PRECISION OPTICS CORPORATION, INC. (Form: 10-K, Received: 09/26/2019 16:46:17)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 001-10647

PRECISION OPTICS CORPORATION, INC.

(Exact name of registrant as specified in its charter)

Massachusetts	04-2795294
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

22 East Broadway

Gardner, Massachusetts 01440

(Address of principal executive offices) (Zip Code)

(978) 630-1800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class		Trading symbol(s)		Name of each exchange on which registered
Common stock, $0.01 par value		PEYE		OTCQB

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ☐ Yes ☒ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act. ☐ Yes ☒ No

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on December 31, 2018 was approximately $11,694,630 based on a total of 8,662,689 shares of the registrant’s common stock held by non-affiliates on December 31, 2018, at the closing price of $1.35 per share as reported on the OTCQB market on December 31, 2018.

The number of shares of outstanding common stock of the registrant as of September 20, 2019 was 12,843,639.

Documents incorporated by reference: None.

PRECISION OPTICS CORPORATION, INC.

FORM 10-K

TABLE OF CONTENTS

			PAGE
PART I
	Item 1.	Business	1
	Item 1A.	Risk Factors	8
	Item 2.	Properties	15
	Item 3.	Legal Proceedings	15
	Item 4.	Mine Safety Disclosures (Not applicable.)	15

PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	16
	Item 6.	Selected Financial Data	18
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	22
	Item 8.	Financial Statements and Supplementary Data	23
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	24
	Item 9A.	Controls and Procedures	24
	Item 9B.	Other Information	25

PART III
	Item 10.	Directors, Executive Officers and Corporate Governance	26
	Item 11.	Executive Compensation	29
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	34
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	39
	Item 14.	Principal Accounting Fees and Services	40

PART IV
	Item 15.	Exhibits, Financial Statement Schedules	41
	Item 16.	Form 10-K Summary	43
		Signatures	44

PART I

This Annual Report contains forward-looking statements as defined under the federal securities laws. All statements other than statements of historical facts included in this Annual Report on Form 10-K regarding our financial performance, business strategy and plans and objectives of management for future operations and any other future events are forward-looking statements and based on our beliefs and assumptions. Words such as “may,” “will,” “expect,” “might,” “believe,” “anticipate,” “intend,” “could,” “estimate,” “project,” “plan,” and other similar words are one way to identify such forward-looking statements. Actual results could vary materially from these forward-looking statements. Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties, and assumptions including, without limitation, those risks and uncertainties contained in the Risk Factors section of this Annual Report on Form 10-K and our other filings made with the SEC. Although we believe that our expectations are reasonable, we can give no assurance that such expectations will prove to be correct. Based upon changing conditions, any one or more of these events described herein as anticipated, believed, estimated, expected or intended may not occur. All prior and subsequent written and oral forward-looking statements attributable to our Company or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement. We do not intend to update any of the forward-looking statements after the date of this Annual Report to conform these statements to actual results or to changes in our expectations, except as required by law.

ITEM 1.

BUSINESS.

Overview

We have been developing and manufacturing advanced optical instruments since 1982. Today, the majority of our business is the design and manufacture of high-quality medical devices. Approximately 8% of our revenue in fiscal year 2019 is from the design, manufacture and resale of optical products for military and defense and 13% for other industrial, non-medical products. Our medical instrumentation line includes traditional endoscopes and endocouplers as well as other custom imaging and illumination products for use in minimally invasive surgical procedures. Much of our recent development efforts have been targeted at the development of next generation endoscopes. Over the last ten years, we have funded internal research and development programs to develop next generation capabilities for designing and manufacturing 3D endoscopes and very small Microprecision™ lenses, anticipating future requirements as the surgical community continues to demand smaller and more enhanced imaging systems for minimally invasive surgery. Our unique proprietary technology in these areas, combined with recent developments in the areas of 3D displays and millimeter sized CMOS image sensors, has allowed us to begin commercialization of these technologies. Thus, approximately 30-40% of our revenues in each of the fiscal years 2017, 2018 and 2019 were derived from engineering and design services we performed for our customers to incorporate our technologies and capabilities into their medical device products. We believe that new products based on these technologies provide enhanced imaging for existing surgical procedures which help to enable development of many new medical device products and related medical procedures. Approximately 50-70% of our total revenues in fiscal years 2017, 2018 and 2019 were derived from the assembly and manufacture of endoscopic medical devises, sub-assemblies and optical components ordered by our customers and usually developed from the engineering and design services we perform for them. We expect sales revenue increases to come from the orders from our customers to manufacture the products we help them engineer and design.

Effective June 1, 2019 we acquired the operating assets of Ross Optical Industries, Inc. of El Paso, Texas, which we began operating as a division of our Company beginning on that date. The accompanying financial statements include the results of operations of the Ross Optical division for June 2019 and the assets and liabilities of the division as of June 30, 2019. The acquisition of the assets of Ross Optical Industries effective June 1, 2019 expands our optics components and assemblies business. All products supplied by Ross Optical include a custom or catalog optic, which is sourced through Ross Optical’s extensive domestic and worldwide network of optical fabrication companies. Most systems make use of optical lenses, prisms, mirrors and windows and range from individual optical components to complex mechano-optical assemblies. Products often include thin film optical coatings that are applied using the in-house coating department. Approximately 80% or more of Ross Optical revenues are to customers in the United States with the balance principally to Canada and Western Europe. Ross Optical’s sales are mostly resale of specialized optical components with the remainder being assemblies. Ross Optical does not perform revenue generating engineering services or internal research and development.

The Ross Optical division sales are primarily optical components and assemblies for industrial applications in addition to medical and military uses. By combining the unique capabilities of our company with the Ross Optical division we believe there are opportunities for expanded sales of each division products and services throughout the combined customer base. Additionally, we believe Ross’ expanded worldwide vendor relationships will benefit our traditional efforts to source materials at competitive prices for our development projects and manufacturing activities.

History

We incorporated in Massachusetts in December 1982 and have been publicly-owned since November 1990. References to our Company contained herein include our two wholly-owned subsidiaries, Precise Medical, Inc. and Wood’s Precision Optics Corporation, Limited, except where the context otherwise requires. Effective June 1, 2019 we acquired the operating assets of Ross Optical Industries, Inc. of El Paso, Texas, which we began operating as a division of our Company beginning on that date. The accompanying financial statements include the results of operations of the Ross division for June 2019 and its assets and liabilities as of June 30, 2019.

Our websites are www.poci.com and www.rossoptical.com. Information contained on our websites does not constitute part of this report.

Principal Products and Services

Our Current Core Business: Since 1982, we have manufactured medical products such as endoscopes and endocouplers. We have developed and sold endoscopes incorporating various optical technologies including our proprietary Lenslock™ technology, for use in a variety of minimally invasive surgical and diagnostic procedures. Today, we produce endoscopes for various applications, which are CE marked and therefore certified for sale throughout the European Economic Area. Since 1985, we have developed, manufactured and sold a proprietary product line of endocouplers. We also design and manufacture custom optical medical devices to satisfy our customers’ specific requirements. In addition to medical devices, we also manufacture and sell components and assemblies specially designed for industrial and military use.

The acquisition of the assets of Ross Optical Industries effective June 1, 2019 expands our optics components and assemblies business. All products supplied by Ross Optical include a custom or catalog optic, which is sourced through Ross Optical’s extensive domestic and worldwide network of optical fabrication companies. Most systems make use of optical lenses, prisms, mirrors and windows and range from individual optical components to complex mechano-optical assemblies. Products often include thin film optical coatings that are applied by the company’s in-house coating department.

Microprecision™ Lenses and Micro Medical Cameras: While the size of endoscopes has gradually decreased over time, the widespread use of very small endoscopes, with diameters of one millimeter or smaller, has been limited, in part, we believe, by the inability of traditional lens fabrication methods to support these smaller sizes with good image quality and acceptable manufacturing costs. We believe our Microprecision™ optics technology provides a solution to this problem. Combined with recent advances by other companies in complementary metal-oxide-semiconductor, or CMOS, image sensor fabrication techniques, our Microprecision™ lenses and proprietary manufacturing techniques enable the manufacture of micro medical cameras at low prices and with sizes on the order of one millimeter or less, characteristics that make them well suited to medical applications.

In June 2015, we announced a partnership with OmniVision Technologies, Inc., and Fujikura, Ltd., in which we jointly developed a CMOS based camera module with a diameter of 1.6 mm and 400 x 400 pixel resolution, representing superior image quality for camera modules of its size. In June 2017 OmniVision Technologies, Inc. announced our collaboration with them in the development of an even smaller, high-quality optical solution based on a newly developed OmniVision image sensor integrated with our Microprecsion™ lenses. This solution enables even smaller diameter endoscopes for use in medical procedures.

We are currently engaged in development projects with numerous customers to design and produce even smaller CMOS based camera modules together with customized illumination using various technologies to match the needs of the medical device endoscopes. We are also currently designing disposable versions of our camera modules and assemblies designed for single-use and reduced risk of contamination from repeated use. We believe these on-going improvements are significant to the continued evolution and acceptance of our Microprecision™ technology platform.

We have been engaged by various customers for an increasing amount of development work relating to the design of endoscopes and camera assemblies that utilize our Microprecision™ technology. We previously received two production orders exceeding $M each from two customers for their custom designed products, and follow-on orders for equal or larger amounts from each of these two customers. We also believe we will receive additional productions orders from other customers currently in our engineering and design pipeline.

3D Endoscopes: Our 3D endoscopes provide next generation optical imaging for minimally invasive surgical procedures that utilize hand-held rigid endoscopes by using the brain’s natural ability to perceive depth, which is the third dimension, by viewing one’s environment through two eyes. Utilizing our proprietary technology to provide independent images to right and left eyes, surgeons can view the operative field with 3D perception.

Competition and Markets

We sell our products in a highly competitive market and we compete for business with both foreign and domestic manufacturers. Many of our current competitors are larger than us and have substantially greater resources than we do. In addition, there is an ongoing risk that other domestic or foreign companies who do not currently service or manufacture products for our target markets, some with greater experience in the optics industry and greater financial resources than we have, may seek to produce products or services that compete directly with ours.

While our resources are substantially more limited than those of some of our competitors, we believe that we can compete successfully in this market on the basis of product quality, price, delivery and innovation. Our success will depend, in part, on our ability to maintain a technological advantage over our competitors. To this end, we intend to continue to aggressively support and augment our internal engineering, research and development resources and to aggressively pursue patent protection for existing and new technology. We believe that our unique technical capabilities in the areas of Microprecision™ optics, micro medical cameras and illumination, as well as 3D endoscopes currently represent competitive advantages for us in the minimally invasive surgical device market.

The competitive advantage of our Ross Optical division is its ability to provide difficult-to-find optics, and, increasingly, to provide a broader range of services based on its ability to source optics worldwide, but augmented by its ability to provide, thin-film coatings and assembly.

Market Opportunities

Microprecision™ Lenses and Micro Medical Cameras: While other approaches exist for the manufacture of camera lenses, we design custom camera module assemblies with the combined objectives of low cost, small size, range of optical specifications and high image quality desired by our customer’s device specifications. By enabling the production of millimeter sized and smaller cameras with low manufacturing costs, we believe our Microprecision™ technology opens the possibility to replace existing re-sterilizable endoscopes with a single-use alternative. Also, the small size of our Microprecision™ lenses and micro medical cameras combined with our proprietary illumination techniques can provide visualization for existing procedures that are currently performed blind or with sub-optimal imaging, and we believe can facilitate the development of new surgical procedures that are currently impractical without sub-millimeter visualization instrumentation.

3D Endoscopes and Robotic Surgery Systems: 3D endoscopes have been used for many years as part of robotic surgery systems partly because the market price of robotic surgery systems is high enough to support the cost of a high quality custom 3D display. Competition amongst medical device companies, many of which are our customers for other products, in the area of 3D robotic surgery systems is increasing, and various companies are now pursuing less expensive, procedure specific robotic systems. We believe our experience and expertise in 3D endoscopes for medical applications could be a benefit to various companies in this area that could provide us with new product development and manufacturing opportunities.

Sales and Marketing

We market our engineering design and manufacturing services relating to 3D endoscopes, Microprecision™ optical components and micro medical cameras by leveraging our existing relationships with major medical device companies – many of whom are current customers. We intend to make our existing and future technologies available to our customers for use in their current and newly developed minimally invasive surgical products and to eventually develop and market our own proprietary products, which incorporate these new technologies. In addition to direct sales channels through our existing customer relationships and referrals, we also develop new sales opportunities through our website, email mailings and attendance at market specific tradeshows.

International Business

We have had negligible direct export sales to date. However, our medical products have received the CE mark certification, which permits sales into the European Economic Area and which benefits our customers as they market their products manufactured by us or containing our sub-assemblies into markets outside the United States. In the future, we may establish or use additional production facilities overseas to produce key components for our business, such as lenses. From the 1990s through approximately 2014, we maintained a physical presence in Asia to support business and quality control activities throughout the region as needed. We continue to acquire various optical components from overseas to meet the needs of custom device designs. We believe that the availability of specialized components and cost savings from various overseas production resources is essential to our ability to deliver complex and unique device designs and to compete on a price basis in the medical products area particularly and to our profitability generally.

The addition of Ross Optical adds an expanded network of overseas suppliers of various types and sizes of optical components and assemblies that will enhance our ability to meet the material demands of our customers’ unique optical and medical device designs. In 2018, 17% of Ross Optical’s sales were to customers outside of the United States, with the majority of international sales going to Europe and Canada.

Research and Development

We believe that our future success depends, to a large degree, on our ability to continue to conceive and develop new optical products and technologies to enhance the performance characteristics and methods of manufacture of existing and new products. Although development work on behalf of customers is almost entirely performed under revenue generating contracts and customer purchase orders, research and development expenses are incurred on our own proprietary products and technology, such as Microprecision™ optics, micro medical cameras and 3D endoscopes. Accordingly, we treat engineering expenses not consumed in customer contracted development and our investment of funds and resources in internal product and intellectual property development as research and development expense in the accompanying statement of operations. For the years ended June 30, 2019 and 2018, research and development expenses were $505,300 and $456,377, respectively.

Raw Materials and Principal Suppliers

A key raw material component for our products is precision grade optical glass, which we obtain from a few suppliers, principally SCHOTT North America, Inc. and Ohara Corporation.

We obtain CMOS sensors used in our development of endoscope products for our customers from various suppliers such as OmniVision Technologies, Inc. We believe that while the number of sources of supply is limited for the CMOS sensors with the specifications used in medical device endoscopes we develop, the manufacturing capacities of those suppliers is adequate to meet our demand in the next twelve months. Likewise, a limited number of suppliers provide CMOS electronic cabling services for the smallest sensors, such as FujiKura, Ltd. and High Speed Interconnects. However, we believe our demand for these services is relatively small compared to these companies’ and others’ capacities for CMOS sensor electronic cabling services.

Patents and Trademarks

We rely, in part, upon patents, trade secrets and proprietary knowledge as well as personnel policies and employee confidentiality agreements concerning inventions and other creative efforts to develop and maintain our competitive position. We plan to file for patents, copyrights and trademarks in the United States and in other appropriate countries to protect our intellectual property rights to the greatest extent practicable. We currently hold rights to various United States patents, and have patent applications pending, including applications for our new generation of micro medical cameras and 3D endoscopes. Our current patent portfolio includes patents, rights to patents and patent applications that cover various aspects of our technology in the following areas:

	—	Medical devices;
	—	3-D endoscopes;
	—	Microprecision™ lenses and micro medical cameras;
	—	Military products.

The patents contained in our current patent portfolio have various expiration dates through May 2036. We are not aware of any infringements of these patents. While we believe that our pending applications relate to patentable devices or concepts, these patents may not ultimately be issued and we may not be able to successfully defend these patents or effectively limit the development of competitive products and services.

In July 2011, we entered into an asset purchase agreement with Intuitive Surgical Operations, Inc., in which we received $2.5 million in connection with the sale of certain intellectual property. Pursuant to the agreement, we agreed to assign to Intuitive Surgical all of the issued and non-expired patents and pending patent applications that we held on the date of the agreement, and in return, Intuitive Surgical agreed to grant to us a royalty-free, worldwide license to these patents in fields outside of medical robotics.

We intend to continue to innovate and extend our technological capabilities in the areas of 3-D endoscopy Microprecision™ optics, micro medical cameras, and related illumination techniques, and to aggressively pursue patent protection for such developments.

Employees

As of June 30, 2019, we had 62 employees, 59 of which were full-time employees. There were 44 employees in manufacturing, 9 in engineering/research and development, 4 in sales, and 5 in finance and administration. We are not a party to any collective bargaining agreements. We believe our relations with our employees are very good.

Customers

Revenues from our largest customers, as a percentage of total revenues, for fiscal years 2019 and 2018 were as follows:

	2019		2018
Customer A		8%		16%
Customer B		6%		14%
Customer C		18%		8%
Customer D		13%		5%
Customer E		11%		4%
All Others		44%		53%
		100%		100%

No other customer accounted for more than 10% of our revenues in fiscal years 2019 and 2018. At June 30, 2019, our largest customer account receivable balance was 12% of total accounts receivable. At June 30, 2018, our four largest customer account receivable balances were 22%, 16%, 13%, and 13%, respectively, of total accounts receivable. No other accounts accounted for more than 10% of accounts receivable at June 30, 2019 or 2018.

Environmental Matters

Our operations are subject to a variety of federal, state and local laws and regulations relating to the discharge of materials into the environment or otherwise relative to the protection of the environment. From time to time, we use a small amount of hazardous materials in our operations. We believe that we currently comply with all applicable environmental laws and regulations and intend to do our best efforts to remain in compliance.

Government Regulations

Domestic Regulation. We currently develop, manufacture and sell several medical products, the marketing of which is subject to governmental regulation in the United States. Medical devices are regulated in the United States by the Food and Drug Administration, or FDA, and, in some cases, by certain state agencies. The FDA regulates the research, testing, manufacture, safety, effectiveness, labeling, promotion and distribution of medical devices in the United States. Generally, medical devices require clearance or approval prior to commercial distribution. Additionally, certain material changes to, and changes in, intended uses of, medical devices are also subject to FDA review and clearance or approval. Non-compliance with applicable requirements can result in failure of the FDA to grant pre-market clearance or approval, withdrawal or suspension of approval, suspension of production, or the imposition of various other penalties.

We previously notified the FDA of our intent to market our endoscopes, image couplers, beamsplitters, adapters and video ophthalmoscopes, and the FDA has determined that we may market such devices, subject to the general control provisions of the Food, Drug and Cosmetic Act. We obtained this FDA permission without the need to undergo a lengthy and expensive approval process due to the FDA’s determination that such devices met the regulatory standard of being substantially equivalent to existing FDA-approved devices.

In the future, we plan to market additional medical devices that may require the FDA’s permission to market such products. We may also develop additional products or seek to sell some of our current or future medical products in a manner that requires us 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.

Our Ross Optical division currently imports, exports and manufactures optical products for the defense industry, some of which is controlled by U.S. regulations. Generally, these regulations require strict control over technical data in documented form and as embodied in products, both within Ross Optical and as part of exported shipments. In particular, Ross Optical maintains a technology control plan, is ISO certified and ITAR (International traffic in Arms Regulations) registered with the U.S. State Department and maintains a number of technology assistance agreements with overseas suppliers, that have been approved by the U.S. State Department. Non-compliance with applicable requirements can result in U.S. actions that may result in withdrawal or suspension of approvals, suspension of company imports, exports or production, or the imposition of fines or various other penalties.

Foreign Requirements. 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 and sell our products in foreign jurisdictions. The regulatory environment in the European Union member countries of the European Economic Area for medical device products differs from that in the United States. Medical devices sold in the European Economic Area must bear the Conformité Européenne, or 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 our medical products are manufactured in conformity with the CE mark requirements.

ITEM 1A.

RISK FACTORS.

RISKS RELATED TO OUR BUSINESS

In addition to the other information set forth in this annual report, you should carefully consider the following factors, which could materially affect our business, financial condition or results of operations in future periods. The risks described below are not the only risks facing our Company. The following information should be read together and in conjunction with “Forward-Looking Statements,” “Item 1. Business,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the accompanying notes thereto. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations in future periods.

We have a history of losses, we may continue to incur losses and not achieve profitability in the near term; and we may need to raise additional funds.

During the years ended June 30, 2019 and 2018, we incurred net losses of $614,871 and $351,390, respectively. Our accumulated deficit at June 30, 2019 amounted to $45,636,993. We had working capital of $2,757,161 and $481,876 as of June 30, 2019 and 2018, respectively. During the year ended June 30, 2019, net cash used in operating activities amounted to $1,031,693. We may continue incurring losses for the foreseeable future and not achieve sustained profitability in the near term. We must generate sufficient cash flow or raise additional capital to pursue our product development initiatives, and penetrate markets for the sale of our products. If required we believe that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations, strategic alliances, or other means. However, if we are unable to secure adequate additional capital when needed, we 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.

We may not realize the opportunities from the Ross Optical acquisition.

On July 1, 2019, we closed on an asset purchase agreement with Ross Optical Industries, Inc. and its shareholders to acquire substantially all of the assets of Ross Optical. The Ross Optical division sales are primarily optical components and assemblies for industrial applications in addition to medical and military uses. By combining the unique capabilities of our company with the Ross Optical division we believe there are opportunities for expanded sales of each division products and services throughout the combined customer base. Additionally, we believe Ross’ expanded worldwide vendor relationships will benefit our traditional efforts to source materials at competitive prices for our development projects and manufacturing activities. The success of the Ross Optical acquisition will continue to depend, in part, on our ability to realize the anticipated growth opportunities from integrating the acquired business with our business, including integrating its lines of products into our offering of products and services. Our success also depends on the successful integration of our and the acquired business’s operations and information and financial systems. We cannot assure you that we will be able to realize such opportunities or that our management will not be distracted by the integration of the acquired business.

We rely on a small number of customers who may not consistently purchase our products in the future and if we lose any one of these customers, our revenues may decline.

In the fiscal year ended June 30, 2019, our three largest customers represented approximately 18%, 13% and 11%, respectively, of our total revenues. In the fiscal year ended June 30, 2018, our two largest customers represented approximately 16% and 14%, respectively, of our total revenues. No other customer accounted for more than 10% of our revenues during those periods. At June 30, 2019, our largest customer account receivable balance was 12% of total accounts receivable. At June 30, 2018, our four largest account receivable balances were 22%, 16%, 13%, and 13%, respectively, of the total accounts receivable.

In the future, a small number of customers may continue to represent a significant portion of our total revenues in any given period. These customers may not consistently purchase our products at a particular rate over any subsequent period. A loss of any of these customers could adversely affect our revenues.

We could suffer unrecoverable losses on our customers’ accounts receivable, which would adversely affect our financial results.

At June 30, 2019, our largest customer account receivable balance was 12% of total accounts receivable. While we believe we have a varied customer base and have experienced strong collections in the past, we may experience changes in our customer base, including reductions in purchasing commitments, which could also have a material adverse effect on our revenues and liquidity. Additionally, our customers could become unable or unwilling to pay amounts owed to us. During fiscal 2018, we recorded a $227,500 reserve against accounts receivable amounts owed to us by one customer that has not been able to pay us for design services we provided. We have not purchased insurance on our accounts receivable balances. Large uncollectible accounts receivable balances could have a material adverse effect on our financial condition.

We rely heavily upon the talents of our Chief Executive Officer and our President of the Ross Optical Division, the loss of whom could damage our business.

Our performance depends, to a large extent, on a small number of key scientific, technical, managerial and manufacturing personnel. In particular, we believe our success is highly dependent upon the services and reputation of our Chief Executive Officer, Dr. Joseph N. Forkey and our President of the Ross Optical division, Mr. Divaker Mangadu. The loss of Dr. Forkey’s services could damage our business. Dr. Forkey provides highly valuable contributions to our capabilities in optical instrument development, in management of new technology and in potentially significant longer-term Company initiatives. The loss of Mr. Mangadu could damage the operations of the Ross Optical division as Mr. Mangadu provides highly valuable contributions to the effective operation of Ross including its sales, customer and vendor relationships, production activities and overall administration. We do not carry key-man life insurance on Dr. Forkey or Mr. Mangadu.

We must continue to be able to attract employees with the scientific and technical skills that our business requires and if we are unable to attract and retain such individuals, our business could be severely damaged.

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. If we cannot attract such individuals, we may not be able to perform the necessary design services for our customers or produce our products causing damage to our business or an inability to meet customer demand or increase revenues.

We are subject to a high degree of regulatory oversight and, if we do not continue to receive the necessary regulatory approvals, our revenues may decline.

The FDA has granted us clearance to manufacture and 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 may lose the FDA’s permission to manufacture and market our current products or may not obtain the necessary regulatory permission, approvals or licenses for the manufacturing or 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. If we lose the FDA’s permission to manufacture and market our current products or we do not obtain regulatory permission to manufacture and market our future products, our revenues may decline and our business may be harmed.

We face risks inherent in product development and production under fixed-price purchase orders and these purchase orders may not 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. Fixed-price purchase orders represented approximately 25% to 50% of our total revenues during the last several years. 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 continue to be profitable for us throughout the fixed-price period.

We primarily perform engineering and manufacturing services for our customers who could decide to use another vendor for these services in the future.

A significant portion of our revenues are derived from engineering and manufacturing services that we perform to design and fabricate medical device products or sub-assemblies of medical device products for our customers who in turn sell the products to the end users. Our customers typically own the proprietary rights to and control commercial distribution of the final products. Therefore, in many of these cases we do not own the proprietary rights to the medical device products that we manufacture or that our sub-assemblies are made a part of. Our customers could decide to use other suppliers for these services based on cost, quality, delivery time, production capacities, competitive and regulatory considerations or other factors. Thus, revenues from our customers and the products and services we provide them are subject to significant fluctuation on a product to product basis from period to period.

We resell products we purchase from third parties and our customers could decide to use another vendor for to acquire those products.

Our new division Ross Optical which we acquired effective June 1, 2019 primarily acquires specialized optical components and assemblies from third parties pursuant to specifications provided from its customers, inspects and sometimes further processes those products before reselling them to its customers. Because Ross Optical does not manufacture the optical components and assemblies or owns the intellectual property rights to the products its customers could choose to obtain those products and services from other sources or could apply pressure to Ross Optical to lower its prices resulting in reduced future gross margins and operating results.

Third parties may infringe on our intellectual property and, as a result, we could incur significant expense in protecting our patents or not have sufficient resources to protect them.

We utilize a number of licensed patents that are important to our business. In July 2011, we entered into an asset purchase agreement with Intuitive Surgical Operations, Inc., in which we received $2.5 million in connection with the sale of certain intellectual property. Pursuant to the agreement, we agreed to assign to Intuitive Surgical all of the issued and non-expired patents and pending patent applications we held at the time of the agreement and, in return, Intuitive Surgical agreed to grant to us a royalty-free, worldwide license to these patents in fields outside of medical robotics.

Although we are not currently aware of any past or present infringements of our patents, we plan, jointly with Intuitive Surgical, 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. If our competitors or other third parties infringe on our patents, our business may be harmed.

Third parties may claim that we have infringed on their patents and, 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 use the technology that was the subject of the claim, or sell products embodying such technology. If we engage in litigation, our expenses may increase and our business may be harmed. If we are prohibited from using a particular technology in our products, our revenues may decline and our business may be harmed.

We depend on the availability of certain key supplies and services that are available from only a few sources and if we experience difficulty with a supplier, we may have difficulty finding alternative sources of these supplies or services.

We require certain key supplies to develop and manufacture our products, particularly our precision grade optical glass, which is available from only a few sources, each of which is located outside of the United States. Additionally, we rely on outside vendors to grind and polish certain of our lenses and other optical components, such as prisms and windows. We also rely on a limited number of suppliers for specialized CMOS sensors and the electronic wiring of those sensors. 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 to meet our needs. 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 these essential materials and services in adequate quantities and at acceptable prices.

From time to time, subcontractors may produce some of our products for us, and our business is subject to the risk that these subcontractors fail to make timely delivery. Our products and services are also used as components of the products and services of other manufacturers. We are therefore subject to the risk that manufacturers who 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. If this occurs, we may not be able to deliver our products on a timely basis and our revenues may decline.

