Precision Optics Corporation, Inc. (POCI) Q4 2025 Earnings Report, Transcript and Summary

Good day, and welcome to the Precision Optics Reports Fourth Quarter and Fiscal Year 2025 Financial Results Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Robert Blum with Lytham Partners. Please go ahead.

All right. Thank you very much, operator, and thank you to everyone joining the call today. As the operator mentioned, on today's call, we will discuss Precision Optics' fourth quarter and fiscal year 2025 financial results for the period ended June 30, 2025. 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 will open the call for a question-and-answer session. [Operator Instructions] 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 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 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 a result 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 Dr. Joe Forkey, Chief Executive Officer of Precision Optics. Joe, please proceed.

Thank you, Robert, and thank you all for joining our call today. Let me start by saying we certainly have a lot to be excited about at Precision Optics. We just finished the fiscal year with the highest quarterly revenue in our company's history. The $6.2 million fourth quarter puts us at an annualized run rate of approximately $25 million and the underlying drivers of this increase are sustainable into the foreseeable future. Our production business has grown substantially, and we expect that trend to continue. While we've experienced gross margin challenges in Q3 and Q4 of fiscal 2025, we understand these challenges and are aggressively taking steps to resolve them. With ongoing higher top line revenue, the growing engineering pipeline and improving gross margins, we believe we are now operating at a new level for Precision Optics and expect the gains we have made in revenue increases in fiscal '25 will increasingly flow through to the bottom line throughout fiscal '26 and beyond. The key driver to the achievement of these record revenues is the advancement of two major programs, which transitioned over the past year or so from our development pipeline into production. And while the benefits of the recent transition of these two major programs haven't flowed through to the bottom line yet, the increase in top line revenue provides the foundation upon which Precision Optics will grow to become a much larger and more profitable company. These two programs, one with a top-tier aerospace company and the other with a surgical robotics company focused on transformative solutions in urology carry long-term contracts with minimum annual commitments. These production contracts, along with additional programs in our development pipeline that are expected to move to production over the next 12 to 36 months, provide increased visibility and confidence into the future outlook for POC. With the growth that we anticipate, we have recently invested in our facilities to support the company's growth, not only for fiscal 2025 and 2026, but for years to come. In September, we moved our headquarters and corporate offices from Gardner, Massachusetts to Littleton, Massachusetts. This move opens up space at our existing facilities in Gardner for the consolidation and expansion of dedicated production resources. The new facility in Littleton, which is less than an hour from Boston, along with the new facility in South Portland, Maine, which we moved into in August, also allows us access to a broader engineering talent pool to support the company's growing product development pipeline. I believe we will look back at fiscal 2025 a few years from now as a critical inflection point in the company's history. When we advanced multiple products from our pipeline into production, began to refine operating processes to efficiently manufacture at higher scales, made the necessary investments in our facilities to sustainably support growth and build a strong backlog of programs through the launch of the Unity platform, all of which has provided us the foundation for substantial growth and greater visibility into the future. Today, I'll focus my remarks on the following items. First, updates on our two major production programs. Second, gross margin challenges in fiscal 2025. Third, steps we've taken to improve gross margin in fiscal 2026 and beyond. And finally, guidance for fiscal 2026. With that high-level overview, let me provide some more details, starting with our large production contract with a top tier aerospace company. This is a highly complex and specific assembly we are producing, and it is essential for our customers' product and revenue forecast. We continue to increase production to meet the ever-growing demand from this customer with revenues increasing sequentially every quarter throughout the year and increase is expected