Good afternoon, and welcome to the Precision Optics Second Quarter Fiscal Year 2023 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert Blum from Lytham Partners. Please go ahead.

Thank you very much, Gary, and thank you all for joining us today to discuss Precision Optics’ second quarter fiscal year 2023 financial results for the period ended December 31, 2022. With us on the call representing the company today are Dr. Joe Forkey, Precision Optics’ Chief Executive Officer; and Mr. Kevin Dahill, the company’s interim Chief Financial Officer. At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. Today’s conference call is also being webcast with replay capabilities available, both through the webcast as well as through dial-in instructions. The details of both were included in today’s press release. 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 our filings with the Securities and Exchange Commission. All forward-looking statements contained during this conference call speak only 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 the result of the receipt of new information, the occurrence of future events or otherwise. With that said, let me turn the call over to Dr. Joe Forkey, Chief Executive Officer of Precision Optics. Joe, please proceed.

Thank you, Robert, and thank you all for joining our call today to discuss our second quarter fiscal year 2023 financial results. This was a quarter of many positive milestones for Precision Optics. Operationally, we achieved record quarterly revenue, gross margin, net income and adjusted EBITDA, and we received a number of significant purchase orders for existing products and new product development that help to bolster our production backlog and product development pipeline. These developments will help us continue our recent trend of increasing top line revenue and bottom line profitability. During the quarter, we completed the uplisting to NASDAQ, and we finalized the technology licensing and royalty agreement that we believe will be a model for greater access to the single-use medical device market and a potential catalyst for long-term growth. I will discuss the drivers of our second quarter operational successes, but first, I’d like to talk for a few minutes about the strategic milestones that were accomplished during the quarter. We have been working on moving the company’s stock from the OTCQB exchange to NASDAQ for many months. I’m really pleased that we were able to complete the uplisting on November 16. Since we made the move, we have seen an increased level of investor interest in the company. The best evidence of this is the sixfold increase in our average daily trading volume, adjusted for the reverse split. We also had the honor of ringing the opening bell on NASDAQ on December 14. This is a great opportunity to recognize the many years of hard work by everyone involved with the company, including our customers, suppliers, directors, investors and especially our employees. We continue to believe that the added visibility of our company and its stock that comes from being listed on NASDAQ will be important…

[Operator Instructions] Our first question is from Sergio Heiber with Heiber Research.

Hey Joe. Congratulations, fantastic quarter and especially on the part of reaching profitability. [Technical Difficulty] and does that come from a new customer, an established customer?

Sorry. Sergio, you broke up for just a minute there. I heard the end of the question, whether it’s from a new customer, an old customer, I didn’t hear the beginning of the question.

Could you give us more color on the AR, on the accounts receivable?

On the accounts receivable?

Yes.

It’s fairly broad. I mean there are 2 or 3 customers who have been customers for many years that are slow-paying a little bit as they’re managing their cash. But that’s only a part of the large AR. That’s maybe 25% of it. The rest of it is really spread out across many, many customers. And it comes from the fact that we deliver products heavily in the end of the quarter.

And do you want to give us any guidance going forward?

None beyond what I’ve already said.

There wasn’t very much as far as guidance, just that there’s a very strong pipeline. So can you give us any color on what you expect from the pipeline as far as going to commercial in the next 12 months?

Yes, sure. I can comment a little more on that. So we have something like 7 or 8 programs that could go into production in the next 12 to 18 months. There are 3 or 4 in particular that are sort of poised and pretty ready to go into production and are limited from a timing standpoint really by the steps that the customers have to go through, either finalizing the funding in order to get into launch or waiting for their final clearance from the FDA. So here, I can give you an example of just 2 or 3 of those that are in that sort of latter category where we sort of see things coming fairly imminently. One of them is the ophthalmology single-use program that I talked a lot about that has to do with that agreement, right? That agreement in part is an indication of how close we are. We’re finalizing validation units now. The customer is planning to submit to the FDA in the next few months. And then we’ll start production to build the pipeline, hopefully, before the end of the year -- to build the inventory, I should say. The second one is for a robotic surgery customer. We just finished the final prototype run. They’re waiting for us to build a certain number of pilot units to put into inventory while they’re waiting for their final approval from the FDA on their final clinical test. So that one also looks like it could launch before the end of this calendar year. And then the third one that I put in that category is the urology program, where we basically finished the final prototypes, and we’re ready to build the pilot build. Again, that would fill the pipeline. And in this case, the customer is doing their next round of funding so that they can fully fund their launch plans. So, we’ve got a number of customers, each of which is waiting for various things from clinical trials to final funding. But because our pipeline is so large now, it’s not -- it won’t be unusual going forward for us to have multiple customers that are sort of poised and ready to go into production. And while some of them may take a little longer than others, I expect we’ll start to see a pretty good cadence of things coming out of the pipeline and going to production.

