Q4 2024 Precision Optics Corp Inc Earnings Call

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Operator: Good afternoon, and welcome to the Precision Optics 4th quarter and fiscal year 2024 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Speaker Change: Good afternoon and welcome to the Precision Optics fourth quarter in fiscal year 2024 financial results conference call.

Speaker Change: All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two.

Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two.

Operator: Please note, this event is being recorded.

Robert Blum: I would now like to turn the conference over to Robert Blum with Listen Partners. Please go ahead.

Speaker Change: Please note, this event is being recorded.

Speaker Change: I would now let's turn to the conference over to Robert Blum with Lithium partners. Please go ahead.

Robert Blum: Thank you very much, Gary. And everyone's joining the call today. As the operator mentioned on today's call, we will discuss Precision Optics' 4th and fiscal year 2024 financial results for the period ending June 30th, 2024.

Robert Blum: Thank you very much, Gary, and everyone joining the call today. As the operator mentioned on today's call, we will discuss Precision Optics 4th quarter and fiscal year 2024 financial results for the period ending June 30th at 2024.

Robert Blum: With us on the call, we're representing the company today, 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. If you dialed into the call through the traditional teleconference line as the operator indicated, please press star, then one to ask a question. If you're 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. We'll do our best to get to as many of the questions as possible.

Speaker Change: with us on the call where I'm presenting the company today, Dr. Joe Forkey, Precision Optics Chief Executive Officer and Mr. Wayne Coll, the company's chief financial officer. At the conclusion of today's prepare-to-marks, we'll open the call for a question and answer session.

Speaker Change: and the President, if you dialed into the call through the traditional teleconference line as the operator indicated, please press star then one to ask a question.

Speaker Change: 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. We'll do our best to get to as many of the questions as possible. Before we begin with prepared marks, we submit for the record the following statement.

Robert Blum: Before we begin with prepared remarks, we submit for the record the following statement. Stabense made by the management team, a 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. For looking statement, subscribe 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.

Steven Smith: Steven Smith, by the management team, a precision optics during the course of this conference call, may contain forward-looking statements within the meaning of Section 27A of the Securities Act in 1933, is amended and Section 21E of the Securities Exchange Act in 1934 is amended and such forward-looking statements are made pursuant to the say-farbal provisions of the

Steven Smith: for looking statements, subscribe future expectations, plans, results or strategies, and are generally preceded by words such as may, future, plan, or plan, will, or should expect to anticipate draft eventually or projected.

Robert Blum: 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 risks that actually result made different materially from those projected in the forward-looking statements as a result of various factors and other risks identified in the company's filing, so with the Securities Exchange Commission. All forward-looking statements contained during this conference call speak only as a 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.

Speaker Change: Lester's a caution that such statements are subject to a multitude of risks and uncertainties. They could cause future circumstances events or results to different materially from those projecting the forward-looking statements.

Speaker Change: and including the rest 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 filing with the security exchange commission.

Speaker Change: All Foreign Wicking Statements contained during this conference, called Speak Only as a Date, in which they were made, and are based on management of assumptions and estimates as of such date.

Speaker Change: Company does not undertake any obligation to publicly update any forward-looking statements, whether as the result of the receipt of new information, the occurrence of future events or otherwise. With that said, let me turn the call over to Dr. Joe Forkey, Chief Executive Officer, Precision Optics. Joe, please proceed.

Robert Blum: With that said, let me turn the call over to Dr. Joe Forkey, Chief Executive Officer, Precision Optics. Joe, please proceed.

Joseph Forkey: Thank you, Robert, and thank you all for joining our call today to discuss our fourth quarter and fiscal year 2020-24 results. As most of you know, on August 14, we pre-announced revenue expectations for the year to be in a range of 18.5 to 18.9. 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 and a few key programs in the latter half of the fourth quarter.

Speaker Change: Thank you all for joining our call today to discuss our fourth quarter in fiscal year 2024 results.

Speaker Change: As most of you know, on August 14th, we pre-announced revenue expectations for the year to be in a range of 18.5 to 18.9 million dollars.

Speaker Change: 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.

Speaker Change: These lower levels were driven by specific delays in a few key programs in the latter half of the fourth quarter.

Joseph Forkey: 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.

Speaker Change: 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.

Joseph Forkey: 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.

Speaker Change: 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.

Joseph Forkey: 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 long-time spinal surgery product for which our customer had built up excess inventory that they needed to burn through before placing additional orders.

Speaker Change: Let me first take a step back and discuss some of the challenges and successes of fiscal year 2024.

Speaker Change: As we communicated over the past year, when we visited 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.

Speaker Change: 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 long time spinal surgery product for which our customer had built up excess inventory that they need to burn through before placing additional orders.

Joseph Forkey: These programs represented approximately $5.6 million in revenue in fiscal 2023. In addition, our Ross optical division saw a sharp drop in revenue caused by an overall slowdown in the optics components industry, starting in the first quarter of fiscal 2024. This represented a year-over-year reduction in revenue of approximately $1.5 million. All told, these situations had a starting fiscal 2024 with reduction of over $7 million in fiscal 2023-based business. While this certainly made for a challenging fiscal 2024, we succeeded in rebuilding the revenue base by moving a number of programs from our product development pipeline into production and successfully bringing on new programs into our product development pipeline.

Speaker Change: These programs represented approximately $5.6 million in revenue in fiscal 2023.

Speaker Change: In addition, our Roth optical division saw a sharp drop in revenue caused by an overall slow down in the optics components industry.

Speaker Change: Starting in the first quarter of fiscal 2024.

Speaker Change: This represented a year-over-year reduction in revenue have approximately $1.5 million.

Speaker Change: All told these situations had a starting fiscal 2024 with reduction of over $7 million in fiscal 2023 base business.

Speaker Change: While this certainly made for a challenging fiscal 2024, we succeeded in rebuilding the revenue base by moving a number of programs from our product development pipeline into production and successfully bringing on new programs into our product development pipeline.

