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Operator: Good day, and welcome to the Precision Optics Reports Second Quarter Fiscal Year 2026 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 with Lytham Partners. Please go ahead.

Robert Blum: 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’ second quarter fiscal year 2026 financial results for the period ended December 31, 2025. With us on the call representing the company today is 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. If you dialed into the call through the traditional teleconference line, as the operator indicated, please * star, then 1 to ask a question. 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. 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 are 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.

Joseph Forkey: Thank you, Robert, and thank you all for joining our call today. When we spoke last quarter, we described Precision Optics as operating at a new level, driven by record systems manufacturing revenue and sustained strength in our 2 largest production programs. I’m pleased to report that in the second quarter of fiscal 2026, that momentum not only continued, it has accelerated. Revenue for Q2 reached a record $7.4 million. That total consisted of $6.0 million in production revenue, net of tariffs, up 92% year-over-year and up 9% sequentially, and $1.0 million in engineering revenue, which was down 29% year-over-year, but up 47% sequentially. This sequential growth in engineering, along with continued growth in engineering bookings, is particularly important as it reflects the early stages of the recovery we discussed on our last call.

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It has become clear that our production business is, on its own, acting like a successful start-up company. This does not mean the 2 sides of our business are not tightly interwoven. They are. Production programs are the result of the sales and execution of our engineering or product development team. However, we have experienced growing pains as significant production programs have ramped, while we were under-resourced in terms of line management, production support, and other functions that a rapidly growing production business requires. Recognizing we were not addressing operating challenges in a sufficiently aggressive fashion, we changed leadership with the addition of Joe Traut as COO in October. By the end of the year, production was running better, and it has continued to improve in early 2026.

Concurrently, we have invested in sales leadership and marketing efforts, and our pipeline of product development opportunities is growing. While the gross margin and bottom line performance in the second quarter were not what was expected, we are making solid progress week in and week out and can see results continuously improving. Today, I’ll focus my remarks on 4 primary areas: first, updates on our manufacturing programs; second, the operational improvements underway and their expected impact on gross margin and adjusted EBITDA; third, positive developments in product development and the rebound we are seeing at Ross Optical; and finally, our updated guidance and outlook for the remainder of fiscal 2026. Let me begin with production, which continues to be the primary driver of our revenue growth.

Our top-tier aerospace program generated $2.7 million in revenue during Q2. This marks another quarter of sustained high-volume performance at the same record levels set in Q1. As a reminder, this program involves a highly specialized optical assembly used in a next-generation aerospace platform. The product has stringent performance and reliability requirements, and we have become a trusted strategic sole-source supplier to this customer. Demand remains strong. Our joint forecast with the customer, combined with our internal capacity planning, supports an increase from the shipment levels of approximately $2.5 million in the second quarter to over $3.5 million for the fourth quarter of this fiscal year. Importantly, by the end of Q2, our operations team had updated the line to enable more than 50% higher maximum throughput compared to the end of Q1.

The team also made good progress improving operating efficiency, and we are already beginning to see tangible throughput increases, which we expect will have a positive impact on our financial results in Q3 and more substantially in Q4. One of the most compelling aspects of this program is its operating leverage. Quarterly volumes could increase by 50% without requiring any increase in headcount. In fact, with steady material flow to avoid start-and-stop production patterns and line-down inefficiencies, we could potentially add approximately $1 million of incremental quarterly revenue with minimal incremental costs beyond materials, translating into significant gross margin and bottom line expansion as volumes increase. This remains a cornerstone program for Precision Optics and a powerful contributor to our path toward profitability.

Our single-use cystoscope program for a surgical robotics company generated $2.0 million in revenue during Q2 compared to $1.5 million in Q1, marking the sixth consecutive quarter with record revenue. End market demand remains extremely strong, and our customer continues to push for higher output. However, gross margins on this program remains challenged in Q2 as yields have been below expectations and labor utilization has been suboptimal due to training time and other inefficiencies in production line operations. During the second quarter, we made substantial progress on improving operations that should drive improved gross margins in the third and fourth quarters. First, 2 significant updates, one to the product design and the second to the supply chain, both in development for several months, are scheduled for implementation this quarter.

