Good afternoon, and welcome to the Precision Optics Fourth Quarter and Fiscal Year 2024 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.

Thank you very much, Gary, and everyone joining the call today. As the operator mentioned on today's call, we will discuss Precision Optics fourth quarter and fiscal year 2024 financial results for the period ending June 30th, 2024. With us on the call representing the company today is Dr. Joe Forkey, Precision Optics’ Chief Executive Officer, and Mr. Wayne Coll, the company's Chief Financial Officer. At the conclusion of today's prepared remarks, we'll open the call for a question-and-answer session. [Operator Instructions] Before we begin with prepared marks, we submit for the record the following statements. 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. They 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 of the date in which they were made and are based on management's assumptions and estimates as of such date. 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 fourth quarter and fiscal year 2024 results. As most of you know, on August 14th, we pre-announced revenue expectations for the year to be in a range of $18.5 million to $18.9 million. Our final revenue numbers that we reported today were $19.1 million for the year and $4.7 million for the fourth quarter. These revenue levels were slightly above the range we pre-announced in August, but somewhat lower than we anticipated at the time of our last conference call in May. These lower levels were driven by specific delays in a few key programs in the latter half of the fourth quarter. I will explain the causes of these delays in more detail in a minute, but let me emphasize right from the top, the customer relationships in each case remain strong and the market potential of each product is intact. So our long-term outlook for these programs and overall business growth remains high. We always have a lot to cover on our Q4 calls since we have just about completed our Q1 and have a preview of Q2. Let me first take a step back and discuss some of the challenges and successes of fiscal year 2024. As we communicated over the past year, when we exited our record-setting fiscal 2023, we were facing the loss or pullback of a few significant programs that were not moving forward in fiscal 2024. This included two production products and two product development programs that were discontinued, one defense/aerospace program that was redesigned by our customer, and our longtime spinal surgery product for which our customer had built up excess inventory that they need to burn through before placing additional orders. These programs represented approximately $5.6…

Thank you, Joe. Let me expand on some of Joe's comments on the financial results, starting with revenue. For the year, revenue was $19.1 million, a decrease of $1.9 million from last year. Last year's results included $600,000 of one-time technology license revenue. Excluding this, fiscal 2024 revenue was down 6.6% compared to fiscal 2023. This is a significant accomplishment as we started the year with a loss of previous year programs and revenue representing about $7 million or 34% of fiscal 2023 revenue. A major contributor to that recovery was the product development or engineering pipeline segment of our business, which posted revenue at a record level of $8.3 million, representing a year-over-year increase of 24%. Looking specifically at the fourth quarter, revenue was $4.7 million compared to $5 million last year, a decrease of 6%. Joe has already commented on the key drivers here. With the pullback in revenue for the year, we saw less absorption of certain fixed costs in production, which impacted our overall gross margins. Lower revenues related specifically to Ross Optical reduced revenue by $1.5 million and gross margin by $1 million. For the year, gross margins were 30% compared to 38% last year. Excluding the license revenue, last year's gross margins would have been in the mid 35% range. For the fourth quarter of fiscal 2024, gross margins were 22% compared to 39% in last year's fourth quarter. The fourth quarter was particularly impacted by the ramp-up challenges Joe summarized, which led not only to lower revenue but also significantly reduced gross margin. We also recognized unfavorable charges to COGS in the fourth quarter resulting from one-time adjustments in the carrying value of our raw materials inventories. We do expect gross margin to recover quickly as production processes stabilize and revenues increase. Operating…

