What changed in this filing

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Item 1. Financial Statements

2021-05-13 compared with 2021-02-16 · 394 added, 397 removed, 185 unchanged (81% of the section changed)

1 unchanged sentence

PRECISION OPTICS CORPORATION, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

1 unchanged sentence

Cash and cash equivalents

Accounts receivable (net of allowance for doubtful accounts of $249,883 at December 31, 2020 and $248,450 at June 30, 2020)

Accounts receivable (net of allowance for doubtful accounts of $250,633 at March 31, 2021 and $248,450 at June 30, 2020)

Prepaid expenses

24 unchanged sentences

issued and outstanding –

13,191,789 shares at December 31, 2020 and June 30, 2020

13,263,789 shares at March 31, 2021 and 13,191,789 June 30, 2020

Additional paid-in capital

4 unchanged sentences

TOTAL LIABILITIES AND STOCKHOLDERS’

The accompanying notes are an integral

part of these consolidated interim financial statements.

The accompanying notes are an integral part

of these consolidated interim financial statements.

PRECISION OPTICS CORPORATION, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED

FOR THE THREE AND NINE MONTHS ENDED

31, 2021 AND 2020

Ended December 31,

Ended March 31,

Cost of Goods Sold

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Operating Loss

Interest (Expense) Income

Loss Per Share:

Basic and Fully Diluted

Other Income (Expense)

Interest Expense

Gain on Forgiveness of Bank Note

Net Income (Loss)

$ (1,103,065 )

Income (Loss) Per Share:

Fully Diluted

Weighted Average Common Shares Outstanding:

Basic and Fully Diluted

The accompanying notes are an integral

part of these consolidated interim financial statements.

Fully Diluted

The accompanying notes are an integral part

of these consolidated interim financial statements.

PRECISION OPTICS CORPORATION, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

FOR THE THREE AND SIX MONTHS ENDED

FOR THE THREE AND NINE MONTHS ENDED

31, 2021 AND 2020

Six Month Period Ended December 31, 2020

Nine Month Period Ended March 31, 2021

Stockholders’

7 unchanged sentences

(47,275,804 )

Six Month Period Ended December 31, 2019

Proceeds from exercise of stock options

Stock-based compensation

Balance, March 31, 2021

$ (46,723,526 )

Nine Month Period Ended March 31, 2020

Stockholders’

11 unchanged sentences

(46,273,928 )

The accompanying notes are an integral

part of these consolidated interim financial statements.

Issuance of common stock for services

Exercise of stock options net of 8,258 shares withheld

Stock-based compensation

Balance, March 31, 2020

$ (46,740,058 )

The accompanying notes are an integral part

of these consolidated interim financial statements.

PRECISION OPTICS CORPORATION, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED

FOR THE NINE MONTHS ENDED

31, 2021 AND 2020

Six Months Ended

Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

Adjustments to Reconcile Net Loss to Net Cash Provided From (Used In) Operating Activities -

Net Income (Loss)

$ (1,103,065 )

Adjustments to Reconcile Net Loss to Net Cash Used In Operating Activities -

Depreciation and amortization

1 unchanged sentence

Non-cash consulting expense

Gain on forgiveness of bank note

Changes in Operating Assets and Liabilities -

Accounts receivable, net

Inventories, net

Prepaid expenses

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Gross proceeds from exercise of stock options

Net Cash (Used in) Provided By Financing Activities

Private placement expense paid

Net Cash (Used In) Provided From Financing Activities

NET DECREASE IN CASH AND CASH EQUIVALENTS

2 unchanged sentences

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:

Offering costs included in current liabilities

The accompanying notes are an integral

part of these consolidated interim financial statements.

Offering Costs Included in Accrued Liabilities

Acquisition of Manufacturing Equipment Under Capital Lease

The accompanying notes are an integral part

of these consolidated interim financial statements.

PRECISION OPTICS CORPORATION, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL

STATEMENTS (UNAUDITED)

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Operations

The accompanying consolidated financial

statements include the accounts of Precision Optics Corporation, Inc.

The accompanying consolidated financial statements

include the accounts of Precision Optics Corporation, Inc.

and its wholly-owned subsidiaries (the “Company”).

All significant intercompany accounts and transactions have been eliminated in consolidation.

These consolidated financial statements

have been prepared by the Company, without audit, and reflect normal recurring adjustments which, in the opinion of management,

are necessary for a fair statement of the results of the second quarter and six months of the Company’s fiscal year 2021.

