Precision Optics Corporation Inc (POCI) 2021 Q4 法說會逐字稿

Good afternoon, and welcome to the Precision Optics fourth-quarter and fiscal year 2021 financial results conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.

All right. Thank you so much, [Ailee]. And thank you all for joining us today to discuss the financial results of Precision Optics for the fourth quarter and fiscal year 2021 ended June 30, 2021.

With us on the call representing the company today are Dr. Joe Forkey, Precision Optics' Chief Executive Officer; and Dan Habhegger, the company's Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. Today's conference call is also being webcast with replay capabilities available both through the webcast, as well as through dial-in instructions. The details of both were included in today's press release.

Before we begin with prepared remarks, we submit for the record the following statements. Statements made by the management team of Precision Optics during the course of this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. And such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements describe future expectations, plans, results or strategies and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in our filings with the Securities and Exchange Commission.

All forward-looking statements contained during this conference call speak only of the date in which they were made and are based on management's assumptions and estimates as of such date. The company does not undertake any obligation to publicly update any forward-looking statements, whether as a result of the receipt of new information, the occurrence of future events or otherwise.

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

Thank you, Robert. And thank you all for joining our call today to discuss our fourth quarter and fiscal year-end 2021 financial results.

Similar to our last few calls, I will first summarize a few key events of the quarter and year, including some brief commentary on the numbers and put it into the context of the strategic plans we have discussed on earlier calls. I'll then talk a bit about the status of our commercialized programs and pipeline projects, including some industry trends we are seeing and how Precision Optics is positioned to grow our operations going forward. Then I'll wrap up with a more detailed recap of the financial results, and as always, take questions.

At a high level, I am pleased with the performance throughout fiscal 2021 as we reported record annual revenues of $10.7 million, consistent with our pre-announced results back in August. This is a great achievement considering the difficult environment for many of our production projects due to the pandemic.

As we have discussed in earlier calls, the pandemic has reduced significantly our production revenue for released products by slowing or postponing production on three of our major programs. The revenue from these programs has largely been replaced by new engineering pipeline project. This was possible because of the strategic focus we have made over the last few years to enhance our sales and engineering capabilities to acquire and advance new pipeline projects.

While some of the new engineering pipeline projects were not as individually profitable as some of the more mature production revenue they replaced, they all generated positive gross margin and greatly reduced the impact that pandemic-related reductions in production revenues would have had otherwise. Our engineering pipeline today is as large and robust as it has been any time in the company's history. And with a hopeful return of many of our production projects to pre-pandemic levels in the future, we expect overall growth in fiscal 2022 and beyond.

Our senior management team also did a great job managing our way through the pandemic by leveraging tools that were available to us to maintain our workforce, while at the same time, taking the necessary precautions to ensure the safety of our employees. This efficient management allowed us to end fiscal year 2021 in June with only a slight adjusted EBITDA loss of $24,000, an improvement of nearly $750,000 in adjusted EBITDA performance as compared to fiscal 2020, which was the first fiscal year affected by the pandemic.

Importantly, the market opportunities for micro-optic and 3D-enabled devices and components in the medical and defense and aerospace industries continues to be robust. Even during the pandemic, when some customers pulled back on production orders for some mature products, our customers uniformly have continued to pursue development efforts for next-generation applications that leverage the unique and proprietary capabilities of Precision Optics. This is true of both large established industry players, as well as well-funded startup companies, and interestingly, is true of all three of the customers who reduced their production levels of their mature products.

Coming off of a year with record revenue, a continuously growing engineering pipeline, a hopeful return to historic production levels for pandemic-impacted products and continued efficient management of our operating expenses and cash flows, we believe we are well positioned for the future.

With that high-level summary, I'll now comment on some of the details on our various projects and associated industry trends. Overall, production revenue during fiscal 2021 was $7.9 million, down about 7% compared to fiscal 2020. The impact from the pandemic on our cardiac, otoscopy, and lead defense product were the primary drivers for the decrease as our Ross operations and traditional products all continued to perform well throughout the year.

As we reported throughout much of fiscal 2021, we continue to see reduced production levels from the cardiac program from where they were prior to the start of the pandemic. As the pandemic reduced the number of surgical procedures last year, our customers' inventory of the endoscope that we make increased, and so, we throttled back on our production rate. This resulted in a reduction of revenue from this customer by about 33% year over year and 52% compared to fiscal 2019, the last full pre-pandemic year.

In conversations with this customer, there are strong indications that demand is coming back for their application. We believe we have moved beyond the immediate acute impact of the pandemic and are starting to climb back to pre-pandemic levels of demand. In some cases, they have even begun to resume their efforts to expand into new geographic market. This market recovery will have a delayed effect in terms of us ramping production levels back to pre-pandemic levels as they burn off some excess inventory. But the fact that demand in the market is recovering provides significant optimism that longer-term production will return to levels as high as and greater than they were before the pandemic.