Thank you, Wayne. To summarize, fiscal 2024 was certainly a challenging year. And while we made substantial progress rebuilding our revenue base during the year, revenue in the fourth quarter came in a bit lower than our initial expectations. This was caused by a few program delays that impacted fourth quarter revenue by about $500,000 to $600,000. Some of these issues will also impact first quarter fiscal 2025 revenue, which we expect to be in the range of $4.2 million to $4.4 million. But as of today, most of these issues have been resolved. We now have strong visibility and confidence that with our production single-use programs starting to grow in Q2, the re-ramp of our defense/aerospace program that was put on a temporary hold starting up again last week, coupled with a number of other growing programs, we will see significantly higher revenues in Q2 and record quarterly revenues before the end of fiscal 2025. This should also improve profitability due to the leverage of fixed costs in our business model. All in all, we are very optimistic that we will see substantial growth both in top line and bottom line performance in fiscal 2025. Before I turn it over to questions, I want to mention that we will be participating in the Lytham Partners Fall 2024 Investor Conference tomorrow. If you would like to schedule a one-on-one meeting, please reach out to Robert Blum to coordinate. To all of you on the call, I thank you for your continued support of Precision Optics. We'd be happy to take any questions at this time.

[Operator Instructions]

All right. Hey, Gary. This is Robert Blum. I guess while we wait to see if anyone comes in on a live call, I've got some webcast submissions here. So, Joe and Wayne, if you have -- let's walk through a couple of these. First question here is, on previous calls mentioned, we would complete a $1.2 million defense order by August ‘24 and follow-on orders were expected. Was it completed and have we seen any follow-up discussion or orders?

Yeah. So, that was the new defense/aerospace program that we commented on during the comments here. This is the program that was put on a hold by the customer for almost a couple of months. And so because of that hold, it reduced the time that it will take to finish the orders that this question is referring to. The good news, as I mentioned in the script here, was that the customer has allowed us to restart shipping. And so we're quite confident that this program is going to contribute significantly to Q2 and beyond. As for the second part of the question, the customer has given us new orders. In fact, this is one of the things I mentioned in my remarks. The customer gave us new orders even while they had us on a production hold because they were confident that we would be able to sort out with them what the issues were. So, the answer to the question is, we have not finished the deliveries, but that's because our customer put us on hold. We expect to finish the deliveries now in the next quarter. And we do have follow-on orders that will continue after that.

[Operator Instructions] Our next question, Joe, is can you walk through what you believe your contribution margin is on the various programs? Is there a target contribution margin you look for?

I'm going to let Wayne answer this one.

Yeah. So, depending on the lines of business, the margin tends to differ. When you take, for instance, the defense/aerospace work we do in the micro-optics lab, those margins are probably some of the highest that the company experiences in excess of 50%. And you compare that to manufacturing margins, particularly related to the manufacturing of the single-use product and so forth, and those margins tend to be more in the 30% range at the moment. And then in between that, you've got the Ross Optical business, which, at full utilization, again, is in that higher -- almost 50% type of margin profile. With lower revenues, it’s got a lower margin profile. And then on the product development side, those -- that tends to be, again, in the mid -- the margins tend to be in the low to mid 40s, taking into account both the labor elements, the non-recurring engineering revenues and material revenues that are part of that segment.

Okay, great. Next question here, and I know you touched on this a little bit, for the aerospace/defense program that was put on hold but is now back up and running, can you expand on what some of the factors were that forced the hold? Was any of this related to POC, or was this unrelated?

Yeah, sure. I can comment a little more on this. The assembly that we provide is used to transmit a laser beam. And so there are some measurements of the laser beam that have to be made when we finish the production here and we do the inspections, and then there are similar measurements that are made by our customer at their facility. The way the measurements are made is very complicated and requires some fairly sophisticated equipment. And ultimately, the measurements that are being made can be impacted by the motion of some of the components that we assemble that are as small as, maybe even 10 microns. I mean, it's very, very sensitive. And so what happened was we were making measurements here, we were shipping, and then it was taking our customers some time for them to make measurements on their end. When they started making measurements, they saw differences in what -- compared to what we had measured. And so, there was a concern that there may have been a drift because the measurements are so sensitive to even tens of microns of movement. So they asked us to stop production while we collectively worked to sort out what was the ultimate cause. Ultimately, the belief now is that it was not a motion of the parts we were assembling, but instead a sensitivity issue with the two highly sensitive devices, one that we were using and one that they were using. And so they asked us to do some troubleshooting, some test measurements, some test assemblies and then we sent them back and forth to test and align our QC measurements. And based on all of that, they've agreed and we've agreed that it likely was a measurement issue, and so they've allowed us to restart production. As we've done that, we've added a little bit to the measurements that we make in order to just further confirm that the conclusion that we came to collectively was the right one. So, all in all, there's no indication that there was a problem with what POC was doing or making or producing, but because this is such a highly sensitive and tightly specified part, it really was a measurement error caused by the particular devices that were being used to make the measurements.

