Good day, and welcome to the Precision Optics Reports Third Quarter Fiscal Year 2026 Financial Results Conference Call. The operator provided instructions. Please note this event is being recorded. I would now like to hand the conference over to Mr. Robert Blum, Lytham Partners. Please go ahead.
All right. Thank you, Darcy, and thank you to everyone joining the call today. As the operator mentioned, on today's call, we will discuss Precision Optics' third quarter fiscal year 2026 financial results and it is for the period ended March 31, 2026. With us on the call representing the company today are 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 and the operator provided instructions. 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 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, Precision Optics. Joe, please proceed.
Thank you, Robert, and thank you all for joining our call today. Last quarter, we said Precision Optics had strong production demand, but we were still working through the challenges of scaling a much larger manufacturing business. In the third quarter, revenue continued to grow, and we began to see the payoff of the investments we've made in the last few quarters, improving manufacturing processes and efficiency. Revenue was $8.7 million, a new quarterly record for Precision Optics and more than double the quarterly revenue of a year ago. More importantly, we achieved positive adjusted EBITDA, a major milestone that reflects both the strength of our core production programs and the manufacturing improvements we've made over the last several quarters. Our two largest production programs continue to drive the business. Revenue from our top-tier aerospace customer reached $3.6 million, a new record, representing 44% sequential growth. This was the result of our investment in production capacity now achieving improved efficiency. Production yields on this line have now increased to 97% consistently, a significant improvement from previous months that were typically in the 85% to 95% range. Because our customer has faced bottlenecks elsewhere in their deployment process, they have asked us to slow production against our existing backlogs in Q1 and Q2 of fiscal 2027 with new orders expected for Q3. All indications are that we continue to be the sole source for this assembly and that the long-term prospects for this program remain extremely high. Our single-use cystoscope program also contributed record revenue at $2.2 million in the third quarter, an all-time high and representing approximately 10% sequential growth. More importantly, we have made dramatic progress in terms of production yields and costs. Here too, yields have increased to current rates above 90%, but not yet to the targeted 95% level, which we expect to achieve in Q4. Beyond those two lead programs, we continue to advance newer programs, including our single-use ophthalmic endoscope program, supported by a $3.5 million follow-on production order that we just announced last week. Our Ross Optical division also contributed significantly to the quarter's improved bottom line. Revenue for Ross Optical was approximately $1.3 million compared to $1.0 million in Q2 and $0.8 million a year ago, representing 65% year-over-year growth. This is important because this business can support higher revenue without a proportional increase in headcount or other fixed costs, so incremental revenue contributes meaningfully to gross profit and adjusted EBITDA. As a result of revenue growth and production improvements, our overall gross margin improved to 24% compared to 10% a year ago and 3% in Q2. While we still have work to do, the quarter showed that our operational improvements are beginning to translate into stronger financial performance as our production lines become more stable and the higher revenue levels leverage the manufacturing infrastructure we've built over recent quarters. The process and personnel updates that have driven the results are directly attributable to the change we made in our operating leadership, bringing on Joe Traut as Chief Operating Officer in October of last year. Joe has rebuilt the operations team, making changes where needed and empowering others to act with urgency to deliver more products with greatly improved efficiency. Joe and his team have made great progress in six months, and I am confident we are seeing just the beginning of what they can accomplish going forward. We also strengthened our balance sheet in March through an oversubscribed $10 million public offering led by existing and new investors and including participation from directors and officers. This capital supports our growth plans, and I want to thank all of our investors for their support. Given the strength of our results and our visibility into the remainder of the fiscal year, we are increasing fiscal 2026 revenue guidance to a range of $29 million to $31 million compared to our previous guidance of $26 million to $28 million. This represents 52% to 62% growth over fiscal 2025 revenue of $19.1 million. We are also increasing fiscal 2026 adjusted EBITDA guidance to a range of negative $2.5 million to negative $2.7 million compared to our previous guidance of negative $2.5 million to negative $3.0 million. This translates into another quarter of roughly breakeven adjusted EBITDA in Q4. For comparison, adjusted EBITDA was negative $3.7 million in fiscal 2025 and negative $2.7 million in the first six months of the current fiscal year. As we look forward to Q4 and into fiscal 2027, we anticipate continued strong performance from our lead aerospace and cystoscopy production lines, along with our quickly ramping single-use ophthalmic endoscope line. And with the