Our customers may claim that the products we sold them were defective and if our insurance is not sufficient to cover such 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 products we assist in developing, manufacture and supply to our customers. Additionally, the products we supply could be used in conjunction with other products in medical device applications, such as certain endoscope products claimed to be associated with surgical suite contamination resulting from their intended re-use and re-sterilization. We maintain product liability insurance to cover us in the event of liability claims, and as of September 26, 2019, no such claims have been asserted or threatened against us. However, our insurance may not be sufficient to cover all possible future product claims, costs and any resulting liabilities.

We would be liable if our business operations harmed the environment and a 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.

Our quarterly financial results vary quarter to quarter and depend on many factors. 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 customer 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; and

—

competitive pricing pressures.

We may not be able to grow or sustain revenues or achieve or maintain profitability on a quarterly or annual basis and levels of revenue and/or profitability may vary from one such period to another.

Some of our competitors are large, well-financed companies who have research and marketing capabilities that are superior to ours.

The industries in which we operate 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 optics, semiconductor or medical products industries, are seeking to produce products and services that compete with our products and services.

Ross Optical is subject to tariffs and regulatory scrutiny, and it faces the risk of changes to this regulatory environment and business in the future.

Ross Optical is ISO and ITAR registered and currently imports, exports, and manufactures optical products for the defense industry, some of which are controlled by regulations promulgated by the U.S. Departments of State and Commerce. If Ross Optical fails to comply with the terms of these regulations and registrations, it may lose its ITAR registration or suffer other consequences, such as the withdrawal or suspension of approvals, suspension of imports, exports or production, or the imposition of fines or other penalties.

There is also the risk that new laws or regulations or changes in enforcement practices applicable to the business of Ross Optical could be imposed, which may adversely affect its ability to compete effectively with other institutions that are not affected in the same way or which may impact its supplier and customers. In addition, regulation imposed on market participants generally, such as the proposed China tariff increases announced by President Trump could negatively affect the overall profitability of Ross Optical’s international business.

These developments could impact Ross Optical’s profitability, or even make it uneconomical for Ross Optical to continue to conduct all or certain of its business, or could cause Ross Optical to incur significant costs associated with adjusting its business to these changes.

RISKS RELATED TO OUR STOCK

Trading in our common stock is limited and the price of our common stock may be subject to substantial volatility.

Our common stock is quoted on OTCQB, the OTC market tier for companies that report to the SEC, under the symbol PEYE. We expect our common stock to continue to be quoted on the OTCQB for the foreseeable future. Broker-dealers may decline to trade in OTCQB stocks given the market for such securities is often limited, the stocks are more volatile and the risk to investors is greater. These factors may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of their shares. This could cause our stock price to decline.

Additionally, the price of our common stock may be volatile as a result of a number of factors, including, but not limited to, the following:

—

our ability to successfully conceive and to develop new products and services to enhance the performance characteristics and methods of manufacture of existing products;

—

our ability to retain existing customers and customers’ continued demand for our products and services;

—

the timing of our research and development expenditures and of new product introductions;

—

the timing and level of acceptance of new products or enhanced versions of our existing products; and

—

price and volume fluctuations in the stock market at large which do not relate to our operating performance.

“Penny stock” rules may make buying or selling our securities difficult which may make our stock less liquid and make it harder for investors to buy and sell our securities.

Trading in our securities is subject to the SEC’s “penny stock” rule and we anticipate that trading in our securities will continue to be subject to the penny stock rules for the foreseeable future. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by these requirements may discourage broker-dealers from recommending transactions in our securities, which could severely limit the liquidity of our securities and consequently adversely affect the market price for our securities.

We are contractually obligated to issue shares in the future, diluting your interest in us.

As of June 30, 2019, there were 1,819,500 shares of our common stock issuable upon exercise of stock options outstanding, at a weighted average exercise price of $0.87 per share. As of June 30, 2019, a total of 655,898 shares of our common stock are reserved for issuance under our 2011 Equity Incentive Plan. Additionally, on July 1, 2019 we issued 760,000 shares of our common stock at $1.25 per share to partially fund the acquisition of Ross Optical effective June 1, 2019, which brought our total common shares outstanding to 12,831,139. Moreover, we expect to issue additional shares and options to purchase shares of our common stock to compensate employees, consultants and directors, and we may issue additional shares to raise capital. Any such issuances will have the effect of further diluting the interest of the holders of our securities.

ITEM 2.

PROPERTIES.

We conduct our domestic operations at three facilities in Gardner, Massachusetts and one facility in El Paso, Texas. We are currently a tenant-at-will, paying rent of $9,000 per month for our main Gardner facility. We rent two other smaller Gardner facilities on a month-to-month basis. Our Ross Optical division rents a facility in El Paso, Texas from an unrelated party pursuant to an operating lease through May 2022 at monthly base rates beginning at $3,392 and increasing to $3,563 per month during the term of the lease.

We believe these facilities are adequate for our current operations and are adequately covered by insurance. Significant increases in production or the addition of significant equipment additions or manufacturing capabilities in connection with the production of our line of endoscopes and other products may, however, require improvements to existing facilities or the acquisition or lease of additional facilities. We may establish production facilities domestically or overseas to produce key assemblies or components, such as lenses, for our products. Overseas facilities may subject us 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 our competitive position and profitability.

ITEM 3.

LEGAL PROCEEDINGS.

Our Company, on occasion, may become involved in legal matters arising in the ordinary course of our business, which could have a material adverse effect on our business, financial condition or results of operations. We are not currently aware of any pending or threatened litigation against us or our officers and directors in their capacity as such that could have a material impact on our operations or finances.

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock is quoted on OTCQB, the OTC market tier for companies that report to the SEC, under the symbol PEYE. The following table sets forth the high and low bid prices for our common stock for each quarter during the last two fiscal years as quoted on OTCQB. Such OTC market quotations reflect inter-dealer prices, without retail markup, markdown or commissions and may not necessarily represent actual transactions.

	High		Low
For the Fiscal Year Ended June 30, 2018
First Quarter ended September 30, 2017	$	0.60	$	0.40
Second Quarter ended December 31, 2017	$	0.64	$	0.40
Third Quarter ended March 31, 2018	$	0.55	$	0.41
Fourth Quarter ended June 30, 2018	$	0.55	$	0.48

For the Fiscal Year Ended June 30, 2019
First Quarter ended September 30, 2018	$	1.85	$	0.53
Second Quarter ended December 31, 2018	$	1.60	$	0.80
Third Quarter ended March 31, 2019	$	1.84	$	1.13
Fourth Quarter ended June 30, 2019	$	1.75	$	1.07

Holders

As of September 26, 2019, we had approximately 64 holders of record of our common stock. Holders of record include nominees who may hold shares on behalf of multiple owners.

Dividends

We have not declared any dividends during the last two fiscal years. At present, we intend to retain our earnings, if any, to finance research and development and the expansion of our business.

Recent Sales of Unregistered Securities

Other than as previously disclosed in our quarterly reports on Form 10-Q or current reports on Form 8-K, we did not issue any additional shares of our common stock since March 31, 2019.

Securities Authorized for Issuance under Equity Compensation Plans

The following table summarizes information about our equity compensation plans as of June 30, 2019.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted- average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		117,398	$	0.55		–
Equity compensation plans not approved by security holders		1,702,102	$	0.89		655,898
Total		1,819,500	$	0.87		655,898

2006 Equity Incentive Plan

On November 28, 2006, our stockholders approved the Precision Optics Corporation, Inc. 2006 Equity Incentive Plan, referred to as the 2006 Plan, which succeeded the Precision Optics Corporation, Inc. Amended and Restated 1997 Equity Incentive Plan, referred to as the 1997 Plan. No further awards have been or will be granted under the 1997 Plan. The 2006 Plan allowed for the granting of stock options to selected employees, directors and other persons who provide services to us or our affiliates. No further awards will be granted under the 2006 Plan.

2011 Equity Incentive Plan

The Precision Optics Corporation, Inc. 2011 Equity Incentive Plan, referred to as the 2011 Plan, was adopted by our Board of Directors on October 13, 2011. The 2011 Plan allows for the granting of stock options to selected employees, directors and other persons who provide services to us or our affiliates.

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 our 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, we filed a registration statement on Form S-8 to register the 1,500,000 shares of common stock.

On May 1, 2019, the Board of Directors approved an amendment to the 2011 Equity Incentive Plan to update the Plan for the latest changes to the tax laws and increase the maximum number of shares of our common stock that may be awarded under the Plan from 1,825,000 to 2,825,000, an increase of 1,000,000 shares. In connection therewith, on September 6, 2019, we filed a registration statement on Form S-8 to register the 1,000,000 shares of common stock.

ITEM 6.

SELECTED FINANCIAL DATA.

As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with the Financial Statements and Notes thereto, and other financial information included elsewhere in this Annual Report on Form 10-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains descriptions of our expectations regarding future trends affecting our business. The following discussion sets forth certain factors we believe could cause actual results to differ materially from those contemplated by the forward-looking statements.

Overview

We have been a developer and manufacturer of advanced optical instruments since 1982. Our medical instrumentation line includes traditional endoscopes and endocouplers as well as other custom imaging and illumination products for use in minimally invasive surgical procedures. Much of our recent development efforts have been targeted at the development of next generation endoscopes. For the last ten years, we have funded internal research and development programs to develop next generation capabilities for designing and manufacturing 3D endoscopes and very small Microprecision™ lenses, anticipating future requirements as the surgical community continues to demand smaller and more enhanced imaging systems for minimally invasive surgery.

Effective June 1, 2019 we acquired the operating assets of Ross Optical Industries, Inc. of El Paso, Texas, which we began operating as a division of our Company beginning on that date. The accompanying financial statements include the results of operations of the Ross Optical division for June 2019 and the assets and liabilities of the division as of June 30, 2019. The acquisition of the assets of Ross Optical Industries effective June 1, 2019 expands our optics components and assemblies business. All products supplied by Ross Optical include a custom or catalog optic, which is sourced through Ross Optical’s extensive domestic and worldwide network of optical fabrication companies. Most systems make use of optical lenses, prisms, mirrors and windows and range from individual optical components to complex opto-mechanical assemblies. Products often include thin film optical coatings that are applied using the in-house coating department. Approximately 80% or more of Ross Optical revenues are to customers in the United States with the balance principally to Canada and Western Europe. Ross Optical’s sales are mostly resale of specialized optical components with the remainder being assemblies. Ross Optical does not perform revenue generating engineering services or internal research and development. The majority of Ross Optical sales are for industrial applications with the remainder split between military and medical device products.

The Management Discussion and Analysis which follows is based on the financial condition and results of operations of our Company including the operating results for the month of June 2019 and the balance sheet as of June 30, 2019 of our new division Ross Optical.

Our business is the design and manufacture of high-quality medical devices. Approximately 8% of our revenue in fiscal year 2019 is from the design, manufacture and resale of optical products for military and defense and 13% for other industrial, non-medical products. Our medical instrumentation line and unique design and manufacturing capabilities include traditional endoscopes and endocouplers as well as other custom imaging and illumination products for use in minimally invasive surgical procedures. We design and manufacture 3D endoscopes and very small Microprecision™ lenses, assemblies and complete medical devices to meet the surgical community’s continuing demand for smaller, disposable, and more enhanced imaging systems for minimally invasive surgery.

We are registered to the ISO 9001:2015 and ISO 13485:2016 Quality Standards and comply with the FDA Good Manufacturing Practices and the European Union Medical Device Directive for CE marking of our medical products. Our websites are www.poci.com and www.rossoptical.com. Information contained on our websites does not constitute part of this report.

The markets in which we do business are highly competitive and include both foreign and domestic competitors. Many of our competitors are larger and have substantially greater resources than we do. Furthermore, other domestic or foreign companies, some with greater financial resources than we have, may seek to produce products or services that compete with ours. We routinely outsource specialized production efforts as required to obtain the most cost effective production. Over the years and through the acquisition of the Ross Optical division in June 2019, we have achieved extensive experience collaborating with other optical specialists worldwide.

We believe that competition for sales of our medical products and services, which have been principally sold to original equipment manufacturers, or OEM, customers, is based on our ability to design and produce technical features, performance, engineering service and production scheduling, on-time delivery, quality control and product reliability, and competitive pricing.

We believe that our future success depends, to a large degree, on our ability to develop new optical products and services to enhance the performance characteristics and methods of manufacture of existing products. Accordingly, we expect to continue to seek and obtain product-related design and development contracts with customers and to selectively invest our own funds on research and development, particularly in the areas of Microprecision™ optics, micro medical cameras, illumination, and 3D endoscopes.

The Ross Optical division sales are primarily optical components and assemblies for industrial applications in addition to medical and military uses. By combining the unique capabilities of our Company with the Ross Optical division we believe there are opportunities for expanded sales of each division’s products and services throughout the combined customer base. For example, we believe that our extensive engineering and design services may benefit Ross’ customer base and that Ross’ expanded worldwide vendor relationships may benefit our traditional efforts to source materials at competitive prices for our development projects and manufacturing activities.

During the fiscal year ended June 30, 2019, approximately 41% of our sales were made to three customers. No other customers made up more than 10% of consolidated sales during the period, and we expect this percentage to decrease as sales include the Ross division for the entirety of future periods presented. Of these three companies, one is a large, international, medical device company who has been our customer for many years and currently purchases a spine surgery product we helped to develop over seven years ago. Another is a large international medical device company as well acquiring an ENT product we assisted in developing that incorporates our unique, proprietary Microprecision™ lens technology. And the third is also a medical device company purchasing from us another medical device product we helped to design for a cardiovascular application and based on our Microprecision™ lens technology and optical visualization system expertise.

Current sales and marketing activities are intended to broaden awareness of the benefits of our new technology platforms and our successful application of these new technologies to medical device projects requiring surgery-grade visualization from sub-millimeter sized devices and 3D endoscopy, including disposable products and assemblies. We market directly to established medical device companies primarily in the United States that we believe could benefit from our advanced endoscopy visualization systems. Through this direct marketing, referrals, attendance at trade shows and a presence in online professional association websites, we have expanded our on-going pipeline of projects to significant medical device companies as well as well-funded emerging technology companies. We expect our customer pipeline to continue to expand as development projects transition to production orders and new customer projects enter the development phase. We believe there are opportunities to expand the reach of sales activities of our business and that of our new division, Ross Optical. This may be accomplished through the gradual integration of some of the sales and marketing resources of the two operations.

Critical Accounting Policies and Estimates

Our critical accounting policies are included in the Notes to our Financial Statements contained in this Annual Report on Form 10-K.

Results of Operations for the Fiscal Year Ended June 30, 2019 as Compared to the Fiscal Year Ended June 30, 2018

Total revenues for fiscal year 2019 were $6,804,169, an increase of $2,766,121, or 68.5%, from revenues for fiscal year 2018 of $4,038,048. Included in fiscal year 2019 revenues is $656,232 from the Ross Optical division in June 2019. During the fiscal year ended June 30, 2019 revenues increased in the production category by 99.3% and increased in the engineering services category by 2.3%. In addition to the inclusion of June 2019 Ross Optical revenues, production revenues increased primarily due to the ramp up of production level orders from two medical device products that have transitioned from engineering to production, and a resurgence of orders from a long-standing customer for a traditional spine visualization product line.

The 2.3% increase in engineering revenues during the fiscal year 2019 is considered to be the result of normal engineering project fluctuations. As in prior periods, engineering revenues in fiscal year 2019 are represented by decreased revenues from certain customer projects transitioning through development phases and increased by the addition of new projects or the timing of phases and acceleration and advancement of those projects. The number of engineering projects we worked on in fiscal year 2019 was less than the number of engineering projects worked on in fiscal year 2018. The engineering projects range in type including CMOS, Microprecision™, 3D and robotic visualization and illumination systems. We believe the quality of the engineering projects continues to provide the opportunity for production purchase orders from these customers as the products advance to clinical evaluation and commercialization.

Revenues from our largest customers, as a percentage of total revenues, were as follows:

	Year Ended June, 30
	2019		2018
Customer A		8%		16%
Customer B		6%		14%
Customer C		18%		8%
Customer D		13%		5%
Customer E		11%		4%
All Others		44%		53%
		100%		100%

No other customer accounted for more than 10% of our revenues in fiscal years 2019 and 2018.

Gross profit for fiscal year 2019 of $2,122,478, reflected an increase of $640,560, or 43.2%, as compared to gross profit for fiscal year 2018 of $1,481,918. Gross profit, as a percentage of revenues for fiscal year 2019, was 31.2% as compared to gross profit, as a percentage of revenues for fiscal year 2018, of 36.7%. The increase in gross margin dollars in fiscal year 2019 was due primarily to increased sales revenue compared to fiscal 2018, and the decrease in gross margin percentage realized in fiscal year 2019 resulted from production ramp-up costs and inefficiencies and cost over-runs on a large engineering project. Periodic gross profit and gross profit percentage depend on a number of factors, including overall sales volume, facility utilization, product sales mix, the costs of engineering services, and production start up costs and process development in connection with custom products entering the production phase, and therefore fluctuations in gross profit as a percentage of sales is expected.

We believe we have gained experience in developing and manufacturing products based on the new Microprecision™ and CMOS technologies and we have become more efficient in estimating and executing engineering service contracts and manufacturing activities. As a result of the care taken to manage our custom development projects, we experienced successful transitions from engineering to production in all three significant projects currently contributing to our revenue growth. However, two projects in particular have caused our margins to decline during fiscal year 2019. One is a production product constituting 14% of fiscal 2019 sales, which resulted in 2.9% lower margins in fiscal year 2019 due to customer design issues we are helping to correct. Additionally, we have experienced cost over-runs on an engineering project constituting 10% of fiscal 2019 sales, which resulted in 5.0% lower margins in fiscal year 2019. In both of these cases we believe the inefficiencies are temporary and solutions are being reached that will allow these projects to achieve targeted margins.

Research and development expenses were $505,300 for fiscal year 2019 as compared to $456,377 for fiscal year 2018. The increase of $48,923, or 10.7%, in fiscal year 2019 compared to fiscal year 2018 was due primarily to engineering personnel added during the year and an increase in internal engineering related development projects that we believe will enhance our technology platform of capabilities and our overall competitiveness in providing unique optical and illumination solutions for medical device endoscopes.

Selling, general and administrative expenses increased by $727,450, or 52.9%, to $2,101,610 for fiscal year 2019 as compared to $1,374,160 for fiscal year 2018. The increase in SG&A expenses in fiscal year 2019 includes $140,635 relating to the Ross Optical division incurred in June 2019, in addition to an increase in stock based compensation of $413,446. The remainder of the increase in fiscal 2019 resulted from increased compensation to existing and newly hired personnel, sales commissions, director and legal fees, advertising and international freight. These increases were partially offset by a decrease in bad debt expense and investor relations firm expenses in fiscal year 2019

Business acquisition expenses were $128,111 in fiscal year 2019 and represent direct costs relating to the acquisition of the Ross Optical division such as audit and legal fees and travel costs.

The income tax provisions in fiscal years 2019 and 2018 represent the minimum statutory state income tax liability.

Liquidity and Capital Resources

We have sustained recurring net losses for several years. During the year ended June 30, 2019 we incurred a net loss of $614,871 and used cash in operating activities of $1,031,693. However, as a result of a sale of 760,000 shares of our common stock and the purchase of the operating assets of the Ross Optical division recorded in our financial statements at June 30, 2019, our cash and cash equivalents were $2,288,426, accounts receivable were $2,165,107, and current liabilities were $3,611,312, including $450,192 of advances paid against open purchase orders by our customers and a current liability of $1,443,341 owed and paid in July 2019 for the purchase of the Ross Optical division.

We have traditionally funded working capital needs through product sales, management of working capital components of our business, cash received from public and private offerings of our common stock, warrants to purchase shares of our common stock or convertible notes, and by customer advances paid against purchase orders by our customers and recorded in the current liabilities section of the accompanying financial statements. We have incurred year to year and quarter to quarter operating losses during our efforts to develop current products including Microprecision™ optical elements, micro medical camera assemblies and 3D endoscopes. Our management believes that the opportunities represented by these products have the potential to generate sales increases to achieve breakeven and profitable results.

We believe our increased levels of sales will continue and that the addition of the Ross Optical division will enhance our financial performance such that our existing financial condition and the prospect of increased sales from the opportunities our current products offer will be sufficient to fund our operations on a profitable basis. However, if we are not able to achieve sustained breakeven and profitable results using our existing financial resources, we would be required to pursue additional financing that may not be available at acceptable terms or may cause dilution to our existing shareholders.

Capital equipment expenditures during fiscal year 2019 and fiscal year 2018 were $140,038 and $4,448, respectively. Patent application expenditures during fiscal year 2019 and fiscal year 2018 were $6,812 and $17,189, respectively. Future capital equipment and patent expenditures will be dependent upon future sales and success of on-going research and development efforts.

Contractual cash commitments for the fiscal years subsequent to June 30, 2019 are summarized as follows:

	Fiscal 2020		Thereafter		Total
Capital lease for equipment, including interest	$	10,250	$	5,126	$	15,376
Minimum operating lease payments - Ross Optical division	$	40,784	$	80,999	$	121,783

We have contractual cash commitments related to open purchase orders as of June 30, 2019 of approximately $1,334,606.

Material Trends and Uncertainties

We currently have no material trends or uncertainties that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Financial Statements

	Page

Report of Independent Registered Public Accounting Firm	F-1

Consolidated Balance Sheets at June 30, 2019 and 2018	F-2

Consolidated Statements of Operations for the Years Ended June 30, 2019 and 2018	F-3

Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2019 and 2018	F-4

Consolidated Statements of Cash Flows for the Years Ended June 30, 2019 and 2018	F-5

Notes to Consolidated Financial Statements	F-6


Pro Forma Statement of Operations for the year ended June 30, 2019 (Unaudited)	F-20

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Precision Optics Corporation, Inc.:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Precision Optics Corporation, Inc. as of June 30, 2019 and 2018 and the related consolidated statements of operations, changes in stockholder’s equity, cash flows, for each of the two years in the period ended June 30, 2019 and the related notes (collectively referred to as “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018 and the results of its operations and its cash flows for the periods then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, 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. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ Stowe & Degon LLC

Westborough, Massachusetts

September 26, 2019

We have served as the Company’s auditors since 2008.

F-1

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets at June 30, 2019 and 2018

	2019			2018
ASSETS
Current Assets:
Cash and cash equivalents	$	2,288,426		$	402,738
Accounts receivable (net of allowance for doubtful accounts of $246,953 at June 30, 2019 and $232,500 at June 30, 2018)		2,165,107			796,923
Inventories		1,734,604			1,144,068
Prepaid expenses		180,336			70,991
Total current assets		6,368,473			2,414,720

Fixed Assets:
Machinery and equipment		2,748,715			2,511,638
Leasehold improvements		668,446			553,596
Furniture and fixtures		168,450			148,303
		3,585,611			3,213,537
Less—Accumulated depreciation and amortization		3,202,605			3,164,051
Net fixed assets		383,006			49,486

Patents, net		54,087			47,275
Goodwill		687,664			–

TOTAL ASSETS	$	7,493,230		$	2,511,481

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of capital lease obligation	$	9,572		$	8,962
Accounts payable		1,174,263			703,538
Customer advances		450,192			857,842
Accrued compensation and other		533,944			362,502
Amount due for business acquisition		1,443,341			–
Total current liabilities		3,611,312			1,932,844

Capital lease obligation, net of current portion		5,027			14,601
Acquisition earn out liability		500,000			–

Stockholders’ Equity:
Common stock, $0.01 par value: 50,000,000 shares authorized; issued and outstanding – 12,071,139 shares at June 30, 2019 and 10,197,139 shares at June 30, 2018		120,712			101,972
Additional paid-in capital		48,893,172			45,484,186
Accumulated deficit		(45,636,993	)		(45,022,122	)
Total stockholders’ equity		3,376,891			564,036

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	7,493,230		$	2,511,481

The accompanying notes are an integral part of these consolidated financial statements.

F-2

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

for the Years Ended June 30, 2019 and 2018

	2019			2018

Revenues	$	6,804,169		$	4,038,048
Cost of goods sold		4,681,691			2,556,130

Gross profit		2,122,478			1,481,918

Research and development expenses, net		505,300			456,377
Selling, general and administrative expenses		2,101,610			1,374,160
Business acquisition expenses		128,111			–
Total operating expenses		2,735,021			1,830,537

Operating loss		(612,543	)		(348,619	)

Interest expense		(1,416	)		(1,859	)

Loss before provision for income taxes		(613,959	)		(350,478	)

Provision for income taxes		912			912

Net loss	$	(614,871	)	$	(351,390	)

Loss per share:
Basic and fully diluted	$	(0.05	)	$	(0.04	)

Weighted average common shares outstanding:
Basic and fully diluted		11,486,079			9,826,151

The accompanying notes are an integral part of these consolidated financial statements.

F-3

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

for the Years Ended June 30, 2019 and 2018

	Number of Shares		Common Stock		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Equity

Balance, July 1, 2017		8,872,916	$	88,729	$	45,140,383	$	(44,670,732	)	$	558,380
Proceeds from private placement of common stock, net of issuance costs of $2,963		555,556		5,556		241,482		–			247,038
Proceeds from exercise of stock purchase warrants		666,667		6,667		–		–			6,667
Issuance of common stock for consulting services		102,000		1,020		49,980		–			51,000
Stock-based compensation		–		–		52,341		–			52,341
Net loss		–		–		–		(351,390	)		(351,390	)
Balance, June 30, 2018		10,197,139	$	101,972	$	45,484,186	$	(45,022,122	)	$	564,036

Proceeds from private placement of common stock, net of issuance costs of $12,250		1,600,000		16,000		1,971,750		–			1,987,750
Proceeds from exercise of stock options		74,000		740		53,160		–			53,900
Issuance of common stock for services		200,000		2,000		208,000		–			210,000
Proceeds from private placement of common stock subscribed, net of estimated issuance costs of $12,250		–		–		912,750		–			912,750
Stock-based compensation		–		–		263,326		–			263,326
Net loss		–		–		–		(614,871	)		(614,871	)
Balance, June 30, 2019		12,071,139	$	120,712	$	48,893,172	$	(45,636,993	)	$	3,376,891

The accompanying notes are an integral part of these consolidated financial statements.

F-4

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows for the

Years Ended June 30, 2019 and 2018

	2019			2018
Cash Flows from Operating Activities:
Net loss	$	(614,871	)	$	(351,390	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities-
Depreciation and amortization		38,554			27,216
Provision for doubtful accounts receivable		8,083			227,500
Stock-based compensation expense		473,326			52,341
Non-cash consulting expense		–			2,400
Changes in operating assets and liabilities, net of effects of business acquisition-
Accounts receivable		(723,369	)		(555,875	)
Inventories		137,510			(88,621	)
Prepaid expenses		(106,456	)		(15,006	)
Accounts payable		69,365			48,580
Customer advances		(432,000	)		677,705
Accrued compensation and other		118,165			75,807
Net cash provided by (used in) operating activities		(1,031,693	)		100,657

Cash Flows from Investing Activities:
Cash acquired in business acquisition, net of $56,659 paid at year end		106,545			–
Additional patent costs		(6,812	)		(17,189	)
Purchases of fixed assets		(140,038	)		(4,448	)
Net cash used in investing activities		(40,305	)		(21,637	)

Cash Flows from Financing Activities:
Payment of capital lease obligation		(8,964	)		(8,392	)
Gross proceeds from private placements of common stock		2,925,000			210,001
Gross proceeds from exercise of stock options and warrants		53,900			6,667
Private placement expenses paid		(12,250	)		(2,963	)
Net cash provided by financing activities		2,957,686			205,313

Net increase in cash and cash equivalents		1,885,688			284,333
Cash and cash equivalents, beginning of year		402,738			118,405

Cash and cash equivalents, end of year	$	2,288,426		$	402,738

Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes	$	912		$	912

Supplemental disclosure of non-cash financing activities:
Issuance of common stock for services	$	210,000		$	51,000
Private placement expenses incurred but not yet paid	$	12,250		$	–
Issuance of common stock in settlement of accounts payable	$	–		$	40,000

The accompanying notes are an integral part of these consolidated financial statements.

F-5

PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)

Nature of Business

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, and sources for resale specialized optical components 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.

Certain balance sheet items in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. This reclassification had no effect on the previously reported net loss.

