Filed
pursuant to Rule 424(b)(3) and Rule 424(c)
Registration
No. 333- 136033
PROSPECTUS
SUPPLEMENT NO. 5
8,450,000
Shares
PRECISION
OPTICS CORPORATION, INC.
Common
Stock
This
prospectus supplement amends the prospectus dated August 14, 2006, as
previously supplemented by Prospectus Supplement No. 1 thereto dated October
13,
2006, Prospectus Supplement No. 2 thereto dated November 14, 2006,
Prospectus Supplement No. 3 dated February 14, 2007, and Prospectus Supplement
No. 4 dated May 15, 2007 related to the common stock that may be re-sold by
the selling security holders named therein to include information related
to the
financial condition and the results of operations for Precision Optics
Corporation, Inc. for the quarter and year ended June 30, 2007.
This
prospectus supplement should be read in conjunction with the prospectus dated
August 14, 2006, Prospectus Supplement No.1 thereto dated October 13, 2006,
Prospectus Supplement No. 2 thereto dated November 14, 2006, Prospectus
Supplement No. 3 dated February 14, 2007, and Prospectus Supplement No. 4
dated
May 15, 2007, which are to be delivered with this prospectus supplement.
Investing
in our common stock involves risks. See “Risk Factors” beginning on page 1 of
the prospectus.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION
TO THE
CONTRARY IS A CRIMINAL OFFENSE.
October
9, 2007
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
__________________________________
FORM
10-KSB
(Mark
One)
x
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
Fiscal Year Ended June 30, 2007
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
For
transition period from ____ to ____
Commission
File Number 001-10647
PRECISION
OPTICS CORPORATION, INC.
(Name
of
small business issuer in its charter)
|
MASSACHUSETTS
|
|
04-279-5294
|
|
(State
or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
22
East Broadway
Gardner,
Massachusetts 01440
(Address
of principal executive offices) (Zip Code)
(978)
630-1800
(Issuer’s
telephone number, including area code)
Securities
registered under Section 12(b) of the Act: None
Securities
registered under Section 12(g) of the Act: Common
Stock, $.01 par value
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. ¨
Check
whether the issuer: (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
x
No
¨
Check
if
no disclosure of delinquent filers in response to Item 405 of Regulation S-B
is
contained in this form, and no disclosure will be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB. ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨
No
x
The
issuer’s revenues for its most recent fiscal year were $2,477,469.
The
aggregate market value of the voting stock, consisting solely of common stock,
held by non-affiliates of the issuer computed by reference to the closing price
of such stock was $2,278,356 as of August 31, 2007.
The
number of shares of outstanding common stock of the issuer as of August 31,
2007
was 25,458,212.
Transitional
Small Business Disclosure Format (check one): Yes
¨
No
x
The
issuer’s Proxy Statement for the 2007 Annual Meeting of Shareholders to be held
on November 27, 2007 is incorporated by reference into Part III of this Form
10-KSB.
PART
I
ITEM
1. DESCRIPTION
OF BUSINESS
This
Annual Report contains forward-looking statements as defined under the federal
securities laws. Actual results could vary materially. Factors that could cause
actual results to vary materially are described herein and in other documents.
Readers should pay particular attention to the considerations described in
the
section of this report entitled “Managements
Discussion and Analysis of Financial Condition and Results of Operations -
Factors That May Affect Future Results and Market Price of
Stock.”
Readers should also carefully review any risk factors described in other
documents the Company files from time to time with the Securities and Exchange
Commission.
Where
we say “we”, “us”, “our”, or the “Company”, we mean Precision Optics Corporation
or Precision Optics Corporation and it subsidiaries, as applicable. Where we
refer to the “industry”, we mean the optical instruments manufacturing industry.
Certain statements in this Annual Report contain words such as “could”,
“expects”, “may”, “anticipates”, “believes”, “intends”, “estimates”, “plans”,
“envisions”, “seeks” and other similar language and are considered forward
looking statements or information under applicable securities laws. These
statements are based on our current expectations, estimates, forecasts and
projections about the operating environment, economies and markets in which
we
operate. These statements are subject to important assumptions, risks and
uncertainties, which are difficult to predict and the actual outcome may be
materially different. Although we believe expectations reflected in such
forward-looking statements are reasonable based upon the assumptions in this
Annual Report, they may prove to be inaccurate and consequently our actual
results could differ materially from our expectations set out in this Annual
Report.
HISTORY
Precision
Optics Corporation, Inc. (the “Company”) was incorporated in Massachusetts in
1982 and has been publicly owned since November 1990. References to the Company
contained herein include its two wholly-owned subsidiaries, except where the
context otherwise requires.
BUSINESS
OF ISSUER
Precision
Optics Corporation, Inc., a developer and manufacturer of advanced optical
instruments since 1982, designs and produces high-quality medical instruments,
optical thin film coatings, micro-optics with characteristic dimensions less
than 1 mm, and other advanced optical systems. The Company’s medical
instrumentation line includes laparoscopes, arthroscopes and endocouplers and
a
line of world-class 3-D endoscopes for use in minimally invasive surgical
procedures. Precision Optics Corporation is registered to the ISO 9001:2000,
ISO
13485:2003, and CMDCAS Quality Standards, and comply with the FDA Good
Manufacturing Practices and the European Union Medical Device Directive for
CE
Marking of our medical products. The Company’s internet website is
www.poci.com.
Principal
Products and Services and Methods of Distribution.
Medical
Products: Endoscopes and Image Couplers.
The
Company’s medical products include endoscopes, as well as image couplers,
beamsplitters and adapters, all of which are used as accessories to endoscopes.
Since January 1991, the Company has developed and sold endoscopes incorporating
various optical technologies for use in a variety of minimally invasive surgical
and diagnostic procedures. The Company’s current line of specialized endoscopes
include arthroscopes (which are used in joint surgery), laryngoscopes (which
are
used in the diagnosis of diseases of the larynx), laparoscopes (which are used
in abdominal surgery), ENT scopes (which are used for ear, nose and throat
procedures) and stereo endoscopes and cameras (which are used in cardiac and
general surgery, and enable surgeons to visualize the surgical field in 3-D
imagery).
The
Company produces autoclavable endoscopes for various applications, which are
CE
mark certified for European use, and have been designed and tested to withstand
sterilization by autoclave (sterilization in superheated steam under pressure),
as well as all other commonly used medical sterilization means. The major
benefits of instruments that can be autoclaved include increased patient safety,
quick turnaround, and elimination of hazardous sterilant and by-product
materials, all of which provide increased value to the user compared to
alternative sterilization methods.
The
Company developed and has manufactured and sold since 1985 a proprietary product
line of instrumentation to couple endoscopes to video cameras. Included in
this
product line are imaging couplers (for example, the Series 200 Parfocal Zoom
Couplers and the Series 950 Universal Couplers), which physically connect the
endoscope to a video camera system and transmit the image viewed through the
scope to the video camera. The Company’s Series 800 Beamsplitters perform the
same function while preserving for the viewer an eye port for direct,
simultaneous viewing through the endoscope. These devices are sold primarily
to
endoscope and video camera manufacturers and suppliers for resale under the
Company’s customers’ names. All of the image couplers and beamsplitters
manufactured by the Company are approved for surgery-approved sterilization.
Further, the Company believes it is one of only a few manufacturers of
autoclavable image couplers worldwide.
Medical
Products: Next Generation LenslockTM Endoscopes.
The
Company continues to develop and ship its next generation endoscopes that
incorporate its leading proprietary LenslockTM
technology (patent pending). Since December 2005, over 250 ENT endoscopes with
diameter of 2.7 mm that incorporate LenslockTM technology have been
shipped. The Company is currently launching its 4 mm LenslockTM
sinuscope, finalizing development of its 5 mm LenslockTM laproscope,
and is actively pursuing development of its new 4 mm LenslockTM wide
field arthroscope. All of these LenslockTM endoscopes are expected to
be in production in the near future. The Company believes that
LenslockTM
technology has advantages over competitive products due to ease of manufacture
and repair, superior image quality, significant cost effectiveness and quality
of repair and that further incorporating this into its endoscope product line
will lead to increased sales.
Medical
Products: Sub-millimeter optics & endoscopes:
Utilizing recently developed proprietary techniques, including patent pending
micro-precisionTM lens fabrication technology, the Company designs
and manufactures ultra-small lenses, prisms, and assemblies with sizes as small
as 0.2 mm. Assemblies range in complexity from the combination of two lens
elements to entire imaging systems utilizing multiple micro-optical elements
in
combination with larger, conventional optics. Developments in medical procedures
requiring minimally invasive visualization in very small spaces, in such
specialties as spinal surgery, neurosurgery, cardiothoracic surgery, cardiology
and pulmonology, have led to products requiring lenses and endoscopes as small
as 0.2 millimeters in diameter. Utilizing its proprietary technology, the
Company currently manufactures a number of products with length and / or
diameter less than 1 mm and is actively expanding its product line in this
area.
Medical
Products: Custom design & device production.
The
Company designs, prototypes and manufactures custom optical medical products
to
satisfy customers’ specific requirements. During fiscal year 2007, the Company
completed development and began shipments of an advanced surgical visualization
system to a significant new customer. Possible follow-on orders will be
dependent on market acceptance and other considerations and no assurances
regarding any such order can be made.
Industrial
Products.
In
addition to its medical products, the Company also sells components, and
assemblies such as image couplers and beamsplitters specially designed for
industrial use, including the video-monitored examination of a variety of
industrial cavities and interiors, as well as specialized borescopes for
industrial applications. Utilizing micro-precisionTM technology, the
Company also designs and manufactures sub-millimeter optical components and
assemblies for industrial use.
Optical
Thin Films.
The
Company designs and manufactures various types of high quality thin film
coatings for use in a wide range of optical applications. Thin film coatings
are
produced in-house for use in the Company’s medical instrumentation and other
products. In addition, the company designs and manufactures custom thin film
products. The Company recently began shipping a new, proprietary industrial
filter which was developed over the past eighteen months for a specific
customer.
Night
Vision Optics.
The
Company has recently completed a partnership effort for the proprietary
development of a new class of night vision lenses including a new patent-pending
eyepiece lens. With prototypes completed, the Company is beginning to
manufacture lenses in pre-production quantities. The product incorporating
the
Company’s new night vision lenses is currently being evaluated for need and use,
including field testing. The Company cannot control the timing of current
evaluations and cannot therefore predict when, if ever, these night vision
lenses might begin to generate revenue. Should the Company’s customer secure
orders for its night vision system, the partnership agreement ensures we will
either be contracted to manufacture the new lenses, or will receive royalties
on
lenses manufactured elsewhere.
Optical
System Design and Development Services.
The
Company is able to provide customers with advanced lens design, imaging
analysis, optical system design, structural design and analysis, prototype
production and evaluation, optics testing, and optical system assembly. Some
of
the Company’s efforts have led to optical system production business for the
Company, and the Company believes its prototype development service may lead
to
new product production from time to time.
The
Company sells its products in a highly competitive market and it competes for
business with both foreign and domestic manufacturers. Many of the Company’s
current competitors are larger and have substantially greater resources than
the
Company. In addition, there is an ongoing risk for the Company that other
domestic or foreign companies who do not currently service or manufacture
products for the Company’s target markets, some with greater experience in the
optics industry and greater financial resources than the company, may seek
to
produce products or services that compete directly with those of the
Company.
The
Company believes that competition for sales of its medical products and
services, which have been principally sold to medical device companies who
incorporate the Company’s products into their systems, is based on performance
and other technical features, as well as other factors, such as scheduling
and
reliability, in addition to competitive pricing. The Company markets and sells
its endoscopes to suppliers of original equipment manufacturer (OEM)
video cameras and video endoscopes for incorporation into their own product
lines and for resale under their own name. A number of domestic and foreign
competitors also sell endoscopes to such OEM suppliers, and the Company’s share
of the endoscope market is nominal. The Company believes that, while its
resources are substantially more limited than its competitors, the Company
can
compete successfully in this market on the basis of product quality, price
and
delivery.
The
Company currently sells its image couplers, beamsplitters, and adapters to
a
market that consists of approximately 30 to 35 potential OEM customers who
manufacture and sell video cameras, endoscopes, and video-endoscopy systems.
In
the past, the Company has been successful in marketing and selling its products
to approximately two-thirds of these customers, and currently estimate that
it
maintains approximately 20% to 30% of the market share in these products. The
Company plans to continue to focus its sales and marketing efforts in this
area,
and to work to increase its market share. However, a challenge the Company
faces
is customers’ own in-house capabilities to manufacture such products, for which
it estimates that approximately 50% of the market demand for image couplers,
beamsplitters, and adapters is met by these “captive” facilities. In general,
and despite in-house capacity, the Company believes that many customers continue
to purchase products from the Company in order to devote their own technical
resources to their primary products, such as cameras or endoscopes.
