Good day, and welcome to the Precision Optics Reports Second Quarter Fiscal Year 2026 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham 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 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; and 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 into the call through the traditional teleconference line, as the operator indicated, please * 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 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 and Exchange Commission. All forward-looking statements contained during this conference call speak only as of the date in which they are 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 2 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 start-up company. This does not mean the 2 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 Traut 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…

Thank you, Joe. Let me expand on some of Joe's comments on the financial results, starting with revenue. For the second quarter, revenue was $7.4 million compared to $4.5 million in the year ago second quarter and up compared to $6.7 million in the prior sequential quarter. Breaking it down, production revenue was approximately $6.4 million compared to $3.1 million in the year ago quarter and $6.0 million in the prior sequential quarter. Product development, or engineering revenue, was $1 million compared to $1.2 million in the year ago quarter and $700,000 in the previous quarter. Our aerospace program contributed $2.7 million in revenues, while the cystoscope program achieved $2.0 million. As we discussed last quarter, we successfully negotiated agreements with these customers to pass through tariffs without markup. The tariffs are treated as revenue and correspondingly as cost of goods sold. Net of tariffs, the aerospace program had revenue of $2.5 million and the cystoscope program, $1.8 million. Total revenue, net of tariffs, would have been $7.0 million. For the quarter, gross margins were 2.8% compared to 14.2% in the prior sequential quarter and 23.6% in the second quarter of a year ago. Joe touched on many of the key impacts on gross margins, but to summarize: high levels of manufacturing scrap and temporary tariff impacts, the yield and throughput on our cystoscope line was below optimal levels, profitability of our product development group was negative due to underutilization during the quarter, and our optics lab experienced a delayed reorder of a key defense program that we expect to begin building now in the fourth quarter. We believe improvements made by our new operations team, both those already implemented and those currently underway, will dramatically improve efficiencies and result in improvement to gross margins in the second half of…

Thank you, Wayne. Before we take questions, let me recap a few points. Q2 revenue reached a record $7.4 million, driven by expanded production revenue, which grew 105% year-over-year. Our aerospace shipments remain at record levels with meaningful increases expected in Q3 and Q4. Our cystoscope operations have stabilized with margin improvement expected in Q3 and Q4, and our ophthalmic program ramp is accelerating with yields now above 90%. Product development bookings are at the highest level in over a year, and the Ross Optical backlog is the strongest it has been in over 3 years. And finally, operational improvements driven by the new operations team are in place and gaining traction with margin recovery underway and expected to accelerate in the second half of the fiscal year. In many ways, fiscal 2026 remains a transition year, one in which we are building the infrastructure and processes required to support a significantly larger production business. This should be expected. It is an investment that is worth making, as we believe the production business is on a long-term growth trajectory that will create significant value for shareholders. We believe the production business over time can create value on its own, well beyond POC's current market capitalization. The success we're seeing is not unexpected. This is the result of much of the hard work over the last few years, and we're excited to see this part of the business growing as rapidly as it is. With that, we'd be happy to take any questions.

[Operator Instructions]

All right. Nick, this is Robert here. While we wait to see if anyone dials in through the teleconference line, I want to remind everyone on the webcast that if you'd like to ask a question, you can type it into the Ask a Question box there on the webcast player. Joe and Wayne, we have a few questions that have come in here. First one, can you clarify if the design revisions required to fix these yield shortfalls are currently within your internal manufacturing control? Or are you waiting on your customers to approve engineering changes? Furthermore, what is the exact lead time for these revisions to hit the P&L, and can you bridge the gap to that date without a dilutive equity raise?

Let's see. There's a lot there. It's a great question. So the design piece of the yield improvement that we expect to see on the cystoscope line, we have been working on for many months. The design change has been approved by our customer. We have received initial parts for that design change, and we've done the engineering builds that are required in order to qualify the design change. So there are a number of sort of documentation and some more testing that has to happen. There has to be some formal approval from our customer, which we're quite confident we will get because they've been part of the process all along. So we anticipate that this design change will go into production sometime in the next month or so. And I'll let Wayne comment on the latter part of that question about how we get there from a financial standpoint.

Thanks, Joe. Yes, we've had advanced discussions with lenders over the last several months, as I mentioned, and with due diligence proceeding, we do expect to announce a new loan facility during the third quarter. We also received -- recently received grant funding from Massachusetts, the impact of which we're still quantifying. We always consider equity financing as one option. But at the moment, we are uncertain how much equity capital, if any, is going to be needed to close any potential funding gaps.

Once again, if you have any questions on the webcast player, please type those into the Ask a Question feature there on the webcast box there. The next question is, can you comment on facility changes and when they will all be up and running? I know there's a little bit of an overlap there, but anything else you can expand upon?

