Precision Optics at Lytham Partners: Strategic Growth and Challenges

On Thursday, 29 May 2025, Precision Optics Corporation (NASDAQ:POCI) participated in the Lytham Partners Spring 2025 Investor Conference. The conference call, led by CEO Joe Forkey, highlighted the company’s strategic growth initiatives and the challenges it faces. Precision Optics, a leader in optical systems for medical and defense aerospace applications, is transitioning from product development to manufacturing, aiming to boost revenues and achieve profitability.

Key Takeaways

• Precision Optics is transitioning from development to manufacturing, with revenue growth expected from new programs.
• The company targets a $24 million annual revenue run rate to surpass adjusted EBITDA breakeven.
• Production challenges in the single-use cystoscopy line have been resolved, doubling production rates.
• The aerospace program continues to grow, with a $6 million backlog.
• Future plans include expanding production lines and replenishing the product development pipeline.

Financial Results

Precision Optics has experienced substantial revenue growth over the past several years, though recent figures have leveled off. The company aims to resume growth with new programs entering production. A target revenue run rate of $6 million per quarter is set to achieve adjusted EBITDA breakeven. Historically, gross margins have ranged from 30% to 40%, with a target of 40% as new programs stabilize. Recent financing of $5 million, supported by existing shareholders, will be used for facility upgrades and working capital.

Operational Updates

The company is moving from product development to manufacturing, driven by two major programs: the single-use cystoscopy and aerospace programs. The cystoscopy line faced initial production challenges, but improvements have doubled production rates. The aerospace program has a purchase agreement forecasting at least $4 million annually, with a backlog exceeding $6 million. Facility expansions include a larger clean room and new leases in Texas and Maine.

Future Outlook

Precision Optics plans to expand production lines and bring two to four programs into commercialization annually. The company is focusing on replenishing its product development pipeline, especially with the Unity platform, and aims to drive market interest through technological advancements. The Unity platform has already attracted five potential customers.

Q&A Highlights

During the Q&A session, CEO Joe Forkey addressed the cystoscope production status, which has more than doubled since February. He emphasized the company’s path to profitability, with expectations of surpassing breakeven revenue this quarter. The Unity platform is anticipated to play a significant role in replenishing the product development pipeline.

In conclusion, Precision Optics is poised for growth with strategic initiatives and resolved production challenges. For more details, refer to the full transcript below.

Full transcript - Lytham Partners Spring 2025 Investor Conference:

Robert Blum, Managing Partner, Lithium Partners: Hello, everyone. Thank you all for joining us during the Lithium Partners Spring twenty twenty five Investor Conference. My name is Robert Blum, Managing Partner here at Lithium Partners. And today, Joe Forkey, the Chief Executive Officer for Precision Optics will be, walking us through his slide presentation. And then if time permits at the end, we’ll engage in a short q and a discussion.

Precision Optics trades on the NASDAQ under the ticker symbol, POCI. With that, Joe, welcome, and, the floor is yours.

Joe Forkey, Chief Executive Officer, Precision Optics: Thanks, Robert, and, thanks, everyone, for tuning in today. I’m happy to be with you today and to be able to tell you a little bit about Precision Optics Corporation. As the as the name implies, Precision Optics is a company that that works with optical systems, both designing and manufacturing systems. We focus on a few very specific subareas within optics. Optics is very broad, we focus on some very specific areas.

I’ll talk about the specific technologies that we work in in just a minute. But let me start with the the overall business model that we use in order to compete in the marketplace and and create shareholder value. So the the the business model is pretty straightforward. As I said, we’re a technology company. Focus on some very specific technologies within the general optics area.

We develop that technology ourselves, and then we show that technology to our customers. If our customer and we agree that the technology we have can be turned into a product that can enable their next generation procedure and medical device or their next generation device or machine or approach in the defense aerospace side of things, then we’ll engage with that customer. They’ll pay us on a time and materials basis to take our technology, design it into a product. Once that product goes through all of the testing and regulatory requirements and goes into manufacturing, POC is the company that does the manufacturing. The the company will grow as we have more and more programs through our go through our product development pipeline and go into manufacturing because once a product gets into manufacturing in these markets, it tends to stay there for a for a pretty significant period of time.

