Good afternoon, and welcome to the Precision Optics Second Quarter Fiscal Year 2024 Financial Results conference call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Robert Blum of Lytham Partners. Please go ahead.

All right. Thank you, Andrea, and to everyone as well for joining the call today. As the operator mentioned on today's call, we will discuss Precision Optics' second quarter fiscal year 2024 financial results for the period ended December 31, 2023. With us on the call representing the company today are Dr. Joe Forkey, Precision Optics' Chief Executive Officer; and Wayne Coll, the company's Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question and answer session. Today's conference call is also being webcast with replay capabilities available through both the webcast as well as through the dial-in instructions. The details of both are 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 27 A of the Securities Act of 1933 as amended, and Section 21 E of the Securities Exchange Act of 1934, as amended, and such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results, or strategies, and are generally preceded by words such as may; future; plan or planned; will or should; expected; anticipates; draft; eventually; or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in the company's filings with the Securities and Exchange Commission. All forward-looking statements contained during this conference call speak only as of the date on which they were made, and are based on management's assumptions and estimates as of such date. The company does not undertake any obligation to publicly update any forward-looking statements whether as a result of the receipt of new information, the occurrence of future events, or otherwise. With that said, let me turn the call over to Dr. Joe Forkey, Chief Executive Officer, Precision Optics. Joe, please proceed.

Thank you, Robert, and thank you all for joining our call today to discuss our second quarter fiscal year 2024 financial results. Revenue for the second quarter was $4.8 million. As we anticipated and discussed on recent calls, this is down year-over-year due to timing differences between reorders for ongoing production, the exit of certain mature customer programs, and the introduction of new customer programs. Also consistent with our recent discussions, however, was the 12% quarter-over-quarter increase in second quarter revenue compared to the first quarter. This is in line with our expectations that as we continue to expand our engineering pipeline, and as new programs move from engineering to production, we will see higher overall revenues and profitability in the second half of the year, with record quarterly run rates expected by the end of the fiscal year. Production revenue for the quarter was $2.6 million, up 6% over first quarter production revenue -- an increased driven mainly by the introduction of a new defense aerospace program to production. Engineering revenue for the quarter was $2.3 million, up 33% compared to the same quarter a year ago, and up 19% sequentially. This increase in engineering revenue for the quarter was supported in part by the addition of two senior engineers who started during the second quarter. We continued to recruit aggressively to grow our technical team to take advantage of the high demand for our engineering services. Gross margins decreased from Q1 to Q2, resulting in an adjusted EBITDA loss relatively close to that of Q1, despite the increase in revenue in Q2. As Wayne will discuss in more detail, we understand the underlying causes of the reduced margin in the second quarter and are confident we have taken appropriate steps to recover gross margin in the second half…

Thank you, Joe. Let me expand on some of Joe's comments on the financial results, starting with revenue. Last year, we recognized $600,000 in one-time revenue pertaining to a technology rights agreement in the second quarter, which makes year-over-year comparisons to this year's second quarter a bit challenging. For the second quarter of fiscal 2024, total revenue was $4.8 million, a decrease of 18% compared to $5.9 million in last year's second quarter. However, net of the technology rights revenue, the year-over-year decline for the quarter was 8.8% or $463,000. Engineering revenue was a record $2.3 million compared to $1.7 million last year, an increase of 33%. However, revenue from optical components was down $600,000 for the quarter compared to the same quarter last year, primarily due to reduced demand at Ross Optical, which, while improving in the second quarter compared to the first, is still down compared to the prior year. Finished products and assemblies was down approximately $400,000 year-over-year due to the elimination of certain products from our customers' portfolios and a pause in the manufacture of one product into the beginning of our next fiscal year while our customer sells through their existing inventory. However, as Joe touched on, we expect this category to be a source of significant revenue growth during the second half of this fiscal year. Compared to the first quarter, revenues grew by $500,000 due primarily to increasing engineering revenues, improvements in order volumes at Ross, and the production start of the new defense aerospace program that Joe mentioned earlier. We have taken proactive measures within our Ross Optical operation to continue revenue growth, including the onboarding of a new technical salesperson in the second quarter, and a revitalized digital marketing program. For the second quarter, our gross margin was 30.1% compared to…

Thank you, Wayne. I'd like to summarize a few key points before we take questions. First, our engineering pipeline is as large and robust as it has ever been, with record engineering revenue in the second quarter. We believe this is a key leading indicator of future production revenue increases. While total second quarter revenue was down year-over-year, we grew revenue sequentially from Q1 to Q2, and expect to see continued growth in Q3 in Q4 of this year. With growth in revenue will come increase utilization of our manufacturing capacity, and thus improvement in gross margins and the bottom line. Our technological capabilities are highly sought after. We are one of only a few companies in the world that can deliver the type of micro-optics and digital imaging that are supporting the next generation of medical devices. The segments of the medical device market that we operate in are growing quickly, and we expect to benefit from this surge in new devices that are coming to the market in the coming years. With a number of production orders in hand that support sequential revenue growth in the back half of fiscal 2024, coupled with continued strength in our engineering pipeline, we remain optimistic for a strong finish to fiscal 2024, and look forward to ongoing growth in future years. To all of you on the call, I thank you for your continued support of Precision Optics. We'd be happy to take questions at this time.

We will now begin the question-and answer-session. [Operator Instructions]. Our first will come from Chris Vichovski, a Private Investor.

