PRECISION OPTICS CORPORATION, INC.

Previous wording

The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended December 31, 2024 and with our audited consolidated financial statements for the year ended June 30, 2024 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 30, 2024.

Current wording

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, 2025 and with our audited consolidated financial statements for the year ended June 30, 2024 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 30, 2024 , as amended by that certain Amendment No. 1 on Form 10-K/A filed with the Securities and Exchange Commission on October 28, 2024.

Previous wording

Total revenues for the quarter ended December 31, 2024 were $4,526,907, as compared to $4,824,289 for the same period in the prior year, a decrease of $297,382 or 6.2% and for the six months ended December 31, 2024 was $8,723,960 as compared to $9,145,544 for the same period in the prior year, a decrease of $421,584, or 4.6%.

Current wording

Total revenues for the quarter ended March 31, 2025 were $4,185,968, as compared to $5,242,579 for the same period in the prior year, a decrease of $1,056,611 or 20.2% and for the nine months ended March 31, 2025 was $12,909,928 as compared to $14,388,123 for the same period in the prior year, a decrease of $1,478,195, or 10.3%.

Previous wording

Revenue from Engineering Design Services decreased 46.8% and 26.7% during the three- and six-month periods ending December 31, 2024 from the same periods in the prior fiscal year. Revenue decreases in the engineering category resulted from decreased demand for services, increases in internal research and development, and delays related to milestone completion. Engineering demand was reduced in the quarter by customer design engagements completing the transition into the manufacture of new Finished Products and Assemblies.

Current wording

Revenue from Engineering Design Services decreased 59.3% and 38.2% during the three- and nine-month periods ending March 31, 2025 from the same periods in the prior fiscal year. Revenue decreases in the engineering category resulted from decreased demand for services, increases in internal research and development, and delays related to milestone completion. Engineering revenue in the quarter was reduced due to unplanned increases in non-billable sustaining engineering activity to support manufacturing scale up along with delayed revenue opportunities within the product development pipeline.

Previous wording

Revenue from Optical Components increased 50.8% and 30.4% during the three- and six-month periods ending December 31, 2024 from the same periods in the prior fiscal year due to the introduction of new defense/aerospace and medical device programs.

Current wording

Revenue from Optical Components increased 22.2% and 27.3% during the three- and nine-month periods ending March 31, 2025 from the same periods in the prior fiscal year due to the introduction of new defense/aerospace and medical device programs.

Previous wording

Revenue from Finished Products and Assemblies decreased 41.7% and 45.0% during the three- and six-month periods ending December 31, 2024 from the same periods in the prior fiscal year. The decreases in Finished Products and Assemblies were attributable to lower demand for certain production programs and the timing of order fulfillment.

Current wording

Revenue from Finished Products and Assemblies decreased 42.3% and 44.1% during the three- and nine-month periods ending March 31, 2025 from the same periods in the prior fiscal year. The decreases in Finished Products and Assemblies were attributable to lower demand for certain production programs and the timing of order fulfillment.

Previous wording

Gross margin decreased to 23.6% during the quarter ending December 31, 2024, compared to 30.1% for the quarter ending December 31, 2023. Gross profit decreased to $1,069,942 during the three months ending December 31, 2024, compared to $1,450,976 for the three months ended December 31, 2023, primarily driven by changes in the product sales mix and the decreases in revenue discussed above.

Current wording

Gross margin decreased to 10.0% during the quarter ending March 31, 2025, compared to 35.5% for the quarter ending March 31, 2024. Gross profit decreased to $417,975 during the three months ending March 31, 2025, compared to $1,858,737 for the three months ended March 31, 2024, primarily driven by yield issues associated with new manufacturing lines, lower utilization of billable engineering resources, and the decreases in revenue discussed above.

Previous wording

Gross margin decreased to 25.1% during the six months ending December 31, 2024, compared to 31.9% for the six months ending December 31, 2023. Gross profit decreased to $2,187,272 during the six months ending December 31, 2024, compared to $,2,914,587 for the six months ending December 31, 2023.

Current wording

Gross margin decreased to 20.2% during the nine months ending March 31, 2025, compared to 33.2% for the nine months ending March 31, 2024. Gross profit decreased to $2,605,247 during the nine months ending March 31, 2025, compared to $4,773,324 for the nine months ending March 31, 2024.

Previous wording

R&D expenses increased $96,019 to $317,747 during the quarter ending December 31, 2024, compared to $221,728 during the quarter ending December 31, 2023. R&D expenses increased $283,920 to $718,406 during the six months ending December 31, 2024, compared to $434,486 during the six months end December 31, 2023. 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.

Current wording

R&D expenses increased $18,469 to $211,242 during the quarter ending March 31, 2025, compared to $192,773 during the quarter ending March 31, 2024. R&D expenses increased $302,389 to $929,648 during the nine months ending March 31, 2025, compared to $627,259 during the nine months ending March 31, 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.

Previous wording

SG&A expenses decreased $271,194, or 14.0% to $1,662,216 during the three months ending December 31, 2024, compared to $1,933,411 during the three months ending December 31, 2023. The decrease in SG&A for the three-month period was primarily due to lower bad debt expense and lower stock-based compensation. SG&A expenses increased $36,272, or 1.0% to $3,625,828 during the six months ending December 31, 2024, compared to $3,589,556 during the six months ended December 31, 2023.

Current wording

SG&A expenses increased $320,527, or 16.7% to $2,245,018 during the three months ending March 31, 2025, compared to $1,924,491 during the three months ending March 31, 2024. The increase in SG&A for the three-month period was primarily due to increased personnel costs, chiefly stock-based compensation and recruiting expense, SG&A expenses increased $356,799, or 6.5% to $5,870,846 during the nine months ending March 31, 2025, compared to $5,514,047 during the nine months ending March 31, 2024.

Previous wording

During the six months ending December 31, 2024, net cash used in operating activities totaled $1,105,431 as compared to $1,492,824 during the six months ending December 31, 2023. The decrease in net cash used in operating activities was primarily due to increased accounts payable and customer advances during the six months ending December 31, 2024, partially offset by the increase in net loss and inventory during such period.

Current wording

During the nine months ending March 31, 2025, net cash used in operating activities totaled $2,978,165 as compared to $1,706,998 during the nine months ending March 31, 2024. The increase in net cash used in operating activities was primarily due to the increase in net loss and inventory during the nine months ending March 31, 2025, partially offset by the increase in accounts payable and customer advances during such period.

Previous wording

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 costs. During the six months ending December 31, 2023, net cash used in investing activities was $170,772, consisting of purchases of property and equipment and patent costs.

Current wording

During the nine months ending March 31, 2025, net cash used in investing activities was $149,837, consisting of purchases of property and equipment net of adjustments in patent costs. During the nine months ending March 31, 2024, net cash used in investing activities was $282,078, consisting of purchases of property and equipment and patent costs.

Previous wording

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. During the six months ending December 31, 2023, we made payments of $277,912 on term notes and capital leases offset by proceeds on stock exercises of $2,700.

Current wording

During the nine months ending March 31, 2025, we made payments of $196,487 on term notes and capital leases and repaid $1,000,000 on our revolving line of credit. We raised a net of $6,270,136 from two registered direct offerings made in August 2024 and February 2025 pursuant to our shelf registration statement. During the nine months ending March 31, 2024, we made payments of $417,109 on term notes and capital leases offset by borrowings on the line of credit of $400,000.

Previous wording

In October 2021 we entered a $2,600,000 term loan with a commercial bank. In June 2023 we added a second term loan in the amount of $750,000. We secured a $250,000 line of credit from the same bank in October 2021 for working capital needs, which was increased to $500,000 in May 2022 and to $1,250,000 in June 2023. There were $900,000 in borrowings outstanding on the line of credit on December 31, 2024 and additional availability in the amount of $350,000.

Current wording

In October 2021 we entered a $2,600,000 term loan with a commercial bank. In June 2023 we added a second term loan in the amount of $750,000. We secured a $250,000 line of credit from the same bank in October 2021 for working capital needs, which was increased to $500,000 in May 2022 and to $1,250,000 in June 2023. There were no borrowings under the Revolver at March 31, 2025.

Previous wording

Our loan agreement contains a minimum annual debt service coverage ratio covenant of 1.2x. We did not meet this annual debt service coverage ratio as of June 30, 2024. Our lender has agreed to waive compliance with the debt service ratio covenant for the period ending June 30, 2024. In addition to the waiver, we have entered into amendments dated September 30, 2024 with our lender to both term loans which provide for a six-month period of interest only payments from October 15, 2024 through March 15, 2025. We will begin to pay 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. There were no other changes to or modifications to the Loan Agreement or the Notes.

Current wording

Our loan agreement contains a minimum annual debt service coverage ratio covenant of 1.2x. We did not meet this annual debt service coverage ratio as of June 30, 2024. Our lender has agreed to waive compliance with the debt service ratio covenant for the period ending June 30, 2024. In addition to the waiver, we have entered into amendments dated September 30, 2024 with our lender to both term loans which provide for a six-month period of interest only payments from October 15, 2024 through March 15, 2025. We will begin to pay 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 ended 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 we completed 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. There were no other changes to or modifications to the Loan Agreement or the Notes.

Previous wording

Capital equipment expenditures and additional patent costs during the six months ended December 31, 2024 and in the same period in the prior year were $60,085 and $170,772, respectively.

Current wording

Capital equipment expenditures and additional patent costs during the nine months ended March 31, 2025 and in the same period in the prior year were $7,484 and $282,078, respectively.

Previous wording

We have contractual cash commitments related to open purchase orders as of December 31, 2024 of approximately $5,807,000.

Current wording

We have contractual cash commitments related to open purchase orders as of March 31, 2025 of approximately $5,740,000.