Joseph Forkey: This progress was punctuated by the record-breaking $9 million production order that we announced in May, in record product development revenue, with this segment of our business growing by nearly 24% year-over-year.

Speaker Change: This progress was punctuated by the record-breaking $9 million production order that we announced in May and record product development revenue with this segment of our business growing by nearly 24% year over year.

Joseph Forkey: I am happy to report that we are starting Fiscal 2025 in a much stronger position. Of all programs that contributed significantly to our fiscal 2024 revenue, we have only one which contributed about $400,000 that will not continue into fiscal 2025. So, this year, we are building on a strong base of business that will allow us to reach record levels of revenue in fiscal 2025. While the first quarter of fiscal 2025 will still have suppressed revenue levels due to some specific ramp-up challenges, we expect to see a step increase in revenue beginning in the second quarter.

Speaker Change: I'm happy to report that we are starting fiscal 2025 in a much stronger position.

Speaker Change: Of all programs that contributed significantly to our fiscal 2024 revenue, we have only one, which contributed about $400,000, that will not continue into fiscal 2025.

Speaker Change: So, this year we are building on a strong base of business that will allow us to reach record levels of revenue in fiscal 2025.

Speaker Change: Well, the first quarter of fiscal 2025 will still have suppressed revenue levels due to some specific ramp up challenges. We expect to see a step-in-creation revenue beginning in the second quarter.

Joseph Forkey: Beyond the recovery of top-line revenue during fiscal 2024, we also continued to strengthen our team and invest in operational infrastructure to support a larger business. To support the ongoing increase in interests from the medical device market and our product development capabilities, we have added engineering talent and begun a rollout of our new platform product that draws on our many years of experience in developing new digital imaging systems. This effort, along with management of our overall sales and marketing team, is now being led by our new VP of Sales and Marketing, Clay Schwabbe. Play has extensive experience in the medical device space with previous positions in small growing companies as well as some of the industry's largest, Boston Scientific in Metronaut.

Speaker Change: Beyond the recovery of top line revenue during fiscal 2024, we also continued to strengthen our team and invest in operational infrastructure to support a larger business.

Speaker Change: To support the ongoing increase in interests from the medical device market and our product development capabilities, we have added engineering talent and began a rollout of our new platform product that draws on our many years of experience in developing new digital imaging systems.

Speaker Change: This effort, along with management of our overall sales marketing team, is now being led by our new VP of sales marketing, Clay Swabbe.

Clay Swabbe: Play has extensive experience in the medical device space with previous traditions and small growing companies as well as some of the industry's largest Boston scientific and metronics.

Joseph Forkey: Clay has taken over management of sales and marketing from our former Senior Vice President, Jeff Darubio, who managed our team for more than 10 years.

Speaker Change: Clay has taken over management of sales and marketing from our former Senior Vice President, Jeff Daruvio, who managed our team for more than 10 years.

Joseph Forkey: I want to take this opportunity to recognize the critical role Jeff has played in our company, helping us to increase sales by over 700 percent during his tenure. With significant growth expected in production, we have also updated the infrastructure of our manufacturing team and implemented a new ERP system. As part of the integration of the Lighthouse Imaging Business, we made the decision last year to consolidate all optical systems manufacturing in our Massachusetts location while maintaining an office in Maine to house our engineering and digital imaging center of excellence. We now have all but one of our production programs running in Massachusetts, and we expect this final product to transition in the next couple of months.

Speaker Change: I want to take this opportunity to recognize the critical role Jeff has played in our company, helping us increase sales by over 700% during his tenure.

Speaker Change: with significant growth expected in production.

Speaker Change: We have also updated the infrastructure of our manufacturing team and implemented a new ERP system.

Speaker Change: As part of the integration of the Lighthouse Imaging Business, we made the decision last year to consolidate all optical systems manufacturing in our Massachusetts location while maintaining an office in Maine to house our engineering and digital imaging center of excellence.

Speaker Change: We now have all but one of our production programs running in Massachusetts and we expect this final product to transition in the next couple months.

Joseph Forkey: We have updated our management structure in this area, moving some folks from Maine to Massachusetts, redefining roles for some senior employees, and hiring additional resources, particularly manufacturing engineering.

Speaker Change: We have updated our management structure in this area, moving some folks from Maine to Massachusetts, redefining roles for some senior employees, and hiring additional resources, particularly manufacturing and engineering.

Joseph Forkey: All told, we are well positioned to support the growth we expect during fiscal 2025 and beyond.

Speaker Change: All told, we are well-desertion to support the growth we expect during fiscal 2025 and beyond.

Joseph Forkey: Let me take a few minutes now to discuss in more detail what happened with the programs that impacted revenue in the latter part of Q4 and in Q1 and where we see things going in Q2 of fiscal 2025 and beyond. We manage our business in four separate revenue streams: product development, optical systems production, raw optical, and our micro optics laboratory. At the micro optics lab, we started Q4 coming off a particularly strong revenue contribution of $1.2 million in Q3. From a highly complex optical assembly, we have manufactured for a top tier defense customer for many years.

Speaker Change: Let me take a few minutes now to discuss in more detail what happened with the programs that impacted revenue and the latter part of Q4 and in Q1 and where we see things going in Q2 of fiscal 2025 and beyond.

Speaker Change: We manage our business in four separate revenue streams, product development, optical systems production, raw-sautical, and our micro-optics laboratory.

Speaker Change: At the Micro Optics Labs, we started Q4 coming off a particularly strong revenue contribution of $1.2 million in Q3 from a highly complex optical assembly. We have manufactured for a top tier defense customer for many years.

Joseph Forkey: In April, we announced the follow-on order from this customer. Given the nature of the production process, this order starts with lower revenue rates that grow larger as we move through the order. Q4 revenue from this program was therefore about $260,000, almost a million dollars lower than that of Q3. for the first and second quarters of fiscal 2025, we expect revenue of approximately $360,000 and $370,000 for this order.

Speaker Change: In April, we announced the follow-on order from this customer.

