Precision Optics Corporation, Inc.

Good afternoon, everyone, and welcome to the Precision Optics Report's third quarter fiscal year 2024 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please send your conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and one on a touch-tone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Robert Bloom with Lotham Partners. Please go ahead.

All right. Thank you very much, Jamie, as well as to everyone joining us on the call today. As the operator mentioned, on today's call, we will discuss Precision Optics' third quarter fiscal year 2024 financial results for the period ended March 31, 2024. With us on the call representing the company today are Dr. Joe Forkey, Precision Optics Chief Executive Officer, and Mr. Wayne Cole, the company's Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question and answer session. If you dialed in to the call through the traditional teleconference line, as the operator indicated, please press star then 1 to ask a question. If you are listening through the webcast portal and would like to ask a question, you can submit your question through the Ask a Question feature in the webcast player, and we'll do our best to get to as many questions as possible. Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of Precision Optics during the course of this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended. and Section 21E of the Securities Exchange Act of 1934 is amended, and such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results, or strategies, and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually, or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in the company's filings with the Securities Exchange Commission. All forward-looking statements contained during this conference call speak only of the date on which they were made. and are based on management's assumptions and estimates as of such date. The company does not undertake any obligation to publicly update any forward-looking statements, whether as the result of the receipt of new information, the occurrence of future events, or otherwise. With that said, let me turn the call over to Dr. Joe Forkey, Chief Executive Officer, Precision Optics. Joe, please proceed.

