NASDAQ:POCI Precision Optics Q2 2025 Earnings Report $4.32 +0.07 (+1.65%) As of 04:00 PM Eastern This is a fair market value price provided by Polygon.io. Learn more. Earnings History Precision Optics EPS ResultsActual EPS-$0.15Consensus EPS N/ABeat/MissN/AOne Year Ago EPSN/APrecision Optics Revenue ResultsActual Revenue$4.53 millionExpected RevenueN/ABeat/MissN/AYoY Revenue GrowthN/APrecision Optics Announcement DetailsQuarterQ2 2025Date2/13/2025TimeAfter Market ClosesConference Call DateThursday, February 13, 2025Conference Call Time5:00PM ETUpcoming EarningsPrecision Optics' Q3 2025 earnings is scheduled for Tuesday, May 13, 2025, with a conference call scheduled on Wednesday, May 14, 2025 at 5:00 PM ET. Check back for transcripts, audio, and key financial metrics as they become available.Conference Call ResourcesConference Call AudioConference Call TranscriptPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfilePowered by Precision Optics Q2 2025 Earnings Call TranscriptProvided by QuartrFebruary 13, 2025 ShareLink copied to clipboard.There are 4 speakers on the call. Operator00:00:00Please note this event is being recorded. I would now like to turn the conference over to Robert Blum with us and partners. Please go ahead. Speaker 100:00:08All right. Thank you, Betsy, and to everyone joining the call today. As the operator mentioned, on today's call, we will discuss Precision Optics second quarter fiscal year twenty twenty five financial results, and this is for the period ended 12/31/2024. With us on the call representing the company today are Doctor. Joe Forkey, Precision Optics' Chief Executive Officer and Wayne Cole, the company's Chief Financial Officer. Speaker 100:00:33At the conclusion of today's prepared remarks, we will open the call for a question and answer session. 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. Speaker 100:01:42Listeners 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 as 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 the results 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 Doctor. Speaker 100:02:26Joe Forkey, Chief Executive Officer for Precision Optics. Joe, please proceed. Precision Optics. Joe, please proceed. Speaker 200:02:33Thank you, Robert, and thank you all for joining our call today. I'm pleased to be speaking with you today on the heels of a particularly strong production quarter with an ongoing increase in demand from our two largest customers, which sets the stage for continuation of this growth in upcoming quarters and into the foreseeable future. As we discussed in our last call, the transition of the endoscopy market to CMOS based endoscope systems, many designed now for single use, provides a major opportunity for POC given the investments we have made over many years in this technology. With the formal market launch of our Uniti Imaging platform just two weeks ago, we have further enhanced our position in this substantial and rapidly growing marketplace. Coupling recent production revenue increases in the largest backlog in recent history together with our strong engineering pipeline and positive response to the formal launch of Uniti, we are poised for substantial and sustainable growth in both the near and long term. Speaker 200:03:38As we've discussed over many of our recent calls, we have a number of programs that are reaching key inflection points, where either the programs are moving from product development to production or where the early production output is ramping. In particular, our single use stethoscope program and more recent defense aerospace program have been ramping over the last couple of quarters. The increase in production from Q1 to Q2 driven largely by these two programs was 42%. While this was not quite as high as we anticipated during our November call, it still represents the largest quarter over quarter production increase in many years and the highest production revenue since fiscal twenty twenty three. Given our strong backlogs for production programs, along with engineering revenue expected to return to more normalized levels in the second half of the year, we expect continued growth for the remainder of fiscal twenty twenty five and beyond. Speaker 200:04:37We are currently forecasting increasing revenue over the next two quarters with Q4 at approximately $6,000,000 which would be a quarterly record for POC and will result in positive quarterly adjusted EBITDA. As we discussed on our last call, nearly all new endoscopes today are designed using CMOS sensors and often can be made at price points that support a single use model. These disposable single CMOS based endoscopes provide significant benefits over traditional endoscope designs. Surgeons always get brand new scope image quality. Hospitals don't need to track scopes through reprocessing procedures. Speaker 200:05:18And perhaps most importantly, the single use scopes eliminate any chance of cross contamination from one patient to another. Beyond these benefits, CMOS based scopes often have higher image quality than those based on older imaging technologies. Now that CMOS sensors have been available for medical devices for a number of years and with some big name early adopters, particularly Boston Scientific, demonstrating that single use endoscopes are technically, clinically and economically viable, the entire endoscope market is moving in this direction. This has resulted in a single use endoscope market with annual growth rates estimated to be as high as 20% per year. POC is uniquely situated to benefit from this accelerating trend. Speaker 200:06:08Anticipating the movement of the endoscope market to the broad use of CMOS based designs, POC began aligning its technical base in this direction many years ago. Our historic focus on micro optics design, fabrication and assembly has resulted in proprietary techniques associated with illumination and imaging at sub-ten millimeter and often sub-two millimeter sizes in line with the characteristic sizes of medical endoscopes. When OmniVision, a market leader in CMOS component production, first announced nearly ten years ago its intention to develop a family of medical grade CMOS sensors, POC's micro optics were a natural complement. POC partnered with OmniVision to build the first cameras based on these OmniVision sensors gaining critical experience with this new technology, experience we continue to expand on today. We further enhanced our capabilities in this area three years ago, adding an electrical engineering team that specializes in processing of images captured by CMOS based endoscopes. Speaker 200:07:13During this time, we also continued to develop our know how with ongoing development of new design approaches and new approaches to manufacturing these devices. The result of these long term strategic efforts is that today POC is the best positioned company from a technical standpoint to develop next generation CMOS based endoscopy systems. With the single use market growing as fast as it is, our sales team and senior leadership set out more than a year ago to evaluate our position in this market and to determine the best way to creatively leverage our years, indeed decades of experience as we present ourselves to prospective customers. The outcome of this evaluation was a recognition that POC's experience puts us in a unique position to establish baseline CMOS endoscope platform designs that can be used as a starting point for each new customer's development program. While customer specific requirements will always drive the final endoscope design, many of the core elements of the endoscope and imaging system will often be very similar. Speaker 200:08:25And with our extensive experience, the required customization of these baseline designs will often take the form of a modification based on modular design elements used by POC on previous programs. Our strategy of maintaining as much intellectual property related to scope design as possible even when executing on customer programs has resulted in a strong base of intellectual property and know how. The question has been how to monetize this value by creating proprietary endoscopes without putting us in direct competition with our customers. We concluded the approach of offering customers standard baseline designs that are then customized often reusing modular design elements would achieve a similar goal to creating a proprietary product but by different means. We believe this approach, which is the basis for our new Unity platform, will revolutionize the way new endoscopic systems are developed. Speaker 200:09:27In some sense, POC has been in the forefront of developing next generation technology for many years. With the advent of Unity, we are now in the forefront of developing next generation design processes. Combining these two capabilities, best technology with best design process further cements our competitive advantage as the next generation endoscope partner of choice. Unity provides significant benefits to our customers. Perhaps the most appealing benefit is an accelerated time to market. Speaker 200:10:02Because we have a head start on the design process with our baseline designs, customers can begin system integration and