Speaker Change: Given the nature of the production process, this order starts with lower revenue rates that grow larger as we move through the order.

Speaker Change: Q4 revenue from this program was therefore about $260,000, almost a million dollars lower than that of Q3.

Speaker Change: For the first and second quarter of the fiscal 2025, we expect revenue of approximately $360,370,000 for this order.

Joseph Forkey: Within optical systems production, we expected and achieved significant revenue growth from Q3 to Q4 from three programs. Two of these are programs that transition from our product development pipeline to production in the last 12 months, and the third is our autoscopy program, which has continued to recover from the complete shutdown during the pandemic. The output from these three production programs nearly doubled, increasing from approximately $500,000 in Q3 to nearly a million dollars in Q4. All three were running well in the early part of the fourth quarter, and we expected they would continue to ramp through Q4 and beyond.

Speaker Change: Within Optical Systems Production, we expected and achieved significant revenue growth from Q3 to Q4 from 3 programs.

Speaker Change: Two of these are programs that transition from our product development pipeline to production in the last 12 months and the third is our autoscopy program which has continued to recover from the complete shutdown during the pandemic.

Speaker Change: The output from these three production programs nearly doubled, increasing from approximately $500,000 in Q3 to nearly a million dollars in Q4.

Speaker Change: All three were running well in the early part of the fourth quarter and we expected they would continue to ramp through Q4 in beyond.

Joseph Forkey: While all indicators still point to significant increases in these programs in the next couple of quarters, we've experienced some challenges as they have ramped up. The first of these is our new defense aerospace program that went into production in the second quarter of fiscal 2024. We had been ramping steadily until the middle of Q4 when we began to saturate the existing production line. Duplicating tools and fixtures and training additional operators took longer than expected during Q4, but we resolved these issues and continued shipping in Q1. In August of this year, however, our customer identified a potential specification failure, later determined to be the measurement technique used in acceptance testing by our customer and not a problem with the product itself.

Speaker Change: While all indicators, still point to significant increases in these programs in the next couple of quarters, we've experienced some challenges as they have ramped up.

Speaker Change: The first of these is our new defense aerospace program that went into production in the second quarter of fiscal 2024.

Speaker Change: We had been ramping steadily until the middle of Q4 when we began to saturate the existing production line.

Speaker Change: Duplicating tools and fixtures and training additional operators took longer than expected during Q4, but we resolved these issues and continued shipping in Q1.

Speaker Change: In August of this year, however, our customer identified a potential specification failure. Later determines to be the measurement technique used in acceptance testing by our customer and not a problem with the product itself.

Joseph Forkey: This is an indication of the extremely tight tolerances we are building to, tolerances that can only be measured with some of the most sophisticated measuring equipment available today. Unfortunately, the customer ordered a temporary production stop during the investigation, which reduced Q1 revenue by approximately half a million dollars. The good news, however, is that we restarted production on the line last week and fully expect this product to contribute to revenue at a higher level of approximately $850,000 starting in Q2. Importantly, our customer had the confidence to give us new follow-on orders for deliveries later this year, even while production was stopped during Q1.

Speaker Change: This is an indication of the extremely tight tolerances we are building through. TORNCES that can only be measured with some of the most sophisticated measuring equipment available today.

Speaker Change: Unfortunately, the customer ordered a temporary production stop during the investigation which reduced Q1 revenue by approximately half a million dollars.

Speaker Change: The Good News, however, is that we restarted production on the line last week, and fully expect this product to contribute to revenue at a higher level of approximately $850,000 starting in Q2.

Speaker Change: Importantly, our customer had the confidence to give us new follow-on orders for deliveries later this year, even while production was stopped during Q1.

Joseph Forkey: The second new program that went into production last year but stalled a bit in Q4 was the robotic laparoscopy product. Production began in January, and while we have delivered a significant number of units, we have also experienced variable yield from lots to lots. This resulted in lower shipments than expected both in Q4 and in Q1. Originally, we believe we would improve yield with experience, but we recently began a more thorough review of the build process to identify the root cause of the variable yield. Based on preliminary findings, we are confident we will be able to increase yields in Q2 and beyond.

Speaker Change: The second new program that went into production last year, but stole the bit in Q4, was the robotic left-roast could be product.

Speaker Change: Production began in January and while we have delivered a significant number of units, we have also experienced variable yield from lots to lots.

Speaker Change: This resulted in lower shipments than expected both in Q4 and in Q1.

Speaker Change: Originally, we believe we would improve yield with experience, but we recently began a more thorough review of the build process to identify the root cause of the variable yield.

Speaker Change: Based on preliminary findings, we are confident we will be able to increase yields in Q2 and beyond.

Joseph Forkey: We restarted deliveries of the autoscopy product a little over a year ago. While restarting the line, we experienced some supply chain and yield issues, which were largely resolved by the 4th quarter of fiscal 2024, and we recognized approximately $400,000 in revenue of that quarter. However, our customer requested we reduce shipments in the first quarter to match their demand as they were dealing with the discontinuation of an electronic component, which has now been replaced. As a result, we were not able to deliver all of the units we produced in Q1. We expect shipments to be more regular in Q2 and beyond at a run rate of approximately $250,000 per quarter, with expectations that this may increase significantly by the end of fiscal 25 depending on market penetration.

Speaker Change: We restarted deliveries of the autonomy products a little over a year ago.

Speaker Change: While restarting the line, we experienced some supply chain and yield issues, which relired the result by the fourth quarter of fiscal 2024, and we recognized approximately $400,000 in revenue that quarter.

Speaker Change: However, our customer requested we reduce shipments in the first quarter to match their demand as they were dealing with the discontinuation of an electronic component which has now been replaced.

Speaker Change: As a result, we were not able to deliver all of the units we produced in Q1.

Speaker Change: We expect shipments to be more regular in Q2 and beyond at a run rate of approximately $250,000 per quarter with expectations that this may increase significantly by the end of fiscal 25, depending on market penetration.