to continue throughout fiscal 2026. For perspective, Q1 revenue for this program was $300,000, Q2 revenue was $600,000, Q3 was $900,000 and in Q4 of fiscal 2025, revenue for this program was just under $2 million. We are now operating at record daily production revenues with the month of June contributing more than $900,000 alone. That's 3x what we shipped in the entire first quarter. We continue to take steps to further increase production capacity and we have commitments from our customers to accept deliveries at rates approximately double the average rate of Q4. We also have received significant additional production orders so that our current backlog for this program alone now stands at a record of nearly $9 million. We estimate our gross margin, specifically on this program is in the mid-30% range, so the ongoing increase in shipments will help to improve overall gross margin. Also, our customer for this product has agreed to reimburse BOC for tariff costs, and we are finalizing arrangements to these reimbursements now. Production revenue for our single-use cystoscope also hit a record level in Q4 of nearly $800,000, continuing the trend of increasing revenue each of the four quarters since production began. With the introduction of a partial second production line in August of this year and ongoing increases in demand from our customer and the end user market, we expect revenue levels from this program to continue to increase throughout fiscal 2026. While we are certainly pleased with this continuing revenue growth for this program, it has not been without its challenges as we've communicated in recent quarters. Compared to our aerospace customer, this is a lower-priced, higher-volume single-use production program. For this program, in particular, we have run into challenges with production yield, more than anticipated labor touch time and substantial tariff increases. Considering the impact of all these issues together, we believe this product was operating at zero gross margin or a slight loss during the fourth quarter of fiscal 2025 and significantly pulled down our overall corporate gross margin. In the first quarter of fiscal 2026, we have already taken several steps to increase the profitability of this product. We have identified opportunities for yield improvement through design updates and touch time reduction through fixture and process improvements. We are working with our customer who is an agreement with these steps we've taken and is generally extremely supportive. There is a mutual understanding of the complexity of the assembly and attitude that we must get this working right. These are robust long-term solutions and are not out of the ordinary for a production line recently started and used for a highly complex product like this one. While we are confident these modifications will bring the profitability of this product in line with our original expectations, they will take some months to implement. In the meantime, we have renegotiated pricing with our customer to account for lower yields and higher touch time costs in the near term. The renegotiated near-term price is approximately 24% higher than the price at the end of the fourth quarter of fiscal 2025. In addition, our customer has agreed to cover tariffs associated with this product, which represents approximately 20% of the price at the end of the fourth quarter. We believe these design and production changes, along with pricing updates for the near term will result in steadily increasing profitability for this product beginning in the first quarter of fiscal 2026 and continuing throughout the year. In addition to the two large programs, there are a number of other continuing programs that round out our production forecast for fiscal 2026. Summarizing our systems manufacturing business, while we are experienced in growing teams of a very small business, taking on large and complex initial program challenges -- excited that production is growing to a size that will begin to reflect scaling and efficiencies as we move through the new fiscal year. We expect our systems manufacturing business to grow at least 75% in fiscal 2026. Beyond our production programs, our product development pipeline is recovering from the dip caused by the transfer of the single-use cystoscope to production. We continue to expect two to three programs to transfer to production in each of the next two years, and we are quickly gaining momentum with a number of new customers based on the Unity platform that we discussed in recent calls. Our business development team is working aggressively to reach new customers through increased outreach, including our first-ever panel webinar, which I will host this coming Wednesday to discuss current trends in medical device imaging. For anyone interested in this event, registration is on our