These consolidated financial statements do not include all disclosures associated with annual consolidated financial statements

and, accordingly, should be read in conjunction with footnotes contained in the Company’s consolidated financial statements

for the year ended June 30, 2020, together with the Report of Independent Registered Public Accounting Firm filed under cover

of the Company’s 2020 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 24,

All significant

intercompany accounts and transactions have been eliminated in consolidation.

These consolidated financial statements have been

prepared by the Company, without audit, and reflect normal recurring adjustments which, in the opinion of management, are necessary for

a fair statement of the results of the third quarter and nine months of the Company’s fiscal year 2021.

These consolidated financial

statements do not include all disclosures associated with annual consolidated financial statements and, accordingly, should be read in

conjunction with footnotes contained in the Company’s consolidated financial statements for the year ended June 30, 2020, together

with the Report of Independent Registered Public Accounting Firm filed under cover of the Company’s 2020 Annual Report on Form 10-K,

filed with the Securities and Exchange Commission on September 24, 2020.

Use of Estimates

The preparation of these consolidated financial

statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues

and expenses.

The Company bases its estimates on historical experience and on various other assumptions that are believed to be

reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets

and liabilities that are not readily apparent from other sources.

statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and

The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable

under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities

that are not readily apparent from other sources.

Actual results may differ from these estimates.

Loss Per Share

Basic loss per share is computed by dividing

Income (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 loss per

share is computed by dividing 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 (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.

For the three and six months

ended December 31, 2020 and 2019, the effect of such securities was antidilutive and not included in the fully diluted calculation

because of the net loss generated in those periods.

The following is the calculation of loss per share for the three

and six months ended December 31, 2020 and 2019:

Ended December 31,

Net Loss - Basic and Diluted

Basic and Dilutive Weighted Average Shares Outstanding

Loss Per Share - Basic and Diluted

The number of shares issuable upon the

exercise of outstanding stock options that were excluded from the computation as their effect was antidilutive was approximately

2,135,200 and 2,047,800 for the three and six months ended December 31, 2020 and 2019, respectively.

Income taxes are accounted for under the

asset and liability method.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to

differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases

and operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected

to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment

In assessing the likelihood of utilization

of existing deferred tax assets, management has considered historical results of operations and the current operating environment.

Based on this evaluation, a full valuation reserve has been provided for the deferred tax assets.

For the three and nine months

ended March 31, 2020, the effect of such securities was antidilutive and not included in the fully diluted calculation because of the

net loss generated in that period.

The following is the calculation of income (loss) per share for the

three and nine months ended March 31, 2021 and 2020:

Ended March 31,

Net Income (Loss) - Basic and Diluted

$ (1,103,065 )

Weighted Average Shares Outstanding

Fully Diluted

Income (Loss) Per Share

Fully Diluted

The number of shares issuable upon the exercise

of outstanding stock options that were excluded from the computation as their effect was antidilutive was 15,000 and 260,000 for the three

and nine months ended March 31, 2021, respectively, and 2,072,800 for the three and nine months ended March 31, 2020.

Income taxes are accounted for under the asset

and liability method.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between

the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax

credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in

the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities

of a change in tax rates is recognized in income in the period that includes the enactment date.

In assessing the likelihood of utilization of

existing deferred tax assets, management has considered historical results of operations and the current operating environment.

on this evaluation, a full valuation reserve has been provided for the deferred tax assets.

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 as of December

Inventories are stated at the lower of

cost (first-in, first-out) or market and consisted of the following:

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 as of March 31, 2021.

Inventories are stated at the lower of cost (first-in,

first-out) or market and consisted of the following:

Raw Materials

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NOTE PAYABLE TO BANK

The Company executed an unsecured Promissory

Note with a bank on May 6, 2020 and received $808,962 of loan proceeds pursuant to the Paycheck Protection Program under the Coronavirus

Aid, Relief, and Economic Security Act (the “CARES Act”).

The Promissory Note bears interest at a fixed rate of 1%

per annum, with principal and interest payments commencing on August 16, 2021.

However, if the Small Business Administration confirms

forgiveness of the Company’s loan and reimburses the bank for the total outstanding balance of principal and interest, the

Company’s obligations under the Promissory Note will be deemed fully satisfied and paid in full.

The Company has begun the

loan forgiveness application process and expects that it will ultimately qualify for full forgiveness.

Any portion of the Company’s

CARES Act loan that is not forgiven shall be converted to a term loan with the bank with monthly payments bearing interest at no

more than 1% per annum and a maturity date two years from the Promissory Note date, or May 6, 2022.

