PRECISION OPTICS CORPORATION, INC. Q4 FY2024 earnings call

• In fiscal 2024, the company faced loss or pullback of significant programs from fiscal 2023, but rebuilt revenue by moving programs from product development to production and bringing in new programs. The product development segment grew nearly 24% year-over-year. • Started fiscal 2025 in a stronger position with only one program contributing ~$400,000 not continuing. First quarter of fiscal 2025 has suppressed revenue but expects a step increase in Q2. • Added engineering talent, rolled out new platform product, and updated management structure. Hired new VP of Sales and Marketing, Clay Schwabe. Updated manufacturing infrastructure and implemented new ERP system. • Discussed details of programs impacting revenue in Q4 and Q1, including the defense/aerospace program, robotic laparoscopy product, and otoscopy product, and their expected recovery in Q2 and beyond. • Ross Optical is still feeling the impact of the industry-wide slowdown but starting to see some customers place follow-on orders.

For the fiscal year, revenue was $19.1 million, a decrease of $1.9 million from the previous year. Excluding one-time technology license revenue, fiscal 2024 revenue was down 6.6% compared to fiscal 2023. The product development/engineering pipeline segment posted record revenue of $8.3 million, representing a 24% year-over-year increase. Ross Optical saw a sharp drop in revenue due to the industry-wide slowdown in optical component sales, with a year-over-year reduction of approximately $1.5 million. At the micro-optics lab, Q4 revenue was about $260,000, nearly $1 million lower than Q3's $1.2 million.

• Expect a sharp increase in revenue in Q2 with record quarterly revenues before the end of fiscal 2025. • Adjusted EBITDA breakeven quarterly revenue levels are expected to be approximately $5.5 million, aligned with revenue expectations for Q2 and beyond. • Production single-use programs starting to grow in Q2, re-ramp of defense/aerospace program restarted, and other growing programs will drive higher revenues.

• Program delays in the latter half of Q4 and Q1 that impacted revenue. • Industry-wide slowdown in optical component sales affecting Ross Optical. • Potential specification failure issues in the defense/aerospace program, although later determined to be a measurement technique issue, but still a risk during the investigation period.

Q: On previous calls mentioned, we would complete a $1.2 million defense order by August ‘24 and follow-on orders were expected. Was it completed and have we seen any follow-up discussion or orders?

A: The defense/aerospace program was put on hold by the customer for a couple of months. We've restarted shipping and the customer has given new orders even while on hold. We expect to finish deliveries in the next quarter and have follow-on orders.

Q: Can you walk through what you believe your contribution margin is on the various programs? Is there a target contribution margin you look for?

A: Depending on the lines of business, margins differ. Defense/aerospace work in the micro-optics lab has margins in excess of 50%. Manufacturing margins for single-use product are in the 30% range. Ross Optical business has higher margins at full utilization and lower margins with lower revenues. Product development margins are in the low to mid 40s.

Q: For the aerospace/defense program that was put on hold but is now back up and running, can you expand on what some of the factors were that forced the hold? Was any of this related to POC, or was this unrelated?

A: The hold was due to measurement issues with sensitive laser beam measurements. It was a measurement error caused by the particular devices used to make the measurements, not a problem with what POC was doing or producing. We did troubleshooting and test assemblies, and the customer allowed restart of production after confirming it was a measurement issue.

Q: For the single-use program, you mentioned revenue expectations have increased. Can you provide any commentary on the dynamics leading to the increase?

A: The single-use product's customer's product received FDA clearance and is cannibalizing their own market. Positive feedback from the market and surgeons led to increased expectations for deliveries, thus increasing the rate at which they want product from us.

Q: Will the new product you are researching and offering change the model of the company by increasing R&D expenses and increasing gross margins? Presumably now you can bill the R&D expenses for custom client products, but in the future the clients will use your platform, which is not entirely custom and you have to pay the R&D expenses by yourself. How will that affect gross margins, R&D expenses, profitability? And sort of adding to that, how does this platform sort of allow companies to transition from entry-level stage to a more established pipeline customer?

A: The platform product requires some internal R&D to create a baseline design. It accelerates time to market and allows charging for baseline designs, which should help gross margins on the product development side go up slightly. It doesn't remove the time and materials charge for customizing for customers but reduces time to market and risk, bringing customers into the product development pipeline.