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 and illumination systems and related components. The Company conducts
business in one industry segment only and its customers are primarily domestic. The Company performs advanced optical and illumination
system design, development, assembly and manufacturing services for products that fall into two principal areas: (i) medical products
for use by hospitals and physicians; and (ii) products used by military and industrial customers.
The Company has sustained recurring net losses
for several years. During the year ended June 30, 2017, the Company incurred a net loss of $1,006,457 and used cash in operating
activities of $667,434. As of June 30, 2017, cash and cash equivalents were $118,405, accounts receivable were $468,548, and current
liabilities were $1,218,781. As of June 30, 2016, cash and cash equivalents were $50,059, accounts receivable were $750,380, and
current liabilities were $1,503,961. 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. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Until the Company achieves breakeven and profitable
results, the Company will be required to pursue several options to manage cash flow and raise capital, including issuing debt or
equity or entering into a strategic alliance. The sale of additional equity or convertible debt securities, if converted into common
stock, would result in additional dilution to the Company’s current stockholders, and debt financing, if available, may involve
restrictive covenants that could restrict our operations or finances and encumber the Company’s assets. Financing may not
be available in amounts or on terms acceptable to the Company, if at all. If the Company is unable to secure additional capital,
it may be required to curtail our research and development initiatives and take additional measures to reduce costs in order to
conserve our cash in amounts sufficient to sustain operations and meet our obligations. If the Company cannot raise funds on acceptable
terms or achieve positive cash flow, it may not be able to continue to develop new products, grow market share, take advantage
of future opportunities or respond to competitive pressures or unanticipated requirements, any of which could negatively impact
the Company’s business, operating results and financial condition, or impact the Company’s ability to continue to conduct
operations.
(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.
The Company recognizes revenue when four basic
criteria are met: (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) collectability is reasonably assured. The Company’s shipping terms are customarily
FOB shipping point.
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 that 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 the “Revenues” section of the Company’s consolidated statement of operations, while shipping
costs are classified in the “selling, general and administrative expenses” section of the Company’s 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 $118,405 and $50,059 at June 30, 2017 and 2016, respectively, consist primarily of cash at banks and money market funds. The
Company maintains its cash and cash equivalents in bank deposit accounts that, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk
on its cash and cash equivalents.
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,
2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
Raw material
|
|
$
|
501,346
|
|
|
$
|
520,490
|
|
Work-in-progress
|
|
|
388,614
|
|
|
|
383,889
|
|
Finished goods
|
|
|
165,487
|
|
|
|
229,072
|
|
|
|
$
|
1,055,447
|
|
|
$
|
1,133,451
|
|
The Company provides for estimated obsolescence
on unmarketable inventory based upon assumptions about future demand and market conditions. If actual demand and market conditions
are less favorable than those projected by management, additional inventory write-downs may be required. Inventory, once written
down, is not subsequently written back up, as these adjustments are considered permanent adjustments to the carrying value of the
inventory.
(f)
|
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
|
Depreciation expense was $33,660 and $25,856
for the years ended June 30, 2017 and 2016, respectively.
(g)
|
Significant Customers and Concentration of Credit Risk
|
Financial instruments that subject the Company
to credit risk consist primarily of cash equivalents and trade accounts receivable. The Company places its investments with highly
rated financial institutions. The Company has not experienced any losses on these investments to date. At June 30, 2017, the
Company’s five largest customer account receivable balances were 16%, 15%, 12%, 12% and 11%, respectively, of total accounts
receivable. At June 30, 2016, receivables from the Company’s three largest customers were 19%, 13% and 10%, respectively,
of the total accounts receivable. No other customer accounted for more than 10% of the Company’s receivables as of June 30,
2017 and 2016. The Company has not experienced any material losses related to accounts receivable from individual customers. The
Company generally does not require collateral or other security as a condition of sale, rather it relies on credit approval, balance
limitation and monitoring procedures to control credit risk 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.
Revenues from the Company’s largest customers,
as a percentage of total revenues, were as follows:
|
|
2017
|
|
|
2016
|
|
Customer A
|
|
|
11%
|
|
|
|
4%
|
|
Customer B
|
|
|
10
|
|
|
|
7
|
|
Customer C
|
|
|
10
|
|
|
|
16
|
|
Customer D
|
|
|
–
|
|
|
|
12
|
|
All Others
|
|
|
69
|
|
|
|
61
|
|
|
|
|
100%
|
|
|
|
100%
|
|
No other customer accounted for more than 10%
of the Company’s revenues in fiscal years 2017 and 2016.