Today, we are at a point where where we are, have just recently moved a number of programs from the product development phase into manufacturing. And so even in this quarter right now, we are up upping the volume of manufacturing, and we expect this to have a significant impact in our overall revenue. So we’re really at an inflection point now and really excited about, the way this business model is is moving forward. This shows our revenue ramp. So over the last, seven or eight years, we’ve had pretty continuous growth here.

Most of this is organic. Some is from a couple of acquisitions that we made, in 02/2019 and in 02/2022. We had a slight pullback from ’23 to ’24. We had a couple of legacy products, that pulled back, that went end of life. ’24 to ’25, our fiscal year runs from June from July 1 to June 30.

Fiscal ’20 ’5 has been about flat compared to ’24. But as I say said just a minute ago, we have some programs going into production, and we expect that will start this upward trend running again towards the end of fiscal twenty five, which we’re in right now, and into ’26 and beyond. The three different technologies that we focus on are are shown here. The first one is micro optics. We make some optics that are as small as 50 microns.

This is about the width of a human hair. We can then take those individual optics, design those into entire systems. Mostly, we use this technology for very small endoscopic systems for medical devices, which I’ll talk about in a minute. But there are some applications in the defense area and in the aerospace area as well. Three d imaging is the second area that we have focused on.

This really now is broadening a little bit to to very high precision imaging systems. So this includes things like, UHD, ultra high definition or four k imaging, as well as three d imaging where we we can make endoscopes that can allow the surgeon to see in three dimensions. The third area is a little bit broader and is an area of significant growth for us. This is in the area of digital imaging. This area basically is a a place where we’re taking the the digital image sensor technology that was developed for cell phones and laptops and other other consumer applications and partnering with some of the largest digital imaging manufacturers, so called CMOS imager manufacturers in the world, we’re bringing that technology to the medical device space and transforming the way that medical device endoscopes are being made today.

As I’ve already mentioned, we have two key markets. The first is in the area of medical device. This slide shows all of the specific areas within medical device areas in the body where we have programs that are running today. Those are the ones that are circled. All of the the areas that are identified in here are places that we have worked on in the last ten years or so.

So we have a very broad applicability of this technology. On the micro precision side of things, our technology allows us to make endoscopes that are smaller than any endoscopes that have been made in the past. And these have great applicability to places in the body where the incision size is really critical. So you can think of things like cardiac, spine, brain. We do a lot with ophthalmology, ear, nose, and throat in general, and then cystoscopy, urology.

Those are the kinds of places where we find the best application for the micro precision. Three d endoscopes, and again, more generally sort of ultra high definition and high precision endoscopes, are really pushing next generation procedure. Three d endoscopes in particular are used in a number of sort of whole body robotic systems like the system that Intuitive Surgical developed. We made our our the first three d endoscopes for Intuitive Surgical many, many years ago. The idea here is that with the added resolution, the added perception you can get with three d endoscopes and ultra high definition endoscopes, you can see things and do things in the body, particularly with automated systems like robotic systems that would be difficult to do without that level of of image quality.

And then the third area in digital imaging, really, as I already mentioned, is an area where we are bringing the advancements that were developed for consumer electronics and consumer imaging into the medical device world. This means that we can take CMOS sensor digital imagers, put them on the distal end of an endoscope, and get better image quality than some of the the more traditional technologies that have been used for endoscopes. And then very importantly, we can we can we can impact the cost of these endoscopes in a very dramatic way. And in particular, we can get the cost of these endoscopes low enough that that we can work with our partners, our customers to provide single use endoscope systems. What this means is that the endoscope now is used once and then discarded.

The big benefit here, of course, is that you don’t have to worry about sterilizing the end oscope, which is the way things have been done for the entire history of minimally invasive surgery. You don’t have to sterilize it when you take it from being used with one patient and then using it with the second. You don’t have to worry about cross contamination. And unfortunately, there are cases with reusable scopes where a patient will go into the hospital for one issue and they’ll contract the disease while they’re in the hospital because of a imperfectly sterilized endoscope. So going to single use has has has great safety benefits.