highest backlog in many quarters, we believe that the recent increases in Ross Optical revenues are sustainable and will continue to contribute to positive margins and bottom line profitability going forward. In addition to the continuation of these strong revenue-producing programs, we expect as many as five to six programs in the development pipeline to move to production in fiscal 2027. Three of these are scheduled to enter production over the next six months: a low-volume single-use device for small joint arthroscopy, an upper GI scope and a robotic surgery articulating rigid scope. While there are always timeline, yield and efficiency challenges when development programs are transitioning to production, our new operations team is deeply experienced and already working closely with the production and product development teams to ensure a smooth transfer and efficient drive to profitable volume production. This was a fantastic quarter for POC, and we believe it's just the beginning of leveraging our improved operational infrastructure. With high revenue supported by our existing programs, new programs entering production today and new production slated for the next six to 12 months, along with a strong outlook for Ross Optical revenue and high variable margins, we believe the recent positive trends will continue to drive growing profitability. In light of our operating performance and growing confidence in our production capabilities, which contributed to our successful capital raise, we are thinking about strategic investments in our business in two specific areas. First, we are investing in capabilities required to become the leading production company in micro-optics, including components and systems, especially those that are small and complex. We have learned through the ramp of the production programs I spoke to before that there are greater requirements to becoming a premier production company than we initially expected. Investments go beyond simply increased production capacity. We require investment in quality assurance, manufacturing engineering, supply chain management and other functions. We have made several of these out of necessity in recent months, and we'll continue on this path to enhance and stabilize these capabilities to be well prepared for the anticipated ongoing increase in production volume. Along with this, we continue to evaluate multiple options for potential updates to our manufacturing facilities. Second, we want to grow within the markets we currently serve, all of which continue to exhibit strong growth trajectories able to support the substantial long-term growth of POC. We participate in three primary markets: medical device, defense and aerospace, and satellite communications. We have previously considered satellite communications as part of aerospace, but have begun to treat that segment separately as we work to better understand market drivers and primary participants. Medical device, which remains our largest and most immediate opportunity, continues to move toward minimally-invasive procedures, smaller imaging systems and single-use devices. This aligns directly with our core strengths, particularly in micro-optics and digital imaging. Market data continues to support these observations with recent reports estimating the disposable endoscope market will grow at a compound annual growth rate of approximately 15% to 20% over the next 10 years. This is also where our Unity platform becomes important. Unity was designed to reduce development costs, time to market and execution risk through a modular imaging architecture that can support reusable and single-use endoscopic systems. As more customers look to bring advanced imaging products to market efficiently, we believe Unity can enhance our role as a development and production partner and provide a strong competitive advantage. Today, we have one Unity program in our product development pipeline and are in discussions with four additional sales prospects. The second major market is defense/aerospace, which is increasingly driving optical systems to smaller size, weight and power or SWaP. We believe there are opportunities in a broad range of products from autonomous vehicles to directed energy weapons. Interest and budgets for these types of systems have increased substantially given the wars in Ukraine and tensions in the Middle East. We are adding resources and emphasis here as evidenced by our recent participation at the SPIE Defense and Security Conference at the National Harbor in Maryland just two weeks ago. Our recently announced development agreement for a high-end jet engine inspection borescope is a good example of the complex optical opportunities where Precision Optics can be highly competitive. The third market focus is satellite communications and related infrastructure. Current market studies estimate this market to be growing at 15% to 25% per year. We see opportunities similar to the program which is currently our largest revenue generator in both ground-based and space-based systems as satellite networks continue to expand. Across medical device, defense/aerospace and satellite communications, we are finding a common theme that customers need smaller, more precise, higher-performance optical systems. We will be investing in go-to-market resources to expand our presence and customer reach within these sectors, and we will consider add-on capabilities as needed to complement and broaden our current offerings. Investments will be made with discipline and high expectations of returns, which we think is achievable given current market dynamics. With that overview, let me turn it over to Wayne to review the financials in more detail. Wayne?
