PRECISION OPTICS CORPORATION, INC. 10-Q

Item 1. Financial Statements. PRECISION OPTICS CORPORATION, INC. BALANCE SHEETS (UNAUDITED) September 30, June 30, 2025 2025 ASSETS Current Assets: Cash and cash equivalents $ 1,392,105 $ 1,773,735 Accounts receivable, net of allowance for credit losses of $ 63,804 at September 30, 2025 and $ 80,192 at June 30, 2025 4,187,933 4,336,730 Inventories, net 3,880,308 3,562,112 Prepaid expenses 399,630 385,390 Total current assets 9,859,976 10,057,967 Fixed Assets: Machinery and equipment 3,406,046 3,385,958 Leasehold improvements 1,240,705 871,356 Furniture and fixtures 564,944 538,428 Total fixed assets 5,211,695 4,795,742 Less—accumulated depreciation and amortization 4,250,817 4,261,950 Net fixed assets 960,878 533,792 Operating lease right-to-use asset 2,513,607 141,825 Patents, net 226,259 232,493 Goodwill 8,824,210 8,824,210 Total other assets 11,564,076 9,198,528 TOTAL ASSETS $ 22,384,930 $ 19,790,287 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Current portion of capital lease obligation $ 18,383 $ 27,368 Current maturities of long-term debt 577,898 577,898 Accounts payable 4,008,335 2,909,100 Contract liabilities 2,030,772 1,821,929 Accrued compensation and other 899,566 764,004 Current portion of operating lease liability 82,341 50,995 Total current liabilities 7,617,295 6,151,294 Long-term debt, net of current maturities 1,144,730 1,289,205 Operating lease liability, net of current portion 2,699,462 90,954 Total liabilities 11,461,487 7,531,453 Stockholders’ Equity: Common stock, $ 0.01 par value: 50,000,000 shares authorized; issued and outstanding – 7,714,701 shares at September 30, 2025 and June 30, 2025 77,147 77,147 Additional paid-in capital 69,453,956 69,152,317 Accumulated deficit ( 58,607,660 ) ( 56,970,630 ) Total stockholders’ equity 10,923,443 12,258,834 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 22,384,930 $ 19,790,287 The accompanying notes are an integral part of these interim financial statements. 3 PRECISION OPTICS CORPORATION, INC. STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2025 AND 2024 (UNAUDITED) Three Months Ended September 30, 2025 2024 Revenues $ 6,680,823 $ 4,197,053 Cost of Goods Sold 5,734,465 3,079,723 Gross Profit 946,358 1,117,330 Research and Development Expenses 311,840 400,659 Selling, General and Administrative Expenses 2,229,773 1,963,612 Total Operating Expenses 2,541,613 2,364,271 Operating Loss ( 1,595,255 ) ( 1,246,941 ) Interest Expense ( 41,775 ) ( 64,306 ) Net Loss $ ( 1,637,030 ) $ ( 1,311,247 ) Loss Per Share: Basic & Fully Diluted $ ( 0.21 ) $ ( 0.21 ) Weighted Average Common Shares Outstanding: Basic & Fully Diluted 7,714,701 6,216,630 The accompanying notes are an integral part of these interim financial statements. 4 PRECISION OPTICS CORPORATION, INC. STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED sEPTEMBER 30, 2025 AND 2024 (UNAUDITED) Three Month Period Ended September 30, 2025 Number of Shares Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Balance, July 1, 2025 7,714,701 $ 77,147 $ 69,152,317 $ ( 56,970,630 ) $ 12,258,834 Stock-based compensation – – 301,639 – 301,639 Net loss – – – ( 1,637,030 ) ( 1,637,030 ) Balance, September 30, 2025 7,714,701 $ 77,147 $ 69,453,956 $ ( 58,607,660 ) $ 10,923,443 Three Month Period Ended September 30, 2024 Number of Shares Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Balance, July 1, 2024 6,073,939 $ 60,739 $ 61,197,433 $ ( 51,190,384 ) $ 10,067,788 Issuance of common stock in registered direct offering 265,868 2,659 1,201,883 – 1,204,542 Proceeds from exercise of stock option 10,363 104 26,896 – 27,000 Stock-based compensation – – 149,364 – 149,364 Net loss – – – ( 1,311,247 ) ( 1,311,247 ) Balance, September 30, 2024 6,350,170 $ 63,502 $ 62,575,576 $ ( 52,501,631 ) $ 10,137,447 The accompanying notes are an integral part of these interim financial statements. 