It turns out single use endoscopes are easier for the hospital because it’s easier for them to track, and surgeons love them because they get a brand new image out of each endoscope that they use for each procedure. So there’s a whole bunch of ways that our technology really medical device, and this is why this is, the biggest, focus and the the biggest contributor to our overall revenue. We do work in defense aerospace. This represents about, 30% of our revenue these days. The the real focus here is on the micro optics and smaller sizes.

There’s a big push in the in the military and in the aerospace community to reduce size, weight, and power. And particularly, anything that you lift off the ground is going to be benefited by having lower weight and lower power. So it turns out that satellites are one of the places where our smaller size and high precision alignment can be very, very useful. And so we have some programs running in that area today. Drones are lifted off the ground, and so there’s a big push on size, weight, and power there.

It also turns out that the countermeasure to drones, which are directed energy weapons and in particular, laser weapons, have some requirements for some very, very small optics in order to achieve the kinds of performance that they need. So these these are areas that we are engaged in. We have not put as much effort into the marketing into this area as we have in medical device, but we’re moving in that direction, and we believe that there are some some some prime opportunities here to expand our, our footprint in defense aerospace. Importantly, we we have over the years developed internally and then through a critical acquisition a few years ago, expanded the technical capabilities so we can now, design and manufacture the entire imaging system. And this has great benefit to our customers because, typically, our customers come to us because they don’t have in house optical or imaging expertise.

So we can be their one stop shop to be able to design the system from the front end where you’re generating the light that goes into the body, the imaging system, the the digital CMOS, and then the processing of the image electronically. So we present the image to the to the end user as an HD coming off of an HDMI cable. This is really a critical part of of what makes our offering very unique. On the digital imaging side, I mentioned in the beginning, our business model is we develop technology then show that technology to our customers. We’ve done a number of of digital imaging systems now over the last five to ten years, and we’ve we’ve recognized that many of these systems have common elements within the design that is used for for all of the digital imaging systems.

Now to be clear, there are always differences between the final product that we’re making for each customer because they have different procedures and different sizes and shapes, but much of the core underlying functionality of the system is the same. So It’s critical to our business model that we we get these programs through the product development pipeline and into production. And you can see here, these two orange lines on the top are the two programs that are our largest manufacturing programs that started in the last twelve months. The rest of these programs that have the long lines have gone in production. Three of them have been in production for a number of years.

Most of the rest of them have gone in the last six to twelve months. So it really is a time when we’re going through this inflection from mostly product development to a much larger manufacturing component. Importantly, you also see towards the bottom of this slide, there are a number of programs with arrows that are short of manufacturing. And this is really the pipeline. These are the programs that will go into production in the next six to twelve months, and then a number of these will go into production twelve to twenty four months.

And then with the Unity platform in particular, we’re bringing new programs into the bottom of this pipeline so that we’ll have a pipeline that will run three years out, four years out, five years out. Typically, are targeting programs that will go into production with a $1 to $3,000,000 a year run rate, and we’re targeting a pipeline size that will allow us to get somewhere between two and four programs going into production each year. I mentioned these two large orders. These are really a big part of the growth that we are experiencing right now. The first is a single use cystoscopy program.

This program went into production about six to nine months ago. We received the production order about a year ago for $9,000,000 It was our largest production order that the company has ever received. And our customer has been increasing the rate at which they want us to deliver these products over the last six to nine months because the they have been experiencing with their product has accelerated even beyond where they thought it would be. So this program is moving very quickly to becoming one of our two top programs. The second big program is our aerospace program.

We started production about a year and a half ago, but but this program has really started to ramp in the last six to nine months. We, after many months of negotiations, signed a main purchase agreement with this customer just a couple of months ago. And in this agreement, they have agreed to to to a forecast of at least $4,000,000 per year. They’ve been running at a much higher rate than that over this past year. And so today, we have a backlog of over $6,000,000.

