Good afternoon, everyone, and welcome to the Precision Optics Reports Third Quarter Fiscal Year 2024 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Robert Blum with Lytham 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 Coll, 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 one 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 through as many questions as possible. Before we begin with prepared remarks, we submit for the record the following statements. 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, 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 should 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 as 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. 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 stair-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…

Thank you, Joe. Let me expand on some of Joe's comments on the financial results, starting with revenue. The third quarter of fiscal 2024, total revenue was 5.2 million, an increase of 4% compared to 5 million in last year's third quarter. As Joe mentioned, excluding the one-time technology license revenue we received in the second quarter of last year, this is close to the quarterly record revenue for the company. Engineering revenue was a record 2.3 million compared to 1.4 million last year, an increase of 62%. However, production revenue was 3 million compared to 3.6 million in last year's third quarter. The biggest change from the year-ago quarter here is the level of business of our Ross Optics division. As we discussed over the last few quarters, our components business, which is primarily supplied through Ross Optics, continues to be below the peak levels of a year or two ago. In conversations with other similar suppliers and experts in the industry, we all seem to be experiencing the same relative phenomenon as we exited the pandemic and the glut of inventory levels worked their way through the supply chains. We believe we are relatively stable at these new levels but are looking at strategies to increase market share as we move forward. For the third quarter, our gross margin was 35.4% compared to 34.4% in the same quarter last year, this represents a significant improvement over the 30.1% margin in the preceding sequential quarter. The improvement is attributable to higher revenues absorbing against certain fixed costs in our cost of sales. As our production revenue continues to improve, we expect to see margins moving up towards our target of 40%. Total operating expenses in the third quarter were 2.12 million compared to 2.23 million in the third quarter…

Thank you, Wayne. I want to finish by thanking all the team members of Precision Optics for their incredible dedication over the past few years. We have accomplished a lot over this time. Today, we have an engineering pipeline larger than any time in the past. We have a number of products that have recently, or very soon, will transition to production, the most notable of which is the single-use product for which we received the $9 million order we announced last week. Today, our products tend to be at a higher level in the value-add supply chain, and our customers tend to be larger, well-established companies that can better support the introduction and growth of new products. We have updated our management structure and consolidated production facilities and infrastructure. Combined, these advances have positioned us well for continuing revenue growth and improved profitability through fiscal year 2025 and beyond. Before I turn it over to questions, I want to mention that we will be participating in the Lytham Partners Spring 2024 Investor Conference on May 30th. If anyone would like to schedule a one-on-one meeting, please reach out to Robert Bloom to coordinate. To all of you on the call, I thank you for your continued support of Precision Optics. We'd be happy to take questions at this time.

[Operator Instructions].

All right, Jamie. While we wait to see if anyone comes into the live teleconference line, we'll go ahead and take a couple of questions through the webcast here. And again, as a reminder to everyone on the webcast, if you'd like to ask a question, you can type it into the question box on the webcast player. Joe, a couple of questions here. First one is, I guess, given the consolidation of the production resources into a single location and with this new production order, talk about the anticipated need to expand production facilities.

Yeah, sure. So, there's really a couple of parts to this. So, the first part is that as our lease expires and our main facility will actually be moving to a smaller facility there. So on that side, we'll be sort of reducing the overall footprint that we have to continue to support in Maine. We will continue to keep an engineering group that came from Lighthouse, which was one of the main reasons we did the acquisition, running in the main facility. But it'll be a new facility that'll be somewhat simpler than the one that supported manufacturing as well. It's true in Massachusetts with the new order coming in and with the consolidation of manufacturing, we are in need of more space than we needed previously. We do have a couple of buildings. We actually have four facilities now that we're using in Massachusetts. One of those is set up in such a way that we can flex the amount of space that we have pretty easily and pretty cost effectively up and down. So, in the near term, we're pretty well covered in terms of being able to support the additional production that will be done in Massachusetts, again, in large part because of the new order. In the longer term, though, it is true. I just mentioned we have four facilities in Massachusetts. And so, there is a need in Massachusetts to consolidate the space that we have. And so, we are beginning to look around and to see what kinds of opportunities there are out there to be able to consolidate into a single building. So, I guess the short answer is there is a need to look at ways to continue to improve efficiencies as we grow, and we're looking at that. But there's nothing that's catastrophic that'll happen in the immediate term because we have systems and facilities that allow us to flex a little bit up and down as we need to.

