for working capital[196][197] - As of June 30, 2022, the company had federal and state net operating loss carryforwards of approximately $11.0 million and $4.8 million, respectively[221] Revenue by Product and Service Type | Revenue Type | 2022 | 2021 | | :--- | :--- | :--- | | Engineering Design Services | $5,371,483 | $2,770,481 | | Optical Components | $6,481,896 | $5,751,212 | | Medical Device Products and Assemblies | $3,824,869 | $2,153,214 | | Total Revenues | $15,678,248 | $10,674,907 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with the company's accountants were reported - None reported[224] Controls and Procedures A material weakness in inventory control at the Lighthouse division rendered disclosure controls ineffective as of June 30, 2022 - Management concluded that disclosure controls and procedures were not effective as of June 30, 2022[225] - A material weakness was identified related to the failure to perform procedures to verify inventory quantities at the Lighthouse division prior to the audit[230] - Remediation efforts include performing a total physical inventory count at the Lighthouse division and improving its perpetual inventory systems[231] Other Information No other information was reported in this section - None[235] Part III Directors, Executive Officers and Corporate Governance The company details its board composition, executive officers, and the recent establishment of Audit and Compensation Committees - The Board of Directors consists of five members: Peter V. Anania, Dr. Joseph N. Forkey, Andrew J. Miclot, Dr. Richard B. Miles, and Peter H. Woodward (Chairman)[238] - The executive officers are Dr. Joseph N. Forkey (CEO, President, Treasurer) and Daniel S. Habhegger (CFO, Secretary)[245] - The Audit Committee was established in July 2022, with Mr. Woodward qualifying as the audit committee financial expert[259][261] - The Compensation Committee was established in May 2022, with members Miclot (Chair) and Woodward[262] Executive Compensation This section outlines compensation for named executives and directors, including salaries, bonuses, and equity awards - CEO Dr. Joseph Forkey has a compensation agreement with a base salary of $250,000 per year[269] Summary Executive Compensation Table (FY 2022) | Name and Principal Position | Salary ($) | Bonus ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Dr. Joseph N. Forkey, CEO | 250,000 | 0 | 0 | 250,000 | | Daniel S. Habhegger, CFO | 193,630 | 20,000 | 0 | 213,630 | | Jeffrey L. DiRubio, SVP Sales & Marketing | 168,002 | 29,316 | 31,818 | 229,136 | Director Compensation (FY 2022) | Name | Fees earned or paid in cash ($) | Option awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | Andrew J. Miclot | 5,000 | 32,740 | 37,740 | | Dr. Richard B. Miles | 5,000 | 32,740 | 37,740 | | Peter V. Anania | 3,750 | 32,740 | 36,490 | | Peter H. Woodward (Chairman) | 40,000 | 49,103 | 89,103 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Details significant stockholders owning over 5% and reports that management collectively owns 17.2% of common stock - All directors and executive officers as a group beneficially owned 3,116,761 shares, representing 17.2% of the company's common stock[292] Stockholders with Over 5% Ownership (as of Sept 20, 2022) | Name of Beneficial Owner | Percent of Shares Beneficially Owned | | :--- | :--- | | Sandra F., Norman H. and Brian L. Pessin | 15.2% | | Dolphin Offshore Partners LP | 12.2% | | Hershey Strategic Capital, LP | 5.8% | | Stuart L Sternberg | 5.2% | | MHW Partners, L.P. | 5.0% | Certain Relationships and Related Transactions, and Director Independence A private placement transaction with a significant shareholder is disclosed, and three directors are identified as independent - In an October 2021 private placement, a related party (Sandra Pessin, a >5% owner) acquired 468,750 shares of common stock for $750,000[294][295] - The Board has determined that directors Peter H. Woodward, Dr. Richard B. Miles, and Andrew J. Miclot are independent[296] Principal Accounting Fees and Services Total fees paid to the independent accounting firm Stowe & Degon LLC increased to $117,915 in FY2022 - All services provided by the independent registered public accounting firm were pre-approved by the Board of Directors[298] Independent Accountant Fees | Fee Type | 2022 | 2021 | | :--- | :--- | :--- | | Audit Fees | $96,815 | $94,125 | | Audit Related Fees | $4,420 | $– | | Business Acquisition Related Fees | $6,680 | $– | | Tax Fees | $10,000 | $9,850 | | Total Fees | $117,915 | $103,975 | Part IV Exhibits, Financial Statement Schedules This section lists all financial statements and exhibits filed with the Form 10-K - Lists the financial statements and all exhibits filed with or incorporated by reference into the report[301][303] - All financial statement schedules have been omitted as they are not required or not applicable[302] Form 10-K Summary This item is not applicable and no summary is provided - None[307]