Notes to Consolidated Financial Statements
(1)
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
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.
(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 have been 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 $402,738 and $118,405 at June 30, 2018 and 2017, 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 net realizable value and include material, labor and manufacturing overhead. The components of inventories
at June 30, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Raw material
|
|
$
|
500,908
|
|
|
$
|
501,346
|
|
Work-in-progress
|
|
|
434,536
|
|
|
|
388,614
|
|
Finished goods
|
|
|
208,624
|
|
|
|
165,487
|
|
|
|
$
|
1,144,068
|
|
|
$
|
1,055,447
|
|
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 $27,216 and $33,660
for the years ended June 30, 2018 and 2017, 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,
2018, the Company’s four largest customer account receivable balances were 22%, 16%, 13%, and 13%, respectively, of total
accounts receivable. At June 30, 2017, receivables from the Company’s five largest customers were 16%, 15%, 12%, 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, 2018 and 2017.
The allowance for doubtful accounts receivable
was increased from $5,000 at June 30, 2017 to $232,500 at June 30, 2018 in order to specifically reserve for $227,500 owed by one
customer. Other than this doubtful account receivable, 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 the allowance for doubtful accounts, which is established based upon review of specific account
balances and historical experience, is adequate at June 30, 2018.
Revenues from the Company’s largest
customers, as a percentage of total revenues, were as follows:
|
|
2018
|
|
|
2017
|
|
Customer A
|
|
|
16%
|
|
|
|
5%
|
|
Customer B
|
|
|
14
|
|
|
|
10
|
|
Customer C
|
|
|
8
|
|
|
|
10
|
|
Customer D
|
|
|
4
|
|
|
|
11
|
|
All Others
|
|
|
58
|
|
|
|
64
|
|
|
|
|
100%
|
|
|
|
100%
|
|
No other customer accounted for more than
10% of the Company’s revenues in fiscal years 2018 and 2017.
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, 2018 and 2017, 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, 2018 and 2017:
|
|
Year Ended June 30
|
|
|
|
2018
|
|
|
2017
|
|
Net Loss– Basic and Diluted
|
|
$
|
(351,390
|
)
|
|
$
|
(1,006,457
|
)
|
|
|
|
|
|
|
|
|
|
Basic Weighted Average Shares Outstanding
|
|
|
9,826,151
|
|
|
|
8,343,235
|
|
Potentially Dilutive Securities
|
|
|
–
|
|
|
|
–
|
|
Diluted Weighted Average Shares Outstanding
|
|
|
9,826,151
|
|
|
|
8,343,235
|
|
|
|
|
|
|
|
|
|
|
Loss Per Share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.12
|
)
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.12
|
)
|
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 4,530,513 and 4,553,213 for the years ended June 30, 2018 and 2017, 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, 2018 and 2017 amounted to $52,341
and $201,612, 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, 2018 and 2017, 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, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Balance at beginning of period
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
Provision for warranty claims
|
|
|
6,109
|
|
|
|
14,842
|
|
Warranty claims incurred
|
|
|
(6,109
|
)
|
|
|
(14,842
|
)
|
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, 2018
and 2017.
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, 2018 and 2017 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 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 2014-09 is effective for the Company beginning in its fiscal year 2019, 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 will expand its revenue related disclosures as a result of adopting the new standard, which will primarily include
revenue disaggregation. The Company has adopted ASU 2014-09 for the Company’s fiscal year beginning July 1, 2018, using the
modified retrospective approach. The Company believes ASU 2014-09 will not have a significant impact on the consolidated financial
statements.
In February 2016, the FASB issued
ASU 2016-02,
Leases (Topic 842)
. This guidance establishes a right-of-use (“ROU”) model that requires a
lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.
Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in
the statement of operations and comprehensive income. The new standard is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for
lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements, with certain practical expedients available. The Company is currently assessing the
potential impact of this ASU on its consolidated financial statements and footnote disclosures.
In August 2016, the FASB issued ASU
2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. This ASU is
effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years with early
adoption permitted. This guidance provides specific classification of how certain cash receipts and cash payments are
presented in the statement of cash flows. The ASU should be applied using a retrospective transition method. If it is
impracticable to apply the amendments retrospectively for some of the cash flow issues, the amendments for those issues
should then be applied prospectively at the earliest date practicable. The Company is currently assessing the potential
impact of this ASU on its presentation of the consolidated statement of cash flows.
(a)
|
Related Party Transactions
|
Transactions with Officers and Directors
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 2018 and 2017, and is included in the Company’s accompanying consolidated statements
of operations. Unpaid rent due to this related party in the amounts of $117,000 and $126,000 at June 30, 2018 and 2017, respectively,
is include in accounts payable on the balance sheets.