Joseph Forkey: The overall impact of the challenges in these three programs reduced our Q4 revenue by approximately half a million dollars and will negatively impact Q1 revenue by approximately $900,000, resulting in expected Q1 revenue between 4.2 and $4.4 million.

Speaker Change: The overall impact of the challenges in these three programs.

Speaker Change: Reduced our Q4 revenue by approximately half a million dollars, and will negatively impact Q1 revenue by approximately 900,000 dollars, resulting in expected Q1 revenue between 4.2 and 4.4 million dollars.

Joseph Forkey: The other major program that just transitioned from product development to production in the last few months is the record $9 million production order for a single-use and discopic imaging assembly that we announced in May. When we received this order, we anticipated fiscal 2025 revenue would be approximately $2.2 million. With our customer already increasing their demand and pulling in their forecasts, we have been ramping up deliveries. We are now delivering at a rate of approximately $600,000 per quarter and are currently standing up a second production line to achieve our updated estimate of $3.6 million in revenue for fiscal 2025.

Speaker Change: The other major program that just transitioned from product development to production in the last few months is the record 9 million dollar production order for a single use and Scott for imaging assembly that we announced in May.

Speaker Change: When we received this order, we anticipated fiscal 2025 revenue would be approximately $2.2 million.

Speaker Change: With our customer already increasing their demand and pulling in their forecast, we have been ramping up deliveries.

Speaker Change: We are now delivering at a rate of approximately $600,000 per quarter and are currently standing up as second production line to achieve our updated estimate of $3.6 million in revenue for fiscal 2025.

Joseph Forkey: Based on the strong market dynamics of our customers' end use market, we expected the demand could continue to grow in the future.

Speaker Change: Based on the strong market dynamics of our customers' end-use market, we expected the man could continue to grow in the future.

Joseph Forkey: We hope to be able to provide more details on this program soon. This order provides the impetus for ongoing POC investments in single use and discope manufacturing at scale with high technical performance and at price points consistent with the single use endoscope market. This will ultimately result in an efficient manufacturing platform that will provide ongoing strategic advantage.

Speaker Change: We hope to be able to provide more details on this program soon.

Speaker Change: This order provides the impetus for ongoing POC investments in single use and disco manufacturing at scale with high technical performance and at price points consistent with the single use and disco market.

Speaker Change: This will ultimately result in an efficient manufacturing platform that will provide ongoing strategic advantage.

Joseph Forkey: In summary, we are exiting Q1 with the optical systems production programs in far better shape and running at production level, supporting expectations that will contribute at much higher levels for Q2 and beyond.

Speaker Change: In summary, we are exiting Q1 with the Optical Systems Production programs in far better shape and running at production level supporting expectations, they will contribute at much higher levels for Q2 and beyond.

Joseph Forkey: As we start fiscal 2025, our product development pipeline is as robust as ever, and we continue to add new opportunities on a regular basis. This is a strong indicator of the overall strength of the medical device imaging market, which is growing at 5-10% per year and the even stronger single use segment, which is growing 2-3 times faster. We are continuing to recruit for engineering talent as we believe we have more opportunities than we can support with the existing team. As I mentioned on our last call, we have now developed a concept to provide an existing family of baseline designs to new customers coming into our product development pipeline.

Speaker Change: As we start fiscal 2025, our product development pipeline is as robust as ever and we continue to add new opportunities on a regular basis.

Speaker Change: This is a strong indicator of the overall strength of the medical device imaging market, which is growing at 5 to 10% per year. And the even stronger single use segment, which is growing 2 to 3 times faster.

Speaker Change: We are continuing to recruit for engineering talent, as we believe we have more opportunities than we can support with the existing team.

Speaker Change: As I mentioned on our last call, we have now developed a concept to provide an existing family of baseline designs to new customers coming into our product development pipeline.

Joseph Forkey: We call this our platform product because the baseline designs we draw out from our many years of experience act as a starting point for POC's design of a customer's new product. Customers may choose from a pre-existing set of hardware and software components that then can be engineered specifically to their specification. This platform gives us a competitive advantage in the marketplace, as these well-qualified baseline systems can offer an accelerated path to market and reduce development risk to our customers. Financially, this provides a high margin offering that will utilize less engineering resource to entice customers into development programs. The limited launch of this product to a few select customers has been very well received, and we already have three new customers based on this approach.

Speaker Change: We call this our platform product because the baseline designs we straw from our many years of experience act as a starting point for POC's design of a customer's new product.

Speaker Change: Customers may choose from a pre-existing set of hardware and software components that then can be engineered specifically to their specification.

Speaker Change: This platform gives us a competitive advantage in the marketplace as these well-qualified baseline systems can offer an accelerated past the market and reduce development risks to our customers.

Speaker Change: Financialy, this provides a high margin offering that will utilize less engineering resource to entice customers into development programs.

Speaker Change: The limited launch of this product to a few select customers has been very well received and we already have three new customers based on this approach

Joseph Forkey: We expect to proceed with a more formal launch in the coming months.

Joseph Forkey: Ultimately, we believe this approach will help us to become the provider of choice for next-generation medical device digital imaging systems. Finally, our Ross Optical Division is still feeling the impact of the industry-wide slowdown in optical component sales, although we are just now beginning to see some customers who have delayed deliveries for many months starting to accept product into place following orders. This is consistent with the general attitude in the industry that business will begin to pick up again in the beginning of calendar 2025.

Speaker Change: We expect it proceed with a more formal launch in the coming months.

Speaker Change: Ultimately, we believe this approach will help us to become the provider of choice for next generation medical device digital imaging systems.

Speaker Change: Finally, a raw optical division is still feeling the impact of the industry-wide slowdown in optical component sales. Although we are just now beginning to see some customers who have delayed deliveries for many months starting to accept product into place following orders.

Speaker Change: This is consistent with the general attitude in the industry that business will begin to pick up again in the beginning of calendar 2025.