All right, perfect. That's helpful. Again, just once again, everyone on the teleconference line, star one to ask a question, or you can type it in if you're on the webcast here. Next question, I'll sort of paraphrase it here. You mentioned sort of this approach to accelerate the time to market for new customers by utilizing sort of this platform system based on other customer programs. Talk about how you're able to charge, I guess, for development work, but still maintain IP and the rights associated with these platform systems.

Yes, that's a great question. So, the short answer is we work really hard to be able to do it. The key point here, I think, is that the IP that we insist on continuing to own and to control is IP that is centered around our core technology, which is the micro-optics and the micro-optical imaging systems. Our customers, not surprisingly when they first come to us, start from a position of wanting to own and control all of the IP that goes into the products that we make for them. The key is that we have to differentiate between the IP that's critical to their business and the IP that's critical to our business. So, for our customers, their key business competitive advantage is not the imaging system itself. That imaging system that we develop for them typically helps to enable their product, but their sort of special sauce or their critical competitive advantage has something to do with the procedure that they've developed or the tool that they have that supports that procedure. And so, what we have to sort of work with them on is clearly defining the IP that's relevant to their procedure or their product or their tool and differentiating that from the IP that's critical to us, which has to do with the micro-optics and the micro-imaging systems. And once we get through that conversation, to be clear, it sometimes takes two or three rounds and often has to be done at a senior management level. But once we get through that discussion and once it becomes really clear to them that they really need the IP that we already have, the micro-optics imaging systems, we're generally able to negotiate an arrangement where we can maintain the ownership and control of the IP associated with the parts that we're doing, and they continue to own and maintain the IP associated with their part of the system. I will say that there are times when we will agree to license certain parts of our IP to a particular customer in a very specific field of use if the opportunity is significant enough and it's closely enough related to what they're trying to do and they have reasons why they need it. But generally, the key point here is that we have to differentiate between the IP around the micro-optical systems that POC is bringing to the table and concerned with, and the IP associated with the specific procedures or tools that our customer is working on.

Okay. Fantastic. Next question here is, can you talk about the, I guess, contribution margins, if you will, between some of the new products that are coming on board? Is there sort of a target margin and how that relates to your fixed overhead?

Yes. So, I'll take that one, Robert. In terms of the products that are coming on board for single use, we can expect, and the customer kind of requires a lower price point to compete in the marketplace. But as a result of the additional volume, again, absorbing the fixed overhead costs that we have, we still see our margins moving positively with larger orders.

Okay. Great. And I'll just do one last reminder here. If you're on the teleconference line, star then one. If you're on the webcast, go ahead and type it into the question queue there. Final question that I have, at least at the moment, is any sort of outlook that you're able to provide here for the fourth quarter?

So, we expect the fourth quarter to be similar to or higher than the third quarter. We have a number of programs that are running in production. Some of these are new programs. And exactly where the fourth quarter ends up depends on how quickly some of these programs get up to the higher volumes and whether those higher volumes come in in June or July. So, the sort of broader answer is that we expect revenues to continue to increase. Exactly how much hits the fourth quarter versus the first quarter is a little difficult to predict, but it will certainly be at the levels that we saw in the third quarter or higher.

Okay. Great. And actually, I apologize. We did have one additional question come in here. Joe, can you comment on the size of potential production revenue for projects in the engineering phase today and where are some of the near-term opportunities?

Yes, sure. So, part of the answer to that question is related to a couple of the comments I made in the prepared remarks about our customers tending today to be larger customers. And the products that we're designing and building are higher on the value-add chain. In large part, that's because of the combination with Lighthouse, the acquisition of Lighthouse. We can do entire systems now as opposed to individual components or smaller individual endoscopes. Having said all that, our typical rule of thumb is that when a program comes out of production, we expect the starting order sizes to be on the order of $1 million per year. More recently, those have been coming in close to the $2 million to $3 million per year, again, because they're larger programs and larger customers. We have, in addition to the program that we just received the large order for that we've already announced, we have three other programs that are, we think, within six months or so of coming into production. All three of those are through the prototype and testing phase, and two of those are waiting for 510(k) approval. One is just about to submit their 510(k) approval. So, there, we expect those to be relatively – go into production relatively soon.

All right. Fantastic. Joe, Wayne, I show no further questions on this side, so I'll go ahead and turn it over to you for any closing remarks.

Great. Thank you, Robert, and thanks to everyone for joining our call today. I look forward to speaking to everyone soon.

Ladies and gentlemen, that does conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.