The Company executed an unsecured Promissory Note

with a bank on May 6, 2020 and received $808,962 of loan proceeds pursuant to the Paycheck Protection Program under the Coronavirus Aid,

Relief, and Economic Security Act (the “CARES Act”).

On March 30, 2021, the Small Business Administration forgave the Promissory

Note held by the Company in full, including any accrued interest at that date.

The forgiveness of the Promissory Note is recorded as other

income in the accompanying Consolidated Statements of Operations for the three and nine month periods ended March 31, 2021.

LEASE OBLIGATION

In January 2020 the Company entered into

a five-year capital lease and a twelve-month capital lease in the amounts of $47,750 and $65,463 respectively, for manufacturing

The net book value of fixed assets under capital lease obligations as of December 31, 2020 is $90,570.

On July 1, 2019 the Company entered into

a three-year operating lease for its facility in El Paso, Texas with total remaining minimum lease payments of $93,711 at December

Total rent expense including base rent and common area expenses was $23,090 and $15,190 during the three months ended

December 31, 2020 and 2019, respectively.

Included in the accompanying balance sheet at December 31, 2020 is a right-of-use asset

of $90,181 and current and long-term right-of-use operating lease liabilities of $59,127 and $31,054, respectively.

At December 31, 2020, future minimum lease payments under the

capital lease and operating lease obligations are as follows:

In March 2021, the Company entered into a five-year

capital lease in the amount of 161,977 for manufacturing equipment.

In January 2020, the Company entered into a five-year capital lease

for $47,750 for manufacturing equipment.

The net book value of fixed assets under capital lease obligations as of March 31, 2021 is $197,790.

On July 1, 2019 the Company entered into a three-year

operating lease for its facility in El Paso, Texas with total remaining minimum lease payments of $78,266 at March 31, 2021.

expense including base rent and common area expenses was $21,438 and $19,632 during the three months ended March 31, 2021 and 2020, respectively.

Included in the accompanying balance sheet at March 31, 2021 is a right-of-use asset of $75,804 and current and long-term right-of-use

operating lease liabilities of $60,131 and $15,673, respectively.

At March 31, 2021, future minimum lease payments under the capital

lease and operating lease obligations are as follows:

Fiscal Year Ending June 30:

5 unchanged sentences

current portion

The Company’s operating leases for

its three Gardner, Massachusetts office, production and storage spaces plus an equipment lease have expired and are continuing

on a month to month tenant at will basis.

Rent expense on these operating leases was $83,231 and $72,827 for the six months ended

December 31, 2020 and 2019, respectively.

The Company’s operating leases for its Gardner, Massachusetts

office, production and storage spaces plus an equipment lease have expired and are continuing on a month-to-month tenant at will basis.

Rent expense on these operating leases was $124,848 and $109,241 for the nine months ended March 31, 2021 and 2020, respectively.

STOCK-BASED COMPENSATION

The following table summarizes stock-based

compensation expense for the three and six months ended December 31, 2020 and 2019:

Ended December 31,

The following table summarizes stock-based compensation

expense for the three and nine months ended March 31, 2021 and 2020:

Ended March 31,

Cost of Goods Sold

2 unchanged sentences

Stock Based Compensation Expense

No compensation has been capitalized because

such amounts would have been immaterial.

The following tables summarize stock option

activity for the six months ended December 31, 2020:

No compensation has been capitalized because such

amounts would have been immaterial.

The following tables summarize stock option activity

for the nine months ended March 31, 2021:

Options Outstanding

4 unchanged sentences

Outstanding at June 30, 2020

Outstanding at December 31, 2020

Information related to the stock options

outstanding as of December 31, 2020 is as follows:

Outstanding at March 31, 2021

Information related to the stock options outstanding

as of March 31, 2021 is as follows:

Exercise Prices

5 unchanged sentences

“in-the-money”

outstanding and exercisable options as of December 31, 2020 was $875,330 and $795,283, respectively.

outstanding and exercisable options as of March 31, 2021 was $1,074,132 and $935,406, respectively.

REVENUE RECOGNITION

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 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.

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.

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 three and six months ended December 31, 2020 and

Ended December 31,

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 three and nine months ended March 31, 2021 and 2020:

Ended March 31,

Engineering Design Services

3 unchanged sentences

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

As of December 31, 2020, 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 our performance obligations.

The Company generally satisfies performance obligations within one year from

the contract inception date.

Contract liabilities, which were recorded

as customer advances in the Company’s Consolidated Balance Sheets, and unearned revenue are comprised of the following:

Ended December 31,

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

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 March 31,

2021, 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 our performance obligations.

The Company generally satisfies performance obligations within one year from the contract

inception date.