5 PRECISION OPTICS CORPORATION, INC. STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED September 30, 2025 AND 2024 (UNAUDITED) Three Months Ended September 30, 2025 2024 Cash Flows from Operating Activities: Net Loss $ ( 1,637,030 ) $ ( 1,311,247 ) Adjustments to reconcile net loss to net cash used in operating activities - Depreciation and amortization 65,181 48,290 Stock-based compensation expense 301,639 149,364 Non-cash interest expense 4,608 4,376 Non-cash operating lease expense 49,322 – Loss on disposal of fixed assets 34,506 – Changes in operating assets and liabilities - Accounts receivable, net 148,797 421,896 Inventories, net ( 318,196 ) ( 592,521 ) Prepaid expenses ( 14,240 ) 10,889 Accounts payable 1,099,235 746,038 Contract liabilities 208,843 ( 65,804 ) Accrued compensation and other 135,562 270,097 Net cash provided by (used in) operating activities 78,227 ( 318,622 ) Cash Flows from Investing Activities: Purchases of fixed assets ( 304,731 ) ( 24,349 ) Proceeds from sale of fixed assets 3,000 – Additional patent costs ( 58 ) ( 3,750 ) Net cash used in investing activities ( 301,789 ) ( 28,099 ) Cash Flows from Financing Activities: Payments of capital lease obligations ( 8,985 ) ( 11,212 ) Payments of long-term debt ( 149,083 ) ( 128,315 ) Payment of debt modification costs – ( 15,000 ) Payment on revolving line of credit – ( 500,000 ) Proceeds from registered direct sale of common stock, net – 1,204,542 Gross proceeds from the exercise of stock options – 27,000 Net cash provided by (used in) financing activities ( 158,068 ) 577,015 Net increase(decrease) in cash and cash equivalents ( 381,630 ) 230,294 Cash and cash equivalents, beginning of period 1,773,735 405,278 Cash and cash equivalents, end of period $ 1,392,105 $ 635,572 Supplemental disclosure of cash flow information: Operating right-of-use assets obtained in exchange for operating lease liabilities $ 2,632,584 $ – Lease improvements financed by landlord $ 218,750 $ – The accompanying notes are an integral part of these interim financial statements. 6 PRECISION OPTICS CORPORATION, INC. NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Operations These 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 first three months of the Company’s fiscal year 2026. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with footnotes contained in the Company’s financial statements for the year ended June 30, 2025, together with the Report of Independent Registered Public Accounting Firm filed under cover of the Company’s 2025 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 29, 2025, as amended by Amendment No. 1 on Form 10-K/A filed with the Securities and Exchange Commission on October 28, 2025 . Use of Estimates The preparation of these 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 months ended September 30, 2025 and 2024, potentially dilutive securities outstanding have been excluded from the computations of weighted-average shares outstanding because such securities have an antidilutive impact due to the net loss reported during those periods. The number of shares issuable upon the exercise of outstanding stock options that were excluded from the computation of fully dilutive weighted average shares outstanding was approximately 1,623,576 for the three months ended September 30, 2025 and 1,329,236 for the three months ended September 30, 2024. The following is the calculation of income (loss) per share for the three months ended September 30, 2025 and 2024: Schedule of income (loss) per share Three Months Ended September 30, 2025 2024 Net Income (Loss) Basic and Fully Diluted $ ( 1,637,030 ) $ ( 1,311,247 ) Weighted Average Shares Outstanding Basic & Fully Diluted 7,714,701 6,216,630 Loss Per Share – Basic & Fully Diluted $ ( 0.21 ) ( 0.21 ) Significant Customers and Concentration of Credit Risk Financial instruments that subject the Company to credit risk consist primarily of cash equivalents and trade accounts receivable. The Company places its investments with highly rated financial institutions. The Company has not experienced any losses on these investments to date. 7 The allowance for credit losses was $ 63,804 at September 30, 2025, and $ 103,224 at September 30, 2024. Schedule of allowance for credit losses Three Months Ended September 30, 2025 2024 Allowance for credit losses, beginning of period $ 80,192 $ 118,872 Change in the provision for expected credit losses ( 16,388 ) ( 15,648 ) Allowance for credit losses, end of period $ 63,804 $ 103,224 During the three months ended September 30, 2025, the Company decreased the credit loss reserve. Management believes the allowance for credit losses, which is established based upon review of specific account balances and historical experience, is adequate at September 30, 2025. 