Basic income (loss) per share is computed by
dividing net income or net loss by the weighted average number of shares of common stock outstanding during the period. Diluted
income (loss) per share is computed by dividing net income or net loss by the weighted average number of shares of common stock
outstanding during the period, plus the number of potentially dilutive securities outstanding during the period such as stock options
and warrants. For the year ended June 30, 2017 and 2016, the effect of such securities was antidilutive and not included in the
diluted calculation because of the net loss generated in those periods.
The following is the calculation of loss per
share for the years ended June 30, 2017 and 2016:
|
|
Year Ended June 30
|
|
|
|
2017
|
|
|
2016
|
|
Net Loss– Basic and Diluted
|
|
$
|
(1,006,457
|
)
|
|
$
|
(1,034,765
|
)
|
|
|
|
|
|
|
|
|
|
Basic Weighted Average Shares Outstanding
|
|
|
8,343,235
|
|
|
|
7,157,978
|
|
Potentially Dilutive Securities
|
|
|
–
|
|
|
|
–
|
|
Diluted Weighted Average Shares Outstanding
|
|
|
8,343,235
|
|
|
|
7,157,978
|
|
|
|
|
|
|
|
|
|
|
Loss Per Share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.15
|
)
|
Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.15
|
)
|
The number of shares issuable upon the exercise
of outstanding stock options and warrants that were excluded from the computation as their effect was antidilutive was approximately
4,553,213 and 4,169,000 for the years ended June 30, 2017 and 2016, respectively.
(i)
|
Stock-Based Compensation
|
The measurement and recognition of compensation
costs for all stock-based awards made to employees and the Board of Directors are based upon fair value over the requisite service
period for awards expected to vest. The Company estimates the fair value of share-based awards on the date of grant using the Black-Scholes
option-pricing model. Stock-based compensation costs recognized for the years ended June 30, 2017 and 2016 amounted to $201,612
and $241,388, respectively.
Patent 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 $0 for
the years ended June 30, 2017 and 2016, respectively.
In July 2011, the Company assigned all of its
currently issued and pending patents, as well as new inventions that it conceived before July 28, 2012, to Intuitive Surgical Operations,
Inc. The Company retained a royalty-free, worldwide license to these patents in fields outside of medical robotics.
(k)
|
Fair Value of Financial Instruments
|
Financial instruments consist principally of
cash and cash equivalents, accounts receivable and accounts payable. The estimated fair value of these financial instruments approximates
their carrying value due to their short-term nature.
Long-lived assets and certain identifiable
intangibles are 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.
The Company does not incur future performance
obligations in the normal course of business other than providing a standard one-year warranty on materials and workmanship to
its customers (except in certain unusual and infrequently occurring situations where extended warranty terms beyond one year are
negotiated with the customer). The Company provides for estimated warranty costs at the time product revenue is recognized. Warranty
costs have been included as a component of cost of goods sold in the accompanying consolidated statements of operations. The following
tables summarize warranty reserve activity for the years ended June 30, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
Provision for warranty claims
|
|
|
14,842
|
|
|
|
4,189
|
|
Warranty claims incurred
|
|
|
(14,842
|
)
|
|
|
(4,189
|
)
|
Balance at end of period
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
(n)
|
Research and Development
|
Research and development expenses are charged
to operations as incurred. The Company groups development and prototype costs and related reimbursements in research and development.
There were no reimbursements for research and development recorded in research and development for the years ended June 30, 2017
and 2016.
Comprehensive income or loss is defined as
the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owners
sources. The Company’s comprehensive loss or income for the years ended June 30, 2017 and 2016 was equal to its net loss
for the same periods.
Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In
assessing the likelihood of utilization of existing deferred tax assets, management has considered historical results of operations
and the current operating environment.
Operating segments are identified as components
of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision
maker, or decision-making group, in making decisions about how to allocate resources and assess performance. The Company’s
chief decision-maker is its Chief Executive Officer. To date, the Company has viewed its operations and manages its business as
principally one segment. For all periods presented, over 90% of the Company’s sales have been to customers in the United
States.
