PRECISION OPTICS CORPORATION, INC. 10-Q

Item 1. Financial Statements. PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 31, 2021 June 30, 2020 ASSETS Current Assets: Cash and cash equivalents $ 781,845 $ 1,134,697 Accounts receivable (net of allowance for doubtful accounts of $250,633 at March 31, 2021 and $248,450 at June 30, 2020) 1,533,781 1,481,437 Inventories 1,949,281 2,197,244 Prepaid expenses 132,156 133,707 Total current assets 4,397,063 4,947,085 Fixed Assets: Machinery and equipment 3,084,691 2,907,533 Leasehold improvements 765,780 731,801 Furniture and fixtures 178,640 178,640 4,029,111 3,817,974 Less—Accumulated depreciation and amortization 3,419,203 3,314,824 Net fixed assets 609,908 503,150 Operating lease right-to-use asset 75,804 118,403 Patents, net 135,536 95,229 Goodwill 687,664 687,664 TOTAL ASSETS $ 5,905,975 $ 6,351,531 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Current portion of capital lease obligation $ 37,779 $ 51,761 Current portion of acquisition earn out liability 166,667 166,667 Note payable to bank – 808,962 Accounts payable 1,024,611 1,066,005 Customer advances 232,884 417,059 Accrued compensation and other 585,463 581,770 Current portion of operating lease liability 60,131 57,156 Total current liabilities 2,107,535 3,149,380 Capital lease obligation, net of current portion 162,200 35,810 Acquisition earn out liability 166,666 333,333 Operating lease liability, net of current portion 15,673 61,247 Stockholders’ Equity: Common stock, $0.01 par value: 50,000,000 shares authorized; issued and outstanding – 13,263,789 shares at March 31, 2021 and 13,191,789 June 30, 2020 132,638 131,918 Additional paid-in capital 50,044,789 49,702,986 Accumulated deficit (46,723,526 ) (47,063,143 ) Total stockholders’ equity 3,453,901 2,771,761 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 5,905,975 $ 6,351,531 The accompanying notes are an integral part of these consolidated interim financial statements. 3 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED) Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 Revenues $ 2,458,290 $ 2,374,584 $ 8,001,641 $ 7,686,330 Cost of Goods Sold 1,640,266 1,557,565 5,353,999 4,977,255 Gross Profit 818,024 817,019 2,647,642 2,709,075 Research and Development Expenses, net 146,063 319,875 443,609 700,605 Selling, General and Administrative Expenses 927,979 962,591 2,671,176 3,111,397 Total Operating Expenses 1,074,042 1,282,466 3,114,785 3,812,002 Operating Loss (256,018 ) (465,447 ) (467,143 ) (1,102,927 ) Other Income (Expense) Interest Expense (666 ) (683 ) (2,202 ) (138 ) Gain on Forgiveness of Bank Note 808,962 – 808,962 – Net Income (Loss) $ 552,278 $ (466,130 ) $ 339,617 $ (1,103,065 ) Income (Loss) Per Share: Basic $ 0.04 $ (0.04 ) $ 0.03 $ (0.09 ) Fully Diluted $ 0.04 $ (0.04 ) $ 0.02 $ (0.09 ) Weighted Average Common Shares Outstanding: Basic 13,243,595 12,982,494 13,208,805 12,898,004 Fully Diluted 14,068,459 12,982,494 13,841,700 12,898,004 The accompanying notes are an integral part of these consolidated interim financial statements. 4 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED) Nine Month Period Ended March 31, 2021 Number of Shares Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Balance, July 1, 2020 13,191,789 $ 131,918 $ 49,702,986 $ (47,063,143 ) $ 2,771,761 Stock-based compensation – – 71,146 – 71,146 Net income – – – 793 793 Balance, September 30, 2020 13,191,789 131,918 49,774,132 (47,062,350 ) 2,843,700 Stock-based compensation – – 157,079 – 157,079 Net loss – – – (213,454 ) (213,454 ) Balance, December 31, 2020 13,191,789 131,918 49,931,211 (47,275,804 ) 2,787,325 Proceeds from exercise of stock options 72,000 720 27,551 – 28,271 Stock-based compensation – – 86,027 – 86,027 Net income – – – 552,278 552,278 Balance, March 31, 2021 13,263,789 $ 132,638 $ 50,044,789 $ (46,723,526 ) $ 3,453,901 Nine Month Period Ended March 31, 2020 Number of Shares Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Balance, July 1, 2019 12,071,139 $ 120,712 $ 48,893,172 $ (45,636,993 ) $ 3,376,891 Issuance of common stock in private placement 760,000 7,600 17,400 – 25,000 Proceeds from exercise of stock options 12,500 125 8,550 – 8,675 Issuance of common stock for services 25,000 250 44,750 – 45,000 Stock-based compensation – – 76,505 – 76,505 Net loss – – – (86,110 ) (86,110 ) Balance, September 