During
the past year and one-half, the Company has added significant new resources
with
the addition of a director of marketing with special experience in broad market
initiatives, especially in the medical field. Together with the Company’s
existing sales and marketing staff, this team has already begun a number of
efforts to strengthen the Company’s market presence. This has included a newly
designed website (www.poci.com),
and a
much more comprehensive view of trade show opportunities. Coupled with the
recently renewed efforts for select key trade show attendance by the Company’s
Chief Scientific Officer and its Chief Executive Officer, as well as its overall
sales and marketing staff, the Company believes it has a greater opportunity
to
reach and follow up a broader customer base than the Company has heretofore
been
able to achieve. A number of new opportunities are already leading to customer
discussions for prospects for the Company’s leading technologies including,
Lenslock TM,
micro-precision TM,
and
custom applications of the Company’s core optical capabilities. This includes
renewed interest in some of the Company’s well-developed products such as its
“classic” autoclavable endoscopes, and endocouplers, as well as new applications
with the Company’s micro (fiberoptic) endoscopes.
As
an
additional service component, the Company offers advanced optical design and
development services, not related to thin film coatings, to a wide range of
potential customers and has numerous competitors. The ability to supply design
and development services to such customers is highly dependent upon a company’s
reputation and prior experience, which the Company believes it can provide
to
its customers on a cost efficient basis.
The
Company has had negligible direct export sales to date. However, the Company’s
medical products have received the CE Mark Certification, which permits sales
into the European marketplace. The Company may establish or use production
facilities overseas to produce key components for the Company’s business, such
as lenses. The Company believes that the cost savings from such production
may
be essential to the Company’s ability to compete on a price basis in the medical
products area particularly and to the Company’s profitability
generally.
The
Company believes that its future success depends to a large degree on its
ability to continue to conceive and to develop new optical products and services
to enhance the performance characteristics and methods of manufacture of
existing products. Accordingly, it expects to continue to seek to obtain
product-related design and development contracts with customers and to invest
its own funds on its research and development. The Company spent approximately
$1,312,000 and $1,106,000 of its own funds (net of reimbursements) during fiscal
years 2007 and 2006, respectively, on research and development.
The
Company is currently incorporating its Lenslock TM
technology (patent pending) into its line of endoscopes. This proprietary
technology ensures lower cost, easier reparability and enhanced durability.
The
Company is also aggressively pursuing the design, development and manufacture
of
ultra-small instruments (some with lenses less than one millimeter in diameter)
utilizing its micro-precision TM
lens
technology (patent pending). The Company is also exploring new initiatives
in
single-molecule technology and nanotechnology for biomedical and other
applications.
Raw
Materials and Principal Suppliers.
The
basic
raw material of the majority of the Company’s product line is precision grade
optical glass, which the Company obtains from several major suppliers. For
optical thin film coatings, the basic raw materials are metals and dielectric
compounds, which the Company obtains from a variety of chemical suppliers.
Certain of the thin film coatings utilized in the Company’s products are
currently procured from an outside supplier, but most thin film coatings are
produced in-house. The Company believes that its demand for these raw materials
and thin film coating services is small relative to the total supply, and that
materials and services required for the production of its products are currently
available in sufficient production quantities and will be available for fiscal
year 2008. The Company believes, however, that there are relatively few
suppliers of the high quality lenses and prisms which its endoscopes require.
In
response, the Company has established its own optical shop for producing
ultra-high quality prisms, micro-optics and other specialized optics for a
variety of medical and industrial applications.
The
Company relies, 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 to maintain its competitive
position. The Company does not believe that its business is dependent upon
any
patent, patent pending, or license, although it believes that trade secrets
and
confidential know-how may be important to the Company’s scientific and
commercial success.
The
Company plans to file for patents, copyrights, and trademarks in the United
States and in appropriate countries to protect its intellectual property rights
to the extent practicable. The Company holds the rights to several United States
and foreign patents and has several patent applications pending, including
those
for its new generation of 3-D endoscopes, its leading Lenslock TM
endoscope technology, and its innovative micro-precision TM
lens
technology. The Company knows of no infringements of its patents. The Company
plans to protect its patents from infringement in each instance where it
determines that doing so would be economical in light of the expense involved
and the level and availability of the Company’s financial resources. While the
Company believes that its pending applications relate to patentable devices
or
concepts, there can be no assurance that patents will be issued or that any
patents issued can be successfully defended or will effectively limit the
development of competitive products and services.
Employees.
As
of
June 30, 2007, the Company had 35 full time employees and 7 part time employees.
There were 21 employees in manufacturing, 12 in engineering/research and
development, 3 in sales and marketing, and 6 in finance and
administration.
Customers.
Revenues
from the Company’s largest customers, as a percentage of total revenues, were as
follows:
|
|
|
2007
|
|
2006
|
|
|
Customer
A
|
|
|
27
|
%
|
|
18
|
%
|
|
Customer
B
|
|
|
22
|
|
|
15
|
|
|
Customer
C
|
|
|
10
|
|
|
15
|
|
|
All
Others
|
|
|
41
|
|
|
52
|
|
|
|
|
|
100
|
%
|
|
100
|
%
|
No
other
customer accounted for more than 10% of the Company’s revenues in fiscal years
2007 and 2006.
Environmental
Matters.
The
Company’s 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. From time to time
the
Company uses a small amount of hazardous materials in its operations. The
Company believes that it complies with all applicable environmental laws and
regulations.
Government
Regulations on the Business.
Domestic
Regulation.
The
Company currently develops, manufactures and sells 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 (“FDA”) and, in some cases, by certain state agencies. The FDA
regulates the research, 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 use of,
medical devices also are 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.
In
the
future, the Company plans to market additional endoscopes and related medical
products that may require the FDA’s permission to market such products. The
Company may also develop additional products or seek to sell some of its current
or future medical products in a manner that requires the Company 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, to require
periodic reporting of product defects to the FDA, and to prohibit the sale
of
devices which do not comply with law.
Foreign
Requirements.
Sales
of medical device products outside the United States are subject to foreign
regulatory requirements that may vary from country to country. Our failure
to
comply with foreign regulatory requirements would jeopardize our ability to
market our products in foreign jurisdictions. The regulatory environment in
the
European Union for medical device products differs from that in the United
States. Medical devices sold in the European Economic Area must bear the CE
mark. Devices are classified by manufacturers according to the risks they
represent, with a classification of Class III representing the highest risk
devices and Class I representing the lowest risk devices. Once a device has
been
classified, the manufacturer can follow one of a series of conformity assessment
routes, typically through a registered quality system, and demonstrate
compliance to a “European Notified Body.” The CE mark may then be applied to the
device. Maintenance of the system is ensured through annual on-site audits
by
the notified body and a post-market surveillance system requiring the
manufacturer to submit serious complaints to the appropriate governmental
authority. All of the Company’s medical products are CE mark
certified.
ITEM
2. DESCRIPTION
OF PROPERTY
The
Company conducts its domestic operations at two facilities in Gardner,
Massachusetts. The main Gardner facility is leased from a corporation owned
by
an officer-shareholder-director of the Company. The lease terminated in December
1999 and the Company is currently a tenant-at-will. The other Gardner facility
is rented on a month-to-month basis. The Company rents office space in Hong
Kong
for sales, marketing and supplier quality control and liaison activities of
its
Hong Kong subsidiary.
The
Company believes these facilities are adequate for its current operations and
adequately covered by insurance. Significant increases in production or the
addition of significant equipment additions or manufacturing capabilities in
connection with the production of the Company’s line of endoscopes, optical thin
films, and other products may, however, require the acquisition or lease of
additional facilities. The Company may establish production facilities
domestically or overseas to produce key assemblies or components, such as
lenses, for the Company’s products. Overseas facilities may subject the Company
to the political and economic risks associated with overseas operations. The
loss of or inability to establish or maintain such additional domestic or
overseas facilities could materially adversely affect the Company’s competitive
position and profitability.
ITEM
3. LEGAL
PROCEEDINGS
None.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of the Company’s security holders during the
fourth quarter of fiscal year 2007.
PART
II
ITEM
5. MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The
Company’s common stock is quoted on the OTCBB under the symbol “POCI.OB.” Prior
to December 27, 2005, the Company’s common stock was listed on the NASDAQ
Capital Market® under
the symbol
“POCI.” Set forth below are the high and low sales prices or bid prices for the
Company’s common stock for each quarter during the last two fiscal years as
quoted on the OTCBB or listed by NASDAQ, as applicable. The quotes from the
OTCBB reflect inter-dealer prices, without retail markup, markdown or
commissions and may not represent actual transactions. The information below
was
obtained from those organizations, for the respective periods.
| |
|
2007
|
|
|
|
2006
|
|
|
|
|
Quarter
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.49
|
|
$
|
0.25
|
|
$
|
0.90
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
|
|
$
|
0.49
|
|
$
|
0.25
|
|
$
|
0.80
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
|
|
$
|
0.60
|
|
$
|
0.32
|
|
$
|
0.50
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
|
|
$
|
0.50
|
|
$
|
0.32
|
|
$
|
0.71
|
|
$
|
0.32
|
|
On
February 1, 2007, the Company sold an aggregate of 10,000,000 shares of common
stock, par value $0.01 per share, at a price of $0.25 per share and warrants
to
purchase an aggregate of 10,000,000 shares of common stock at an exercise price
of $0.32 per share, which were immediately exercisable, raising gross proceeds
of $2,500,000. All of the following shares of common stock issued were issued
in
a non registered transaction in reliance on Section 4(2) of the Securities
Act
of 1933, as amended:
|
Purchaser
|
|
Common
Stock
Purchased*
|
|
|
|
|
|
|
|
Special
Situations Fund III QP, L.P.
|
|
8,000,000
|
|
|
Special
Situations Private Equity Fund, L.P.
|
|
8,000,000
|
|
|
Joel
Pitlor (a)
|
|
2,000,000
|
|
|
Arnold
Schumsky
|
|
1,200,000
|
|
|
LaPlace
Group LLC
|
|
800,000
|
|
*
Includes shares of common stock and shares underlying outstanding
warrants
(a)
Director of the Company
These
shares and the shares of common stock issuable upon the exercise of the warrants
were subsequently registered on a registration statement on a Form SB-2, which
was declared effective by the Securities and Exchange Commission on March 23,
2007.
As
of
August 31, 2007, there were approximately 130 holders of record of the Company’s
common stock. Holders of record include nominees who may hold shares on behalf
of multiple owners.
The
Company has not declared any dividends during the last two fiscal years. At
present, the Company intends to retain its earnings, if any, to finance research
and development and expansion of its business.
ITEM
6. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Important
Factors Regarding Forward-Looking Statements
When
used
in this discussion, the words “believes,” “anticipates,” “intends to,” “could,”
“expects,” “may,” “estimates,” “plans,” “envisions,” “seeks,” and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. These risks and uncertainties, many
of which are not within our control, include, but are not limited to, the
uncertainty and timing of the successful development of our new products; our
ability to raise capital and to continue as a going concern; decisions by
customers to place orders for our products; the risks associated with reliance
on a few key customers; our ability to attract and retain personnel with the
necessary scientific and technical skills; the timing and completion of
significant orders; the timing and amount of our research and development
expenditures; the timing and level of market acceptance of customers’ products
for which we supply components; performance of our vendors; our ability to
control costs associated with performance under fixed price contracts; and
the
continued availability of essential supplies, materials and services. We caution
investors not to place undue reliance on these forward looking statements,
which
speak only as of the date hereof. We undertake no obligation to revise or update
these forward-looking statements to reflect events or circumstances that may
occur after the date hereof or to reflect the occurrence of unanticipated
events.
Overview
The
Company, a developer and manufacturer of advanced optical instruments since
1982, designs and produces high-quality optical thin film coatings,
micro-optics, medical instruments, and other advanced optical systems. The
Company’s medical instrumentation line includes laparoscopes, arthroscopes and
endocouplers and a world-class product line of 3-D endoscopes for use in
minimally invasive surgical procedures.
The
Company is currently developing specialty instruments incorporating its Lenslock
TM
technology (patent pending) which ensures lower cost, easier repairability
and
enhanced durability. The Company is also aggressively pursuing ultra-small
instruments (some with lenses less than one millimeter in diameter) utilizing
micro-precision TM
lens
technology (patent pending). The Company is also exploring new initiatives
in
single-molecule technology and nanotechnology for biomedical and other
applications.
