Q2 2025 Precision Optics Corp Inc Earnings Call
Good day and welcome to the precision optics reports second quarter fiscal year, 2025 result conference call.
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Robert Blum: I would now like to turn the conference over to Robert Blum, What's up and partners. Please go ahead.
Speaker Change: Alright, Thank you Betsy and to everyone joining the call today as the operator mentioned on today's call. We will discuss precision optics second quarter fiscal year 2025 financial results and this is for the period ended December 31, 2024 with us on the call representing the company today are Dr. Joe for key precision optics chief.
Wayne Call: <unk> officer, and Wayne call, the company's Chief Financial Officer.
Wayne Call: At the conclusion of today's prepared remarks, we will open the call for a question and answer session. If you're dialed into the call through the traditional teleconference line as the operator indicated. Please press Star then one to ask a question. If you are listening through the webcast portal and we'd like to ask a question you can submit your questions through the ask a question.
<unk> feature in the webcast player.
Wayne Call: Before we begin with prepared remarks, we submit for the record the following statement statement.
Speaker Change: Statements made by the management team of precision optics. During the course of this conference call may contain forward looking statements within the meaning of section 27, a of the Securities Act of 1933 as amended and section 21 E of the Securities Exchange Act of 1934 as amended and such forward looking statements are made pursuant to the safe.
Speaker Change: Barbara 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.
Speaker Change: Ours 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 rest of 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.
Speaker Change: Securities Exchange Commission all forward looking statements contained during this conference call speak only as of the date in which they were made and are based on management's assumptions and estimates as of such date.
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.
Joe: Alright with that said, let me turn the call over to Dr. Joe <unk>, Chief Executive Officer for precision optics, Joe. Please proceed.
Speaker Change: Thank you Robert and thank you all for joining our call today.
I am pleased to be speaking with you today on the heels of a particularly strong production quarter and with an ongoing increase in demand from our two largest customers, which sets the stage for a continuation of this growth in upcoming quarters and into the foreseeable future.
Speaker Change: As we discussed in our last call the transition of the endoscopy market to Cmos based Endoscopes systems. Many design now for single use provides a major opportunity for POC given the investments we have made over many years in this technology.
Speaker Change: With the formal market launch of our unity imaging platform just two weeks ago, we have further enhanced our position in this substantial and rapidly growing marketplace.
Speaker Change: Coupling recent production revenue increases and the largest backlog in recent history together with our strong engineering pipeline and positive response to the formal launch of unity, we are poised for substantial and sustainable growth in both the near and long term.
Speaker Change: As we've discussed over many of our recent calls we have a number of programs that are reaching key inflection points, where either the programs are moving from product development to production or where the early production output is ramping.
In particular, our single use just to scope program and more recent defense Aerospace program had been ramping over the last couple of quarters.
Speaker Change: The increase in production from Q1 Q2, driven largely by these two programs was 42%.
Speaker Change: While this was not quite as high as we anticipated during our November call. It still represents the largest quarter over quarter production increase in many years and the highest production revenue since fiscal 2023.
Speaker Change: Given our strong backlogs for production programs, along with engineering revenue expected to return to more normalized levels in the second half of the year. We expect continued growth for the remainder of fiscal 2025 and beyond.
Speaker Change: We are currently forecasting increasing revenue over the next two quarters with Q4 at approximately $6 million, which would be a quarterly record for POC and result in positive quarterly adjusted EBITDA.
Speaker Change: As we discussed on our last call nearly all new Endoscopes today are designed using Cmos sensors, and often can be made at price points that support our single use model.
Speaker Change: These disposable single use Cmos based endoscopes provide significant benefits over traditional endoscope designs.
Speaker Change: Surgeons always get brand new scope image quality hospitals don't need to track scope through reprocessing procedures and perhaps most importantly, the single use scopes eliminate any chance of cross contamination from one patient to another.
Speaker Change: Beyond these benefits Cmos based goes often have higher image quality than those based on older imaging technologies.
Speaker Change: Now that Cmos sensors have been available for medical devices for a number of years and with some big name early adopters, particularly Boston scientific demonstrating that single use endoscopes are technically clinically and economically viable the entire endoscope market is moving in this direction.
Speaker Change: This is resulted in a single use endoscope market with annual growth rates estimated to be as high as 20% per year.