Okay, great. Our next question here is for the single-use program, you mentioned revenue expectations have increased. Can you provide any commentary on the dynamics leading to the increase?

Yeah, sure. So, of course, with non-disclosures in place and such, we're limited as to how much detail we can give on what's happening. But I can give a couple of comments that are sort of general that I think will help everyone understand what's going on here. So, the product that we're making -- the single-use product that we're making for our customer is going into a system that's replacing an existing product that they have on the market today. It recently received clearance from the FDA, and so they now are actually in the market. The market risk associated with a new product going on the market is relatively low in this case because they already have a product on the market, so they're cannibalizing their own market. And really they put together this new product to expand the market that they already were doing very well in with the product that they had. So, once the product actually got out there, even though it's still in a limited release mode, once it got out there and they were able to confirm with some of the folks in the market, some of the surgeons, that the benefits that they believed would come with it were actually realized in the field by the surgeons, their marketing group's expectations for deliveries of their product, I think, has gone up. And so that, of course, comes back to us and increases the rate at which they want product from us. So that's what's happening. I think it's a very good dynamic. And I think there, as we said in the script, I think there are opportunities for this to continue to grow as they continue to go out in the market and get more positive feedback.

Okay, great. [Operator Instructions] We have a couple of questions here pertaining to the platform. I'll sort of bring these together. Will the new product you are researching and offering change the model of the company by increasing R&D expenses and increasing gross margins? Presumably now you can bill the R&D expenses for custom client products, but in the future the clients will use your platform, which is not entirely custom and you have to pay the R&D expenses by yourself. How will that affect gross margins, R&D expenses, profitability? And sort of adding to that, how does this platform sort of allow companies to transition from entry-level stage to a more established pipeline customer? So, I know I threw a lot out at you there. I can rephrase some of them if you need me to.

No, no, that's fine. I think I get the sense of the question. It's a great question. So, this is good, because I want to clarify something on the platform product. And as I said in my remarks, we'll be doing more in terms of marketing and having a formal launch and such in the next few months. So I think this will become clearer and clearer as we provide more and more information to the market in general. But the idea here is that we do need to do a little bit of internal R&D in order to get the platform product going. But, by and large, the R&D work for the platform product is all the work that we have done over the last three, five, seven years in developing these kinds of products for many of our customers. You'll recall that one of the key elements of our business model is that we maintain the ability to use the IP that we develop during the development process of these products. Now we can't go and duplicate our customers’ product and sell it to their direct competitor, but what we've discovered is that there are core elements of all of the products that we make. There are core design elements that are common to all of the different products. And so what we're doing is we're taking these core design elements and reconfiguring them in a way that we can provide a baseline model very quickly, which should be an initial prototype to our customers, very fast, almost off the shelf. And then we have various modular pieces, which are pieces that come from other products that we've made for other customers, that we can sort of bolt on. These are, think of Lego blocks that you can…

All right, great. Well, I show no additional questions here, Joe. So, I will turn it over to you for any closing remarks.

Okay. Thank you, Robert. Thank you, everyone, for joining us on the call today. I look forward to speaking to all of you soon. Thanks very much. Have a good evening.

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