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.
(s)
|
Recent Accounting Pronouncements
|
In July 2015, the Financial Accounting Standards
Board ("FASB") issued new accounting guidance for measuring inventory. The core principal of the guidance is that
an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This
guidance does not apply to inventory that is being measured using the Last-In, First-Out (LIFO) or the retail inventory method.
The guidance is effective for financial statements issued for annual and interim periods beginning after December 15, 2016 on a
prospective basis. Early adoption is permitted. The Company is currently evaluating the impact this will have on the
consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 provides a single, comprehensive accounting
model for revenues arising from contracts with customers that supersedes most of the existing revenue recognition guidance, including
industry-specific guidance. Under this model, revenue is recognized at an amount that an entity expects to be entitled to upon
transferring control of goods or services to a customer, as opposed to when risks and rewards transfer to a customer under existing
revenue recognition guidance. ASU 201-09 is effective for the Company beginning in its fiscal year 2018, and may be applied retrospectively
to all prior periods presented or through a cumulative adjustment to the opening retained earnings balance in the year of adoption.
The Company is currently in the process of evaluating the impact of ASU 2014-09 on its consolidated financial statements.
(a)
|
Related Party Transactions
|
The Company leases its main Gardner facility
from a corporation owned by Mr. Richard E. Forkey, who resigned from the Company’s board of directors on July 9, 2014. The
Company is currently a tenant-at-will, paying rent of $9,000 per month. Total rent expense paid or accrued to such related party
was $108,000 in each of fiscal years 2017 and 2016, and is included in the Company’s accompanying consolidated statements
of operations.
On November 22, 2016, the Company entered into
agreements with accredited investors for the sale and purchase of 1,333,334 units with each unit consisting of one share of the
Company’s common stock, $0.01 par value and one warrant to purchase one-half of one share of the Company’s common stock,
at a purchase price of $0.60 per unit. The Company received $780,000 in gross cash proceeds from the offering and settled an outstanding
accounts payable balance with a consultant in the amount of $20,000 by issuing units. The Company is using the net proceeds from
this placement for general working capital purposes.
The warrants issued in this offering will vest
on October 2, 2017 and expire on October 16, 2017. The warrant exercise price is variable and depends on the Company’s achievement
of certain performance criteria. The warrant exercise price was agreed to be $0.40 per share if the Company achieved both of the
revenue and income performance criteria as defined, the exercise price would be $0.20 per share if the Company achieves one of
the performance criteria, and the exercise price would be $0.01 if the Company did not achieve either of the performance criteria.
Since the Company did not achieve either of the criteria, the exercise price of the warrants is $0.01.
In conjunction with the offering, the Company
also entered into a registration rights agreement with the investors, whereby the Company was obligated to file a registration
statement with the Securities Exchange Commission on or before 90 calendar days after November 22, 2016 to register the resale
by the investors of the 1,333,334 shares and warrant shares purchased in the offering. The registration statement was filed with
the Securities and Exchange Commission on February 3, 2017 and became effective on March 2, 2017.
Pursuant to the above transaction, the Company’s
Chairman of the Board Mr. Woodward, as principal of MHW Partners, L.P., purchased 156,667 units at an aggregate purchase price
of $94,000.
On October 19, 2015, the Company entered into
agreements with accredited investors for the sale and purchase of 1,044,776 shares of the Company’s common stock, $0.01 par
value at a purchase price of $0.67 per share. The Company received $700,000 in gross proceeds from the offering. The Company used
the net proceeds from this placement for general working capital purposes.
In conjunction with the placement, the Company
also entered into a registration rights agreement with the investors, whereby it was obligated to file a registration statement
with the Securities Exchange Commission on or before 90 calendar days after October 19, 2015 to register the resale by the investors
of the 1,044,776 shares of common stock purchased in the placement. The registration statement was filed with the Securities Exchange
Commission on January 19, 2016 and became effective on February 1, 2016.
Pursuant to the above transaction, the Company’s
director Mr. Schwartz purchased 14,925 shares of common stock at an aggregate purchase price of $10,000, and the Chairman of the
Board Mr. Woodward, as principal of MHW Partners, L.P., purchased 87,313 shares of common stock at an aggregate purchase price
of $58,500.