Speaker Change: POC is uniquely situated to benefit from this accelerating trend.
Speaker Change: Anticipating the movement of the inner scope market to the broad use of Cmos based design POC began aligning its technical base in this direction many years ago.
Speaker Change: Our historic focus on micro optics design fabrication and assembly as resulted in proprietary techniques associated with illumination and imaging at sub 10 millimeter and often sub two millimeter sizes.
Speaker Change: In line with the characteristics sizes of medical into scopes.
Speaker Change: When omni vision, a market leader in Cmos component production first announced nearly 10 years ago. Its intention to develop a family of medical grade Cmos sensors POC as micro optics were a natural complement.
Speaker Change: POC partnered with omni vision to build the first cameras based on these omnivision sensors, gaining critical experience with this new technology.
Speaker Change: <unk>, we continued to expand on today.
Speaker Change: We further enhanced our capabilities in this area three years ago, adding in electrical engineering team that specializes in processing of images captured by Cmos based endoscopes.
Speaker Change: During this time, we also continued to develop our knowhow with ongoing development of new design approaches and new approaches to manufacturing these devices.
Yeah.
Speaker Change: The result of these long term strategic efforts is that today POC is the best positioned company from a technical standpoint to develop next generation Cmos based endoscopy systems.
Speaker Change: With the single use market growing as fast as it is our sales team and senior leadership set out more than a year ago to evaluate our position in this market and to determine the best way to creatively leverage our years, indeed decades of experience as we present ourselves to prospective customers.
Speaker Change: The outcome of this evaluation was a recognition that POC has experience puts us in a unique position to establish baseline Cmos into scope platform designs that can be used as a starting point for each new customers development program.
Speaker Change: While customer specific requirements will always drive the final into scope design many of the core elements of the endoscope and imaging system will often be very similar.
Speaker Change: With our extensive experience the required customization of these baseline design will often take the form of a modification based on modular design elements used by POC on previous programs.
Speaker Change: Our strategy of maintaining as much intellectual property related to scope design as possible even when executing on customer programs has resulted in a strong base of intellectual property and knowhow.
Speaker Change: The question has been how to monetize this value by creating proprietary endoscopes without putting us indirect competition with our customers.
Speaker Change: We concluded the approach of offering customers standard baseline designs that are then customized often reusing modular design elements would achieve a similar goal to creating a proprietary product but by different means.
Speaker Change: We believe this approach which is the basis for our new unity platform will revolutionize the way new endoscopic systems are developed.
Speaker Change: In some sense POC has been in the forefront of developing next generation technology for many years with the advent of unity. We are now in the forefront of developing next generation design processes.
Speaker Change: Combining these two capabilities best technology with best design process further cements, our competitive advantage as the next generation and <unk> partner of choice.
Speaker Change: Unity provide significant benefits to our customers, perhaps the most appealing benefit is an accelerated time to market.
Speaker Change: Because we have a head start on the design process with our baseline designs customers can begin system integration and user testing earlier, reducing development cycles and speeding up the path to production.
Speaker Change: This is a benefit to both our customers and to POC as our interests are well aligned to get to the commercialization stage faster.
Speaker Change: By leveraging previously validated design elements and by minimizing the need for bespoke engineering efforts to achieve prototypes unity reduces the uncertainties inherent in developing and testing novel imaging devices and results in potential cost savings as the risks of redesign or significantly reduce.
Speaker Change: Yes.
Speaker Change: And finally unity supports the development of multiple products from a single design framework offering scalability for growing product portfolios.
Speaker Change: We expect that these benefits will enhance <unk> competitive position in this market, resulting in an increased rate of new opportunities.
Speaker Change: Ultimately, we believe this will lead to a larger product development pipeline that could grow to double the size. It is today.
Speaker Change: This will require an increase in the size of our engineering team, but we are confident we can build the team as we experienced this growth.
Speaker Change: Furthermore, because of the time to market for each program will now be reduced we expect an even greater acceleration in the rate at which programs are moved to production, which is an important growth driver for our overall business.
Speaker Change: We launched unity the last week of January at Photonics, West one of the world's largest optics conferences followed immediately during the first week of February with presentations at M. D. N M. Wes a key conference for medical device design and manufacturing.
Speaker Change: The response at both conferences was extremely positive with multiple potential customers already contacting us with new development opportunities.