website. So while revenue for fiscal 2026 will largely be driven by our two largest programs, there is a host of other programs right behind those that will continue growth into the future. With strong confidence in our ability to maintain revenue at the higher level seen in the fourth quarter of fiscal 2025, let me turn now to a few comments on gross margin. A number of issues pulled down gross margins in Q3 and Q4 of fiscal 2025. And while Q4 gross margin was slightly higher than that of Q3, we expect margins to recover substantially more in fiscal 2026. Because our single-use cystoscope program occupied so much of our engineering team's efforts prior to fiscal 2025, its transition this past year to production led to a reduction in product development revenue for the first time in over 6 years. Because product development revenue tends to have higher margins than production, overall gross margin suffered from this shift in product mix. In fiscal 2025, this issue was exacerbated by the need to pull design engineers into troubleshooting on the single-use cystoscope line, reducing the amount of engineering resources available for billable product development work. As I already mentioned, we have a clear path now to improve the single-use cystoscope production line, which will reduce the requirement for engineering support. Also, we are already beginning to see a recovery of the product development pipeline and expect steady increases throughout fiscal 2026. In the fourth quarter of fiscal 2025, about $0.5 million of product development revenue was for tooling and fixtures for additional production lines, which carries a margin just under 10%. Because these revenues are mainly for low-risk pass-through materials purchases that still contribute to the bottom line, we welcome orders like these, but they do pull down overall gross margin percentage. While we expect materials revenues such as this to continue, we expect it will be a smaller percentage of total revenue, and therefore, should be much less impactful as production programs grow. Finally, the impact of the tariff increases in Q3 and particularly in Q4, was substantial. Total tariff costs in Q4 alone were approximately $180,000, representing about 3% gross margin. We have worked aggressively on this issue. As I already mentioned, we are close to having agreements on tariff reimbursement with our two major production customers, at least one of which we expect will be retroactive to July 1, and we now have a policy requiring tariff reimbursement on virtually all new orders. We are investing in the business through the operational steps I described already, but also by strengthening our overall operations team. In the first quarter of fiscal 2026, we recruited and hired our first manufacturing and quality engineers. We just recently hired a new Director of Quality and Regulatory Affairs, and I'm really pleased to announce today that we have just come to agreement with Joe Traut who will start as our new Chief Operating Officer on October 1. Joe is an industry veteran with over 30 years of experience in medical device production, much of it focused on bringing up new production lines, transferring production lines from one location to another and overall improving manufacturing efficiency and performance. Joe has consulted to us for the last two months. He's already familiar with the issues we need to tackle, and I'm really thrilled that he has agreed to come on full time to help us drive the performance of our operations to higher levels. Joe will be replacing Mahesh Lawande, who has been in the COO position for about two years. These were two critical years for our operations as we launched our aerospace and single-use cystoscope production programs. I want to thank Mahesh for his tireless efforts and dedication during this time. For fiscal 2026, we expect revenue of approximately $25 million which compares to $19 million in 2025, an increase of over 30%. This will be driven largely by our systems manufacturing business, which is forecasted to increase by more than 75% as our two large production programs continue to expand. We expect fiscal 2026 gross margins of approximately 30%, which favorably compares to 18% in 2025. Improved manufacturing yields, better pass-through of tariffs and elimination of some low-margin revenue are all key factors to the improvement. Our long-term margin goal remains 40% with significant increases in revenue and gross margins, we expect to recover positive adjusted EBITDA in the range of $0.5 million for fiscal 2026. We believe there is substantial operating leverage to drive significant bottom line profit as revenues continue to increase. With that, let me turn it over to Wayne to review the financials in more detail. I will then provide some closing comments and then open the call to questions. Wayne?