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 the 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. Segment Reporting Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions about how to allocate resources and assess performance. The Company’s chief decision-maker is its Chief Executive Officer. To date, the Company has viewed its operations and manages its business as principally one segment. The chief operating decision maker assesses performance for the single reporting segment and decides how to allocate resources based on revenues, gross profit, and net income (loss) that also is reported on the income statement as revenues, gross profit, and net income (loss). The measure of segment assets is reported on the balance sheet as total 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 September 30, 2025. Amortization expense for the three months ended September 30, 2025 and 2024 was $ 6,292 and $ 0 , respectively. 2. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market and consisted of the following: Schedule of inventories September 30, 2025 June 30, 2025 Raw Materials $ 1,945,891 $ 1,799,624 Work-In-Progress 576,042 598,720 Finished Goods 1,358,375 1,163,768 Total Inventories $ 3,880,308 $ 3,562,112 8 3. BANK FINANCING ACTIVITIES Bank Line of Credit On October 4, 2021, the Company entered into a Loan Agreement with Main Street Bank of Marlborough, Massachusetts (the “Lender”), which provided for a $2,600,000 Term Loan and a $250,000 Revolving Line of Credit Loan Facility (the “Revolver”), which was increased to $500,000 effective May 17, 2022, and $1,250,000 effective June 2, 2023. Borrowings under the Revolver are limited by the borrowing base comprised of a percentage of accounts receivable and inventory and secured by all assets of the Company. Borrowings under the Revolver bear interest payable monthly at the prime lending rate plus 1.5% per annum and shall not be less than 4.75% per annum. Borrowings under the Revolver are due upon demand. There were no borrowings under the Revolver at September 30, 2025. The Company’s Loan Agreement with the Lender contains a minimum annual debt service coverage ratio covenant of 1.2x. The Company did not meet this annual debt service coverage ratio for the fiscal year ended June 30, 2024. The Company’s Lender has agreed to waive compliance with such debt service ratio covenant for the period ending June 30, 2024. In addition to such waiver, the Lender and the Company have entered into an amendment dated September 30, 2024 to that certain Term Loan dated October 4, 2021, as amended and that certain Promissory Note dated June 2, 2023 (collectively, the “Notes”) which amendments provide for a six-month period of interest only payments from October 15, 2024 through March 15, 2025 for the Notes. The Company commenced payments of principal and interest under the Notes beginning with the payments due on April 15, 2025, with a new amortization schedule for the remaining term for such Notes through their maturity date. On February 14, 2025, the Lender agreed to waive compliance with the annual debt service coverage ratio covenant for the fiscal year ending June 30, 2025, subject to a $30,000 waiver fee and the completion of an equity raise of at least $4,500,000 by February 24, 2025, which the Company satisfied on February 21, 2025. Any future advances are contingent on the Company achieving a minimum Debt Service Coverage ratio of 1.20x based on quarterly testing, which the Company was not in compliance with as of September 30, 2025. There were no other changes to or modifications to the Loan Agreement or the Notes. Long-Term Debt Long-term debt consists of the following at September 30, 2025: Schedule of long-term debt Amount Term Loan Note payable to Main Street Bank with monthly principal payments of $ 35,271 , excluding six months in Fiscal 2025, plus interest at a fixed rate of 7.0 % per annum. Secured by all assets of the Company, and subject to certain periodic reporting to the bank and other conditions including an annual minimum EBITDA plus stock-based compensation to debt service coverage ratio of 1.20:1 commencing with the fiscal year ending June 30, 2023. The Term Loan Note matures on October 15, 2028 . $ 1,305,039 Permanent Working Capital Loan payable to Main Street Bank with monthly principal payments of $ 14,423 , excluding six months in Fiscal 2025, plus interest at a fixed rate of 8.625 % per annum. Secured by all assets of the Company, and subject to certain periodic reporting to the bank and other conditions including an annual minimum EBITDA plus stock-based compensation to debt service coverage ratio of 1.20:1 commencing with the fiscal year ending June 30, 2023. The Permanent Working Capital Loan matures on June 15, 2028 . 