Speaker Change: The launch of unity caps off a year long preparation, which included a significant effort by our technical team during Q1, and Q2 to fully define and document the baseline platform designs.
Speaker Change: This resulted in lower product development revenue and higher R&D costs. During this time period.
Speaker Change: The second quarter also coincided with slowdowns or holds on a few of our development programs caused by customers waiting for regulatory clearance or financing events.
Speaker Change: With the major portion of our technical resources to support the unity launch now behind us and with most of the customer initiated delays resolved. We expect an increase in product development revenue in Q3, and especially in Q4, even before considering the impact of new projects coming from the unity launch.
Speaker Change: Production revenue in Q2 was up substantially over Q1 and is expected to reach record levels in Q3 in Q4.
Speaker Change: This is driven in large part by our single use just to scope and more recent defense aerospace programs.
Speaker Change: Both of these programs now have multimillion dollar backlogs in both customer support the work we are doing to expand clean room space higher New assembly technicians, and standup multiple shifts and ore mines to address the backlog and expected long term ramp.
Speaker Change: As a reminder, the first of these is our first single use program, which has assisted scope imaging assembly that we designed in now manufacturer for our customers' next generation AI powered surgical robotic platform for treatment of benign prostate hyperplasia.
Speaker Change: Our customer a dominant player in this market has a significant installed base of robotic systems deployed in hospitals internationally.
Speaker Change: The single use imaging module redesigned for them received FDA clearance in August and is now in their sales teams capable hands.
Speaker Change: We received a $9 million production order in May of last year from this customer and we currently estimate that we will deliver approximately $2 $7 million of this product during our current fiscal year.
Speaker Change: Like our customer we are optimistic the market for treatment of benign prostate hyperplasia, which is already a large market will expand as a direct result of their solution.
Speaker Change: The second major production program is for the Aerospace Assembly, we've discussed previously.
Speaker Change: This program Leverages <unk> proprietary manufacturing technology developed for high precision micro optics systems to produce an extremely precise and high value Assembly.
Speaker Change: We first announced an initial production order in September 2023, and have received numerous follow on purchase order since then.
Speaker Change: We are doubling our production capacity to achieve an annual run rate in the $3 million to $4 million range before the end of this fiscal year.
Speaker Change: In addition to these two major programs production continues on seven additional programs.
Speaker Change: Four of these are production programs that had been running pretty steady now for multiple years contributing on the order of $4 million in annual revenue.
Speaker Change: In addition, our surgical robotics scope is resuming production. This month, a new sub assembly used for our retinal camera just started production in January and our second single use program, which is foreign ophthalmic application is slated to start production before the end of February.
Speaker Change: With all of this new and continuing production activity. We expect we expect production revenue increases to drive overall revenue increases in the second half of fiscal 2025, helping us to achieve record levels in the fourth quarter.
Speaker Change: Over the last several quarters, we have seen our Ross optical components business drop and level out at a rate of approximately when $1 million per year due to short term market forces that we've discussed previously.
Speaker Change: At the recent Photonics West Conference, we continue to hear from colleagues that their experience is similar to ours.
Speaker Change: We expect to see this part of our business remained steady in Q3, and Q4 and to begin to recover near the end of fiscal 'twenty five in beginning of fiscal 2026.
Speaker Change: All in all we are confident we will continue to see near term sequential quarterly revenue increases driven strongly by production increases and leading to improvements in profitability in Q3 and Q4.
Speaker Change: At the risk of what were using the term I do believe this is an inflection point for POC.
Speaker Change: The revenue downturn, we experienced at the beginning of fiscal 2024 has persisted somewhat longer than originally expected, but this is largely because the programs. We are managing now are larger the customers better established and shifting significant programs to production just takes time.
Speaker Change: While our Q2 revenue came in slightly lower than expected, we nonetheless for C capacity limitations based on demand coming from existing customers as the main challenge for us to overcome and reaching significantly higher production rates.
Speaker Change: With robust plans in place to address these capacity requirements. This is an extremely positive sign that the drivers of our anticipated growth are valid real insignificant.
Wayne Call: With that let me turn it over to Wayne to review the financials in more details.
Speaker Change: Wayne.
Thank you Joe.
Speaker Change: And before we get started I just want to clarify over the last several quarters, we've seen a ross optical components business dropping level out at a rate of approximately $1 million per quarter quarter not per year.