Super, Joe. I know that this has been your plan going back a few years. Congratulations on achieving what you set out to achieve. So the -- I have one last question about the royalty. And that’s never been -- I don’t think anything that you brought up. Can you give us more color on why you chose to go the royalty route?

Yes, sure. So first, I’ll say I didn’t -- I haven’t said much about it before because we’ve been negotiating with the customer, and we weren’t sure until it was done, where exactly where we’re going to end up. What I will say is this, this particular customer was an ideal customer for us to engage with for our first single-use program. They really have been a partner in figuring out together how we would manage not only the technical aspects of the single-use program, but also the economic aspects of it. And so I have talked a lot about the fact that as we’ve been going through this program, we’ve been learning not only the technology, but also the business side of it. And so we basically started with this company some 4 or 5 years ago and sat down at the conference room table and said, "Look, there are some challenges we’re going to have to overcome, but we’re willing to work together and to get creative and figure out how we can put together a plan that works for both sides." And so the real -- there are a number of benefits to our customer to have this technology licensing arrangement in place. So first of all, they can have us continue to manufacture it for forever if they want, right? They also, however, have the option of taking it to their own facility or to a third-party facility. And that becomes very important with the single-use program because the labor cost profile of a company in Gardner, Massachusetts is not the most aggressive, right? And there’s always an interest on our customers’ part to having multiple suppliers, especially these days where everyone is concerned about supply chain with some of the challenges that came over the last couple of years. So at the end of the day, the bottom line is going this route where there’s an opportunity for our customer to move to a third-party manufacturer, which might be themselves, and pay us a royalty is beneficial to us because we receive a royalty without using all of our limited resources, all of our limited production resources. That royalty is lower than it would be for a gross margin. But because we’re not using up all of our resources, it’s still beneficial because it drops directly to the bottom line. From our customer standpoint, it basically removes one layer of the supply chain if they bring it in-house or they can go to a very low-cost labor contract manufacturer. And so from their standpoint, the royalty ends up being a much smaller addition to their cost of goods than they would see otherwise. So really, it benefits both of us in a way that allows us both to benefit from the really significant growth that we’re all seeing in the single-use market.

Fantastic Joe. And can we expect more acquisitions?

So as I’ve said before, we are looking at acquisitions, and we will pursue acquisitions on an opportunistic basis. And as I said before, the optics industry is fairly well fragmented, and I think there are probably other targets out there.

So Joe, do you -- 3 years ago, did you see the company as it is now? Are you exceeding your expectations? Meeting your expectations? Or behind?

That’s a tough question because I ran through lots and lots of models. On the whole, we are performing as well or better than I had hoped for.

[Operator Instructions] The next question is from Rick Teller, [ph] a private investor.

Joe, you covered some of the things I was going to ask about the single-use ophthalmic product that you announced yesterday, but there’s one thing that you didn’t cover what I wanted to ask about, which is that the economics of single-use, as you’ve discussed a number of times, is it’s a much lower price point and higher -- obviously, higher volume and presumably, a more automated production. And so it’s more of a fixed cost operation as far as your company is concerned. And that in order to really make money on it, you have to have -- we have to be pushing through a certain amount of volume. And often, other than the initial pipeline filling, it takes a while for your customers to develop demand for their product, they have to train people how to use it and so forth. If this -- if your customer that was subject to the agreement you announced yesterday decides to take the thing in-house or to have it produced, say, overseas, some place inexpensively. Does that make it more difficult for you to achieve profitability in the single-use category collectively, not just that product, which obviously gaining royalties is doing nothing for it, is very profitable. But might that hurt the gross margins on some other products you have because your volume would be lower?

Yes. No, that’s a great question, Rick. So if our plan was simply to move forward with an expectation of manufacturing single-use products in every case, then it’s true, this would make it more challenging. Although I will add, there’s a little caveat there because a large part of the volume economics comes from sourcing of the components, the materials that go into it, part of the BOM. And there are opportunities, I think, even with our individual customers who may choose to pay us a royalty to manufacture themselves or with a third party. We still have a unique relationship with those customers, and I think there are still opportunities where we may aggregate the demand for certain components and be able to step in, in the supply chain and still supply it to them at a lower cost if we’re aggregating the demand from all of our customers. And so that may be another place where we can continue to benefit from the economies of scale. The other thing I’ll add is that with this new agreement, there’s nothing that says that going into the future, we might not still make the decision to expand the company in a way that we’re in a better position to manufacture ourselves, right? I think we’re going to have to see a little bit how the next agreement like this one pans out and what kinds of opportunities we have to move forward. One of the things that was really beneficial with this technology agreement is that we were able to get started in the single-use space without having to make a large investment on a low labor cost facility overseas and all of the start-up and stand up that that requires. Once we get to the point where we see that, that might be a useful thing to do, there’s nothing that says that we can’t come back to these existing customers and pull those projects back into a facility like that. Again, I don’t know exactly where we’re going to end up. But the nice thing about this agreement is it hasn’t eliminated the possibility of moving in any of those directions, but it has given us an opportunity to start into the single-use market in a way that were guaranteed some bottom line profit no matter how this goes moving forward.