Contract liabilities, which were recorded as customer

advances in the Company’s Consolidated Balance Sheets, and unearned revenue are comprised of the following:

Ended March 31,

Contract Liabilities, Beginning of Period

3 unchanged sentences

COVID-19 PANDEMIC

The COVID-19 world-wide pandemic that began

during the quarter ended March 31, 2020 and the domestic and international impact of policy decisions being made in major countries

around the world has had, and could continue to have, an adverse impact on the Company’s sources of supply, current and future

orders from its customers, collection of amounts owed to the Company from its customers, its internal operating procedures, and

the Company’s overall financial condition.

Given the uncertainty surrounding the continuation of economic impacts both domestically

and abroad, the Company cannot predict with certainty at this time what the future impact of COVID-19 and resulting business and

economic policies in the US and abroad will be on its up-coming quarterly fiscal operating results.

The COVID-19 world-wide pandemic that began during

the quarter ended March 31, 2020 and the domestic and international impact of policy decisions being made in major countries around the

world has had, and could continue to have, an adverse impact on the Company’s sources of supply, current and future orders from

its customers, collection of amounts owed to the Company from its customers, its internal operating procedures, and the Company’s

overall financial condition.

Given the uncertainty surrounding the continuation of economic impacts both domestically and abroad, the

Company cannot predict with certainty at this time what the future impact of COVID-19 and resulting business and economic policies in

the US and abroad will be on its up-coming quarterly fiscal operating results.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations.

The following discussion of our financial

condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements

and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended December 31, 2020

and with our audited consolidated financial statements for the year ended June 30, 2020 included in our Annual Report on Form 10-K,

filed with the Securities and Exchange Commission on September 24, 2020.

This Quarterly Report on Form 10-Q

contains forward-looking statements.

The following discussion of our financial condition

and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes to those

statements included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 and with our audited consolidated

financial statements for the year ended June 30, 2020 included in our Annual Report on Form 10-K, filed with the Securities and Exchange

Commission on September 24, 2020.

This Quarterly Report on Form 10-Q contains

forward-looking statements.

When used in this report, the words “anticipate,”

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and similar expressions are intended to identify forward-looking statements.

not place undue reliance on these forward-looking statements.

Our actual results could differ materially from those anticipated

in the forward-looking statements for many reasons, including the risks described in this report, the risks described in our Annual

Report on Form 10-K for the year ended June 30, 2020 and other reports we file with the Securities and Exchange Commission.

we believe the expectations reflected in the forward-looking statements are reasonable, they relate only

to events as of the date on which the statements are made.

We do not intend to update any of the forward-looking statements after

the date of this report to conform these statements to actual results or to changes in our expectations, except as required by

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.

We selectively execute 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.

As Ross Optical Industries of El Paso,

Texas we also operate as a supplier of custom optical components and assemblies for military and defense, medical and various other

industrial applications.

All products sold by us under the Ross Optical name include a custom or catalog optic, which is sourced

through our 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 our in-house coating department.

Approximately 61% of our business during

the six months ended December 31, 2020 is from the design and manufacture of high-quality medical devices.

Approximately 9% of

our revenue during the same period is from the design, manufacture and resale of optical products for military and defense, and

30% is from other industrial, non-medical products.

Our proprietary medical instrumentation line and unique custom 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.

You should not place undue reliance on

these forward-looking statements.

Our actual results could differ materially from those anticipated in the forward-looking statements

for many reasons, including the risks described in this report, the risks described in our Annual Report on Form 10-K for the year ended

June 30, 2020 and other reports we file with the Securities and Exchange Commission.

Although we believe the expectations reflected in the forward-looking statements are

reasonable, they relate only to events as of the date on which the statements are made.

We do not intend to update any of the forward-looking

statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as required

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.

We selectively execute 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.

As Ross Optical Industries of El Paso, Texas we

also operate as a supplier of custom optical components and assemblies for military and defense, medical and various other industrial

applications.

All products sold by us under the Ross Optical name include a custom or catalog optic, which is sourced through our 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 our in-house coating department.

Approximately 60% of our business during the nine

months ended March 31, 2021 is from the design and manufacture of high-quality medical devices.

Approximately 8% of our revenue during

the same period is from the design, manufacture and resale of optical products for military and defense, and 32% is from other industrial,

non-medical products.

Our proprietary medical instrumentation line and unique custom 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™

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 internet websites are www.poci.com

and www.rossoptical.com.

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 internet websites are www.poci.com and www.rossoptical.com.

Information on our websites is not intended to be integrated into this report.