(c)

Revenues

On July 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers (ASC 606) using the modified retrospective method for contracts that were not completed as of July 1, 2018, whereby revenues are recognized as the performance obligations to deliver products or services are satisfied and are recorded based on the amount of consideration the Company expects to receive in exchange for satisfying the performance obligations. Most of the Company’s products and services are marketed to medical device companies almost exclusively in the United States. Products and services are primarily transferred to customers at a point in time based upon when services are performed or product is shipped.

Revenues represent the amount of consideration the Company expects to receive from customers in exchange for transferring products and services. Other selling costs to obtain and fulfill contracts are expensed as incurred due to the short-term nature of a majority of its revenues. The Company extends terms of payment to its customers based on commercially reasonable terms for the markets of its customers, while also considering their credit quality. Shipping and handling costs charged to customers are included in revenues.

The Company disaggregates revenues by product and service types as it believes it best depicts how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors. Revenues are comprised of the following for the fiscal years ended June 30, 2019 and 2018:

	2019		2018
Engineering Design Services	$	1,313,543	$	1,283,534
Optical Components		1,821,889		1,226,190
Medical Device Products and Assemblies		3,668,737		1,528,324
Total Revenues	$	6,804,169	$	4,038,048

F-6

Contract Assets and Liabilities

The nature of the Company’s products and services does not generally give rise to contract assets as it typically does not incur costs to fulfill a contract before a product or service is provided to a customer. The Company’s costs to obtain contracts are typically in the form of sales commissions paid to employees. The Company has elected to expense sales commissions associated with obtaining a contract as incurred as the amortization period is generally less than one year. These costs have been recorded in selling, general and administrative expenses. As of June 30, 2019, there were no contract assets recorded in the Company’s Consolidated Balance Sheets.

The Company’s contract liabilities arise as a result of unearned revenue received from customers at inception of contracts or where the timing of billing for services precedes satisfaction of the Company’s performance obligations. The Company generally satisfies performance obligations within one year from the contract inception date. As of July 1, 2018, contract liabilities were $857,842, which were recorded as customer advances in the Company’s Consolidated Balance Sheets, of which $768,408 was recognized in sales during the fiscal year ended June 30, 2019. As of June 30, 2019, contract liabilities recorded as customer advances were $450,192.

(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 $2,288,426 and $402,738 at June 30, 2019 and 2018, 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.

(e)

Inventories

Inventories are stated at the lower of cost (first-in, first-out) and net realizable value and include material, labor and manufacturing overhead. The components of inventories at June 30, 2019 and 2018 are as follows:

	2019		2018
Raw material	$	578,856	$	500,908
Work-in-progress		409,019		434,536
Finished goods		746,729		208,624
	$	1,734,604	$	1,144,068

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-7

(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 and amortization expense was $38,554 and $27,216 for the years ended June 30, 2019 and 2018, 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, 2019, the Company’s largest customer account receivable balance was 12% of total accounts receivable. At June 30, 2018, receivables from the Company’s four largest customer account receivable balances were 22%, 16%, 13%, and 13%, respectively, of total accounts receivable. No other customer accounted for more than 10% of the Company’s receivables as of June 30, 2019 and 2018.

The allowance for doubtful accounts receivable was increased to $246,953 at June 30, 2019 from $232,500 at June 30, 2018 in order to specifically reserve for various accounts receivable balances generated in the Ross Optical division. $227,500 of the reserve was established in fiscal 2018 relating to one specific customer. Other than these doubtful accounts 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 in 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, 2019.

Revenues from the Company’s largest customers, as a percentage of total revenues, were as follows:

	2019		2018
Customer A		8%		16%
Customer B		6%		14%
Customer C		18%		8%
Customer D		13%		5%
Customer E		11%		4%
All Others		44%		53%
		100%		100%

No other customer accounted for more than 10% of the Company’s revenues in fiscal years 2019 and 2018.

F-8

(h)

Loss per Share

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, 2019 and 2018, 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, 2019 and 2018:

	Year Ended June 30
	2019			2018
Net Loss– Basic and Diluted	$	(614,871	)	$	(351,390	)

Basic Weighted Average Shares Outstanding		11,486,079			9,826,151
Potentially Dilutive Securities		–			–
Diluted Weighted Average Shares Outstanding		11,486,079			9,826,151

Loss Per Share
Basic	$	(0.05	)	$	(0.04	)
Diluted	$	(0.05	)	$	(0.04	)

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 1,819,500 and 4,530,513 for the years ended June 30, 2019 and 2018, 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, 2019 and 2018 amounted to $473,326 and $52,341, respectively.

(j)

Goodwill and Patents

Long-lived assets such as goodwill and patents are capitalized when acquired and reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. Impairment of the carrying value of long-lived assets such as goodwill and patents would be indicated if the best estimate of future undiscounted cash flows expected to be generated by the asset grouping is less than its carrying value. If an impairment is indicated, any loss is measured as the difference between estimated fair value and carrying value and is recognized in operating income or loss. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. No such impairments of goodwill or patents have been estimated by management during the years ended June 30, 2019 or 2018.

F-9

(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.

(l)

Warranty Costs

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, 2019 and 2018:

	2019			2018
Balance at beginning of period	$	25,000		$	25,000
Provision for warranty claims		5,791			6,109
Warranty claims incurred		(5,791	)		(6,109	)
Balance at end of period	$	25,000		$	25,000

(m)

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, 2019 and 2018.

(n)

Comprehensive Income

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, 2019 and 2018 was equal to its net loss for the same periods.

(o)

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 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.

F-10

(p)

Segment Reporting

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.

(q)

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.

(r)

Recent Accounting Pronouncements

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 and intends to implement it in the first interim period following the year ended June 30, 2019.

(2)

BUSINESS ACQUISITION

On July 1, 2019 the Company acquired the operating assets of Ross Optical Industries, Inc. of El Paso, Texas, a supplier of custom and catalogue optical components sourced through an extensive network of worldwide specialized vendors and sold for industrial, military and medical applications. The acquisition had an effective date of June 1, 2019, and a purchase price of up to $2,000,000. Pursuant to the agreement $1,500,000 was owed at closing subject to certain holdback terms, of which $1,443,341 remained owed and is recorded as a current liability in the accompanying balance sheet at June 30, 2019. The Company agreed to pay the remaining $500,000 as an earn-out contingent upon the satisfaction of certain financial thresholds consisting of mutually agreed upon revenue and gross margin targets of the Ross Optical division over a term of three years, beginning on July 1, 2019 at a rate of up to $166,666 per year. The $500,000 earn out obligation is recorded as a long-term liability in the accompanying balance sheet at June 30, 2019.

To partially fund the acquisition the Company raised gross proceeds of $950,000 on July 1, 2019 through the sale of 760,000 shares of its common stock. See Note 4(f).

F-11

(a)

Purchase Price Allocation and Goodwill

The allocation of purchase price is preliminary and subject to change based on future payments made for the earn-out contingent liability. Any unearned portions of the earn-out liability will be recognized in earnings. The acquired assets, contingent consideration and assumed liabilities at the effective date of acquisition include the following:

At Acquisition Effective Date June 1, 2019	Amount
Cash and cash equivalents	$	163,204
Trade accounts receivable, net		652,898
Inventories		728,046
Other current assets		2,889
Fixed assets		232,036
Total Assets Acquired		1,779,073
Accounts payable		401,360
Customer advances		24,350
Accrued compensation and other		41,027
Total Liabilities Assumed		466,737
Net assets acquired		1,312,336
Goodwill		687,664
Total Purchase Price-Initial and Contingent Consideration	$	2,000,000

(b)

Consolidated Pro Forma Results

Consolidated unaudited pro forma results of operations for the Company are presented below assuming that the acquisition of the Ross Optical division has occurred on July 1, 2017. Pro forma operating results include net adjustments resulting from the acquisition transaction and reducing operating expenses by $447,722 and $364,149 during the years ended June 30, 2019 and 2018, respectively.

	2019		2018
Revenues	$	10,539,623	$	7,932,325
Net Income	$	121,946	$	472,317
Earnings per Share
Basic	$	0.01	$	0.05
Fully Diluted	$	0.01	$	0.05

Pro forma financial information is not necessarily indicative of the Company’s actual results of operations if the acquisition had been completed at the date indicated, nor is it necessarily an indication of future operating results. Amounts do not include any operating efficiencies or cost saving that the Company believes are achievable.

F-12

(3)

COMMITMENTS

(a)

Related Party Transactions

Transactions with Officers and Directors

Warrants to purchase 666,667 shares of the Company’s common stock were issued in conjunction with the sale the Company’s common stock in November, 2016. All 666,667 warrants were exercised in October 2017, by payment to the Company of $0.01 per share or an aggregate purchase price of $6,667. 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 in November 2016 and exercised warrants at 0.01 per share for an additional 78,333 shares in October 2017.

In March 2019 the Company’s board of directors approved the payment of $10,000 per quarter to the Company’s Chairman of the Board for the performance of services to the Company beginning retroactively for the quarter ended December 31, 2018. The agreement has no maturity date and $20,000 was paid prior to June 30, 2019 and $10,000 is included in accounts payable at June 30, 2019.

Transactions with Stockholders Known by the Company to Own 5% or More of the Company’s Common Stock

In October 2017 Dolphin Offshore Partners L.P. and Hershey Strategic Capital, L.P. exercised warrants pursuant to the November 2016 placement described above for 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.

At June 30, 2019 the Company had received payments for common stock subscriptions totaling $925,000 at $1.25 per share. On July 1, 2019 the Company received an additional $25,000 and closed the placement on that date by issuing 760,000 unregistered common shares. The placement proceeds were used to partially fund the business acquisition of the Ross Optical division. In conjunction with the placement, the Company also entered into a registration rights agreement with the investors requiring submission of a registration statement with the Securities and Exchange Commission within ninety days of the placement. Ms. Sandra Pessin acquired 200,000 shares in this placement for $250,000 or $1.25 per share, and at that time Ms. Pessin was owner of more than 5% of the Company’s outstanding common stock.

F-13

(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, 2019, future minimum lease payments under the capital lease obligation are as follows:

Fiscal Year Ending June 30:	Amount
2020	$	10,250
2021		5,126
Total minimum payments		15,376
Less: amount representing interest		777
Present value of minimum lease payments		14,599
Less: current portion		9,572
	$	5,027

The net book value of assets held under capital leases is $13,192 at June 30, 2019.

(c)

Operating Lease Commitments

The Company’s operating leases for its Gardner, Massachusetts office and production 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 $58,228 and $58,100 for the years ended June 30, 2019 and 2018, respectively.

The Ross Optical division rents a single facility in El Paso, Texas from an unrelated party pursuant to an operating lease with the following non-cancellable minimum lease payments through May 2022.

Fiscal Year Ending June 30:	Amount
2020	$	40,784
2021		41,803
2022		39,196
Total minimum payments	$	121,783

In addition to the minimum lease payments, the Company also pays operating costs associated with the El Paso lease. Total rent expense for the month of June 2019 since the acquisition of the Ross Optical division and included in the accompanying statement of operations was $4,976.

F-14

(4)

STOCKHOLDERS’ EQUITY

(a)

Stock Options

The following table summarizes stock-based compensation expense for the years ended June 30:

	2019		2018
Cost of Goods Sold	$	11,233	$	8,669
Research and Development Expenses		20,398		15,423
Selling, General and Administrative Expenses		231,695		28,249
Stock Based Compensation Expense	$	263,326	$	52,341

(b) Common Stock Award

On August 2, 2018, the Company awarded its Chief Executive Officer 300,000 shares of common stock for services performed through June 30, 2018. As of June 30, 2019, 200,000 shares have been issued. The fair market value of the 300,000 shares on the award date equal to $210,000 has been recorded as general and administrative stock-based compensation expense in the quarter ended September 30, 2018.

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, 2019 or 2018, as the Company is currently in a loss position. There were 831,000 stock options granted during the year ended June 30, 2019 and 40,000 stock options granted during the year ended June 30, 2018.

As of June 30, 2019, the unrecognized compensation costs related to options vesting in the future is $200,578. 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 2019:

	Year Ended
	June 30, 2019
Assumptions:
Option life		5.3 years
Risk-free interest rate		3.0%
Stock volatility		133%
Dividend yield		0
Weighted average fair value of grants	$	0.70

F-15

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, 2019: 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 and in some instances are subject to future performance criteria. 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. On May 1, 2019, the Board of Directors approved an amendment to the 2011 Equity Incentive Plan which increased the maximum number of shares of our common stock that may be awarded under the Plan from 1,825,000 to 2,825,000, an increase of 1,000,000 shares. At June 30, 2019, a total of 1,702,102 stock options are outstanding and 655,898 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. At June 30, 2019, a total of 117,398 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, 2019 and 2018:

	Options Outstanding
	Number of Shares			Weighted Average Exercise Price	Weighted Average Contractual Life
Outstanding at July 1, 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
Grants	831,000		$	0.99
Exercised	(64,500	)	$	0.75
Cancellations	(2,700	)	$	0.86
Outstanding at June 30, 2019	1,819,500		$	0.87	7.05 years

F-16

Information related to the stock options outstanding as of June 30, 2019 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		2.04	$	0.27		40,000	$	0.27
$	0.40		15,000		7.83	$	0.40		10,000	$	0.40
$	0.48		60,000		6.75	$	0.48		60,000	$	0.48
$	0.50		100,000		5.98	$	0.50		100,000	$	0.50
$	0.55		46,500		4.60	$	0.55		41,500	$	0.55
$	0.64		25,000		8.37	$	0.64		15,000	$	0.64
$	0.70		100,000		9.10	$	0.70		100,000	$	0.70
$	0.73		801,000		7.29	$	0.73		631,500	$	0.73
$	0.85		6,000		3.51	$	0.85		6,000	$	0.85
$	0.90		6,000		4.51	$	0.90		6,000	$	0.90
$	0.95		30,000		5.03	$	0.95		30,000	$	0.95
$	1.20		207,800		2.67	$	1.20		207,800	$	1.20
$	1.30		381,000		9.89	$	1.30		0	$	1.30
$	1.35		1,200		0.40	$	1.35		1,200	$	1.35
$	0.27–1.35		1,819,500		7.09	$	0.87		1,249,000	$	0.87

The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisable options as of June 30, 2019 was $565,150 and $484,005, respectively.

(c)

Warrants

Warrants for the issuance of 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 were no warrants for the purchase of the Company’s stock outstanding as of June 30, 2019 or 2018.

(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 used the net proceeds from this placement for general working capital purposes.

F-17

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, pursuant to which the Company filed a registration statement for the 555,556 shares with the Securities and Exchange Commission on November 20, 2017 and which became effective on December 13, 2017.

(e)

Sale of Stock in October 2018

On October 16, 2018, the Company entered into agreements with accredited investors for the sale and purchase of 1,600,000 unregistered shares of its common stock, $0.01 par value at a purchase price of $1.25 per share. The Company received $2,000,000 in gross proceeds from the offering. The Company is using the net proceeds from this placement for general working capital purposes.

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 October 16, 2018 to register the resale by the investors of 1,600,000 shares of our common stock purchased in the placement. The registration statement was filed with the Securities and Exchange Commission on January 3, 2019 and Amendment No. 1 to the registration statement was filed with the Securities and Exchange Commission on January 16, 2019. The registration statement became effective on February 5, 2019.

(f)

Sale of Stock in July 2019

On July 1, 2019, the Company entered into agreements with accredited investors for the sale and purchase of 760,000 unregistered shares of its common stock, $0.01 par value at a purchase price of $1.25 per share. The Company received $950,000 in gross proceeds from the offering, $925,000 of which was received as of June 30, 2019 and is included in the accompanying statement of stockholders’ equity as common stock subscriptions. The Company used the net proceeds from this placement to partially fund the July 1, 2019 acquisition of the operating assets of Ross Optical Industries, Inc with an effective date of June 1, 2019.

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 120 calendar days after July 1, 2019 to register the resale by the investors of 760,000 shares of our common stock purchased in the placement.

(5)

INCOME TAXES

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.

F-18

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, 2019 and 2018.

A reconciliation of the federal statutory rate to the Company’s effective tax rate for the fiscal years ended June 30, 2019 and 2018 is as follows:

	2019		2018
Income tax expense (benefit) at federal statutory rate		(21.0)%		(21.0)%
Increase (decrease) in tax resulting from:
State taxes, net of federal benefit		(6.3)%		(6.3)%
Change in valuation allowance		5.0%		20.4%
Stock based compensation		21.0%		4.5%
Nondeductible items		1.1%		2.3%
Effective tax rate		(0.2)%		(0.1)%

The components of deferred tax assets and liabilities at June 30, 2019 and 2018 are approximately as follows:

	2019			2018
Deferred tax assets:
Net operating loss carry forwards	$	2,121,000		$	2,601,000
Tax credit carry forwards		298,000			377,000
Reserves and accruals not yet deducted for tax purposes		563,000			360,000
Total deferred tax assets		2,982,000			3,338,000
Valuation allowance		(2,982,000	)		(3,338,000	)
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.

At June 30, 2019, the Company had federal and state net operating loss carry forwards of approximately $9,134,000 and $3,196,000, respectively, which will, if not used, expire at various dates beginning in fiscal year 2020. In addition, the Company had net operating loss carry forwards from its Hong Kong operations of approximately $2,252,000, which carry forward indefinitely.

(6)

PROFIT SHARING PLAN

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 2019 and 2018.

F-19

Pro Forma Statement of Operations

Precision Optics Corporation, Inc. and Ross Optical Industries, Inc.

Year Ended June 30, 2019

(Unaudited)

							Adjustments
	Precision Optics Corporation, Year Ended 6/30/2019			Ross Optical Industries, Inc. Year Ended 6/30/2019			Owners’ Compensation and Acquisition Expenses			Bank Debt Interest			Added Depreciation Expense		Federal Income Tax Expense				Pro Forma Year Ended 6/30/19
							(Note 1)			(Note 2)			(Note 3)		(Note 4)

Revenues	$	6,147,937		$	4,391,686			–			–			–		–		$	10,539,623

Cost of goods sold		4,357,091			2,365,607			–			–		$	19,451		–			6,742,149

Gross Profit		1,790,846			2,026,079			–			–			–		–			3,797,474

Research and development expenses		505,300			–			–			–			–		–			505,300
Selling, general and administrative expense		1,960,975			1,406,557		$	(195,315	)		–			–		–			3,172,217

Business acquisition expense		128,111			–		$	(128,111	)		–			–		–			–
		2,594,386			1,406,557			–			–			–		–			3,677,517

Net income (loss) from operations		(803,540	)		619,522			–			–			–		–			119,957

Other (income) expense								–			–			–		–
Interest expense		1,416			7,898			–		$	(7,898	)		–		–			1,416
Other					(4,317	)		–			–			–		–			(4,317)
		1,416			3,581			–			–			–		–			(2,901)

Net income (loss) before taxes		(804,956	)		615,941			–			–			–		–			122,858

Income tax expense		912			135,849			–			–			–	$	(135,849	)		912

Net income (loss)	$	(805,868	)	$	480,092			–			–			–		–		$	121,946

Notes to Unaudited Pro Forma Statements of Operations for the year ended June 30, 2019

The following notes describe the pro forma adjustments made to the unaudited consolidated statement of operations of Precision Optics Corporation, Inc. (“POC”) and Ross Optical Industries, Inc. (“ROI”) for the year ended June 30, 2019 as though POC acquired the ROI net assets as of July 1, 2018. Prior to the acquisition of ROI by POC there were no intercompany transactions between the companies.

Note 1. The founder and CEO of ROI will not continue with POC after the acquisition, therefore, his annual salary of $120,000 as well as the executive bonuses paid to the owners of ROI are removed from the pro forma statement of operations. Business acquisition costs removed from operating expenses represent direct legal, audit and travel costs incurred as part of the acquisition of the operating assets of Ross Optical Industries, Inc.

F-20

Note 2. POC did not assume any ROI bank debt and therefore interest expense is removed from the pro forma statement of operations.

Note 3. Due to the $97,253 write up of fixed assets to their fair market value additional depreciation is added to this pro forma statement of operations assuming a five-year useful life and straight-line depreciation.

Note 4. As of June 30, 2019 POC has an estimated $9.1 million Federal net operating loss carry-forwards which can be used to offset taxable income generating in future years by the POC and ROI combined operations. Therefore, the federal tax expense of ROI has been removed from this pro forma statement of operations assuming the application of POC net operating loss carry-forwards.

Deferred tax assets resulting from future application of POC net operating loss carry forwards have been discounted to zero as of the date of these pro forma financial statements since the realization of the NOL carry forwards by future taxable income is currently uncertain.

F-21

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.

CONTROLS AND PROCEDURES.

Management’s Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures, including internal control over financial reporting, were not effective, as of June 30, 2019, to ensure the information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended (i) is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are intended to be designed to provide reasonable assurance that such information is accumulated and communicated to our management.

Management’s Annual Report on Internal Control Over Financial Reporting

Our disclosure controls and procedures include components of our internal control over financial reporting. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, with our Company have been detected.

A “material weakness” is defined as a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A “significant deficiency” is a control deficiency, or a combination of control deficiencies, that adversely affects a company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the annual or interim financial statements that is more than inconsequential will not be prevented or detected.

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of June 30, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our evaluation, our management concluded that our internal control over financial reporting was not effective as of June 30, 2019.

The following is a description of two material weaknesses in our internal control over financial reporting:

Segregation of Duties: As previously disclosed in our Annual Reports on Form 10-K for the fiscal years ended June 30, 2008-2018, our management identified a control deficiency during the 2008 fiscal year because we lacked sufficient staff to segregate accounting duties. We believe the control deficiency resulted primarily because we have the equivalent of one and one-half persons performing all accounting-related on-site duties. As a result, we did not maintain adequate segregation of duties within our critical financial reporting applications, the related modules and financial reporting processes. This control deficiency could result in a misstatement of balance sheet and income statement accounts in our interim or annual consolidated financial statements that would not be detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.

To address and remediate the material weakness in internal control over financial reporting described above, beginning with the quarter ended September 30, 2008, we instituted a procedure whereby our Chief Executive Officer, our Chief Financial Officer and other members of our Board of Directors perform a higher level review of the quarterly and annual reports on Form 10-Q and Form 10-K prior to filing.

We believe that the step outlined above strengthens our internal control over financial reporting and mitigates the material weakness described above. As part of our 2019 assessment of internal control over financial reporting, our management has evaluated this additional control and has determined that it is operating effectively.

Inventory Valuation: As previously disclosed in our Annual Reports on Form 10-K for the fiscal years ended June 30, 2009-2018, we reported a material weakness with respect to the valuation of our inventories. Specifically, the amounts used to value our inventory at June 30, 2009 with respect to overhead rates and purchased items were often inconsistent with the supporting documentation, due to year-to-year changes in overhead rates and costs of purchased items that were not properly reflected in inventory valuation. Accordingly, management had determined that this control deficiency constituted a material weakness as of June 30, 2009. One audit adjustment of approximately $58,000 to our audited financial statements as of June 30, 2011 was necessary as a result of this condition.

To address and remediate the material weakness in internal control over financial reporting described above, beginning in the quarter ended September 30, 2009 and continuing through the year ended June 30, 2019, we implemented procedures to improve our inventory controls and documentation surrounding inventory valuation for overhead rates, and performed procedures to ensure that the pricing of inventory items was consistent with the supporting documentation. We believe that the step outlined above strengthens our internal control over financial reporting and mitigates the material weakness described above.

We intend to continue to remediate material weaknesses and enhance our internal controls but cannot guarantee that our efforts will result in remediation of our material weaknesses or that new issues will not be exposed in this process.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the fourth quarter of our fiscal year covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION.

Effective October 1, 2019, our Board of Directors approved an increase in base salary of our Chief Executive Officer, Dr. Joe Forkey, to $250,000 per year.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Identification of Directors

Set forth below is certain information with respect to the individuals who are our directors as of September 20, 2019.

Name	Age		Position(s) or Office(s) Held
Joseph N. Forkey		51	Chief Executive Officer, President, Treasurer and Director
Andrew J. Miclot		63	Director
Richard B. Miles		76	Director
Peter H. Woodward		46	Chairman of the Board of Directors

Board Composition. Our Board of Directors is divided into three classes that are as nearly equal in number as possible, with each class serving for a staggered term of office. Only one class is elected each year. Each director serves a three-year term and until his or her successor has been duly elected and qualified. Our Board currently consists of five directors. Our Class I director is Peter H. Woodward. Our Class II director is Andrew J. Miclot. Our Class III directors are Joseph N. Forkey and Richard B. Miles.

Biographies and Qualifications of Our Directors. The biographies of our directors and certain information regarding each director’s experience, attributes, skills and/or qualifications that led to the conclusion that the individual should be serving as a director of our Company are as follows:

Dr. Joseph N. Forkey

Dr. Joseph N. Forkey has served as our Chief Executive Officer, President and Treasurer since February 8, 2011. Dr. Forkey has been a member of our Board of Directors since 2006. He served as our Chairman of our Board of Directors from February 2011 to July 2014. He served as our Executive Vice President and Chief Scientific Officer from April 2006 to February 2011, and held the position of our Chief Scientist from September 2003 to April 2006. Since joining us, he has been involved in general technical and management activities of our Company, as well as investigations of opportunities that leverage our newly developed technologies. Dr. Forkey holds B.A. degrees in Mathematics and Physics from Cornell University, and a Ph.D. in Mechanical and Aerospace Engineering from Princeton University. Prior to joining us, Dr. Forkey spent seven years at the University of Pennsylvania Medical School as a postdoctoral fellow and research staff member. Dr. Forkey is a valuable member of our Board due to his depth of scientific, operating, strategic, transactional, and senior management experience in our industry. Additionally, Dr. Forkey has held positions of increasing responsibility at our Company and holds an intimate knowledge of our Company due to his longevity in the industry and with us.

Andrew J. Miclot

Mr. Miclot was appointed to our Board on March 2, 2016. Mr. Miclot has more than 35 years of leadership experience with medical device suppliers and brings substantial global industry knowledge to our Company. Since January 2017, Mr. Miclot has been the Vice Chairman and Director of WishBone Medical, Inc., a pediatric orthopedic company dedicated to the unmet needs of children suffering from orthopedic challenges and President from October 2017 to January 2019. He is on several Advisory Boards including ODT, Orthopedic Design & Technology, since December 2005 and Indiana University Alumni Association since October 2016. From October 2015 to January 2018, Mr. Miclot served as President, CEO and Director of Micro Machine Co., a supplier of medical products for the orthopedic and spinal industries. Prior to joining Micro Machine Co., from May 2013 to September 2014, Mr. Miclot was Executive Vice President of MicroTechnologies, Inc., a medical device supplier. Mr. Miclot was General Manager and Senior Vice President of ArthroCare Corporation from June 2009 to March 2013. From January 2008 to March 2009, Mr. Miclot was President, CEO and Director of Ascension Orthopedics, Inc. He was Vice President of Marketing for the orthopedic global business unit at Orthofix, Inc. from April 2007 to January 2008, and from March 1994 to April 2007, he served as Senior Vice President with Symmetry Medical Inc., a medical device supplier and was also the Investor Relations Officer, after the NYSE IPO in December 2004 until April 2007. Mr. Miclot has a BA degree in Speech and Hearing and a MA degree in Audiology from Indiana University and an MBA from the Lake Forest Graduate School of Management, earned in 1991.

Richard B. Miles

Professor Richard B. Miles was appointed to our Board of Directors in November 2005. He was a member of the Mechanical and Aerospace Engineering faculty at Princeton University from 1972 until 2013, at which time he retired from his Princeton academic appointment and became Professor Emeritus and Senior Scholar. From 1980 to 1996 he served as Chairman of Engineering Physics at Princeton. In 2017 he joined Texas A&M University and was appointed TEES Eminent Professor of Aerospace Engineering. In 2019 he was named Distinguished University Professor. He is a member of the National Academy of Engineering and a senior member of the National Academy of Inventors. He serves on the Board of Directors of the Hertz Foundation and the Board of Trustees of Pacific University, Oregon and is a Fellow of the Optical Society of America (OSA) and the American Institute Aeronautics and Astronautics (AIAA). Professor Miles is a valuable member of our Board due to his depth of scientific experience and familiarity with the field of our technologies, insight into the academic community, and familiarity with the latest developments and innovations in science and technology.