Thank you, Joe. Let me expand on some of Joe's comments on the financial results, starting with revenue. For the fourth quarter, revenue was $6.2 million compared to $4.2 million in the prior sequential quarter and $4.7 million in the year ago or fourth quarter of fiscal 2024. Breaking it down, production revenue was $5.1 million compared to $3.3 million in the prior sequential quarter and $2.8 million in the year ago quarter, while engineering revenue was $1.1 million compared to $1.9 million in the year ago quarter. For the year, revenue was flat compared to the prior year at $19.1 million. This, on the surface, masks the trend in the transformation of our more engineering-focused business to a more rapidly scaling manufacturing enterprise. On the product development side, our engineering pipeline continues to strengthen in response to marketing around the Unity platform, coupled with an expanding outreach that is focused on broadening our customer base. We now project fiscal 2026 revenues to reach $25 billion. This growth is being driven by continued expansion of our systems manufacturing business as our backlog and production demand continues to increase, driven by recent purchase commitments for the aerospace and single-use programs. Growth of 75% is expected in this area from approximately $8.3 million in fiscal 2025 to $14.5 million in fiscal 2026. This continues the trend from fiscal 2025, where revenue from this business segment nearly tripled from $1.2 million in Q1 to $3.4 million in Q4. Conservatively, we are currently forecasting a modest recovery in product development going from $4.9 million in fiscal 2025 to $5.6 million in 2026. Revenue from our micro-optics labs is expected to drop from $2.1 million in fiscal 2025 to $1.3 million in fiscal 2026 due entirely to timing of that division's large defense customer reorder. And our Ross Optical operations are expected to be essentially flat at $3.7 million to $3.8 million. For the quarter ending June 30, 2025, gross margins were 13% compared to 10% in the prior sequential quarter and 22% in the fourth quarter of a year ago. Although we continue to scale production of our single-use cystoscope following the production costs incurred during the previous sequential quarter, we continue to recognize suboptimal yields. We expect those yields to improve and normalize toward target levels in the third quarter of fiscal 2026 for all the reasons Joe covered. The under-absorption of engineering resources was a contributing factor here as well. For the year, gross margins were 18% compared to 30% in the prior year. We expect gross margin to continue to recover as production revenues increase. We are expecting a blended gross margin of approximately 30% for fiscal 2026 with much of the improvement occurring in the second half of the fiscal year. We decreased R&D spending in the quarter from $355,000 to $228,000 compared to the quarter ending June 30, 2024. R&D spending in the current fiscal year increased approximately $180,000 to $1.2 million compared to $982,000 during the year ending June 30, 2024, primarily due to our investment in Unity. Selling, general and administrative expenses increased $2 million during the three months ended June 30, 2025 compared to $1.9 million during the three months ending June 30, 2024. For the year, SG&A increased from $7.5 million to $7.8 million primarily due to increased personnel costs, primarily stock-based compensation and recruiting expenses. As a result of the factors I've discussed, our net loss was $1.4 million for the quarter as it was for the same quarter last year. Our net loss for the year was $5.8 million compared to $3 million in the prior year. Adjusted EBITDA, which excludes stock-based compensation, interest expense, depreciation and amortization was negative $856,000 in the fourth quarter of 2025 compared to negative $1.3 million in the previous sequential quarter and negative $1.1 million in the year ago quarter. For fiscal 2025, adjusted EBITDA was negative $3.7 million compared to negative $1.6 million in fiscal 2024. Cash at the end of June was approximately $1.8 million and debt was below $1.9 million. Accordingly, we are working to increase the availability of debt capital to fund our continued business expansion. I will now turn the call back over to Joe for some final comments.

