What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-02-17 compared with 2025-11-13 · 149 added, 101 removed, 101 unchanged (71% of the section changed)

Management’s Discussion

and Analysis of Financial Condition and Results of Operations.

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

included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended December 31, 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.

1 on Form 10-K/A filed with the Securities and Exchange Commission on October 28, 2025 (our

“Annual Report on Form 10-K”) .

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.

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.

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.

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.

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 and other reports we file with the Securities

and Exchange Commission.

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

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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

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.

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Our website is www.poci.com.

The information contained on our websites does not constitute part of this report.

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,

The information contained

on our website does not constitute part of this report.

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.

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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

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.

on Form 10-K/A filed with the Securities and Exchange Commission on October 28, 2025 .

Results of Operations

Ended September 30,

Ended December 31,

Percent of Sales

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Total Revenues

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.

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.

Ended December 31,

Percent of Sales

Percent Change

Engineering Design Services

Systems Manufacturing

MicroOptics Lab

Ross Optical Industries

Total Revenues

Total revenues for the quarter ending December 31,

2025 were $7,367,837, as compared to $4,526,907 for the same period in the prior year, an increase of $2,840,930 or 62.8% and for the

six months ended December 31, 2025 was $14,048,660 as compared to $8,723,960 for the same period in the prior year, an increase of $5,324,700,

Revenue from Engineering Design Services decreased

31.2% and 46.3% during the three and six-month periods ending December 31, 2025 from the same periods in the prior fiscal year.

the quarter ending December 31, 2025 revenue decreases in the engineering category resulted from decreased demand for services.

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 213.2%

and 248.9% during the three and six-month periods ending December 31, 2025 from the same periods in the prior fiscal year, due primarily

to significant increases in customer demand and the resultant scaling of manufacturing capabilities.

Revenue from the MicroOptics Lab decreased 60.1% and

68.3% during the three and six-month periods ending December 31, 2025 from the same periods in the prior fiscal year, primarily due to

delays in receiving new production orders from our defense customer.

Revenue from Ross Optical Industries increased 0.5%

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.

and 6.8% during the three and six-month periods ending December 31, 2025 from the same periods in the prior fiscal 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.

Gross margin decreased to 2.8% during the quarter

ending September 30, 2025, compared to 26.6% for the quarter ending September 30, 2024.

ending December 31, 2025, compared to 23.6% for the quarter ending December 31, 2024.

Gross profit decreased to $204,660 during the three

months ending December 31, 2025, compared to $1,069,942 for the three months ended December 31, 2024.

Within Systems Manufacturing, low

gross margins were primarily driven by yield losses within our cystoscope single-use manufacturing line, startup yield issues for a second

customer’s single-use manufacturing line, and under-absorption of manufacturing overhead.

Costs associated with Engineering Design

Services are primarily attributed to our engineering workforce, which we have chosen to keep in place as we focus on increasing revenue,

leading to negative margins for the period.

Similarly, the MicroOptics Lab workforce requires specialized training, and we have also experienced

negative margins resulting from the reorder delays discussed above but have chosen to keep the workforce in place.

Gross margin decreased to 8.2% during the six months

ending December 31, 2025, compared to 25.1% for the six months ending December 31, 2024.

Gross profit decreased to $1,151,018 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.

six months ending December 31, 2025, compared to $2,187,272 for the six months ending December 31, 2024.

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.

R&D expenses decreased $68,173 to $249,574 during

the quarter ending December 31, 2025, compared to $317,747 during the quarter ending December 31, 2024.

R&D expenses decreased $156,992

to $561,414 during the six months ending December 31, 2025, compared to $718,406 during the six months ended December 31, 2024.

expenses for the applicable periods 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.

SG&A expenses increased $35,199, or 2.1% to $1,697,415

during the three months ending December 31, 2025, compared to $1,662,216 during the three months ending December 31, 2024.

SG&A expenses

increased $301,360, or 8.3% to $3,927,188 during the six months ending December 31, 2025, compared to $3,625,828 during the six months

ended December 31, 2024.