These updates were delayed primarily due to the complexity and added care required to make changes to an FDA-cleared product already being used clinically. Because these updates represent reductions in cost and improvements in yield, they both will have a strong impact on gross margin. In fact, because the yield improvement is at the final assembly stage, it represents virtually 100% variable margin. We expect these changes to result in a $150,000 to $200,000 quarterly increase in gross profit at current production rates. In addition to these updates, our new operations team has successfully stabilized the main production line and significantly increased throughput on a second partial line. Production and shipments are now predictable, enabling better planning and higher efficiency, which contribute to higher gross margin, a stable line, and stronger customer confidence.

We expect that the anticipated improvements in our single-use and aerospace programs would bring the company to break-even levels of adjusted EBITDA even before other anticipated positive developments. Beyond our 2 lead programs, a third key production program, a single-use ophthalmic device, is now ramping significantly and should contribute towards continued growth in the second half of the fiscal year and beyond. In calendar 2025, revenue from this program was limited, as we built only 1,000 units, and start-up margins were significantly negative. We expect the next order will be for 10,000 to 15,000 units and will support $2 million to $3 million in revenue this calendar year with gross margin greater than 30%. The operational progress on this scope has been dramatic and highlights the benefits of our new operations management team, as well as learnings from our other single-use program.

In November, yields were approximately 60%. Today, yields are routinely above 90%, and we are pushing to exceed 95%. In November, we produced approximately 6 units per day. Today, we are producing 20 to 25 per day and working to increase to 35 per day. In summary, our production revenue levels continue to validate the strength of demand across our key programs and markets. However, as we discussed in detail last quarter and again here, gross margins remain challenged due to manufacturing inefficiencies associated with scaling operations, yield challenges on our single-use programs, and outsized impacts from production scrap. These issues contributed to negative adjusted EBITDA in Q2, despite the large increase in revenue. That said, we are already seeing meaningful improvement as we enter the second half of our fiscal year.

The impact of the new operations leadership team began to materialize toward the end of the quarter. We saw measurable operational improvements in December, improvements that we expect will carry forward into Q3 and expand further in Q4. We acknowledge that this is an approximate 1-quarter shift to the right from our original expectations, but we believe we now have the people and systems in place to execute on an improved manufacturing optimization plan that is already improving profitability and will lead to positive adjusted EBITDA beginning in Q4. In recent quarters, our Ross Optical division has produced lower results than we have seen historically, largely due to the impact of tariffs and the associated changes in customer purchasing trends.

This now has begun to turn around. Ross Optical delivered revenue above $1 million for the second quarter in a row, and we enter Q3 with the highest backlog in over 3 years. This provides strong evidence that the market rebound we anticipated is beginning to take shape. Because the Ross Optical division can support higher revenue without significant incremental fixed costs, revenue increases here carry strong variable margins. Accordingly, we expect Ross to experience improved margins in the second half of fiscal 2026. Product development, or what we sometimes describe as engineering revenue, increased sequentially and is forecasted to continue to increase in Q3 and Q4. This forecast is supported by the second consecutive quarterly increase in product development purchase order bookings in Q2, which were at the highest level in over a year.

As we’ve discussed in earlier calls, the aggressive time line for the development of the single-use cystoscope product, combined with the transfer to production a 1.5 years ago, resulted in an abrupt reduction in engineering work that has taken some time to recover. We attribute the recent success and increased bookings in part to the renewed marketing efforts we initiated over the past year, and we expect bookings increases to continue through Q3, Q4, and beyond. Our primary pipeline for new customer programs continues to be minimally invasive medical devices. And while we still receive inquiries about reusable devices, the trend, as expected, is continuing to move to single-use. As we’ve discussed on previous calls, this strong market interest is based on the benefits of virtual elimination of cross-contamination, superior image quality, and ease of use.

While the single-use endoscope market has grown substantially over the last couple of years, market studies still predict annual growth rates to continue in the mid-to-high teens over the next 10 years. With the successes of our first few programs that have gone to production in this area, we are well positioned to take advantage of the ongoing growth in this market. We also continue to see strong interest in our technologies from the defense aerospace market, with a particular emphasis on next-generation aeronautic and satellite systems for both commercial and government use. The specific segments that we target have seen heavy investments in recent years, supporting expectations for double-digit annual growth rates over the next decade. Our large production aerospace program, along with some of our recently announced new programs, fit squarely into these market segments, and we believe there are additional opportunities for us in this area.