Thank you, Wayne. Let me finish by summarizing a few key points. First, we are very optimistic about the future, given the high growth expectations of our production business and the high degree of confidence and visibility into these programs. Second, we believe that these new higher revenue levels of roughly $6 million per quarter or $25 million per year are sustainable given our significant production backlog. And finally, we are investing in the team to quickly address all operations, challenges, including those associated with a small and rapidly growing production business. We are maturing as a company. We may not get everything perfect the first time, but we're building our internal capacity to take on challenges and deliver strong long-term business results. To all of you on the call, I thank you for your continued support of Precision Optics. We will be participating in the Lytham Partners Fall Investor Conference with one-on-one meetings tomorrow. Please contact Robert for more information. With that, we'd be happy to take any questions.

[Operator Instructions] And your first question today will come from [ Chris Bechowski ], Private Investor.

I have a couple of questions. First, just like off the top of my head, it seems like you're guiding at about the same revenue for '26 to be at the same revenue rate -- quarterly revenue rate as Q4 that you just reported. But you are also saying that your two largest customers will progressively increase the revenue contributions throughout the next year. And you're saying that you will also get bigger engineering revenues throughout the next year. So how do we -- is that -- are you just being conservative in your guidance? How do we square these things?

Yes, sure. It's a great question. So we are being a little conservative, that's true. If you were listening carefully when Wayne went through the different business units, there is one business unit, our micro optics lab that will come down about $800,000 in the year. That's exclusively due to timing of one big order that we typically get from them. The other thing, though, is embedded in some of the gross margin commentary, we talked about the fact that there is $0.5 million in Q4 that was from tooling and fixturing that we put together for expansion of production lines. So that tooling and fixturing, that's $0.5 million in a quarter right? That will be replaced by much higher margin production revenue as we go through quarter-to-quarter throughout fiscal '26. So basically, the mix of revenue is going to change a little bit and there will be more of it coming through, especially with that higher margin aerospace program.

Okay. I understand. So you're a little bit different than the usual manufacturing company that you actually get to charge some of your capital costs to your customers and you get revenue from that.

That's exactly right. It's -- the markup is small but it's low risk and it's sort of pass-through. So it benefits the bottom line, but it sort of artificially reduces what the gross margin percentage is.

Okay. All right. So now for your medical program, what you're saying is that your client agreed to pay higher cost to kind of reimburse you for some of the initial production difficulties. And then presumably, they will kind of ramp down to the original cost. How is that going to work? Is it going -- is it like previously agreed schedule of the ramp-down or is it going to be -- are they just going to kind of wait for you to tell them that, yes now we've overcome the difficulties so we can sell it to you for a lower price.

Yes. So it's a little bit of a combination. So for this customer, we have open book pricing, and we've negotiated margins, but they recognize that the start-up costs have been more substantial than we anticipated. So basically, referencing back to that open book pricing, we came back to them and they agreed that the costs were higher, so they would cover some costs in the short term. The reason I say it's sort of a combination is that they have given us targets by which they would like us to see solutions to some of these near-term problems. So we've negotiated sort of a step down from the price that we're at now with an understanding that ultimately, we need to get back to the margins that we originally negotiated at the beginning of the program.

Okay. And about the tariff reimbursement, you're still in negotiations about those?

Sorry, you were asking about the tariff reimbursement?

Well, I guess they're not really reimbursements, but just price hikes for tariffs.

Yes. So we basically have verbal agreements. We just have to document it all. They were in the process...

Yes. Okay. All right. And regarding the medical program as well, I think you said that you're kind of done with the engineering part of the solution. You've already engineered a solution, so now it's just implementation. So your engineering resources are ready to be used for actual engineering revenue. Is that correct?

Generally, that's correct. Let me explain in a little more detail. So some of the issues that we're seeing with regard to yield can be improved, can be solved by doing some slight redesigns to the product itself. That work will still require our engineering design team and that will continue. What was happening in the fourth quarter is that there are enough issues on the line that we were pulling the engineering design team onto the line to do what some people would call sustaining engineering. And the amount of that work that we have to do has substantially been reduced because the team got in there and they got some solutions. Also, we've hired a manufacturing engineer and a quality engineer whose job specialty is really digging into things like that on the line. So for all those reasons, while we still need the design engineers to help with the redesign aspects that we're using to get better yields, that will still be less of their time than we were pulling them in for earlier when we were working on all the yield issues.

Okay. So I guess you're saying that engineering resource would be still feed up kind of progressively throughout '26?

That's right. With the pretty big jump in Q1 and Q2 from where we were in Q4.

Okay. And do you have projects lined up for those people?

We do. Yes. And we're bringing in more and more continuously. The market is responding well to the Unity platform. Our -- as I alluded to, our business development team is doing a good job with outreach and sort of expanded their marketing efforts. We have this new first-ever webinar that we're doing this week, and there are a number of programs like that, that our team is using to continue to fill the pipeline. So we have -- I think we have 7 or 8 programs that are already in the pipeline that we have plenty of work for our engineers to work on. But we also have -- are working aggressively to get even more. So yes, we're in good shape there.

Okay. That's great to hear. And just to be clear, as opposed to most other companies, you get revenue in the beginning of the pipeline, right, as soon as your engineers start working on it, you start billing, right? That's good. And the other thing I was going to ask is this couple of quarters where you had your engineers busy. Do you think it will affect the number of incoming production orders just because your engineers weren't working on new production orders? Or do you already have new production orders coming in?

