Precision Optics Corporation, Inc.

Good afternoon and welcome to the Precision Optics Q126 earnings event. All participants will be in a listen-only mode. Should you need assistance, please signal a 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 then one on your touch-tone telephones. 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 Lithum Partners. Sir, please go ahead.

All right. Thank you very much. And thank you to everyone for joining us today. As the operator mentioned on today's call, we'll discuss Precision Optics first quarter fiscal year 2026 financial results for the period ended September 30th, 2025. With us on the call representing the company today is Dr. Joe Forkey, Precision Optics Chief Executive Officer, Mr. Wayne Cole, the company's Chief Financial Officer. At the conclusion of today's prepared remarks, we'll open the call for a question and answer session. If you dial through the conference 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. 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 as 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 risk 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 and Exchange Commission. All forward-looking statements 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. All right, with that said, let me turn the call over to Joe Forkey, Chief Executive Officer, Precision Optics. Joe, please proceed.

Thank you, Robert, and thank you all for joining our call today. On our last conference call, which was only six weeks ago, we talked about POC now operating at a new level, fueled by the record systems manufacturing revenue in the fourth quarter of fiscal 2025, which we expected to continue into the indefinite future. I'm pleased to report today that this positive momentum continued during the first quarter of fiscal 2026, as we reported record quarterly revenue of $6.7 million. We have reached agreement with certain key customers to reimburse us for the cost of tariffs, which makes those revenues a pass-through for us. Backing out the tariff reimbursements, this represents an increase of 46% compared to revenue in the same quarter a year ago. These large increases are driven primarily by our two key manufacturing programs, one with the top-tier aerospace company and the other with the surgical robotics company for whom we make a single-use cystoscope. As we discussed on our last call, we've experienced gross margin challenges mainly associated with the aggressive ramp of production operations. We have come to appreciate our production business is much like a startup, with the need to build infrastructure, processes, and talent in order to scale. Despite producing product for years, ramping programs to multimillion-dollar annual levels with delivery rates 10 to 100 times higher than historical programs while adding new programs concurrently, has stressed the organization and required costs, all of which impact our gross margins. In fact, it may be more challenging to do with an existing business, as we have had to make team infrastructure and process changes from what was existing in order to serve both longstanding and new customer programs of varying revenue sizes. I'll touch on this more in a minute. As we grow, we will realize the benefits of the investments that we've made. Our product development revenue was still limited in the first quarter due to the recent advancement of a number of significant programs from development to production. Our sales team has been working to refill the pipeline, and we have now begun to see a more robust recovery of that part of our business. Since our last conference call, we have signed two new large development agreements, which we announced in the last week. These programs, one for the development of augmented reality systems for defense applications and the other for a high-resolution borescope for jet engine inspection, represent the beginning of an upward swing in new product development programs that we expect to continue in upcoming quarters. These two programs are also important because they broaden our exposure to the aerospace and defense industry, as major players in that market have begun to recognize how well POC's technologies are positioned to support the industry's need for smaller-sized optical systems. All in all, our first quarter results support the guidance we provided on our last call. We continue to expect that fiscal year 2026 revenue will be in excess of $25 million and that we will have approximately half a million dollars of positive adjusted EBITDA for the year, despite the first quarter loss. Beyond this guidance, I want to reaffirm the overall sentiment of our last call. With ongoing higher top-line revenue, a growing engineering pipeline, and improving gross margins, we believe we are now operating at a new level for precision optics and expect the gains we are experiencing in top-line revenue will increasingly flow through to the bottom line throughout fiscal 26 and beyond. Today, I'll focus my remarks on the following items. First, updates on our two major production programs. Second, our gross margin analysis for Q1 and the path to anticipated improvements. And third, recent developments in our product development pipeline. In the first quarter of fiscal 2026, we achieved record quarterly revenue for our aerospace program for the fourth quarter in a row. With $2.5 million in revenue, net of tariffs, this represents an increase of more than 800% compared to revenue for this program a year ago. With a backlog of over $9 million and ongoing requests from our customers to increase output as quickly as possible, we expect this program to continue to grow at least through the remainder of fiscal 2026. In fact, we just recently completed a line expansion that will allow us to increase production throughput by as much as an additional 50% beginning next week. In the first quarter, we successfully negotiated for this customer to reimburse us on a pass-through basis for tariffs we incur in sourcing components. With this reimbursement, the program is now delivering a gross margin in the mid-30% range, and we expect that this level will increase as we gain experience to produce more efficiently and leverage fixed costs with greater volume. This program is very likely to be an important cornerstone of our business for years to come. For our single-use Cystoscope program, revenue during the quarter was $1.5 million net of tariff reimbursements, an 85% increase compared to the previous quarter, and a 180% increase year over year. This was another record quarter for this program, highlighting two important conclusions. The end market demand for this product continues to be very strong, and our customer is working with us to deliver as much volume as possible as quickly as possible. And second, the issues we had during the second half of last year that limited output are being resolved, and we are back to producing at record rates. Delivering many hundreds of units a week requires a different infrastructure and process than delivering 100 units a month or a year as POC has done in the past. Updating our systems has been challenging, and frankly, I think we underestimated the extensive changes that were required. But I believe we now have the right management team in place and a substantially more robust system that will not only help improve results for this program, but also for future programs. For example, we expect our single-use ophthalmic product to begin ramping significantly in the January timeframe. Because of what we've learned from the cystoscopy program, we are already evaluating the potential need for line loading adjustments when volumes increase and putting