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 were
exercisable beginning on October 2, 2017 and expired on October 16, 2017. All warrants for 666,667 shares were exercised before
October 16, 2017, by payment to the Company of $0.01 per share or an aggregate purchase price of $6,667.
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 and exercised warrants at 0.01 per share for an additional 78,333 shares.
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 shares, respectively,
at aggregate purchase prices of $550,000 and $75,000, respectively. Dolphin Offshore Partners L.P. and Hershey Strategic Capital,
L.P. also exercised warrants pursuant to the November 2016 placement described above for and additional 458,334 and 62,500 shares,
respectively, at aggregate purchase prices of $4,583 and $625, respectively. At the time of these transactions, both Dolphin Offshore
Partners L.P. and Hershey Strategic Capital, L.P. were beneficial owners 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, 2018,
future minimum lease payments under the capital lease obligation are as follows:
Fiscal Year Ending June 30:
|
|
Amount
|
|
2019
|
|
$
|
10,250
|
|
2020
|
|
|
10,250
|
|
2021
|
|
|
5,126
|
|
Total minimum payments
|
|
|
25,626
|
|
Less: amount representing interest
|
|
|
2,063
|
|
Present value of minimum lease payments
|
|
|
23,563
|
|
Less: current portion
|
|
|
8,962
|
|
|
|
$
|
14,601
|
|
The net book value of assets held under capital leases is $21,986
at June 30, 2018.
(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 $58,100
and $54,912 for the years ended June 30, 2018 and 2017, respectively.
The following table summarizes stock-based
compensation expense for the years ended June 30:
|
|
2018
|
|
|
2017
|
|
Cost of Goods Sold
|
|
$
|
8,669
|
|
|
$
|
34,676
|
|
Research and Development Expenses
|
|
|
15,423
|
|
|
|
31,952
|
|
Selling, General and Administrative Expenses
|
|
|
28,249
|
|
|
|
134,984
|
|
Stock Based Compensation Expense
|
|
$
|
52,341
|
|
|
$
|
201,612
|
|
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, 2018 or 2017, as the Company is currently in a loss position. There were 40,000 stock options granted during the
year ended June 30, 2018 and 15,000 stock options granted during the year ended June 30, 2017.
As of June 30, 2018, 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 year 2018:
|
|
Year Ended
|
|
|
|
June 30, 2018
|
|
Assumptions:
|
|
|
|
|
Option life
|
|
|
5.3 years
|
|
Risk-free interest rate
|
|
|
1.01%
|
|
Stock volatility
|
|
|
171%
|
|
Dividend yield
|
|
|
0
|
|
Weighted average fair value of grants
|
|
|
$ 0.58
|
|
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, 2018: The Precision Optics Corporation, Inc. 2011 Equity Incentive Plan (the “2011 Plan”) and the Precision
Optics Corporation, Inc. 2006 Equity Incentive Plan (the “2006 Plan”). Vesting periods under the 2011 Plan and the
2006 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 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, 2018, a total of 933,102 stock options are outstanding and 789,898 shares
of common stock were available for future grants under the 2011 Plan.
The 2006 Plan 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 122,598 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, and no shares of common stock are available
for future grants under the 2006 Plan.
The following tables summarize stock option
activity for the years ended June 30, 2018 and 2017:
|
|
Options Outstanding
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Contractual
Life
|
Outstanding at July 1, 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
|
Grants
|
|
|
40,000
|
|
|
$
|
0.61
|
|
|
|
Cancellations
|
|
|
(62,700
|
)
|
|
$
|
0.99
|
|
|
|
Outstanding at June 30, 2018
|
|
|
1,055,700
|
|
|
$
|
0.76
|
|
|
6.13 years
|
Information related to the stock options
outstanding as of June 30, 2018 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
|
|
|
|
3.04
|
|
|
$
|
0.27
|
|
|
|
40,000
|
|
|
$
|
0.27
|
|
$
|
0.40
|
|
|
|
15,000
|
|
|
|
8.83
|
|
|
$
|
0.40
|
|
|
|
10,000
|
|
|
$
|
0.40
|
|
$
|
0.48
|
|
|
|
60,000
|
|
|
|
7.75
|
|
|
$
|
0.48
|
|
|
|
60,000
|
|
|
$
|
0.48
|
|
$
|
0.50
|
|
|
|
100,000
|
|
|
|
7.98
|
|
|
$
|
0.50
|
|
|
|
100,000
|
|
|
$
|
0.50
|
|
$
|
0.55
|
|
|
|
44,500
|
|
|
|
5.69
|
|
|
$
|
0.55
|
|