Speaker Change: Okay. So let me expand on some of the gels climax on the financial results starting with revenue.
Speaker Change: For the second quarter revenue was $4 5 million compared to $4 8 million in the second quarter of fiscal 2024, while somewhat less than our expectation of $5 million discussed on our last call the increase of 42% and manufacturing revenue over the prior quarter that Joe mentioned earlier.
Speaker Change: It's still an achievement despite some of the expected throughput pushing into our third quarter.
Speaker Change: For the quarter ending December 31, 2024, gross margins were 24% compared to 30% in the quarter ending December 31 2023.
Speaker Change: Like the last two prior sequential quarters product development billings were impacted by the assignment of certain engineering resources towards non billable projects, specifically finalizing the companys unity imaging platform.
Speaker Change: Offering that was so well received there are two more significant trade show just weeks ago we.
Speaker Change: We have continued to scale our manufacturing team in preparation for increased production revenues well beyond the levels we recorded today.
Speaker Change: These items together with a lower sales volume impact to gross margin.
Speaker Change: We expect gross margin to recover as manufacturing continues to scale and revenues increase particularly in the fourth quarter.
Speaker Change: We increased research and development spending in the quarter from $222000 $318000 from the quarter ended December 31 2023.
R&D expenses, likewise increased $284000 to $718000. During the six months ended December 31, 2024 compared to $434000. During the six months ended December 31 2023.
Speaker Change: Similar to the two prior sequential quarters, we incurred significant internal R&D expenses that we've already discussed.
Speaker Change: Selling general and administrative expenses.
Speaker Change: Or SG&A for the quarter was $1 7 million a.
Speaker Change: A decrease of over $200000 compared to $1 9 million last year, primarily due to lower bad debt expense and lower stock based compensation.
Speaker Change: SG&A expenses were essentially flat in the six months ending December 31, 2024 compared to the same period in the prior year.
Speaker Change: And while these costs may be similar and predictable nature of our spending is more aligned with our business strategies.
Speaker Change: As a result of the lower revenue our net loss was $910000 for the quarter ending December 31, 2024, compared to a $704000 net loss last year.
Speaker Change: Adjusted EBITDA, which excludes stock based compensation interest expense depreciation and amortization was negative $555000 in the second quarter of 2025 compared to a negative adjusted EBITDA of $269000 last year.
Speaker Change: As we look to achieve our goals for the second half of the fiscal year, we expect adjusted EBITDA breakeven quarterly revenue revenue levels to be approximately $5 $5 million.
Speaker Change: We believe we will achieve revenue levels of at least $5 million for the third quarter ending March 31, 2025, and at least $6 million in the fourth quarter, which will result in adjusted EBITDA beyond breakeven.
Speaker Change: Okay.
Speaker Change: Our cash balance at December 31, 2024 was approximately $200000 with availability on our line of credit of 350000 docs.
Speaker Change: As we have mentioned in prior calls we are in the process of finalizing our facilities plans to better access the pool of talent, we need to support growth, while we expand our manufacturing footprint and clean room space.
Speaker Change: Our objective is to balance manufacturing with reasonable labor and overhead costs, while broadening the access to the professional talent, we need to support the growth we foresee.
Speaker Change: We remain confident about the attractiveness of this cost effective approach to scaling more dramatically in the future.
Speaker Change: We expect to announce more about these plans in the coming weeks and months.
Joe: I will now turn the call back over to Joe for some final comments.
Joe: Thank you Wayne.
Speaker Change: Let me finish by summarizing a few key points.
Speaker Change: First the production ramp we have been forecasting is now in process with a 42% sequential increase in Q2.
Speaker Change: With a strong backlog and an expected return of normalized engineering operations. We believe we will see continued growth in the third and fourth quarters.
Speaker Change: Our outlook for single use is extremely high we have developed a unique set of technologies and a unique product offering and our unity platform to accelerate speed to market and reduced development risk.
Speaker Change: The launch of unity is expected to be very positive for us.
Speaker Change: This momentum with single use is being matched with continued strength from our defense and aerospace programs and finally, the production backlog. We see today is as large as it has ever been.
Speaker Change: We have multiple orders that stretch out for many months and in some cases for years with a number of customers encouraging us to ramp capacity as quickly as we can.
Speaker Change: This is a much different position than we have been in the past and it provides better visibility into the growth we expect in the coming quarters.