user testing earlier, reducing development cycles and speeding up the path to production. This is a benefit to both our customers and to POC as our interests are well aligned to get to the commercialization stage faster. By leveraging previously validated design elements and by minimizing the need for bespoke engineering efforts to achieve prototypes, Uniti reduces the uncertainties inherent in developing and testing novel imaging devices and results in potential cost savings as the risks of redesign are significantly reduced. And finally, Unity supports the development of multiple products from a single design framework offering scalability for growing product portfolios. We expect that these benefits will enhance POC's competitive position in this market resulting in an increased rate of new opportunities. Speaker 200:11:06Ultimately, we believe this will lead to a larger product development pipeline that could grow to double the size it is today. This will require an increase in the size of our engineering team, but we are confident we can build the team as we experience this growth. Furthermore, because the time to market for each program will now be reduced, we expect an even greater acceleration in the rate at which programs are moved to production, which is an important growth driver for our overall business. We launched Uniti the January at Photonics West, one of the world's largest optics conferences followed immediately during the February with presentations at MD and M West, a key conference for medical device design and manufacturing. The response at both conferences was extremely positive with multiple potential customers already contacting us with new development opportunities. Speaker 200:12:05The launch of Uniti caps off a year long preparation, which included a significant effort by our technical team during Q1 and Q2 to fully define and document the baseline platform designs. This resulted in lower product development revenue and higher R and D costs during this time period. The second quarter also coincided with slowdowns or holds on a few of our development programs caused by customers waiting for regulatory clearance or financing events. With the major push on our technical resources to support the Unity launch now behind us and with most of the customer initiated delays resolved, we expect an increase in product development revenue in Q3 and especially in Q4, even before considering the impact of new projects coming from the Unity launch. Production revenue in Q2 was up substantially over Q1 and is expected to reach record levels in Q3 and Q4. Speaker 200:13:05This is driven in large part by our single use stethoscope and more recent defense aerospace programs. Both of these programs now have multimillion dollar backlogs and both customers support the work we are doing to expand clean room space, hire new assembly technicians and stand up multiple shifts and or lines to address the backlog and expected long term ramp. As a reminder, the first of these is our first single use program, which is a cystoscope imaging assembly that we designed and now manufacture for our customers' next generation AI powered surgical robotic platform for treatment of benign prostate hyperplasia. Our customer, a dominant player in this market, has a significant installed base of robotic systems deployed in hospitals internationally. The single use imaging module we designed for them received FDA clearance in August and is now in their sales team's capable hands. Speaker 200:14:06We received a $9,000,000 production order in May of last year from this customer and we currently estimate that we will deliver approximately $2,700,000 of this product during our current fiscal year. Like our customer, we are optimistic the market for treatment of benign prostate hyperplasia, which is already a large market, will expand as a direct result of their solution. The second major production program is for the aerospace assembly we've discussed previously. This program leverages POC's proprietary manufacturing technology developed for high precision micro optic systems to produce an extremely precise and high value assembly. We first announced an initial production order in September 2023 and have received numerous follow on purchase orders since then. Speaker 200:14:58We are doubling our production capacity to achieve an annual run rate in the $3,000,000 to $4,000,000 range before the end of this fiscal year. In addition to these two major programs, production continues on seven additional programs. Four of these are production programs that have been running pretty steady now for multiple years, contributing on the order of $4,000,000 in annual revenue. In addition, our surgical robotic scope is resuming production this month. A new sub assembly used for a retinal camera just started production in January and our second single use program, which is for an ophthalmic application is slated to start production before the February. Speaker 200:15:41With all of this new and continuing production activity, we expect production revenue increases to drive overall revenue increases in the second half of fiscal twenty twenty five, helping us to achieve record levels in the fourth quarter. Over the last several quarters, we have seen our Ross Optical Components business drop in level out at a rate of approximately $1,000,000 per year due to short term market forces that we've discussed previously. At the recent Photonics West Conference, we continued to hear from colleagues that their experience is similar to ours. We expect to see this part of our business remain steady in Q3 and Q4 and to begin to recover near the end of fiscal twenty twenty five and beginning of fiscal twenty twenty six. All in all, we are confident we will continue to see near term sequential quarterly revenue increases driven strongly by production increases and leading to improvements in profitability in Q3 and Q4. Speaker 200:16:45At the risk of overusing the term, I do believe this is an inflection point for POC. The revenue downturn we experienced at the beginning of fiscal twenty twenty four has persisted somewhat longer than originally expected, but this is largely because the programs we are managing now are larger, the customer is better established and shifting significant programs to production just takes time. While our Q2 revenue came in slightly lower than expected, we nonetheless foresee capacity limitations based on demand coming from existing customers as the main challenge for us to overcome in reaching significantly higher production rates. With robust plans in place to address these capacity requirements, this is an extremely positive sign that the drivers of our anticipated growth are valid, real and significant. With that, let me turn it over to Wayne to review the financials in more details. Speaker 200:17:43Wayne? Speaker 300:17:45Thank you, Joe. And before we get started, I just want to clarify over the last several quarters, we've seen our RAS optical components business drop in level out at a rate of approximately $1,000,000 per quarter. Speaker 200:17:57Quarter, not per year. Thank you. Speaker 300:18:00Okay. So let me explain on some of Joe's comments on the financial results, starting with revenue. For the second quarter, revenue was $4,500,000 compared to $4,800,000 in the second quarter of fiscal twenty twenty four. While somewhat less than our expectation of $5,000,000 as we discussed in our last call, the increase of 42 in manufacturing revenue over the prior quarter that Joe mentioned earlier was still an achievement despite some of the expected throughput pushing into our third quarter. For the quarter ending 12/31/2024, gross margins were 24% compared to 30% in the quarter ending 12/31/2023. Speaker 300:18:47Like the last two prior sequential quarters, product development billings were impacted by the assignment of certain engineering resources towards non billable projects, specifically finalizing the company's Uniti Imaging Platform offering that was so well received there are two most significant trade show just weeks ago. We have continued to scale our manufacturing team in preparation for increased production revenues well beyond the levels we reported today. These items together with a lower sales volume impacted gross margin. We expect gross margin to recover as manufacturing continues to scale and revenues increase, particularly in the fourth quarter. We increased research and development spending in the quarter from $222,000 to $318,000 from the quarter ended 12/31/2023. Speaker 300:19:42R and D expenses likewise increased $284,000 to $718,000 during the six months ended 12/31/2024 compared to $434,000 during the six months ended 12/31/2023. Similar to the two prior sequential quarters, we incurred significant internal R and D expenses that we've already discussed. Selling, general and administrative expenses or SG and A for the quarter was $1,700,000 a decrease of over $200,000 compared to $1,900,000 last year, primarily due to lower bad debt expense and lower stock based compensation. SG and A expenses were essentially flat in the six months ending 12/31/2024, compared to the same period in the prior year. And while