Yes, that's a great question. To some extent, the engineering revenue that we saw before '25 and '23 and '24 was a little bit artificially high, if you like, because the amount of engineering work then and then following on where we were using the engineers on the production line for the cystoscope was much greater than we would typically expect for a typical product development program. So all of that is to say, even though we had our engineers working on that one big project, which made a lot of sense because the future potential for that program is tremendous. We still had a number of other programs that we're continuing to move along. We had specific engineers who were focused on the other programs other than the cystoscope program. So if you look in our slide deck that we always post on our website and that we talk about on one-on-ones, there's an engineering pipeline side. And if you were to look at that today -- we just updated it today, you'll see that there are some 6 or 7 or 8 programs, three of those, in particular, are in the verification validation phase. And that phase is the one that's immediately prior to production. So we expect those three programs will go into production in the next 12 months. There's also one other program that was in production that we pulled back on. This was a laparoscope for robotic surgery. We pulled back because there are some yield issues on that project, which we think we have a handle on, but also because we were moving that product production line from our main facility to our Gardner, Massachusetts facility as part of this realignment and consolidation of production in one location in Gardner. That one will come back online later this year as well. So between that program and the three programs that are in verification validation, we expect we'll have plenty of programs coming in the next 12 months. If you look at the pipeline, you'll see there are a number of other programs that are behind those first three. Those other programs we expect will come in the 12- to 24-month time frame. So really, what we're doing now is we're pulling in new programs, we're pulling those in with the target of having these newer programs coming in today ready for production in two to three years and given the benefits of the Unity platform, where we're starting with the baseline design, we expect that we'll be able to get new programs that come in today queued up and ready to go for 24 to 36 months, which is really the place where we need to be looking at new programs for production given the pipeline -- given how the pipeline looks today.

This is great to hear, and I'll have a lot of fun looking through your deck. Okay. This is it for me. Good luck.

[Operator Instructions]

All right. Operator, this is Robert here. While we wait to see if anyone else dials into the traditional teleconference line. We have a couple of webcast questions. [Operator Instructions] Chris actually addressed some of the questions that were already asked here, but a couple that weren't, Joe and Wayne, if you could touch on these. How are -- there's a second single-use program here. How are things going with that? And are any of the same maybe challenges that related to the first single-use program occurring there as well?

Yes. Thanks. So that program is moving along nicely. We announced, I think, in the last earnings call that, that program went into production in the March, April time frame. It's been ramping much more slowly than the cystoscope program. So it's given us more time to sort of develop things as we go. Nonetheless, there are still some start-up challenges. But we expect, and what we've seen is that all the things that we've learned on the cystoscope program are allowing us to respond the similar kinds of issues. They are different designs, so they're specifically different but there are similar kinds of issues. And so we're using what we learned from the cystoscope program to be able to move through those start-up pickups and challenges that always come when you start a new production line. That, combined with the fact that it's starting off more slowly means that it's coming online, I would say, a little bit more smoothly. Now similar to the cystoscopy program, our customer just told us a couple of weeks ago that they want to double their forecast. So again, we're going to -- even after we're getting started, we're going to have to ramp pretty quickly. And so we're poised to do that. Again, we've got a great team. They've learned a lot from the cystoscope program. We have Joe Traut coming on who I think is really ideal for these kinds of challenges. So I expect that the ramp on that program will be much smoother than the one -- than it has been on the cystoscope program.

All right. Very good. [Operator Instructions] Barring any additional questions, Joe and Wayne maybe final question here. You mentioned that gross margin improvement will be back half weighted. Does that mean Q4 gross margins next year will be well north of 30%?

That would be correct, Robert. We'll see strengthening margins as we get further into the year following the work we're doing on the cystoscope line and with the ramping of the aerospace program as well.

Okay. Great. I am showing no further questions. So with that, Joe, I will turn it back over to you for any closing remarks.

Great. Thanks very much, Robert, and thank you very much, everyone, for joining us on the call today. We look forward to talking with everyone again soon. Thank you.

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