Investors and others should

note that we announce material financial information using our company websites (www.poci.com;

www.rossoptical.com), our investor

relations website, SEC filings, press releases, public conference calls and webcasts.

Information about Precision Optics, our business,

and our results of operations may also be announced by social media posts on our Ross Optical LinkedIn page (www.linkedin.com/company/ross-optical-industries/)

and Twitter feed (http://twitter.com/rossoptical).

The information that we post on these social

media channels could be deemed to be material information.

Therefore, we encourage investors, the media, and others interested

in Precision Optics to review the information that we post on these social media channels.

These social media channels may be updated

from time to time on Precision Optics’

Investors and others should note that we announce material

financial information using our company websites (www.poci.com;

www.rossoptical.com), our investor relations website, SEC filings, press

releases, public conference calls and webcasts.

Information about Precision Optics, our business, and our results of operations may also

be announced by social media posts on our Ross Optical LinkedIn page (www.linkedin.com/company/ross-optical-industries/) and Twitter feed

(http://twitter.com/rossoptical).

The information that we post on these social media

channels could be deemed to be material information.

Therefore, we encourage investors, the media, and others interested in Precision

Optics to review the information that we post on these social media channels.

These social media channels may be updated from time to

time on Precision Optics’

investor relations website.

The information on, or accessible through, our websites

and social media channels is not incorporated by reference in this Quarterly Report on Form 10-Q.

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 we have developed extensive experience collaborating with other optical

specialists worldwide.

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, single-use endoscopes and 3D endoscopes.

Our largest customer during the six months

ended December 31, 2020 accounted for 13.3% of our revenue and represented engineering, design and assembly revenues for a medical

diagnostic system.

During the six months ended December 31, 2020 we had revenue from another two hundred twenty-six customers,

and none of those customers accounted for more than 10% of our total revenue.

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

single-use 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.

Optical division markets through existing customers and trade shows, in addition to proactive online marketing strategies executed

primarily through its website.

This management’s discussion and

analysis of financial condition and results of operations is based upon our unaudited consolidated financial statements, which

have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.

The preparation

of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets,

liabilities, revenues and expenses.

We base our estimates on historical experience and on various other assumptions that are believed

to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of

assets and liabilities that are not readily apparent from other sources.

The information on, or accessible through, our websites and social media channels

is not incorporated by reference in this Quarterly Report on Form 10-Q.

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

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

Over the years we have developed extensive experience collaborating with other optical specialists worldwide.

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, single-use endoscopes and 3D endoscopes.

Our largest customer during the nine months ended

March 31, 2021 accounted for 11.3% of our revenue and represented engineering, design and assembly revenues for a medical diagnostic system.

During the nine months ended March 31, 2021 we had revenue from another two hundred seventy-nine customers, and none of those customers

accounted for more than 10% of our total revenue.

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 single-use 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.

Our Ross Optical division markets through existing customers

and trade shows, in addition to proactive online marketing strategies executed primarily through its website.

This management’s discussion and analysis

of financial condition and results of operations is based upon our unaudited consolidated financial statements, which have been prepared

without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.

The preparation of these consolidated

financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the

circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not

readily apparent from other sources.

Actual results may differ from these estimates.

There have been no significant changes

in our critical accounting policies as disclosed in the Notes to our Financial Statements contained in our Annual Report on Form 10-K

for the year ended June 30, 2020 filed with the Securities and Exchange Commission on September 24, 2020.

There have been no significant changes in our

critical accounting policies as disclosed in the Notes to our Financial Statements contained in our Annual Report on Form 10-K for

the year ended June 30, 2020 filed with the Securities and Exchange Commission on September 24, 2020.

Results of Operations

Our total revenues for the quarter ended

December 31, 2020, were $2,785,450, as compared to $2,796,762 for the same period in the prior year, a decrease of $11,312, or

Engineering revenue during the quarter ended December 31, 2020 increased approximately $370,000 compared to the same fiscal

quarter of the prior year due primarily to the addition of projects with two new customers.

Production revenue had a decrease in

quarter-over-quarter revenue of approximately $246,000 due primarily to COVID-19 related slow-downs instituted by our existing

Other revenue changes between the quarter ended December 31, 2020 and the same period of the prior year were considered

customary fluctuations with existing customers and project progressions.