475,962 Less current maturities ( 577,898 ) Less debt issuance and modification costs, net of accumulated amortization of $ 34,364 ( 58,373 ) Long-term debt, net of current maturities and debt issuance costs $ 1,144,730 At September 30, 2025 principal payments due on the Term Loan Note payable are as follows: Schedule of principal payments due on term loan note payable Fiscal Year Ending June 30: 2026 $ 447,250 2027 596,333 2028 596,333 2029 141,085 Total long-term debt $ 1,781,001 9 4. LEASE OBLIGATIONS In March 2021 the Company entered into a five-year capital lease in the amount of $ 161,977 and in January 2020, the Company entered into a five-year capital lease for $ 47,750 , both for manufacturing equipment. The net book value of fixed assets under capital lease obligations as of September 30, 2025 is $ 18,383 . On July 1, 2019 the Company entered into a three-year operating lease for its facility in El Paso, Texas, and in February 2022 the Company entered into an extension of the lease for an additional three years through June 2025. In May 2025, this lease was extended for an additional three years through May 2028. Remaining minimum lease payments at September 30, 2025 total $ 135,724 . Total lease costs including base rent and common area expenses was $ 20,052 and $ 16,340 during the three months ending September 30, 2025 and 2024, respectively. Included in the accompanying balance sheet at September 30, 2025 is a right-of-use asset of $ 123,817 and current and long-term operating lease liabilities of $ 40,410 and $ 83,779 , respectively. On May 15, 2025 the Company entered into a eight-year lease in South Portland, Maine with two five-year extension options. Remaining minimum lease payments at September 30, 2025 total $ 1,112,387 . Total lease costs including base rent and common area expenses was $ 32,661 during the three months ending September 30, 2025. The amount of variable lease payments is immaterial. Included in the accompanying balance sheet at September 30, 2025 is a right-of-use asset of $ 554,786 and current and long-term operating lease liabilities of $ 31,402 and $ 760,751 , respectively. The applicable discount rate utilized for this lease at commencement was 9.0 %. On June 2, 2025 the Company entered into a seven-year operating lease in Littleton, Massachusetts with two five-year extension options. Remaining minimum lease payments at September 30, 2025 total $ 2,588,721 . Total lease costs including base rent and common area expenses was $ 30,456 during the three months ending September 30, 2025. The amount of variable lease payments is immaterial. Included in the accompanying balance sheet at September 30, 2025 is a right-of-use asset of $ 1,835,004 and current and long-term operating lease liabilities of $ 10,529 and $ 1,854,932 , respectively. The applicable discount rate utilized for this lease at commencement was 9.0 %. At September 30, 2025 future minimum lease payments under the capital lease and operating lease obligations are as follows: Schedule of future minimum lease payments under capital lease and operating lease obligations Fiscal Year Ending June 30: Capital Leases Operating Leases 2026 $ 18,669 $ 197,123 2027 – 555,198 2028 – 567,327 2029 – 535,107 2030 – 551,240 2031 and thereafter – 1,434,940 Total Minimum Payments 18,669 3,840,935 Less: amount representing interest 286 1,059,132 Present value of minimum lease payments 18,383 2,781,803 Less: current portion 18,383 82,341 Future minimum long-term lease liability $ – $ 2,699,462 The Company’s four facilities in Gardner, Massachusetts which are used for offices, production and storage spaces are leased primarily on a tenant-at-will basis. Rent expense on these operating leases was $ 57,884 and $ 51,797 for the three months ended September 30, 2025 and 2024, respectively. 