Peter H. Woodward

Mr. Woodward was appointed to our Board effective July 9, 2014 and as chairman of the Board in connection with the sale and purchase agreement we entered into in July 2014. Mr. Woodward is the founder of MHW Capital Management, LLC, or MHW, a position he has held since September 2005. MHW specializes in large equity investments in public companies implementing operating strategies to significantly improve their profitability. From 1996 to 2005, Mr. Woodward was the Managing Director for Regan Fund Management, LLC. He served as the President and Chief Executive Officer and Director of Cartesian, Inc. from June 2015 to July 2018, and currently serves as Chairman of the Board and Chairman of the Audit Committee for TSS, Inc., and as the CEO of Innoative Power, LLC. Mr. Woodward holds a BA in economics from Colgate University and a Masters of International Affairs with a concentration in international economics and finance from Columbia University. He is also a Chartered Financial Analyst.

Identification of Executive Officers

Set forth below is certain information with respect to the individuals who are our executive officers as of September 20, 2019.

Name	Age		Position(s) or Office(s) Held
Joseph N. Forkey		51	Chief Executive Officer, President, Treasurer and Director
Donald A. Major		58	Chief Financial Officer and Secretary

Biographies and Qualifications of Our Executive Officers. The biographies of our executive officers and certain information regarding each officer’s experience, attributes, skills and/or qualifications that led to the conclusion that the individual should be serving as an executive officer of our Company are as follows:

Dr. Joseph N. Forkey

For Dr. Forkey’s full biography, please refer to the section entitled “Biographies and Qualifications of Our Directors.”

Donald A. Major

Mr. Major serves as our Chief Financial Officer and Secretary since June 2016 when he resigned as a member of our Board on which he served since 2005. From 2012 until June 2016, Mr. Major also served as our Executive Vice President for Corporate Development. Mr. Major is a Certified Public Accountant (inactive) and has experience in public accounting and in financial officer positions in publicly held and start-up medical device companies. Mr. Major has been an independent consultant since October 2007, providing companies with various management services as well as sourcing services for a private equity firm. Mr. Major served as Vice President of Corporate Development of Advanced Duplication Services LLC, Vice President and Treasurer of Anderson Entertainment, LLC (formerly Digital Excellence LLC), which was owned by a private equity firm and sold to Advanced Duplication Services LLC. Prior to that time, Mr. Major served in various executive financial positions in public and closely held medical device companies such as Bioplasty, Inc, Uroplasty, Inc., Advanced Bio-Surfaces, Inc., and in public accounting with Grant Thornton, Minneapolis. He earned his B.A. in Accounting from Michigan State University.

Other Involvement in Certain Legal Proceedings

None of our directors or executive officers has been involved in any bankruptcy or criminal proceedings, nor have there been any judgments or injunctions brought against any of our directors or executive officers during the last ten years that we consider material to the evaluation of the ability and integrity of any director or executive officer.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and persons who own more than 10% of a registered class of our securities to file reports of beneficial ownership and changes in beneficial ownership with the Securities and Exchange Commission on Forms 3 (Initial Statement of Beneficial Ownership), 4 (Statement of Changes of Beneficial Ownership of Securities) and 5 (Annual Statement of Beneficial Ownership of Securities). Officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

Based solely upon a review of reports provided to us by our officers and directors, we believe that, during the fiscal year ended June 30, 2019, no person required to file reports under Section 16(a) of the Securities Exchange Act of 1934 failed to file such reports on a timely basis during such fiscal year, except that we are aware that Dolphin Offshore Partners LP which owns approximately 20% of our common stock based on available public records as of September 17, 2019 has not filed a Form 3 to date. Dolphin Offshore Partners LP is not affiliated with our Company.

Code of Ethics

We adopted a Corporate Code of Ethics and Conduct that applies to all employees, officers and directors of our Company, including our principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions, a copy of which was filed as Exhibit 14.1 to our Annual Report on Form 10-K for the Fiscal Year Ended June 30, 2008 with the Securities and Exchange Commission on September 28, 2008. A copy of our Corporate Code of Ethics and Conduct can be obtained free of charge by contacting our Secretary, c/o Precision Optics Corporation, Inc., 22 East Broadway, Gardner, Massachusetts 01440.

Procedure for Nominating Directors

There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.

The Board of Directors will consider candidates for director positions that are recommended by any of our stockholders. Any such recommendation should be provided to our Secretary. The recommended candidate should be submitted to us in writing addressed to our Secretary, c/o Precision Optics Corporation, Inc., 22 East Broadway, Gardner, Massachusetts 01440. The recommendation should include the following information: name of candidate; address, phone and fax number of candidate; a statement signed by the candidate certifying that the candidate wishes to be considered for nomination to our Board of Directors and stating why the candidate believes that he or she would be a valuable addition to our Board of Directors; a summary of the candidate’s work experience for the prior five years and the number of shares of our stock beneficially owned by the candidate.

The Board will evaluate the recommended candidate and shall determine whether or not to proceed with the candidate in accordance with our procedures. We reserve the right to change our procedures at any time to comply with the requirements of applicable laws.

Committees of the Board of Directors

The Board of Directors has the responsibility for establishing broad corporate policies and reviewing our overall performance rather than day-to-day operations. The Board’s primary responsibility is to oversee management of our Company and, in so doing, serve the best interests of our Company and our stockholders.

Our Board of Directors has the ability to establish, or disband, such committees as necessary or appropriate to serve the needs of our Company. In February 2012, our Board of Directors made the determination to restructure and unanimously voted to disband its committees, including its Audit Committee. Our full Board of Directors performs all of the functions normally designated to an audit committee, compensation committee and nominating committee.

Audit Committee and Audit Committee Financial Expert

As of February 2012, the Board of Directors no longer has a separately designated audit committee. Now, the functions of the audit committee are conducted by the entire Board, whose members are named above. We do not currently have an “audit committee financial expert,” as defined in Item 407(d)(5)(ii) of Regulation S-K.

We believe that each member of our Board is financially literate and possesses sufficient experience, both professionally and by virtue of his service on our Board, to be fully capable of discharging his duties as a member of our Board performing audit committee functions.

ITEM 11.

EXECUTIVE COMPENSATION.

Executive Compensation

Summary Executive Compensation

The following table sets forth all compensation for our fiscal years ended June 30, 2019 and 2018 awarded to, earned by, or paid to our Principal Executive Officer, our most highly compensated executive officer and our most highly compensated employee, all of which are referred to herein as the “Named Executive Officers.” No other executive officer earned over $100,000 in the last completed fiscal year.

Summary Executive Compensation Table for the Fiscal Years Ended June 30, 2019 and 2018

Name and Principal Position	Year June 30,	Salary ($)		Bonus ($)			Stock Awards ($) (1)			Option Awards ($) (2)			All Other Compensation ($)			Total ($)
Joseph N. Forkey	2019		200,000		0			210,000	(3)		230,836	(4)		0			640,836
Director, Chief Executive Officer, President and Treasurer	2018		120,000		0			0			0			0			120,000

Donald A. Major	2019		176,037		0			0			101,590	(5)		0			277,627
Chief Financial Officer, Secretary	2018		159,843		0			0			0			0			159,843

Richard G. Cyr	2019		145,826		19,307	(6)		0			51,844	(7)		22,620	(8)		239,597
Optics Laboratory Manager	2018		145,000		38,120	(6)		0			0			23,004	(8)		206,124


Jeffrey L. DiRubio
Vice President, Sales & Marketing	2019		27,785		35,328	(6)		0			115,209	(9)		122,000	(10)		300,322

_______________________

(1)	Represents the aggregate grant date fair value of stock awards granted in the respective fiscal year as computed in accordance with FASB ASC Topic 718, Compensation — Stock Compensation. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option valuation model. A discussion of the assumptions used in calculating the amounts in this column may be found in the Notes to our audited consolidated financial statements for the year ended June 30, 2019 set forth in this Annual Report on Form 10-K. These amounts do not represent the actual amounts paid to or realized by the directors during the fiscal year ended June 30, 2019.

(2)	Represents the aggregate grant date fair value of stock option awards granted in the respective fiscal year as computed in accordance with FASB ASC Topic 718, Compensation — Stock Compensation. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model. A discussion of the assumptions used in calculating the amounts in this column may be found in the Notes to our audited consolidated financial statements for the year ended June 30, 2019 set forth in this Annual Report on Form 10-K. These amounts do not represent the actual amounts paid to or realized by the directors during the fiscal year ended June 30, 2019.

(3)	On August 2, 2018, we awarded Mr. Forkey 300,000 shares of common stock for services performed through June 30, 2018. As of June 30, 2019, 200,000 shares have been issued, and the remaining 100,000 shares will be issued on January 1, 2020.

(4)	On August 2, 2018, we granted Mr. Forkey stock options to purchase up to 350,000 shares of our common stock at an exercise price of $0.73 per share. The options vested as follows: (i) one–half of the options vest if we achieve revenues of $1.5 million or higher for two consecutive fiscal quarters, based on the reported revenues in our Form 10-Ks or 10-Qs; and (ii) one-half of the options vested if our common stock was trading at $1.00 per share or higher for fifteen consecutive trading days. In the event of a change of control all unvested options will vest. As of June 30, 2019, 175,000 options are vested pursuant to (ii) the $1.00 stock trading criteria described above.

(5)	On August 2, 2018, we granted Mr. Major stock options to purchase up to 100,000 shares of our common stock at an exercise price of $0.70 per share, or the closing price of our common stock on August 2, 2018. The options vested as follows: 33,000 options vest three months following the grant date; 33,000 options vest three months following the end of the second consecutive quarter with Company quarterly revenues of $1,500,000 or greater, as announced in our Form 10-Q and / or 10-K filings; 34,000 options vest three months following the end of a second consecutive quarter with a Company gross margin percentage of 30% or greater, as announced in our Form 10-Q or 10-K filings. All options vest and become exercisable upon the effective date of an involuntary termination of Mr. Major as Chief Financial Officer for a reason other than cause or upon the effective date of a change in control of the Company. On May 10, 2019 the Board of Directors approved the immediate vesting as of that date of any unvested options held by Mr. Major and exercise of all options until their expiration dates regardless of Mr. Major’s employment status with the Company in return for services performed and to be performed.

(6)	Represents performance bonus awards for the respective fiscal year.

(7)	We granted Mr. Cyr a stock option to purchase up to 45,000 shares of our common stock at an exercise price of $1.30 per share, the closing price of our common stock on May 1, 2019. Provided Mr. Cyr remains eligible under the plan on these dates, the options vest on May 1, 2020, 2021 and 2022 in amounts of 15,000 on each of the three dates.

(8)	Represents the payments made to Mr. Cyr pursuant to the month-to-month rental of certain specialized optics lab machinery and equipment used and available for use by the Company.

(9)	We granted Mr. DiRubio a stock option to purchase up to 100,000 shares of our common stock at an exercise price of $1.30 per share, the closing price of our common stock on May 1, 2019. Provided Mr. DiRubio remains eligible under the plan on these dates, the options vest on May 1, 2020, 2021 and 2022 in amounts of 34,000, 33,000 and 33,000 options, respectively.

(10)	Represents consulting fees paid to Mr. DiRubio during fiscal year 2018 before Mr. DiRubio became Vice President, Sales & Marketing on May 1, 2019.

Employment Contracts

Agreement with Mr. Forkey

On July 27, 2018, our Board of Directors approved a new compensation agreement with our Chief Executive Officer, Joseph Forkey effective August 2, 2018. Pursuant to the agreement, we agreed to pay Mr. Forkey a base salary of $200,000 per year beginning retroactively on July 1, 2018. Effective October 1, 2019, our Board of Directors approved an increase of Dr. Forkey’s base salary to $250,000 per year. On August 2, 2018, we also granted Mr. Forkey a stock option to purchase up to 350,000 shares of our common stock at an exercise price of $0.73 per share. The options vested as follows: (i) one–half of the options vest if we achieved revenues of $1.5 million or higher for two consecutive fiscal quarters, based on the reported revenues in our Form 10-Ks or 10-Qs; and (ii) one-half of the options vested if our common stock was trading at $1.00 per share or higher for fifteen consecutive trading days. In the event of a change of control all unvested options will vest. As of June 30, 2019, 175,000 options are vested pursuant to (ii) the $1.00 stock trading criteria described above. We will also grant Mr. Forkey 300,000 shares of common stock at a rate of 50,000 shares per fiscal quarter retroactively starting January 1, 2017 and through the quarter ended June 30, 2018. As of June 30, 2019, 200,000 of such shares have been issued to Mr. Forkey, and the remaining 100,000 shares will be issued on January 1, 2020.

Agreements with Mr. Major

In June 2016 we entered into a consulting agreement with Mr. Major to serve as our Chief Financial Officer from June 15, 2016 to June 30, 2017, with such term to renew automatically on a month to month basis thereafter unless terminated by either party with 30 days’ notice. Mr. Major received compensation at a rate of $6,500 per month to work up to an estimated 40% full-time equivalent per month in his capacity as our Chief Financial Officer. If Mr. Major worked more than the 40% full-time equivalent in any given month, Mr. Major received additional compensation, up to a maximum amount of $16,000 in any given month. This consulting agreement was terminated pursuant to the new compensation agreement with Mr. Major made effective on August 1, 2018.

On July 27, 2018, our Board of Directors approved a new compensation agreement with our Chief Financial Officer and Secretary, Donald Major effective August 1, 2018 pursuant to which we agreed to pay Mr. Major a base salary of $175,000 per year for a minimum 75% full-time commitment, and to grant Mr. Major a stock option to purchase up to 100,000 shares of our common stock at an exercise price of $0.70 per share, the closing price of our common stock on August 2, 2018. The options were subject to certain vesting terms, and on May 10, 2019 the board of directors approved the immediate vesting as of that date of any unvested options held by Mr. Major and exercise of all options until their expiration dates regardless of Mr. Major’s employment status with the Company in return for services performed and to be performed. Mr. Major will receive a severance payment equal to six weeks of base salary upon the effective date of an involuntary termination of Mr. Major as Chief Financial Officer for a reason other than cause or upon the effective date of a change in control of the Company.

Agreement with Mr. DiRubio

Effective May 1, 2019 we entered into an employment agreement with Mr. DiRubio to serve as our Vice President, Sales & Marketing effective May 1, 2019 pursuant to which we agreed to pay Mr. DiRubio a base salary of $168,000 per year plus potential annual bonuses totaling $75,000 contingent upon meeting certain sales and company profit goals. Mr. DiRubio was also granted a stock option to purchase up to 100,000 shares of our common stock at an exercise price of $1.30 per share, the closing price of our common stock on May 1, 2019. Provided Mr. DiRubio remains eligible under the plan on these dates, the options vest on May 1, 2020, 2021 and 2023 in amounts of 34,000, 33,000 and 33,000 options, respectively. We also agreed to give Mr. DiRubio six months’ notice or pay in lieu of notice in case he is involuntarily terminated within six months of a change in control.

Agreement with Mr. Mangadu

In connection with the acquisition of the Ross Optical division we entered into an employment agreement on July 1, 2019 with Divaker (Divi) Mangadu to serve as President of Ross Optical Industries (a division of Precision Optics Corporation). The agreement covers a period of five years unless terminated sooner under certain conditions by the parties and may be renewed beyond the initial and subsequent terms for additional one year periods. Mr. Mangadu shall receive an annual salary of $140,000 plus annual bonus up to $40,000, and shall also receive a stock option to purchase 100,000 shares of the Company’s common stock exercisable at a price equal to the stock market value on the date of grant and vesting in 3 installments of 33,000, 33,000 and 34,000 each one, two, and three years, respectively after the date of grant. If Mr. Mangadu is terminated without cause by the Company during the initial five year term of the agreement, he shall receive a lump-sum $75,000 cash severance payment and all unexercised stock options shall vest immediately and be exercisable for the remainder of their term. If Mr. Mangadu is terminated without cause subsequent to the initial five year term, he shall receive a lump-sum cash severance payment equal to one-half his then current annual salary. The agreement also provides that for a period of five years after July 1, 2019 Mr. Mangadu agrees not to compete with the Company, solicit employees, vendors or customers for purposes that do not directly benefit the Company or to interfere in any way with the Company’s relationship with any vendors or customers.

Apart from the agreements described above, we have no other employment contracts in place with any Named Executive Officer or any compensatory plan or arrangement with respect to any Named Executive Officer where such plan or arrangement will result in payments to such Named Executive Officer upon or following his resignation, or other termination of employment with us and our subsidiaries, or as a result of a change-in-control of our Company or a change in the Named Executive Officers’ responsibilities following a change-in-control.

Outstanding Equity Awards at Fiscal Year-End Table for the Fiscal Year Ended June 30, 2019

The following table shows grants of options outstanding on June 30, 2019, the last day of our fiscal year, to each of the Named Executive Officers named in the Summary Executive Compensation Table.

Name	Number of securities underlying unexercised options exercisable			Number of securities underlying unexercised options unexercisable			Option exercise price ($)		Option expiration date
Joseph N. Forkey		150,000			0			1.20	03/02/2022
		175,000	(2)		175,000	(2)		0.73	08/02/2028

Donald A. Major		400			0			1.35	11/24/2019
		27,600			0			1.20	03/02/2022
		3,000			0			0.85	01/02/2023
		3,000			0			0.90	01/02/2024
		30,000			0			0.95	07/09/2024
		60,000			0			0.73	05/18/2025
		80,000			0			0.50	06/20/2026
		100,000	(3)		0			0.70	08/02/2028

Richard G. Cyr		40,000			0			0.27	07/14/2021
		15,000	(1)		10,000	(1)		0.73	05/18/2025
		0	(4)		45,000	(4)		1.30	05/17/2029

Jeffrey L. DiRubio		0	(4)		100,000	(4)		1.30	05/17/2029

_______________________

(1)	The options were granted on May 18, 2015. 5,000 options vested on August 18, 2015 and 10,000 options vested on February 14, 2018. The remaining 10,000 options will vest in accordance with the achievement of specified performance criteria.

(2)	The options were granted on August 2, 2018 with vesting subject to stock price and sales level performance criteria. As of June 30, 2019 one-half or 175,000 options have vested pursuant to stock price criteria and the remaining 175,000 option will vest upon the Company’s achieving two consecutive fiscal quarters of sales in excess of $1,500,000.

(3)	The options were granted on August 2, 2018 with certain vesting terms, the modification of which the Board of Directors approved on May 10, 2019 as described in the Employment Contracts section above.

(4)	The options were granted on May 17, 2019 with vesting of one-third of the options on each of the dates May 17, 2020, 2021, and 2022, respectively, subject to the holders’ eligibility under the Option Plan on each of those dates.

Profit Sharing and 401(k) Plan

We have a defined contribution 401(k) 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 2019 and 2018. No employer matching contributions were made to the plan in fiscal years 2019 and 2018.

Director Compensation

The following table sets forth cash amounts and the value of other compensation paid to our directors, but does not include the compensation of Dr. Joseph N. Forkey, our Chief Executive Officer, President, and Treasurer, as his compensation is reflected in the Summary Executive Compensation Table. During the fiscal year ended June 30, 2019, our Board of Directors determined that Dr. Joseph N. Forkey was our employee director and, therefore, would not earn any fees related to service on our Board.

Director Compensation Table for the Fiscal Year Ended June 30, 2019

Name of Director	Fees earned or paid in cash ($)(1)			Total ($)
Andrew J. Miclot		2,000			2,000
Richard B. Miles		1,750			1,750
Kenneth S. Schwartz		1,500	(2)		1,500
Peter H. Woodward		32,000	(3)		32,000

_______________________

(1)	Under our director compensation plan, each director receives $250 per board or committee meeting that the director attends. We also reimburse our directors for travel expenses.

(2)	Mr. Schwartz served on our board from July 9, 2014 until he passed away on June 13, 2019.

(3)	Mr. Woodward serves as our Chairman and performs various management services. In March 2019 the Company’s board of directors approved the payment of $10,000 per quarter to Mr. Woodward for the performance of certain management services beginning retroactively for the quarter ended December 31, 2018.

As of June 30, 2019, the following stock options were outstanding for each of our directors: Andrew J. Miclot – 60,000, Richard B. Miles – 74,400, Peter H. Woodward – 90,000.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following tables set forth information regarding our common stock owned as of the close of business on September 20, 2019 by the following persons: (i) each person who is known by us to own beneficially more than 5% of our common stock, (ii) each of our directors who beneficially owns our common stock, (iii) each of our Named Executive Officers who beneficially own our common stock and (iv) all executive officers and directors, as a group, who beneficially own our common stock. The information on beneficial ownership in the table and footnotes thereto is based upon data furnished to us by, or on behalf of, the persons listed in the table.

We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.

In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options held by that person or group that are currently exercisable or exercisable within 60 days after September 20, 2019. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person or group.

Stockholders Known by Us to Own Over 5% of Our Common Stock

	Amount of beneficial ownership (1)						Percent of
Name and Address of Beneficial Owner	Shares Owned		Shares – Rights to Acquire		Total Number		Shares Beneficially Owned (2)
Dolphin Offshore Partners LP (3) 4828 First Coast Highway, STE 5 Fernandina, FL 32034		2,070,625		0		2,070,625		16.1%

Stuart L Sternberg (4) 85 Bellevue Ave Rye, NY 10580		1,258,002		0		1,258,002		9.8%

Sandra F. and Norman H. Pessin (5) 500 Fifth Avenue, Suite 2240 New York, NY 10110		1,196,595		0		1,196,595		9.3%

Hershey Strategic Capital, LP (6) 888 7^th Ave., 17^th Floor New York, New York 10019		986,480		0		986,480		7.7%

MHW Partners, L.P. (7) 150 East 52^ndStreet 30^th Fl. New York, New York 10022		674,013		90,000		764,013		5.9%

_______________________

(1)

Represents shares with respect to which each beneficial owner listed has or will have, upon acquisition of such shares upon exercise or conversion of options, warrants, conversion privileges or other rights exercisable within 60 sixty days, sole voting and investment power. For the purposes of this table, we have not assumed the limitations on exercise set forth in certain options, which limit the number of shares of common stock that the holder, together with all other shares of common stock beneficially owned by such person, does not exceed 4.999% of the total outstanding shares of common stock.

(2)

As of September 20, 2019, there were 12,843,639 issued shares of our common stock issued and outstanding. Percentages are calculated on the basis of the amount of issued and outstanding common stock plus, for each person or group, any securities that such person or group has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights.

(3)	We relied, in part, on the Schedule 13D/A filed jointly by Dolphin Offshore Partners, L.P., Dolphin Mgmt. Services, Inc. and Peter E. Salas on December 27, 2017 for this information. Dolphin Offshore Partners, L.P., a Delaware limited partnership, is an investment manager. Dolphin Mgmt. Services, Inc., a Delaware corporation, is the managing general partner of Dolphin Offshore Partners, L.P. Peter E. Salas is the President, sole shareholder and controlling person of Dolphin Mgmt. Services, Inc. Peter Salas is a U.S. citizen.
	Dolphin Offshore Partners, L.P., Dolphin Mgmt. Services, Inc. and Peter E. Salas each may be deemed to beneficially own an aggregate of 2,070,625 shares of common stock. Dolphin Offshore Partners, L.P., Dolphin Mgmt. Services, Inc. and Peter E. Salas each may be deemed to have shared power to vote or direct the vote, and dispose or direct the disposition, of all such shares of common stock.

(4)	We relied, in part, on the Schedule 13G/A filed by Stuart Sternberg on July 11, 2019, for this information.

(5)	We relied, in part, on a Schedule 13D/A filed jointly with the SEC on July 5, 2019 by Sandra F. Pessin and Norman H. Pessin. Mr. and Mrs. Pessin are married and considered to beneficially hold each other’s shares. Ms. Pessin owns 963,334 shares and Mr. Pessin owns 233,625 shares for a combined beneficial ownership of 1,196,959 shares.

(6)	We relied, in part, on the Schedule 13D/A jointly filed by Hershey Strategic Capital, LP, Hershey Management I, LLC and Hershey Strategic Capital GP, LLC on October 10, 2017 for this information. Hershey Management I, LLC, a Delaware limited liability company, is the investment advisor of Hershey Strategic Capital, LP, a Delaware limited partnership. Hershey Strategic Capital GP, LLC, a Delaware limited liability company, is the general partner of Hershey Strategic Capital, LP. Adam Hershey is the sole managing member of both Hershey Management I, LLC and Hershey Strategic Capital GP, LLC. As the investment advisor, Hershey Management I, LLC has the voting and dispositive power with respect to all of the shares of common stock owned by Hershey Strategic Capital, LP. On July 9, 2014, Richard E. Forkey resigned as a director and Hershey Strategic Capital, LP designated Peter H. Woodward and Dr. Kenneth S. Schwartz to our Board of Directors and such designees were so appointed. Pursuant to the securities purchase agreement among us and several investors dated July 1, 2014, Hershey Strategic Capital, LP is entitled to designate two members of our Board of Directors, one of whom will be Chairman. If either of the directors designated by Hershey Strategic Capital, LP resigns from the Board of Directors before the third anniversary of the closing date of the transaction reflected in the purchase agreement, Hershey Strategic Capital, LP has the right to appoint an additional member of our Board of Directors, provided that funds and accounts managed Hershey Strategic Capital, LP at such time own more than one-half the number of shares purchased by Hershey Strategic Capital, LP in the transaction. Hershey Strategic Capital, LP beneficially owns 986,480 shares of common stock. Hershey Strategic Capital, LP is managed by Adam Hershey, and in such capacity, Mr. Hershey holds the power to vote and direct the disposition of all shares of common stock owned by Hershey Strategic Capital, LP. Hershey Management I disclaims beneficial ownership in the shares.

(7)

We relied, in part, on a Form 4 filed with the SEC on December 1, 2016 by Peter H. Woodward, on a Schedule 13D/A jointly filed with the SEC on November 3, 2015 by MHW Partners, L.P., MHW Capital, LLC, MHW Capital Management, LLC, and on a Form 4 filed with the SEC on October 26, 2015 by Peter H. Woodward for this information.

MHW Partners, L.P. is a Delaware limited partnership. MHW Capital, LLC is a Delaware limited liability company. MHW Capital Management, LLC is a Delaware limited liability company. MHW Capital, LLC is the general partner of MHW Partners, L.P. Mr. Woodward is the principal of MHW Capital Management, LLC and MHW Capital, LLC and in such capacity, Mr. Woodward holds the power to vote and direct the disposition of all shares of common stock owned by MHW Partners, L.P. MHW Partners, L.P., MHW Capital, LLC, MHW Capital Management, LLC and Mr. Woodward share the power to vote and direct the disposition of all shares of common stock owned by MHW Partners, L.P. Mr. Woodward is a citizen of the United States and our current Chairman of our Board of Directors.

MHW Partners, L.P. beneficially owns 674,013 shares of common stock, and 90,000 shares that may be acquired upon the exercise of outstanding stock options by Mr. Woodward. The options vested in three installments: one-third vested immediately on the date of grant; one-third vested on May 18, 2016; the remaining one-third vested on May 18, 2017. The options have an exercise price of $0.73 and expire on May 18, 2025. However, the aggregate number of shares of common stock into which such warrants and options are exercisable, and which MHW Partners, L.P. has the right to acquire beneficial ownership, is limited to the number of shares of common stock that, together with all other shares of common stock beneficially owned by MHW Partners, L.P., does not exceed 4.999% of the total outstanding shares of common stock. Accordingly, such warrants and options are not currently exercisable into common stock until the actual shares of common stock held by MHW Partners, L.P. is less than 4.999% of the total outstanding shares of common stock. MHW Partners, L.P. may waive this 4.999% restriction with 61 days’ notice to us.

Officers and Directors

		Amount of beneficial ownership (2)						Percent of
Name and address of beneficial owner (1)	Nature of beneficial ownership	Shares Owned		Shares – Rights to Acquire		Total Number		Shares Beneficially Owned (3)
Joseph N. Forkey (4)	Chief Executive Officer, President, Treasurer and Director		333,620		500,000		833,620		6.3%

Peter H. Woodward (5)	Chairman of the Board of Directors		674,013		90,000		764,013		5.9%

Richard B. Miles (6)	Director		15,112		74,400		89,512		*

Andrew J. Miclot (7)	Director		0		60,000		60,000		*

Donald A. Major (8)	Chief Financial Officer, Secretary		125,778		304,000		429,778		3.3%

Richard G. Cyr (9)	Optics Laboratory Manager		0		100,000		100,000		*

Jeffrey L. DiRubio (10)	Vice President, Sales & Marketing		186,000		100,000		286,000		2.2%

All directors and executive officers as a group			1,334,523		1,228,400		2,562,923		18.2%

* Percentage of shares beneficially owned does not exceed one percent of issued and outstanding shares of stock.