Transactions with Stockholders Known by
the Company to Own 5% or More of the Company’s Common Stock
Pursuant to the November 2016 placement described
above, Dolphin Offshore Partners L.P. and Hershey Strategic Capital, L.P. purchased 916,667 and 125,000, respectively, at aggregate
purchase prices of $550,000 and $75,000, respectively. At the time of the transaction, both Dolphin Offshore Partners L.P. and
Hershey Strategic Capital, L.P. were beneficial owners of more than 5% of outstanding common stock.
Pursuant to the October 2015 placement described
above, Hershey Strategic Capital, L.P. purchased 37,313 shares of common stock at an aggregate purchase price of $25,000. At the
time of the transaction, Hershey Strategic Capital was a beneficial owner of more than 5% of outstanding common stock.
(b)
|
Capital Lease Obligation
|
The Company entered into a five-year capital
lease obligation in January 2016 for the acquisition of manufacturing equipment with payments totaling $51,252. At June 30, 2017,
future minimum lease payments under the capital lease obligation are as follows:
Fiscal Year Ending June 30:
|
|
Amount
|
|
2018
|
|
$
|
10,250
|
|
2019
|
|
|
10,250
|
|
2020
|
|
|
10,250
|
|
2021
|
|
|
5,126
|
|
Total minimum payments
|
|
|
35,876
|
|
Less: amount representing interest
|
|
|
3,921
|
|
Present value of minimum lease payments
|
|
|
31,955
|
|
Less: current portion
|
|
|
8,391
|
|
|
|
$
|
23,564
|
|
The net book value of assets held under capital leases is $30,780
at June 30, 2017.
(c)
|
Operating Lease Commitments
|
The Company’s operating leases for its
office space and equipment expired at various dates during fiscal year 2017 and the Company is continuing those rents on a month
to month tenant at will basis. Rent expense on operating leases, excluding the related party rent described above, was $54,912
and $52,168 for the years ended June 30, 2017 and 2016, respectively.
Stock-based compensation costs recognized during
the year ended June 30, 2017 and 2016 amounted to $201,612 and $241,388 respectively, and were included in the accompanying consolidated
statements of operations in: selling, general and administrative expenses (2017 — $134,984; 2016 — $123,370), cost
of goods sold (2017 — $34,676; 2016 — $60,680), and research and development expenses, net (2017 — $31,952; 2016
— $57,338). No compensation has been capitalized because such amounts would have been immaterial. There was no net income
tax benefit recognized related to such compensation for the years ended June 30, 2017 or 2016, as the Company is currently in a
loss position. There were 15,000 stock options granted during the year ended June 30, 2017 and 160,000 stock options granted during
the year ended June 30, 2016.
As of June 30, 2017, the unrecognized compensation
costs related to options vesting in the future is $0. The Company uses the Black-Scholes option-pricing model as the most appropriate
method for determining the estimated fair value for the stock awards. The Black-Scholes method of valuation requires several assumptions:
(1) the expected term of the stock award; (2) the expected future stock volatility over the expected term; and (3) risk-free interest
rate. The expected term represents the expected period of time the Company believes the options will be outstanding based on historical
information. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common
stock and the risk-free interest rate is based on the U.S. Zero-Bond rate. The Company utilizes a forfeiture rate based on an analysis
of the Company’s actual experience. The fair value of options at date of grant was estimated with the following assumptions
for options granted in fiscal 2017:
|
|
Year Ended
|
|
|
|
June 30, 2017
|
|
Assumptions:
|
|
|
|
|
Option life
|
|
|
5.3 years
|
|
Risk-free interest rate
|
|
|
1.01%
|
|
Stock volatility
|
|
|
175%
|
|
Dividend yield
|
|
|
0
|
|
Weighted average fair value of grants
|
|
$
|
0.38
|
|
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, 2017: The Precision Optics Corporation, Inc. 2011 Equity Incentive Plan (the “2011 Plan”); the Precision Optics
Corporation, Inc. 2006 Equity Incentive Plan (the “2006 Plan”), and the Precision Optics Corporation, Inc. Amended
and Restated 1997 Incentive Plan (the “1997 Plan”). Vesting periods under the 2011 Plan, the 2006 Plan, and the 1997
Plan are at the discretion of the Board of Directors and typically average three to five years. Options under these Plans are granted
at fair market value on the date of grant and typically have a term of ten years from the date of grant.