Several programs already in our product development pipeline continue to advance toward production, with 4 programs scheduled to transition in the next 12 months. Three of these are for reusable products used in sinoscopy, urology, and otoscopy, and one for a single-use product for a specific arthroscopic procedure. Each of these programs is expected to contribute roughly $1 million to $3 million in annual revenue when they transition to production. Importantly, as more of these programs enter production, we expect significant leverage of the operations management and support teams that we have been investing in over the last few quarters, resulting in higher gross margins across all programs. Given stronger-than-anticipated production demand, we are increasing our full year revenue guidance to a range of $26 million to $28 million, which is up from the $25 million we estimated previously.

However, the timing shift in margin recovery by about 1 quarter results not only in an additional quarter of adjusted EBITDA loss, but also pushes positive adjusted EBITDA quarters out of this fiscal year into the next, removing the opportunity to recover this year from the EBITDA losses in the first half. Combined, this results in revised full year adjusted EBITDA guidance of negative $2.5 million to negative $3.0 million. We expect Q3 to be a strong improvement over Q2 and Q4 to improve to positive adjusted EBITDA. Importantly, our long-term prospects remain strong, as evidenced by sustained top line growth, improving operational discipline, increasing bookings, especially for product development, and a strong overall backlog entering Q3.

We remain confident that our business model and the markets we are serving can sustain substantial growth over the coming quarters and years. With that overview, let me turn it over to Wayne to review the financials in more detail. Wayne?

Wayne Coll: Thank you, Joe. Let me expand on some of Joe’s comments on the financial results, starting with revenue. For the second quarter, revenue was $7.4 million compared to $4.5 million in the year ago second quarter and up compared to $6.7 million in the prior sequential quarter. Breaking it down, production revenue was approximately $6.4 million compared to $3.1 million in the year ago quarter and $6.0 million in the prior sequential quarter. Product development, or engineering revenue, was $1 million compared to $1.2 million in the year ago quarter and $700,000 in the previous quarter. Our aerospace program contributed $2.7 million in revenues, while the cystoscope program achieved $2.0 million. As we discussed last quarter, we successfully negotiated agreements with these customers to pass through tariffs without markup.

The tariffs are treated as revenue and correspondingly as cost of goods sold. Net of tariffs, the aerospace program had revenue of $2.5 million and the cystoscope program, $1.8 million. Total revenue, net of tariffs, would have been $7.0 million. For the quarter, gross margins were 2.8% compared to 14.2% in the prior sequential quarter and 23.6% in the second quarter of a year ago. Joe touched on many of the key impacts on gross margins, but to summarize: high levels of manufacturing scrap and temporary tariff impacts, the yield and throughput on our cystoscope line was below optimal levels, profitability of our product development group was negative due to underutilization during the quarter, and our optics lab experienced a delayed reorder of a key defense program that we expect to begin building now in the fourth quarter.

We believe improvements made by our new operations team, both those already implemented and those currently underway, will dramatically improve efficiencies and result in improvement to gross margins in the second half of the year. Turning to operating expenses. Total OpEx was $1.9 million during the quarter compared to $2.0 million in the year ago second quarter. Breaking it down, SG&A expenses were $1.7 million during both this quarter and the comparison quarter a year ago. R&D spending in the quarter decreased slightly to $250,000 from $318,000 in the year ago second quarter. The decrease is a result of progress made in prior periods in the development of the Unity platform, a key driver of our new product development engagements. As a result of the factors I’ve discussed, our net loss was $1.8 million for the quarter compared to $1.0 million in the year ago second quarter and compared to a net loss of $1.6 million in the sequential first quarter.

Adjusted EBITDA, which excludes stock-based compensation, interest expense, depreciation and amortization, was negative $1.5 million in the second quarter of 2025 compared to negative $0.6 million in the year ago quarter and compared to a negative $1.2 million in Q1. Cash at the end of December was approximately $900,000 and bank debt was $1.6 million. We are making progress in negotiations to increase the use of debt capital to fund both our continued business expansion plans and working capital needs, and we believe the outcome will be favorable considering the positive trajectory of our business and recent discussions with potential partners. We expect to announce expanded loan facilities during the third quarter. As Joe mentioned, we have had to make revisions to our fiscal year outlook based on the first half results.