The increase in SG&A for the six-month period was primarily due to increased stock compensation, executive

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.

These financial statements have been prepared on a going concern

basis, which assumes the Company will continue to realize its assets and discharge its liabilities in the normal course of business.

continuation of the Company as a going concern is dependent upon the ability of the Company to obtain necessary equity financing to continue

operations and the attainment of profitable operations.

Management anticipates that its cash on hand of $0.9 million as of December 31,

2025 is insufficient to fund its planned operations for a period of at least one year from when these financial statements are issued.

These factors raise substantial doubt regarding the Company's ability to continue as a going concern.

These unaudited condensed consolidated

financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification

of liabilities that might be necessary should the Company be unable to continue as a going concern.

During fiscal 2026 through the date of the filing of this Quarterly

Report on Form 10-Q, we have taken the following actions, and implemented the following plans, to improve our operational and financial

performance and enhance our liquidity and financial condition:

· Through new leadership and improved accountability and process discipline

implemented throughout the organization, improved manufacturing yields and increased production throughput;

· Renegotiated pricing and added tariff reimbursement with some of our major

manufacturing customers

· Improved the quality and depth of our product development pipeline;

· Planned increased utilization of engineering resources and the capabilities

of our MicroOptics Laboratory;

· Planned launch of several maturing development projects into manufacturing

in the coming twelve months.;

· Planned reductions in our cost structure to better align operating expenses

with revenue expectations, including headcount rationalization and optimization.

Our ability to meet future anticipated liquidity needs over the next

year beyond the date of this Quarterly Report on Form 10-Q will largely depend on our ability to execute our operational strategy, generate

positive cash inflows from operations, maximize our borrowing capacity and secure additional capital.

The Company intends to seek in the near term additional

funding through one or more of the following:

equity offerings, debt financings, government funding, and delay of planned cash outlays.

However, our ability to do so, and on favorable terms, may be affected by general economic, financial and other factors which are beyond

There can be no assurance that any such additional capital raises, management of planned cash outlays, or a combination thereof

can be achieved or achieved on favorable terms.

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.

During the six months ending December 31, 2025, net

cash used in operating activities totaled $177,852 as compared to $1,105,431 during the six months ending December 31, 2024.

in net cash used in operating activities was primarily due to increased accounts payable and accrued expenses during the six months ending

December 31, 2025, partially offset by the increase in net loss 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.

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.

During the six months ending December 31, 2025, net

cash used in investing activities was $398,131, consisting of purchases of property and equipment and patent costs.

During the six months

ending December 31, 2024, net cash used in investing activities was $60,085 consisting of purchases of property and equipment and patent

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.

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,

During the six months ending December 31, 2025, we

made payments of $316,266 on term notes and capital leases.

During the six months ending December 31, 2024, we made payments of $158,863

on term notes and capital leases and repaid $100,000 on our revolving line of credit.

We raised a net of $1,204,542 through the issuance

of new shares in a registered direct common stock offering and $27,000 in proceeds from stock option exercises.

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

There were no borrowings under the Revolver at June 30, 2025.

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 December 31, 2025.

The Company’s Loan Agreement with the Lender

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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.

ratio for the fiscal year ended June 30, 2024, the Company’s Lender 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

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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.

on quarterly testing which the company was not in compliance with as of December 31, 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.

Capital equipment expenditures and additional patent

costs during the six months ended December 31, 2025 and in the same period in the prior year were $401,131 and $60,085, respectively.

Contractual cash commitments for the fiscal periods

subsequent to September 30, 2025, are summarized as follows:

subsequent to December 31, 2025, are summarized as follows:

Capital lease for equipment, including interest

Minimum operating lease payments

We have contractual cash commitments related to

open purchase orders as of September 30, 2025 of approximately $7,402,000.

We have contractual cash commitments related to open

purchase orders as of December 31, 2025 of approximately $7,070,000.

Off-Balance Sheet Arrangements

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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.

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 2. Management’s Discussion and Analysis