Our total revenues for the six months ended

December 31, 2020 were $5,543,351, as compared to $5,311,746 for the same period in the prior year, an increase of $231,605,

Similar to the quarter ended December 31, 2020, revenues increased during the six months ended December 31, 2020 compared

to the same period of the prior year due to a $549,000 increase in engineering revenue caused by the addition of two new projects,

offset by a smaller amount from decreases in production revenue from various customers experiencing slow-downs due to the affects

The COVID-19 world-wide pandemic that began

during the quarter ended March 31, 2020 and the domestic and international impact of policy decisions being made in major countries

around the world has had, and could continue to have, an adverse impact on our sources of supply, current and future orders from

our customers, collection of amounts owed to us from our customers, our internal operating procedures, and our overall financial

Given the uncertainty surrounding the continuation of economic impacts both domestically and abroad, we cannot predict

with certainty at this time what the future impact of COVID-19 and resulting business and economic policies in the US and abroad

will be on our up-coming quarterly fiscal operating results.

Gross profit for the quarter ended December

31, 2020 was $854,440, compared to $917,939 for the same period in the prior year, reflecting a decrease of $63,499, or 6.9%.

profit for the quarter ended December 31, 2020 as a percentage of our revenues was 30.7%, a decrease from the gross profit percentage

of 32.8% for the same period in the prior year.

Gross profit for the six months ended December 31, 2020 was $1,829,618, as

compared to $1,892,056 for the same period in the prior year, which reflects a decrease of $62,438 or 3.3%.

Gross profit for the

six months ended December 31, 2020 as a percentage of our revenues was 33.0%, a decrease from the gross profit percentage

of 35.6% for the same period in the prior year.

Quarterly 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 challenges in connection with new products, the effects of COVID-19 pandemic policy decisions on various economies and

our suppliers and customers, as well as the effects on production efficiencies due to the augmented policies we have incorporated

into our operations as a result of the COVID-19 pandemic.

Our gross margin on individual engineering

projects is dependent on a number of factors and is expected to fluctuate from quarter to quarter based on the nature and status

of engineering projects, unanticipated cost over-runs, design challenges and changes, start-up production activities or other customer-imposed

project changes or delays.

Our decrease in gross margin from 32.8% to 30.7% during the fiscal quarter ended December 31, 2019 compared

to 2020 and from 35.6% to 33.0% during the six months ended December 31, 2019 and 2020 was primarily the result of a gross margin

decrease in one engineering project due to cost over-runs, plus a decrease in higher margin production revenues with customers

due to COVID-19 factors.

The remainder of our production, engineering and component revenues resulted in margins within our targeted

range with reasonably expected fluctuations.

Our total revenues for the quarter ended March

31, 2021, were $2,458,290, as compared to $2,374,584 for the same period in the prior year, an increase of $83,706, or 3.5%.

revenue during the quarter ended March 31, 2021 increased approximately $340,000 compared to the same fiscal quarter of the prior year

due primarily to the addition of projects with two new customers.

Production revenue had a decrease in quarter-over-quarter revenue of

approximately $232,756 due primarily to COVID-19 related slow-downs instituted by our existing customers.

Other revenue changes between

the quarter ended March 31, 2021 and the same period of the prior year were considered customary fluctuations with existing customers

and project progressions.

Our total revenues for the nine months ended March 31,

2021 were $8,001,641, as compared to $7,686,330 for the same period in the prior year, an increase of $315,311, or 4.1%.

Similar to the

quarter ended March 31, 2021, revenues increased during the nine months ended March 31, 2021 compared to the same period of the prior

year due to a $889,000 increase in engineering revenue caused by the addition of two new projects, offset by a smaller amount from decreases

in production revenue from various customers experiencing slow-downs due to the effects of COVID-19.

Gross profit for the quarter ended March 31, 2021

was $818,024, compared to $817,019 for the same period in the prior year, reflecting an increase of $1,005.

Gross profit for the quarter

ended March 31, 2021 as a percentage of our revenues was 33.3%, a decrease from the gross profit percentage of 34.4% for the same period

in the prior year.

Gross profit for the nine months ended March 31, 2021 was $2,647,642, as compared to $2,709,075 for the same period

in the prior year, which reflects a decrease of $61,433 or 2.3%.

Gross profit for the nine months ended March 31, 2021 as a percentage

of our revenues was 33.1%, a decrease from the gross profit percentage of 35.2% for the same period in the prior year.

Quarterly 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 challenges in connection with new products, the effects of COVID-19

pandemic policy decisions on various economies and our suppliers and customers, as well as the effects on production efficiencies due

to the augmented policies we have incorporated into our operations as a result of the COVID-19 pandemic.

Our gross margin on individual engineering projects

is dependent on a number of factors and is expected to fluctuate from quarter to quarter based on the nature and status of engineering

projects, unanticipated cost over-runs, design challenges and changes, start-up production activities or other customer-imposed project

changes or delays.