Thank you, Joe. Let me expand on some of Joe's comments on the financial results. Starting with revenue. For the third quarter, total revenue was $8.7 million compared to $4.2 million in the year ago third quarter, an increase of $4.5 million or 108%. Revenue was also up compared to $7.4 million in the prior sequential quarter. Breaking it down, production revenue was approximately $7.6 million compared to $3.3 million in the year ago quarter and $6.4 million in the prior sequential quarter. Product development or engineering revenue was $1.1 million compared to $900,000 in the year ago quarter and $1.0 million in the previous quarter. Our aerospace program contributed $3.6 million in revenue during the quarter, while the single-use cystoscope program contributed $2.2 million in revenue, net of tariffs. Ross Optical revenue was $1.3 million in the quarter compared to $1.0 million in the sequential second quarter and $800,000 in the year ago third quarter. Both represented quarterly records. As we discussed last quarter, we successfully negotiated agreements with these customers to pass through tariffs without markup. Total revenue net of tariffs would have been $8.3 million. For the quarter, gross margin was 23.6% compared to 10% in the year ago third quarter and 2.8% in the prior sequential quarter. Gross profit increased to $2.1 million compared to $418,000 in the year ago quarter. As Joe discussed, the improvement was especially meaningful because it reflects the operational progress we had made in the business. Higher production volumes, better throughput and improved yields all contributed to stronger gross profit performance. The gross margin was also impacted by the recording of a $225,000 refundable credit from the Commonwealth of Massachusetts Economic Development Incentive program, which is earned by POC as we increase the number of employees at our Massachusetts locations. Given our anticipated growth, we expect additional refundable credits from the E-DIP program in future periods. Total operating expenses were approximately $2.1 million during the third quarter compared to approximately $2.5 million in the year ago third quarter. Breaking it down, SG&A expenses were $1.9 million during this quarter compared to $2.2 million in the year ago quarter. The decrease was primarily due to lower stock-based compensation and recruiting costs, partially offset by increased consulting, bonuses and bad debt expense. R&D expenses were $267,000 during the quarter compared to $211,000 in the year ago quarter, an increase of $56,000. R&D expenses primarily represent employee-related expenses to support product improvements, development of new technologies and standardized approaches to address opportunities in our three primary markets. As a result of the factors I've discussed, our net loss for the quarter was $108,000 compared to a net loss of $2.1 million in the year ago third quarter compared to a net loss of $1.8 million in the sequential second quarter. Adjusted EBITDA, which excludes stock-based compensation, interest expense, depreciation and amortization was positive $300,000 in the third quarter compared to negative $1.3 million in the year ago third quarter and negative $1.5 million in the sequential second quarter. This was a major milestone for the company and reflects the combination of record revenue, improved manufacturing performance, better yields and continued operating expense discipline. As Joe discussed, we believe the third quarter provides evidence that the investments we have made in operations leadership, manufacturing infrastructure and production capacity are beginning to translate into improved profitability. Cash at March 31, 2026 was $10.7 million compared to approximately $900,000 at December 31, 2025. During the quarter, we completed an oversubscribed $10 million public offering to support our growth plans. The offering included participation from both existing and new investors as well as participation from directors and officers. This financing significantly strengthened our balance sheet and provides additional flexibility as we continue to scale production, support working capital needs and invest in the growth opportunities Joe discussed earlier. Bank debt at March 31, 2026 was approximately $1.5 million. We continue to engage in productive discussions with our current as well as alternate commercial banks to improve our loan facilities commensurate with our growth plan. As Joe mentioned, based on the strength of our third quarter results and our visibility into the remainder of the fiscal year, we are increasing our fiscal 2026 revenue guidance to a range of $29 million to $31 million compared to our previous guidance of $26 million to $28 million. We are also increasing our fiscal 2026 adjusted EBITDA guidance to a range of negative $2.5 million to negative $2.7 million compared to our previous guidance of negative $2.5 million to negative $3.0 million. With year-to-date revenue of $22.8 million and positive adjusted EBITDA achieved in the third quarter, our updated outlook reflects the improved operating performance of the business, continued strength in our core production programs and our expectation that the recent positive trends will continue into the fourth quarter. I will now turn the call back over to Joe for some final comments.
Thank you, Wayne. Before we take questions, let me recap just a few points. First, Q3 revenue reached a new quarterly record of $8.7 million, driven by continued strength in our core production programs. Second, we achieved positive adjusted EBITDA, which is a major milestone for Precision Optics and demonstrates the impact of our strong production volumes, improved yields, better throughput and overall impact of the operational changes we have put in place. Third, with the ongoing strength of our base production programs, newer production programs ramping today and a number of programs slated to move from development to production in fiscal 2027, we anticipate continued profitable growth. And finally, we strengthened the balance sheet through our oversubscribed $10 million public offering and increased our full year guidance based on the strength of our results and visibility into the fourth quarter. In many ways, this quarter demonstrates the business model we have been building toward. Our production programs are scaling, our operations are improving, our pipeline remains active, and our financial performance is beginning to reflect that progress. We still have work ahead of us, but we are encouraged by the trajectory of the business and believe Precision Optics is well positioned to create significant long-term value for shareholders. With that, we'd be happy to take any questions.
The operator provided instructions.
All right. Darcy, this is Robert. While we wait to see if anyone queues up through the live teleconference line, we want to remind everyone that's listening through the webcast that the operator provided instructions. We do have a couple of questions online, Joe and Wayne. So why don't we get to those first here. The first question here is, can you comment on revenue expectations in Q4 for aerospace and the cystoscope? And what do we expect in Q1 for this as well?