Production of our otoscopy product remains on hold, pending better end-market visibility for the product as our customer work through the excess inventory they have built up during the pandemic. While our customer continues to sell product and the market volume is beginning to show some early signs of recovery, the timing and extent of future order requirements are still uncertain. Despite this, our relationship with this customer continues to remain very strong.

As I mentioned last quarter, they've engaged us to help them evaluate some design options on another program. While the long-term size of this program is difficult to predict, it continues to progress and grow and validates the strong partnership we have developed. At the end of the day, we continue to believe the long-term prospects for their product remains very positive and that our position as their sole supplier is solid. We look forward to working closely with them to make our original product, as well as this new program successful for both of our companies.

In our production defense program, the follow-on order has been held up since the beginning of the pandemic. We have heard recently, however, from our customer that this project is ramping back up and that we should expect an order any day now. As I've mentioned on earlier calls, we have already procured the raw materials for this product and are well prepared to start quickly when we receive this anticipated order.

As I mentioned earlier, the volumes of our traditional products, including complex endocouplers, specialized endoscopes, custom spinal surgery products, along with the components supplied by our Ross Optical division, all remained stable during the fourth quarter and year. We are maintaining good margins on these products despite the impacts from worldwide shipping and lead time delays that have developed across many industries.

Finally, we continue to see new customer opportunities developing out of cross-selling synergies between our Ross Optical operation and our historical POC operation. This has always been one of the highlights of that acquisition, and we are pleased to see it coming to fruition. I simply couldn't be more pleased with how this acquisition has played itself out over the last three years.

As we look forward to fiscal 2022, we believe that in later parts of the fiscal year, we will see growth from our production programs with long-term recovery from the effects of the pandemic, as well as transition of a couple of pipeline programs into production.

Let's transition to our engineering developments and pipeline, which is as large and robust as it has been at any time in recent history. Even compared to where we were when we last spoke in May, we have added new programs to the pipeline and have advanced certain projects beyond the initial evaluation stage. Today, we have development projects in the medical device areas of ophthalmology, colonoscopy, otoscopy, cardiology, and urology. And as a consequence of our continued effort to explore business opportunities in the defense aerospace market, we have also recently added another development project from this market into our engineering pipeline.

From a revenue standpoint, fiscal 2021 engineering revenue was $2.8 million, nearly double compared to fiscal 2020. Fourth-quarter engineering revenue was $783,000. As I've discussed, this has helped significantly to offset revenue reductions due to pandemic impact on our recently released production products. This growth in engineering revenue is due in part to the increase in our sales resources, which has led to the identification of more opportunities, along with the increase in our technical capabilities, which has allowed us to respond to these opportunities quickly.

Both of these are areas that we have identified over the last couple of years as strategic areas of investment. Not only do the number of projects that are moving through our engineering group drive growth in our engineering revenue in the near term, they also increase the pipeline of candidates for long-term commercial production. And while we don't expect every one of these engineering pipeline projects to ultimately move to production, it is true that improvements in engineering revenue are generally a strong leading indicator of potential future growth in production revenue.

On our last earnings call, I spent a few minutes discussing single-use products and the associated technology we have been developing in the areas of design and manufacture of such products. As I mentioned then, the market for single-use devices continues to expand as more and more customers recognize the medical and financial benefits of such devices.

While we are well positioned to take advantage of the growing single-use market, we continue to see a robust ongoing market for reusable medical devices as well, especially those that require cutting-edge technologies to provide advanced next-generation performance. As such, we expect the ongoing opportunities in this area for the foreseeable future, both from our long-term existing products, as well as new and existing development projects.

Finally, we continue to look at expanded markets for our proprietary technologies, particularly in the defense and aerospace market. Today, we have a couple of pipeline projects in this area.

With that overview of the three market areas we focus on for new opportunities, let me summarize the status of a few pipeline projects, starting with our most advanced pipeline project, the multi-camera colonoscope, which is enabled by the custom micro-cameras that we provide.

Very similar to last quarter, we continue to wait anxiously for final FDA 510(k) clearance for our colonoscope customer. As has been well reported, the FDA has been behind due to pandemic-related emergency use authorizations, which I believe is the reason why this product has not yet received final clearance. Our customer, however, has reiterated that -- their belief that they are on track for 510(k) clearance soon based on recent meetings they have had with the FDA.

While we and our customer wait for the FDA, they have developed a robust go-to-market plan with a sales force, demo systems, and production facilities already in place. We remain confident that soon after they receive clearance, we will see additional production orders for our cameras.

The project with the large defense aerospace company that we have discussed the last few quarters continues to move forward. We will complete what we expect to be the final lot of prototype units in the next week or so, and still believe we are well positioned to have this project transition to production soon.

Within our single-use ophthalmology program, we continue to move through the design validation stage of this program. As a single-use product, the design validation serves to confirm that this product can be made reproducibly in high volumes. We have already built a few hundred of these units, and expect to build a few hundred more before completing the design validation process.

While the cost of this program are somewhat higher than we originally anticipated, it is still profitable, and we continue to gain valuable experience and technical know-how that will benefit us in future single-use project. We still anticipate that this product will go through regulatory approval in the next three months to six months in production by mid next year.