Precision
Optics Corporation is certified to the ISO 9001 and ISO 13485 Quality Standards
and complies with the FDA Good Manufacturing Practices and the European Union
Medical Device Directive for CE marking of its medical products. The Company’s
internet website is www.poci.com.
The
areas
in which the Company does business are highly competitive and include both
foreign and domestic competitors. Many of the Company’s competitors are larger
and have substantially greater resources than the Company. Furthermore, other
domestic or foreign companies, some with greater financial resources than the
Company, may seek to produce products or services that compete with those of
the
Company. The Company routinely outsources specialized production efforts as
required, both domestic and off-shore to obtain the most cost effective
production. Over the years, the Company has achieved extensive experience with
other optical specialists worldwide.
Since
the
1990’s the Company has maintained a Hong Kong subsidiary to support business and
quality control activities as required throughout Asia. The Company believes
that the cost savings from such production is essential to the Company’s ability
to compete on a price basis in the medical products area particularly and to
the
Company’s profitability in general.
The
Company believes that competition for sales of its medical products and
services, which have been principally sold to original equipment manufacturer
(OEM) customers, is based on performance and other technical features, as well
as other factors, such as scheduling and reliability, in addition to competitive
price.
Critical
Accounting Policies and Estimates
General
Management’s
discussion and analysis of financial condition and results of operations are
based upon the Company’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”). The preparation of these consolidated
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses.
The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions
or
conditions.
The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue
Recognition
The
Company recognizes revenue in accordance with U.S. GAAP and the Securities
and
Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104, Revenue
Recognition in Financial Statements.
SAB No.
104 requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery
has
occurred or services rendered; (3) the price to the buyer is fixed or
determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management’s judgments regarding the fixed
nature of the price to the buyer charged for products delivered or services
rendered and collectibility of the sales price. The Company assesses credit
worthiness of customers based upon prior history with the customer and
assessment of financial condition. The Company’s shipping terms are customarily
FOB shipping point.
Bad
Debt
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments.
Allowances for doubtful accounts are established based upon review of specific
account balances and historical experience. If the financial condition of the
Company’s customers were to deteriorate, resulting in an impairment of their
ability to make future payments, additional allowances may be
required.
Inventories
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.
Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed
of
The
Company accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
This
statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability
of
assets to be held and used is measured by a comparison of the carrying amount
of
an asset to undiscounted future net cash flows expected to be generated by
the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of through sale
are
reported at the lower of the carrying amount or fair value less estimated costs
to sell.
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 carryforwards. 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.
Stock-Based
Compensation
On
July
1, 2006, the Company adopted SFAS No. 123(R) Accounting
for Stock-Based Compensation
(“SFAS
No. 123(R)”), which requires the measurement and recognition of all compensation
costs for all stock based awards made to employees and the Board of Directors
based upon fair value over the requisite service period for awards expected
to
vest. Prior to adoption, the Company accounted for stock options under the
intrinsic value method set in accordance with Accounting Principles Board
Opinion No. 25, “Accounting
for Stock Issued to Employees,”
and
related interpretations, and provided the required pro forma disclosures
prescribed by SFAS No. 123, “Accounting
for Share-based Compensation”
(“SFAS
No. 123”), as amended.
SFAS
123(R) requires the Company to estimate the fair value of share-based awards
on
the date of grant using an option pricing model. The Company adopted SFAS 123(R)
using the modified prospective transition method which required the application
of the accounting standard starting July 1, 2006, the first day of the Company’s
fiscal year 2007. Prior period information has not been restated to reflect
the
fair value method of expensing share-based awards.
Fiscal
Year 2007 Results of Operations
Total
revenues for fiscal year 2007 were $2,477,469, an increase of $327,905, or
15%,
from fiscal year 2006 revenues of $2,149,564. Revenues for the fourth quarter
of
fiscal year 2007 were $1,111,833. These represent the highest quarterly and
yearly sales levels in six years and were due principally to shipments, to
a
significant new customer, of an advanced surgical visualization system, along
with the introduction of a number of other new products. The advanced surgical
visualization system relied heavily on the Company’s experience and superior
technology in the area of medical optics systems, specifically in the area
of
advanced optical endoscopic instrumentation.
Revenues
from our largest customers, as a percentage of total revenues, were as
follows:
|
|
|
2007
|
|
2006
|
|
|
Customer
A
|
|
|
27
|
%
|
|
18
|
%
|
|
Customer
B
|
|
|
22
|
|
|
15
|
|
|
Customer
C
|
|
|
10
|
|
|
15
|
|
|
All
Others
|
|
|
41
|
|
|
52
|
|
|
|
|
|
100
|
%
|
|
100
|
%
|
No
other
customer accounted for more than 10% of our revenues in fiscal years 2007 and
2006.
Gross
profit for fiscal year 2007 reflected a change of $225,180, compared to fiscal
year 2006. Gross profit as a percentage of revenues increased from 12% in fiscal
year 2006 to 19% in fiscal year 2007. The favorable change in gross profit
was
due primarily to increased sales volume as a result of the introduction of
a new
advanced surgical visualization system for a significant new customer in fiscal
year 2007 compared to fiscal year 2006.
Research
and development expenses increased by $206,273, or 19%, during fiscal year
2007
compared to the previous year. The increase was due primarily to activities
aimed at the development of a new advanced surgical visualization system for
a
significant new customer. Research and development expenses were net of
reimbursement of related costs of $101,309 and $135,129 during fiscal years
2007
and 2006, respectively.
Selling,
general and administrative expenses increased by $645,938 or 44%, during fiscal
year 2007 compared to the previous year. The increase was primarily a result
of
a non-cash charge of $164,831 related to stock-based compensation expense
following the adoption of SFAS No. 123(R) on July 1, 2006, along with enhanced
sales and marketing activities focused on increasing sales of recently developed
products, including a new director of marketing for a full-year and higher
professional fees. The previous year expense was also lower as it included
the
effect of a gain on the sale of fixed assets of $165,700.
Interest
income increased by $9,677 or 27% during fiscal year 2007 compared to the
previous year. The increase was due to higher interest rates and a higher
average balance of cash and cash equivalents.
The
income tax provisions in fiscal years 2007 and 2006 represent the minimum
statutory state income tax liability.
Fiscal
Year 2006 Results of Operations
Total
revenues for fiscal year 2006 were $2,149,564, an increase of $895,714, or
71%,
from fiscal year 2005 revenues of $1,253,850.
The
revenue increase from the prior year was due principally to growth in sales
of
micro-lenses, autoclavable endoscopes and couplers, along with the introduction
of a number of new products.
Revenues
from our largest customers, as a percentage of total revenues, were as
follows:
|
|
|
2006
|
|
2005
|
|
|
Customer
A
|
|
|
18
|
%
|
|
20
|
%
|
|
Customer
B
|
|
|
15
|
|
|
12
|
|
|
Customer
C
|
|
|
15
|
|
|
—
|
|
|
All
Others
|
|
|
52
|
|
|
68
|
|
|
|
|
|
100
|
%
|
|
100
|
%
|
No
other
customer accounted for more than 10% of our revenues in fiscal years 2006 and
2005.
Gross
profit (loss) for fiscal year 2006 reflected a change of $633,462 compared
to
fiscal year 2005. Gross profit as a percentage of revenues increased from a
negative 31% in fiscal year 2005 to a positive 12% in fiscal year 2006. The
favorable change in gross profit (loss) was due primarily to increased sales
volume and lower provisions for slow moving and obsolete inventories in fiscal
year 2006 compared to fiscal year 2005.
Research
and development expenses decreased by $301,843, or 21%, during fiscal year
2006
compared to the previous year. The decrease was due to a lower level of
resources being devoted to product development activities, and a shift to more
customer focused efforts, resulting in initial product shipments to several
new
customers. Research and development expenses were net of reimbursement of
related costs of $135,129 and $95,969 during fiscal years 2006 and 2005,
respectively.
Selling,
general and administrative expenses decreased by $405,311 or 22%, during fiscal
year 2006 compared to the previous year. The decrease was due primarily to
the
effect of a gain on the sale of fixed assets of $165,700, along with savings
from reduced professional fees, the chief financial officer position changing
to
part time, and through reduced premiums as a result of changing our general
insurance provider, offset by an increase in consulting fees.
Interest
income decreased by $14,240 or 28% during fiscal year 2006 compared to the
previous year. The decrease was due to the lower average balance of cash and
cash equivalents.
The
income tax provisions in fiscal years 2006 and 2005 represent the minimum
statutory state income tax liability.
Liquidity
and Capital Resources
The
company competes in a highly technical, very competitive, and in most cases,
price driven segments of the medical instrument market place where products
can
take years to develop and introduce to distributors and end users. Furthermore,
research and development, manufacturing, marketing and distribution activities
are strictly regulated by FDA, ISO and other regulatory bodies that, while
intended to enhance the ultimate quality and functionality of products produced,
can contribute to the significant cost and time needed to maintain existing
products and develop and introduce product enhancements and new product
innovations.
The
company has traditionally funded working capital needs through product sales,
management of working capital components of its business, and most prominently,
by cash received from public and private offerings of its common stock. In
July
2004, the Company completed a rights offering to stockholders of record at
June
7, 2004 by issuing 5,256,159 shares of common stock, raising net cash proceeds
of approximately $5 million. In April 2006, the Company sold 8,450,000 shares
of
its common stock, raising net cash proceeds of approximately $2 million.
Additionally, in February 2007, the Company sold an aggregate of 10,000,000
shares of common stock and warrants to purchase an aggregate of 10,000,000
shares of common stock at an exercise price of $0.32 per share, raising net
cash
proceeds of approximately $2.4 million.
The
Company’s current financial condition may raise
doubt among potential equity investors, customers and suppliers regarding the
Company’s ability to continue as a going concern, as referenced by the Report of
Independent Registered Public Accounting Firm on the Company's financial
statements for the year ended June 30, 2007, included in this Annual Report
on
Form 10-KSB. There can be no assurance that the Company will be able to obtain
working capital funds necessary in the time frame needed and at satisfactory
terms to correct the current going concern issue.
As
of
June 30, 2007, cash and cash equivalents were $840,179, accounts receivable
were
$801,206 and current liabilities were $718,387, resulting in a net liquid asset
amount of $922,998. Based on the current financial condition of the company
and
the expectation of future continued quarterly operating losses during fiscal
2008, Management is currently investigating and evaluating alternatives for
raising additional capital through private and public equity offerings that
can
be completed sometime during the first half of fiscal 2008.
Contractual
cash commitments for the fiscal years subsequent to June 30, 2007 are summarized
as follows:
|
|
|
2008
|
|
Thereafter
|
|
Total
|
|
|
Operating
Leases
|
|
$
|
30,068
|
|
$
|
371
|
|
$
|
30,439
|
|
The
Company currently has contractual cash commitments for open purchase orders
subsequent to June 30, 2007 of approximately $118,000.
Trends
and Uncertainties That May Affect Future Results
Fiscal
year 2007 yearly and fourth quarter revenues were the highest in six years.
This
was due in large part to shipments of the advanced surgical visualization
system
discussed below, the design of which relies heavily on the Company’s world class
medical optics technologies, specifically in the area of advanced optical
endoscopic instrumentation. The Company expects its recent pattern of
quarter-to-quarter revenue fluctuations to continue, due to the introductory
stage of many of the Company’s products currently under development and the
uncertain timing of orders from customers and their size in relation to total
revenues. The Company continues to move forward with new products and technical
innovations, in particular, a new generation of endoscopes that incorporate
Lenslock TM
technology (patent pending), new components and instruments utilizing the
Company’s new micro-precision TM
lens
technology (patent pending) for optical components and endoscopes under 1
mm,
new custom medical products, new night vision lenses and new thin film
products.
Over
the
past few years new product and technology development has undergone significant
changes in shifting the emphasis of R&D efforts from the development of
underlying technologies to market exploitation in the applications of these
new
technologies. These have already been realized to some degree in a number of
areas. Over the past two to three years these developments have produced
revenues from new micro- precisionTM lens products and new Lenslock
TM
endoscopes. Recent initiatives in the area of micro-precisionTM
lenses address specific customer opportunities in different medical specialty
applications. In endoscope technologies we continue new product offerings in
our
Lenslock TM
product
line. Since December 2005, over 250 ENT endoscopes with diameter of 2.7 mm
that
incorporate LenslockTM technology have been shipped. The Company is
currently launching its 4 mm LenslockTM sinuscope, is finalizing
prototypes of its 5 mm LenslockTM laproscope, and is actively
pursuing development of its 4 mm LenslockTM wide field arthroscope.