So, generally speaking, we expect both of those programs to continue at similar levels that we saw in Q3 with one caveat: the aerospace program's customer asked us to pull back a bit in Q1 and Q2. So for that particular program, we may see roughly a 15% to 20% pullback in Q1 and Q2. We expect that some of the other programs that are coming online will make up that difference. But, generally speaking, over the long run, we expect both of those programs to continue at the same levels and even to continue growing.
All right. Very good. The next question here is, can you discuss more about the customer requested slowdown, and what happens if it moves to a license model?
So, the customer requested slowdown is for the aerospace program for which there is no licensing model. We have heard from our customer that they take the assembly that we make and then they combine it with components from many other suppliers and build it into satellites. That process of combining it and building it into satellites is running slower than they anticipated. So they've had some challenges on their side. Because of that, they have excess inventory of the parts that we're building, and that's the reason for the slowdown. They've also said very clearly that they expect to be back up to similar levels as before once we get through these next couple of quarters. So we see this as a bit of a blip and not a long-term issue.
And then maybe just on the licensing side.
To the other product, yes, there is a licensing option for both of our single-use programs. That licensing option allows us to duplicate our production line in our customer's facility or another facility of their choice. The cystoscope customer has funded us to build out another production line in our facility and has asked us to build a production line in their facility. We see this as a positive for a couple of reasons. First, they invoked this clause by building the production line in their facility, not a third party. We always expected that they would want to have duplication of supply for this critical component. Duplicating it within their own facility is an ideal situation for us as opposed to going to a competitor. Second, for the units that they build in their facility, we'll collect a royalty. So at the end of the day, we benefit financially when we're either building things in our facility or when they're building things in their facility. We've always known that there would be some mix. Right now, we'll be running basically three shifts on two lines. They'll be running one shift, maybe one and a half shifts on their line. So that ends up being a pretty good mix. We see this as a way for that product's impact to continue to grow even as our production levels stay the same or grow by a small amount.
All right. Very good. So that investor question needs to be expanded upon, please let us know. Again, if you're in the webcast portal, please type your question into the Ask a question feature there on the screen. Next question pertains to Unity. With the adoption of Unity, is the timeframe for conversion of R&D into production shortened?
It is. That's one of the main benefits of the Unity platform, and that's one of the reasons that we put Unity together: we expected the reduction in time to market would be attractive to our customers and to us. We're starting to see this bear out. We only have one program right now in the engineering pipeline that's using Unity, and it has benefited from the platform. The time to production is shorter. I would expand on this and say that we launched Unity about 15 months ago. I expected that by now we would have a product development pipeline full of Unity projects and we don't — we have one. The good news is that our sales and marketing team has been doing a good job, but we had to figure out the best way to market the Unity platform because it is a slightly different message than simply saying we can design an endoscope and build it for you. The good news is that we now have four customers that our sales team is talking to about potential Unity projects. There is no guarantee they'll all come into the engineering pipeline, but we are starting to see more traction. We expect that as we move forward, Unity will contribute to an increase in programs in the product development pipeline and it will help move projects into production faster than we've been able to do in the past.
All right. Very good. Next question here is on Ross Optical. Do you view the significant increase in sales for Ross Optical this quarter as sort of a new run rate for that business?
Yes, that's a great question. We don't have a precise and certain answer yet, but we are analyzing the causes. One factor is that customers held back earlier in this fiscal year because of uncertainties surrounding tariffs. With the Supreme Court ruling, there seems to be some settling of where the tariffs are going to be, and customers who had been holding out are now reordering. Another possibility is some customers are building excess inventory because of supply chain concerns, though we think that is less likely for optics since those supply chain disruptions tend to be region-specific. We are also seeing new customers with meaningful-size orders and existing customers ramping up volumes as their businesses grow. Given what we're seeing — new customers and orders, and returning demand — we believe that the majority of the increase is driven by an uptick in market need and we view this as potentially sustainable.
All right. Very good. Next question here is about manufacturing capacity. Can you talk more about growing out the facilities, where the company stands now square footage-wise or otherwise? And where will it be roughly a year from now? As an extension to that, what is the capacity utilization currently, and where can we get to on that?