Speaker Change: With all of these positive indicators, we are very optimistic about the future prospects of the company.
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 answer session.
Speaker Change: You ask a question on the phone you May Press Star then one on your Touchtone phone.
Speaker Change: If you are using a speakerphone please pick up your handset before pressing the team.
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press star. Thank you.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Yeah.
Speaker Change: Once again, if he would like to ask a question. Please press Star then one to join the question queue.
Speaker Change: Betsy why we while we wait to see if anyone comes in through the life teleconference Flying Joe and when I've got some webcast. So.
Speaker Change: Emission questions here that may be you can.
Speaker Change: I'll look to address.
Speaker Change: The first one here is can you provide an update on the defense contracts.
Speaker Change: Especially the ones with some of the specification problems that seem to have stalled and then started back up or their follow up contracts on any of these.
Speaker Change: Yeah sure. So so we have.
Speaker Change: Two significant defense aerospace programs that that are running today in production.
Speaker Change: One of them has been running for many years and.
Speaker Change: Those who have listened to these calls for many years will recall that we've been talking about this one.
Speaker Change: Really for four or five years, all the way back since before the pandemic that program is continuing to run.
Speaker Change: Quite steadily at between two and two and a half million dollars a year, we have a great relationship with that customer who is one of the largest defense contractors in the country.
Speaker Change: And they tell us that they expect to place Reorders every year.
Speaker Change: As we finish each year each order so that one we expect will continue at two to two and a half million dollar run rate for the indefinite future and has been running quite smoothly.
Speaker Change: One, which I think is the one that the questioner was asking about.
Speaker Change: As is our newer aerospace program, we did comment on it a little bit in the script. This is the one that had some challenges in Q1.
Speaker Change: We talked a little bit about but just to remind everyone. Our customer who again is very large.
Speaker Change: Company.
Our customer asked us to stop the line because they were they were measuring units that we had already delivered and finding specifications that werent satisfying the requirements. It turns out that it was a measurement error with some of the.
Speaker Change: Specs and equipment that.
Speaker Change: That really speaks to that.
Speaker Change: The level of precision that we're working with it's very difficult.
Speaker Change: To measure the performance of these units so the system that they were using was a little different than the system. We were using at the end of the day. They continued to keep all of those units and they they allowed us to restart the production towards the end of Q1 beginning of Q2.
Speaker Change: That's one of the programs that I referred to in our comments that Wayne and I referred to as capacity limited right. Now. So we have received more orders from that customer they've asked us to ship as quickly as we can.
Speaker Change: We expect to get to a $3 million to $4 million run rate by the end of this fiscal year.
Speaker Change: And we're working very aggressively to expand the space requirements that we have the fixtures.
Speaker Change: The assembly text and so all of that is in process in order to increase that program.
Speaker Change: But running all indications from our customers that this is another one that should continue with reorders into the indefinite future.
Speaker Change: Okay. Great next question and sort of put a couple of them together here, maybe just expand a little bit more on on exactly how maybe the unity platform works.
Speaker Change: Yes sure so.
As you can tell from our from our comments, we're pretty excited about the unity platform. We did do a soft launch over the last.
Speaker Change: Six to 12 months and we have a couple of customers who are coming online.
Speaker Change: We expect in the near term because of that the response at the shows was was.
Speaker Change: Quite positive and we have a number of leads from that.
Speaker Change: To get into more of the details let me just say the idea here is we have these baseline designs. The designs are split up according to the size of the into scope and the reason for that is that there are various components in the endoscope predominantly the Cmos sensor, but also some of the illumination systems that that will.
Speaker Change: It would be similar for similarly sized endoscopes, but different four and scopes of different sizes. So we have four categories. We have two of them that we formally launched the first one is for endoscopes that are less than two millimeters and.
Speaker Change: And the second is trended scopes that are between two millimeters and four millimeters.
Speaker Change: So.
Once we engage with our customer we identify their requirements and whichever of those categories that they are into scope requirements fall into based on size, we'll determine the baseline design that we start their program with once we identify that.
Speaker Change: We'll engage with them, we're able to deliver to them.
Speaker Change: And in the scope and a electric.
Speaker Change: Electrical system, our digital imaging system.