Thank you, Robert. And thank you all for joining our call today to discuss our third quarter fiscal year 2024 results. I am pleased to be speaking with you today following the strong financial results we reported this afternoon, as well as the announcement we made last week of our record setting production order to supply a single use endoscope assembly for a cystoscopy surgery system. I'll talk more about this order in a few minutes, but let me start with some comments on our financial results. Revenue for the quarter came in at $5.24 million, close to our all-time quarterly record of $5.29 million in operating revenue that we achieved in the second quarter of fiscal 2023. This comparison excludes the one-time technology license revenue recognized that quarter. The growth is being driven by several new and follow-on production orders we received recently that leverage our unique micro-optics and digital imaging capabilities for medical device and defense aerospace applications, coupled with record levels of engineering revenue. The SARE-STEP sequential revenue growth throughout fiscal 2024, from $4.3 million in Q1 to $4.8 million in Q2, and now $5.2 million in Q3, is in line with the expectations we communicated on earlier calls as these new and follow-on production orders and increased engineering work have helped our revenues recover from the pullback and delays of a couple programs earlier this year. As we expand our engineering pipeline and as more programs move from engineering to production, we expect strong quarterly revenue run rates as we finish this fiscal year and start into fiscal 2025. We have pointed out before our strong engineering pipeline is a good indicator of potential future production revenue. Our gross margins were up quarter over quarter and year over year, and adjusted EBITDA was positive $52,000. These improvements highlight our ability to leverage our fixed operating infrastructure. Following the acquisition of Lighthouse Imaging, we maintained two digital imaging system production groups, one in Maine and one in Massachusetts. Over the last six months, as part of an effort to improve overall operating efficiencies, we have consolidated these duplicated production locations and duplicated management groups into a single business unit with a single management team operating at our corporate headquarters in Massachusetts. Going forward, with expectations of additional revenue growth, we expect increased utilization of this consolidated production resource, thereby driving improvements and profitability metrics. As I stated in the beginning, beyond the improved financial results, the other key highlight was our announcement last week that we received a $9 million high volume production order from a leading surgical company to supply a single-use endoscope assembly used in their cystoscopy surgery system. For those of you that have followed Precision Optics closely over the past few years, you will recognize what a significant milestone this is, and I congratulate all of POC's employees on this great accomplishment. This was the largest single order we've ever received, which will help us to sustain a strong production base for future quarters. For the new order, we expect production deliveries to begin in the next couple of months. Our agreed-upon volumes result in anticipated revenue levels of approximately $2.2 million in fiscal 2025 and $4.6 million in fiscal 2026, with the remainder of the order in the first half of fiscal 2027. These expectations, however, are modeled on system sales and procedure volumes per system, and there is reason for optimism that the consumption of units associated with this order could occur sooner. Additionally, together with our customer, we have begun a continuous improvement engagement for approximately $500,000 the majority of which is expected to occur in the next six months, bringing the total order value to approximately $9.5 million. All production units for this order are anticipated to be manufactured at POC facilities. Consistent with our technology license agreement, however, our customer may decide to transfer production to a non-POC manufacturing facility, in which case POC would receive multi-year royalties. Another important point about this program is that this product is a replacement for a current reusable device in a system that is already on the market and highly successful with growing market penetration. Our customer believes it is early in the process of selling surgery systems into a large market. And as they sell more and more systems, the revenue opportunity for us increases. Looking forward to anticipated delivery of units beyond this order, it would be reasonable to conclude from expected system sales by our customer and the number of procedures per unit that future order annual volumes could be substantially larger than those of this initial order. Beyond the sheer size of this order, the other key milestone here is the validation this order provides regarding POC's ability to design and manufacture single-use endoscopes with high technical performance at price points consistent with the single-use endoscope market. Studies suggest that the single-use market is growing two to three times more rapidly than the endoscope market in general. As we have discussed on earlier calls, single-use endoscopes have many benefits over traditional reusable endoscopes, including ease of inventory control by the hospital guarantee a brand-new image quality for the surgeon in every procedure, and importantly, the virtual elimination of the possibility of cross-contamination from one patient to another. With this validated ability to address the single-use part of the medical device market, combined with our many years of experience designing and producing reusable medical devices, our growing technical and production teams our broad in-house technical capabilities that allow us to design entire medical device imaging systems, and our broad in-house resources that allow us to take a program from concept through mass manufacturing, we are now well positioned to become the preeminent imaging system partner for our target customers in the medical device market. This will require a continuation of the dedicated efforts of the team we have assembled, but we have all the pieces in place with demonstrated success of our capabilities, both from a technical and customer engagement standpoint. Obviously, we are very excited for the future. Since our last conference call, another key development has been the increasing traction we are achieving within the aerospace and defense market. In the past few weeks, we have received two significant follow-on production orders. The first was for our top tier defense aerospace company, which leverages our proprietary manufacturing technology developed for high precision micro optic systems. Last month, we received a $720,000 order, which brings the total production orders for this leading edge application to more than $1.9 million. From a timing perspective, that order, as well as all other orders received previously for this program, are expected to be delivered by August 2024 and we expect additional follow-on orders. The second key order was for $1.25 million from a major US defense contractor to meet continued demand for a highly complex optical assembly. As a reminder, we have supplied this complex assembly to this customer since 2018. This order comes immediately on the heels of us completing a 15-month production order for the same unique assembly allowing our team to maintain a high level of continuity with the program and realize manufacturing efficiencies. Previously, follow-on orders for this product would be placed by our customer a number of months after final deliveries of the previous orders. We believe that the increase in rate of follow-on orders is due in part to the success and potentially the expansion of the program our product is used for. Given the success of these two programs in particular, We believe there are additional opportunities for our products and technologies in the defense and aerospace market. As I mentioned in our last call, we have begun a dedicated effort to better understand the segments of this market and to identify the best places for us to pursue additional opportunities. That effort continues to show the need for smaller-sized optical systems in certain segments and is well aligned with the industry's SWAP mantra, which stands for Reduced Size, Weight, and Power. I look forward to reporting more details of our investigations on coming calls. In addition to exploring the defense aerospace market for expansion opportunities, we have also been updating our marketing approach to the medical device market. Since the acquisition of Lighthouse Imaging, we have engaged in numerous development programs utilizing the combined technical capability to design and build systems that include the entire imaging pipeline, from illumination to imaging to processing to display. We have worked diligently in the quoting and contracting process to maintain ownership and control of the IP embedded in these systems. Over the years, we have frequently debated how to best monetize this investment in IP. Recently, we developed a concept to provide an existing family of baseline designs to new customers. This gives us a competitive advantage in the marketplace as these well-qualified baseline systems can offer an accelerated path to market and reduce development risk to our customers. To be clear, we expect all these customers to continue engagement with POC beyond this initial purchase, but advantages to our customers' time to market generated by starting with this platform approach are compelling. We have already tested this marketing approach with several key customer opportunities and have had an excellent response. We expect, therefore, to extend this updated approach to engage with the market more broadly in the coming months. To wrap things up before I turn it over to Wayne, let me just say how pleased I am with the progress being made at Precision Optics. I believe the business is better positioned today than at any point in the company's history. The enhanced business model we have deployed, where we apply our deep technical knowledge to support a customer from the early design phase all the way through mass manufacture, continues to show great signs of success. or soon will be in production, and many more programs progressing through the pipeline now. I believe the receipt of the single-use production order we announced last week will prove to be transformative to the business in the coming years, not only because of the size of the record-setting order, but also because of what it means for our opportunity within the broader industry as a whole. This order, as well as other new and follow-on production orders, will help to drive production revenue higher. As programs transition from engineering to production, we have numerous new engineering programs that will continue to keep engineering revenue at record levels. Taken together, these strong expectations for production and engineering increases will support growing revenues through fiscal 2025 and beyond, with an associated increase in profitability as we utilize production and operating resources more fully. I'll now turn the call over to Wayne to go into greater detail on the financial results. Wayne? Thank you, Joe.