30, 2019 12,868,639 128,687 49,040,377 (45,723,103 ) 3,445,961 Exercise of stock options net of 3,592 shares withheld 11,408 114 (114 ) – – Stock-based compensation – – 274,706 – 274,706 Net loss – – – (550,825 ) (550,825 ) Balance, December 31, 2019 12,880,047 128,801 49,314,969 (46,273,928 ) 3,169,842 Issuance of common stock for services 100,000 1,000 (1,000 ) – – Exercise of stock options net of 8,258 shares withheld 11,742 117 (117 ) – – Stock-based compensation – – 75,567 – 75,567 Net loss – – – (466,130 ) (466,130 ) Balance, March 31, 2020 12,991,789 $ 129,918 $ 49,389,419 $ (46,740,058 ) $ 2,779,279 The accompanying notes are an integral part of these consolidated interim financial statements. 5 PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED) Nine Months Ended March 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ 339,617 $ (1,103,065 ) Adjustments to Reconcile Net Loss to Net Cash Used In Operating Activities - Depreciation and amortization 104,379 75,449 Stock-based compensation expense 314,252 426,778 Non-cash consulting expense – 45,000 Gain on forgiveness of bank note (808,962 ) – Changes in Operating Assets and Liabilities - Accounts receivable, net (52,344 ) 686,030 Inventories 247,963 (432,919 ) Prepaid expenses 1,551 49,057 Accounts payable (41,394 ) 359,079 Customer advances (184,175 ) (139,667 ) Accrued compensation and other 3,693 (50,163 ) Net Cash Used In Operating Activities (75,420 ) (84,421 ) CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for business acquisition (166,667 ) (1,443,341 ) Additional patent costs (40,307 ) (32,821 ) Purchases of property and equipment (49,160 ) (110,012 ) Net Cash Used In Investing Activities (256,134 ) (1,586,174 ) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of capital lease obligation (49,569 ) (19,375 ) Gross proceeds from private placement of common stock – 25,000 Gross proceeds from exercise of stock options 28,271 8,675 Private placement expense paid – – Net Cash (Used In) Provided From Financing Activities (21,298 ) 14,300 NET DECREASE IN CASH AND CASH EQUIVALENTS (352,852 ) (1,656,295 ) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,134,697 2,288,426 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 781,845 $ 632,131 SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES: Offering Costs Included in Accrued Liabilities $ – $ 23,000 Acquisition of Manufacturing Equipment Under Capital Lease $ 161,977 $ 113,213 The accompanying notes are an integral part of these consolidated interim financial statements. 6 PRECISION OPTICS CORPORATION, INC. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Operations 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 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. Actual results may differ from these estimates. 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 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 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: Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 Net Income (Loss) - Basic and Diluted $ 552,278 $ (466,130 ) $ 339,617 $ (1,103,065 ) Weighted Average Shares Outstanding Basic 13,243,595 12,982,494 13,208,805 12,898,004 Fully Diluted 14,068,459 12,982,494 13,841,700 12,989,004 Income (Loss) Per Share Basic $ 0.04 $ (0.04 ) $ 0.03 $ (0.09 ) Fully Diluted $ 0.04 $ (0.04 ) $ 0.02 $ (0.09 ) 7 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 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. Based 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 March 31, 2021. 2. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market and consisted of the following: March 31, 2021 June 30, 2020 Raw Materials $ 609,128 $ 653,678 Work-In-Progress 517,114 665,593 Finished Goods 823,039 877,973 Total Inventories $ 1,949,281 $ 2,197,244 3. 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”). 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. 8 4. LEASE OBLIGATION 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. Total rent 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: Capital Leases Operating Lease 2021 $ 12,155 $ 15,444 2022 48,619 62,822 2023 48,619 – 2024 48,619 – 2025 43,917 – 2026 27,985 – Total Minimum Payments 229,914 $ 78,266 Less: amount representing interest 29,935 Present value of minimum lease payments 199,979 Less: current portion 37,779 $ 162,200 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. 