10 5. STOCK-BASED COMPENSATION Stock Options The following table summarizes stock-based compensation expense for the three months ended September 30, 2025 and 2024. Schedule of stock-based compensation expense Three Months Ended September 30, 2025 2024 Cost of Goods Sold $ 31,069 $ 39,226 Selling, General and Administrative 270,570 110,138 Stock Based Compensation Expense $ 301,639 $ 149,364 No compensation has been capitalized because such amounts would have been immaterial. The following tables summarize stock option activity for the three months ended September 30, 2025: Schedule of stock option activity Options Outstanding Number of Shares Weighted Average Exercise Price Weighted Average Contractual Life Outstanding at June 30, 2025 1,623,576 $ 4.85 7.15 years Exercised – – – Cancelled, forfeited, or expired – – – Outstanding at September 30, 2025 1,623,576 $ 4.85 6.90 years The aggregate intrinsic value of the Company’s in-the-money outstanding and exercisable options as of September 30, 2025 were $ 544,793 and $ 544,793 , respectively. 6. REVENUE RECOGNITION The Company determines revenue recognition for arrangements that we determine are within the scope of Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” or ASC 606, by performing the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the Company satisfies the performance obligations. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within the contract and determine those that are performance obligations and assesses whether each promised good or service is distinct based on the contract. The Company disaggregates revenues by product and service types as it believes 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 months ended September 30, 2025 and 2024: Schedule of disaggregation of revenues Three Months Ended September 30, 2025 2024 Engineering Design Services $ 656,101 $ 1,613,901 Systems Manufacturing 4,866,706 1,225,178 Micro Optics Lab 100,376 428,157 Ross Optical Industries 1,057,640 929,817 Total Revenues $ 6,680,823 $ 4,197,053 11 Other selling costs to obtain and fulfill contracts are expensed as incurred due to the short-term nature of a majority of contracts. 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 revenue. Revenue recognition policies for each of the four product and service types appear below. Engineering Design Services The Company enters into contractual agreements with its customers, including design services agreements, statements of work and receive purchase orders for development projects. These agreements provide costs on an estimated basis for the services the Company has agreed to provide. Engineering Design Services are rendered on a time and materials basis. The Company recognizes revenue as customers are invoiced for the actual engineering services provided in the period. Revenue is also recognized on materials purchased for development projects at the time of receipt. Engineering Design Services are provided on a best-efforts basis; no warranty is provided as there is no guarantee that the work will result in the attainment of the customer’s project objectives. The Company may obtain customer deposits in advance of rendering engineering design services. Customer deposits are treated as contractual liabilities until the terms of customer agreements are satisfied and are not a component of revenue. Systems Manufacturing, Micro Optics Laboratory, Ross Optical Industries The Company provides fixed price quotations to its customers and requires purchase orders for items manufactured and distributed through the Systems Manufacturing, Micro Optics Laboratory and Ross Optical Industries business units. Revenue is recognized at the time title passes to the customer based on the Company’s review of the customer contract, generally at the time of shipment from the Company’s facilities. Occasionally the Company may enter into “bill and hold” contractual arrangements where title is held by its customers while goods are stored at the Company’s facilities for the customer’s convenience. 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 September 30, 2025, there were no contract assets recorded in the Company’s Balance Sheets. The Company’s contract liabilities arise from 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’s inception date. Contract liabilities, which are recorded in the Company’s Balance Sheets, and unearned revenue are comprised of the following: Schedule of contract liabilities Three Months Ended September 30, 2025 2024 Contract liabilities, beginning of period $ 1,821,929 $ 1,172,350 Unearned revenue received from customers 1,130,915 471,617 Revenue recognized ( 922,072 ) ( 537,421 ) Contract liabilities, end of period $ 2,030,772 $ 1,106,546 12