We just recently doubled the size of our clean room and doubled the size of our production capability for this product. So this one is moving forward very quickly and driving a lot of the overall revenue growth that we expect this quarter and beyond. Very quickly, the go forward strategy is kind of obvious given our our business model. We we need to continue to expand the production lines, particularly for these two very large programs that I just talked about. We have to continue to have pipeline projects go to commercialization.

We do believe that we have two, three, four programs that should go into commercialization into production in the next twelve months. We continue to expand the pipeline, particularly with this Unity platform, so we continue to backfill that pipeline as programs go into production. Obviously, as a technology company, we have to continue to support and advance the technologies themselves. We’re always hiring new high quality engineers in order to be able to do that. We’ll continue to invest in sales and marketing as well as engineering for for all of those reasons.

And then finally, we need to expand and update our facilities. We’ve been talking about this for for six to twelve months. We just announced that we signed a continuation of a lease in one of our facilities in Texas. We signed a new lease on a facility in Maine, and we’re working on an update to our facilities in Massachusetts. So as the company grows, we have to update the infrastructure in the facilities, and we’re in the the process of doing that now.

I didn’t talk very much about acquisitions. We have made two acquisitions over the last five to six years. We really see acquisitions as an opportunistic opportunity for us, and so we continue to look at at potential opportunities here, and we’ll we’ll take advantage of of acquisitions if and when we find those that make sense in terms of the technical, synergies between the companies. Very quickly, just to summarize the the financials, we already talked about the revenue growing, quite substantially over the last, seven, eight years. It’s leveled off a little bit, but it will start to grow again with these new programs going into production.

Gross margins, you can see, have hovered around the 30% to 40% range. Recently, they’ve been a little bit lower as we get these new programs into production. There’s always some startup challenges, but we’re getting through those. And so our target margin is to get to 40% on a blended basis, and we expect we’ll get back there as we get these programs firmly into production. Adjusted EBITDA is showing similar kinds of things.

You see that we were hovering around, breakeven adjusted EBITDA even as we were making some investments over the years and the company was getting larger. In 02/2024, we made some significant investments because we saw the increase in manufacturing coming. We added a chief operating officer role, a number of other, operations roles, really in anticipation of the production that we’re just starting to see now. And so we expect this adjusted EBITDA to to recover. We’ve talked publicly about the expectation that we’ll get to $6,000,000 a year $6,000,000 in this quarter that we’re in now, which should be a $24,000,000 revenue run rate, and that, that will get us firmly beyond adjusted EBITDA breakeven.

Very finally on the balance sheet, all the details are here. The one point I do want to make is that we closed on a $5,000,000 financing in February of this year. It was supported almost entirely by existing shareholders with a 20% discount to market of straight stock. We’re quite grateful for the support of our long term shareholders. I think they understand the vision and they understand where we’re going.

And so we were pleased to be able to close that financing in February. We anticipate that that will be used in part to help with the updates to the facilities that I mentioned, and also for general working capital as the the volume of work that we do continues to increase. With that, I will thank you all for, for tuning in and for for, going through the slide deck with me. Robert, I’d be happy to take any questions.

Robert Blum, Managing Partner, Lithium Partners: Alright. Fantastic. Joe, thank you so much for that. Let’s dive into some more maybe near term items. You completed your conference call here just a couple of weeks ago for the third fiscal quarter.

Again, that’s quarter ending in March. You’ve talked during this presentation about a number of programs that are ramping up. The offset of that is some sort of challenges that you talked about in the manufacturing that, you know, where you experienced some lower initial yields specifically on the one single use cystoscope production line. You actually sort of paused production just a little bit. Talk about how production is going right now specifically on the the cystoscope line.

Joe Forkey, Chief Executive Officer, Precision Optics: Yeah. Sure. So so so just to sort of put this all in context, POC has been manufacturing products for decades. So so we know how to do manufacturing. The thing that is changing is that particularly for these two large programs, the volumes are much larger by a factor factors of 10 than the volumes that we have produced before.

