PRECISION OPTICS CORPORATION, INC. 10-Q

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 financial statements and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2025 and with our audited financial statements for the year ended June 30, 2025 included in our 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. 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, 2025, as amended by Amendment No. 1 on Form 10-K/A filed with the Securities and Exchange Commission on October 28, 2025, 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, and we operate primarily in two key market segments: medical devices and advanced defense/aerospace products. Within our proprietary optical and imaging technology, our unique custom designs, expert manufacturing capabilities, and advanced engineering and development capabilities have generated traditional endoscopes and endocouplers, digital imaging endoscopes using CMOS sensor technology, some designed and manufactured for single-use, as well as other, more advanced, custom imaging and illumination products for our customers’ use in minimally invasive surgical procedures. We design and manufacture ultra-high precision 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 also apply our unique technologies to applications in the Defense / Aerospace markets including applications supporting satellite network communications. To support these two critical market categories, our business operations are conducted in four areas: systems manufacturing, engineering and product development, Ross Optical components and assemblies, and our micro-optics laboratory. Our systems manufacturing operations assemble and manufacture components and systems for both medical device and advanced aerospace customers who choose to outsource these services based on our ability to handle high complexity components, specific optical technologies, micro-optical assemblies and other advanced manufacturing challenges. Our engineering and product development team assesses specific customer product needs, designs devices to solve those needs, and creates manufacturing processes that enable higher volume production of these devices and assemblies that can then be executed by our manufacturing operations group. Effective June 1, 2019, we acquired the operating assets of Ross Optical Industries, Inc. of El Paso, Texas. This acquisition expanded our optics components and assemblies’ business. As Ross Optical Industries we 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 suppliers. 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 applied using our in-house coating department. Effective October 1, 2021, we acquired the operating assets of Lighthouse Imaging, LLC of Windham, Maine,which expanded our electrical engineering capabilities in the development of end-to-end medical visualization devices. The acquisition represented a vertical integration of our established product development capabilities with a team with extensive experience developing visualization systems that we believe provides our customers with single-source value-added development services and product offerings. The operations of Lighthouse Imaging have been integrated with other operations of the company, which continue under the POC brand, so that the company now operates with single systems manufacturing and engineering departments, each of which includes historical POC and Lighthouse Imaging resources. Our website is www.poci.com. The information contained on our websites does not constitute part of this report. 13 General This management’s discussion and analysis of financial condition and results of operations is based upon our unaudited financial statements, which have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. 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 under different assumptions or conditions and any such differences may be material. Critical Accounting Policies and 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, 2025 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. Results of Operations Revenue Three Months Ended September 30, 2025 Percent of Sales 2024 Percent of Sales Increase (Decrease) Percent Change Engineering Design Services 656,101 9.8 1,613,901 38.4 (957,800 ) (59.3 ) Systems Manufacturing 4,866,706 72.9 1,225,178 29.2 3,641,528 297.3 MicroOptics Lab 100,376 1.5 428,157 10.2 (327,781 ) (76.5 ) Ross Optical Industries 1,057,640 15.8 929,817 22.2 127,823 13.7 Total Revenues 6,680,823 100.0 4,197,053 100.0 2,483,770 59.2 Total revenues for the quarter ending September 30, 2025 were $6,680,823, as compared to $4,197,053 for the same period in the prior year, an increase of $2,483,770. Revenue from Engineering Design Services decreased 59.3% during the quarter ending September 30, 2025 from the prior year period ending September 30, 2024. During the quarter ending September 30, 2025 revenue decreases in the engineering category resulted from decreased demand for services, primarily from the transfer of our single-use cystoscope program from Engineering Design Services to Systems Manufacturing. Engineering revenue was lower due to the completion of product development engagements in the prior year and delayed revenue opportunities within the product development pipeline for the current quarter. Revenue from Systems Manufacturing increased nearly 300% during the quarter ending September 30, 2025 from the same period in the prior year, due primarily to significant increases in customer demand and the resultant scaling of manufacturing capabilities. Revenue from the MicroOptics Lab decreased 76.5% during the quarter ending September 30, 2025 from the same period in the prior year, primarily due to delays in receiving new production orders from our defense customer. Revenue from Ross Optical Industries increased 13.7% during the quarter ending September 30, 2025 from the same period in the prior year. We believe the increase is attributable to the inability of our customers to continue to postpone deliveries that had previously been delayed due to the introduction of new tariffs and the resultant uncertainty. 