Yes, sure. So we've talked on earlier calls about a fairly substantial plan with regard to facilities, and we reported that we've already made facilities updates in our main operation, the operation in the state of Maine, as well as some of the buildings in our Massachusetts facility. So we moved to a new headquarters, which we're talking to everyone from, I think, for the first time today. So those facility updates are complete, and everyone's moved in. This includes our engineering group. The last piece that we have to update is our production facilities. And right now, we're updating it as we need it. And over the next, I would say, 6 to 12 months, we're looking at a more substantial and complete overhaul in order to be prepared for the next couple of years. But in the meantime, we have the facilities that we need to execute on the programs that we're working on now and all of the programs that I talked about in the comments today. And so we see this as a longer-term effort that we have to move through. And as Wayne said, there are a number of funding options we can look at for that, including some programs through the state and otherwise to be able to support that facility's update for the production in the long run.

All right. Very good. Once again, if you're on the live dial-in line, please press star, then 1, to ask a question. If you're on the webcast, you can go ahead and type it in there. You have a couple more questions here. Can you -- and again, you've touched on this, but can you talk about your loan discussions and how certain you are that you'll be able to reach positive EBITDA without dilution?

I think Wayne already answered that. The loan discussions are quite advanced. We look at funding from multiple different sources, but we're quite confident that the discussions that we've been having with the banks will be successful.

Barring any additional questions that might come in, this looks like the last question. What's the long-term return you expect on the investments the company is making in its production infrastructure?

Yes. So we talked a lot about production infrastructure on the call today, and I just want to clarify. We see a lot of the investments that we're making in the operations team. So I just commented on the long-term investments we'll need to make on the production facilities. Some of what we've been doing over the last couple of quarters does include facilities updates, updating cleanrooms, adding new fixtures and tools. But really, the piece that is most substantial in terms of the impact that it will have on the next couple of quarters is on the infrastructure. And we talked about putting in place a new Chief Operating Officer. We have a new Senior Director of Operations. We have a number of new quality engineers, manufacturing engineers. We're really building out that personnel infrastructure. And so I'll answer the question this way. There's significant leverage that we can benefit from when it comes to the size of the production business that can be supported by the management infrastructure and the support infrastructure that we've been putting in place for production. It probably came through in the script here, but we -- I think we underestimated how much we needed to invest in that management team and that support structure. So those folks will be able to support a much higher level of production, even than we're talking about having in Q3 and Q4. So I think there will be substantial leverage that we obtain as we continue to increase the number of production programs. Beyond that, I think the investment is a very safe investment because from a baseline standpoint, the 2 programs that we already have in place that are driving the increases in volume, we have strong indications that those will continue for a long period of time. In one case, the program is a product that's a replacement of a product that's on the market already and has been for many years. In the other case, it's a product that's used in a satellite system that has a limited lifetime. And so we know that there will be a need for replacement of those systems. So from a baseline standpoint, we're quite confident that the programs that we've built this infrastructure for will be there for a long period of time, and we believe that we can support significantly higher production revenue with the operations management and support team that we put in place. So we expect significant return on those investments.

Actually, we do have a couple of additional questions that have come in. The next one here talks about your guidance increase in revenue for the year. Can you talk about which program or programs is getting higher-than-expected order flow from your original expectations there?

Yes. So it's really the 2 big production programs. It's the aerospace program and the single-use cystoscope. I believe the aerospace program is the one that's coming in at a faster rate. It's ramping faster of the 2. But both of them are really coming in at a higher level than we had originally anticipated, which is great news.

And maybe there's something you can help clarify here, because there's a question, is it primarily the borescope business that is driving aerospace? So maybe you could help clarify when you talk about defense and aerospace and how the borescope program relates to that.

Sure. So here, I can be very complete. We have 2 major defense aerospace programs that are in production. One is the aerospace program that we talked about an awful lot today that's running at a few million dollars a year. That one -- sorry, a few million dollars a quarter. That one is a system that's supporting a satellite program. The second one is the one that we've talked about on previous calls that we manufacture in our micro-optics lab. That's a program that we're still waiting for a reorder on. That one typically runs at a couple of million dollars a year. That one, we don't know -- we don't have visibility into what the final product is. And then the -- so those are the 2 production programs that are already running. We have a couple of product development programs, the one that the question is about is the borescope program. That program is in the product development phase of our business or a section of our business. And that program is substantially contributing to the increase in the product development revenue, which we're very anxious to get back up to levels that it was at a couple of years ago. So just to be clear, the borescope program is in the product development phase. It's a substantial part of the increase in the product development work that we're doing. It probably won't go into production for another year, I would guess. But when it does, we expect it to increase the production revenue at that point.

All right. Very good. Well, I am showing no additional questions at this time. So Joe, I will turn it back over to you for any closing remarks.

Great. Thanks, Robert, and thank you all for joining us today on the call. I look forward to talking with all of you soon. Thank you, and have a good evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.