So we are in a situation where we are sort of changing the nature of the manufacturing that we’re doing. Now we’ve hired people who have lots of experience with that, but getting those kinds of volumes up and running at the rates that our customers are asking for, even as our customers are increasing their forecasts and pushing us to do more and more, has been a bit of a challenge. And so we talked about this on the earnings call. We we ended up in a place where whenever you have startup, of these large production lines, large volume production lines, there are always gonna be issues with yield not being quite as good as we expected and with training of new operators and hiring new operators. We ended up in February with a situation where the yield had dropped precipitously and low enough that we actually stopped production.

And so that had a big impact on the third quarter numbers. The good news is we’ve done a root cause analysis. We’ve gotten through the issues. We have corrected the issues. And for that program in particular, we’re running today at a rate after you take into account the yield that’s more than double the rate that we were running before we had to shut down the line in February.

So double more than double the rate that we had in January. Similarly, for the aerospace program, the other big program I talked about, we haven’t had yield issues. Did back in the first quarter. It turned out it was an issue on our customer side, not on our side, but that did stop the line in the first quarter. Since then, that line has been increasing continuously.

In that case, we had to expand our clean room facility, so we had to do some build out. We finished that in March. We’ve doubled the tools and fixtures. So today, on that line as well, we are running at twice the rate that we were running even as recently as February or March. So in both of these cases, you know, there have been some challenges getting to the volumes that we need, but the good news is I think we’re through a bunch of those challenges and, you know, the proof is in the pudding.

Today, we are manufacturing manufacturing in both cases at double the rate that we were manufacturing just a few months ago. And I think we’ll continue to see that increase pretty smoothly now as we go through the next few quarters.

Robert Blum, Managing Partner, Lithium Partners: All right. Very good. As it relates to sort of reaching profitability or at least break even on a, on an EBITDA basis here, you talked about some of your targeted gross margin numbers, you know, where sort of OpEx is at and obviously with the expected revenue growth here in the fourth quarter. Talk through sort of the sequencing from revenue through margins down to OpEx and profitability.

Joe Forkey, Chief Executive Officer, Precision Optics: Yes. So the first piece is OpEx. That’s pretty straightforward. OpEx, we have if you look at our income statement, you’ll see that over the last couple of years, our OpEx has increased, and that’s because we were anticipating some of these programs going into production. So we have already sort of taken a hit on the OpEx side.

Mentioned we added a Chief Operating Officer and a number of other positions within the operations of the company. We also have been updating the facilities. I mentioned some of that. So a bunch of the increase in OpEx that’s required to support the higher revenue is already built into the numbers that we’ve seen on the OpEx line for the last few quarters. So we don’t expect that that’s going to continue to increase in the near term as we see the revenue increase.

Really getting to adjusted EBITDA breakeven is all about the top line and about the gross margin. And so as we’ve talked about publicly, we expect with these two big programs, these customers will take product as fast as we can build it. So it’s it’s really been all about getting these production lines up and running, getting through the startup challenges, getting through the yields that we’ve had to get through. We’ve talked about the fact that we expect our breakeven revenue to be somewhere between 5.5, five point seven. That range depends a lot on what the gross margin is and the yields on these two particular lines.

We expect that this quarter will be at 6,000,000, so so we expect that we’ll be beyond breakeven. The key after that, of course, is to is to stay at that level and to continue to grow with these two programs that I’ve talked about a number of times willing to take product as fast as we can make it, we’re going to continue to see that as a good solid base. There are three or four other programs that have gone into production in the last six months that are just getting up and running. So those are going to support the continued growth that we expect and need to see in coming quarters to keep us above EBITDA breakeven.

Robert Blum, Managing Partner, Lithium Partners: All right. Very good. Few minutes we have here. You showed the pipeline earlier. You talked about sort of programs that have moved rapidly from the pipeline into production.

Obviously, a positive on the one side. The the offset is that you gotta refill that pipeline with with programs that are, you know, the next generation or the next ones to move forward. Talk just a little bit further on the pipeline and and maybe what’s close to commercialization here.