[Operator Instructions]

Gary, this is Robert Blum here. I’ve just got one question I know that hadn’t sort of been touched on already and I’ll turn it back over to you if there are any questions. Joe, can you just sort of comment a little bit on sort of the integration of Lighthouse? It’s been sort of a year now. Any sort of general updates or commentary you can provide on that for us?

Yes, sure. Thanks, Robert. So the question comes, I’m sure, in part, because I didn’t mention Lighthouse by name very often in the prepared remarks, and that was really by design. It’s been over a year now. The integration has gone quite well. And so we’re really pushing forward now as one combined company. So the plan going forward with these earnings calls is not to be breaking out the performance of one division or another. That having been said, I will just comment the sales and accounting teams are fully integrated now. The engineering team is working very well together. It’s fully integrated. They’re doing a really great job on the new urology program that I mentioned, both in the comments here today and in the press release that we put out a couple of months ago. They’re working hand in hand. We had joint meetings with the customer, and there were engineers who sit in Portland and there are engineers who sit here in Gardner, all in the same room, all on the same team impressing our customer greatly. So all in all, the integration is going quite well.

Perfect, Joe. Gary, I’m going to turn it back over to you if there are any further questions.

And the next question is from George Melas with MKH Management.

Quick question on the single-use programs. Does that bring you in relationship with customers that are larger? Because it seems like you have 2 programs right now that’s beyond the POC stage, and somehow I get a sense that they are established medical device companies. Is that right? And is that a trend in the single-use space that it’s going to be larger companies rather than start-ups?

That’s an interesting question. So let me answer that, and let me give you two answers to that. So the first answer is that across the board, we’re seeing larger opportunities. So that isn’t necessarily characterized by start-up versus existing large medical device company, but the size of the opportunities in general are getting larger. I think there’s a couple of reasons for that. The first is that we’re a larger company than we were before with more resources. So I think companies are more comfortable with us than maybe they were when we were a $3 million or $4 million a year company, right? The second one, of course, is because of the acquisition, particularly of Lighthouse, we have a broader offering, and so we can deliver a more complete system. From the standpoint of the single-use programs specifically -- I’m trying to think -- it is true that the majority of the programs that we’ve been involved with so far have been with larger established customers or larger established companies. There have been a couple that have come to us who have still been start-ups. So I guess I’d have to say the jury is still out on whether it’s going to break one way or the other. But the companies that we’re working with right now on the single-use programs are, in fact, larger, more established medical device companies.

Okay. And then maybe just a quick follow-up on that. So is your relationship with these companies somewhat different? Is it more difficult for you to keep the IP? And maybe sort of -- maybe in a slightly different way. Are these programs replacing -- I imagine they are replacing existing devices that are not single-use. So is it large companies that have these devices and then are trying to shift to single-use space, and they already own some of the technology that’s involved with these devices. I guess I’m getting complicated.

No, I understand exactly what you’re saying, I think. Let me give it a try. You can steer me in the right direction if I miss it. So there’s really two questions there, I think, there are two parts to this question. The first one is whether these companies are cannibalizing their existing market and moving from a reusable device to a single-use device. And for the larger companies that we’re working with, which, by and large, are the ones we’re working with now for our single-use -- the single-use programs we have now, that is true. That is the case. When we look at the single-use market in general, one of the reasons that we see it growing faster than the medical device market in general, is because it’s not only growing with new procedures, but it’s also growing by replacing reusable devices with single-use devices. I would say, though, sort of across the board, whenever a customer comes to us with a new product, one of the questions they’re always asking is, can it be single-use? And so it depends then on the configuration of the system and all the rest. So the answer to the first part is, it is true that our customers today are replacing their reusable device with a single-use device. We really like that, by the way, because it means that they already have an established market. They already have a brand name. So we see that as lowering the risk to the overall success of the program. In terms of our negotiations with regard to maintaining ownership of the technology, the technology that we’re bringing to the partnership, of course, is the technology that relates to the design and manufacture of the optics in the imaging system in a way that can be manufactured at low cost with high quality. And that -- those technologies are technologies that cut across lots of different disciplines. So while it’s true that our customers may already have some technology, some IP in sort of the particular procedure they’re going to use the product for, the technology that’s embedded in the single-useness, if you like, of the system and then the imaging system really still belongs to us and really comes from our expertise, that after all is why they’ve come and engaged with us. And so it’s -- in all cases, we have to have a negotiation. But I wouldn’t say that it’s more challenging in these cases than it has been in other cases because, again, the reason they’re coming to us is because we have capabilities and technology that other companies don’t and that they don’t have. And so that gives us a significant leverage in being able to negotiate a fair and beneficial -- technology agreement that’s beneficial to POC.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, Gary, and thank you all for joining us today on the call. I look forward to speaking with you all soon. Have a good evening.

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