14 Gross Profit Gross margin decreased to 14.2% during the quarter ending September 30, 2025, compared to 26.6% for the quarter ending September 30, 2024. Gross profit decreased to $946,358 during the three months ending September 30, 2025, compared to $1,117,330 for the three months ending September 30, 2024. The primary factors for the decrease in gross profit include lower utilization of engineering resources for customer-paid engineering, low yields for manufacturing lines producing single-use medical devices, and delays in the reorder for the MicroOptics Lab. Research & Development R&D expenses decreased $88,819 to $311,840 during the quarter ending September 30, 2025, compared to $400,659 during the quarter ending September 30, 2024. R&D expenses for the period represent employee-related expenses to support product improvements, the development of new technologies and standardized approaches to address the opportunities for an evolving single-use medical device environment. Selling, General and Administrative Expenses SG&A expenses increased $266,161, or 13.6% to $2,229,773 during the three months ended September 30, 2025, compared to $1,963,612 during the three months ended September 30, 2024. The increase in SG&A for the three-month period was primarily due to increased stock compensation, severance, and consulting expenses. Liquidity and Capital Resources Based on our current plans and business conditions, management believes that the Company’s available cash and cash equivalents, the cash generated from operations, the eventual availability of our line of credit, and our ability to raise funds in the capital markets will be sufficient to provide for the Company’s working capital and capital expenditure requirements for at least 12 months from the date of this filing. However, our cash on hand and cash generated solely from operations may be insufficient to meet working capital needs for such period and we may be required to raise external financing in the short-term. Net Cash Used in Operating Activities During the three months ending September 30, 2025, net cash provided by operating activities totaled $78,227 as compared to $318,622 net cash used in operating activities during the three months ending September 30, 2024. The increase in net cash provided by operating activities was primarily due to the increase in accounts payable, stock compensation and inventory during the three months ending September 30, 2025, partially offset by the decrease in accounts receivable and net losses during such period. Net Cash Used in Investing Activities During the three months ending September 30, 2025, net cash used in investing activities was $301,789, consisting of purchases of property and equipment and patent costs. During the three months ended September 30, 2024, net cash used in investing activities was $28,099, consisting of purchases of property and equipment and patent costs. Net Cash Provided by Financing Activities During the three months ending September 30, 2025, we made payments of $158,068 on term notes and capital leases. During the three months ending September 30, 2024, we made payments of $139,527 on term notes and capital leases, repaid $500,000 on our revolving line of credit and raised a net of $1,204,542 through the issuance of new shares in a registered direct common stock offering. Indebtedness 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 will 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 June 30, 2025. 15 The Company’s Loan Agreement with the Lender contains a minimum annual debt service coverage ratio covenant of 1.2x. As the Company did not meet this annual debt service coverage ratio for the fiscal year ended June 30, 2024, the Company’s Lender had 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 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 provided 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. Capital equipment expenditures and additional patent costs during the three months ended September 30, 2025 and in the same period in the prior year were $523,539 and $28,099, respectively. Contractual cash commitments for the fiscal periods subsequent to September 30, 2025, are summarized as follows: Fiscal 2026 Thereafter Total Capital lease for equipment, including interest $ 18,669 $ – $ 18,669 Minimum operating lease payments $ 197,123 $ 3,643,812 $ 3,840,935 We have contractual cash commitments related to open purchase orders as of September 30, 2025 of approximately $7,402,000. 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.