Our decrease in gross margin from 34.4% to 33.3% during the fiscal quarter ended March 31, 2021 compared to 2020 and

from 35.2% to 33.1% during the nine months ended March 31, 2021 and 2020 was primarily the result of a gross margin decrease in one engineering

project due to cost over-runs, plus a decrease in higher margin production revenues with customers due to COVID-19 factors.

The remainder

of our production, engineering and component revenues resulted in margins within our targeted range with reasonably expected fluctuations.

Research and development expenses were $146,063

$145,970 for the quarter ended December 31, 2020, compared to $228,576 for the same period in the prior year, a decrease of $82,606,

Research and development expenses were $297,546 for the six months ended December 31, 2020, compared to $380,730

for the same period in the prior year, a decrease of $83,184, or 21.8%.

In-house research and development and certain internal

functions not directly related to customer engagements are classified as research and development expenses with the majority of

our engineering, research and development activities being consumed in revenue generating engagements with our customers for the

development of their products.

During the quarter ended December 31, 2019 we had a greater amount of our engineering personnel

time consumed in internal research and development activities causing increased research and development expense compared to the

quarter and six months ended December 31, 2020.

Selling, general and administrative expenses

were $1,743,197 for the six months ended December 31, 2020, compared to $2,148,806 for the same period in the prior year,

a decrease of $405,609, or 18.9%.

The decrease in the six months ended December 31, 2020, compared to the same period of the prior

fiscal year was due to decreased recruiting, shareholder relations, stock compensation and administrative travel costs offset by

increases in consulting, professional accounting and insurance expenses.

Selling, general and administrative expenses

were $921,195 for the quarter ended December 31, 2020, compared to $1,240,961 for the same period in the prior year, a decrease

of $319,766, or 25.8%.

The decrease in the quarter ended December 31, 2020, compared to the same quarter of the prior fiscal year

was due to decreased shareholder relations, stock compensation and administrative travel costs offset by increases in consulting,

for the quarter ended March 31, 2021, compared to $319,875 for the same period in the prior year, a decrease of $173,812, or 54.3%.

and development expenses were $443,609 for the nine months ended March 31, 2021, compared to $700,605 for the same period in the

prior year, a decrease of $256,996, or 36.7%.

In-house research and development and certain internal functions not directly related to

customer engagements are classified as research and development expenses with the majority of our engineering, research and development

activities being consumed in revenue generating engagements with our customers for the development of their products.

During the quarter

and nine months ended December 31, 2019 and March 31, 2020 we had a greater amount of our engineering personnel time consumed in internal

research and development activities causing increased research and development expense compared to the quarter and nine months ended March

Selling, general and administrative expenses were

$2,671,176 for the nine months ended March 31, 2021, compared to $3,111,397 for the same period in the prior year, a decrease of

$440,221, or 14.1%.

The decrease in the nine months ended March 31, 2021, compared to the same period of the prior fiscal year was due

to decreased recruiting, shareholder relations, stock compensation and administrative travel costs offset by increases in consulting,

professional accounting and insurance expenses.

Selling, general and administrative expenses were

$927,979 for the quarter ended March 31, 2021, compared to $962,591 for the same period in the prior year, a decrease of $34,612, or 3.6%.

The decrease in the quarter ended March 31, 2021, compared to the same quarter of the prior fiscal year was due to decreased shareholder

relations, stock compensation and administrative travel costs offset by increases in consulting, professional accounting and insurance

Liquidity and Capital Resources

We have sustained recurring net losses

We have sustained recurring net losses from operations

for several years.

During the year ended June 30, 2020 we incurred a net loss of 1,426,150 and used cash in operating activities

During the six months ended December 31, 2020 we had net loss of $212,661 and used cash in operating activities of

At December 31, 2020 cash was $816,263, accounts receivables were $1,590,867 and current liabilities were $2,680,315,

including $151,877 of customer advances received for future order deliveries and $808,962 of a CARES Act PPP Promissory Note payable

expected to be forgiven in full on or before August 16, 2022.

Although our sales levels have increased

and our financial performance has shown signs of periodic improvement during certain recent fiscal quarters, our operating expenses

have decreased, however, we continue to experience pricing pressure from our customers and challenges in engineering projects and

production orders that result in cost over-runs and lower gross margins, and decreased orders from customers experiencing COVID-19

related slow downs.

Consequently, critical to our ability to maintain our financial condition is achieving and maintaining a level

of quarterly revenues that generate break even or better financial performance as well as timely collection of accounts receivable

from our customers.