_______________________

(1)	Unless otherwise stated, the address of each beneficial owners listed on the table is c/o Precision Optics Corporation, Inc., 22 East Broadway, Gardner, MA 01440.

(2)	Represents shares with respect to which each beneficial owner listed has or will have, upon acquisition of such shares upon exercise or conversion of options, warrants, conversion privileges or other rights exercisable within 60 sixty days, sole voting and investment power.

(3)	As of September 20, 2019, we had 12,843,639 shares of our common stock issued and outstanding. Percentages are calculated on the basis of the amount of issued and outstanding common stock plus, for each person or group, any securities that such person or group has the right to acquire within 60 days of September 20, 2019 pursuant to options, warrants, conversion privileges or other rights.

(4)	Dr. Forkey is a member of our Board of Directors and serves as our Chief Executive Officer, President and Treasurer. Dr. Forkey’s beneficial ownership consists of (a) 333,620 shares of common stock held in joint ownership with his wife, Heather Forkey, with whom he shares voting and dispositive control, and (b) 500,000 shares of common stock that may be acquired upon the exercise of outstanding stock options.

(5)	Mr. Peter Woodward is the Chairman of our Board of Directors. Mr. Woodward is the managing member and general partner of MHW Partners and in such capacity, Mr. Woodward holds the power to vote and direct the disposition of all shares of common stock owned by MHW Partners. On September 28, 2012, MHW Partners purchased 222,223 shares of our common stock, and warrants to purchase up to 168,386 shares of our common stock at an exercise price of $1.11 per share, subject to adjustment and a call provision if certain market price targets are reached, and an expiration date of September 28, 2017. On July 2, 2014, MHW Partners purchased 125,000 shares of common stock. On October 19, 2015, MHW Partners purchased 100,000 shares of common stock. On November 22, 2016 MHW Partners purchased 156,667 shares of common stock, and warrants to purchase 78,333 shares of common stock at an exercise at a variable exercise price subject to the Companies achievement of certain performance criteria. Mr. Woodward exercised the 78,333 November 22, 2016 warrants on October 16, 2017 at $0.01 per share. Mr. Woodward’s beneficial ownership consists of (a) 674,013 shares of common stock held through MHW Partners, L.P., and (b) 90,000 shares of common stock which may be acquired upon the exercise of outstanding stock options.

(6)	Mr. Miles is a member of our Board of Directors. Mr. Miles’ beneficial ownership consists of (a) 15,112 shares of common stock, and (b) 74,400 shares of common stock that may be acquired upon the exercise of outstanding stock options.

(7)	Mr. Andrew Miclot is a member of our Board of Directors. Mr. Miclot’s beneficial ownership consists of 60,000 shares that may be acquired upon the exercise of outstanding stock options.

(8)	Mr. Major is our Chief Financial Officer. Mr. Major’s beneficial ownership consists of (a) 125,778 shares of common stock, and (b) 304,000 shares of common stock that may be acquired upon the exercise of outstanding stock options.

(9)	Mr. Cyr is our Optics Laboratory Manager and is considered a “named executive officer” as defined in Item 402(a)(3) of Regulation S-K. Mr. Cyr’s beneficial ownership consists of 55,000 shares of common stock that may be acquired upon the exercise of outstanding stock options.

(10)	Mr. DiRubio became our Vice President, Sales & Marketing effective May 1, 2019. Mr. DiRubio’s beneficial ownership consists of (a) 186,000 shares of common stock, and (b) 100,000 shares of common stock that may be acquired upon the exercise of outstanding stock options.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Certain Relationships and Related Transactions

Since the beginning of the last fiscal year we had the following related party transactions.

Transactions with Officers and Directors

We issued warrants to purchase 666,667 shares of our common stock in conjunction with the sale of our common stock in the November 2016 private placement. All 666,667 warrants were exercised in October 2017, by payment of $0.01 per share or an aggregate purchase price of $6,667. Our 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 in the November 2016 private placement and exercised warrants at 0.01 per share for an additional 78,333 shares in October 2017.

In March 2019 our board of directors approved the payment of $10,000 per quarter to our Chairman of the Board for the performance of services to the Company beginning retroactively for the quarter ended December 31, 2018. The agreement has no maturity date and $20,000 was paid prior to June 30, 2019 and $10,000 is included in accounts payable at June 30, 2019.

Transactions with Stockholders Known by the Company to Own 5% or More of the Company’s Common Stock

In October 2017 Dolphin Offshore Partners L.P. and Hershey Strategic Capital, L.P. exercised warrants pursuant to the November 2016 private placement described above for 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.

At June 30, 2019, we received payments for common stock subscriptions totaling $925,000 at $1.25 per share. On July 1, 2019, we received $950,000 and closed the private placement on that date by issuing 760,000 unregistered common shares. The placement proceeds were used to partially fund the business acquisition of the Ross Optical division closed on July 1, 2019 with an effective date of June 1, 2019. In conjunction with the placement, we also entered into a registration rights agreement with the investors requiring submission of a registration statement with the Securities and Exchange Commission within 120 days of the placement. Ms. Sandra Pessin acquired 200,000 shares in this placement for $250,000 or $1.25 per share, and at that time Ms. Pessin was owner of more than 5% of the Company’s outstanding common stock.

Director Independence

During the fiscal year ended June 30, 2019, the Board of Directors determined that Messrs. Richard B. Miles, and Andrew J. Miclot were “independent” as defined under the standards of independence set forth in the Nasdaq Listing Rules and the rules under the Securities Exchange Act of 1934.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES.

Independent Registered Public Accounting Firm Fees

Our principal and sole independent registered public accounting firm for the fiscal years ending June 30, 2019 and 2018 is Stowe & Degon LLC, referred to as Stowe. The following table presents fees for professional audit services and other services rendered by Stowe, for the fiscal years ended June 30, 2019 and 2018:

	2019		2018
Audit Fees (1)	$	77,263	$	83,250
Audit Related Fees (2)		7,220		3,251
Business Acquisition Related Fees (3)		43,969		–
Total Audit and Audit Related Fees		128,452		86,501
Tax Fees (4)		8,750		12,450
Total Fees	$	137,202	$	98,951

_______________________

(1)	Audit fees for fiscal year 2019 are comprised of fees for professional services performed for the audit of our annual financial statements and review of our quarterly financial statements of $77,263, including direct out-of-pocket expenses in the amount of $2,013. Audit fees for fiscal year 2018 are comprised of fees for professional services performed for the audit of our annual financial statements and review of our quarterly financial statements of $83,250, including direct out-of-pocket expenses in the amount of $1,809.

(2)	Audit-related fees are comprised of fees for assurance and related attestation services that are reasonably related to the performance of the audit of our annual financial statements, or the review thereof, and fees for due diligence services.

(3)	Business acquisition related fees relate to audit, assurance and related attestation services relating to our acquisition of the Ross Optical division in June 2019.

(4)	Tax fees for fiscal 2019 and 2018 are comprised of fees for professional services performed with respect to corporate tax compliance, tax return preparation and filing, tax planning and tax advice.

Pre-Approval Policies

Under the direction of our Chief Executive Officer, our Board of Directors pre-approves all services provided by our independent registered public accounting firm. 100% of the above services and fees were reviewed and approved by the Board of Directors either before or after the respective services were rendered. The Board of Directors has considered the nature and amount of fees billed by Stowe and believes that the provision of services for activities unrelated to the audit is compatible with maintaining the firm’s independence.

PART IV

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

a.	Documents filed as part of this report

The following documents are filed as part of this Annual Report on 10-K:

1.	FINANCIAL STATEMENTS

The following documents are filed in Part II, Item 8 of this Annual Report on Form 10-K:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at June 30, 2019 and 2018

Consolidated Statements of Operations for the years ended June 30, 2019 and 2018

Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2019 and 2018

Consolidated Statements of Cash Flows for the years ended June 30, 2019 and 2018

Notes to Consolidated Financial Statements

Pro Forma Statement of Operations for the year ended June 30, 2019

2.	FINANCIAL STATEMENT SCHEDULES

All financial statement schedules have been omitted as they are not required, not applicable, or the required information is otherwise included.

b.	Exhibits

The exhibits listed below are filed with or incorporated by reference in this report.

Exhibit		Description

2.1		Asset Purchase Agreement between the Company and Optometrics Corporation, dated January 18, 2008 (included as Exhibit 2.1 to the Form 8-K filed January 25, 2008 and incorporated herein by reference).

3.1		Articles of Organization of Precision Optics Corporation, Inc., as amended (included as Exhibit 3.1 to the Form SB-2 filed March 16, 2007, and incorporated herein by reference).

3.2		Bylaws of Precision Optics Corporation, Inc. (included as Exhibit 3.2 to the Form S-1 filed December 18, 2008, and incorporated herein by reference).

3.3		Articles of Amendment to the Articles of Organization of Precision Optics Corporation, Inc., dated November 25, 2008 and effective December 11, 2008 (included as Exhibit 3.1 to the Form 8-K filed December 11, 2008, and incorporated herein by reference).

3.4		Amended and Restated Bylaws of Precision Optics Corporation, Inc. (included as Exhibit 3.1 to the Current Report on Form 8-K filed July 11, 2014, and incorporated herein by reference).

10.1		Precision Optics Corporation, Inc. 2011 Equity Incentive Plan, dated October 13, 2011 (included as Exhibit 10.2 to Form S-8 filed October 14, 2011, and incorporated herein by reference.)

10.2		Precision Optics Corporation, Inc. Amended 2011 Equity Incentive Plan, dated October 14, 2011, as amended on April 16, 2015 (included as Exhibit 10.1 to the Company’s Registration Statement on Form S-8 filed April 20, 2015, and incorporated herein by reference).

10.3		Consulting Agreement with Donald A. Major dated June 15, 2016 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 23, 2016, and incorporated herein by reference).

10.4		Form of Purchase Agreement, by and among Precision Optics Corporation, Inc. and several Investors, dated November 22, 2016 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 29, 2016, and incorporated herein by reference).

10.5		Form of Registration Rights Agreement, by and among Precision Optics Corporation, Inc. and several Investors, dated November 22, 2016 (included as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 29, 2016, and incorporated herein by reference).

10.6		Form of Purchase Agreement, by and among Precision Optics Corporation, Inc. and several Investors, dated August 22, 2017 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 25, 2017, and incorporated herein by reference).

10.7		Form of Registration Rights Agreement, by and among Precision Optics Corporation, Inc. and several Investors, dated August 22, 2017 (included as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 25, 2017, and incorporated herein by reference).

10.8		Compensation Agreement, by and among Precision Optics Corporation, Inc. and Joseph N. Forkey, dated August 2, 2018 (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 3, 2018, and incorporated herein by reference).

10.9		Offer letter, by and among Precision Optics Corporation, Inc. and Donald Major, dated August 2, 2018.

10.10		Form of Securities Purchase Agreement by and among the Company and the Investors, dated October 16, 2018 (included as Exhibit 10.1 to the Form 8-K filed on October 18, 2018, and incorporated herein by reference).

10.11		Form of Registration Rights Agreement by and among the Company and the Investors, dated October 16, 2018 (included as Exhibit 10.2 to the Form 8-K filed on October 18, 2018, and incorporated herein by reference).

10.12†+		Asset Purchase Agreement dated July 1, 2019, between Precision Optics Corporation, Inc. and Ross Optical Industries, Inc. and the shareholders (included as Exhibit 10.1 to the Form 8-K filed on July 8, 2019, and incorporated herein by reference).

10.13		Form of Purchase Agreement, by and among Precision Optics Corporation, Inc. and several Investors, dated July 1, 2019 (included as Exhibit 10.2 to the Form 8-K filed on July 8, 2019, and incorporated herein by reference).

10.14	Form of Registration Rights Agreement, by and among Precision Optics Corporation, Inc. and several Investors, dated July 1, 2019 (included as Exhibit 10.3 to the Form 8-K filed on July 8, 2019, and incorporated herein by reference).

10.15	Employment Agreement, by and among Precision Optics Corporation. Inc. and Divaker Mangadu, dated July 1, 2019 (included as Exhibit 10.4 to the Form 8-K filed on July 8, 2019, and incorporated herein by reference).

10.16*†	Employment agreement, by and among Precision Optics Corporation, Inc. and Jeff DiRubio, dated April 26, 2019.

10.17*+	Lease Agreement, by and among Precision Optics Corporation, Inc. and Texzona Industries Ltd. dated July 1, 2019.

14.1	Precision Optics Corporation, Inc. Corporate Code of Ethics and Conduct (included as Exhibit 14.1 to the Form 10-K filed September 28, 2008, and incorporated herein by reference).

21.1	Subsidiaries of the Registrant (included as Exhibit 21.1 to the Form 10-K filed September 26, 2008, and incorporated herein by reference).

23.1*	Consent of Independent Registered Public Accounting Firm.

31.1*	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*	Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith.
†	Certain portions of the agreement have been omitted to preserve the confidentiality of such information. The Company will furnish copies of any such information to the SEC upon request.
+	The schedules to the agreement have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish copies of any such schedules to the SEC upon request.

Copies of above exhibits not contained herein are available to any stockholder, upon written request to: Chief Financial Officer, Precision Optics Corporation, Inc., 22 East Broadway, Gardner, MA 01440.

ITEM 16.

FORM 10-K SUMMARY.

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PRECISION OPTICS CORPORATION, INC.


Date: September 26, 2019	By:	/s/ Joseph N. Forkey
		Joseph N. Forkey President and Chief Executive Officer
		(Principal Executive Officer)


Date: September 26, 2019	By:	/s/ Donald A. Major
		Donald A. Major Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, 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	Capacity	Date

/s/ Joseph N. Forkey Joseph N. Forkey	Chief Executive Officer, President, Treasurer and Director (Principal Executive Officer)	September 26, 2019

/s/ Donald A. Major Donald A. Major	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	September 26, 2019

/s/ Andrew J. Miclot	Director	September 26, 2019
Andrew J. Miclot

/s/ Peter H. Woodward	Director, Chairman	September 26, 2019
Peter H. Woodward

/s/ Richard B. Miles	Director	September 26, 2019
Richard B. Miles

Exhibit 10.16

[Certain identified information has been excluded from the exhibit because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed]

April 25, 2019

POC 19-0017

Mr. Jeff DiRubio

Dear Jeff:

I am pleased to offer you the employee position of Vice President, Sales & Marketing with Precision Optics Corporation. Acceptance of this offer will constitute termination of the Consulting Agreement entered into between you and the Company on March 30, 2018, provided, however, that the $2,000 travel advance made in accordance with Addendum 1 of the Consulting Agreement will be reimbursed by you to the Company or deducted from your last payroll payment.

If you accept our offer, your effective start date as an employee of the Company will be Wednesday, May 1, 2019. Your initial base salary as an exempt employee will be $168,000 per year, less applicable deductions, payable in accordance with the regular payroll practices of the Company. Your position will report to the CEO of the Company. You will also be granted a stock option to acquire one hundred thousand (100,000) shares of the Company’s common stock. These options will have an exercise price equal to the closing price of the stock on the day the Board approves the award. They will vest in three installments of 34,000, 33,000, and 33,000 on May 1, 2020, 2021 and 2022, respectively, and they will be subject to the terms of the Company’s incentive stock option plan and final approval by the Company’s Board of Directors.

You will also be eligible to earn two bonus payments each fiscal year beginning with the fiscal year ending June 30, 2020. These bonuses will be $50,000 for attainment of 100% of [___] and $25,000 for attainment of 100% of [___]. [___] and [___] will be set each year by the Company CEO. You will be eligible for a pro-rated bonus on [___] that meet or exceed at least 80% of [___] and on [___] that meet or exceed at least 75% of [___]. Each of these bonuses will be paid on a yearly basis, in the first regular payroll following the Company’s 10K filing. The Company may make quarterly pre-payments against the expected yearly bonus, at the sole discretion of the CEO, after discussion with you. If pre-payments are made in the first, second or third quarter, the nominal cumulative value will be calculated according to the percentage of ¼, ½, and ¾, respectively, of the yearly targets, achieved by the end of each quarter, but any actual pre-payment may be less than the nominal amount calculated. In order to limit the risk to you that the sum of pre-payments could exceed the annual bonus, resulting in a required return payment by you to the Company, the Company CEO will consider [___] when deciding if a pre-payment should be made. If a pre-payment is made, it will be paid in the first regular payroll following the Company’s 10Q filing for each quarter.

For the quarter ending June 30, 2019, you will be eligible to earn a bonus of $12,500 for attainment of [___], with a pro-rated bonus paid for [___] of this target. You will also be eligible for a bonus of $2,500 if the Company achieves a [___] for this quarter. Both of these bonuses will be based solely on [___] for the Company’s Garner, MA operation.

During your employment, you will be eligible to participate in all benefit plans made available by the Company from time to time to employees generally, subject to plan terms and generally applicable Company policies.

Precision Optics Corporation currently provides the following benefits to full-time employees: [___]

The Company is committed to providing a drug-free workplace and has established a drug-free workplace policy. All employees are required to strictly abide by this policy as a condition of employment.

You will be expected to devote your full business time and efforts to the performance of your duties and responsibilities for the Company, and to abide by all Company policies and procedures, as in effect from time to time. You will fulfill the duties of the Vice President, Sales & Marketing, position by working remotely and by working on-site at the Company on average one day per week, plus additionally as and when required by the position.

You will be considered by the Company to be an “insider” for purposes of Section 16 of the Securities and Exchange Act of 1934 and required to file with the SEC a Form 3 upon the effective date of this agreement reflecting your beneficial ownership in POC stock, and a Form 4 for any transaction that represents a change in your ownership thereafter. The Company’s legal counsel will assist you with those filings.

As a condition of your employment, you will remain obligated to the terms and conditions of the Company's standard "Employee Proprietary Information Agreement" which you agree to or already have executed.

Please note that this offer letter and your response are not meant to constitute a contract of employment for a specific term. This means that, if you accept this offer, you will retain the right to terminate your employment at any time and that the Company will retain a similar right. We do ask, however, that you give three (3) months' written notice if you decide to resign. The Company will give you comparable three (3) months’ notice, or payment in lieu of notice, if it terminates your employment. In addition, if your position with the Company is involuntarily terminated within six (6) months of a “Change in Ownership” for a reason other than “Cause”, the Company will pay you six (6) months of pay at your then current annual salary rate.

The offer of employment described in this letter shall terminate at the end of the day on Monday, April 29, 2019. By signing below to accept this offer of employment, you give us assurance that you have not relied on any agreements or representations, express or implied, with respect to your employment that is not set forth expressly in this letter.

Jeff, formalities aside, I look forward to the transition of your VP, Sales & Marketing role to an employee position at POC.

	Very truly yours,

	/s/ Joseph N. Forkey
	Joseph N. Forkey
	Chief Executive Officer

Acceptance

I, Jeff DiRubio, hereby accept the offer of employment as herein stated.

	/s/ Jeff DiRubio
	Signature

	4-26-2019
	Date

Exhibit 10.17

LEASE AGREEMENT

THIS LEASE AGREEMENT (“Lease” or “Agreement”) is made this 1^st day of July, 2019 (“Effective Date”) between Texzona Industries, Ltd. (“Landlord”), and the Tenant named below.

Key Definitions:

Tenant:	Precision Optics Corporation, Inc.

Tenant’s Representative,	Divi Mangadu

Address, and Telephone:	1410 Gail Borden, Suite A-3 El Paso, TX 79935

	Phone: Email:
Premises:	Landlord hereby demises and leases to Tenant, and Tenant hereby takes from Landlord, approximately 9,375 rentable square feet of that certain building (the “Building”) located at 1410 Gail Borden, Suite A- 3 & A-4, El Paso, Texas 79935, County of El Paso, State of Texas, the real property of which is more particularly described by the Legal Description attached hereto as Exhibit "B-1" and Site Plan attached hereto as Exhibit “B” and incorporated herein by reference, together with all rights, privileges, easements, appurtenances and immunities belonging to or in any way pertaining thereto, and together with the Building and other improvements situated or to be situated thereon (the said portion of the project’s real property, Building and improvements being hereinafter referred to as the ("Premises").

Project:	Greenway Industrial Business Center, described on Exhibit “B” and being the land and improvements thereon described on Exhibit “B-1” attached hereto.

Building:	The building municipally known as 1410 Gail Borden, El Paso, Texas 79935.

Tenants Share of Project:	3.64% (based on total square footage for the Project: 257,875 s.f.)

Tenant’s Share of Building:	9.34% (based on total square footage of Building: 100,375 s.f.)

Lease Term:	Beginning on the Commencement Date and ending on the last day of the 36th full calendar month thereafter. Partial months shall be prorated.

Commencement Date:	June 1, 2019, Landlord may, at its option, prepare a letter to Tenant outlining the Commencement Date and the end of the original Lease Term, which is sometimes referred to as the “end date or end of the Lease Term”.
Monthly Base Rent:	Base Rent shall equal the following amounts for the respective periods set forth below:
	Period		Monthly Base Rent
	Commencement Date through Month – 12		$ 3,391.56
	Months 13-24		$ 3,476.35
	Months 25-36		$ 3,563.26
Initial Estimated Annual Operating Expense Payments: (estimates only and subject to adjustment to actual costs and expenses according to the provisions of this Lease)*	1. Taxes: 2. Insurance: 3. Operating Expenses: Total	$ 0.87 psf $ 0.21 psf $ 1.06 psf $ 2.14 psf	$ 8,156.25 total $ 1,968.75 total $ 9,937.50 total $ 20,062.50 total
*estimated only and subject to adjustment to actual costs as provided in the Lease. Any partial months shall be pro-rated for such partial month.
Initial Monthly Base Rent and Operating Expense Payments:	$ 5,063.44

Security Deposit:	$ 1,848.94 (On Account)

Use:	The purpose receiving, storing, shipping and selling products, materials and merchandise made and/or distributed by Tenant and for such other lawful purposes as may be incidental thereto; Tenant may also use the Premises for light manufacturing.

Broker:	Vista Star Realty, LLC – Per Separate Agreement.

Addenda:	See Paragraph 42.

Exhibits:	Exhibit A – Premises Exhibit B – Project Exhibit B-1 – Project Land and Improvements Description Exhibit C – Certificate of Insurance Exhibit D – Rules and Regulations Exhibit E – Sign Criteria Exhibit F – Move-out Conditions Exhibit G – Floorplan

1. Granting Clause; Quiet Enjoyment. In consideration of the obligation of Tenant to pay rent as herein provided and in consideration of the other terms, covenants, and conditions hereof, Landlord leases to Tenant, and Tenant takes from Landlord, the Premises, to have and to hold for the Lease Term, subject to the terms, covenants and conditions of this Lease. Tenant agrees that the Premises does not include the roof, exterior walls or space below the floor of the Premises or Building. If Tenant shall perform all of the covenants and agreements herein required to be performed by Tenant, Tenant shall, subject to the terms of this Lease, at all times during the Lease Term, have peaceful and quiet enjoyment of the Premises against any person claiming by, through or under Landlord.

2. Use and Acceptance of Premises. The Premises shall be occupied and used by Tenant solely for the purpose of conducting therein the business listed in the key definitions at the first of this Lease and for such lawful purposes as may be incident thereto and for no other purpose without Landlord's prior written consent. Tenant's acceptance of occupancy from Landlord shall constitute acknowledgment by Tenant that Tenant has inspected the Premises, the Building and the Project of which the Premises are a part and that same are suitable for Tenant's intended use thereof as stated in this Paragraph 2. TENANT RECOGNIZES AND AGREES THAT LANDLORD IS MAKING NO WARRANTIES EXPRESSED OR IMPLIED, AS TO THE SUITABILITY OF THE PREMISES OR THE PROJECT FOR ANY PARTICULAR USE OR THE CONDITION OF ANY PORTION THEREOF. TENANT ACCEPTS THE SPACE “AS IS” AND WITH ALL FAULTS. TENANT WAIVES ANY IMPLIED WARRANTY THAT THE PREMISES IS SUITABLE FOR TENANT’S INTENDED USE OR PURPOSES. NOTWITHSTANDING THE FOREGOING, LANDLORD IS NOT AWARE OF AND HAS NO REASON TO BELIEVE THERE ARE ANY CIRCUMSTANCES OR CONDITIONS IN OR ON THE PREMISES OR THE PROPERTY WHICH WOULD PREVENT TENANT’S INTENDED USE OR PURPOSES.

3. Operation by Tenant.

(a) Tenant, at Tenant's expense, shall comply with all laws, rules, orders, ordinances, directions, regulations and requirements of federal, state, county and municipal authorities regardless of when they become effective, pertaining to Tenant's use or occupancy of the Premises and with any covenants, conditions and restrictions, including, without limitation, all applicable federal, state and local laws, regulations or ordinances pertaining to air, soil and water quality, Hazardous Materials (as defined below), waste disposal, air emissions and other environmental, health and safety, zoning and land use matters, including all Environmental Requirements (as defined below), the Americans with Disabilities Act or similar laws (as amended, “ADA”) and with any directive or order of any public officer or officers, pursuant to law, which impose any duty upon Landlord or Tenant with respect to the use or occupancy of the Premises (the “Legal Requirements”). Landlord is not aware of and has no reason to believe there are any such circumstances or conditions in or on the premises or the property other than the proper use, storage and disposal of certain materials customarily used in Tenants light manufacturing activities within the premises.

(b) Tenant will use the Premises in a careful, safe and proper manner and will not commit waste, overload the floors or structure of the Premises or Building or subject the Premises to use that would damage the Premises, the Building or the Project. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise, or vibrations to emanate from the Premises, or take any other action that would constitute a nuisance or would disturb, unreasonably interfere with, or endanger Landlord or any tenants of the Project or any adjacent or neighboring property owners or occupants. In no event may Tenant engage in any action or inaction which would cause a change in the zoning classification (including any variances or so-called “grandfathered” benefits) which is currently applicable to the Premises. Outside storage, including without limitation, storage of non-operational trucks, trailers and other vehicles, parts and supplies is prohibited without Landlord’s prior written consent. Tenant shall not use the Premises and areas surrounding the Premises as a place of public accommodation under the ADA or similar laws. Tenant shall not conduct an auction, liquidation, or going out of business sale on the Premises or areas surrounding the Premises, including the Common Areas (as defined in this Lease) without Landlord’s prior written consent.

(c) Tenant shall be responsible, at its sole cost and expense, for obtaining and keeping in full force and effect, under the terms of the Legal Requirements, any and all permits, approvals, authorizations and/or licenses which are required or necessary for the use and/or occupation of the Premises, or to establish, operate, and conduct its business operations in the Premises, as well as for any specific new permits, approvals, authorizations and/or licenses that may be required or necessary for carrying out Tenant made alterations or Tenant Additions (defined below).

(d) Tenant shall supply and maintain at its expense any fire extinguishers or other fire prevention equipment or systems relating to or required by Tenant’s use of the Premises as required by Legal Requirements. Tenant shall be responsible for all keys and security of the Premises at its sole cost and expense.

(e) Landlord shall have the exclusive right to use, rent or exploit for any purpose (provided Landlord’s use does not unreasonably interfere with or restrict Tenant’s use of the Building or Premises) the roof and exterior walls of the Building or Premises, or any other areas of the Project, including but not limited to erecting signs or other structures on or over all or any part of the same, erecting scaffolds and other aids to the construction and installation of the same, and installing, maintaining, using, repairing, and replacing pipes, ducts, solar and electronic systems or devices, conduits and wires leading through, to or from the Building and Premises and serving other parts of the Project. Tenant shall have no right whatsoever to use the exterior walls or roof of the Building or Premises in the Building, except as otherwise provided in this Lease. Tenant shall not penetrate in any manner the exterior walls or roof of the Building or Premises.