Hello. Thanks for taking my question. You said a lot of engineering revenue this quarter, now is that all going to turn into manufacturing revenue in future quarters, or do you sometimes just do engineering on contract, or is everything for something that you start producing in the future?

Yes. So with very few exceptions, we only take programs into our engineering pipeline that we expect will go to production. Now that doesn't mean that 100% of everything that we do in the engineering pipeline ultimately gets to production, but we do go through a fairly thorough analysis before we accept an engineering program, and evaluate the programs with a high focus on the likelihood that they'll go to production. So the short answer is everything in the engineering pipeline we work on with an expectation that it will go to production.

Okay. So this huge growth in engineering -- this large growth in the engineering revenue, it's important for even larger revenues in the production side.

Exactly.

Okay. On that program, you mentioned, that you expect for it to be the largest program -- and I think that is going to be in the fourth quarter, it's going to start -- could you tell a non-medical professional exactly what it's going into?

So I can tell you briefly, we're constrained a bit by the nondisclosure agreements we have with our customer because they have not announced publicly what it is that we're doing for them. But it's a cystoscopy system, which means that it's used in urinary tract. And it's a robotic type system. So it's a robotic system that has an endoscope that goes into the urinary tract to do various things.

Okay. And is it one-time use?

It is. Yes.

Okay. So I guess you're going to be making lots of them.

Exactly, yes.

Okay. Alright. this all seems very optimistic. Good luck. And this is all from me. Thanks.

Great. Thanks very much for the questions.

[Operator Instructions].

Andrea, this is Robert Blum here. Before -- while we see if there's any additional questions in the queue, Joe, a couple of questions here on this side. As you mentioned sort of the pursuit of more defense and aerospace projects, give us an idea of how long it sort of takes to A, win these opportunities, and B, sort of the conversion of them into revenue, maybe in comparison to the medical device side?

Yes. It's a great question. It's actually part of what we're looking at as we're digging into the various segments of the defense aerospace market. But I can use the two programs that we have running right now as good examples of sort of the extremes. And as you point out in comparison to medical device, let me just remind everyone, the medical device programs -- because of the regulatory requirements and because we're typically working on a program from the very conception stage -- typically take two or three years to get through the engineering process. Now in some cases, it will take even longer if it's a program that requires something more than a 510(k), or if there are multiple clinical trials that are required. But typically for a medical device program, we're looking at somewhere around two or three years to go through the engineering pipeline -- sometimes a little faster times, sometimes a little slower. Our experience with the defense aerospace programs is that it depends critically on just how far the program is pushing the technological limits of what people have done before. So this new program that I commented on, that came into production this year, is a program for which the customer came to us with a set of prints and a fairly welldefined design, and they came to us about a year ago. So this one took about a year for us to to develop the process, to build it, which is really the key technology that we're contributing year. It's the manufacturing process and the know-how that we have in the manufacturing process. So it took us about a year to put that process together, for their particular design that they came to us with, and then to run through a…

All right. Perfect. That is helpful. Our next question we have here is you mentioned the introduction of a new ERP system. Talk about how you expect the system to improve operations and financial results?

Yes. So I should say, Wayne and our new COO, Mahesh, really have spearheaded this effort, which has required the efforts of a lot of people in the company. They've done a great job of getting this ready to launch in the next month, as Wayne alluded to. So I'm going to let him answer this question, but I would just say, from my standpoint, I expect I'll be able to get and more detailed reports more often, which I think from my standpoint will help me to understand what's going on in the company on a more timely basis. But let me let Wayne talk about this in more detail.

Thanks, Joe. Yes, I think my answer is similar. An integrated system will allow us to collect better information, more quickly and productively so we can run the business more efficiently, and it's really going to help us to scale with our existing headcount.

All right. Perfect. Sounds good. I think the last question here is how are you planning to manage sort of the significant growth in production you are expecting, and do you have the resources that you need?

Yes. And so, that's a question we've been asking ourselves for quite some time. So of course, we've seen that this production ramp is coming for a little while now. In terms of planning for it, we've planned in a number of fronts. So we did do a bit of a sort of a mini reorganization of the company a few months ago, in order to get people into the positions that we thought would be most effective as the production starts to grow. The last of those positions that we came out of this restructuring reorganization, was a senior director of operations for production, and that role has been filled by someone internally just about a week or two ago. So we've been working, for some time, to make sure that the organizational arrangement is ideally suited to the production that we see coming. In terms of the resources beyond that, there is obviously the direct labor resources that we'll need. And so while we can sort of pre-positioned those folks, we can't do too much of that, because I have people sitting around and not being productive. So the direct labor for the assembly work and production work, we're pretty confident we can bring in when and as we need them for the growth that we see. The other sort of critical piece of resources is one that I alluded to in our comments, and that is our production facilities. And while we're able to satisfy the requirements that we have today, we do believe that over the next few quarters, depending on exactly when various programs start to hit, that we likely will outgrow the facilities that we have. So there are a couple of different ways that we could expand, and one of those ways of course, is to look at a new facility. So we are looking at all potential ways of satisfying the facility requirements. And as we move forward, as the new programs come online, we'll be ready to have a new facility capabilities as we need them in the most efficient way possible.

All right, fantastic. That's all the questions we have here. Andrea, I'm going to go ahead and turn it back over to you if there's any additional questions, or to close the call out.

There appear to be no questions on the line at this time, I will turn the conference over to management for any closing remarks.

Thank you, Andrea, and thanks, everyone, for joining us on the call today. I look forward to speaking with everyone soon. Have a good night, and stay safe.

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