these costs may be similar and predictable, the nature of our spending is more aligned with our business strategies. Speaker 300:20:45As a result of the lower revenue, our net loss was $910,000 for the quarter ending 12/31/2024, compared to a $704,000 net loss last year. Adjusted EBITDA, which excludes stock based compensation, interest expense, depreciation and amortization was negative $555,000 in the second quarter of twenty twenty five compared to a negative adjusted EBITDA of $269,000 last year. As we look to achieve our goals for the second half of the fiscal year, we expect adjusted EBITDA breakeven quarterly revenue levels to be approximately $5,500,000 We believe we will achieve revenue levels of at least $5,000,000 for the third quarter ending 03/31/2025 and at least $6,000,000 in the fourth quarter, which will result in adjusted EBITDA beyond breakeven. Our cash balance at 12/31/2024 was approximately $200,000 with availability on our line credit of $350,000 As we have mentioned in prior calls, we are in the process of finalizing our facilities plans to better access the pool of talent we need to support growth while we expand our manufacturing footprint and cleanroom space. Our objective is to balance manufacturing with reasonable labor and overhead costs, while broadening the access to the professional talent we need to support the growth we foresee. Speaker 300:22:25We remain confident about the attractiveness of this cost effective approach to scaling more dramatically in the future. We expect to announce more about these plans in the coming weeks and months. I will now turn the call back over to Joe for some final comments. Speaker 200:22:42Thank you, Wayne. Let me finish by summarizing a few key points. First, the production ramp we have been forecasting is now in process with a 42% sequential increase in Q2. With a strong backlog and an expected return of normalized engineering operations, we believe we will see continued growth in the third and fourth quarters. Our outlook for single use is extremely high. Speaker 200:23:09We have developed a unique set of technologies and a unique product offering in our Unity platform to accelerate speed to market and reduce development risk. The launch of Unity is expected to be very positive for us. This momentum with single use is being matched with continued strength from our defense and aerospace programs. And finally, the production backlog we see today is as large as it has ever been. We have multiple orders that stretch out for many months and in some cases for years with a number of customers encouraging us to ramp capacity as quickly as we can. Speaker 200:23:47This is a much different position than we have been in, in the past and it provides better visibility into the growth we expect in the coming quarters. With all of these positive indicators, we are very optimistic about the future prospects of the company. To all of you on the call, I thank you for your continued support of PrecisionOptics. We'd be happy to take any questions at this time. Operator00:24:12We will now begin the question and answer session. Speaker 100:24:50Betsy, while we wait to see if anyone comes in through the live teleconference line, Joe and Wayne have got some webcast submission questions here that maybe you can look to address. The first one here is, can you provide an update on the defense contracts, especially the ones with some of the specification problems that seem to have stalled and then started back up? Are there follow-up contracts on any of these? Speaker 200:25:21Yes, sure. So we have two significant defense aerospace programs that are running today in production. One of them has been running for many years and those who have listened to these calls for many years will recall that we've been talking about this one, really for four or five years all the way back since before the pandemic. That program is continuing to run quite steadily at between $2,000,000 and $2,500,000 a year. We have a great relationship with that customer who is one of the largest defense contractors in the country. Speaker 200:26:01And they tell us that they expect to place reorders every year as we finish each order. So that one we expect will continue at $2,000,000 to $2,500,000 run rate for the indefinite future and has been running quite smoothly. The second one, which I think is the one that the questioner is asking about is our newer aerospace program. We did comment on it a little bit in the script. This is the one that had some challenges in Q1, which we talked a little bit about. Speaker 200:26:31But just to remind everyone, our customer, who again is a very large company, our customer asked us to stop the line because they were measuring units that we had already delivered in finding specifications that weren't satisfying the requirements. It turns out that it was a measurement error with some of the inspection equipment that really speaks to the level of precision that we're working with. It's very difficult to measure the performance of these units. So the system that they were using was a little different than the system we were using. At the end of the day, they continued to keep all of those units and they allowed us to restart the production towards the end of Q1, beginning of Q2. Speaker 200:27:17That's one of the programs that I referred to in our comments that Wayne and I referred to as capacity limited right now. So we have received more orders from that customer. They've asked us to ship as quickly as we can. We expect to get to a $3,000,000 to $4,000,000 run rate by the end of this fiscal year. And we're working very aggressively to expand the space requirements that we have, the fixtures, the assembly techs. Speaker 200:27:45And so all of that is in process Okay, great. Speaker 100:27:58Okay, great. Next question and sort of put a couple of them together here. Maybe just expand a little bit more on exactly how maybe the Unity platform works? Speaker 200:28:10Yes, sure. So as you can tell from our comments, we're pretty excited about the Uniti platform. We did do a soft launch over the last six to twelve months and we have a couple of customers who are coming online. We expect in the near term because of that. The response at the shows was quite positive and we have a number of leads from that. Speaker 200:28:34To get into more of the details, let me just say, the idea here is we have these baseline designs. The designs are split up according to the size of the endoscope. And the reason for that is that there are various components in the endoscope, predominantly the CMOS sensor, but also some of the illumination systems that will be similar for similarly sized endoscopes, but different for endoscopes of different sizes. So, we have four categories. We have two of them that we formally launched. Speaker 200:29:06The first one is for endoscopes that are less than two millimeters, and the second is for endoscopes that are between two millimeters and four millimeters. And so once we engage with our customer, we identify their requirements and whichever of those categories that their endoscope requirements fall into based on size will determine the baseline design that we start their program with. Once we identify that, we'll engage with them, we're able to deliver to them an endoscope and an electrical system, a digital imaging system, a camera control unit box, if you like. We can deliver to them the endoscope and the camera control unit that's basically off the shelf. And this acts as the very first prototype which we can deliver to them in a matter of days to weeks as opposed to a traditional design process that will take weeks to months. Speaker 200:30:01And so that already accelerates the timeline for them to get started with things like looking at image quality, looking at how the electronics interface with their larger system, all of that accelerates the timeline quite dramatically. As soon as we do that, we work with them to define the specifications that they need for their specific endoscope. And then we start looking at how are we going to modify the design that we already have. And what we expect is that somewhere between seventy five percent and ninety percent of the design that we already have will be able to use without making any changes. That other 10% to 25% or 30% that we have to change in many cases, we'll be able to plug in a design element that we've used in another program. Speaker 200:30:49So as a specific example, we may go from a LED at the distal end illumination system to a fiber optic illumination system. We've built endoscopes with both of those. Our platform model will have one version, but we could swap out that illumination system by using the system we had before. All of this accelerates the timeline. We'll continue to modify the baseline design with these specific modifications, customizations our customer needs. Speaker 200:31:19Then when we get to the final prototype stage and we have to go to do all of the regulatory testing, because we're using many design elements that have already gone through regulatory testing, the likelihood that we passed the regulatory testing on the first shot is quite high. We always will have to do