All of these LenslockTM endoscopes are expected to be in production
in the near future. The Company believes that LenslockTM
technology has advantages over competitive products due to ease of manufacture
and repair, superior image quality, significant cost effectiveness and quality
of repair and that further incorporating this into its endoscope product line
will lead to increased sales.
During
fiscal year 2007, the Company began shipments of an advanced surgical
visualization system to a significant new customer. These shipments are pursuant
to production orders totaling over $1 million. Shipments of the advanced
surgical visualization system were in excess of $600,000 in fiscal year 2007
with the balance of the order delivered in the first quarter of fiscal year
2008. Possible follow-on orders will be dependent on market acceptance and
other
considerations at that time and no assurances regarding any such order can
be
made.
Going
forward, our expectations are aimed at applied development for revenue bearing
products. Some examples beyond the new instruments mentioned above include
the
lenses we developed for a new color Night Vision system that we are beginning
to
manufacture in pre-production quantities, as well as a new line of industrial
filter thin film coatings, which we have developed over the last 18 months
and
just recently began to ship to a specific customer.
Notwithstanding
the need to obtain additional financing, the Company believes that the recent
introduction of several new products, along with new and on-going customer
relationships, have the potential to generate additional revenues, which
are required in order for the Company to achieve profitability.
For
the
quarter ended June 30, 2007, cash and cash equivalents decreased by $1,270,980
compared to an increase of $1,558,869 for the previous quarter ended March
31,
2007 as a result of the receipt of $2,500,000 in gross proceeds from the
closing
of a private placement on February 1, 2007, offset by negative cash flows
from
operating activities.
Capital
equipment expenditures during the year ended June 30, 2007 were $139,667,
up
from $31,735 for fiscal year 2006. Future capital equipment expenditures
will be
dependent upon future sales and success of on-going research and development
efforts.
For
the
quarter ended June 30, 2007, research and development expenses were $345,353,
up
37% from $252,295 for the quarter ended June 30, 2006. The level of future
quarterly R&D expenses is ultimately dependent upon the Company’s assessment
of new product opportunities.
Section
404 of the Sarbanes-Oxley Act of 2002, requiring companies to report on the
effectiveness of the Company’s internal controls over financial reporting, will
first apply to the Company’s Annual Report on Form 10-KSB for the fiscal year
ending June 30, 2008. The Company expects its operating expense will increase
as
a result of the costs associated with the implementation of and maintaining
compliance with Section 404.
Factors
That May Affect Future Results and Market Price of
Stock
Our
Auditor’s Report Contains a Statement That Our Net Loss and Negative Cash Flows
From Operations Raise Substantial Doubt About our Ability to Continue as a
Going
Concern.
After
conducting an audit of the Company’s consolidated financial statements for the
fiscal year ended June 30, 2007, our independent auditors issued an unqualified
opinion on the financial statements that included a material uncertainty related
to our ability to continue as a going concern due to net losses from operations
combined with negative cash flows from operations. The Company’s ability to
continue as a going concern is dependent upon its ability to meet its
obligations on a timely basis. Management anticipates that the Company will
require additional financing to fund operating activities during fiscal 2008,
and anticipates seeking to raise capital through offering equity securities
in
private or public offerings. The fact that we have received this “going
concern opinion” from our auditors may make it more difficult for us to raise
capital on favorable terms. If the Company is unable to obtain additional
funds when they are required or if the funds cannot be obtained on terms
favorable to the Company, management may be required to delay or scale back
its
current operations and business strategy.
Our
Quarterly Financial Results Depend on a Large Number of Factors and Therefore
May Vary Quarter to Quarter - As a Result, We Cannot Predict with a High
Degree of Certainty Our Operating Results in Any Particular Fiscal
Quarter.
Our
quarterly operating results may vary significantly depending upon factors such
as:
|
·
|
the
timing of completion of significant
orders
|
|
·
|
the
timing and amount of our research and development
expenditures
|
|
·
|
the
costs of initial product production in connection with new
products
|
|
·
|
the
timing of new product introductions –
both by us
and by our competitors
|
|
·
|
the
timing and level of market acceptance of new products or enhanced
versions
of our existing products
|
|
·
|
our
ability to retain existing customers and customers’ continued demand for
our products and services
|
|
·
|
our
customers’ inventory levels, and levels of demand for our customers’
products and services
|
|
·
|
competitive
pricing pressures
|
We
cannot
be certain whether we will be able to grow or sustain revenues or achieve or
maintain profitability on a quarterly or annual basis or that levels of revenue
and/or profitability may not vary from one such period to another.
We
Rely on a Small Number of Customers and Cannot Be Certain They Will Consistently
Purchase Our Products in the Future.
In
the
fiscal year ended June 30, 2007, our three largest customers represented
approximately 27%, 22%, and 10% respectively, of our total revenues. In the
fiscal year ended June 30, 2006, our three largest customers represented
approximately 18%, 15%, and 15% respectively, of our total revenues. No other
customer accounted for more than 10% of our revenues during those
periods.
In
the
future, a small number of customers may continue to represent a significant
portion of our total revenues in any given period. We cannot be certain that
such customers will consistently purchase our products at any particular rate
over any subsequent period.
We
Rely Heavily Upon the Talents of Our Chief Executive Officer and Chief
Scientific Officer, the Loss of Whom Could Severely Damage Our
Business.
Our
performance depends to a large extent on a small number of key scientific,
technical, managerial, and marketing personnel. In particular, we believe our
success is highly dependent upon the services and reputation of our Chief
Executive Officer, Mr. Richard E. Forkey. Loss of Mr. Forkey’s services could
severely damage our business.
Additionally,
Dr. Joseph N. Forkey, our Executive Vice President and Chief Scientific Officer,
provides highly valuable contributions to our capabilities in optical instrument
development, in management of new technology and in potentially significant
longer-term initiatives in Biophysics and Biomedical instrumentation, as well
as
new photonics-based market opportunities. The loss of Dr. Forkey’s scientific
contributions could severely damage our business.
Our
ability to attract employees with a high degree of scientific and technical
talent is crucial to the success of our business. There is intense competition
for the services of such persons, and we cannot guarantee that we will be able
to attract and retain individuals possessing the necessary
qualifications.
We
Have a Number of Large, Well-Financed Competitors Who Have Research and
Marketing Capabilities That Are Superior to Ours.
The
industries in which we compete are highly competitive. Many of our existing
and
potential competitors have greater financial resources and manufacturing
capabilities, more established and larger marketing and sales organizations
and
larger technical staffs than we have. Other companies, some with greater
experience in the telecommunications, optics, semiconductor or medical products
industries, are seeking to produce products and services that compete with
our
products and services.
We
Are Subject to a High Degree of Regulatory Oversight - We Cannot Be Certain
That
We Will Continue to Receive the Necessary Regulatory
Approvals.
The
FDA
has allowed us to market the medical products we currently sell in the United
States. However, prior FDA approval may be required before we can market
additional medical products that we may develop in the future. We may also
seek
to sell current or future medical products in a manner that requires us to
obtain FDA permission to market such products. We may also require the
regulatory approval or license of other federal, state or local agencies or
comparable agencies in other countries.
We
cannot
be certain that we will continue to receive the FDA’s permission to market our
current products or obtain the necessary regulatory permission, approvals or
licenses for the marketing of any of our future products. Also, we cannot
predict the impact on our business of FDA regulations or determinations arising
from future legislation or administrative action.
We
Face Risks Inherent in Product Development and Production Under Fixed Price
Purchase Orders - We Cannot Be Sure That These Purchase Orders Will Be
Profitable over Time.
A
portion
of our business has been devoted to research, development and production under
fixed price purchase orders. For our purposes, a fixed price purchase order
is
any purchase order under which we will provide products or services for a fixed
price over an extended period of time (usually six months or longer). In our
2007 and 2006 fiscal years, fixed price purchase orders represented
approximately 31% and 26%, respectively, of our total revenues. We expect that
revenues from fixed price purchase orders will continue to represent a
significant portion of our total revenues in future fiscal years.
Because
they involve performance over time, we cannot predict with certainty the
expenses involved in meeting our obligations under fixed price purchase orders.
Therefore, we can never be sure at the time we enter into any single fixed
price
purchase order that such purchase order will be profitable for us.
Third
Parties May Infringe on Our Patents - As a Result, We Could Incur
Significant Expense in Protecting Our Patents or Not Have Sufficient Resources
to Protect Them.
We
hold a
number of patents that are important to our business. Although we are not
currently aware of any past or present infringements of our patents, we plan
to
protect these patents from infringement and obtain additional patents whenever
feasible. To this end, we have obtained confidentiality agreements from our
employees and consultants and others who have access to the design of our
products and other proprietary information. Protecting and obtaining patents,
however, is both time consuming and expensive. We therefore may not have the
resources necessary to assert all potential patent infringement claims or pursue
all patents that might be available to us.
Third
Parties May Claim that We Have Infringed on Their Patents - As a Result, We
Could Be Prohibited from Using All or Part of Any Technology Used in Our
Products.
Should
third parties claim a proprietary right to all or part of any technology that
we
use in our products, such a claim, regardless of its merit, could involve us
in
costly litigation. If successful, such a claim could also result in us being
unable to freely to use the technology that was the subject of the claim, or
sell products embodying such technology.
We
Depend on the Availability of Certain Key Supplies and Services That Are
Available From Only a Few Sources - If We Experience Difficulty with a
Supplier, We May Have Difficulty Finding Alternative Sources of
Supply.
Certain
key supplies used in our products, particularly precision grade optical glass,
are available from only a few sources, each of which is located outside the
United States. Also, outside vendors grind and polish certain of our lenses
and
other optical components, such as prisms and windows. Based upon our ordering
experience to date, we believe the materials and services required for the
production of our products are currently available in sufficient quantities.
Our
requirements are small relative to the total supply, and we are not currently
encountering problems with availability. However, this does not mean that we
will continue to have timely access to adequate supplies of essential materials
and services in the future or that supplies of these materials and services
will
be available on satisfactory terms when the need arises. Our business could
be
severely damaged if we become unable to procure essential materials and services
in adequate quantities and at acceptable prices.
From
time
to time, certain of our products may be produced for us by subcontractors,
and
our business is subject to the risk that these subcontractors fail to make
timely delivery. Our products and services are also from time to time used
as
components of the products and services of other manufacturers. We are therefore
subject to the risk that manufacturers that integrate our products or services
into their own products or services are unable to acquire essential supplies
and
services from third parties in a timely fashion.
Our
Customers May Claim that the Products We Sold Them Were Defective - If Our
Insurance Is Not Sufficient to Cover a Claim, We Would Be Liable for the
Excess.
Like
any
manufacturer, we are and always have been exposed to liability claims resulting
from the use of our products. We maintain product liability insurance to cover
us in the event of liability claims, and no such claims have been asserted
or
threatened against us to date. However, we cannot be certain that our insurance
will be sufficient to cover all possible future product
liabilities.
We
Would Be Liable If Our Business Operations Harmed the Environment - Failure
to Maintain Compliance with Environmental Laws Could Severely Damage Our
Business.
Our
operations are subject to a variety of federal, state and local laws and
regulations relating to the protection of the environment. From time to time,
we
use hazardous materials in our operations. Although we believe that we are
in
compliance with all applicable environmental laws and regulations, our business
could be severely damaged by any failure to maintain such
compliance.
ITEM
7. CONSOLIDATED
FINANCIAL STATEMENTS
The
Consolidated Financial Statements appear on pages 21 through 40 of this
Form 10-KSB.
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated
Financial Statements
as
of
June 30, 2007 and 2006
Together
with Independent Registered Public Accounting Firm’s Report
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Shareholders of
Precision
Optics Corporation, Inc.:
We
have
audited the accompanying consolidated balance sheets of Precision Optics
Corporation, Inc. and subsidiaries (the Company) as of June 30, 2007 and 2006
and the related consolidated statements of operations, stockholders’ equity and
cash flows for the years then ended. These consolidated financial statements
are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal controls over
financial reporting. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Precision
Optics Corporation, Inc. and subsidiaries as of June 30, 2007 and 2006 and
the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States
of
America.
As
discussed in Note 1 of the notes to the consolidated financial statements,
effective July 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123(R), Share-Based
Payment.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring net losses
and negative cash flows from operations, which raises substantial doubt about
its ability to continue as a going concern. Management's plans concerning these
matters are described in Note 1. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
/s/
Vitale, Caturano and Company, Ltd.