Joe Forkey, Chief Executive Officer, Precision Optics: Yes. Sure. So I mentioned that we’re always looking for two, three, four programs to come out of the product development pipeline into production each year. We have a number that are targeted to go into production in the next twelve months. It’s not all under our control, right, because our customers have to be ready with their part of the system.

They have to get through FDA clearance and all of the regulatory requirements on their side. But there are a couple of programs that that our customers are pushing very aggressively on. Two in particular I can just comment on briefly. One is another single use program, which we’re quite excited about. It’s for a very specific arthroscopic application with a very small endoscope, similar to some of these other single use endoscopes that have gone into production in the last year.

That’s one of them. The second one is an otoscopy application that actually relies on some of our ultra high definition sort of three d applications where the customer is developing an otoscope that can that can use some algorithms to determine, a bunch of information about ear infections. And so they’re pushing very aggressively, and we’re pushing very aggressively with them. So there are a couple other ones. In the interest of time, I won’t go through all of them, but we do have specific programs earmarked in in sort of expectations that they will go into production in the next twelve months.

So that part of the model that we have, you know, two to four programs going into production every year is is solidly intact, and we already have the programs identified for the next couple years. On the flip side, as you said, as programs go into production, that means that they come out of the product development pipeline. And so we’re always we’re always out there working and looking for new programs. We had a fairly significant change in the product development pipeline and the product development revenue when this pro one of these two programs that’s the large cystoscopy program went into production in the June, July, August time frame. And so we’ve been working to recover that.

We’re making some good progress on that. The Unity platform came out at just the right time to sort of expand the interest in the market. We’ve had a big marketing campaign around Unity. People can go to our website and see the the interviews that our our VP of sales and marketing did with a number of people in the company, including myself. You can get online, and you can see the podcast that we’ve been doing.

So there’s been a big push from our sales team on that side. We’ve had a great response to that effort. We have five custom potential customers that we’re talking to who came to us because of the Unity platform. So we’re quite confident that we’re gonna see a recovery of the product development pipeline. And with the Unity platform, I expect that that’s gonna that’s gonna drive the the the programs into the product development pipeline for the, you know, the indefinite future.

Robert Blum, Managing Partner, Lithium Partners: Alright. Very good, Joe. I got, less than two minutes left here. Final closing comments, takeaways, outlook for the the quarter reminding, folks there in the backlog.

Joe Forkey, Chief Executive Officer, Precision Optics: Yes, sure. So this is an exciting time for our customer for our company. I’ve been thinking about this a lot over the last few weeks and looking at how the third quarter came out and how the fourth quarter is shaping up. A number of years ago, three, four years ago, we were all about getting enough customers. About two years ago or so, as I think about it, it was about getting our customers to take product as fast as we wanted to build it.

We’re now in a unique situation for us, which is we’re in a place where our customers will take the product as fast as we can. And really, it’s all about executing on the manufacturing side. I’m quite confident we have the right group of people. We’ve we’ve gotten through some of these hiccups in the beginning, and so we really do see this as an inflection point, for the company in the company’s history where we start to see that last piece of the overall business model where programs go into production and the production revenue starts to increase and continue to increase on a on a continuous basis going forward. So we’re pretty excited.

We think, that the company has a bright future, and and we’re anxious to to demonstrate that with some great results in this quarter.

Robert Blum, Managing Partner, Lithium Partners: All right. Very good. Well, Joe, thank you so much for the time as always. Thank you everyone here is who’s watching. If I can help coordinate, any introductions to management here, schedule a meeting, let me know.

Send me an email, bloom,blum,@lithiumpartners.com. Again, like to learn more about lithium, you can visit our website or, follow us on LinkedIn to make sure events like, this one here with Joe, you get, made aware of going forward here. So, Joe, thanks again for the time. Greatly appreciate it. Enjoy the conference.

And to everyone watching, enjoy, have a great rest of your day.

Joe Forkey, Chief Executive Officer, Precision Optics: Thanks, Robert. Thanks, everyone, for joining us.

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