the regulatory testing because there will be some changes, but because most of the design elements that are embedded in there have gone through regulatory testing before, the risk associated with failing the regulatory testing is much lower and that also accelerates the timeline, reduces risk to our customers. So at the end of the day, we expect that we'll be able to accelerate the time to market by somewhere between six to twelve months depending on the complexity and specifics of the particular endoscope product. And that for our customer is worth a ton. And for us is worth an awful lot because our business model of course is to get programs from the engineering pipeline into production. Speaker 200:32:15So that's a little more detail on exactly how this works. People who are interested in more detail can go to our website, they can go to our LinkedIn page. There's lots of information out there. Part of what we did when we launched this at the Photonics West Show a couple of weeks ago is update all of our online presences in order to be able to communicate more details about this out to potential customers. So I'd encourage everyone to go to our website, take a look. Speaker 100:32:45Okay, great. I think hopefully that answers the question. Again, just reminder to everyone, if you're dialed in to queue up and ask a question or you can submit your question through the Ask a Question feature on the webcast player. Next question here, Joe, you talked about achieving levels of about $5,000,000 in Q2. What happened between sort of that mid November timeframe and the end of the quarter? Speaker 100:33:14I think you talked a little bit about this, but maybe if anything else you can expand upon? Speaker 200:33:19Yes, sure. So we did comment on this in the script, but let me try and summarize fairly succinctly here. There were really two parts of the business that came in a little lower than we anticipated. The first one was the product development group and there were really two reasons for this. There was a fair amount of work that we needed to get done in order to launch the Uniti platform in January. Speaker 200:33:44And I think we underestimated a little bit the amount of work that we would need our engineering teams to put in, in order to finalize the designs and in order to work with our sales team in order to get the language exactly right in the sales sheets and the diagrams for the sales sheets, those sorts of things. That all took a little bit longer than we had anticipated. The second thing is that there were a couple of our product development programs, where customers had events that caused them to either slow down or to postpone some of the activities into later quarters. These are things like regulatory approval that didn't come through because there was another part of the the system that they had to go back and update. There were one or two customers that were waiting for some financing events and so they told us that we needed to throttle back a little bit while they got those things resolved. Speaker 200:34:40The good news is that none of these were cancellations of programs. They were all adjustments to the timeline. Most of those have been resolved in Q3. One or two are still stretching out to get restarted in Q4. So there are a couple of those issues that we had not foreseen in the November. Speaker 200:35:05And then the third one is that, while almost all of our product development programs are done at a time and materials basis, there are a couple of programs with very large customers that are at very specific stages in the development process, which are based on milestone payments. And so there was one in particular where the milestone stretched out into Q2 and so we were unable to recognize the revenue even though we had done a lot of the work. Sorry, it stretched out to Q3 from Q2. So we were not able to recognize that revenue in Q2. We will recognize it in Q3. Speaker 200:35:41And that was really just a timing issue. So that was one part of it that the product development group came in a little bit lower than we had anticipated. And actually, I think Q2 was probably the lowest product development revenue quarter in the last year or so. So that really had an impact. The other impact frankly was that we were just too optimistic in how fast we could ramp some of these programs in particular the Sistoscope program and this newer defense aerospace program. Speaker 200:36:12In both of these cases as we talked about in the scripts, our customers have given us orders, we have substantial backlogs, we have taken steps to be able to respond to this increase in demand, but it just took us a little longer to get the resources in place to be able to satisfy that excess backlog. And so I think we were just a little bit too optimistic in the November. Again, it's not a loss of business. It's sliding out a little bit and we're doing a whole bunch of things in order to make sure that we can respond to that additional backlog in Q3 and particularly in Q4. Speaker 100:36:55Okay, great. It looks like maybe we have one further question here. You've talked about sort of having the largest backlog in recent history and that revenue growth has been capacity constrained. Can you explain further how you intend to increase capacity? Speaker 200:37:14Sure. So this really follows on to what I was just saying about the shortfall in Q2. There are some so let me be very specific because we did talk a little bit in the script. I understand why people are quite interested in what we're doing. So let me get a little bit more specific to sort of explain the level of effort that we're making in this regard. Speaker 200:37:38So for both of these programs that have substantial backlogs, there are backlogs in a number of programs, but these two that we've talked about, the cystoscope and the defense aerospace, there are a number of things that we have to do in order to be able to expand production. So the first one is both of these are built in clean rooms and the clean rooms that each of these are being built in are at capacity. They're fully saturated. There's no more room for more people. There's no more room for more fixtures. Speaker 200:38:08So in both cases, we have more than doubled the clean room capacity. So in one case, we've already completed the new clean room space. That space is for the cystoscope, was certified in mid January. For the second one, the Defense Aerospace program, we expect certification to happen tomorrow. So these are expansions of the cleanroom space that we need in order to be able to increase the number of people and the number of lines. Speaker 200:38:39In both cases, we are increasing the number of lines from a single line to two lines and in some cases we may go to three lines. For the cystoscope system that will take another few months. In the meantime, we're running a second shift, which we started a couple of months ago. In the case of the Defense Aerospace, we already have the fixtures fabricated. So those will be able to go into this new cleanroom relatively quickly. Speaker 200:39:09We have been increasing our workforce for these two programs quite substantially over the last couple of months. This was one of the things that took a little longer than we anticipated and prevented us from doing as much work as we had hoped in Q2. Just to give people a sense, we have increased the workforce for these two programs by something like 80%. And we now have as of next week, we will have a full complement of additional employees that are required to be able to get to double the output that we have now. So, all in all, with all of these steps, both the facilities update, the fixtures and the line update and now the workforce update, we expect that we'll be able to double the output for the defense aerospace program by March, by the March. Speaker 200:40:03And we expect we'll be able to double the output for the cystoscope in about three months from now, maybe four months from now with a steady ramp using a second shift in the interim. So in both of these cases, we've been moving very aggressively and with very specific requirements in order to be sure that we can respond to and take advantage of the very significant backlog that we have. Speaker 100:40:28All right, very good. Joe, I'm showing no further questions here. So I'll turn it back over to you for any closing remarks. Speaker 200:40:36Great. Thanks, Robert. And I just want to thank everyone for joining us on the call today. I look forward to speaking to everyone again very soon. Thanks very much. Operator00:40:48The conference has now concluded. Thank Thank you for attending today's presentation. You may now disconnect.