Speaker Change: Camera control unit box, if you like we can deliver to them the <unk> scope and the camera control unit that basically off the shelf and this acts as the very first prototype, which we can deliver to them in a matter of days to weeks as opposed to a traditional design process that will take weeks to months and so that.
Speaker Change: Already accelerates the timeline for them to get started with things like looking at image quality looking at how the electronics interfaced with their larger system all of that accelerates the timeline quite dramatically as soon as we do that we work with them to define the specification that they need for their specific into scope.
Speaker Change: And then we start looking at how are we going to modify the design that we already have and what we expect is that somewhere between.
Speaker Change: 75, and 90% of the design that we already have will be we'll be able to use without making any changes that other 10% to 25% to 30% that we have to change in many cases, we'll be able to plug in a design element that we've that we've used in another program. So as a specific example, we may.
Speaker Change: Go from a L E D at the distal in illumination system to a fiber optic illumination system, we've built and discussed with both of those are platform model. We will have one version, but we could swap out that illumination system by using the system. We have before all of this accelerates the timely.
Speaker Change: We will continue to modify the baseline design with these specific modifications customization of our customer needs then when we get to the final prototype stage and we have to go to do all of the regulatory testing because were using many design elements that have already gone through regulatory testing the likelihood that we passed the regulatory testing on the.
Speaker Change: First shot is quite high we always will have to do the regulatory testing because there'll be some changes, but because most of the design elements that are embedded in there have gone through regulatory testing before the risk associated with failing the regulatory testing is much lower and that also accelerates the timeline reduces risk to our customer.
Speaker Change: So at the end of the day, we expect that we'll be able to accelerate the time to market by somewhere between six to 12 months, depending on the complexity and specifics of the particular endoscope product and that for our customer is worth a ton and for US is worth an awful lot because our business model of course is to get programs from the engineering.
Speaker Change: <unk> into production, so that's a little more detail on exactly how this works.
Speaker Change: Who are interested in more and more detail can go to our website. They can go to our Linkedin page.
Speaker Change: Page, there's lots of information out there.
Speaker Change: What we did when we launched this at Photonics West show a couple of weeks ago is update all of our online presence is in order to.
Speaker Change: Be able to communicate more details about this out to.
Speaker Change: Customers. So I would encourage everyone to go to our website gigawatt.
Speaker Change: Okay, Great I think hopefully that answers the question.
Speaker Change: Just a reminder to everyone star one if you're dialed into to queue up and ask a question or you can submit your questions through the ask a question feature on the webcast player.
Speaker Change: Next question here, Joe you talked about achieving levels.
Speaker Change: $5 million in Q2, what happened between sort of that mid November timeframe at the end of the quarter I think you talked a little bit about this but maybe if anything else you can expand upon.
Speaker Change: Yeah sure. So so we did comment on this in the script, but let me, let me try and summarize fairly succinctly here.
Speaker Change: There were really.
Speaker Change: Two parts of the business that came in a little lower than we anticipated that the first one was the product development group and they were really two reasons for this there was a fair amount of work that we needed to get done in order to launch the unity platform in January.
Speaker Change: And I think we underestimated a little bit.
Speaker Change: Mt of work that we would need our engineering teams to.
Speaker Change: Put in in order to finalize the designs and in order to work with our sales team in order to get the language exactly right in the sales sheets and the.
Speaker Change: The diagrams for the sale of seats those sorts of things that also look a little bit longer than we had anticipated.
Speaker Change: Second thing is that there were a couple of our product development programs.
Speaker Change: Where customers had events.
Speaker Change: Events that caused them to either slow down or.
Speaker Change: Or to postpone some of the activities into later quarters. These are things like regulatory approval that didn't come through because there is another part of the system that they had to go back and update.
Speaker Change: There were one or two customers that were waiting for some financing events and so they told us that we needed to throttle back a little bit while they got those things.
Speaker Change: All the good news is that none of these.
Speaker Change: Where were cancellations of programs they were all.
Speaker Change: Adjustments to the timeline most of those have been resolved in Q3, one or two.
Speaker Change: It's still stretching out to get restarted in Q4. So there are a couple of those.
Speaker Change: Issues that we had not foreseen in.
Speaker Change: The beginning to middle of November and then the third one is that well.
Well well almost all of our product development programs are done at a time and materials basis. There are a couple of programs with very large customers.