The 2011 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.
On April 16, 2015, the Board of Directors approved an amendment to the 2011 Equity Incentive Plan which increased the maximum number
of shares of the Company’s common stock that may be awarded under the Plan from 325,000 to 1,825,000, an increase of 1,500,000
shares. In connection therewith, on April 20, 2015, the Company filed a registration statement on Form S-8 to register the 1,500,000
shares of the Company’s common stock. At June 30, 2017, a total of 954,602 stock options are outstanding and 870,398 shares
of common stock were available for future grants under the 2011 Plan.
The 2006 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 139,898 shares of common stock, including shares rolled forward from the 1997 Plan, have been reserved for issuance
under the 2006 Plan. At June 30, 2017, a total of 123,798 stock options are outstanding, 23,100 stock options have been cancelled
and no shares of common stock are available for future grants under the 2006 Plan.
The 1997 Plan as amended and restated in 2006
provided eligible participants (certain employees, directors, consultants, etc.) the opportunity to receive a broad variety of
equity based and cash awards. Options granted vested and were exercisable for periods determined by the Board of Directors, not
to exceed 10 years from the date of grant. All stock options outstanding under the 1997 Plan expired during fiscal 2016, no options
are outstanding under the 1997 Plan at June 30, 2017, and no shares of common stock are available for future grants under the 1997
Plan.
The following tables summarize stock option
activity for the years ended June 30, 2017 and 2016:
|
|
Options Outstanding
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Contractual
Life
|
Outstanding at July 1, 2015
|
|
|
1,079,079
|
|
|
$
|
1.43
|
|
|
8.46 years
|
Grants
|
|
|
160,000
|
|
|
$
|
0.49
|
|
|
|
Cancellations
|
|
|
(103,079
|
)
|
|
$
|
7.03
|
|
|
|
Outstanding at June 30, 2016
|
|
|
1,136,000
|
|
|
$
|
0.79
|
|
|
8.00 years
|
Grants
|
|
|
15,000
|
|
|
$
|
0.40
|
|
|
|
Cancellations
|
|
|
(72,600
|
)
|
|
$
|
0.85
|
|
|
|
Outstanding at June 30, 2017
|
|
|
1,078,400
|
|
|
$
|
0.78
|
|
|
7.01 years
|
Information related to the stock options outstanding
as of June 30, 2017 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
|
|
$
|
0.27
|
|
|
|
40,000
|
|
|
|
4.04
|
|
|
$
|
0.27
|
|
|
|
40,000
|
|
|
$
|
0.27
|
|
$
|
0.40
|
|
|
|
15,000
|
|
|
|
9.83
|
|
|
$
|
0.40
|
|
|
|
5,000
|
|
|
$
|
0.40
|
|
$
|
0.48
|
|
|
|
60,000
|
|
|
|
8.75
|
|
|
$
|
0.48
|
|
|
|
40,000
|
|
|
$
|
0.48
|
|
$
|
0.50
|
|
|
|
100,000
|
|
|
|
8.98
|
|
|
$
|
0.50
|
|
|
|
65,000
|
|
|
$
|
0.50
|
|
$
|
0.55
|
|
|
|
29,500
|
|
|
|
4.62
|
|
|
$
|
0.55
|
|
|
|
29,500
|
|
|
$
|
0.55
|
|
$
|
0.73
|
|
|
|
539,500
|
|
|
|
7.88
|
|
|
$
|
0.73
|
|
|
|
479,500
|
|
|
$
|
0.73
|
|
$
|
0.85
|
|
|
|
9,000
|
|
|
|
5.51
|
|
|
$
|
0.85
|
|
|
|
9,000
|
|
|
$
|
0.85
|
|
$
|
0.90
|
|
|
|
9,000
|
|
|
|
6.51
|
|
|
$
|
0.90
|
|
|
|
9,000
|
|
|
$
|
0.90
|
|
$
|
0.95
|
|
|
|
65,000
|
|
|
|
7.03
|
|
|
$
|
0.95
|
|
|
|
65,000
|
|
|
$
|
0.95
|
|
$
|
1.20
|
|
|
|
207,800
|
|
|
|
4.67
|
|
|
$
|
1.20
|
|
|
|
207,800
|
|
|
$
|
1.20
|
|
$
|
1.25
|
|
|
|
1,200
|
|
|
|
1.41
|
|
|
$
|
1.25
|
|
|
|
1,200
|
|
|
$
|
1.25
|
|
$
|
1.35
|
|
|
|
1,200
|
|
|
|
2.40
|
|
|
$
|
1.35
|
|
|
|
1,200
|
|
|
$
|
1.35
|
|
$
|
7.75
|
|
|
|
1,200
|
|
|
|
0.41
|
|
|
$
|
7.75
|
|
|
|
1,200
|
|
|
$
|
7.75
|
|
$
|
0.27–7.75
|
|
|
|
1,078,400
|
|
|
|
7.01
|
|
|
$
|
0.78
|
|
|
|
953,400
|
|
|
$
|
0.81
|
|
The aggregate intrinsic value of the Company’s
“in-the-money” outstanding and exercisable options as of June 30, 2017 was $34,875 and $26,975, respectively.