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallPrecision Optics Q2 202500:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsPress Release(8-K)Quarterly report(10-Q) Precision Optics Earnings HeadlinesPrecision Optics to Present at the Planet MicroCap Showcase: VEGAS 2025 on April 23, 2025April 21, 2025 | globenewswire.comPrecision Optics Signs Major Aerospace Deal, Expands Backlog To $6.6M With New OrdersApril 5, 2025 | nasdaq.comNew “Trump” currency proposed in DCAccording to one of the most connected men in Washington… A surprising new bill was just introduced in Washington. Its purpose: to put Donald Trump’s face on the $100 note. All to celebrate a new “golden age” for America. April 25, 2025 | Paradigm Press (Ad)Precision Optics enters into main purchase agreement with aerospace customerApril 4, 2025 | markets.businessinsider.comPrecision Optics to Participate in the Lytham Partners 2025 Industrials & Basic Materials Investor Summit on April 1, 2025March 27, 2025 | globenewswire.comPrecision Optics Appoints Joseph P. Pellegrino, Jr. to Board of DirectorsMarch 20, 2025 | globenewswire.comSee More Precision Optics Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like Precision Optics? Sign up for Earnings360's daily newsletter to receive timely earnings updates on Precision Optics and other key companies, straight to your email. Email Address About Precision OpticsPrecision Optics (NASDAQ:POCI) designs, develops, manufactures, and sells specialized optical and illumination systems and related components primarily in the United States and the European Economic Area. It offers medical instrumentation products, including endoscopes and endocouplers, as well as other custom imaging and illumination products, such as Microprecision lenses and micro medical cameras, and 3D endoscopes for use in minimally invasive surgical procedures by hospitals and physicians. The company also provides components and assemblies for industrial and military use. It markets its products to medical device companies. 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There are 4 speakers on the call. Operator00:00:00Please note this event is being recorded. I would now like to turn the conference over to Robert Blum with us and partners. Please go ahead. Speaker 100:00:08All right. Thank you, Betsy, and to everyone joining the call today. As the operator mentioned, on today's call, we will discuss Precision Optics second quarter fiscal year twenty twenty five financial results, and this is for the period ended 12/31/2024. With us on the call representing the company today are Doctor. Joe Forkey, Precision Optics' Chief Executive Officer and Wayne Cole, the company's Chief Financial Officer. Speaker 100:00:33At the conclusion of today's prepared remarks, we will open the call for a question and answer session. 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. Speaker 100:01:42Listeners 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 as 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 the results 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 Doctor. Speaker 100:02:26Joe Forkey, Chief Executive Officer for Precision Optics. Joe, please proceed. Precision Optics. Joe, please proceed. Speaker 200:02:33Thank you, Robert, and thank you all for joining our call today. I'm pleased to be speaking with you today on the heels of a particularly strong production quarter with an ongoing increase in demand from our two largest customers, which sets the stage for continuation of this growth in upcoming quarters and into the foreseeable future. As we discussed in our last call, the transition of the endoscopy market to CMOS based endoscope systems, many designed now for single use, provides a major opportunity for POC given the investments we have made over many years in this technology. With the formal market launch of our Uniti Imaging platform just two weeks ago, we have further enhanced our position in this substantial and rapidly growing marketplace. Coupling recent production revenue increases in the largest backlog in recent history together with our strong engineering pipeline and positive response to the formal launch of Uniti, we are poised for substantial and sustainable growth in both the near and long term. Speaker 200:03:38As we've discussed over many of our recent calls, we have a number of programs that are reaching key inflection points, where either the programs are moving from product development to production or where the early production output is ramping. In particular, our single use stethoscope program and more recent defense aerospace program have been ramping over the last couple of quarters. The increase in production from Q1 to Q2 driven largely by these two programs was 42%. While this was not quite as high as we anticipated during our November call, it still represents the largest quarter over quarter production increase in many years and the highest production revenue since fiscal twenty twenty three. Given our strong backlogs for production programs, along with engineering revenue expected to return to more normalized levels in the second half of the year, we expect continued growth for the remainder of fiscal twenty twenty five and beyond. Speaker 200:04:37We are currently forecasting increasing revenue over the next two quarters with Q4 at approximately $6,000,000 which would be a quarterly record for POC and will result in positive quarterly adjusted EBITDA. As we discussed on our last call, nearly all new endoscopes today are designed using CMOS sensors and often can be made at price points that support a single use model. These disposable single CMOS based endoscopes provide significant benefits over traditional endoscope designs. Surgeons always get brand new scope image quality. Hospitals don't need to track scopes through reprocessing procedures. Speaker 200:05:18And perhaps most importantly, the single use scopes eliminate any chance of cross contamination from one patient to another. Beyond these benefits, CMOS based scopes often have higher image quality than those based on older imaging technologies. Now that CMOS sensors have been available for medical devices for a number of years and with some big name early adopters, particularly Boston Scientific, demonstrating that single use endoscopes are technically, clinically and economically viable, the entire endoscope market is moving in this direction. This has resulted in a single use endoscope market with annual growth rates estimated to be as high as 20% per year. POC is uniquely situated to benefit from this accelerating trend. Speaker 200:06:08Anticipating the movement of the endoscope market to the broad use of CMOS based designs, POC began aligning its technical base in this direction many years ago. Our historic focus on micro optics design, fabrication and assembly has resulted in proprietary techniques associated with illumination and imaging at sub-ten millimeter and often sub-two millimeter sizes in line with the characteristic sizes of medical endoscopes. When OmniVision, a market leader in CMOS component production, first announced nearly ten years ago its intention to develop a family of medical grade CMOS sensors, POC's micro optics were a natural complement. POC partnered with OmniVision to build the first cameras based on these OmniVision sensors gaining critical experience with this new technology, experience we continue to expand on today. We further enhanced our capabilities in this area three years ago, adding an electrical engineering team that specializes in processing of images captured by CMOS based endoscopes. Speaker 200:07:13During this time, we also continued to develop our know how with ongoing development of new design approaches and new approaches to manufacturing these devices. The result of these long term strategic efforts is that today POC is the best positioned company from a technical standpoint to develop next generation CMOS based endoscopy systems. With the single use market growing as fast as it is, our sales team and senior leadership set out more than a year ago to evaluate our position in this market and to determine the best way to creatively leverage our years, indeed decades of experience as we present ourselves to prospective customers. The outcome of this evaluation was a recognition that POC's experience puts us in a unique position to establish baseline CMOS endoscope platform designs that can be used as a starting point for each new customer's development program. While customer specific requirements will always drive the final endoscope design, many of the core elements of the endoscope and imaging system will often be very similar. Speaker 200:08:25And with our extensive experience, the required customization of these baseline designs will often take the form of a modification based on modular design elements used by POC on previous programs. Our strategy of maintaining as much intellectual property related to scope design as possible even when executing on customer programs has resulted in a strong base of intellectual property and know how. The question has been how to monetize this value by creating proprietary endoscopes without putting us in direct competition with our customers. We concluded the approach of offering customers standard baseline designs that are then customized often reusing modular design elements would achieve a similar goal to creating a proprietary product but by different means. We believe this approach, which is the basis for our new Unity platform, will revolutionize the way new endoscopic systems are developed. Speaker 200:09:27In some sense, POC has been in the forefront of developing next generation technology for many years. With the advent of Unity, we