We believe profitable operating results can be achieved through a combination of revenue levels, realized gross

margins and controlling operating expense increases, all of which are subject to periodic fluctuations resulting from sales mix

and the stage of completion of varying engineering service projects as they progress towards and into production level revenues.

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 and recorded in the current liabilities section of the accompanying financial statements.

Our management believes

that the opportunities represented by our current production projects and engineering pipeline of Microprecision™

projects have the potential to generate increasing revenues and profitable financial results.

On May 6, 2020, we received loan proceeds

in the amount of $808,962 under the Paycheck Protection Program, or PPP, from Bank of America.

The PPP, established as part of

the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, provides for loans to qualifying businesses that are forgivable

provided the loan proceeds are used for eligible purposes, including payroll, benefits, rent and utilities.

The unsecured loan,

which is in the form of a note dated May 6, 2020 and recorded as a current liability in accompanying financial statements, matures

on May 6, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on August 16, 2021.

While we currently

believe that our use of the loan proceeds meets the conditions for forgiveness of the loan, we have begun the forgiveness application

process and we cannot yet be assured that our $808,962 PPP loan will be eligible for forgiveness, in whole or in part.

During the year ended June 30, 2020, we incurred a net loss of 1,426,150 and used cash in operating activities of $592,492.

During the nine months ended March 31, 2021 we had a net loss from operations of $467,143 and used cash in operating activities of $75,420.

At March 31, 2021, cash was $781,845, accounts receivables were $1,533,781 and current liabilities were $2,107,535, including $232,884

of customer advances received for future order deliveries.

Although our sales levels have increased, our

financial performance has shown signs of periodic improvement during certain recent fiscal quarters, and our operating expenses have decreased,

however, we continue to experience pricing pressure from our customers and challenges in engineering projects and production orders that

result in cost over-runs and lower gross margins, and decreased orders from customers experiencing COVID-19 related slowdowns.

Consequently,

critical to our ability to maintain our financial condition is achieving and maintaining a level of quarterly revenues that generate break

even or better financial performance as well as timely collection of accounts receivable from our customers.

We believe profitable operating

results can be achieved through a combination of revenue levels, realized gross margins and controlling operating expense increases, all

of which are subject to periodic fluctuations resulting from sales mix and the stage of completion of varying engineering service projects

as they progress towards and into production level revenues.

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

and recorded in the current liabilities section of the accompanying financial statements.

Our management believes that the opportunities

represented by our current production projects and engineering pipeline of Microprecision™

optical projects have the potential to

generate increasing revenues and profitable financial results.

On May 6, 2020, we received loan proceeds in the

amount of $808,962 under the Paycheck Protection Program, or PPP, from Bank of America.

The PPP, established as part of the Coronavirus

Aid, Relief and Economic Security Act, or CARES Act, provides for loans to qualifying businesses that are forgivable provided the loan

proceeds are used for eligible purposes, including payroll, benefits, rent and utilities.

The unsecured loan dated May 6, 2020 was forgiven

on March 30, 2021 by the Small Business Administration pursuant to the CARES Act.

The forgiveness of the Promissory Note is recorded as

other income in the accompanying Consolidated Statements of Operations for the three and nine month periods ended March 31, 2021.

Capital equipment expenditures and additional

patent costs during the six months ended December 31, 2020 were $59,033.

Future capital equipment expenditures will be dependent

upon the type and amount of future sales revenue and the needs of on-going research and development efforts.

We have contractual cash commitments related

to open purchase orders as of December 31, 2020 of approximately $696,000, plus a $51,515 commitment remaining under two capital

lease obligations for the acquisition of equipment and $93,711 commitment remaining under a three-year facility lease relating

the Ross Optical division in El Paso, Texas (see Note 3.

patent costs during the nine months ended March 31, 2021 were $89,467.

Future capital equipment expenditures will be dependent upon the

type and amount of future sales revenue and the needs of on-going research and development efforts.

We have contractual cash commitments related to

open purchase orders as of March 31, 2021 of approximately $440,000, plus a $229,914 commitment remaining under three capital lease obligations

for the acquisition of equipment and $78,266 commitment remaining under a three-year facility lease relating the Ross Optical division

in El Paso, Texas (see Note 3.

Lease Obligations).

We have no other contractual cash commitments since

other leased facilities are currently on a month-to-month basis.

We have no other contractual cash commitments since other leased facilities are currently

on a month-to-month basis.

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.

Quantitative and Qualitative

Disclosures About Market Risk.

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.

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.

Quantitative and Qualitative Disclosures

About Market Risk.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements