PRECISION OPTICS CORPORATION, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

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 first nine months of the Company’s fiscal year 2025. 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, 2024, together with the Report of Independent Registered Public Accounting Firm filed under cover of the Company’s 2024 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.

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 months and nine months ended March 31, 2025, 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 1,308,988 for the three and nine months ended March 31, 2025.

The following is the calculation of income (loss) per share for the three months and nine months ended March 31, 2025 and 2024:

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.

The allowance for credit losses was $66,833 at March 31, 2025, and $826,434 at March 31, 2024.

During the nine months ended March 31, 2024, the Company increased the credit loss reserve to cover potential losses due to the non-payment of one engineering customer and subsequently wrote off the receivable against the reserve during the year ended June 30, 2024. The Company generally does not require collateral or other security as a condition of sale, rather it relies on credit approval, balance limitation and monitoring procedures to control credit risk in trade account financial instruments. Management believes the allowance for credit losses, which is established based upon review of specific account balances and historical experience, is adequate at March 31, 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.

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, 2025.

Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:

The inventory reserve was $431,259 and $266,843 at March 31, 2025 and June 2024, respectively.

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 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 March 31, 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. 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 March 31, 2025:

At March 31, 2025 principal payments due on the Term Loan Notes payable are as follows:

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, 2025 is $36,225.

On July 1, 2019, the Company entered into a three-year operating lease for its facility in El Paso, Texas, and in February 2022 extended the lease through June 2025. Remaining minimum lease payments at March 31, 2025 total $11,512. Total rent expense including base rent and common area expenses was $49,808 and $52,534 during the nine months ended March 31, 2025 and 2024, respectively.

On October 4, 2021, the Company assumed the remaining term of the Windham, Maine lease as part of the Lighthouse acquisition. The lease expires on July 31, 2025. Remaining minimum lease payments on March 31, 2025 total $45,435. Total rent expense including base rent and common area expenses was $103,296 and $91,819 during the nine months ended March 31, 2025 and 2024, respectively. Included in the accompanying balance sheet at March 31, 2025 is a right-of-use asset of $57,088 and current right-of-use operating lease liabilities of $57,088.

At March 31, 2025 future minimum lease payments under capital lease and operating lease obligations are as follows:

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 $156,143 and $147,544 for the nine months ended March 31, 2025, and 2024, respectively.

On August 14, 2024 we entered into securities purchase agreements with institutional and accredited investors in addition to certain directors and officers of the Company for the purchase and sale of 265,868 shares of the Company’s common stock resulting in gross proceeds of approximately $1.4 million before deducting placement agent commissions and other estimated offering expenses. Net proceeds were $1,204,542.

On February 19, 2025, the Company entered into securities purchase agreements with institutional and accredited investors for the sale of 1,272,500 shares of the Company’s common stock in a registered direct offering at a purchase price of $4.00 per share. The offering closed on February 21, 2025 with net proceeds after transaction costs of $5,053,000.

Stock Options

The following table summarizes stock-based compensation expense for the three months and nine months ended March 31, 2025 and 2024.

The following table summarizes stock-based compensation expense for the three and nine months ended March 31, 2025 and 2024:

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, 2025:

The aggregate intrinsic value of the Company’s in-the-money outstanding and exercisable options as of March 31, 2025 were $668,778 and $618,634, respectively.

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 determines 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 and nine months ended March 31, 2025 and 2024:

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.

Optical Components, Finished Products and Assemblies

The Company provides fixed price quotations to its customers and requires purchase orders for all purchased optical components, finished devices and assemblies. Revenue is recognized at the time title passes to the Company’s customers based on its review of the customer contract, generally at the time of shipment from its facilities. Occasionally the Company may enter into “bill and hold” contractual arrangements where title is held by its customers while goods are stored at our facilities for their convenience.

Technology Rights and Royalties

The Company may recognize revenue for the sale of technology rights and through the receipt of royalties obtained under a license of our intellectual property. These revenues are recognized in the period in which, in our judgment, they are earned and no longer contingent under the terms and conditions of the relevant customer contract.

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, 2025, there were no contract assets recorded in the Company’s Consolidated 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 Consolidated Balance Sheets, and unearned revenue are comprised of the following:

On May 13, 2025, the Company entered into a First Lease Extension Agreement (the “Extension”) with Texzona Industries, Inc., pursuant to which the Company will continue to lease approximately 9,375 square feet of commercial space located at 1410 Gail Borden, El Paso, Texas. The term of Extension is for a period of 36 months commencing on June 1, 2025 and shall end on May 31, 2028.

Base rent for each year of the term is $49,219, $50,695 and $52,216. In addition to base rent, the Company is responsible for taxes, insurance and common area maintenance (“CAM”). Beginning June 1, 2025, the total estimated monthly rental payment including CAM is $5,773.

On May 14, 2025, the Company entered into a Lease Agreement (the “Southborough Lease”) with 500 Southborough, LLC (the “Southborough Landlord”), pursuant to which the Company will lease approximately 8,750 square feet of commercial space located at 500 Southborough Drive, City of South Portland, County of Cumberland, Maine (the “Southborough Premises”). The Lease provides for an initial term commencing on the date the Southborough Landlord obtains a certificate of occupancy for the Southborough Premises and all Southborough Landlord work is substantially complete and expiring on the last day of the calendar month during which the eighth anniversary of the commencement date occurs. The commencement date is anticipated to be August 1, 2025, subject to Southborough Landlord’s review of floor plans and associated estimated construction timeframe.

The Southborough Lease provides the Company with two options to extend the term for additional five-year periods, exercisable with at least nine months’ prior written notice. Base rent for the initial term is abated for the first five months following the commencement date, after which annual base rent payable is $131,250 (or $10,937.50 per month), with annual increases of 3%. Base rent for any extension term will be as agreed by the parties or, if not agreed, at 95% of the then-current fair market base rental rate for similar space in South Portland, as determined by appraisal, with annual increases of 3% during each extension term.

In addition to base rent, the Company is responsible for its proportionate share (19.34%) of operating expenses, as defined in the Southborough Lease. The Southborough Lease is structured as a triple net lease. The Company is entitled to a tenant improvement allowance of $25 per rentable square foot for fit-up costs and $0.15 per rentable square foot for architectural costs, to be disbursed as costs are incurred. The Southborough Landlord is responsible for completing certain improvements to the Southborough Premises prior to occupancy, including interior wall construction, loading area, and separate utility metering. If delivery of the Southborough Premises is delayed beyond September 1, 2025, for reasons within the Southborough Landlord’s control, the Company is entitled to one day of abated rent for each day of delay.