Precision Optics Corporation, Inc.

Good day and welcome to the Precision Optics Report's second quarter fiscal year 2026 financial results conference call. 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, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Robert Bloom with Listen Partners. Please go ahead.

All right. Thank you very much, operator, and thank you to everyone joining the call today. As the operator mentioned, on today's call, we will discuss Precision Optics second quarter fiscal year 2026 financial results. This is for the period ended December 31, 2025. With us on the call representing the company today is Dr. Joe Forkey, Precision Optics Chief Executive Officer at and 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 dialed into the call through the traditional teleconference line, as the operator indicated, please press star, then one to ask a question. If you're 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 contained during this conference call speak only of the date in 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 a 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 Dr. Joe Forkey, Chief Executive Officer of Precision Optics. Joe, please proceed.

Thank you, Robert, and thank you all for joining our call today. When we spoke last quarter, we described precision optics as operating at a new level, driven by record systems manufacturing revenue and sustained strength in our two largest production programs. I'm pleased to report that in the second quarter of fiscal 2026, that momentum not only continued, it has accelerated. Revenue for Q2 reached a record $7.4 million. That total consisted of $6.0 million in production revenue, net of tariffs, up 92% year over year, and up 9% sequentially. And $1.0 million in engineering revenue, which was down 29% year over year, but up 47% sequentially. This sequential growth in engineering along with continued growth in engineering bookings, is particularly important as it reflects the early stages of the recovery we discussed on our last call. It has become clear that our production business is, on its own, acting like a successful startup company. This does not mean the two sides of our business are not tightly interwoven. They are. Production programs are the result of the sales and execution of our engineering or product development team. However, we have experienced growing pains as significant production programs have ramped, while we were under-resourced in terms of line management, production support, and other functions that a rapidly growing production business requires. Recognizing we were not addressing operating challenges in a sufficiently aggressive fashion, we changed leadership with the addition of Joe Trout as COO in October. By the end of the year, production was running better, and it has continued to improve in early 2026. Concurrently, we have invested in sales leadership and marketing efforts, and our pipeline of product development opportunities is growing. While the gross margin and bottom line performance in the second quarter were not what was expected, we are making solid progress week in and week out and can see results continuously improving. Today, I'll focus my remarks on four primary areas. First, updates on our manufacturing programs. Second, the operational improvements underway and their expected impact on gross margin and adjusted EBITDA. Third, positive developments in product development and the rebound we are seeing at Ross Optical. And finally, our updated guidance and outlook for the remainder of fiscal 2026. Let me begin with production. which continues to be the primary driver of our revenue growth. Our top tier aerospace program generated $2.7 million in revenue during Q2. This marks another quarter of sustained high volume performance at the same record levels set in Q1. As a reminder, this program involves a highly specialized optical assembly used in a next generation aerospace platform. The product has stringent performance and reliability requirements, and we have become a trusted strategic sole source supplier to this customer. Demand remains strong. Our joint forecast with the customer, combined with our internal capacity planning, supports an increase from the shipment levels of approximately $2.5 million in the second quarter to over $3.5 million for the fourth quarter of this fiscal year. Importantly, by the end of Q2, our operations team had updated the line to enable more than 50% higher maximum throughput compared to the end of Q1. The team also made good progress improving operating efficiency, and we are already beginning to see tangible throughput increases, which we expect will have a positive impact on our financial results in Q3 and more substantially in Q4. One of the most compelling aspects of this program is its operating leverage. Quarterly volumes could increase by 50% without requiring any increase in headcount. In fact, with steady material flow to avoid start and stop production patterns and line down inefficiencies, we could potentially add approximately a million dollars of incremental quarterly revenue with minimal incremental costs beyond materials. translating into significant gross margin and bottom line expansion as volumes increase. This remains a cornerstone program for precision optics and a powerful contributor to our path toward profitability. Our single-use Cystoscope program for a surgical robotics company generated $2.0 million in revenue during Q2, compared to $1.5 million in Q1, marking the sixth consecutive quarter with record revenue. End market demand remains extremely strong, and our customer continues to push for higher output. However, gross margins on this program remain challenged in Q2 as yields have been below expectations and labor utilization has been suboptimal due to training time and other inefficiencies in production line operations. During the second quarter, we made substantial progress on improving operations that should drive improved gross margins in the third and fourth quarters. First, two significant updates, one to the product design and the second to the supply chain, both in development for several months, are scheduled for implementation this quarter. These updates were delayed primarily due to the complexity and added care required to make changes to an FDA cleared product already being used clinically. Because these updates represent reductions in cost and improvements in yield, they both will have a strong impact on gross margin. In fact, because the yield improvement is at the final assembly stage, it represents virtually 100% variable margin. We expect these changes to result in a $150,000 to $200,000 quarterly increase in gross profit at current production rates. In addition to these updates, our new operations team has successfully stabilized the main production line and significantly increased throughput on a second partial line. Production and shipments are now predictable, enabling better planning and higher efficiency, which contribute to higher gross margin, a stable