4. Base Rent. Tenant shall pay Base Rent in the amount set forth in the key definitions on the first page of this Lease. The first month’s Base Rent, the Security Deposit, and the first monthly installment of estimated Operating Expenses (as herein defined) shall be due and payable on the date hereof, and Tenant promises to pay to Landlord in advance, without demand, deduction or set-off, monthly installments of Base Rent on or before the first (1st) day of each calendar month succeeding the Commencement Date. Payments of Base Rent for any fractional calendar month shall be prorated. All payments required to be made by Tenant to Landlord hereunder (or to such other party as Landlord may from time to time specify in writing) may be made by Electronic Fund Transfer of immediately available federal funds, or by check (certified or cashier’s check if requested by Landlord), at such place, within the continental United States as Landlord may from time to time designate to Tenant in writing. The obligation of Tenant to pay Base Rent and other sums to Landlord and the obligations of Landlord under this Lease are independent obligations. Tenant shall have no right at any time to abate, reduce, or set-off any rent due hereunder except as may be expressly provided in this Lease.

5. Operating Expense Payments.

(a) It is the intention of Landlord and Tenant that Landlord receive the Base Rent “net” of all other charges except as expressly provided herein. Accordingly, beginning on the Commencement Date, Tenant shall pay as additional rent Tenant's Share (defined below) of the Operating Expenses and relating to the Premises, the Building, and the Project. As used in this Lease, the term “Rent” shall mean, collectively, Base Rent and additional rent. The term “Operating Expenses” shall mean all costs and expenses incurred by Landlord with respect to the ownership, maintenance, repair and operation of the Common Area and Project, including but not limited to: Taxes (as provided in this Lease); Insurance (as provided in this Lease); utilities; maintenance, repair and replacement of all portions of the Project (including the buildings and Common Areas), including without limitation, signs, sprinklers and fire suppression systems (if any), mechanical systems, including any HVAC or EVAP systems and their components, plumbing systems, exterior surfaces (including but not limited to painting, cleaning and graffiti removal), paving and parking areas (including striping, line painting and snow removal), dock systems, dock doors, roads, roofs, and roof systems, alleys, landscaping (including sprinkler systems), utility lines, lighting, electrical systems, Building Systems (defined below); trash collection, sweeping; compliance with laws, rules, regulations and orders of governmental authorities, including any Legal Requirements; fees and assessments; amounts paid to contractors and subcontractors for work or services performed in connection with the foregoing; property management fees (which, at Landlord’s option, may be payable to itself, an affiliate or third party manager); and administrative fees equal to fifteen percent (15%) of the Operating Expenses (excluding Taxes and Insurance) (which, at Landlord’s option, may be payable to itself, an affiliate or third party manager); deductibles on insurance loss; security services (if any). Notwithstanding the foregoing, Landlord agrees that all Operating Expenses must be reasonable and customary for the operation and maintenance of the Property and Project.

(b) Operating Expenses do not include costs, expenses, depreciation or amortization for repairs and replacements required to be made by Landlord at its expense under this Lease, unless otherwise provided therein or caused by Tenant, its agents, employees, contractors or invitees; debt service under mortgages; ground rent or ground leases; costs of restoration to the extent of net insurance proceeds received by Landlord with respect thereto; leasing commissions; or the costs of renovating space for tenants in the Project.

(c) Landlord has included in the Key Definitions of this Lease, a statement estimating Tenant's Share of the Operating Expenses for the current calendar year (herein the "Estimate"). Beginning on the Commencement Date and on the first (1st) day of each month during the Lease Term, Tenant shall pay Landlord as additional rent one-twelfth (1/12) of the Estimate. In addition, Tenant shall pay with the rental payment for the first (1st) month following receipt of the Estimate an amount equal to the number of months elapsed in the calendar year prior to receipt of the Estimate times one-twelfth (1/12) of the Estimate, so as to bring said monthly payments current for the year. As soon as practical after the end of each calendar year, Landlord shall furnish Tenant a written statement showing Tenant's Share of the total Operating Expenses actually due for the calendar year ended (the "Actual Expenses"). If the Actual Expenses exceed the Estimate, then Tenant agrees to pay within ten (10) days of receipt of said statement, the difference between Tenant's Share of the Actual Expenses and the Estimate. If the Estimate exceeds the Actual Expenses, then, assuming Tenant is not in default, upon request by Tenant Landlord agrees to refund the balance or apply such amount to amounts due by Tenant under this Lease or hold such amount as a credit for Tenant under this Lease. Tenant’s failure to object to the written statement within thirty (30) days after receipt shall be deemed acceptance by Tenant. For purposes of this Paragraph 5, a year shall mean a calendar year. The provisions of this Paragraph 5 shall apply for any partial calendar year during which this Lease is effective, subject to a pro rata adjustment based upon the number of calendar months or portions thereof that this Lease is in effect. Tenant’s obligation to pay, such difference shall survive the termination or expiration of this Lease. This Lease is intended to comply with Section 171.1011(f) of the Texas Tax Code, as amended, for pass through items.

(d) For purposes of calculating Tenant’s Share of Operating Expenses or charges under this Lease, a year shall mean a calendar year except the first year, which shall begin on the Commencement Date, and the last year, which shall end on the expiration of this Lease. With respect to Operating Expenses which Landlord allocates to the entire Project, Tenant’s Share shall be the percentage set forth in the key definitions in this Lease as Tenant’s Share of the Project, as adjusted by Landlord in the future for changes in the physical size of the Premises or the Project. For Operating Expenses which Landlord allocates only to the Building, Tenant’s Share shall be the percentage set forth in the key definitions in Paragraph 1 as Tenant’s Share of the Building as adjusted by Landlord in the future for changes in the physical size of the Premises or the Building. In addition to Tenant’s Share of Operating Expenses, Tenant shall pay to Landlord any expenses allocated exclusively to Tenant, including maintenance, janitorial, garbage removal, repair and replacement of Building Systems (i.e. HVAC or EVAP systems), which Landlord may invoice to Tenant or include as allocated to Tenant as internal Operating Expenses.

(e) Landlord may equitably increase Tenant’s Share for any item of expense (including Operating Expense) or cost reimbursable by Tenant that relates to a repair, replacement, or service that benefits only the Premises or a portion of the Building or that Project that includes the Premises or based on occupancy or use. The estimated Operating Expenses for the Premises set forth on the first page of this Lease are only estimates, and Landlord makes no guaranty or warranty that such estimates are accurate.

(f) [INTENTIONALLY OMITTED.]

(g) Landlord and Tenant each agree that they are knowledgeable and experienced in commercial transactions and further hereby acknowledge and agree that the provisions of this Lease for determining charges, amounts and additional rent payable by Tenant are commercially reasonable and valid, even though such methods may not state precise mathematical formula for determining such charges and is commercially reasonable and, as to each such charge or amount, constitutes a “method by which the charge is to be computed.” ACCORDINGLY, LANDLORD AND TENANT HEREBY VOLUNTARILY WAIVE THE APPLICABILITY OF SECTION 93.012 OF THE TEXAS PROPERTY CODE, TO THE TERMS OF THIS LEASE.

6. Late Charges. Tenant agrees to pay a late charge equal to the greater of (a) $50.00, or (b) ten percent (10%) as additional rent for each payment due hereunder that remains unpaid for more than five (5) days when due under this Lease to cover Landlord's administrative costs of processing such late payment. In addition to said late charge, any rental or other amount due from Tenant under this Lease which is more than ten (10) days delinquent shall bear interest from the date such rental or other amount was due at the lesser of the rate of twelve percent (12%) per year or the then maximum non-usurious rate under applicable law, (the lesser of said amounts being herein referred to as the "Maximum Rate.") In the event the late charge is ever deemed to be "interest" the amount of interest on past due amounts shall be automatically reduced so that the combination of said late charge and the interest on past due amounts, if any, does not exceed the Maximum Rate. Any amount collected which exceeds the Maximum Rate will be deemed credited to other amounts owed by Tenant to Landlord under this Lease, and any remaining excess after such credit shall be refunded to Tenant. It is the intent of both Landlord and Tenant to at all times comply with the applicable law regarding the maximum non-usurious amount or rate of interest which may be contracted for, charged, taken, reserved or received by Landlord. Any rental and/or payments due hereunder returned to Landlord by Tenant’s bank or other financial institution, for any reason, such as “Insufficient Funds” or otherwise, will entitle Landlord to collect an additional $40.00 from Tenant for each such payment.

7. Utilities. Tenant shall timely pay before delinquency for all water, gas, electricity, heat, light, power, telephone, sewer, sprinkler services, refuse and trash collection, garbage removal, water meter charges and franchise fees, and other utilities and services used by Tenant on the Premises, all maintenance charges for utilities, and any storm sewer or meter franchise fee charges, hook up or termination fees or other similar charges for utilities, together with any taxes, penalties, surcharges or the like pertaining to Tenant's use of the Premises. With respect to all utilities separately metered, Tenant shall arrange for utility services in its own name and timely pay all charges directly to the provider. Tenant shall pay to Landlord as additional rent separately stated, or in Landlord’s discretion as Operating Expenses, its share of all reasonable and customary charges for utilities not separately metered based upon consumption, as reasonably determined by Landlord. Landlord shall not be liable to Tenant for any interruption in the service of any utilities to the Premises. No interruption or failure of utilities shall result in the termination of this Lease or the abatement of any amounts owed by Tenant under this Lease. Tenant agrees to limit use of water and sewer for normal restroom and kitchen use consistent with its current use of the facility. Tenant acknowledges that it has inspected the utilities and has determined that the utilities are sufficient for Tenant’s use of the Premises. Tenant shall not install any equipment or make use of the Premises which overloads the utilities available to the Premises. If Tenant violates this Paragraph, Landlord may, in addition to any other remedies which Landlord has hereunder, require Tenant, at Tenant’s expense, to upgrade such utility lines and related equipment including without limitation transformers.

8. Taxes.

(a) Landlord’s Rights and Obligations. Landlord has the sole right to render the Project, land and any improvements thereon to any appropriate taxing authorities. Tenant, as additional rent as provided in this Lease, agrees to pay Tenant's Share of all taxes (both general and special), assessments, or governmental charges (hereinafter "Taxes") lawfully levied or assessed against the land, the Project or any portion thereof, including without limitation any gross receipts, excise or similar tax and all taxes or levies imposed in substitution or replacement thereof or in substitution or replacement of increases therein, along with Taxes imposed pursuant to Section 171, et seq of the Texas Tax Code, along with amendments thereto. Tenant's Share of the Taxes shall be payable as additional rent in accordance with this Lease, herein. Additionally, Tenant shall pay to Landlord upon demand, Tenant's Share of all reasonable costs (including tax consultants and/or attorneys’ fees, but only to the extent of actual tax savings resulting from the actions of said consultants or attorneys) incurred by Landlord in connection with any protest or contest of the valuation of taxes imposed on the Project or the land. Provided, however, Landlord shall have no obligation to take any such action. Tenant shall have the right to inspect, at Landlord's business office during regular business hours and upon reasonable notice to Landlord, the tax bills which Landlord receives from the applicable taxing authorities.

(b) Tenant’s Obligations. During the Lease Term, Tenant shall pay prior to delinquency all taxes assessed against and levied upon fixtures, furnishings, equipment and all other personal property of Tenant contained in the Premises. When possible, Tenant shall cause its personal property to be assessed and billed separately from the real property of Landlord. If any of Tenant's personal property shall be assessed with Landlord's real property, Tenant shall pay Landlord the taxes attributable to Tenant within ten (10) days after receipt of a written statement therefor or, at Landlord's option as provided in this Lease.

9. Insurance; Waiver.

(a) Landlord's Obligation. During the Lease Term and any extensions of this Lease, Landlord shall procure and maintain such property (“all risk”) and commercial general liability insurance coverage on the Project (including buildings and Common Areas) as Landlord deems appropriate, including if Landlord so elects, loss of rental insurance. In addition, Landlord may procure such other insurance as may be reasonably required by Landlord’s lender with respect to the Project.

(b) Tenant's Obligations.

(i) All Risk Property, General Liability and Other Insurance. Tenant, as additional rent, shall pay to Landlord an amount equal to Tenant's Share of all premiums paid by Landlord for insurance described in this Lease. Tenant's Share of such premiums is payable as additional rent under Paragraph 5.

(ii) Plate Glass. During the Lease Term, Tenant shall carry full coverage insurance on all plate glass in the Premises and cause the same to be replaced if chipped, cracked or broken, including the replacement thereof in the event of an illegal or malicious act by any third party.

(iii) Liability. During the Lease Term, Tenant shall procure and maintain a Commercial General Liability coverage policy or policies of insurance, insuring both Landlord and Tenant, against all claims, damages or actions arising out of or in connection with Tenant's use or occupancy of the Premises, the Building, or the Project (including the Common Areas), and adjoining streets, sidewalks, and passageways, or by the condition of the Premises, the limits of such policy or policies to be in an amount not less than $1,000,000.00 per occurrence and in an amount not less than $2,000,000.00 in the general aggregate for personal injury including, without limitation, bodily injury, death or property. Such policy or policies shall additionally include Contractual Liability insurance in support of the indemnity sections of this Lease and Fire Legal Liability insurance coverage in the maximum allowable amount which shall include insurance coverage for any damage to the Premises leased by Tenant. Tenant shall also maintain (i) business interruption insurance covering for at least 12 months, and (ii) workers compensation insurance on its employees in the required statutory amounts. All of Tenant’s policies shall contain a waiver of subrogation and right of recovery.

(iv) Property Insurance. During the Lease Term, Tenant shall carry insurance against fire and such other risks as are from time to time included in standard extended coverage insurance, for the full insurable value, covering all of Tenant's equipment, furniture, merchandise, trade fixtures, including Trade Fixtures (as defined below), furnishings, wall covering, floor covering, carpeting, drapes, equipment, improvements, betterments and all items of property of Tenant located on or within the Premises. All property of Tenant kept in the Premises shall be so kept at Tenant's risk only. Such policy shall contain a waiver of subrogation and right of recovery.

(v) Construction Liability. Tenant, at its own cost and expense, shall obtain and maintain at all times when demolition, excavation, or construction work being done by Tenant and is in progress on the Premises, construction liability insurance with limits of not less than $1,000,000.00 and

$2,000,000.00 in the general aggregate for personal injury, including, without limitation, bodily injury, death, or property damage, protecting Landlord and Tenant as well as such other person or persons as Tenant may designate against any and all liability for injury or damage to any person or property in any way arising out of such demolition, excavation, or construction work.

(vi) Form of Insurance. Policies required of Tenant hereunder shall: (A) be issued by a reputable insurance company qualified to do business in the state where the Premises and the Project are located with an AM Best rating of A minus or better; (B) list Landlord, and any Property Manager if any, as an additional insured; (C) provide that they cannot be cancelled or amended in any material respects unless Landlord is given thirty (30) days prior written notice by Tenant; (D) state that such insurance is primary and non-contributory over any insurance carried by Landlord; (E) contain an endorsement in favor of Landlord waiving such insurance company's right of subrogation against Landlord. Landlord shall have the right to review said insurance amounts at least yearly during the Lease Term and require Tenant to increase said insurance policies to provide coverage in such amounts agreed to herein. Tenant shall provide Landlord with any renewal of insurance required under this Paragraph at least ten (10) days prior to the expiration of any such policy. Tenant will also reimburse Landlord for any increased premiums or additional insurance which Landlord reasonably deems necessary as a result of Tenant's use or occupancy of the Premises or any vacancy or abandonment thereof by Tenant. In addition, Tenant’s insurance as required in this Lease shall apply as primary insurance with respect to any other insurance or self-insurance programs afforded to or obtained by Landlord. TENANT WAIVES ALL RIGHTS AGAINST LANDLORD FOR RECOVERY OF DAMAGES TO THE EXTENT THE DAMAGES ARE COVERED (OR SHOULD HAVE BEEN COVERED) BY THE LIABILITY INSURANCE AND OTHER INSURANCE OBTAINED OR REQUIRED TO HAVE BEEN OBTAINED BY TENANT UNDER THIS LEASE. The insurance required by Landlord hereunder may be maintained under a blanket or master policy which includes properties other than the Project.

(vii) Certificate of Insurance. A duly executed certificate of insurance substantially similar to the form attached as Exhibit “C” to this Lease shall be delivered by Tenant to Landlord: (A) within fifteen (15) days of the Effective Date, (B) at least fifteen (15) days prior to the expiration of the respective insurance policy for any renewals, or (C) within fifteen (15) days after receipt of a written request by Landlord during this Lease.

(c) Mutual Waiver of Subrogation Rights. Landlord and Tenant and all parties claiming under them mutually release and discharge each other and their respective officers, directors, partners, employees and agents from all claims and liabilities arising from or caused by any casualty, hazard or event to the extent they could be covered by valid and collectible insurance required to be carried under this Lease by Landlord or Tenant, respectively, and waive any right of subrogation which might otherwise exist in or accrue to any person on account thereof; provided that such release shall not operate in any case where the effect is to invalidate such insurance coverage. The failure of a party to carry the required insurance shall not void this waiver. This clause shall survive the termination of this lease. THIS RELEASE SHALL APPLY EVEN IF THE LOSS OR DAMAGE SHALL BE CAUSED BY THE FAULT OR NEGLIGENCE OF A PARTY HERETO OR FOR ANY PERSON FOR WHICH SUCH PARTY IS RESPONSIBLE.

(d) Waiver. LANDLORD, ITS OFFICERS, DIRECTORS, PARTNERS, AGENTS, MANAGERS, CONTRACTORS, LICENSEES AND EMPLOYEES (INDIVIDUALLY, THE “LANDLORD” AND COLLECTIVELY THE “LANDLORD PARTIES”), SHALL NOT BE LIABLE FOR, AND TENANT WAIVES ALL CLAIMS FOR DAMAGE OR LOSS (EXCEPT CLAIMS CAUSED BY OR RESULTING FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE LANDLORD OR ANY LANDLORD PARTY, INCLUDING BUT NOT LIMITED TO CONSEQUENTIAL DAMAGES AND BUSINESS INTERRUPTIONS, TO PERSON, PROPERTY OR OTHERWISE, SUSTAINED BY TENANT OR ANY PERSON CLAIMING THROUGH TENANT RESULTING FROM ANY ACCIDENT OR OCCURRENCE IN OR UPON ANY PART OF THE PREMISES OR THE PROJECT. THIS WAIVER SHALL INCLUDE WITHOUT LIMITATION CLAIMS FOR DAMAGES RESULTING FROM BUT NOT LIMITED TO: (i) ANY EQUIPMENT OR APPURTENANCES BECOMING OUT OF REPAIR; (ii) INJURY DONE OR CAUSED BY WIND, WATER, ICE OR OTHER NATURAL ELEMENTS; (iii) ANY DEFECT IN OR FAILURE OF PLUMBING, HEATING OR AIR-CONDITIONING EQUIPMENT, BUILDING SYSTEMS, ELECTRIC WIRING OR INSTALLATION THEREOF, GAS, WATER, SEWER AND STEAM PIPES, STAIRS, PORCHES, RAILINGS, SIDEWALKS DRIVEWAYS OR WALKS; (iv) BROKEN GLASS;(v) THE BACKING UP OF ANY SEWER PIPE OR DOWNSPOUT; (vi) THE BURSTING, LEAKING OR RUNNING OF ANY TANK, TUB, WASHSTAND, WATER, SNOW OR ICE UPON THE PREMISES OR THE PROJECT; (vii) THE FALLING OF ANY FIXTURE, PLASTER, BRICK OR STUCCO; (viii) DAMAGE TO OR LOSS BY THEFT OR OTHERWISE OF PROPERTY OF TENANT OR OTHERS; (ix) ACTS OR OMISSIONS OF OTHER PERSONS IN THE PREMISES, OTHER TENANTS IN THE PROJECT, OCCUPANTS OF NEARBY PROPERTIES, OR ANY OTHER PERSONS; AND (x) ANY ACT OR OMISSION OF OWNERS OF ADJACENT OR CONTIGUOUS PROPERTY. ALL PROPERTY OF TENANT KEPT IN THE PREMISES SHALL BE SO KEPT AT TENANT'S RISK ONLY AND TENANT SHALL INDEMNIFY, DEFEND AND SAVE LANDLORD AND THE LANDLORD PARTIES HARMLESS FROM CLAIMS ARISING OUT OF DAMAGE TO THE SAME, INCLUDING SUBROGATION CLAIMS BY TENANT'S INSURANCE CARRIER.

NOTWITHSTANDING ANYTHING IN THIS LEASE TO THE CONTRARY, LANDLORD AND TENANT WAIVE ALL CLAIMS AGAINST EACH OTHER (AND AGAINST EACH OTHER’S PARENT COMPANY AND AFFILIATES AND THEIR OFFICERS, DIRECTORS, EMPLOYEES, MANAGERS AND AGENTS) FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, SPECIAL, EXEMPLARY OR PUNITIVE DAMAGES, INCLUDING, BUT NOT LIMITED TO, LOSS OF ACTUAL OR ANTICIPATED PROFITS, REVENUES OR PRODUCT AND REGARDLESS OF WHETHER ANY SUCH CLAIM ARISES OUT OF BREACH OF CONTRACT OR WARRANTY, TORT, NEGLIGENCE, PRODUCT LIABILITY, MISREPRESENTATION, INDEMNITY, CONTRIBUTION, STRICT LIABILITY, EQUITY, OR ANY OTHER LEGAL THEORY.

(h) Failure to Comply. Notwithstanding the foregoing, should Tenant fail to comply with any insurance requirements set forth above, Landlord shall have the right, but not the obligation, after five (5) days’ prior written notice to Tenant, to purchase said insurance premiums required for compliance under this Lease and Tenant agrees to pay Landlord, upon demand, the premium cost thereof, as additional rent under this Lease.

10. Landlord’s Maintenance and Repairs.

(a) Landlord’s Obligations. Landlord shall maintain or cause to be maintained, at its expense, the structural soundness of the roof, foundation, structural columns and girders, and exterior walls of the Building, in good order, repair, condition except for damage thereto due to the acts or omissions of Tenant, or Tenant’s employees, agents, invitees, and contractors, or use beyond ordinary wear and tear by Tenant. The term “walls” as used in this Paragraph shall not include windows, glass or plate glass, doors or overhead doors, store fronts, dock bumpers, dock plates or levelers, or office entries. Tenant shall promptly give Landlord written notice of any repair required by Landlord pursuant to this Paragraph, after which Landlord shall have a reasonable opportunity to repair.

(b) Landlord’s Obligations at Tenant’s Cost. Tenant shall pay as additional rent, in accordance with Paragraph 5 (as Operating Expenses), Tenant’s share of the expenses incurred by Landlord in keeping or causing to be kept, reasonable wear and tear excluded: (i) all utility lines serving the Building located in Common Areas that are not controlled by applicable utilities; and (ii) the Common Areas of the Project, exterior Building glass and doors, and non-structural roof components of the Project. Tenant shall promptly give Landlord written notice of any repair required by Landlord pursuant to this Paragraph, after which Landlord shall have a reasonable opportunity to repair (not to exceed thirty (30) days, unless such repairs cannot reasonably be repaired within such period).

(c) Maintenance Contracts. Landlord reserves the right to maintain itself or enter into contracts (which, at Landlord’s option, may be payable to itself, an affiliate or third party) for the maintenance of all heating, ventilation and air-conditional equipment, Building Systems (defined below), or other equipment or fixture, which serves the Building or the Premises, including those located on the roof or exterior of the Premises. Landlord shall bill Tenant for Tenant’s Share of such expenses as provided in Paragraph 5. Tenant shall pay Landlord for such expenses within ten (10) business days upon written request of Landlord. Except as provided in this Paragraph, Landlord shall not be obligated to make repairs, replacements or improvements of any kind upon the Premises, or to any equipment, merchandise, stock in trade, facilities or fixtures therein, all of which shall be Tenant's responsibility.

11. Tenant’s Maintenance and Repairs.

(a) Tenant’s Obligations. Tenant shall at all times keep the Premises (including all entrances and vestibules) and all partitions, windows and window frames and moldings, glass, doors, door openers, fixtures, equipment and appurtenances thereof (including lighting, electrical, and plumbing equipment and appurtenances and all interior heating, ventilation and air-conditioning equipment) and all parts of the Premises and all areas, improvements, and Building Systems (defined below) in and serving the Premises, not required in this Lease to be maintained by Landlord, in good order, condition and repair and in a clean, orderly, sanitary and safe condition, damage by unavoidable casualty excepted (including but not limited to doing such things as necessary to cause the Premises to comply with all applicable laws, rules, regulations and orders of governmental and public authorities and agencies) and all Legal Requirements. If replacement of equipment, fixtures and appurtenances thereto are necessary, Tenant shall replace the same with equipment, fixtures and appurtenances of the same quality, and shall repair all damages done in or by such replacement. Such repairs and replacements shall include, without limitation, dock and loading areas, truck doors, dock plates or levelers, dock bumpers, dock doors and dock door systems, warehouse floors, floors (including carpet, VCT or tile), plumbing and all plumbing fixtures, hot water heaters, telephone, water and sewer, electrical, cable (including fiber) and other utilities up to points of common connection, Building Systems (defined below), lighting and light fixtures, entries, doors, ceilings, windows, interior walls, and the interior side of Premises demising walls.

(b) Building Systems. For purposes of this Lease, the term “Building Systems” shall mean the electrical, heating, ventilation and air conditioning systems (including HVACs and EVAPs and all their components), sprinklers and fire suppression systems, life safety or security systems, and other mechanical and building systems serving the Premises. Such repairs and replacements include expenditures and repairs whose benefit may extend beyond the Lease Term. At Landlord’s discretion, Building Systems may be maintained at Tenant’s expense pursuant to maintenance contracts entered into by Landlord under this Lease.

(c) Landlord’s Right to Perform. If Tenant fails to perform any repair or replacement for which it is responsible, Landlord may, after five (5) days’ notice to Tenant, perform such work and be reimbursed by Tenant within ten (10) days after demand therefor. Tenant shall bear the full reasonable, customary and necessary cost of any repair or replacement to any part of the Premises, the Building or the Project that results from damage caused by Tenant, its agents, employees, contractors, or invitees.

(d) Notice to Tenant. Tenant and its agents, employees and contractors shall not (i) penetrate walls or roofs of the Premises or the Building, or (ii) install any devices, equipment or wiring on the exterior of the Premises or the Building (including the roof), including, but not limited to, satellite dishes, cable or other communication devises, for any reason whatsoever without the advance written consent of Landlord. Tenant acknowledges that accessing the roof of the Building could void Landlord’s roof warranties and Tenant shall be liable for any damages to Landlord.

12. Alterations; Trade Fixtures; Liens.

(a) Alterations. Tenant shall not make any addition, alteration or improvement, including painting, decorating or changing the architectural treatment of any part of the exterior of the Premises or Project, without Landlord’s prior written approval thereto, and will promptly remove any paint, decoration, alteration, addition or changes applied or installed without Landlord’s approval or take such other action with respect thereto as Landlord directs. Tenant shall not make structural alterations or changes to the Premises or the Building Systems. Tenant shall not make any alterations that result in the penetration of the roof, foundation or walls without Landlord’s advance written consent. Any such penetrations, even with Landlord’s consent, will be performed in a manner so as not to invalidate any roof or other warranty with respect to the Building or the Project. If Landlord grants consent to any requested alterations, the alterations shall be performed in a good, workmanlike and lien free manner in accordance with the all applicable Legal Requirements and any restrictions which may be imposed by Landlord as a condition to its consent. All alterations, changes, additions and leasehold improvements made by Tenant or made by Landlord on Tenant’s behalf and all fixtures installed by Tenant which are not Trade Fixtures are herein collectively referred to as “Tenant Additions,” and shall be property of Landlord. Such Tenant Additions shall not be removed by Tenant on, before or following expiration or termination of this Lease without Landlord’s consent except as may be required by this lease.

(b) Trade Fixtures. Tenant, at its own cost and expense may erect such shelves, bins, machinery and trade fixtures (collectively the “Trade Fixtures”) in the ordinary course of its business provided that such items do not alter the basic character of the Premises, do not overload or damage the Premises, including floors or walls and may be removed without injury to the Premises, and the construction, erection, and installation thereof complies with all Legal Requirements and other provisions of this Lease. Subject to the terms of this Lease (including Paragraph 22 below), upon the expiration or termination of this Lease, Tenant shall remove its Trade Fixtures and shall repair any damage to the Premises or the Building caused by such removal unless requested otherwise in writing by Landlord.