We now expect revenue to be $26 million to $28 million, up from the $25 million previously outlined. Our adjusted EBITDA is now expected to be negative $2.5 million to negative $3.0 million compared to a positive $500,000 reported previously. With year-to-date adjusted EBITDA already negative $2.7 million, our outlook implies we will have approximately break-even adjusted EBITDA for the remainder of the fiscal year. I will now turn the call back over to Joe for some final comments.

Joseph Forkey: Thank you, Wayne. Before we take questions, let me recap a few points. Q2 revenue reached a record $7.4 million, driven by expanded production revenue, which grew 105% year-over-year. Our aerospace shipments remain at record levels with meaningful increases expected in Q3 and Q4. Our cystoscope operations have stabilized with margin improvement expected in Q3 and Q4, and our ophthalmic program ramp is accelerating with yields now above 90%. Product development bookings are at the highest level in over a year, and the Ross Optical backlog is the strongest it has been in over 3 years. And finally, operational improvements driven by the new operations team are in place and gaining traction with margin recovery underway and expected to accelerate in the second half of the fiscal year.

In many ways, fiscal 2026 remains a transition year, one in which we are building the infrastructure and processes required to support a significantly larger production business. This should be expected. It is an investment that is worth making, as we believe the production business is on a long-term growth trajectory that will create significant value for shareholders. We believe the production business over time can create value on its own, well beyond POC’s current market capitalization. The success we’re seeing is not unexpected. This is the result of much of the hard work over the last few years, and we’re excited to see this part of the business growing as rapidly as it is. With that, we’d be happy to take any questions.

Operator: [Operator Instructions]

Robert Blum: All right. Nick, this is Robert here. While we wait to see if anyone dials in through the teleconference line, I want to remind everyone on the webcast that if you’d like to ask a question, you can type it into the Ask a Question box there on the webcast player. Joe and Wayne, we have a few questions that have come in here. First one, can you clarify if the design revisions required to fix these yield shortfalls are currently within your internal manufacturing control? Or are you waiting on your customers to approve engineering changes? Furthermore, what is the exact lead time for these revisions to hit the P&L, and can you bridge the gap to that date without a dilutive equity raise?

Joseph Forkey: Let’s see. There’s a lot there. It’s a great question. So the design piece of the yield improvement that we expect to see on the cystoscope line, we have been working on for many months. The design change has been approved by our customer. We have received initial parts for that design change, and we’ve done the engineering builds that are required in order to qualify the design change. So there are a number of sort of documentation and some more testing that has to happen. There has to be some formal approval from our customer, which we’re quite confident we will get because they’ve been part of the process all along. So we anticipate that this design change will go into production sometime in the next month or so. And I’ll let Wayne comment on the latter part of that question about how we get there from a financial standpoint.

Wayne Coll: Thanks, Joe. Yes, we’ve had advanced discussions with lenders over the last several months, as I mentioned, and with due diligence proceeding, we do expect to announce a new loan facility during the third quarter. We also received — recently received grant funding from Massachusetts, the impact of which we’re still quantifying. We always consider equity financing as one option. But at the moment, we are uncertain how much equity capital, if any, is going to be needed to close any potential funding gaps.

Robert Blum: Once again, if you have any questions on the webcast player, please type those into the Ask a Question feature there on the webcast box there. The next question is, can you comment on facility changes and when they will all be up and running? I know there’s a little bit of an overlap there, but anything else you can expand upon?

Joseph Forkey: Yes, sure. So we’ve talked on earlier calls about a fairly substantial plan with regard to facilities, and we reported that we’ve already made facilities updates in our main operation, the operation in the state of Maine, as well as some of the buildings in our Massachusetts facility. So we moved to a new headquarters, which we’re talking to everyone from, I think, for the first time today. So those facility updates are complete, and everyone’s moved in. This includes our engineering group. The last piece that we have to update is our production facilities. And right now, we’re updating it as we need it. And over the next, I would say, 6 to 12 months, we’re looking at a more substantial and complete overhaul in order to be prepared for the next couple of years.

But in the meantime, we have the facilities that we need to execute on the programs that we’re working on now and all of the programs that I talked about in the comments today. And so we see this as a longer-term effort that we have to move through. And as Wayne said, there are a number of funding options we can look at for that, including some programs through the state and otherwise to be able to support that facility’s update for the production in the long run.