line, and stronger customer confidence. We expect that the anticipated improvements in our single-use and aerospace programs would bring the company to break even levels of adjusted EBITDA even before other anticipated positive developments. Beyond our two lead programs, a third key production program, a single-use ophthalmic device, is now ramping significantly and should contribute towards continued growth in the second half of the fiscal year and beyond. In calendar 2025, revenue from this program was limited. as we built only 1,000 units, and startup margins were significantly negative. We expect the next order will be for 10,000 to 15,000 units and will support $2 to $3 million in revenue this calendar year, with gross margin greater than 30%. The operational progress on this scope has been dramatic and highlights the benefits of our new operations management team, as well as learnings from our other single-use programs. In November, yields were approximately 60%. Today, yields are routinely above 90%, and we are pushing to exceed 95%. In November, we produced approximately six units per day. Today, we are producing 20 to 25 per day and working to increase to 35 per day. In summary, our production revenue levels continue to validate the strength of demand across our key programs and markets. However, as we discussed in detail last quarter and again here, gross margins remain challenged due to manufacturing inefficiencies associated with scaling operations, yield challenges on our single-use programs, and outsized impacts from production scraps. These issues contributed to negative adjusted EBITDA in Q2, despite the large increase in revenue. That said, we are already seeing meaningful improvement as we enter the second half of our fiscal year. The impact of the new operations leadership team began to materialize toward the end of the quarter. We saw measurable operational improvements in December, improvements that we expect will carry forward into Q3 and expand further in Q4. We acknowledge that this is an approximate one-quarter shift to the right from our original expectations, but we believe we now have the people and systems in place to execute on an improved manufacturing optimization plan that is already improving profitability and will lead to positive adjusted EBITDA beginning in Q4. In recent quarters, our Ross Optical Division has produced lower results than we have seen historically. largely due to the impact of tariffs and the associated changes in customer purchasing trends. This now has begun to turn around. Ross Optical delivered revenue above a million dollars for the second quarter in a row, and we enter Q3 with the highest backlog in over three years. This provides strong evidence that the market rebound we anticipated is beginning to take shape. Because the Ross Optical Division can support higher revenue without significant incremental fixed costs, revenue increases here carry strong variable margins. Accordingly, we expect Ross to experience improved margins in the second half of fiscal 2026. Product development, or what we sometimes describe as engineering revenue, increased sequentially and is forecasted to continue to increase in Q3 and Q4. This forecast is supported by the second consecutive quarterly increase in product development purchase order bookings in Q2, which were at the highest level in over a year. As we've discussed in earlier calls, the aggressive timeline for the development of the single-use cystoscope product, combined with the transfer to production a year and a half ago, resulted in an abrupt reduction in engineering work that has taken some time to recover. We attribute the recent success in increased bookings in part to the renewed marketing efforts we initiated over the past year, and we expect bookings increases to continue through Q3, Q4, and beyond. Our primary pipeline for new customer programs continues to be minimally invasive medical devices. And while we still receive inquiries about reusable devices, the trend, as expected, is continuing to move to single use. As we've discussed on previous calls, this strong market interest is based on the benefits of virtual elimination of cross contamination, superior image quality, and ease of use. While the single-use endoscope market has grown substantially over the last couple of years, market studies still predict annual growth rates to continue in the mid to high teens over the next 10 years. With the successes of our first few programs that have gone to production in this area, we are well positioned to take advantage of the ongoing growth in this market. We also continue to see strong interest in our technologies from the defense aerospace market, with a particular emphasis on next-generation aeronautic and satellite systems for both commercial and government use. The specific segments that we target have seen heavy investments in recent years, supporting expectations for double-digit annual growth rates over the next decades. Our large production aerospace program, along with some of our recently announced new programs, fits squarely into these market segments, and we believe there are additional opportunities for us in this area. Several programs already in our product development pipeline continue to advance toward production, with four programs scheduled to transition in the next 12 months. Three of these are for reusable products used in sinoscopy, urology, and otoscopy, and one for a single-use product for a specific arthroscopic procedure. Each of these programs is expected to contribute roughly $1 to $3 million in annual revenue when they transition to production. Importantly, as more of these programs enter production, we expect significant leverage of the operations management and support teams that we have been investing in over the last few quarters, resulting in higher gross margins across all programs. Given stronger than anticipated production demand, we are increasing our full year revenue guidance to a range of $26 to $28 million, which is up from the $25 million we estimated previously. However, the timing shift in margin recovery by about a quarter results not only in an additional quarter of adjusted EBITDA loss, but also pushes positive adjusted EBITDA quarters out of this fiscal year into the next, removing the opportunity to recover this year from the EBITDA losses in the first half. Combined, this results in revised full-year adjusted EBITDA guidance of negative 2.5 to negative 3.0 million dollars. We expect Q3 to be a strong improvement over Q2 and Q4 to improve to positive adjusted EBITDA. Importantly, our long-term prospects remain strong, as evidenced by sustained top-line growth, improving operational discipline, increasing bookings, especially for product development, and a strong overall backlog entering Q3. We remain confident that our business model and the markets we are serving can sustain substantial growth over the coming quarters and years. With that overview, let me turn it over to Wayne to review the financials in more detail. Wayne?