(c) Liens. Tenant shall promptly pay all contractors and materialmen, and not permit or suffer any lien to attach to the Premises or the Project or any part thereof, and indemnify and save harmless Landlord against the same. Landlord shall have the right to require Tenant to furnish a bond or other indemnity satisfactory to Landlord prior to the commencement of any work by Tenant on the Premises. If any lien attaches or is claimed, Tenant, within ten (10) days following the imposing of any such lien, shall cause the same to be released of record by payment or posting of a bond as provided in the Texas Property Code. Tenant has no express or implied authority to create or place any lien or encumbrance of any kind upon, or in any manner to bind the interest of Landlord in the Premises or the Project or to charge the rentals payable hereunder for any claim in favor or any person dealing with Tenant, including, without limitation, those who may furnish materials or perform labor for any construction or repairs.

13. Signs. Tenant shall not make any changes to the exterior of the Premises or the Building, install any exterior lights, signs, decorations, balloons, flags, pennants, banners, or painting, or erect or install any signs, windows or door lettering, placards, decorations, or advertising media of any type which can be viewed from the exterior of the Premises, without Landlord’s prior written consent. Tenant shall not penetrate the outside walls or roofs of the Premises or the Building without Landlord’s advanced written consent. Upon surrender or vacation of the Premises, Tenant shall remove all signs and repair, paint, and/or replace the Building fascia surface to which its signs are attached. Tenant shall obtain all applicable governmental permits and approvals for sign and exterior treatments. All signs, decorations, advertising media, blinds, draperies and other window treatment or bars or other security installations visible from outside the Premises shall be subject to Landlord’s approval and conform in all respects to Landlord's requirements. Tenant shall be responsible for all costs of installing, maintaining, and removing its signs.

14. Parking and Use of Common Areas and the Project.

(a) Common Area. For purposes of this Lease, “Common Areas” means all areas and facilities as provided by Landlord from time to time for the use or enjoyment of all tenants in the Project or the Building, including, if applicable, all roads and facilities on the Project furnished, made available or maintained by Landlord in or near the Project, including parking areas, truck loading areas, driveways, sidewalks, landscaped areas, retaining walls, fences and rock walls, lighting facilities, and other areas and improvements provided by Landlord for the general use in common of the tenants and their business invitees and customers in the Project. The Common Areas shall at all times be subject to the exclusive control and management of Landlord. Tenant acknowledges that it does not have an exclusive interest in the Common Areas. Landlord reserves the right to grant such easements and other rights in the Common Areas as Landlord may from time to time deem necessary, including without limitation, easements for mutual ingress and egress, truck turning and similar matters for the benefit of adjacent properties. Landlord may, at its sole option, modify the Common Areas or make such changes thereto as Landlord deems reasonably necessary. Landlord shall not be obligated to maintain or provide any security services or systems for the Project. Tenant agrees that Landlord shall not be liable for, and Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage suffered or incurred by Tenant in the Common Areas or in connection with any unauthorized entry into the Premises or other criminal or willful acts of third parties. Landlord shall have no obligation to provide any particular number of parking spaces or to provide designated parking spaces for the employees or customers of Tenant.

(b) Use of Common Area. Tenant and Tenant's business invitees, employees and customers shall have the nonexclusive right, in common with Landlord and all others to whom Landlord has granted or may hereafter grant rights, to use the Common Areas, subject to such reasonable rules and regulations as Landlord may from time to time impose and the rights of Landlord set forth above, including those attached hereto as Exhibit “D.” Tenant shall not, nor shall it allow its business invitees, employees or customers to park vehicles, trucks, trailers or leave or store property of any kind in the truck loading and unloading areas, truck courts or truck lanes without Landlord’s advance written approval, which Landlord may revoke or modify at any time. The Common Areas shall include the parking lot areas in front of and/or next to doors (include overhead dock doors) to the Premises. Landlord may at any time close temporarily all or any part of the Common Areas to make repairs or changes, to prevent the acquisition of public rights therein or for any other reasonable purpose. Tenant shall not interfere with the other tenants' rights to use any part of the Common Areas. Landlord may allocate parking spaces among Tenant and other tenants of the Project if, in Landlord's opinion, such parking facilities are becoming crowded. Landlord shall not be obligated to enforce Tenant's parking rights against third parties.

(c) Expense of Operating and Maintaining the Common Areas. Tenant shall pay as additional rent, in accordance with Paragraph 5, Tenant's Share of the reasonable, necessary, and customary expenses incurred by Landlord in operating and maintaining the Common Areas, which shall be included as Operating Expenses.

15. Damage and Destruction. If the Premises are hereafter damaged or destroyed or rendered partially untenantable for their accustomed use by fire or other casualty and such fire or other casualty, Landlord shall, unless this Lease is terminated as below, promptly repair the same to substantially the condition which they were in immediately prior to the happenings of such casualty (excluding stock in trade, fixtures, furniture, furnishings, carpeting, floor covering, wall covering, drapes and equipment), and from the date of such casualty until the Premises are so repaired and restored, the monthly Rent hereunder shall abate in such proportion as the part of said Premises thus destroyed or rendered untenantable bears to the total Premises; provided, however, Landlord shall not be obligated to expend for such repair or restoration an amount in excess of the insurance proceeds received by Landlord as a result of such damage. Landlord’s obligation to rebuild is contingent upon its receipt of insurance proceeds sufficient to make such repairs. In the event any mortgagee or lender requires such sums to be applied to any debt, Landlord will not be deemed to have received the proceeds. Notwithstanding the above, if the Premises or any material portion of the Project is wholly or partially damaged, destroyed or rendered untenantable for their accustomed use by fire or other casualty then Landlord shall have the right to terminate this Lease effective as of the date of such casualty by giving to Tenant, within ninety (90) days after the happening of such casualty, written notice of such termination. In the event that Landlord is unable or unwilling to rebuild the Premises in their entirety to the condition existing prior to the casualty, whether as a result of failure to obtain insurance proceeds, failure to obtain sufficient insurance proceeds or for any other reason, within ninety (90) days after the casualty, then, unless the casualty was caused by Tenant, Tenant shall have the right to terminate this Lease effective as of the date of such casualty by giving to Landlord written notice of such termination unless the casualty was caused by Tenant in which case Tenant will have no right to terminate this Lease. If any notice of termination is given by either party, this Lease shall terminate and provided Tenant is not in default hereunder, Landlord shall promptly repay to Tenant any rent theretofore paid in advance which was not earned at the date of such casualty. If said notice is not given and Landlord is required or elects to repair or restore the Premises as herein provided and this Lease is not terminated by Tenant, then Tenant shall repair or replace its stock in trade fixtures, furnishings, furniture, carpeting, wall covering, floor covering, drapes and equipment to the same condition as they were in immediately prior to the casualty.

16. Condemnation.

(a) Eminent Domain. If any portion of the Premises or the Project shall be acquired, condemned or damaged as a result of the exercise of any power of eminent domain, condemnation or sale under threat thereof or in lieu thereof, then Landlord at its election may terminate this Lease by giving notice to the Tenant of its election, within one hundred eighty (180) days of the date the condemning authority shall have the right to possession of the Premises or portion of the Project condemned. Moreover, if any portion of the Project is taken and in Landlord’s judgment such taking would materially interfere with or impair its ownership or operation of the Project, Landlord may terminate this Lease. If this Lease shall not be terminated as aforesaid, then it shall continue in full force and effect, and Landlord shall within a reasonable time after possession is physically taken by the condemning authority (subject to delays due to shortage of labor, materials or equipment, labor difficulties, breakdown of equipment, governmental restrictions, fires, other casualties or other causes beyond the reasonable control of Landlord) restore the remaining portion of the Premises to the extent reasonably possible, to render it reasonably suitable for the use permitted by Paragraph 2; provided, however, Landlord shall not be obligated to expend an amount greater than the proceeds received from the condemning authority less all expenses incurred in connection therewith (including attorneys’ fees) for the restoration. Base Rent as provided in this Lease, shall be reduced in the proportion that the area of the Premises so taken bears to the total Premises. No taking of the Common Areas shall entitle Tenant to an abatement.

(b) Damages. Landlord reserves and Tenant assigns to Landlord all rights to damages on account of any taking or condemnation or sale under threat or in lieu thereof or any act of any public or quasi-public authority for which damages are payable. Tenant shall execute such instruments of assignment as Landlord requires, join with Landlord in any action for the recovery of damages if requested by Landlord, and turn over to Landlord any damages recovered in any proceeding. If Tenant fails to execute instruments required by Landlord, or undertakes such other steps as requested, Landlord shall be deemed the duly authorized irrevocable agent and attorney-in-fact of Tenant to execute such instruments and undertake such steps on behalf of Tenant. Landlord shall not reserve any Tenant damages that are part of the Premises, the Building or the Project.

17. Assignment and Subletting. Tenant shall not assign this Lease or any interest therein, whether voluntarily, by operation of law, or otherwise, and shall not sublet the Premises or any part thereof except by written permission and consent of Landlord being first had and obtained. Consent of Landlord to any such assignment or subletting shall not be unreasonably withheld if: (a) at the time of such assignment or subletting Tenant is not in default in the performance and observance of any of the covenants and conditions of this Lease; (b) the assignee or subtenant of Tenant shall expressly assume in writing all of Tenant's obligations hereunder; (c) Tenant shall provide proof to Landlord that the assignee or subtenant has a financial condition which is satisfactory to Landlord and Landlord's lender; (d) the Premises continue to be used solely for the purpose set forth in this Lease; and (e) Landlord is furnished with and approves the form of the proposed sublease. In connection with any such assignment or sublease, Tenant or the assignee or subtenant of Tenant shall pay to Landlord any legal and administrative costs incurred by Landlord in approving such assignment or subletting, not to exceed $2,000.00. Any such assignment or sublease, even with the approval of Landlord, shall not relieve Tenant from liability for payment of all forms of rental and other charges herein provided or from the obligations to keep and be bound by the terms, conditions and covenants of this Lease. The acceptance of rent from any other person shall not be deemed to be a waiver of any of the provisions of this Lease, or a consent to the assignment or subletting of the Premises. Consent to any assignment or subletting shall not be deemed a consent to any future assignment or subletting. Any merger, consolidation or single transaction transfer of corporate shares of Tenant, if Tenant is a corporation, so as to result in a change of control of the Tenant representing 75% of the outstanding equity at the time of the event, shall constitute an assignment and be subject to the conditions of this Section. If Tenant is a general partnership having one or more corporations as partners or if Tenant is a limited partnership having one or more corporations as general partners, the provisions of the preceding sentence shall apply to each of such corporations as if such corporation alone had been the Tenant hereunder. If Tenant is a partnership, the withdrawal of a general partner shall be an assignment subject to the provisions hereof. Moreover, in the event that the rental due and payable by a sublessee or assignee, or a combination of the rental payable under such sublease or assignment plus any bonus or other consideration therefor or incident thereto exceeds the rental payable under this Lease, or if with respect to an assignment, sublease, license or other transfer by Tenant permitted by Landlord, the consideration payable to Tenant by the assignee, subtenant, licensee or other transferee exceeds the rental payable under this Lease, then Tenant shall be bound and obligated to pay Landlord, in addition to all rental required hereunder, such excess rental and other excess consideration within ten (10) days following receipt thereof by Tenant from such sublessee, assignee, licensee or other transferee, as the case may be. Finally, in the event of any assignment or subletting it is understood and agreed that all rentals paid to Tenant by an assignee or sublessee shall be received by Tenant in trust for Landlord, to be forwarded immediately to Landlord without reduction of any kind, and upon election by Landlord such rentals shall be paid directly to Landlord. Without limitation of Landlord’s approval rights as provided above, Tenant shall provide a copy of any executed sublease to Landlord within ten (10) days of the execution thereof.

18. INDEMNIFICATION. TENANT SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS LANDLORD, AND LANDLORD’S AGENTS, MANAGERS, OFFICERS, DIRECTORS, EMPLOYEES AND CONTRACTORS, FROM AND AGAINST ANY AND ALL LOSSES, LIABILITIES, LIENS, CLAIMS, DEMANDS, FINES, PENALTIES, SUITS, PROCEEDINGS, ACTIONS, CAUSES OF ACTIONS, DAMAGES, COSTS AND EXPENSES (INCLUDING ATTORNEYS’ FEES) OF EVERY KIND AND NATURE, WHETHER RESULTING FROM CLAIMS BY THIRD PARTIES FOR INJURIES TO ANY PERSON AND DAMAGE TO OR THEFT OR MISAPPROPRIATION OR LOSS OF PROPERTY ARISING FROM OR GROWING OUT OF THE USE, OCCUPANCY, MANAGEMENT OR CONTROL OF THE PREMISES OR FROM ANY ACTIVITY, WORK, OR THING DONE, PERMITTED OR SUFFERED BY TENANT, ITS SUBTENANTS, ASSIGNEES, INVITEES, EMPLOYEES, CONTRACTORS AND AGENTS, IN OR ABOUT THE PREMISES, COMMON AREAS OR THE PROJECT, TENANT’S FAILURE TO FULLY COMPLY WITH APPLICABLE LAWS OR LEGAL REQUIREMENTS, OR DUE TO ANY OTHER ACT OR OMISSION OF TENANT, ITS SUBTENANTS, ASSIGNEES, INVITEES, EMPLOYEES, CONTRACTORS AND AGENTS, INCLUDING, WITHOUT LIMITATION: (I) LIABILITY FOR DAMAGE RESULTING FROM THE PERSONAL INJURY OR DEATH OF AN EMPLOYEE OF TENANT, REGARDLESS OF WHETHER THE TENANT HAS PAID SUCH EMPLOYEE UNDER THE WORKMAN’S COMPENSATION LAW OF ANY STATE OR OTHER SIMILAR FEDERAL OR STATE PROGRAM FOR THE PROTECTION OF EMPLOYEES, (II) DAMAGE TO ANY REAL OR PERSONAL PROPERTY OF TENANT, LANDLORD OR ANY THIRD PARTIES, AND (III) DAMAGES TO THE PREMISES, COMMON AREAS AND THE PROJECT (INCLUDING DIMINUTION IN VALUE) CAUSED BY BREACH OF TENANT’S OBLIGATIONS UNDER PARAGRAPH 28 (ENVIRONMENTAL). IN THE EVENT TENANT FAILS TO UNDERTAKE ITS INDEMNITY OBLIGATIONS HEREUNDER, TENANT AUTHORIZES LANDLORD (ALTHOUGH EXPRESSLY RECOGNIZING THAT LANDLORD IS UNDER NO OBLIGATION TO DO SO) TO DEFEND, SETTLE OR COMPROMISE ANY CLAIMS, DEMANDS, SUITS, PROCEEDINGS OR THE LIKE WHICH MAY REPRESENT AN INDEMNIFIABLE OBLIGATION OF TENANT HEREUNDER. SUCH ACTION OR INACTION BY LANDLORD SHALL IN NO WAY AFFECT TENANT'S INDEMNITY OBLIGATIONS AS PROVIDED HEREIN. TENANT'S INDEMNITY OBLIGATIONS UNDER THIS PARAGRAPH AND ELSEWHERE IN THIS LEASE SHALL SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS LEASE. THE FURNISHING OF INSURANCE REQUIRED UNDER THIS LEASE SHALL NOT BE DEEMED TO LIMIT TENANT’S OBLIGATIONS UNDER THIS PARAGRAPH.

19. Inspection and Access. Landlord and its agents, representatives, and contractors shall have the right to enter the Premises from time to time during regular business hours after advance written notice to Tenant to examine, to show them to prospective purchasers and other persons, and to make such repairs, alterations, improvements or additions as Landlord deems desirable. Rent shall not abate during any such entry by Landlord, including without limitation, during the period of any such repairs, alterations, improvements, or addition. During the last six (6) months of the Lease Term, Landlord may exhibit the Premises to prospective tenants and maintain upon the Premises notices deemed advisable by Landlord. In addition, during any apparent emergency, Landlord, its agents and employees, may enter the Premises forcibly without liability therefor and without in any manner affecting Tenant's obligations under this Lease. Nothing herein contained, however, shall be deemed to impose upon Landlord any obligation, responsibility or liability whatsoever, for any care, maintenance or repair except as otherwise herein expressly provided.

20. Subordination and Attornment. Tenant accepts this Lease subject and subordinate to any mortgage, deed of trust, or other lien presently existing on the Project or the land or subsequently created on the Project, and to any renewals and extensions thereof, but Tenant agrees that any such mortgagee shall have the right at any time to subordinate such mortgage, deed of trust, or other lien to this Lease. Landlord is hereby irrevocably vested with full power and authority to subordinate this Lease to any mortgage, deed of trust, or other lien hereafter placed on the Project or the land, and Tenant agrees on demand to execute such further instruments subordinating this Lease as Landlord may request, provided such subordination shall be on the express condition that this Lease shall be recognized by the mortgagee, and that the rights of Tenant shall remain in full force and effect during the Lease Term so long as Tenant shall continue to perform all of the covenants and conditions of this Lease. No such mortgagee shall be required to assume any liabilities for defaults occurring prior to its ownership of the Project. Tenant covenants and agrees that upon foreclosure of any deed of trust, mortgage or other instrument of security and the sale of the Project or the land pursuant to any such document, to attorn to any purchaser at such a sale and to recognize such purchaser as the Landlord under this Lease. The agreement of Tenant to attorn to any purchaser pursuant to such a foreclosure sale or trustee's sale in the immediately preceding sentence shall survive any such sale.

21. Surrender; Successors.

(a) Surrender. Upon the expiration or earlier termination of this Lease, whether by forfeiture, lapse of time, or otherwise, or upon the termination of Tenant's right to possession of the Premises, Tenant will surrender and deliver up the Premises to Landlord in good clean order and repair and in the condition when delivered to Tenant under this Lease, reasonable ordinary wear and tear and loss by fire or other casualty excepted. Tenant shall make good and repair all damages to the Premises as shall be caused by Tenant. At such time, Tenant shall deliver all keys to the Premises, including all internal keys. All Tenant Additions will, following the expiration or termination of this Lease, remain in the Premises as Landlord’s property unless Landlord directs Tenant to remove all or any portion of same whereupon Tenant agrees that it shall, at its expense, remove such Tenant Additions (or portion thereof directed by Landlord) and repair and damage caused by the removal at its expense. Provided Tenant is not in default, it will remove its Trade Fixtures, inventory, and other personal property upon the Lease Term. If Tenant is in default, it shall remove its Trade Fixtures only if specifically directed to do so in writing by Landlord. Tenant shall repair any damage to the Premises caused by the installation or removal of such Tenant Additions, Trade Fixtures, or other improvements or equipment, along with damage to the Premises caused by Tenant’s use of the Premises. Further, Tenant will repair any penetrations it has made to the walls, slab, roof or structure in a manner and to comply with the specifications imposed by Landlord along with any damage caused by such installation or removal by Tenant. Anchor bolts installed in the foundation will be cored out and filled with epoxy to the standards required by Landlord. Foundation and flooring damage caused by any use by Tenant will be repaired or replaced by Tenant. In no event will any Building Systems, fire sprinklers, fire suppression equipment, EVAP or HVAC system units, equipment or components, floor tiles, carpeting, ceiling tiles, plumbing fixtures, or similar building system items or any equipment or fixtures attached to the realty be considered "Trade Fixtures" or be removed unless directed by Landlord in writing to do so. Tenant agrees that following an Event of Default, Landlord may, at its option, allow any party claiming to be a lessor of Tenant to remove equipment, Trade Fixtures, and similar items leased from such lessor. Landlord shall have no liability to Tenant therefor. Landlord may condition its consent upon such lessor agreeing to repair any damage to the Premises caused by such removal and providing adequate financial assurances of its ability to pay for any such damages; provided, however, no such agreement, or Landlord’s failure to obtain such an agreement, shall relieve Tenant of its obligations hereunder including without limitation, Tenant’s obligation to repair said damage. Tenant shall also properly remove all Hazardous Materials from the Premises and placed on the Project by Tenant. Any Trade Fixtures or Tenant Additions not removed by Tenant as required herein shall be deemed abandoned and may be stored, removed and disposed of by Landlord at Tenant's expense, and TENANT WAIVES ALL CLAIMS AGAINST LANDLORD FOR ANY DAMAGES RESULTING FROM LANDLORD'S RETENTION OR DISPOSAL OF SAME. Tenant shall be entitled to no payment or offset for the value of any such property (even if sold by Landlord) and shall pay on demand all costs incurred by Landlord in connection with such removal or disposal. No retention, disposal or sale of such items shall limit remedies otherwise available to Landlord hereunder for a breach by Tenant. Moreover, any period following the termination or expiration of this Lease during which there is Hazardous Material, Tenant Alterations or Trade Fixtures which are not removed as herein required or when other repairs or conditions to surrender are not completed, shall be considered a holdover by Tenant and, in addition to all other remedies available to Landlord hereunder, shall obligate Tenant to the increased rental payments pursuant to Paragraph 22 below. All obligations of Tenant hereunder not full performed as of the termination or expiration of this Lease shall survive such termination or expiration.

(b) Abandoned Property. If at any time during the term of this lease, Tenant abandons the Premises or any part thereof, Landlord may, at its option, enter the Premises by any means without being liable for any prosecution therefore, and without becoming liable to Tenant for damages or for any payment of any kind whatever, and may, at his discretion, as agent for Tenant, re-let the Premises, or any part thereof, for the whole or any part of the then unexpired term, and may receive and collect all rent payable by virtue of such re-letting, and, at Landlord’s option, hold Tenant liable for any difference between the rent that would have been payable under this lease during the balance of the unexpired term, if this Lease had continued in force, and the net rent for such period realized by Landlord by means of such re-letting. If Landlord’s right of re-entry is exercised following abandonment of the Premises by Tenant, then Landlord may consider any personal property, inventory or equipment belonging to Tenant and left on the Premises to also have been abandoned, in which case Landlord may dispose of all such personal property, inventory or equipment, in any manner Landlord shall deem proper and is hereby relieved of all liability for doing so. “Abandonment” is defined as any absence of Tenant from the Premises for fifteen (15) consecutive days while all or any of the rent or other amounts payable and due is unpaid. Abandonment also includes a failure on the part of the Tenant to respond to telephone calls, emails or text messages regarding the leased premises, while money is owed, for a period of 5 days. Landlord is not obligated to provide notice to Tenant of the Landlord’s intent to retain, destroy, deem the inventory, equipment, or remaining property to be junk, or dispose of any property left on the premises. Any notice of default, lock-out or termination of the lease shall be considered notice to Tenant of Landlord’s intent to retain, destroy, deem the inventory or personal property or equipment, to be junk, or dispose of any property left on the Premises. Landlord, may, but is not required to, store any of Tenant’s property away from the Premises, and charge reasonable storage fees for the property which is equal to a minimum of 50% of the rent owed under the lease or the actual storage costs incurred by Landlord, whichever is greater. Landlord may also charge as additional costs, any costs incurred by Landlord for moving the property left on site or disposing of any items or property determined to be junk, and will not be responsible for any damage or loss of property that occurs as a result of any move or disposal. Landlord, may, but is not required to, keep said stored property for a period of 30 days, in which case, Tenant will be obligated to pay all sums due under the lease as well as the storage fee, moving costs or disposal costs, prior to obtaining access to the property. This provision also applies to any items left on the premises at the end of the Term of the Lease. Landlord may retain, destroy, deem the inventory or remaining property to be junk, or dispose of any property left on the Premises in any manner, at the sole discretion of Landlord, at the end of the Term, including termination as result of Tenant’s actions. Landlord shall have no responsibility for any items left on the Premises after Abandonment, termination of the Lease, or the end of the Term of the Lease.

(c) Successors. All rights and liabilities herein given or imposed upon the respective parties hereto shall bind and inure to the several respective heirs, successors, administrators, executors and assigns of the parties and if Tenant is more than one person, they shall be bound jointly and severally by this Lease. No rights, however, shall inure to the benefit of any assignee of Tenant unless the assignment is approved by Landlord as required herein.

22. Holding Over. If Tenant holds over or occupies the Premises beyond the Lease Term (it being agreed there shall be no such holding over or occupancy without Landlord's written consent), Tenant shall pay Landlord for each day of such holding over a sum equal to the following percentage of the monthly rent applicable hereunder at the expiration of the Lease Term (including Operating Expenses), prorated for the number of days of such holding over: (a) one hundred twenty-five percent (125%) for the first thirty (30) days of the hold over period; (b) one hundred fifty percent (150%) for the second thirty (30) days of the hold over period; (c) one hundred seventy- five percent (175%) for the third thirty (30) days of the hold over period; and (d) two hundred percent (200%) thereafter. In such event, Tenant shall occupy the Premises as a tenant at sufferance, and all of the terms and provisions of this Lease shall be applicable, with the exception of the rent applicable during such holding over period, which shall be increased as aforesaid. Tenant agrees that Landlord may institute a forcible detainer or similar action against Tenant or any other party in possession of the Premises without serving any demand for possession, demand to vacate, notice of termination or similar demand or notice upon Tenant or such party in possession. Tenant will also be liable to Landlord for and indemnify Landlord against: (i) any payment or rent concession which Landlord may be required to make to any tenant obtained by Landlord for all or any part of the Premises (a “New Tenant”) by reason of the late delivery of space to the New Tenant as a result of Tenant’s holding over or failure to surrender the Premises in the manner required by this Lease or in order to induce such New Tenant not to terminate its lease by reason of the holding over by Tenant or failure to surrender the Premises in the manner required by this Lease; and (ii) any claim for damages by any New Tenant. No holding over by Tenant after the Lease Term shall operate to extend the Lease Term. Notwithstanding the foregoing, the acceptance of any use and occupancy charges paid by Tenant pursuant to this Paragraph shall not preclude Landlord from commencing and prosecuting a holdover or summary eviction proceeding.

23. Events of Default by Tenant. Each of the following events shall be an event of default (an “Event of Default”) by Tenant under and a breach of this Lease provided however that Tenant shall have in each case a thirty (30) day cure period, other than in the case of (a) and (b) Tenant shall have a ten (10) day cure period: (a) any failure of Tenant to pay any rent (including Base Rent) or other amount when due under this Lease; (b) any failure of Tenant to obtain and maintain the insurance required by this Lease that is to be maintained by Tenant; (c) any failure by Tenant to perform or observe any of the other terms, provisions, conditions and covenants of this Lease for more than thirty (30) days after written notice of such failure; (d) Tenant shall become bankrupt or insolvent, or file or have filed against it a petition in bankruptcy or for reorganization or arrangement or for the appointment of a receiver or trustee of all or a portion of Tenant's property, or Tenant makes an assignment for the benefit of creditors; (e) if Tenant abandons or vacates the Premises; (f) this Lease, Tenant's interest herein or in the Premises, any improvements thereon, or any property of Tenant is executed upon or attached; (g) the Premises come into the hands of any person other than expressly permitted under this Lease; or (h) Tenant provides and has provided Landlord with any report or statement which is materially false, including credit information.

24. Landlord’s Remedies. Upon the occurrence of any event of default specified in this Lease (including but not limited to those described in Paragraph 23 of this Lease), Landlord, after providing the applicable cure period, and upon providing written notice of default which shall start the cure period and in addition to all other rights or remedies Landlord may have for such default, shall have the right to pursue any one or more of the following remedies:

(a) Terminate Lease. Terminate this Lease in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying said Premises or any part thereof, by force if necessary, without notice or the need to resort to legal process and without being deemed guilty of trespass or becoming liable for any loss or damage occasioned thereby; and Landlord may recover from Tenant the amount of all loss and damage which Landlord may suffer by reason of such termination, including, without limitation, all costs of retaking the Premises and the total rent (including the Rent), Operating Expenses and charges reserved in this Lease for the remainder of the Lease Term (i.e., the duration of this Lease had it not been terminated) all of which shall be immediately due and payable by Tenant to Landlord; and/or

(b) Not Terminate Lease. Without terminating this Lease, enter upon and take possession of the Premises, and expel or remove Tenant and any other person who may be occupying said Premises, or any part thereof, by force if necessary, without notice or the need to resort to legal process and without being deemed guilty of trespass or becoming liable for any loss or damage occasioned thereby. In the event the Lease is terminated by Landlord as provided in section 24 (a) above, Landlord may make such alterations and repairs as it deems advisable to relet the Premises, and relet the Premises or any part thereof for such term or terms (which may extend beyond the Lease Term) and at such rentals and upon such other terms and conditions as Landlord in its sole discretion deems advisable. Upon each such reletting all rentals received by Landlord therefrom shall be applied: first, to any indebtedness other than rent due hereunder from Tenant to Landlord; second, to pay any costs and expenses of reletting, including brokers' and attorneys' fees and costs of alterations and repairs; third, to rent due hereunder; and fourth, the residue, if any, shall be held by Landlord and applied in payment of future rent as it becomes due hereunder. No such reletting shall relieve Tenant or any guarantors from their obligations hereunder. If rentals received from such reletting during any month are less than that to be paid during that month by Tenant hereunder, Tenant shall immediately pay any such deficiency to Landlord. In no event shall Tenant be entitled to any excess rent obtained by reletting the Premises over and above the rent reserved herein.