Robert Blum: All right. Very good. Once again, if you’re on the live dial-in line, please press star, then 1, to ask a question. If you’re on the webcast, you can go ahead and type it in there. You have a couple more questions here. Can you — and again, you’ve touched on this, but can you talk about your loan discussions and how certain you are that you’ll be able to reach positive EBITDA without dilution?

Joseph Forkey: I think Wayne already answered that. The loan discussions are quite advanced. We look at funding from multiple different sources, but we’re quite confident that the discussions that we’ve been having with the banks will be successful.

Robert Blum: Barring any additional questions that might come in, this looks like the last question. What’s the long-term return you expect on the investments the company is making in its production infrastructure?

Joseph Forkey: Yes. So we talked a lot about production infrastructure on the call today, and I just want to clarify. We see a lot of the investments that we’re making in the operations team. So I just commented on the long-term investments we’ll need to make on the production facilities. Some of what we’ve been doing over the last couple of quarters does include facilities updates, updating cleanrooms, adding new fixtures and tools. But really, the piece that is most substantial in terms of the impact that it will have on the next couple of quarters is on the infrastructure. And we talked about putting in place a new Chief Operating Officer. We have a new Senior Director of Operations. We have a number of new quality engineers, manufacturing engineers.

We’re really building out that personnel infrastructure. And so I’ll answer the question this way. There’s significant leverage that we can benefit from when it comes to the size of the production business that can be supported by the management infrastructure and the support infrastructure that we’ve been putting in place for production. It probably came through in the script here, but we — I think we underestimated how much we needed to invest in that management team and that support structure. So those folks will be able to support a much higher level of production, even than we’re talking about having in Q3 and Q4. So I think there will be substantial leverage that we obtain as we continue to increase the number of production programs.

Beyond that, I think the investment is a very safe investment because from a baseline standpoint, the 2 programs that we already have in place that are driving the increases in volume, we have strong indications that those will continue for a long period of time. In one case, the program is a product that’s a replacement of a product that’s on the market already and has been for many years. In the other case, it’s a product that’s used in a satellite system that has a limited lifetime. And so we know that there will be a need for replacement of those systems. So from a baseline standpoint, we’re quite confident that the programs that we’ve built this infrastructure for will be there for a long period of time, and we believe that we can support significantly higher production revenue with the operations management and support team that we put in place.

So we expect significant return on those investments.

Robert Blum: Actually, we do have a couple of additional questions that have come in. The next one here talks about your guidance increase in revenue for the year. Can you talk about which program or programs is getting higher-than-expected order flow from your original expectations there?

Joseph Forkey: Yes. So it’s really the 2 big production programs. It’s the aerospace program and the single-use cystoscope. I believe the aerospace program is the one that’s coming in at a faster rate. It’s ramping faster of the 2. But both of them are really coming in at a higher level than we had originally anticipated, which is great news.

Robert Blum: And maybe there’s something you can help clarify here, because there’s a question, is it primarily the borescope business that is driving aerospace? So maybe you could help clarify when you talk about defense and aerospace and how the borescope program relates to that.

Joseph Forkey: Sure. So here, I can be very complete. We have 2 major defense aerospace programs that are in production. One is the aerospace program that we talked about an awful lot today that’s running at a few million dollars a year. That one — sorry, a few million dollars a quarter. That one is a system that’s supporting a satellite program. The second one is the one that we’ve talked about on previous calls that we manufacture in our micro-optics lab. That’s a program that we’re still waiting for a reorder on. That one typically runs at a couple of million dollars a year. That one, we don’t know — we don’t have visibility into what the final product is. And then the — so those are the 2 production programs that are already running.

We have a couple of product development programs, the one that the question is about is the borescope program. That program is in the product development phase of our business or a section of our business. And that program is substantially contributing to the increase in the product development revenue, which we’re very anxious to get back up to levels that it was at a couple of years ago. So just to be clear, the borescope program is in the product development phase. It’s a substantial part of the increase in the product development work that we’re doing. It probably won’t go into production for another year, I would guess. But when it does, we expect it to increase the production revenue at that point.

Robert Blum: All right. Very good. Well, I am showing no additional questions at this time. So Joe, I will turn it back over to you for any closing remarks.

Joseph Forkey: Great. Thanks, Robert, and thank you all for joining us today on the call. I look forward to talking with all of you soon. Thank you, and have a good evening.

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

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