Joseph Forkey: We are increasing our marketing budget for Ross Optical in order to accelerate and hopefully magnify its rebound in fiscal 2025.

Speaker Change: We are increasing our marketing budgets for Ross Optical in order to accelerate, and hopefully, magnify its rebound in fiscal 2025.

Joseph Forkey: To summarize, we believe production issues that depressed Q4 and Q1 revenue from three ongoing programs are largely resolved. We expect production deliveries against a $9 million order for the single-use endoscope imaging assembly to continue to ramp. We expect product development pipeline revenue to continue at near record levels, and we expect our Ross Optical Division to continue at similar or slightly higher revenue rates compared to recent quarters.

Speaker Change: To summarize, we believe production issues that depressed Q4 and Q1 revenue from three ongoing programs are largely resolved.

Speaker Change: We expect production deliveries against an $9 million order for the single use endoscope imaging assembly to continue to ramp.

Speaker Change: We expect product development pipeline revenue to continue at near record levels, and we expect our Ross Optical Division to continue at similar or slightly higher revenue rates compared to recent quarters.

Joseph Forkey: Taken together, these expectations support our strong confidence that we will see a sharp increase in revenue in Q2, with record quarterly revenues before the end of fiscal 2025.

Speaker Change: Taking together these expectations support our strong confidence that we will see a sharp increase in revenue in Q2 with record quarterly revenues before the end of fiscal 2025.

Wayne Coll: I will now turn the call over to Wayne to review the financials. Thank you, Joe.

Speaker Change: I'll now turn the call over to Wayne to review the financials.

Wayne Coll: Let me expand on some of Joe's comments on the financial results, starting with revenue. For the year, revenue was 19.1 million. The 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 the last of previous year programs in revenue, representing about $7 million, or 34% of fiscal 2023 revenue. A major contributor to that recovery was the product development for 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%.

Wayne Coll: Thank you, Joe. Let me expand on some of Joe's comments on the financial results starting with Revenue.

Wayne Coll: For the year, revenue was 19.1 million, a decrease of 1.9 million from last year. Last year's results included 600,000, but one time technology licensed revenue.

Wayne Coll: Excluding this fiscal 2024 revenue was down 6.6% compared to fiscal 2023.

Wayne Coll: This is a significant accomplishment as we started the year with the loss of previous year programs in revenue, representing about 7 million, but 34% of fiscal 2023 revenue.

Wayne Coll: A major contributor to that recovery was the product development for 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%.

Wayne Coll: 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 and revenue for the year, we saw less absorption of certain fixed costs and production, which impacted our overall gross margins. Lower revenues relate specifically to Ross Optical. Reduce revenue by 1.5 million and gross margin by 1 million dollars. For the year, gross margins were 30 percent compared to 38 percent last year. Excluding the license revenue, last year's gross margins would have been in the mid 35 percent range.

Wayne Coll: Looking specifically at the fourth quarter, revenue is 4.7 million compared to 5 million last year, a decrease of 6%.

Wayne Coll: Joe's already commented on the key drivers here.

Joe Forkey: with the pullback and revenue for the year, we saw less absorption of certain fixed costs and production which impacted our overall gross margins.

Joe Forkey: Lower Revenue's relates specifically to Ross Opsco reduce revenue by $1.5 million and gross margin by $1 million.

Joe Forkey: For the year, gross margins for 30% compared to 38% last year, excluding the license revenue, last year's gross margins would have been in the mid 35% range.

Wayne Coll: For the fourth quarter of fiscal 2024, gross margins were 22 percent compared to 39 percent 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 and favorable charges to clogs 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 expenses for the year were 8.5 million compared to 8.4 million last year, and for Q4, there were 2.4 million compared to 2.5 million last year.

Joe Forkey: For the fourth quarter of fiscal 2024 gross margins were 22% compared to 39% in last year's fourth quarter.

Joe Samarise: The fourth quarter was particularly impacted by the ramp up challenges Joe Samarise, which led not only to low revenue but also significantly reduced gross margin.

Joe Samarise: We also recognize and they will charge us to clogs in the fourth quarter resulting from one time adjustments in the carrying value of our raw materials inventories.

Joe Samarise: We do expect gross margin to recover quickly as production processes stabilize and revenues increase.

Joe Samarise: Operating expenses for the year were 8.5 million compared to 8.4 million last year, and for Q4, there were 2.4 million compared to 2.5 million last year.

Wayne Coll: There are also a few costs in Q4 that were new compared to a year ago.

Wayne Coll: First, is Joe mentioned we have put a focus on recruiting this past year, and during the fourth quarter, we had approximately $200,000 in one-time personnel-related expenses. Beyond this specific expense, there's the cost of new people, engineers especially getting up to speed and achieving target utilization. These are investments in our long-term growth. Second, with the anticipated rollout of our new platform product, we incurred significant internal R&D expenses that were higher compared to earlier quarters in years, but also represent a strong investment in the platform product that we believe will have positive sales impacts in the near term.

Joe Samarise: There are also a few class and Q4 that were new compared to a year ago. First is Joe mentioned, we have put a focus on recruiting this past year, and during the fourth quarter we had approximately 200,000 dollars in one-time personal related expenses.

Speaker Change: Beyond this specific expense, there's the cost of new people, engineers especially getting up to speed and achieving target utilization.

Speaker Change: These are investments in our long-term growth.

Speaker Change: Second was the anticipated roll-out of our new platform product. We encourage significant internal R&D expenses that were hired to pay it to earlier quarters and years, but also represent a strong investment in the platform product that we believe will have positive sales impacts in the near term.

Wayne Coll: Third, with the increase in production volume, we have been exploring the possible expansion of our manufacturing facilities. We have not yet concluded on how best to balance our growth needs with investment costs, but we did incur approximately $50,000 in expenses in this area during the fourth quarter.

Speaker Change: Third, with the increase in production volume.

Speaker Change: We have been exploring the possible expansion of our manufacturing facilities.

Speaker Change: We have not yet concluded on how best to bounce our growth needs with investment costs, but we did incur approximately $50,000 in expenses in this area during the board quarter.