(c) No Election. No re-entry or taking possession of the Premises by Landlord shall be construed as an election to terminate this Lease unless a written notice of such termination is given by Landlord to Tenant. Notwithstanding any such reletting or re-entry or taking possession, without termination, Landlord may at any time thereafter terminate this Lease for any prior breach or default. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by at law or in equity, nor shall pursuit of any remedy herein provided constitute a forfeiture or waiver of any rent due to Landlord hereunder or of any damages accruing to Landlord. Following termination of this Lease, re-entry or repossession of the Premises Landlord shall use reasonable efforts to relet the Premises, at a minimum, Landlord shall list the Premises for lease with a licensed real estate broker of Landlord’s choosing (which may be an affiliate of Landlord) for a period of three (3) months. If no party acceptable to Landlord executes a lease with Landlord on terms reasonably acceptable to Landlord within this three (3) month period, Tenant agrees that Landlord shall conclusively have satisfied any such duty to release or mitigate. In no event will Landlord have any duty to lease the Premises before Landlord leases other vacant space which it has in the Project or other buildings owned by Landlord nor shall Landlord have any duty to lease to and Landlord will not be considered to be acting unreasonably in refusing to lease to any party if: (i) the prospective lessee has a financial condition which is unacceptable to Landlord or Landlord’s lenders; (ii) the prospective lessee requires any alterations which are unacceptable to Landlord or Landlord’s lenders; (iii) the prospective lessee requires tenant improvements to be paid by Landlord; or (iv) the prospective lessee requires terms different from this Lease or which are otherwise unacceptable to Landlord or Landlord’s lender.

(d) Lock Out. Upon the occurrence of an Event of Default under this Lease, Landlord shall be entitled to change or modify the locks at the Premises. Tenant agrees that entry may be gained for that purpose through use of a duplicate or master key or any other means, that same may be conducted out of the presence of Tenant if Landlord so elects, that no notice shall be required to be posted by Landlord on any door to the Premises (or elsewhere) disclosing the reason for such action or any other information, and that Landlord shall not be obligated to provide a key to the changed lock to Tenant unless Tenant shall have first: (i) brought current all payments due to Landlord under this Lease; provided, however, that if Landlord has theretofore formally and permanently repossessed the Premises, or has terminated this Lease, then Landlord shall be under no obligation to provide a key to the new lock(s) to Tenant regardless of Tenant’s payment of past-due rent or other past-due amounts, damages, or any other payment or amounts of any nature or kind whatsoever; (ii) fully cured and remedied to Landlord’s satisfaction all other defaults of Tenant under this Lease (but if such defaults are not subject to cure, such as early abandonment or vacation of the Premises, then Landlord shall not be obligated to provide the new key to Tenant under any circumstances); and (iii) given Landlord security and assurances satisfactory to Landlord that Tenant intends to and is able to meet and comply with its future obligations under this Lease, both monetary and nonmonetary. The provisions of this Paragraph are intended to override and supersede any conflicting provisions of the Texas Property Code (including, without limitation, Chapter 93 thereof, and any amendments or successor statutes thereto), and of any other law, to the maximum extent permitted by applicable law.

(e) Landlord’s Performance for Tenant. If Tenant shall continue in default in the performance of any of the covenants or agreements herein contained after the time limit for the curing thereof, then Landlord may perform the same for the account of Tenant. Any amount paid or expense or liability (together with interest thereon at the Maximum Rate from the date upon which any such expense shall have been incurred) incurred by Landlord in the performance of any such matter for the account of Tenant shall be deemed to be additional rent and the same (together with interest thereon at the Maximum Rate from the date upon which any such expense shall have been incurred) may, at the option of Landlord, be added to any rent then due or thereafter falling due hereunder or shall be payable by Tenant to Landlord on demand.

(f) Application of Payments Received From Tenant. Landlord shall have the right to apply any payments made by Tenant to the satisfaction of any debt or obligation of Tenant to Landlord according to Landlord's sole discretion and regardless of the instructions of Tenant as to application of any such sum, whether such instructions be endorsed upon Tenant's check or otherwise, unless otherwise agreed upon by both parties in writing. The acceptance by Landlord of a check or checks drawn by a party other than Tenant shall not affect Tenant's liability hereunder nor shall it be deemed an approval of any assignment or sublease of this Lease by Tenant.

(g) Waiver of Rights of Redemption. To the extent permitted by law, Tenant waives any and all rights of redemption granted by or under any present or future laws if Tenant is evicted or dispossessed for any cause, or if Landlord obtains possession of the Premises due to Tenant's default hereunder or otherwise.

(h) No Waiver. No delay or omission in the exercise of any right or remedy of Landlord on any default by Tenant shall impair such a right or remedy or be construed as a waiver. The receipt and acceptance by Landlord of delinquent rent shall not constitute a waiver of any other default; it shall constitute only a waiver of timely payment for the particular rent payment involved. No act or conduct of Landlord, including, without limitation, the acceptance of the keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the Lease Term. Only a notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish a termination of this Lease. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Any waiver by Landlord or any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of this Lease.

25. Default by Landlord. Landlord shall not be in default hereunder unless Landlord fails to perform any of its obligations hereunder within thirty (30) days after written notice from Tenant specifying such failure (unless such performance will, due to the nature of the obligation, require a period of time in excess of thirty (30) days, then after such period of time as is reasonably necessary). All obligations of Landlord hereunder shall be construed as covenants, not conditions; and, except as may be otherwise expressly provided in this Lease, Tenant may not terminate this Lease for breach of Landlord’s obligations hereunder. All obligations of Landlord under this Lease will be binding upon Landlord only during the period of its ownership of the Premises and not thereafter. The term “Landlord” in this Lease shall mean only the owner, for the time being of the Project, and in the event of the transfer by such owner of its interest in the Project, such owner shall thereupon be released and discharged from all obligations of Landlord thereafter accruing, but such obligations shall be binding during the Lease Term upon each new owner for the duration of such owner’s ownership. Any liability of Landlord under this Lease shall be limited solely to its interest in the Project, and in no event shall any personal liability be asserted against Landlord in connection with this Lease nor shall any recourse be had to any other property or assets of Landlord.

26. Waiver of Jury Trial. TENANT AND LANDLORD WAIVE ANY RIGHT TO TRIAL BY JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING OUT OF THIS LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO. LANDLORD AND TENANT ACKNOWLEDGE THE DELAY, EXPENSE AND UNCERTAINTY RELATING TO A JURY TRIAL INVOLVING A COMPLEX COMMERCIAL LEASE AS A BASIS FOR THIS PARAGRAPH.

27. Estoppel Certificates. Tenant and Landlord shall at any time, upon the request of the other party, execute, acknowledge and deliver a statement in writing certifying that this Lease is unmodified and in full force and effect (or if modified stating the nature of such modification and certifying that this Lease as modified is in full force and effect), the dates to which the rent and other charges are paid in advance, if any, and acknowledging that there are not, to the party’s knowledge, any uncured defaults on the part of the other party, or specifying such defaults if any are claimed. The parties hereto agree that any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the Project or the land or any assignee or sublessee of Tenant. A party’s failure to deliver such statement within ten (10) days after request for the same, shall be conclusive that: (a) this Lease is in full force and effect; (b) this Lease has not been modified or amended other than expressly stated; (c) there are no uncured defaults in Landlord’s performance; and (d) not more than one (1) month's rent or other charge has been paid in advance.

28. Environmental Requirements.

(a) No Hazardous Materials. Tenant shall not cause, permit or allow any Hazardous Material (other than standard cleaning materials) to be brought upon, stored, used, processed, generated, disposed of on or released or discharged in or about the Premises or the Project by Tenant, its agents, employees, contractors or invitees without the prior written consent of Landlord, which Landlord shall not unreasonably withhold provided Tenant demonstrates to Landlord's satisfaction that such Hazardous Material is necessary or useful to Tenant's business and will be used, kept and stored in a manner that complies with all laws regulating any such Hazardous Material so brought upon or used or kept in or about the Premises or the Project, including any and all Environmental Laws (defined below). Tenant agrees that its operations or activities conducted at the Premises or the Project shall not violate any local, state or federal law, rule or regulation or duty under applicable common law pertaining to human health, safety, protection of the environment, natural resources, conservation, waste management or pollution, including any and all Environmental Laws.

(b) Hazardous Material. As used herein, the term "Hazardous Material" means any pollutant or contaminant (including, without limitation, asbestos or asbestos-containing materials, lead based paint, polychlorinated biphenyls, petroleum or petroleum products or byproducts, flammable explosives, radioactive materials or infectious substances), toxic substance, regulated substance, hazardous waste, hazardous material, hazardous substance, oil, hydrocarbon, asbestos or similar item as defined in or pursuant to the Resource Conservation and Recovery Act, as amended, the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, the Federal Clean Water Act, as amended, the Safe Drinking Water Act, as amended, the Federal Water Pollution Control Act, as amended, the Texas Water Code, as amended, the Texas Solid Waste Disposal Act, as amended, the Emergency Planning and Community Right to Know Act, the Endangered Species Act, the Toxic Substances Control Act , the Occupational Safety and Health Act, the Hazardous Materials Transportation Act or any other federal, state or local environmental or health and safety related, constitutional provisions, law, regulation, ordinance, rule, or bylaw, whether existing as of the date hereof, previously enforced or subsequently enacted (collectively the "Environmental Laws").

(c) Notice of Certain Events and Curative Actions. Tenant shall immediately advise Landlord in writing of (i) any governmental or regulatory actions instituted or threatened under any Environmental Law affecting the Tenant or the Premises; (ii) all claims made or threatened by any third party against Tenant or the Premises or the Project relating to damage, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials; (iii) the discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Premises that could cause the Premises or the Project to be classified in a manner which may support a claim under any Environmental Law; and (iv) the discovery of any occurrence or condition on the Premises or the Project or any real property adjoining or in the vicinity of the Premises or the Project which could subject Tenant, the Premises or the Project to any restrictions in ownership, occupancy, transferability or use of the Premises under any Environmental Law. Landlord may elect to join and participate in any settlements, remedial actions, legal proceedings or other actions initiated in connection with any claims under any Environmental Law and to have its reasonable attorneys’ fees paid by Tenant. At its sole cost and expense, Tenant agrees when applicable or upon request of Landlord to promptly and completely cure and remedy every violation of an Environmental Law caused by Tenant, its agents, employees, contractors or invitees.

(d) Environmental Review. In the event reasonable evidence exists of the occurrence or existence of the violation of any Environmental Law or the presence of any Hazardous Material on the Premises or the Project, caused by Tenant, its agents, employees, contractors, or invitees, Landlord (by its officers, employees and agents) at any time and from time to time may contract for the services of persons (the "Site Reviewers") to perform environmental site assessments ("Site Assessments") on the Premises, the Project or neighboring properties for the purpose of determining whether there exists on the Premises, the Project or neighboring properties any environmental condition which could reasonably be expected to result in any liability, cost or expense to Landlord. The Site Reviewers are hereby authorized to enter upon the Premises for purposes of conducting Site Assessments. The Site Reviewers are further authorized to perform both above and below the ground testing for environmental damage or the presence of Hazardous Materials and such other tests on the Premises, Project or neighboring properties as may be necessary to conduct the Site Assessments in the reasonable opinion of the Site Reviewers. Tenant agrees to supply to the Site Reviewers such historical and operational information regarding the Premises as may be reasonably requested by the Site Reviewers to facilitate the Site Assessments and will make available for meetings with the Site Reviewers appropriate personnel having knowledge of such matters. The results of Site Assessments shall be furnished to Tenant upon request. The cost of performing such Site Assessments shall be paid by Tenant.

(e) ENVIRONMENTAL INDEMNITY. IN ADDITION TO, AND WITHOUT LIMITATION ON THE GENERAL INDEMNITY OBLIGATIONS OF TENANT UNDER THIS LEASE, TENANT SPECIFICALLY AGREES THAT IT SHALL INDEMNIFY, DEFEND AND HOLD LANDLORD HARMLESS FROM ANY AND ALL CLAIMS, JUDGMENTS, DAMAGES, PENALTIES, FINES, COSTS, LIABILITIES OR LOSSES (INCLUDING, WITHOUT LIMITATION, DIMINUTION IN VALUE OF THE PREMISES OR THE PROJECT, DAMAGES FOR THE LOSS OR RESTRICTION ON USE OF RENTABLE OR USABLE SPACE OR OF ANY AMENITY OF THE PREMISES OR THE PROJECT, AND SUMS PAID IN SETTLEMENT OF CLAIMS, ATTORNEYS' FEES, CONSULTANT FEES AND EXPERT FEES) WHICH ARISE DURING OR AFTER THE TERM AS A RESULT OF ANY BREACH BY TENANT OF ITS OBLIGATIONS UNDER THIS PARAGRAPH OR ANY CONTAMINATION OF THE PREMISES OR THE PROJECT RESULTING FROM THE PRESENCE OF HAZARDOUS MATERIALS ON OR ABOUT THE PREMISES CAUSED OR PERMITTED BY TENANT. THIS INDEMNIFICATION OF LANDLORD BY TENANT INCLUDES, WITHOUT LIMITATION, COSTS INCURRED IN CONNECTION WITH ANY INVESTIGATION OF SITE CONDITIONS OR ANY CLEAN UP, REMEDIAL, REMOVAL OR RESTORATION WORK REQUIRED BY ANY FEDERAL, STATE OR LOCAL GOVERNMENTAL AGENCY OR POLITICAL SUBDIVISION BECAUSE OF HAZARDOUS MATERIALS PRESENT IN THE SOIL OR GROUND WATER ON OR UNDER THE PREMISES OR THE PROJECT. WITHOUT LIMITING THE FOREGOING, IF THE PRESENCE OF ANY HAZARDOUS MATERIAL ON THE PREMISES OR THE PROJECT CAUSED OR PERMITTED BY TENANT RESULTS IN ANY CONTAMINATION OF THE PREMISES OR THE PROJECT, TENANT SHALL PROMPTLY TAKE ALL ACTIONS AT ITS SOLE COST AND EXPENSE AS ARE NECESSARY TO RETURN THE PREMISES OR THE PROJECT TO THE CONDITION EXISTING PRIOR TO THE INTRODUCTION OF ANY SUCH HAZARDOUS MATERIAL TO THE PREMISES, PROVIDED THAT LANDLORD'S APPROVAL OF SUCH ACTIONS SHALL FIRST BE OBTAINED. TENANT FURTHER AGREES TO DEFEND LANDLORD, ITS AGENTS, EMPLOYEES, AND ASSIGNS IN ANY ADMINISTRATIVE OR JUDICIAL PROCEEDING COMMENCED BY PRIVATE INDIVIDUALS OR GOVERNMENTAL ENTITIES SEEKING RECOVERY OF DAMAGES FOR PERSONAL INJURY OR PROPERTY DAMAGE, OR RECOVERY OF CIVIL PENALTIES OR FINES ARISING OUT OF, CONNECTED WITH, OR RELATING TO ANY BREACH BY TENANT OF ITS OBLIGATIONS UNDER THIS PARAGRAPH OR ANY CONTAMINATION OF THE PREMISES OR THE PROJECT RESULTING FROM THE PRESENCE OF HAZARDOUS MATERIALS ON OR ABOUT THE PREMISES OR THE PROJECT CAUSED OR PERMITTED BY TENANT. THE FOREGOING INDEMNITY SHALL SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS LEASE.

29. Rules and Regulations. Tenant shall, at all times during the Lease Term and any extension thereof, comply with all reasonable rules and regulations at any time or from time to time established by Landlord covering use of the Premises and the Project. The current rules and regulations are attached hereto as Exhibit “D” and Exhibit “F.” In the event of any conflict between said rules and regulations and other provisions of this Lease, the other terms and provisions of this Lease shall control. Landlord shall not have any liability or obligation for the breach of any rules or regulations by other tenants in the Project.

30. Security Service. Tenant acknowledges and agrees that, while Landlord may, in its sole discretion, patrol the Project, Landlord is not providing any security services with respect to the Premises and that Landlord shall not be liable to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any other breach of security with respect to the Premises.

31. Force Majeure. Landlord shall not be held responsible for delays in the performance of its obligations hereunder when caused by strikes, lockouts, labor disputes, acts of God, inability to obtain labor or materials or reasonable substitutes therefor, governmental restrictions, governmental regulations, governmental controls, delay in issuance of permits, enemy or hostile governmental action, civil commotion, fire or other casualty, and other causes beyond the reasonable control of Landlord (“Force Majeure”).

32. Entire Agreement. This Lease constitutes the complete agreement of Landlord and Tenant with respect to the subject matter hereof. No representations, inducements, promises or agreements, oral or written, have been made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant, which are not contained herein, and any prior agreements, promises, negotiations, or representations are superseded by this Lease. This Lease may not be amended except by an instrument in writing signed by both parties hereto.

33. Severability. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby. It is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there be added, as a part of this Lease, a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable.

34. Brokers. Tenant represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction and that no broker, agent or other person brought about this transaction, other than the Broker, if any, set forth on the first page of this Lease, and Tenant agrees to indemnify and hold Landlord harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction. Lessor represents that some of its partners and/or owners are Texas licensed Real Estate Brokers and Agents

35. Notices. All notices or communications required or permitted to be given under this Lease shall be in writing and shall be transmitted by (a) personal delivery, (b) nationally recognized overnight courier service, (c) certified or registered mail, return receipt requested, postage prepaid, or (iv) electronic mail, along with a secondary form of transmission. Except where otherwise expressly provided to the contrary, all notices and communications shall be deemed to have been given and received by a party on (i) the date of delivery if transmitted by personal delivery, (ii) the first business day after the date of posting if delivered by a nationally recognized overnight courier service, (iii) three (3) days after the date of posting if transmitted by certified or registered mail, or (iv) if by electronic mail, the earlier of the date of written reply by the recipient or confirmation from the recipient or the deemed date of delivery of the secondary form of transmission.

Any notice to Tenant shall be sent to Tenant at the Premises and may include the email address next to Tenant’s signature below. Any notice to Landlord shall be sent to Landlord at P.O. Box 522541, El Paso, Texas 79952, Email: ptgordon@vistastarinc.com and manager@vistastarinc.com. Landlord may by notice given aforesaid change its address for all subsequent notices.

36. Miscellaneous.

(a) Any payments or charges due from Tenant to Landlord hereunder shall be applied to any outstanding charges on the Tenants account as determined in the sole discretion of the Landlord.

(b) If and when included within the term “Tenant”, as used in this instrument, there is more than one person, firm or corporation, each shall be jointly and severally liable for the obligations of Tenant.

(c) This Lease may be executed in any number of counterparts, by original, electronic, scanned or faxed signature, each of which shall be deemed to be an original and all of which shall constitute one and the same agreement.

(d) Except as otherwise expressly provided in this Lease or as otherwise required by law, Landlord retains the absolute right to withhold any consent or approval.

(e) Neither this Lease nor a memorandum of lease shall be filed by or on behalf of Tenant in any public record, except as required by law. Landlord may in Landlord’s sole discretion, prepare and file, and upon request by Landlord, Tenant will execute, a memorandum of lease.

(f) The normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Lease or any exhibits or amendments hereto.

(g) The submission by Landlord to Tenant of this Lease shall have no binding force or effect, shall not constitute an option for the leasing of the Premises, nor confer any right or impose any obligations upon either party until execution of this Lease by both parties.

(h) Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. The captions inserted in this Lease are for convenience only and in no way define, limit or otherwise describe the scope or intent of this Lease, or any provision hereof, or in any way affect the interpretation of this Lease.

(i) CONSTRUCTION AND INTERPRETATION OF THIS LEASE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY PRINCIPLES OF CONFLICTS OF LAWS. LANDLORD AND TENANT CONSENT TO EXCLUSIVE JURISDICTION AND VENUE IN EL PASO COUNTY, TEXAS.

(j) Time is of the essence as to the performance of Tenant’s obligations under this Lease.

(k) All exhibits and addenda attached hereto are hereby incorporated into this Lease and made a part hereof. In the event of any conflict between such exhibits or addenda and the terms of this Lease, such exhibits or addenda shall control.

(l) In the event either party hereto initiates litigation to enforce the terms and provisions of this Lease, the non-prevailing party in such action shall reimburse the prevailing party for its reasonable attorneys’ fees, filing fees, and court and other costs associated with such litigation or dispute. Without limitation on the foregoing, Tenant agrees that should Landlord ever file a forcible detainer action or a forcible entry and detainer action, Landlord shall be entitled to its reasonable attorney’ fees and costs in such action, and Landlord shall not be required to give Tenant written notice to vacate or any other notice in order to recover such attorneys’ fees and costs as provided in Section 24.06 of the Texas Property Code, as amended, or similar statutes.

37. Landlord's Lien/Security Interest. [INTENTIONALLY OMITTED.]

38. Security Deposit. The Security Deposit shall be held by Landlord as security for the performance of Tenant's obligations under this Lease. The Security Deposit is not an advance rental deposit or a measure of Landlord's damages in case of Tenant's default. Upon each occurrence of an Event of Default, Landlord may use all or part of the Security Deposit to pay delinquent payments due under this Lease, and the cost of any damage, injury, expense or liability caused by such Event of Default, without prejudice to any other remedy provided herein or provided by law. Tenant shall pay Landlord on demand the amount that will restore the Security Deposit to its original amount. Landlord's obligation respecting the Security Deposit is that of a debtor, not a trustee; no interest shall accrue thereon. The Security Deposit shall be the property of Landlord, but shall be paid to Tenant when Tenant's obligations under this Lease have been completely fulfilled. Landlord shall be released from any obligation with respect to the Security Deposit upon transfer of this Lease and the Premises to a person or entity assuming Landlord's obligations under this Paragraph.

39. Sale by Landlord. The term “Landlord” in this Lease shall mean only the owner, for the time being of the Premises. In the event of any sale of the Project or the Building by Landlord, or any part thereof, Landlord shall be and is hereby entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease arising out of any act, occurrence or omission occurring after the consummation of such sale; and the purchaser, at such sale or any subsequent sale of the Project or the Building shall be deemed, without any further agreement between the parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out any and all of the covenants and obligations of Landlord under this Lease. Furthermore, in the event of a sale or conveyance by Landlord of the Project or the Building, this Lease shall not be affected by any such sale, and Tenant agrees to attorn to the purchaser thereof.

40. Confidentiality. Tenant agrees that except as may be required by law, it shall not, without the prior written consent of Landlord, make any public announcement about any of the terms, conditions, or provisions of this Lease, or modifications thereof, including without limitation, the Base Rent, Operating Expenses or other amounts due under this Lease (including, but not limited to reporting services such as “Co-Star”, “Loop Net” or broker database). Tenant shall not transmit this Lease or any of the information contained in this Lease to any third party except Tenant’s counsel, consultants, actual or prospective lenders and purchasers, and other advisors engaged to help Tenant or such lenders or purchasers in connection with this Lease pursuant to this Lease and/or any financing or refinancing for Tenant (collectively, the “Permitted Parties”), on a need-to-know basis, provided such Permitted Parties are advised of the confidentiality and nondisclosure obligations of Landlord and agree to be bound thereby. Tenant agrees to indemnify and hold Landlord harmless from and against any actual loss, injury, damage, claim, lien, cost or expenses, including attorneys’ fees, arising from a breach of the foregoing confidentiality agreement. The covenants set forth in this Paragraph shall survive the termination or closing of this Lease.

41. Addendums. The following addendums (if checked) are attached hereto and incorporated herein for all purposes (check as applicable):

	[_]	Cost of Living Increase Addendum
	[X]	Renewal Option Addendum
	[_]	Guaranty(s)
	[_]	Construction Addendum
	[_]	Broker Agreement

42. Guarantors. [INTENTIONALLY OMITTED.]

43. Additional Provisions.

(a) Landlord will repair or replace one overhead dock door in the rear of the premises.

[Signature page follows]

IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written.

	LANDLORD:
	Texzona Industries, Ltd. By: Texzona Management, LLC Its: General Partner

	By: /s/ Patrick Gordon
	Name: Patrick Gordon
	Title: President

	Address:
	PO Box 522541 El Paso, Texas 79952 Email:




	TENANT:
	Precision Optics Corporation, Inc.
	By: /s/ Donald Major
	Name: Donald Major
	Title: Chief Financial Officer

	Address: Premises address 1410 Gail Borden, Suite A-3 El Paso, TX 79935 Cell Email:

ADDENDUM I

RENEWAL OPTION

ATTACHED TO AND A PART OF THE

LEASE AGREEMENT BETWEEN

Texzona Industries, Inc.

and

Precision Optics Corporation, Inc.

RENEWAL OPTION ADDENDUM

This Renewal Option Addendum (Renewal Addendum) dated July 1, 2019, is made by and between Texzona Industries, Inc., ("Landlord”), and Precision Optics Corporation, Inc., (“Tenant”), and is hereby incorporated into and made a part of that certain Standard Industrial Lease between the parties (the "Lease").

For good and valuable consideration, Landlord and Tenant agree as follows:

1. Provided that Tenant has not defaulted with respect to any provision of the Lease, Tenant shall have the right to extend the term of the Lease for one (1) additional period(s) of thirty six (36) months each from the expiration of the prior term, provided, however, that written notice is given to Landlord of such intention to extend the Lease six (6) months prior to the applicable expiration date and further provided that all provisions of the Lease (other than rental as may be modified as provided below) shall continue in full force and effect for the period of such extension.

2. Rent. Monthly Base Rent for the renewal period(s) shall be paid by Tenant as follows:

Month 01 – Month 12 – Monthly Base Rent $3,652.34

Month 13 – Month 24 – Monthly Base Rent $3,743.65

Month 25 – Month 36 – Monthly Base Rent $3.837.24

3. Tenant shall continue to be responsible for Taxes, Insurance and Operating expenses as provided in the Lease Agreement.

4. All capitalized terms used in this Addendum and not defined herein shall have the same meaning provided for in the Lease.

5. This Addendum shall be incorporated into and made a part of the Lease for all purposes.

(Signatures on Next Page)

AGREED AND ACCEPTED:		LANDLORD:



	By:	Texzona Management, LLC.
	Its:	General Partner

		By:

		Its:


		TENANT



		Precision Optics Corporation, Inc.

		By: Donald A. Major

		Its: Chief Financial Officer

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation of our report dated September 26, 2019 relating to the consolidated financial statements of Precision Optics Corporation, Inc. and subsidiaries for the year ended June 30, 2019 included in this Form 10-K, into the Company’s previously filed Registration Statement Nos. 333-110946, 333-128628, 333-177330, and 333-203524 on Form S-8.

/s/ Stowe & Degon LLC

September 26, 2019

Westborough, Massachusetts

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Joseph N. Forkey, certify that:

I have reviewed this Annual Report on Form 10-K of Precision Optics Corporation, Inc. for the fiscal year ended June 30, 2019;

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;

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 registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant 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 registrant, 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)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’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

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’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 registrant’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 registrant’s internal control over financial reporting.

	By:	/s/ Joseph N. Forkey
Date: September 26, 2019		Joseph N. Forkey
		President and Chief Executive Officer
		(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Donald A. Major, certify that:

I have reviewed this Annual Report on Form 10-K of Precision Optics Corporation, Inc. for the fiscal year ended June 30, 2019;

(a)

(b)

(c)

(d)

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:	/s/ Donald A. Major
Date: September 26, 2019		Donald A. Major
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officers of Precision Optics Corporation, Inc., a Massachusetts corporation (the “Company”), do hereby certify, to such officers’ knowledge, that:

The Annual Report on Form 10-K of Precision Optics Corporation, Inc. for the fiscal year ended June 30, 2019 (the “Form 10-K”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: September 26, 2019	By: /s/ Joseph N. Forkey
	Joseph N. Forkey
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: September 26, 2019	By: /s/ Donald A. Major
	Donald A. Major
	Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

A signed original of this written statement required by Section 906 has been provided to Precision Optics Corporation, Inc. and will be retained by Precision Optics Corporation, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.