We've discussed facility updates in prior calls. We moved our professional roles — roles other than manufacturing — to a new facility closer to Boston. We moved the engineering team in Maine to a new facility in South Portland and moved production from Maine down to our Massachusetts facilities in Gardner, where our headquarters is located. We have talked about the need to update Gardner and the manufacturing facilities there and we are evaluating multiple options for the best approach. Today, we occupy three buildings in Gardner. One of those buildings has an enormous amount of space that our landlord rents out to various tenants, and there's typically additional space available for us. Rather than give a single capacity number today, what I can say is that if we decided to and needed to, we could expand the footprint of the Gardner facility to double the size it is today. So we do not expect facility constraints to impede rolling out new production programs. That said, being in three buildings is not ideal and some of the space is not at the level we'd like in terms of modern clean rooms, air handlers and the like. We will need to update these areas: the question is whether to keep everything in Gardner, move to a different facility, or consolidate into one building, and those are the questions we are evaluating now. We don't expect the facility work to delay current program rollouts, but it is part of our 12-month plan to ensure we are ready for continued growth.
All right. Very good. The next question here is regarding pipeline. You mentioned four projects in the pipeline. Is that correct? Over what time frame will you get answers on these? And where in magnitude of revenue potential do these projects fit compared to other projects?
I believe that question refers to the four Unity prospects I mentioned, which are in our sales pipeline rather than the engineering pipeline. There are many more programs in our broader sales funnel. Our general target for new programs, particularly Unity programs, is that they would ultimately generate $1 million to $3 million per year in revenue once in production. As they progress through the engineering pipeline, they typically represent $1 million to $2 million of engineering revenue over a couple of years as they move toward production.
All right. Very good. The next question here is regarding tariffs. What is the scale of tariff refunds you expect? And will those be passed on to customers?
We're still reviewing the full scale of potential tariff refunds. In situations where we've negotiated agreements with customers — for the cystoscope and the satellite line — we will be refunding tariffs to those customers. We do expect not to have to refund the entirety of the tariff refunds and therefore think this will be a net positive to the bottom line, but it will reduce reported sales at the time those credit memos are issued.
All right. Next question here: When will you be able to talk more about specific customers and projects in order to — as other optics companies are able to highlight contracts to a greater degree — when will you be able to provide more color to attract investor and customer interest?
We would love to name specific customers. We discuss this regularly with our customers. The challenge, particularly with very large customers, is that they are often hesitant or do not allow us to name them. Sometimes, as ramps proceed and product characteristics become public, it becomes obvious to the industry who the customer is, and in those cases we may be able to confirm it. We will continue to push our customers for permission to name them, but I don't have a prediction for when we'll be successful.
All right. Next question regarding the cystoscope line. As you mentioned in previous calls, pending improvements in the cystoscope line: have all of these improvements been realized in the third quarter?
Not yet. We've made significant progress: yields are now consistently above 90%, compared with previous yields typically in the 80% range or lower. Achieving 90% in Q3 was a major accomplishment, but we have a series of additional improvements in partnership with our customer to reach consistent yields above 95%, and possibly 97% or 98%. Improvements include updates to procedures, tools and fixtures. Those changes take longer because they involve process modifications, not just training. We are also working to reduce touch time and increase throughput per technician. We expect to see further improvements in Q4 and into next year. As volumes increase, the return on investment for more significant tooling and fixture changes will improve, enabling further throughput gains.
All right. Very good. The next question is: does the industry recognize your momentum? And if so, at what point do you expect revenue to 'hockey stick'?
I'm not going to predict when a hockey stick inflection will occur. We're focused on driving programs into the engineering pipeline and converting engineering programs into production. We see revenue increasing in a healthy way as we move forward. Regarding industry recognition, our Unity marketing efforts and facility improvements have given customers greater visibility into our production capabilities. Having customers visit and see production lines enhances credibility: they see the top-notch engineering plus the ability to roll into production. We sense momentum and believe these improvements will accelerate our ability to bring new programs into engineering and then production, but I cannot provide a specific timing for a dramatic hockey stick increase.
All right. Very good. A question more broadly: talk about expectations for profitability.
This quarter was essentially breakeven, slightly positive. At the current revenue levels and with continued improvements, we expect results to continue to move in a positive direction. We do have the aerospace program pullback to manage through, but other programs are coming online. We believe we can achieve breakeven and then move beyond breakeven relatively quickly because Ross Optical and other incremental revenues have very high variable margins and leverage our existing infrastructure. We view this quarter as an inflection point and expect growing profitability over time.
All right. Very good. Well, with that, Joe, I will turn it over to you for any closing remarks.
Thank you, Robert. Thanks, everyone, for joining us on the call today. We look forward to speaking with you again in a couple of months. Thanks, everyone. Have a good evening.
The conference has now concluded. Thank you for attending today's presentation. You may disconnect.