As of June 30, 2017, there are warrants
outstanding for the issuance of an aggregate of 3,661,560 shares of common stock, at a weighted average exercise price of $0.75
per share. Warrants for the issuance of 2,994,893 of these shares at an average exercise price of $0.87 per share expire on September
28, 2017, and warrants for the issuance of the remaining 666,667 shares at an exercise price $0.01 per share expire on October
16, 2017.
(c)
|
Sale of Stock in October 2015
|
On October 19, 2015, the Company entered into
agreements with accredited investors for the sale and purchase of 1,044,776 shares of the Company’s common stock, $0.01 par
value at a purchase price of $0.67 per share. The Company received $700,000 in gross proceeds from the offering. The Company used
the majority of the net proceeds from this placement for general working capital purposes.
In conjunction with the placement, the Company
also entered into a registration rights agreement with the investors, and in compliance with the terms of the agreement the registration
statement was filed on January 19, 2016 and became effective on February 1, 2016.
In conjunction with the 2015 offering, certain
anti-dilution provisions of the warrants issued in conjunction with the Company’s June 25, 2008 and September 28, 2012 financing
transactions were triggered. As a result of the offering, the number of existing September 28, 2012 warrants increased from 2,189,724
to 2,293,013 and from 217,322 to 222,559, respectively, and the related exercise price decreased from $1.11 to $1.06 and from $0.85
to $0.83, respectively.
(d)
|
Sale of Stock in November 2016
|
On November 22, 2016, the Company entered into
agreements with accredited investors for the sale and purchase of 1,333,334 units with each unit consisting of one share of the
Company’s common stock, $0.01 par value and one warrant to purchase one-half of one share of the Company’s common stock,
at a purchase price of $0.60 per unit. The Company received $780,000 in gross cash proceeds from the offering and settled an outstanding
accounts payable balance with a consultant in the amount of $20,000 by issuing units. The Company is using the net proceeds from
this placement for general working capital purposes.
The warrants issued in this offering will vest
on October 2, 2017 and expire on October 16, 2017. The warrant exercise price is variable and depends on the Company’s achievement
of certain performance criteria. The warrant exercise price was agreed to be $0.40 per share if the Company achieved both of the
revenue and income performance criteria as defined, the exercise price would be $0.20 per share if the Company achieves one of
the performance criteria, and the exercise price would be $0.01 if the Company did not achieve either of the performance criteria.
Since the Company did not achieve either of the criteria, the exercise price of the warrants is $0.01.
In conjunction with the offering, the Company
also entered into a registration rights agreement with the investors, whereby the Company was obligated to file a registration
statement with the Securities Exchange Commission on or before 90 calendar days after November 22, 2016 to register the resale
by the investors of the 1,333,334 shares and warrant shares purchased in the offering. The registration statement was filed with
the Securities and Exchange Commission on February 3, 2017 and became effective on March 2, 2017.
In conjunction with the 2016 offering, certain
anti-dilution provisions of the warrants issued in conjunction with the Company’s September 28, 2012 financing transaction
were triggered. As a result of the offering, the number of existing September 28, 2012 warrants increased from 2,293,013 to 2,558,519
and from 222,559 to 249,627, respectively, and the related exercise price decreased from $1.06 to $0.95 and from $0.83 to $0.74,
respectively.