5. STOCK-BASED COMPENSATION The following table summarizes stock-based compensation expense for the three and nine months ended March 31, 2021 and 2020: Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 Cost of Goods Sold $ 11,233 $ 11,233 $ 33,699 $ 33,699 Research and Development 19,435 21,346 55,795 46,714 Selling, General and Administrative 55,359 42,988 224,758 346,365 Stock Based Compensation Expense $ 86,027 $ 75,567 $ 314,252 $ 426,778 9 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 Number of Shares Weighted Average Exercise Price Weighted Average Contractual Life Outstanding at June 30, 2020 2,065,200 $ 0.95 6.59 years Granted 90,000 $ 1.47 Exercised (72,000 ) $ 0.39 Cancelled (5,000 ) $ 1.30 Outstanding at March 31, 2021 2,078,200 $ 0.99 6.09 years Information related to the stock options outstanding as of March 31, 2021 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 $ 0.48 60,000 5.00 $ 0.48 60,000 $ 0.48 $ 0.50 100,000 4.22 $ 0.50 100,000 $ 0.50 $ 0.55 40,000 3.17 $ 0.55 40,000 $ 0.55 $ 0.70 100,000 7.35 $ 0.70 100,000 $ 0.70 $ 0.73 758,000 5.61 $ 0.73 758,000 $ 0.73 $ 0.85 6,000 1.76 $ 0.85 6,000 $ 0.85 $ 0.90 36,000 3.19 $ 0.90 36,000 $ 0.90 $ 1.20 200,200 0.92 $ 1.20 200,200 $ 1.20 $ 1.25 45,000 8.97 $ 1.25 15,000 $ 1.25 $ 1.30 473,000 8.20 $ 1.30 169,177 $ 1.30 $ 1.40 70,000 9.64 $ 1.40 70,000 $ 1.40 $ 1.42 100,000 8.45 $ 1.42 33,334 $ 1.42 $ 1.45 5,000 9.94 $ 1.45 – $ – $ 1.50 70,000 8.69 $ 1.50 70,000 $ 1.50 $ 1.795 15,000 9.87 $ 1.795 – $ – $ 0.48–1.795 2,078,200 6.09 $ 0.99 1,657,711 $ 0.90 The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisable options as of March 31, 2021 was $1,074,132 and $935,406, respectively. 6. 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 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. 10 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 nine months ended March 31, 2021 and 2020: Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 Engineering Design Services $ 549,636 $ 210,065 $ 1,986,856 $ 1,098,234 Optical Components 1,456,213 1,479,322 4,330,511 4,428,409 Medical Device Products and Assemblies 452,441 685,197 1,684,274 2,159,687 Total Revenues $ 2,458,290 $ 2,374,584 $ 8,001,641 $ 7,686,330 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 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: Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 Contract Liabilities, Beginning of Period $ 151,877 $ 388,506 $ 417,059 $ 450,192 Unearned Revenue Received from Customers 442,681 41,874 614,384 334,893 Revenue Recognized (361,674 ) (119,855 ) (798,559 ) (474,560 ) Contract Liabilities, End of Period $ 232,884 $ 310,525 $ 232,884 $ 310,525 7. 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. 11 Item 2. 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 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,” “suggest,” “estimate,” “plan,” “project,” “continue,” “ongoing,” “potential,” “expect,” “predict,” “believe,” “intend,” “may,” “will,” “should,” “could,” “would” and similar expressions are intended to identify forward-looking statements. 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 by law. 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. 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™ 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). 12 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 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. General 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. 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. Results of Operations 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%. Engineering 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. 13 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 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%. Research 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 31, 2021. 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 expenses. Liquidity and Capital Resources 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 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. 14 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 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. 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 3. 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. 15