are now in the forefront of developing next generation design processes. Combining these two capabilities, best technology with best design process further cements our competitive advantage as the next generation endoscope partner of choice. Unity provides significant benefits to our customers. Perhaps the most appealing benefit is an accelerated time to market. Speaker 200:10:02Because we have a head start on the design process with our baseline designs, customers can begin system integration and user testing earlier, reducing development cycles and speeding up the path to production. This is a benefit to both our customers and to POC as our interests are well aligned to get to the commercialization stage faster. By leveraging previously validated design elements and by minimizing the need for bespoke engineering efforts to achieve prototypes, Uniti reduces the uncertainties inherent in developing and testing novel imaging devices and results in potential cost savings as the risks of redesign are significantly reduced. And finally, Unity supports the development of multiple products from a single design framework offering scalability for growing product portfolios. We expect that these benefits will enhance POC's competitive position in this market resulting in an increased rate of new opportunities. Speaker 200:11:06Ultimately, we believe this will lead to a larger product development pipeline that could grow to double the size it is today. This will require an increase in the size of our engineering team, but we are confident we can build the team as we experience this growth. Furthermore, because the time to market for each program will now be reduced, we expect an even greater acceleration in the rate at which programs are moved to production, which is an important growth driver for our overall business. We launched Uniti the January at Photonics West, one of the world's largest optics conferences followed immediately during the February with presentations at MD and M West, a key conference for medical device design and manufacturing. The response at both conferences was extremely positive with multiple potential customers already contacting us with new development opportunities. Speaker 200:12:05The launch of Uniti caps off a year long preparation, which included a significant effort by our technical team during Q1 and Q2 to fully define and document the baseline platform designs. This resulted in lower product development revenue and higher R and D costs during this time period. The second quarter also coincided with slowdowns or holds on a few of our development programs caused by customers waiting for regulatory clearance or financing events. With the major push on our technical resources to support the Unity launch now behind us and with most of the customer initiated delays resolved, we expect an increase in product development revenue in Q3 and especially in Q4, even before considering the impact of new projects coming from the Unity launch. Production revenue in Q2 was up substantially over Q1 and is expected to reach record levels in Q3 and Q4. Speaker 200:13:05This is driven in large part by our single use stethoscope and more recent defense aerospace programs. Both of these programs now have multimillion dollar backlogs and both customers support the work we are doing to expand clean room space, hire new assembly technicians and stand up multiple shifts and or lines to address the backlog and expected long term ramp. As a reminder, the first of these is our first single use program, which is a cystoscope imaging assembly that we designed and now manufacture for our customers' next generation AI powered surgical robotic platform for treatment of benign prostate hyperplasia. Our customer, a dominant player in this market, has a significant installed base of robotic systems deployed in hospitals internationally. The single use imaging module we designed for them received FDA clearance in August and is now in their sales team's capable hands. Speaker 200:14:06We received a $9,000,000 production order in May of last year from this customer and we currently estimate that we will deliver approximately $2,700,000 of this product during our current fiscal year. Like our customer, we are optimistic the market for treatment of benign prostate hyperplasia, which is already a large market, will expand as a direct result of their solution. The second major production program is for the aerospace assembly we've discussed previously. This program leverages POC's proprietary manufacturing technology developed for high precision micro optic systems to produce an extremely precise and high value assembly. We first announced an initial production order in September 2023 and have received numerous follow on purchase orders since then. Speaker 200:14:58We are doubling our production capacity to achieve an annual run rate in the $3,000,000 to $4,000,000 range before the end of this fiscal year. In addition to these two major programs, production continues on seven additional programs. Four of these are production programs that have been running pretty steady now for multiple years, contributing on the order of $4,000,000 in annual revenue. In addition, our surgical robotic scope is resuming production this month. A new sub assembly used for a retinal camera just started production in January and our second single use program, which is for an ophthalmic application is slated to start production before the February. Speaker 200:15:41With all of this new and continuing production activity, we expect production revenue increases to drive overall revenue increases in the second half of fiscal twenty twenty five, helping us to achieve record levels in the fourth quarter. Over the last several quarters, we have seen our Ross Optical Components business drop in level out at a rate of approximately $1,000,000 per year due to short term market forces that we've discussed previously. At the recent Photonics West Conference, we continued to hear from colleagues that their experience is similar to ours. We expect to see this part of our business remain steady in Q3 and Q4 and to begin to recover near the end of fiscal twenty twenty five and beginning of fiscal twenty twenty six. All in all, we are confident we will continue to see near term sequential quarterly revenue increases driven strongly by production increases and leading to improvements in profitability in Q3 and Q4. Speaker 200:16:45At the risk of overusing the term, I do believe this is an inflection point for POC. The revenue downturn we experienced at the beginning of fiscal twenty twenty four has persisted somewhat longer than originally expected, but this is largely because the programs we are managing now are larger, the customer is better established and shifting significant programs to production just takes time. While our Q2 revenue came in slightly lower than expected, we nonetheless foresee capacity limitations based on demand coming from existing customers as the main challenge for us to overcome in reaching significantly higher production rates. With robust plans in place to address these capacity requirements, this is an extremely positive sign that the drivers of our anticipated growth are valid, real and significant. With that, let me turn it over to Wayne to review the financials in more details. Speaker 200:17:43Wayne? Speaker 300:17:45Thank you, Joe. And before we get started, I just want to clarify over the last several quarters, we've seen our RAS optical components business drop in level out at a rate of approximately $1,000,000 per quarter. Speaker 200:17:57Quarter, not per year. Thank you. Speaker 300:18:00Okay. So let me explain on some of Joe's comments on the financial results, starting with revenue. For the second quarter, revenue was $4,500,000 compared to $4,800,000 in the second quarter of fiscal twenty twenty four. While somewhat less than our expectation of $5,000,000 as we discussed in our last call, the increase of 42 in manufacturing revenue over the prior quarter that Joe mentioned earlier was still an achievement despite some of the expected throughput pushing into our third quarter. For the quarter ending 12/31/2024, gross margins were 24% compared to 30% in the quarter ending 12/31/2023. Speaker 300:18:47Like the last two prior sequential quarters, product development billings were impacted by the assignment of certain engineering resources towards non billable projects, specifically finalizing the company's Uniti Imaging Platform offering that was so well received there are two most significant trade show just weeks ago. We have continued to scale our manufacturing team in preparation for increased production revenues well beyond the levels we reported today. These items together with a lower sales volume impacted gross margin. We expect gross margin to recover as manufacturing continues to scale and revenues increase, particularly in the fourth quarter. We increased research and development spending in the quarter from $222,000 to $318,000 from the quarter ended 12/31/2023. Speaker 300:19:42R and D expenses likewise increased $284,000 to $718,000 during the six months ended 12/31/2024 compared to $434,000 during the six