The Company has identified its federal tax
return and its state tax return in Massachusetts as “major” tax jurisdictions. The periods subject to examination for
its federal and state income tax returns are the years ended in 2014 and thereafter. The Company believes its income tax filing
positions and deductions will be sustained on audit and it does not anticipate any adjustments that would result in a material
change to its financial position. Therefore, no liabilities for uncertain income tax positions have been recorded.
The provision for income taxes in the accompanying
consolidated statements of operations consists of the minimum statutory state income tax liability of $912 for the years ended
June 30, 2017 and 2016.
A reconciliation of the federal statutory rate
to the Company’s effective tax rate for the fiscal years ended June 30, 2017 and 2016 is as follows:
|
|
2017
|
|
|
2016
|
|
Income tax expense (benefit) at federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
Increase (decrease) in tax resulting from:
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
|
|
(5.4
|
)
|
|
|
(6.3
|
)
|
Change in valuation allowance
|
|
|
30.9
|
|
|
|
30.6
|
|
Stock based compensation
|
|
|
8.0
|
|
|
|
9.3
|
|
Nondeductible items
|
|
|
0.2
|
|
|
|
0.4
|
|
Prior-year tax adjustments
|
|
|
0.2
|
|
|
|
0.8
|
|
Other
|
|
|
–
|
|
|
|
(0.9
|
)
|
Effective tax rate
|
|
|
(0.1
|
)%
|
|
|
(0.1
|
)%
|
The components of deferred tax assets and liabilities
at June 30, 2017 and 2016 are approximately as follows:
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
3,716,000
|
|
|
$
|
3,396,000
|
|
Tax credit carry forwards
|
|
|
404,000
|
|
|
|
439,000
|
|
Reserves and accruals not yet deducted for tax purposes
|
|
|
383,000
|
|
|
|
362,000
|
|
Total deferred tax assets
|
|
|
4,503,000
|
|
|
|
4,197,000
|
|
Valuation allowance
|
|
|
(4,503,000
|
)
|
|
|
(4,197,000
|
)
|
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 increased in fiscal 2017, as compared to the prior year, by approximately $311,000.
At June 30, 2017, the Company had federal and
state net operating loss carry forwards of approximately $9,220,000 and $3,520,000, respectively, which will, if not used, expire
at various dates from 2017 through 2036. In addition, the Company had net operating loss carry forwards from its Hong Kong operations
of approximately $2,252,000, which carry forward indefinitely.
The Company has a defined contribution 401(k)
profit sharing plan. Employer profit sharing and matching contributions to the plan are discretionary. No employer profit sharing
or matching contributions were made to the plan in fiscal years 2017 and 2016.
In fiscal year 2017, the Company sold equipment
that was previously written off for proceeds totaling $1,515 and recorded a gain of $1,515. In fiscal year 2016, the Company
sold equipment that was previously written off for proceeds totaling $32,707 and recorded a gain of $32,707. These gains are included
within operating expenses in the accompanying consolidated statements of operations.
Other income in the amount of $22,050 for fiscal
year 2016 represents non-cash gains on the settlement of liabilities for services rendered to the Company, by issuing 105,000 shares
in February 2016. The non-cash gain is the difference between the recorded amount of the liabilities and the value of the stock
when issued.
On August 22, 2017, the Company entered into
agreements with accredited investors for the sale and purchase of 466,668 shares of its common stock, $0.01 par value at a purchase
price of $0.45 per share. The Company received $210,000 in gross proceeds from the offering. The Company intends to use the net
proceeds from this placement for general working capital purposes.
Concurrently with the placement, the Company
entered into an agreement with an investor for the sale of 88,888 unregistered shares of our common stock for services provided
to the Company at a price of $0.45 per share.
In connection with the placement, the Company
also entered into a registration rights agreement with the investors, whereby the Company is obligated to file a registration statement
with the Securities Exchange Commission on or before 90 calendar days after August 22, 2017 to register the resale by the investors
of 555,556 shares of our common stock purchased in the placement.
In conjunction with the 2017 offering, certain
anti-dilution provisions of the warrants issued in conjunction with our September 28, 2012 financing transaction were triggered.
As a result of the offering, the number of existing September 28, 2012 warrants increased from 2,558,519 to 2,731,003 and 249,627
to 263,891, respectively, and the related exercise price decreased from $0.95 to $0.89 and from $0.74 to $0.70, respectively.