Boston,
Massachusetts
September
26, 2007
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets at June 30, 2007 and 2006
|
ASSETS
|
|
2007
|
|
2006
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
840,179
|
|
$
|
2,030,428
|
|
|
Accounts
receivable (net of allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
of
approximately $11,159 and $14,550 in 2007 and 2006,
respectively)
|
|
|
801,206
|
|
|
381,097
|
|
|
Inventories
|
|
|
904,736
|
|
|
445,802
|
|
|
Prepaid
expenses
|
|
|
53,039
|
|
|
45,912
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
2,599,160
|
|
|
2,903,239
|
|
|
Fixed
Assets:
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
|
3,559,384
|
|
|
3,513,736
|
|
|
Leasehold
improvements
|
|
|
553,596
|
|
|
553,596
|
|
|
Furniture
and fixtures
|
|
|
150,603
|
|
|
93,545
|
|
|
Vehicles
|
|
|
42,343
|
|
|
42,343
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
4,305,926
|
|
|
4,203,220
|
|
|
|
|
|
|
|
|
|
|
|
Less—Accumulated
depreciation and amortization
|
|
|
4,148,239
|
|
|
4,127,287
|
|
| |
|
|
|
|
|
|
|
|
Net
fixed assets
|
|
|
157,687
|
|
|
75,933
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Cash
surrender value of life insurance policies
|
|
|
4,438
|
|
|
13,246
|
|
|
Patents,
net
|
|
|
274,311
|
|
|
236,115
|
|
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
278,749
|
|
|
249,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,035,597
|
|
$
|
3,228,533
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
343,730
|
|
$
|
218,658
|
|
|
Accrued
employee compensation
|
|
|
270,437
|
|
|
227,892
|
|
|
Accrued
professional services
|
|
|
75,616
|
|
|
90,000
|
|
|
Accrued
warranty expense
|
|
|
25,000
|
|
|
50,000
|
|
|
Other
accrued liabilities
|
|
|
3,604
|
|
|
2,086
|
|
|
Total
current liabilities
|
|
|
718,387
|
|
|
588,636
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
(Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value-
|
|
|
|
|
|
|
|
|
Authorized—50,000,000
shares
|
|
|
|
|
|
|
|
|
Issued
and outstanding— 25,458,212 shares at June 30, 2007
and
15,458,212 shares at June 30, 2006
|
|
|
254,582
|
|
|
154,582
|
|
|
Additional
paid-in capital
|
|
|
37,197,015
|
|
|
34,729,873
|
|
|
Accumulated
deficit
|
|
|
(
35,134,387
|
)
|
|
(
32,244,558
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
2,317,210
|
|
|
2,639,897
|
|
|
|
|
|
|
|
|
|
|
| |
|
$
|
3,035,597
|
|
$
|
3,228,533
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations for the
Years
Ended June 30, 2007 and 2006
|
|
|
2007
|
|
2006
|
|
| |
|
|
|
(As
reclassified. See Note 1(u).)
|
|
|
Revenues
|
|
$
|
2,477,469
|
|
$
|
2,149,564
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
2,002,196
|
|
|
1,899,471
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
475,273
|
|
|
250,093
|
|
|
|
|
|
|
|
|
|
|
|
Research
and Development Expenses, net
|
|
|
1,312,240
|
|
|
1,105,967
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses
|
|
|
2,097,959
|
|
|
1,452,021
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
3,410,199
|
|
|
2,557,988
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(2,934,926
|
)
|
|
(2,307,895
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest
Income, net
|
|
|
46,011
|
|
|
36,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(2,888,915
|
)
|
|
(2,271,561
|
)
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
914
|
|
|
912
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,889,829
|
)
|
$
|
(2,272,473
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss
per Share - Basic and Diluted
|
|
|
($0.15
|
)
|
|
($0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding - Basic and Diluted
|
|
|
19,624,879
|
|
|
8,768,629
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Equity
for
the Years Ended June 30, 2007 and 2006
| |
|
Number
of
Shares
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Total
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2005
|
|
|
7,008,212
|
|
$
|
70,082
|
|
$
|
32,751,598
|
|
$
|
(29,972,085
|
)
|
$
|
2,849,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock, net
|
|
|
8,450,000
|
|
|
84,500
|
|
|
1,978,275
|
|
|
-
|
|
|
2,062,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,272,473
|
)
|
|
(2,272,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2006
|
|
|
15,458,212
|
|
$
|
154,582
|
|
$
|
34,729,873
|
|
$
|
(32,244,558
|
)
|
$
|
2,639,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock and
warrants,
net
|
|
|
10,000,000
|
|
|
100,000
|
|
|
2,276,216
|
|
|
-
|
|
|
2,376,216
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
-
|
|
|
190,926
|
|
|
-
|
|
|
190,926
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,889,829
|
)
|
|
(2,889,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2007
|
|
|
25,458,212
|
|
$
|
254,582
|
|
$
|
37,197,015
|
|
$
|
(35,134,387
|
)
|
$
|
2,317,210
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows for the
Years
Ended June 30, 2007 and 2006
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,889,829
|
)
|
$
|
(2,272,473
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities-
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
120,404
|
|
|
130,110
|
|
|
Gain
on Sale of Fixed Assets
|
|
|
-
|
|
|
(165,700
|
)
|
|
Provision
for inventory write-down
|
|
|
31,100
|
|
|
32,000
|
|
|
Stock-based
compensation expense
|
|
|
190,926
|
|
|
-
|
|
|
Changes
in operating assets and liabilities-
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(420,109
|
)
|
|
(204,066
|
)
|
|
Inventories
|
|
|
(490,034
|
)
|
|
121,817
|
|
|
Prepaid
expenses
|
|
|
(7,127
|
)
|
|
16,510
|
|
|
Accounts
payable
|
|
|
125,072
|
|
|
58,066
|
|
|
Customer
advances
|
|
|
2,690
|
|
|
(18,000
|
)
|
|
Accrued
expenses
|
|
|
1,989
|
|
|
29,559
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(3,334,918
|
)
|
|
(2,272,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(139,667
|
)
|
|
(31,735
|
)
|
|
Proceeds
from sale of fixed assets
|
|
|
-
|
|
|
180,000
|
|
|
Increase
in other assets
|
|
|
(91,880
|
)
|
|
(80,128
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(231,547
|
)
|
|
68,137
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Gross
proceeds from private placement
|
|
|
2,500,000
|
|
|
2,112,500
|
|
|
Payment
of offering costs
|
|
|
(123,784
|
)
|
|
(49,725
|
)
|
| |
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
2,376,216
|
|
|
2,062,775
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(1,190,249
|
)
|
|
(141,265
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
2,030,428
|
|
|
2,171,693
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
840,179
|
|
$
|
2,030,428
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid during the year for-
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
914
|
|
$
|
912
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(1)
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Nature
of Business and Liquidity
Precision
Optics Corporation, Inc. (the “Company”) designs, develops, manufactures and
sells specialized optical systems and components and optical thin-film coatings.
The Company conducts business in one industry segment only and its customers
are
primarily domestic. The Company’s products and services fall into two principal
areas: (i) medical products for use by hospitals and physicians and (ii)
advanced optical system design and development services and products used by
industrial customers.
The
Company has sustained recurring net losses and negative cash flows from
operations for several years. During the year ended June 30, 2007, the Company
incurred a net loss of $2,889,829 and used cash in operations of $3,334,918.
As
of June 30, 2007, cash and cash equivalents were $840,179, accounts receivable
were $801,206 and current liabilities were $718,387, resulting in a net liquid
asset amount of $922,998. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Based
on
the current financial condition of the company and the expectation of future
continued quarterly operating losses during fiscal 2008, management is currently
investigating and evaluating alternatives for raising additional capital through
private and public equity offerings that can be completed sometime during the
first half of fiscal 2008.
The
Company has incurred quarter to quarter operating losses during its recent
efforts to develop current products including endoscopes, image couplers,
beamsplitters, thin film coatings, night vision and micro-optic lenses, prisms
and assemblies for various applications and utilizing a number of proprietary
and patent-pending technologies including LenslockTM
endoscope
and micro-precisionTM lens technologies. Management expects that such
operating losses will continue through fiscal year 2008, and until sales
increase to breakeven and profitable levels. Management also believes that
the
opportunities represented by these products have the potential to generate
sales
increases to achieve breakeven and profitable results. The Company will continue
its review of other expense areas to determine where additional reductions
in
discretionary spending can be achieved. There can be no assurance that the
Company's operating plans will be successful, and if so required, that the
Company will be successful in obtaining the capital necessary to continue
ongoing operations.
In
April
2006 the Company completed a private placement, issuing 8,450,000 shares of
common stock. Net cash proceeds to the Company (after offering costs of $49,725)
were $2,062,775. In February 2007 the Company completed a private placement,
pursuant to which it sold an aggregate of 10,000,000 shares of common stock
and
warrants to purchase an aggregate of 10,000,000 shares of common stock at an
exercise price of $0.32 per share. Net cash proceeds to the Company (after
offering costs of $123,784) were $2,376,216 (see Note 3).
During
the past year, the introduction of several new products, along with new and
on-going customer relationships, has resulted in significant revenue growth.
The
Company believes that with continued promotion, these opportunities have
the potential to continue the general trend of increasing revenues, which,
along
with enhanced operations are required in order for the Company to achieve
profitability.
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(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
In
December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 104, Revenue
Recognition
(“SAB
No. 104”) which establishes guidance in applying generally accepted accounting
principles to revenue recognition in financial statements and was effective
for
the Company’s fiscal year 2004. SAB No. 104 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services rendered; (3) the
price to the buyer is fixed and determinable; and (4) collectibility is
reasonably assured. The Company’s shipping terms are customarily FOB shipping
point. The Company’s revenue recognition practices comply with the guidance in
the bulletin.
The
sales
price of products and services sold is fixed and determinable after receipt
and
acceptance of a customer’s purchase order or properly executed sales contract,
typically before any work is performed. Management reviews each customer
purchase order or sales contract to determine that the work to be performed
is
specified and there are no unusual terms and conditions which would raise
questions as to whether the sales price is fixed or determinable. The Company
assesses credit worthiness of customers based upon prior history with the
customer and assessment of financial condition. Accounts receivable are stated
at the amount management expects to collect from outstanding balances. An
allowance for doubtful accounts is provided for that portion of accounts
receivable considered to be uncollectible, based upon historical experience
and
management’s evaluation of outstanding accounts receivable at the end of the
year. Bad debts are written off against the allowance when
identified.
The
Company’s revenue transactions typically do not contain multiple deliverable
elements for future performance obligations to customers, other than a standard
one-year warranty on materials and workmanship, the estimated costs for which
are provided for at the time revenue is recognized.
Revenues
for industrial and medical products sold in the normal course of business are
recognized upon shipment when delivery terms are FOB shipping point and all
other revenue recognition criteria have been met. Gross shipping charges
reimbursable from customers, to deliver product, are insignificant and are
included in Revenues, while shipping costs are classified as the Selling,
General and Administrative Expenses section of the Consolidated Statement of
Operations.
(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 $840,179 and $2,030,428 at June 30, 2007 and 2006,
respectively, consist primarily of cash at banks and money market funds.
The
Company maintains its cash and cash equivalents in bank deposit accounts which,
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 cash and cash
equivalents.
(e)
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or market and include
material, labor and manufacturing overhead. The components of inventories at
June 30, 2007 and 2006 are as follows:
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
|
2007
|
|
2006
|
|
|
Raw
material
|
|
$
|
511,588
|
|
$
|
251,725
|
|
|
Work-in-progress
|
|
|
349,936
|
|
|
114,786
|
|
|
Finished
goods
|
|
|
43,212
|
|
|
79,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
904,736
|
|
$
|
445,802
|
|
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.
During
fiscal years 2007 and 2006, the Company recorded pretax non-cash provisions
for
slow-moving and obsolete inventories of approximately $31,100 and $32,000,
respectively.
(f)
Property
and Equipment
Property
and equipment 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 property and equipment 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
|
Amortization
of assets under capital leases are included in depreciation expense.
Depreciation expense was $57,911 and $81,276 for the years ended June 30, 2007
and 2006, respectively.
In
July
2005, the Company sold equipment previously used in its telecommunications
business for $180,000, recognizing a gain of approximately $166,000 in the
quarter ending September 30, 2005, which was included in the accompanying
consolidated statements of operations in Selling, General and Administrative
expenses.