Wayne Coll: As a result of the lower revenue, our net loss was $3 million during fiscal 2024, compared to a $145,000 loss last year. For the fourth quarter, the net loss was $1.4 million compared to a $96,000 loss in last year's fourth quarter. Adjusted EBITDA, which excludes stock-based compensation, interest expense, depreciation, and amortization, was negative $1.6 million in fiscal 2024, compared to a positive adjusted EBITDA of $491,000 last year. For the fourth quarter, we have $1.1 million negative adjusted EBITDA, compared to a negative $410,000 last year. Again, the biggest driver here was the lower revenue and largely fixed manufacturing and operating expenses, along with one-time operating expenses that hit in the fourth quarter.

Speaker Change: As a result of the law revenue, our net loss was $3 million.

Speaker Change: During fiscal 2024 compared to a $145,000 loss last year.

Speaker Change: For the fourth quarter of the net loss was 1.4 million compared to a $96,000 loss in last year's fourth quarter.

Speaker Change: A gested EBITDA, which includes stock-based compensation, interest expense, depreciation and amazization, was negative 1.6 million in fiscal 2024, compared to a positive adjusted EBITDA of 491,000 last year.

Speaker Change: For the fourth quarter, we have $1.1 million negative adjusted EBITDA, compared to $410,000 last year.

Speaker Change: Again, the biggest driver here was the lower revenue in largely fixed meaning battery and operating expenses, along with one time operating expenses that hit in the fourth quarter.

Wayne Coll: As we look to achieve our goals for the upcoming year, we expect adjusted EBITDA break-even quarterly revenue levels to be approximately $5.5 million, which is aligned with our revenue expectations for the second quarter and beyond. Our cash balance at June 30, 2024, was $405,000. After the close of the year this past August, we completed a $1.4 million registered direct offering of Common Stock, which included participation from directors and officers to supplement our working capital.

Speaker Change: As we look to achieve our goals for the upcoming year, we expect adjusted EBITDA break even quarterly revenue levels to be approximately $5.5 million, which is aligned with our revenue expectations for the second quarter and beyond.

Speaker Change: Our cash balance at June 30, 2024 was $105,000.

Speaker Change: After the close of the year, this past August, we completed a $1.5 million registered direct offering of common stock, which included participation from directors and officers to supplements our working capital.

Wayne Coll: As we alluded to earlier, we are evaluating alternatives for the consolidation, expansion, and relocation of our physical facilities to support the growth and efficiencies that are key in our drive to scale. We believe the long-term financial model of the production business is very attractive and will result in a high return on invested capital. This is supported by the high degree of recurring revenue as the result of our single use focus, as well as the high likelihood of strong customer retention, as our technologies are embedded in the products and will have been included in FDA submissions of our customers.

Speaker Change: As we alluded to earlier, we are evaluating alternatives for the consolidation, expansion, and relocation of our physical facilities to support the growth and efficiencies that are key in our drive to scale.

Speaker Change: We believe the long term financial model of the production business is very attractive and we result in a high return on invested capital

Speaker Change: This is supported by the High degree of Recurring Reminue, as the result of our single-use focus.

Speaker Change: As well as the high likelihood of strong customer retention, as our technologies are embedded in the products, and we will have been included in FDA submissions of our customers.

Wayne Coll: Based on our growth expectations, we will, over time, invest in both physical capacity, as well as methods for manufacturing efficiencies. We have confident the attractiveness of the business model will afford us multiple financing alternatives for appropriate investments.

Speaker Change: Based on our growth expectations, we will, over time, invest in both physical capacity as well as methods for manufacturing efficiencies.

Speaker Change: We are confident the attractiveness of the business model, but we'll afford as multiple financing alternatives for appropriate investments.

Wayne Coll: I will now turn the clock back over to Joe for some final comments. Thank you, Wayne.

Speaker Change: I will now turn the call back over to Joe for some final comment.

Joseph Forkey: To summarize, physical 2024 was certainly a challenging year, and while we made substantial progress rebuilding our revenue based 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 of fiscal 2025 revenue, which we expect to be in the range of $4.2 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 program 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.

Joe: Thank you Wayne.

Joe: to summarize fiscal 2024 was certainly a challenging year. And while we made substantial progress rebuilding our revenue based during the year, revenue in the fourth quarter came in a bit lower than our initial expectations.

Speaker Change: This was caused by a few program delays that impacted fourth quarter revenue by about $500,000 to $600,000.

Speaker Change: Some of these issues will also impact first quarter fiscal 2025 revenue, which we expect to be in the range of $4.2 to $4.4 million.

Speaker Change: But as of today, most of these issues have been resolved.

Speaker Change: We now have strong visibility and confidence that with our production single use programs starting to grow in Q2.

Speaker Change: The re-ramp of our Defense Aerospace program that was put on a temporary hold starting up again last week.

Joseph Forkey: 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.

Speaker Change: 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.

Speaker Change: They should also improve profitability due to the leverage of fixed costs in our business model.

Speaker Change: All in all, we are very optimistic that we will see substantial growth both in top line and bottom line performance in fiscal 2025.

Joseph Forkey: Before I turn it over to questions, I want to mention that we will be participating in the Lithium Partners Fall 2024 Investor Conference tomorrow. If you would like to schedule a 101 meeting, please reach out to Robert Bloom to the Court. To all of you on the call, I thank you for your continued support of precision optics.

Speaker Change: Before I turn it over to questions, I want to mention that we will be participating in the Lithium Partners Fall 2024 Investor Conference tomorrow. If you would like to schedule a 101 meeting, please reach out to Robert Blum to coordinate.

Robert Blum: We would be happy to take any questions at this. We will now begin the question and answer session. To ask a question, you may press star and one on your telephone keypad. If you were using a speaker phone, please pick up your handset before pressing the keys. To draw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Again, if you have a question, please press star, then one.

Speaker Change: 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.

Speaker Change: We will now begin the question and answer session.