months ended 12/31/2023. Similar to the two prior sequential quarters, we incurred significant internal R and D expenses that we've already discussed. Selling, general and administrative expenses or SG and A for the quarter was $1,700,000 a decrease of over $200,000 compared to $1,900,000 last year, primarily due to lower bad debt expense and lower stock based compensation. SG and A expenses were essentially flat in the six months ending 12/31/2024, compared to the same period in the prior year. And while these costs may be similar and predictable, the nature of our spending is more aligned with our business strategies. Speaker 300:20:45As a result of the lower revenue, our net loss was $910,000 for the quarter ending 12/31/2024, compared to a $704,000 net loss last year. Adjusted EBITDA, which excludes stock based compensation, interest expense, depreciation and amortization was negative $555,000 in the second quarter of twenty twenty five compared to a negative adjusted EBITDA of $269,000 last year. As we look to achieve our goals for the second half of the fiscal year, we expect adjusted EBITDA breakeven quarterly revenue levels to be approximately $5,500,000 We believe we will achieve revenue levels of at least $5,000,000 for the third quarter ending 03/31/2025 and at least $6,000,000 in the fourth quarter, which will result in adjusted EBITDA beyond breakeven. Our cash balance at 12/31/2024 was approximately $200,000 with availability on our line credit of $350,000 As we have mentioned in prior calls, we are in the process of finalizing our facilities plans to better access the pool of talent we need to support growth while we expand our manufacturing footprint and cleanroom space. Our objective is to balance manufacturing with reasonable labor and overhead costs, while broadening the access to the professional talent we need to support the growth we foresee. Speaker 300:22:25We remain confident about the attractiveness of this cost effective approach to scaling more dramatically in the future. We expect to announce more about these plans in the coming weeks and months. I will now turn the call back over to Joe for some final comments. Speaker 200:22:42Thank you, Wayne. Let me finish by summarizing a few key points. First, the production ramp we have been forecasting is now in process with a 42% sequential increase in Q2. With a strong backlog and an expected return of normalized engineering operations, we believe we will see continued growth in the third and fourth quarters. Our outlook for single use is extremely high. Speaker 200:23:09We have developed a unique set of technologies and a unique product offering in our Unity platform to accelerate speed to market and reduce development risk. The launch of Unity is expected to be very positive for us. This momentum with single use is being matched with continued strength from our defense and aerospace programs. And finally, the production backlog we see today is as large as it has ever been. We have multiple orders that stretch out for many months and in some cases for years with a number of customers encouraging us to ramp capacity as quickly as we can. Speaker 200:23:47This is a much different position than we have been in, in the past and it provides better visibility into the growth we expect in the coming quarters. With all of these positive indicators, we are very optimistic about the future prospects of the company. To all of you on the call, I thank you for your continued support of PrecisionOptics. We'd be happy to take any questions at this time. Operator00:24:12We will now begin the question and answer session. Speaker 100:24:50Betsy, while we wait to see if anyone comes in through the live teleconference line, Joe and Wayne have got some webcast submission questions here that maybe you can look to address. The first one here is, can you provide an update on the defense contracts, especially the ones with some of the specification problems that seem to have stalled and then started back up? Are there follow-up contracts on any of these? Speaker 200:25:21Yes, sure. So we have two significant defense aerospace programs that are running today in production. One of them has been running for many years and those who have listened to these calls for many years will recall that we've been talking about this one, really for four or five years all the way back since before the pandemic. That program is continuing to run quite steadily at between $2,000,000 and $2,500,000 a year. We have a great relationship with that customer who is one of the largest defense contractors in the country. Speaker 200:26:01And they tell us that they expect to place reorders every year as we finish each order. So that one we expect will continue at $2,000,000 to $2,500,000 run rate for the indefinite future and has been running quite smoothly. The second one, which I think is the one that the questioner is asking about is our newer aerospace program. We did comment on it a little bit in the script. This is the one that had some challenges in Q1, which we talked a little bit about. Speaker 200:26:31But just to remind everyone, our customer, who again is a very large company, our customer asked us to stop the line because they were measuring units that we had already delivered in finding specifications that weren't satisfying the requirements. It turns out that it was a measurement error with some of the inspection equipment that really speaks to the level of precision that we're working with. It's very difficult to measure the performance of these units. So the system that they were using was a little different than the system we were using. At the end of the day, they continued to keep all of those units and they allowed us to restart the production towards the end of Q1, beginning of Q2. Speaker 200:27:17That's one of the programs that I referred to in our comments that Wayne and I referred to as capacity limited right now. So we have received more orders from that customer. They've asked us to ship as quickly as we can. We expect to get to a $3,000,000 to $4,000,000 run rate by the end of this fiscal year. And we're working very aggressively to expand the space requirements that we have, the fixtures, the assembly techs. Speaker 200:27:45And so all of that is in process Okay, great. Speaker 100:27:58Okay, great. Next question and sort of put a couple of them together here. Maybe just expand a little bit more on exactly how maybe the Unity platform works? Speaker 200:28:10Yes, sure. So as you can tell from our comments, we're pretty excited about the Uniti platform. We did do a soft launch over the last six to twelve months and we have a couple of customers who are coming online. We expect in the near term because of that. The response at the shows was quite positive and we have a number of leads from that. Speaker 200:28:34To get into more of the details, let me just say, the idea here is we have these baseline designs. The designs are split up according to the size of the endoscope. And the reason for that is that there are various components in the endoscope, predominantly the CMOS sensor, but also some of the illumination systems that will be similar for similarly sized endoscopes, but different for endoscopes of different sizes. So, we have four categories. We have two of them that we formally launched. Speaker 200:29:06The first one is for endoscopes that are less than two millimeters, and the second is for endoscopes that are between two millimeters and four millimeters. And so once we engage with our customer, we identify their requirements and whichever of those categories that their endoscope requirements fall into based on size will determine the baseline design that we start their program with. Once we identify that, we'll engage with them, we're able to deliver to them an endoscope and an electrical system, a digital imaging system, a camera control unit box, if you like. We can deliver to them the endoscope and the camera control unit that's basically off the shelf. And this acts as the very first prototype which we can deliver to them in a matter of days to weeks as opposed to a traditional design process that will take weeks to months. Speaker 200:30:01And so that already accelerates the timeline for them to get started with things like looking at image quality, looking at how the electronics interface with their larger system, all of that accelerates the timeline quite dramatically. As soon as we do that, we work with them to define the specifications that they need for their specific endoscope. And then we start looking at how are we going to modify the design that we already have. And what we expect is that somewhere between seventy five percent and ninety percent of the design that we already have will be able to use without making any changes. That other 10% to 25% or 30% that we have to change in many cases, we'll be able to plug in a design element that we've used in another program. Speaker 200:30:49So as a specific example, we may go from a LED at the distal end illumination system to a fiber optic illumination system. We've built endoscopes with both of those. Our platform model will have one version, but we could swap out that illumination system