(g)
Significant
Customers and Concentration of Credit Risk
Statement
of Financial Accounting Standards (“SFAS”) No. 105, Disclosure
of Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk,
requires
disclosure of any significant off-balance sheet and 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, 2007, receivables from the
Company’s largest customer was 61% of the total accounts receivable. At June 30,
2006, receivables from the Company’s largest customers were 30%, 15%, 12% and
11%, respectively, of the total accounts receivable. No other customer accounted
for more than 10% of the Company’s receivables as of June 30, 2007 and 2006. 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 relying on credit approval, balance
limitation and monitoring procedures to control credit risk of trade account
financial instruments. Management believes that allowances for doubtful
accounts, which are established based upon review of specific account balances
and historical experience, are adequate.
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Revenues
from the Company’s largest customers, as a percentage of total revenues, were as
follows:
|
|
|
2007
|
|
2006
|
|
|
Customer
A
|
|
|
27
|
%
|
|
18
|
%
|
|
Customer
B
|
|
|
22
|
|
|
15
|
|
|
Customer
C
|
|
|
10
|
|
|
15
|
|
|
All
Others
|
|
|
41
|
|
|
52
|
|
|
|
|
|
100
|
%
|
|
100
|
%
|
No
other
customer accounted for more than 10% of the Company’s revenues in fiscal years
2007 and 2006.
(h)
Loss
per Share
The
Company calculates earnings per share according to SFAS No. 128, Earnings
per Share.
Basic
loss per share is computed by dividing net loss by the weighted average number
of shares of common stock outstanding during the period. For each of the two
years in the periods ended June 30, 2007 and 2006, the effect of stock options
was antidilutive; therefore, they were not included in the computation of
diluted loss per share. The number of shares issuable upon the exercise of
outstanding stock options and warrants that were excluded from the computation,
as their effect would be antidilutive, was 12,532,583 and 2,277,583 during
fiscal 2007 and 2006, respectively.
(i)
Stock-Based
Compensation
On
July
1, 2006, the Company adopted SFAS No. 123(R), Accounting
for Stock-Based Compensation
(“SFAS
No. 123(R)”), which requires the measurement and recognition of all compensation
costs for all stock based awards made to employees and the Board of Directors
based upon fair value over the requisite service period for awards expected
to
vest. Prior to adoption, the Company accounted for stock options under the
intrinsic value method set in accordance with Accounting Principles Board
Opinion No. 25, “Accounting
for Stock Issued to Employees,”
and
related interpretations, and provided the required pro forma disclosures
prescribed by SFAS No. 123, “Accounting
for Share-based Compensation”
(“SFAS
No. 123”), as amended.
SFAS
123(R) requires the Company to estimate the fair value of share-based awards
on
the date of grant using an option pricing model. The Company adopted SFAS 123(R)
using the modified prospective transition method which required the application
of the accounting standard starting July 1, 2006, the first day of the Company’s
fiscal year 2007. Prior period information has not been restated to reflect
the
fair value method of expensing share-based awards. Stock-based compensation
costs recognized for the year ended June 30, 2007 amounted to $190,926.
The
Company had previously followed the disclosure-only provisions of SFAS
No. 123, as amended by SFAS No. 148, Accounting
for Share-based Compensation—Transition and Disclosure.
No
stock-based employee compensation cost is reflected in consolidated results
of
operations for the year ended June 30, 2006, as all options granted had an
exercise price equal to the market value of the underlying common stock on
the
date of grant. The following table illustrates the effect on net loss and net
loss per share for the year ended June 30, 2006 as if the Company had applied
the fair value recognition provisions of SFAS No. 123 to share-based
employee awards.
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
|
Year
Ended
2006
|
|
|
Net
loss as reported
|
|
$
|
(2,272,473
|
)
|
|
Add:
Employee compensation expense for share options included in reported
net
income, net of income taxes
|
|
|
-
|
|
|
Less:
Total employee compensation expense for share options determined
under the
fair value method, net of income taxes
|
|
|
(377,430
|
)
|
|
Pro
forma net loss
|
|
$
|
(2,649,903
|
)
|
|
Net
loss per share:
|
|
|
|
|
|
Basic
and diluted - as reported
|
|
$
|
(0.26
|
)
|
|
Basic
and diluted - pro forma
|
|
$
|
(0.30
|
)
|
(j)
Foreign
Currency Translation
The
Company translates certain accounts and financial statements of its foreign
subsidiary in accordance with SFAS No. 52, Foreign
Currency Translation.
The
functional currency of the Company’s foreign subsidiary is the United States
dollar. Transaction gains or losses are reflected in the accompanying
consolidated statements of operations and have not been
significant.
(k)
Patents
Patents
are carried at cost, less accumulated amortization of $515,615 and $453,100
at
June 30, 2007 and 2006, respectively. Such costs are amortized using the
straight-line method over the shorter of their legal or estimated useful lives,
generally five to ten years. Amortization expense was $62,493 and $48,834 for
the years ended June 30, 2007 and 2006, respectively. Amortization expense
is
expected to be approximately $48,000, $42,000, $37,000, $33,000 and $29,000,
respectively, for the years ending June 30, 2008 through June 30,
2012.
(l)
Financial
Instruments
SFAS
No.
107, Disclosure
About Fair Value of Financial Instruments,
requires disclosures about the fair value of financial instruments. Financial
instruments consist principally of cash equivalents, accounts receivable,
accounts payable, and accrued expenses. The estimated fair value of these
financial instruments approximates their carrying value due to the short-term
nature of these financial instruments.
(m)
Long-Lived
Assets
The
Company accounts for long-lived assets in accordance with SFAS No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets.
This
statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability
of
assets to be held and used is measured by a comparison of the carrying amount
of
an asset to future undiscounted net cash flows expected to be generated by
the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported
at
the lower of the carrying amount or fair value less costs to sell.
(n)
Warranty
Costs
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
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. 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
two
years ended June 30, 2007:
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
50,000
|
|
$
|
50,000
|
|
|
Provision
(credit) for warranty claims
|
|
|
(14,197
|
)
|
|
10,122
|
|
|
Warranty
claims incurred
|
|
|
(10,803
|
)
|
|
(10,122
|
)
|
|
Balance
at end of period
|
|
$
|
25,000
|
|
$
|
50,000
|
|
(o)
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. For the years ended June 30, 2007 and 2006, research and
development expense is shown net of reimbursements of $101,309 and $135,129,
respectively, in the accompanying statements of operations.
(p)
Comprehensive
Income
SFAS
No. 130, Reporting
Comprehensive Income,
requires disclosure of all components of comprehensive income on an annual
and
interim basis. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owners sources.
The
Company’s comprehensive loss for the years ended June 30, 2007 and 2006 was
equal to its net loss for the same periods.
(q) 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 carryforwards. 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.
(r)
Segment
Reporting
SFAS
No.
131, Disclosures
About Segments of an Enterprise and Related Information,
establishes standards for reporting information regarding operating segments
in
annual financial statements and requires selected information for those segments
to be presented in interim financial reports issued to stockholders. SFAS No.
131 also establishes standards for related disclosures about products and
services and geographic areas. 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, as defined under SFAS No. 131,
is the Chief Executive Officer. To date, the Company has viewed its operations
and manages its business as principally one segment. For all periods presented,
over 90% of the Company’s sales have been to customers in the United
States.
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(s)
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.
(t) Recent
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
("FIN48"). FIN 48 is an interpretation of FASB Statement No. 109, Accounting
for Income Taxes,
and it
seeks to reduce the diversity in practice associated with certain aspects of
measurement and recognition in accounting for income taxes. In addition, FIN
48
requires expanded disclosure with respect to the uncertainty in income taxes
and
is required to be adopted for fiscal years beginning after December 15,
2006.
The Company is currently evaluating the effect the adoption of FIN 48 will
have on its financial condition or results of operations.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements,
("SFAS
No. 157"). SFAS No. 157 defines fair value, establishes a framework
for measuring fair value, and expands disclosure requirements regarding fair
value measurement. SFAS No. 157 is effective for the Company beginning July
1, 2008. The Company is currently reviewing SFAS No. 157 to determine the
impact and materiality of its adoption.
In
February 2007, the FASB issued Statement No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities
("SFAS
No. 159"), which permits companies to choose to measure many financial
instruments and certain other items at fair value. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The Company is currently evaluating the
effect SFAS No. 159 will have on its consolidated financial position and
results of operations.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements ("SAB No. 108"),
providing guidance on quantifying financial statement misstatement and
implementation when first applying this guidance. Under SAB No. 108, companies
should evaluate a misstatement based on its impact on the current year income
statement, as well as the cumulative effect of correcting such misstatements
that existed in prior years still existing in the current year's ending balance
sheet. SAB No. 108 is effective for fiscal years ending after November 15,
2006. The
adoption of SAB No. 108 did not significantly
affect the Company’s financial condition or results of
operations.
In
December 2006, the FASB issued a FASB Staff Position (“FSP”) Emerging Issues
Task Force (“EITF”) Issue No. 00-19-2, Accounting
for Registration Payment Arrangements
(“FSP
00-19-2”) which addresses an issuer’s accounting for registration payment
arrangements. FSP 00-19-2 specifies that the contingent obligation to make
future payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision
of a financial instrument or other agreement, should be separately recognized
and measured in accordance with FASB Statement No. 5, Accounting
for Contingencies.
The
guidance in FSP 00-19-2 amends FASB Statements No. 133, Accounting
for Derivative Instruments and Hedging Activities,
and No.
150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities
and
Equity,
and
FASB Interpretation No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
to
include scope exceptions for registration payment arrangements. FSP 00-19-2
is
effective immediately for registration payment arrangements and the financial
instruments subject to those arrangements that are entered into or modified
subsequent to the issuance of FSP 00-19-2. For registration payment arrangements
and financial instruments subject to those arrangements that were entered into
prior to the issuance of FSP 00-19-2, this is effective for financial statements
issued for fiscal years beginning after December 15, 2006, and interim periods
within those fiscal years. The Company entered into a Registration Rights
Agreement (the "Agreement") in connection with a private placement in February
2007 (see Note 3). All of the Company’s obligations under the Agreement have
been met and the Company has determined that no accrual is needed as of June
30,
2007 as it is not considered probable that the Company will make any payments
under the applicable provisions of the Agreement.
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(u) Reclassification
The
Company has revised certain classifications within the statement of operations
to more appropriately reflect as research and development costs certain
expenditures associated with product development efforts that previously were
reflected as cost of sales. The Company also reclassified certain reimbursed
research and development costs, including costs associated with the production
of prototypes, as an offset to research and development expense from revenue.
In
accordance with SFAS No. 154, Accounting
Changes and Error Corrections,
this
change has been reflected retrospectively to all periods presented. The Company
believes this better reflects the nature of certain expenditures (and
reimbursements) due to the fact that the Company does not engage in any
contractual arrangements to perform research and development. The effect of
the
reclassification had no impact on operating income, net income, the Company’s
financial position or cash flows.
The
table
below summarizes the effect of these changes for the following
periods:
|
|
|
Year
Ended
December
31, 2006
|
|
|
|
|
Currently
Reported
|
|
Previously
Reported
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,149,564
|
|
|
|
|
$
|
2,284,693
|
|
|
Gross
Profit
|
|
$
|
250,093
|
|
|
|
|
$
|
4,062
|
|
|
Research
and Development Expenses
|
|
$
|
1,105,967
|
|
|
|
|
$
|
859,936
|
|
|
Total
Operating Expenses
|
|
$
|
2,557,988
|
|
|
|
|
$
|
2,311,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
COMMITMENTS
(a)
Related
Party Transactions
The
Company leases one of its facilities from a corporation owned by an
officer-director-shareholder of the Company. The Company is currently a
tenant-at-will, paying rent of $9,000 per month. Total rent expense paid to
related parties was $108,000 in each of fiscal years 2007 and 2006, and is
included in the accompanying consolidated statements of operations.
The
Company paid or accrued fees to a director of $60,000 in each of fiscal years
2007 and 2006 for consulting services.
Another
director is a former partner in a law firm that has performed legal services
for
the Company during fiscal 2007 and 2006 totaling approximately $217,000 and
$136,000, respectively. This
director retired from his position as a member of the Board of Directors of
the
Company, effective at the close of business on June 28, 2007.
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(b)
Operating
Lease Commitments
The
Company has entered into operating leases for its office space and equipment
that expire at various dates through fiscal year 2008. Total future minimum
rental payments under all non-cancelable operating leases are approximately
$30,100 in fiscal 2008 and $400 in fiscal 2009.
Rent
expense on operating leases, excluding the related party rent described above,
was approximately $47,500 and $48,700 for the years ended June 30, 2007 and
2006, respectively.