Speaker Change: Or at very specific stages in the development process, which are based on milestone payments and so there was one in particular, where the milestone stretched out into Q2, and so we were unable to recognize the revenue even though we had done a lot of the work.
Speaker Change: Sorry, it's stretched out to Q3.
Speaker Change: From Q2, so we were not able to recognize that revenue in Q2, we will recognize it in Q3.
Speaker Change: And that was really just a timing issue. So so that was one part of it that the product development group came in a little bit lower than we had anticipated and actually.
Speaker Change: I think Q2 was probably the lowest.
Product development revenue quarter.
Speaker Change: In the last year or so so so that really had an impact the other impact frankly was that we were just too optimistic and how fast we could ramp.
Speaker Change: Some of these programs in particular the scope program.
Speaker Change: This newer defense Aerospace program in both of these cases as we talked about in the in the script our customers have given US orders, we have substantial backlogs, we have taken steps to be able to.
Respond to this increase in demand, but it just took us a little longer to get the resources in place to be able to.
Speaker Change: To satisfy that excess.
Speaker Change: That excess backlog and so I think we were just a little bit too optimistic in the middle of November.
Speaker Change: It's not a loss of business, it's sliding out a little bit and we're doing a whole bunch of things in order to make sure that we can respond to that additional backlog in Q3 and particularly in Q4.
Speaker Change: Okay great.
Speaker Change: It looks like maybe we have one further question here, you've talked about sort of having the largest backlog in recent history and that revenue growth has been capacity constrained.
Can you explain further how you intend to increase capacity.
Speaker Change: Sure. So so this this is really just follows on to what to what I was just saying about.
Speaker Change: The shortfall in Q2, there are some so let me be very specific because we didn't talk a little bit in the in this in the script I understand why people are quite interested in what we're doing so let me get a little bit more specific.
Speaker Change: Yes.
Speaker Change: Just sort of explain the level of effort that we're making in this regard so.
Speaker Change: For both of these programs that have substantial backlogs there.
Speaker Change: Our backlogs in a number of programs, but these two that we've talked about this the scope and the defense aerospace there are a number of things that we have to do in order to be able to expand production. So the first one is both of these are built in clean rooms, and the clean rooms that each of these are being built in our at add capacity. They are fully saturated there is no more room for.
Speaker Change: More people there is no more room for more fixtures.
Speaker Change: In both cases, we have more than doubled.
Speaker Change: The clean room capacity. So in one case, we've already completed the new clean room space that space is for this just the scope was.
Speaker Change: Was certified in mid January for the second one the defense Aerospace program, we expect certification to happen Tomorrow. So these are these are expansions of the clean room space that we need.
Speaker Change: In order to be able to increase the number of people and the number of lines in both cases, we are increasing.
Speaker Change: The number of lines from a single line to two lines and in some cases, we may go to three lines.
For the.
Speaker Change:
Speaker Change: For the system scope system that will take another few months in the meantime, we are running a second shift which we started a.
Speaker Change: A couple of months ago.
Speaker Change: In the case of the defense aerospace.
You already have the fixtures fabricated so those will be able to go into this new clean room relatively quickly we have been increasing our workforce for these two <unk>.
Speaker Change: Programs quite substantially over the last couple of months. This was one of the things that took a little longer than we anticipated in.
Speaker Change: And prevented us from doing as much work as we had hoped.
In Q2, just to give people a sense. We have we have increased the workforce for these two programs by something like 80%.
And we now have.
Speaker Change: As of next week, we will have a full complement of additional employees that are required to be able to get to double the output that we have now so all in all with all of these steps.
Speaker Change: Steps, both the facilities update the fixtures in the line update and now the workforce update we expect that we'll be able to double the output for the defense Aerospace program by by March by the end of March and we expect we'll be able to.
Speaker Change: Double the output for the assisted scope in about three months from now maybe four months from now.
Speaker Change: With the with the steady ramp using a second shift in.
Speaker Change: In the interim so in both of these cases, we've been moving very aggressively and with very specific requirements in order to be sure that we can we can respond to and take advantage of the very significant backlog that we have.
Speaker Change: Alright, very good Joe I'm showing no further questions here, so I'll turn it back over to you for any closing remarks.
Speaker Change: Great. Thanks, Robert and I, just wanted to thank everyone for joining us on the call today I look forward to speaking to everyone again very soon thanks very much.
Speaker Change: Yes.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].