by using the system we had before. All of this accelerates the timeline. We'll continue to modify the baseline design with these specific modifications, customizations our customer needs. Speaker 200:31:19Then when we get to the final prototype stage and we have to go to do all of the regulatory testing, because we're using many design elements that have already gone through regulatory testing, the likelihood that we passed the regulatory testing on the first shot is quite high. We always will have to do the regulatory testing because there will be some changes, but because most of the design elements that are embedded in there have gone through regulatory testing before, the risk associated with failing the regulatory testing is much lower and that also accelerates the timeline, reduces risk to our customers. So at the end of the day, we expect that we'll be able to accelerate the time to market by somewhere between six to twelve months depending on the complexity and specifics of the particular endoscope product. And that for our customer is worth a ton. And for us is worth an awful lot because our business model of course is to get programs from the engineering pipeline into production. Speaker 200:32:15So that's a little more detail on exactly how this works. People who are interested in more detail can go to our website, they can go to our LinkedIn page. There's lots of information out there. Part of what we did when we launched this at the Photonics West Show a couple of weeks ago is update all of our online presences in order to be able to communicate more details about this out to potential customers. So I'd encourage everyone to go to our website, take a look. Speaker 100:32:45Okay, great. I think hopefully that answers the question. Again, just reminder to everyone, if you're dialed in to queue up and ask a question or you can submit your question through the Ask a Question feature on the webcast player. Next question here, Joe, you talked about achieving levels of about $5,000,000 in Q2. What happened between sort of that mid November timeframe and the end of the quarter? Speaker 100:33:14I think you talked a little bit about this, but maybe if anything else you can expand upon? Speaker 200:33:19Yes, sure. So we did comment on this in the script, but let me try and summarize fairly succinctly here. There were really two parts of the business that came in a little lower than we anticipated. The first one was the product development group and there were really two reasons for this. There was a fair amount of work that we needed to get done in order to launch the Uniti platform in January. Speaker 200:33:44And I think we underestimated a little bit the amount of work that we would need our engineering teams to put in, in order to finalize the designs and in order to work with our sales team in order to get the language exactly right in the sales sheets and the diagrams for the sales sheets, those sorts of things. That all took a little bit longer than we had anticipated. The second thing is that there were a couple of our product development programs, where customers had events that caused them to either slow down or to postpone some of the activities into later quarters. These are things like regulatory approval that didn't come through because there was another part of the the system that they had to go back and update. There were one or two customers that were waiting for some financing events and so they told us that we needed to throttle back a little bit while they got those things resolved. Speaker 200:34:40The good news is that none of these were cancellations of programs. They were all adjustments to the timeline. Most of those have been resolved in Q3. One or two are still stretching out to get restarted in Q4. So there are a couple of those issues that we had not foreseen in the November. Speaker 200:35:05And then the third one is that, while almost all of our product development programs are done at a time and materials basis, there are a couple of programs with very large customers that are at very specific stages in the development process, which are based on milestone payments. And so there was one in particular where the milestone stretched out into Q2 and so we were unable to recognize the revenue even though we had done a lot of the work. Sorry, it stretched out to Q3 from Q2. So we were not able to recognize that revenue in Q2. We will recognize it in Q3. Speaker 200:35:41And that was really just a timing issue. So that was one part of it that the product development group came in a little bit lower than we had anticipated. And actually, I think Q2 was probably the lowest product development revenue quarter in the last year or so. So that really had an impact. The other impact frankly was that we were just too optimistic in how fast we could ramp some of these programs in particular the Sistoscope program and this newer defense aerospace program. Speaker 200:36:12In both of these cases as we talked about in the scripts, our customers have given us orders, we have substantial backlogs, we have taken steps to be able to respond to this increase in demand, but it just took us a little longer to get the resources in place to be able to satisfy that excess backlog. And so I think we were just a little bit too optimistic in the November. Again, it's not a loss of business. It's sliding out a little bit and we're doing a whole bunch of things in order to make sure that we can respond to that additional backlog in Q3 and particularly in Q4. Speaker 100:36:55Okay, great. It looks like maybe we have one further question here. You've talked about sort of having the largest backlog in recent history and that revenue growth has been capacity constrained. Can you explain further how you intend to increase capacity? Speaker 200:37:14Sure. So this really follows on to what I was just saying about the shortfall in Q2. There are some so let me be very specific because we did talk a little bit in the script. I understand why people are quite interested in what we're doing. So let me get a little bit more specific to sort of explain the level of effort that we're making in this regard. Speaker 200:37:38So for both of these programs that have substantial backlogs, there are backlogs in a number of programs, but these two that we've talked about, the cystoscope and the defense aerospace, there are a number of things that we have to do in order to be able to expand production. So the first one is both of these are built in clean rooms and the clean rooms that each of these are being built in are at capacity. They're fully saturated. There's no more room for more people. There's no more room for more fixtures. Speaker 200:38:08So in both cases, we have more than doubled the clean room capacity. So in one case, we've already completed the new clean room space. That space is for the cystoscope, was certified in mid January. For the second one, the Defense Aerospace program, we expect certification to happen tomorrow. So these are expansions of the cleanroom space that we need in order to be able to increase the number of people and the number of lines. Speaker 200:38:39In both cases, we are increasing the number of lines from a single line to two lines and in some cases we may go to three lines. For the cystoscope system that will take another few months. In the meantime, we're running a second shift, which we started a couple of months ago. In the case of the Defense Aerospace, we already have the fixtures fabricated. So those will be able to go into this new cleanroom relatively quickly. Speaker 200:39:09We have been increasing our workforce for these two programs quite substantially over the last couple of months. This was one of the things that took a little longer than we anticipated and prevented us from doing as much work as we had hoped in Q2. Just to give people a sense, we have increased the workforce for these two programs by something like 80%. And we now have as of next week, we will have a full complement of additional employees that are required to be able to get to double the output that we have now. So, all in all, with all of these steps, both the facilities update, the fixtures and the line update and now the workforce update, we expect that we'll be able to double the output for the defense aerospace program by March, by the March. Speaker 200:40:03And we expect we'll be able to double the output for the cystoscope in about three months from now, maybe four months from now with a steady ramp using a second shift in the interim. So in both of these cases, we've been moving very aggressively and with very specific requirements in order to be sure that we can respond to and take advantage of the very significant backlog that we have. Speaker 100:40:28All right, very good. Joe, I'm showing no further questions here. So I'll turn it back over to you for any closing remarks. Speaker 200:40:36Great. Thanks, Robert. And I just want to thank everyone for joining us on the call today. I look forward to speaking to everyone again very soon. Thanks very much. Operator00:40:48The conference has now concluded. Thank Thank you for attending today's presentation. You may now disconnect.Read morePowered by