(3)
STOCKHOLDERS’
EQUITY
(a) Stock
Options
Stock-based
compensation costs recognized for the year ended June 30, 2007, included
compensation costs for awards granted prior to, but not yet vested as of July
1,
2006 (adoption date), as well as any new grants issued after July 1, 2006.
Total
costs recognized during the year ended June 30, 2007 amounted to $190,926 and
was included in the accompanying consolidated statements of operations in:
(1)
selling, general and administrative expenses ($164,831), cost of goods sold
($19,435), and research and development expenses, net ($6,660). 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 year
ended June 30, 2007, as the Company is currently in a loss position. The total
amount of options granted during the year ended June 30, 2007 was
265,000.
As
of
June 30, 2007, the unrecognized compensation costs related to options vesting
will be primarily recognized over a period of approximately 4
years:
|
OPTIONS
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
TOTAL
|
|
|
Compensation
Expense
|
|
$
|
108,145
|
|
$
|
84,720
|
|
$
|
21,805
|
|
$
|
21,805
|
|
$
|
236,475
|
|
On
November 10, 2005, the FASB issued FASB Staff Position SFAS 123R-3,
Transition
Election Related to Accounting for Tax Effects of Share-Based Payment
Awards.
The
Company has elected to adopt the alternative transition method provided by
the
FASB Staff Position for calculating the tax effects (if any) of stock-based
compensation expense pursuant to SFAS 123(R). The alternative transition method
includes simplified methods to establish the beginning balance of the additional
paid-in capital pool related to the tax effects of employee stock-based
compensation, and to determine the subsequent impact to the additional paid-in
capital pool and the consolidated statement of operation and cash flows of
the
tax effects of employee stock-based compensation awards that are outstanding
upon adoption of SFAS 123(R).
Upon
adoption of SFAS 123(R), in accordance with Staff Accounting Bulletin No. 107,
Share-Based
Payment
the
Company selected 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:
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
|
Years Ended
|
|
|
|
|
June
30, 2007
|
|
June
30, 2006
|
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
Option
life
|
|
|
5.3
years
|
|
|
5.3
years
|
|
|
Risk-free
interest rate
|
|
|
4.67
|
%
|
|
5.00
|
%
|
|
Stock
volatility
|
|
|
108
|
%
|
|
114
|
%
|
|
Dividend
yield
|
|
|
-0-
|
|
|
-0-
|
|
|
Weighted
average fair value of grants
|
|
$
|
0.22
|
|
$
|
0.65
|
|
Stock
Option and Other Compensation 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, 2007: Amended and Restated 1997 Incentive Plan and
the 2006 Equity Incentive Plan. Vesting periods are at the discretion of the
Board of Directors and typically average five years. Options under these plans
are granted at fair market value and have a term of ten years from the date
of
grant.
During
fiscal 2007, the stockholders approved an equity incentive plan (the “2006
Incentive 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 total of 3,497,438 shares of common stock have been reserved
for issuance under the 2006 Incentive Plan. At June 30, 2007, a total of 40,000
stock options are outstanding and 3,457,438 shares of common stock were
available for future grants under the 2006 Incentive Plan.
During
fiscal 1998, the stockholders approved an incentive plan (the “1997 Incentive
Plan”), which provided 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.
Options for a total of 2,492,583 shares of common stock are outstanding at
June
30, 2007 under the 1997 Incentive Plan, as amended and restated in fiscal year
2006. Prior to the adoption of the 2006 Incentive Plan, 225,000 stock
options were granted in fiscal year 2007 under the 1997 Incentive Plan.
Upon the adoption of the 2006 Incentive Plan, no new awards were granted under
the 1997 Plan. No shares are available for future grants under the Company’s
1997 Stock Option Plan.
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The
following tables summarize stock option activity for the two years ended June
30, 2007:
| |
|
|
Options Outstanding
|
|
|
|
|
|
|
|
| |
|
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Contractual Life
|
|
|
Outstanding
at June 30, 2005
|
|
|
1,317,535
|
|
$
|
1.79
|
|
|
9.51
years
|
|
|
Grants
|
|
|
970,800
|
|
|
0.55
|
|
|
|
|
|
Exercises
|
|
|
—
|
|
|
|
|
|
|
|
|
Cancellations
|
|
|
(10,752
|
)
|
|
15.63
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2006
|
|
|
2,277,583
|
|
$
|
0.66
|
|
|
9.86
years
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
265,000
|
|
|
0.27
|
|
|
|
|
|
Exercises
|
|
|
—
|
|
|
|
|
|
|
|
|
Cancellations
|
|
|
(10,000
|
)
|
|
0.55
|
|
|
|
|
|
Outstanding
at June 30, 2007
|
|
|
2,532,583
|
|
$
|
0.62
|
|
|
8.57
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information
related to the stock options outstanding as of June 30, 2007 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
|
|
|
$0.25
|
|
|
165,000
|
|
|
9.27
|
|
$
|
0.25
|
|
|
60,835
|
|
$
|
0.25
|
|
|
$0.30
|
|
|
100,000
|
|
|
9.15
|
|
|
0.30
|
|
|
-
|
|
|
0.30
|
|
|
$0.46
|
|
|
20,000
|
|
|
8.42
|
|
|
0.46
|
|
|
20,000
|
|
|
0.46
|
|
|
$0.55
|
|
|
1,313,583
|
|
|
8.87
|
|
|
0.55
|
|
|
758,101
|
|
|
0.55
|
|
|
$0.83
|
|
|
934,000
|
|
|
7.97
|
|
|
0.83
|
|
|
280,200
|
|
|
0.83
|
|
|
$0.25-$0.83
|
|
|
2,532,583
|
|
|
8.57
|
|
$
|
0.62
|
|
|
1,119,136
|
|
$
|
0.60
|
|
The
aggregate intrinsic value of the Company’s “in-the-money” outstanding and
exercisable options as of June 30, 2007 was $19,000 and $5,000,
respectively.
On
June
13, 2005 the Company issued options to purchase 934,000
shares (“Performance Options”) of common stock at an exercise price of
$0.83 per share. At the date of issuance, 30% of the options
vested immediately, and the remaining options were subject to vesting upon
the achievement of certain financial milestones by the Company. During
fiscal 2007, certain of these milestones were met, and an additional 35% of
the
options vested as of July 31, 2007.
On
May 9,
2006, the Company’s Board of Directors approved the repricing of certain stock
options held by employees and certain members of the Board of Directors in
order
to provide those employees and directors holding stock options with exercise
prices significantly above recent trading prices with better performance
incentives. The new exercise price per share of common stock subject to such
options (“Repriced Options”) was set at $0.55. The new exercise price per share
applies to all stock options with an original exercise price above $0.55 per
share, other than an option to purchase 560,400 shares of common stock held
by
Joseph Forkey and an option to purchase 373,600 shares of common stock held
by
Richard Forkey. Approximately 383,000 options were affected in the
repricing.
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
According
to Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees,
the
Performance Options and Repriced Options were subject to variable accounting
until the awards are exercised, forfeited, or expire unexercised, which includes
periodic measurement of compensation expense based on the intrinsic value of
the
options. The compensation cost, if any, was recognized and adjusted quarterly
for vested options or ratably over the vesting period for unvested options.
No
compensation expense related to these stock options was reflected in the net
loss for the quarter ended June 30, 2006 as all options granted had an exercise
price greater than the market value of the underlying common stock as of June
30, 2006. Upon the adoption of SFAS No. 123(R) by the Company on July 1, 2006,
these options were no longer subject to variable accounting. Compensation
related to these options is included in the amounts disclosed above for the
year
ended June 30, 2007.
(b)
Sale
of Stock
In
February 2007, the Company completed a private placement with institutional
and
other accredited investors pursuant to which it sold an aggregate of 10,000,000
shares of common stock, at a price of $0.25 per share and warrants to purchase
an aggregate of 10,000,000 shares of common stock at an exercise price of $0.32
per share. Net cash proceeds to the Company (after offering costs of $123,784)
were $2,376,216. On March 16, 2007, in order to fulfill its contractual
obligations, the Company filed a registration statement with the Securities
and
Exchange Commission, under the Securities Act of 1933, as amended, to register
for resale the shares of common stock issued and the shares of common stock
issuable upon the exercise of the warrants sold in this private placement.
The
Company’s registration statement on Form SB-2 covering the securities sold in
the private placement
was
declared effective on March 23, 2007. The
Company is obligated to keep the registration statement effective until the
earlier of (i) such time as all of the shares covered by the prospectus have
been sold or (ii) the date on which the shares may be resold pursuant to Rule
144(k) of the Securities Act of 1933 (the “Securities Act”). Except
in
the event of adverse market conditions and certain permitted delays, if the
Company fails to maintain the effectiveness of the prospectus then it will
be
required to pay liquidated damages to the holders of shares registered
thereunder in an amount equal to 1.0% of the aggregate amount invested by such
holder for each 30-day period or pro rata for any portion thereof following
the
date by which such prospectus should have been effective.
In
April
2006, the Company completed a private placement, issuing 8,450,000 shares of
common stock. Net cash proceeds (after offering costs of $49,725) to the Company
were $2,062,775. On July 25, 2006, in order to fulfill its contractual
obligations, the Company filed a registration statement with the Securities
and
Exchange Commission, under the Securities Act of 1933, as amended, to register
for resale the shares of common stock sold in this private placement.
The
Company’s registration statement on Form SB-2 covering the securities sold in
this private placement
was
declared effective on August 14, 2006. The
Company is obligated to keep the registration statement effective until the
earlier of (i) two years after the date of the closing of the private placement,
(ii) the date on which the shares may be resold by the purchasers without
registration by reason of Rule 144(k) under the Securities Act or any other
rule
of similar effect; or (iii) such time as all shares purchased by such
stockholders have been sold.
The
Company computed $3,522,860 as the fair value for warrants issued in conjunction
with the February 2007 private placement using the Black-Scholes pricing model.
The warrants are exercisable anytime within five years of their issue date
(February 1, 2007) and have met the requirements to be recorded as a component
of stockholder’s equity. The warrants are exercisable at a per share price of
$0.32 subject to certain anti-dilution adjustments. The
fair
value of the warrants at date of issuance was estimated with the following
assumptions:
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
Assumptions:
|
|
|
|
|
Warrant
life
|
|
|
5.0
years
|
|
|
Risk-free
interest rate
|
|
|
4.84
|
%
|
|
Stock
volatility
|
|
|
129
|
%
|
|
Dividend
yield
|
|
|
-0-
|
|
|
Weighted
average fair value of warrants issued
|
|
$
|
0.35
|
|
(4)
INCOME
TAXES
The
provision for income taxes in the accompanying consolidated statements of
operations consists of the minimum statutory state income tax liability of
$914
and $912 for the years ended June 30, 2007 and 2006, respectively.
A
reconciliation of the federal statutory rate to the Company’s effective tax rate
for the two years ended June 30 is as follows:
|
|
|
2007
|
|
2006
|
|
|
Income
tax benefit at federal statutory rate
|
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in tax resulting from-
|
|
|
|
|
|
|
|
|
State
taxes, net of federal benefit
|
|
|
(5.6
|
)
|
|
(6.0
|
)
|
|
Change
in valuation allowance
|
|
|
42.3
|
|
|
(587.9
|
)
|
|
Impact
of Change in Control Limitations
|
|
|
-
|
|
|
627.3
|
|
|
Nondeductible
items
|
|
|
0.6
|
|
|
0.6
|
|
|
Other
|
|
|
(3.3
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
0.0
|
%
|
|
0.0
|
%
|
The
components of deferred tax assets and liabilities at June 30, 2007 and 2006
are
approximately as follows:
|
|
|
2007
|
|
2006
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
1,510,000
|
|
$
|
343,000
|
|
|
Tax
credit carryforwards
|
|
|
58,000
|
|
|
-
|
|
|
Reserves
and accruals not yet deducted for tax purposes
|
|
|
17,000
|
|
|
18,000
|
|
|
Total
deferred tax assets
|
|
|
1,585,000
|
|
|
361,000
|
|
|
Valuation
allowance
|
|
|
(1,585,000
|
)
|
|
(361,000
|
)
|
| |
|
|
|
|
|
|
|
|
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. The
valuation allowance decreased in fiscal 2006 by approximately $12,622,000 as
a
result of change in control limitations. Pursuant to the Tax Reform Act of
1986,
the utilization of net operating loss carryforwards and other tax benefits
are
subject to an annual limitation if a cumulative change of ownership of more
than
50% occurs over a three-year period. As a result of the 2006 private placement
of the Company’s common stock, the Company has triggered significant limitations
on the utilization of those tax attributes. The limitation will allow the use
of
the value of approximately $18,000 of Federal carryforward losses annually
for
the next twenty years, and the same amount for state purposes for 5 years.