|
|
34,500
|
|
|
$
|
0.55
|
|
$
|
0.64
|
|
|
|
25,000
|
|
|
|
9.37
|
|
|
$
|
0.64
|
|
|
|
15,000
|
|
|
$
|
0.64
|
|
$
|
0.73
|
|
|
|
513,000
|
|
|
|
6.88
|
|
|
$
|
0.73
|
|
|
|
493,000
|
|
|
$
|
0.73
|
|
$
|
0.85
|
|
|
|
9,000
|
|
|
|
4.51
|
|
|
$
|
0.85
|
|
|
|
9,000
|
|
|
$
|
0.85
|
|
$
|
0.90
|
|
|
|
9,000
|
|
|
|
5.51
|
|
|
$
|
0.90
|
|
|
|
9,000
|
|
|
$
|
0.90
|
|
$
|
0.95
|
|
|
|
30,000
|
|
|
|
6.03
|
|
|
$
|
0.95
|
|
|
|
30,000
|
|
|
$
|
0.95
|
|
$
|
1.20
|
|
|
|
207,800
|
|
|
|
3.67
|
|
|
$
|
1.20
|
|
|
|
207,800
|
|
|
$
|
1.20
|
|
$
|
1.25
|
|
|
|
1,200
|
|
|
|
0.41
|
|
|
$
|
1.25
|
|
|
|
1,200
|
|
|
$
|
1.25
|
|
$
|
1.35
|
|
|
|
1,200
|
|
|
|
1.40
|
|
|
$
|
1.35
|
|
|
|
1,200
|
|
|
$
|
1.35
|
|
$
|
0.27–1.35
|
|
|
|
1,055,700
|
|
|
|
6.13
|
|
|
$
|
0.76
|
|
|
|
1,010,700
|
|
|
$
|
0.77
|
|
The aggregate intrinsic value of the Company’s
“in-the-money” outstanding and exercisable options as of June 30, 2018 was $18,350 and $17,700, respectively.
As of June 30, 2017, there were 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 expired on September 28, 2017, and warrants for the issuance
of the remaining 666,667 shares were exercised on or before October 16, 2017, by payment to the Company for the aggregate purchase
price of $6,667. There are no warrants for the purchase of the Company’s stock outstanding as of June 30, 2018.
(c)
|
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 warrants for 666,667 shares
were all exercised in October 2017 as described in Footnote 3.(b) Warrants. The Company used the net proceeds from this placement
for general working capital purposes.
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.
(d)
|
Sale of Stock in August 2017
|
On August 22, 2017, the Company entered
into agreements with accredited investors for the sale and purchase of 466,668 unregistered shares of its common stock, $0.01 par
value at a purchase price of $0.45 per share. The Company received $210,001 in gross proceeds from the offering. The Company is
using 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 its 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 was 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. The registration statement was filed with the Securities
and Exchange Commission on November 20, 2017 and became effective on December 13, 2017.
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 2017 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, 2018 and 2017.
A reconciliation of the federal statutory
rate to the Company’s effective tax rate for the fiscal years ended June 30, 2018 and 2017 is as follows:
|
|
2018
|
|
|
2017
|
|
Income tax expense (benefit) at federal statutory rate
|
|
|
(21.0)%
|
|
|
|
(34.0)%
|
|
Increase (decrease) in tax resulting from:
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
|
|
(6.3)
|
|
|
|
(5.4)
|
|
Change in valuation allowance
|
|
|
20.4
|
|
|
|
30.9
|
|
Stock based compensation
|
|
|
4.5
|
|
|
|
8.0
|
|
Nondeductible items
|
|
|
2.3
|
|
|
|
0.2
|
|
Prior-year tax adjustments
|
|
|
–
|
|
|
|
0.2
|
|
Effective tax rate
|
|
|
(0.1)%
|
|
|
|
(0.1)%
|
|
The components of deferred tax assets and
liabilities at June 30, 2018 and 2017 are approximately as follows:
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
2,601,000
|
|
|
$
|
3,716,000
|
|
Tax credit carry forwards
|
|
|
377,000
|
|
|
|
404,000
|
|
Reserves and accruals not yet deducted for tax purposes
|
|
|
360,000
|
|
|
|
383,000
|
|
Total deferred tax assets
|
|
|
3,338,000
|
|
|
|
4,503,000
|
|
Valuation allowance
|
|
|
(3,338,000
|
)
|
|
|
(4,503,000
|
)
|
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 2018, as compared to the prior year, by approximately $1,165,000, net of the effect of
the reduction in the Federal corporate income tax rate to 21% pursuant to the Tax Cuts and Jobs Act effective December 22, 2017
for tax years beginning after 2017.
At June 30, 2018, the Company had federal
and state net operating loss carry forwards of approximately $5,516,000 and $2,915,000, respectively, which will, if not used,
expire at various dates from 2019 through 2037. 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 2018 and 2017.
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. The gain is included within
operating expenses in the accompanying consolidated statements of operations.