Speaker Change: To ask a question, you may press star and one on your telephone keypad.

Speaker Change: If you are using a speaker phone, please pick up your handset before pressing the keys.

Speaker Change: To withdraw your question, please press star then too.

Speaker Change: At this time, we will pause momentarily to assemble our roster.

Speaker Change: Good morning.

Speaker Change: Again, if you have a question, please press star then one.

Robert Blum: 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.

Robert Blum: 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.

Joseph Forkey: 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?

Speaker Change: Let's walk through a couple of these.

Speaker Change: 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 a follow-up discussion or orders?

Joseph Forkey: Yes, so that was the new defense aerospace program that we commented on during the comments here. This is a program that was put on 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.

Speaker Change: Yes, so that was the new Defense Aerospace Program that we commented on during the, during the comments here. This is the program that was put on a hold by the customer for

Speaker Change: Almost a couple of months, and so because of that whole...

Speaker Change: It reduced the...

Speaker Change: The time that it will take to finish the orders that the question is referring to. The good news as I mentioned in the...

Joseph Forkey: 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.

Speaker Change: The script here was that...

Speaker Change: The customer has allowed us to restart shipping, and so we're quite confident that this program is going to contribute significantly.

Speaker Change: 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.

Speaker Change: the customer gave us new orders even while.

Speaker Change: 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 I'll continue after that.

Robert Blum: We expect to finish the deliveries now in the next quarter, and we do have follow-on orders that will continue after that. All right, great.

Wayne Coll: Again, as a reminder, you can submit questions either through the webcast portal there or online here by pressing over the telephone by pressing star then one. 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?

Speaker Change: Alright, great. Again, as a reminder, you can submit the questions either through the webcast portal there or online here by press, or over the telephone by pressing star than one. 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?

Wayne Coll: I'm going to let Wayne answer this one. Yeah, so depending on the lines of business, the margin and 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 percent. 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 percent range at the moment. And then in between that, you've got the raw optical business, which, you know, that full utilization, again, is in that higher, you know, almost 50 percent type of margin profile with lower revenues.

Speaker Change: I'm going to let Wayne answer this one.

Wayne Coll: 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%.

Speaker Change: and you can pair that to make factory margins.

Speaker Change: 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.

Speaker Change: and then in between that...

Speaker Change: You've got the rest of the physical business, which, uh...

Speaker Change: which, you know, that fuller utilization, again, is in that higher, you know, almost 50% type of margin profile with lower revenues. It's got a lower margin profile.

Wayne Coll: It's got a lower margin profile. And then on the product development side, that tends to be, again, in the mid-point; margins tend to be in the low-to-mid-porting. taking into account both the labor elements, the non-recurring engineering revenues, and material revenues that are part of that segment.

Speaker Change: and then on the product development side, those that tends to be, again, in the mid 40s.

Speaker Change: Taking into account both the labor elements, the non-recurring engineering revenues, and material revenues that are part of that segment.

Robert Blum: Okay, great.

Joseph Forkey: 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?

Speaker Change: Okay, great.

Speaker Change: Next question here and I know you touched on this a little bit for the aerospace defense program that was put on a 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.

Joseph Forkey: 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, you know, very, very sensitive.

Speaker Change: Yes, sure. I can comment a little more on this.

Speaker Change: the assembly that we provide.

Speaker Change: is used to transmit a laser beam and so there are some measurements of the laser beam.

Speaker Change: that have to be made.

Speaker Change: 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.

Speaker Change: The way the measurements are made is very complicated and requires some fairly sophisticated equipment.

Speaker Change: and ultimately the measurements that are being made.

Speaker Change: can be impacted by the motion of some of the components that

Speaker Change: that we assemble that are as small as, you know, maybe even 10 microns. I mean, it's very, very sensitive.

Joseph Forkey: 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, you know, tens of microns of movement.

Speaker Change: And so what happened was we were making measurements here, we were shipping and then it was taking our customer some time for them to make measurements on their end

Speaker Change: When they started making measurements, they saw differences in what compared to what we had measured.

Speaker Change: And so there is a concern that there may have been a drift because the measurements are so sensitive to even, you know, tens of microns of movement. So they asked us to stop production while we collectively worked.

Joseph Forkey: 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.

Speaker Change: 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.

Speaker Change: and so they asked us to do some troubleshooting, some tests.

Speaker Change: Measurements, some test assemblies, and then we, you know, sent them back and forth the 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.

Joseph Forkey: 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.

Speaker Change: 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...

Speaker Change: the conclusion that we came to collectively was the right one.

Joseph Forkey: 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.

Speaker Change: All in all, there's no indication that there was a problem with what POC was doing or making or producing.

Speaker Change: 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.

Robert Blum: Okay, great. Our next question here is for the single-use program. You mentioned revenue expectations have increased.

Speaker Change: 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?

Joseph Forkey: Can you provide any commentary on the dynamics leading to the end of the year? I think we're going to be able to make a lot of progress, but we're to make a lot of progress, but we're going to be able to make a lot of progress, but we're going to be able to make a lot of progress, but we're going to be able to make a lot of it recently receives clearance from the five 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, you know, 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.

Speaker Change: Yes, sure. So of course with non-disclosure is in place and such were 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.

Speaker Change: I think we'll help everyone understand what's going on here so the product that we're making this single use product that we're making for our customer is going into a system that's replacing and existing product that they have in the market today.

Speaker Change: It recently received clearance from the five from the FDA and so they now are actually in the market.

Speaker Change: The Market Risk Associated With

Speaker Change: 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.

Joseph Forkey: So once the product actually got out there, and 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 groups' 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.

Speaker Change: with the product that they had. So, once the product actually got out there and 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...

Speaker Change: The benefits that they believed would come with it. We're actually realized in the field by the surgeons.

Speaker Change: the web.

Speaker Change: The marketing groups expectations for deliveries of their product I think has gone up and so that of course comes back to us

Joseph Forkey: 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.

Speaker Change: 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.