The
impact of this limitation has caused a significant reduction in the deferred
tax
asset valuation allowance during fiscal 2006.
PRECISION
OPTICS CORPORATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
At
June
30, 2007, the Company had federal and state net operating loss carryforwards
of
approximately $3,200,000 and $2,900,000, respectively, which will, if not used,
expire at various dates from 2008 through 2026. In addition, the Company had net
operating loss carryforwards from its Hong Kong operations of approximately
$1,400,000 which carryforward indefinitely.
(5) PROFIT
SHARING PLAN
The
Company has a defined contribution 401K profit sharing plan. Employer profit
sharing and matching contributions to the plan are discretionary. No employer
profit sharing contributions were made to the plan in fiscal years 2007 and
2006. Employer matching contributions to the plan amounted to $42,325 and
$29,203 for fiscal years 2007 and 2006, respectively.
(6) Cash
Surrender Value of Life Insurance Policies
The
Company maintains a whole life insurance policy for
a senior executive, which policy is recorded at its cash surrender
value. As of June 30, 2007 and June 30, 2006, the cash surrender value of
these policies are $4,438 and $13,246, respectively.
ITEM
8. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
8A. CONTROLS
AND PROCEDURES
As
of the
end of the period covered by this annual report, the Company’s Chief Executive
Officer and Principal Financial Officer have conducted an evaluation of the
Company’s disclosure controls and procedures. Based on their evaluation, the
Company’s Chief Executive Officer and Principal Financial Officer have concluded
that the Company’s disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the
applicable Securities and Exchange Commission rules and forms and (ii)
accumulated and communicated to the Company’s management, including the
Company’s Chief Executive Officer and the Company’s Principal Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure.
There
was
no change in the Company’s internal control over financial reporting during the
Company’s most recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
ITEM
8B. OTHER
INFORMATION
None.
ITEM
9. DIRECTORS,
EXECUTIVE OFFICERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
The
Company will furnish to the Securities and Exchange Commission a definitive
Proxy Statement (the “Proxy Statement”) not later than 120 days after the close
of its fiscal year ended June 30, 2007. The information required by this item,
other than with respect to the Company’s Corporate Code of Ethics and Conduct,
is incorporated herein by reference to the Proxy Statement.
A
copy of
the Company’s Corporate Code of Ethics and Conduct applicable to all employees,
officers and directors of the Company is incorporated by reference as Exhibit
14.1 to this report and can be obtained free of charge by contacting the
Company’s Clerk, c/o Precision Optics Corporation, 22 East Broadway, Gardner,
Massachusetts 01440.
ITEM
10. EXECUTIVE
COMPENSATION
The
information required by this item is incorporated herein by reference to the
Proxy Statement.
The
information required by this item is incorporated herein by reference to the
Proxy Statement.
ITEM
12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The
information required by this item is incorporated herein by reference to the
Proxy Statement.
ITEM
13. EXHIBITS
The
exhibits listed below are filed with or incorporated by reference in this
report.
|
|
Articles
of Organization of the Company, as amended and corrected.
(1)
|
|
3.2
|
By-laws
of Precision Optics Corporation, Inc. (2)
|
|
4.1
|
Specimen
common stock certificate. (3)
|
|
4.2
|
Registration
Rights Agreement dated as of March 17, 2000 by and among the Company
and
the Initial Investors as defined therein. (4)
|
|
4.3
|
Registration
Rights Agreement dated as of June 30, 1998 by and among the Company,
Special Situations Private Equity Fund, L.P. and Special Situations
Technology Fund, L.P. (5)
|
|
4.4
|
Registration
Rights Agreement dated as of August 5, 1999 by and among the Company,
Special Situations Cayman Funds, L.P., Special Situations Fund III,
L.P.,
Special Situations Private Equity Fund, L.P. and Special Situations
Technology Fund, L.P. (6)
|
|
4.5
|
Registration
Rights Agreement by and among Precision Optics Corporation, Inc.
and each
investor named therein, dated February 1, 2007. (13)
|
|
4.6
|
Form
of Warrant. (13)
|
|
10.1
|
Precision
Optics Corporation, Inc. 1989 Stock Option Plan, amended to date.
(7)
|
|
10.2
|
Three
separate life insurance policies on the life of Richard E. Forkey.
(3)
|
|
10.3
|
Amended
and Restated Precision Optics Corporation, Inc. 1997 Incentive Plan.
(8)
|
|
10.4
|
Securities
Purchase Agreement dated as of March 13, 2000 by and among the Company
and
the Purchasers as defined therein (excluding exhibits).
(4)
|
|
10.5
|
Form
of Purchase Agreement between the Company and each investor named
therein.
(11)
|
|
10.6
|
Employment
Offer Letter dated as of September 15, 2006 from Precision Optics
Corporation, Inc., to Michael T. Pieniazek. (12)
|
|
10.7
|
2006
Equity Incentive Plan (14)
|
|
10.8
|
Purchase
Agreement by and among Precision Optics Corporation, Inc. and each
investor named therein, dated February 1, 2007. (13)
|
|
10.9
|
Form
of Incentive Stock Option Certificate. (15)
|
|
10.10
|
Form
of Nonstatutory Stock Option Certificate. (15)
|
|
14.1
|
Corporate
Code of Ethics and Conduct. (9)
|
|
21
|
Subsidiaries
of Precision Optics Corporation, Inc. (10)
|
|
23.1
|
Consent
of Vitale Caturano & Company Ltd.
|
|
31.1
|
Certification
of Chief Executive Officer required by Rule
13a-14(a)/15d-14(a).
|
|
31.2
|
Certification
of Principal Financial Officer required by Rule
13a-14(a)/15d-14(a).
|
|
32.1
|
Certification
of Chief Executive Officer and Principal Financial Officer required
by
Rule 13a-14(b) and 18 U.S.C. 1350.
|
|
(1)
|
Incorporated
herein by reference to the Company’s Registration Statement on Form SB-2
(No. 333-141368).
|
|
(2)
|
Incorporated
herein by reference to the Company’s 1991 Annual Report on Form 10-KSB
(No. 001-10647).
|
|
(3)
|
Incorporated
herein by reference to the Company’s Registration Statement on Form S-1
(No. 33-36710-B).
|
|
(4)
|
Incorporated
herein by reference to the Company’s Registration Statement on Form S-3
(No. 333-35884).
|
|
(5)
|
Incorporated
herein by reference to the Company’s 1998 Annual Report on Form 10-KSB
(No. 001-10647).
|
|
(6)
|
Incorporated
herein by reference to the Company’s 1999 Annual Report on Form 10-KSB
(No. 001-10647).
|
|
(7)
|
Incorporated
herein by reference to the Company’s 1994 Annual Report on Form 10-KSB
(No. 001-10647).
|
|
(8)
|
Incorporated
herein by reference to the Company’s Quarterly Report on Form 10-QSB for
the quarter ended September 30, 2003 (No. 001-10647).
|
|
(9)
|
Incorporated
herein by reference to the Company’s 2005 Annual Report on Form 10-KSB
(No. 001-10647).
|
|
(10)
|
Incorporated
herein by reference to the Company’s 1996 Annual Report on Form 10-KSB
(No. 001-10647).
|
|
(11)
|
Incorporated
herein by reference to the Company’s Current Report on Form 8-K (No.
001-10647) filed on April 19, 2006.
|
|
(12)
|
Incorporated
herein by reference to the Company’s Current Report on Form 8-K (No.
001-10647) filed on September 21,
2006.
|
|
(13)
|
Incorporated
herein by reference to the Company’s Current Report on Form 8-K (No.
001-10647) filed on February 2, 2007.
|
|
(14)
|
Incorporated
herein by reference to the Company’s Current Report on Form 8-K (No.
001-10647) filed on December 4, 2006.
|
|
(15)
|
Incorporated
herein by reference to the Company’s Quarterly Report on Form 10-QSB for
the quarter ended December 30, 2006
(No.
001-10647).
|
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
The
information required by this item is incorporated herein by reference to the
Proxy Statement.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| |
|
|
|
Date:
September 28, 2007
|
PRECISION
OPTICS CORPORATION, INC.
|
|
|
|
| |
By: |
/s/ Richard E. Forkey |
| |
Richard
E. Forkey
|
| |
Chairman
of the Board,
|
| |
Chief
Executive Officer, President
|
| |
and
Treasurer
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
|
Signature
|
Title
|
Date
|
|
|
|
|
|
|
|
/s/
Richard E. Forkey
Richard
E. Forkey
|
Chairman
of the Board, Chief Executive Officer, President and Treasurer
(Principal
Executive Officer)
|
September
28, 2007
|
|
|
|
|
|
/s/
Joseph N. Forkey
Joseph
N. Forkey
|
Executive
Vice President, Chief Scientific Officer and Director
|
September
28, 2007
|
|
|
|
|
|
/s/
Donald A. Major
Donald
A. Major
|
Director
|
September
28, 2007
|
|
|
|
|
|
/s/
Richard B. Miles
Richard
Miles
|
Director
|
September
28, 2007
|
|
|
|
|
|
/s/
Joel R. Pitlor
Joel
R. Pitlor
|
Director
|
September
28, 2007
|
|
|
|
|
|
/s/
Michael T. Pieniazek
Michael
T. Pieniazek
|
Vice
President and Chief Financial Officer
(Principal
Financial Officer and Principal
Accounting Officer)
|
September
28, 2007
|
Exhibit
31.1
Certification
of Chief Executive Officer Required by Rule
13a-14(a)/15d-14(a)
CERTIFICATIONS
I,
Richard E. Forkey, certify that:
1.
I have reviewed this Annual Report on Form 10-KSB of Precision Optics
Corporation, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the small business issuer
as
of, and for, the periods presented in this report;
4.
The small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer
and
have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the small business issuer, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
(b)
Evaluated the effectiveness of the small business issuer's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the
period covered by this report based on such evaluation; and
(c)
Disclosed in this report any change in the small business issuer's internal
control over financial reporting that occurred during the small business
issuer's most recent fiscal quarter (the small business issuer's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5.
The small business issuer's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee
of
the small business issuer's board of directors (or persons performing the
equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the small business issuer's ability to record, process,
summarize and report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the small business issuer's internal control over
financial reporting.
| |
|
|
| Date:
September
28, 2007 |
|
|
| |
By: |
/s/ Richard E. Forkey |
| |
Richard
E. Forkey |
| |
Chief Executive Officer, President
and
Treasurer
|
Exhibit
31.2
Certification
of Principal Financial Officer Required by Rule
13a-14(a)/15d-14(a)
CERTIFICATIONS
I,
Michael T. Pieniazek, certify that:
1.
I have reviewed this Annual Report on Form 10-KSB of Precision Optics
Corporation, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the small business issuer
as
of, and for, the periods presented in this report;
4.
The small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer
and
have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the small business issuer, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
(b)
Evaluated the effectiveness of the small business issuer's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the
period covered by this report based on such evaluation; and
(c)
Disclosed in this report any change in the small business issuer's internal
control over financial reporting that occurred during the small business
issuer's most recent fiscal quarter (the small business issuer's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5.
The small business issuer's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee
of
the small business issuer's board of directors (or persons performing the
equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the small business issuer's ability to record, process,
summarize and report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the small business issuer's internal control over
financial reporting.
| |
|
|
| Date:
September
28, 2007 |
|
|
| |
By: |
/s/ Michael T. Pieniazek |
| |
Vice
President and Chief Financial Officer |
| |
Principal
Financial Officer
|
Exhibit
32.1
PRECISION
OPTICS CORPORATION, INC.
CERTIFICATION
PURSUANT TO
SECTION
1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
We,
Richard E. Forkey, Chief Executive Officer, and Michael T. Pieniazek, Chief
Financial Officer, of
Precision Optics Corporation, Inc. (the “Company”), certify, pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
|
(1)
|
The
Annual Report on Form 10-KSB of the Company for the year ended June
30,
2007 (The “Report”) fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78 m or
78o(d)); and
|
|
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
DATE:
September 28, 2007
| |
|
|
| |
|
/s/ Richard E. Forkey |
| |
Richard
E. Forkey, Chairman of the Board, Chief |
| |
Executive Officer, President and
Treasurer |
| |
|
|
| |
|
/s/ Michael T. Pieniazek |
| |
Chief
Financial Officer |
| |
Principal
Financial Officer
|