in place in-process inspection points and KPIs to be able to monitor real-time the efficiency of the line. We already have a dedicated manufacturing engineering team and have a plan for the next 12 months identifying points where cycle time will be enhanced by fixture duplication, additional FTE count, and cross-training. Clearly, the work we've done to improve volume throughput on the cystoscopy line will help with margins not only for that product, but for others coming through the pipeline now. All in all, we have made substantial progress on improving the cystoscope line already, and the margin for this program in Q1 showed significant improvement over that of Q4. Additional efforts to improve yield and production efficiency will take time to complete, but we expect them to impact the current second quarter to some extent and to be fully implemented during the third quarter, leading to further improved quarter-over-quarter margin increases for this product. In the first quarter of fiscal 2026, we renegotiated pricing with our customer to account for lower yield and higher touch time costs. The renegotiated price is retroactive to August, and so this update had a partial impact on Q2 margins, but will have a larger impact on Q3 and beyond. In addition, our customer has agreed to cover tariffs associated with this product on a pass-through basis. We believe that the design and production changes, along with pricing updates, will result in steadily increasing profitability for this product throughout the year, an improvement that will have a meaningful impact on the bottom line given the significant contribution of this program to overall revenue. Our Ross Optical Division also saw a nice uptick in revenue and margin from Q4 of fiscal 2025 to Q1 of fiscal 2026. revenue grew 10% quarter over quarter, coming in at over $1 million. Because the Ross Optical Division can support significantly higher revenue with existing staff and infrastructure, the variable margin on revenue increases is high. We are cautiously optimistic that the revenue increase we saw in Q1, which was the second consecutive quarter over quarter increase by 10% or more, along with a strong backlog going into Q2, indicates the beginning of a recovery of the optical components market, where we believe customers have held off on new orders due to tariffs and other uncertainties. While the margin for the systems manufacturing in Ross optical divisions increased significantly from Q4 to Q1, this was masked by the drop in quarter-over-quarter margin of our micro-optics and product development divisions, both of which suffered from under-absorption of resources due to unusually low revenue in the first quarter. We expect the revenue and margin for both of these groups to improve in the second quarter. Our Micro-Optics Division has historically been driven by a product we supplied to one of the nation's largest defense contractors, representing $2 to $2.5 million of annual revenue. We expected another reorder in the September timeframe. Our customer has notified us that the program is continuing, but the new order has been delayed. We are confident that this order is forthcoming. To summarize, we expect improvements in our Cystoscope line yield and efficiency, greater fixed cost absorption due to increases in production levels for our aerospace program, and an increase in micro-optics and product development resource utilization to support higher revenue for both of these divisions. The combination of these developments will result in substantial quarter-over-quarter margin improvements for each quarter and the remainder of fiscal 2026. I'd like to talk for a few minutes now about the reasons for our optimism in our product development pipeline. Revenue from this part of our business in the first quarter of fiscal 2026 was only $656,000. which is the lowest it has been in many years. As I've already mentioned, this was caused mainly by the transfer of programs from development to production, but also due to the natural ebb and flow of demand for our services as programs move through the development process. With a number of existing programs requiring more work as they move towards production, and importantly, with new programs coming in, we believe the first quarter was the bottom of the trough and that we will see a recovery of revenue from this division, starting with a 50% to 75% quarter-over-quarter increase in Q2 and additional growth in Q3 and Q4. Existing programs that will contribute to this increase include two programs, one for a single-use arthroscopy system and another for a reusable sinoscopy system, that recently received five 10K approvals and are driving towards production in the next six to 12 months. Two additional programs, one for urology and another for otoscopy, are targeting 510 approval in the next six to 12 months, with production expected in 12 to 18 months. These timelines support our business goal of having two to four programs move from development to production each year. Our new sales leadership, which has been in place for about five quarters now, has been working diligently to identify and engage new customers for product development, in large part by updating and enhancing our approach to analyzing and communicating to the market. Over the last year, our team has begun using social media in a more directed way, releasing numerous capability videos in a podcast series, now on its ninth installment. More recently, we have begun to use AI tools to improve the efficiency of our team, and we recently hosted our first-ever webinar from which we received uniformly positive feedback and, more concretely, three new high-probability leads that our team is now engaged with. It takes time for these kinds of marketing efforts to translate into new business, but we believe we are starting to see the benefits of this investment. Last week, we announced two new development orders, totaling about $1.4 million. The first is for an optomechanical subassembly that is used in an augmented reality system. This is the second AR system we have worked on, both of which benefit from our ability to design and manufacture very small optical systems that can fit inside of devices worn on the body. We believe there are additional opportunities for our technologies in this quickly growing market. The second new order is for a custom borescope that will be used to inspect the inside of jet engines after they have been deployed to the field. Our customer for this program is one of the world's largest jet engine manufacturers. We will design and later manufacture the borescope itself along with electronics to capture and process images. The system will have three different configurations greater than 1080p HD resolution and will be required to operate at temperatures as high as 100 degrees Celsius. Our customer for this program ran an extensive and detailed process to select the best supplier, including an all-day on-site visit to their facility where they evaluated POC and three other finalists. This program is not using our existing Unity platform. However, the demonstration of our capabilities embodied in Unity demonstrations clearly contributed to our success in winning this contract. With demand for our largest production programs continuing to ramp, a clear path to increasing growth margins, and significant momentum in bringing on new customers for our product development pipeline, we are confident that fiscal 2026 will bring additional records for top line revenue and that this will increasingly flow to bottom line profitability. With that overview, let me now turn it over to Wayne to review the financials in more detail. Wayne? Thank you, Joe.