Speaker Change: For this to continue to grow as they continue to go out in the market and get more positive feedback.

Robert Blum: Okay, great. Just a reminder to everyone: if you have a question, you can submit it online through the portal. The webcast portal, press star one if you are dialed in. 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.

Speaker Change: Okay, great. Just a reminder to everyone if you have a question you can submit it online through the portal, the webcast portal, press star 1 if you are dialed in. We have a couple of questions here pertaining to the platform.

Speaker Change: Bring these together, we'll the new product you are researching and offering.

Speaker Change: changed the model of the company by increasing our de-expenses and increasing gross margins.

Speaker Change: 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 costum and you have to pay the R&D expenses by yourself, how will that affect gross margins?

Joseph Forkey: 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 if you need me to. No, that's fine. I think I get the sense of the question. It's a great question.

Speaker Change: R&D Expenses Profitability.

Speaker Change: 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 out there, I can refray the stuff if you need me to do.

Speaker Change: No, that's fine, I think I get the...

Speaker Change: The sense of the question, it's a great question.

Joseph Forkey: So this is good because I want to clarify something on the platform product. 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 Our ND 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.

Speaker Change: So this is good because I want to clarify something on the platform product and as I said in my remarks, we'll be...

Speaker Change: doing more in terms of marketing and having a formal launch in such in the next few months. So I think this will become clearer and clearer as we provide 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.

Speaker Change: in order to get the platform product going. But by and large, the...

Speaker Change: Our Indeed work for the platform product is all the work that we have done over the last 3, 5, 7 years

Speaker Change: in developing these kinds of products for many of our customers.

Joseph Forkey: Your recall that one of the key elements of our business model is that we maintain the ability to use the IP that we developed during the development process of these products. Now, we can't go and duplicate our customer's 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.

Speaker Change: You'll recall that one of the key elements of our business model is that we maintain the ability.

Speaker Change: to use the IP that we develop during the development process.

Speaker Change: of these products. Now, we can't go and duplicate our customer's product and sell us 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.

Speaker Change: 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.

Speaker Change: that we can provide a baseline.

Speaker Change: Model, very quickly, which should be an initial prototype to our customers very fast, almost off the shelf.

Joseph Forkey: 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, you think, a Lego, you know, Lego blocks that you can add on to the baseline design. So, so that's the first part of it. There's a little bit of R&D expense now that we need to incur in order to take all the different designs that we've done before. And, and, and turn them into a common baseline design. So that's what we're doing right now. But this does not change the overall business model, which is one where we're going to customize what we have for our customer.

Speaker Change: and then we have various modular pieces which are pieces that come from other products, other products that we've made for other customers that we can sort of both on.

Speaker Change: These are, you think, a Lego, you know, Lego block that you can add on to the baseline design.

Speaker Change: So that's the first part of it. There's a little bit of R&D expense now that we need to incur in order to take all the different designs that we've done before and end.

Speaker Change: and turn them into a common baseline design, so that's what we're doing right now.

Speaker Change: Bye.

Speaker Change: This does not change the overall business model, which is one where we're going to customize what we have.

Joseph Forkey: What it does is it allows us to give our customer a higher level base design than we were able to give them before when we were simply showing them a technology. And so, by giving them this higher level base design, it accelerates the time to market. But there's still a requirement to take the base design and wrap it in the outside configuration that our customer needs and to decide which of the other modular pieces to bolt on. And our expectation is that for each customer, they're going to have a couple of unique custom pieces that also have to go on.

Speaker Change: For our customer, what it does is it allows us to give our customer a higher level basis on it and we were able to give them before when we were simply showing them a technology.

Speaker Change: and so by giving him this higher level based design, it accelerates the time to market, but there's still a requirement to take the based design and wrap it in the...

Speaker Change: The outside configuration that our customer needs and to decide which of the other...

Speaker Change: Modular pieces to both on and our expectation is that for each customer they're going to have a couple of unique.

Joseph Forkey: So, it does not remove the time and materials charge that we charge for our customers as they go through the product development process. It just accelerates that, and it allows us to charge our customers for this baseline, baseline designs, which will be the same for every customer. So, from a margin standpoint, because we can charge for this baseline design, which after this bit of R&D that we're entering now, will be the same for everyone. That should help our gross margins on the product development side of things go up slightly. And it will continue to bring our customers into the product development pipeline.

Speaker Change: Custom pieces that also have to go on. So it does not remove the time and materials charge.

Speaker Change: that we charge for our customers as it goes through the product development process, it just accelerates that and it allows us to charge our customers for this baseline design, which will be the same for every customer.

Speaker Change: So, from a margin standpoint, because we can charge for this baseline design, which after this bit of R&D that we're incurring now, will be the same for everyone.

Speaker Change: That's you to help our gross margins on the product development side of things go up slightly and it will continue to bring our customers into the product development pipeline.

Joseph Forkey: But it will add to our competitive advantage because of the reduced time to market and the reduced risk that comes from starting from scratch. So, I hope I think I answered most of the pieces of your question, Robert, whoever asked the question. If there's a follow-up, I'm happy to take.

Speaker Change: But it will add to our competitive advantage because of the reduced time to market and the reduced risk that comes from starting from scratch.

Speaker Change: So, I hope I, I think I answered most of the pieces of your question, Robert, whoever asks the question if there's a follow-up I'm happy to take.

Robert Blum: All right, great.

Joseph Forkey: Well, I show no additional questions here, Joe. So, I will turn it over to you for any closing remarks.

Speaker Change: Alright, great. I show no additional questions here, Joe, so I will turn it over to you for any closing remarks.

Joseph Forkey: Okay. Thank you, Robert. Thank you, everyone, for joining us on the call today.

Speaker Change: Okay?

Joseph Forkey: I look forward to speaking to all of you soon. Thanks very much.

Joe: 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.

Joseph Forkey: Have a good evening.

Operator: The conference is now concluded. Thank you for attending today's presentation.

Operator: You may now disconnect.

Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.