Other projects in our engineering pipeline include an augmented reality system for use in abdominal surgery, two additional otoscopy-related projects, a new multi-spectral camera system, a new ophthalmology program for infants, and a 3D defense aerospace imaging system. All of these programs are moving forward nicely.

All told, the number of engineering pipeline projects is greater today than any time in the recent past. And our sales team continues to pursue additional opportunities. Consistent with our strategic plan, we continue to expand our engineering team, which is extremely busy and doing a great job executing on pipeline projects to move them to long-term production as quickly as possible. All of this activity validates our recent strategic investments and gives us confidence in the prospects for future growth.

I'll now spend a few minutes summarizing and commenting on some key elements of the income statement and balance sheet.

On the top line, revenue during the fourth quarter was $2.7 million, a 20% increase compared to last year's fourth quarter, and up 9% sequentially. For the year, revenue was $10.7 million, a new company record, up 8% compared to fiscal 2020. The quarterly breakdown was $1.9 million of production revenue during Q4 of fiscal 2021, roughly flat compared to $1.9 million in the previous sequential quarte,r as well as the fourth quarter a year ago.

Engineering services revenue was $783,000 during the fourth quarter, which was a 168% increase from the fourth quarter of a year ago and up about $230,000 from the sequential third quarter. For the year, engineering revenue was $2.8 million, approximately double that of fiscal 2020. Again, the volume of projects in the pipeline is larger than at any point in the company's history and pulling in this engineering revenue helped to offset some of the effects of the pandemic on production.

Our gross margin was 29% for the fourth quarter, compared to 33% in the previous quarter and 29% in the fourth quarter a year ago. For the year, gross margins were 32% compared to 34% last year. This slight reduction year over year despite our higher overall revenue, reflects the shift this year in revenue mix with a higher proportion of engineering work, where costs can be somewhat more variable and difficult to predict. As we have discussed on previous calls, much of our engineering work also represents an investment in technology and know-how, which has payoffs far beyond each current quarter's gross margin.

In particular, we continue to make what I believe are important investments in our single-use engineering pipeline programs, which are included in cost of goods sold, leading to a reduced overall gross margin. Adjusting for the impact of these costs, gross margins would have been approximately 37% for the year. There is still room for improvement, much of which will come from more complete utilization of manufacturing overhead through a rebound in growth in production revenue. Our near-term goal continues to be to get back to the 40%-plus gross margin range.

Operating expenses were $1.2 million during the fourth quarter of fiscal 2021, up approximately $250,000 compared to the fourth quarter a year ago and up $150,000 compared to the most recent third quarter of fiscal 2021. These increases in quarterly expenses for the fourth quarter were due mainly to a onetime increase in stock-based incentive compensation.

For the year, operating expenses were $4.3 million, compared to $4.8 million in fiscal 2020. The reduction in operating expenses year over year continues to come from overall careful management of all operating costs, as well as limitations in certain activities, particularly in the area of sales and marketing travel due to the pandemic.

All told on the net income line, we reported a GAAP net loss of $442,000 during the fourth quarter. However, adjusted EBITDA was a positive $24,000, with the primary difference being stock-based compensation. That compared to a $323,000 net loss in last year's Q4 and adjusted EBITDA of negative $207,000.

For the year, adjusted EBITDA was roughly breakeven at $24,000 loss, and net loss was $103,000. This compares to an adjusted EBITDA net loss of $763,000 for fiscal 2020. The significant net loss for fiscal 2020 was caused mainly by the effects of the early days of the pandemic. The recovery back to roughly breakeven for fiscal 2021 was due in large part to our ability to quickly pull in more engineering programs as I've commented on already.

As the effects of the pandemic subside and previously running production programs come back online, we expect revenues and margins to increase, although we still expect some level of quarterly ups and downs along the way due to timing of engineering projects and the timing and scheduling of specific production programs coming back online.

Turning now to our balance sheet. Our cash balance at June 30, 2021, was $861,000, which was up $80,000 compared to the balance of $781,000 at the end of March. The increase was driven primarily by increases in advances from customers, as well as careful expense and cash management. We believe our cash balance at the end of the fourth quarter continues to position us well to execute on our plan.

Before I take questions, let me recap the major elements of our strategic plan that we have discussed the last few quarters. First, growing our sales capabilities and capacity. Second, investing in our technical resources in developing our own intellectual property. Third, investing in and updating our production capabilities, for example, to address the single-use market. And fourth, augmenting our own skills and programs via external partnerships or acquisitions.

On this last point, we continue to explore possible strategic transactions to increase the overall size of the business and benefit from economies of scale, and to augment our existing capabilities and enhance our portfolio of offerings to our customers.

Overall, I am pleased with the progress made in these four strategic areas. Precision Optics has created a strong position in micro-optics and 3D robotics, particularly within the medical device and defense and aerospace markets. We have created an end-to-end solution that allows visionary companies to leverage our capabilities to bring to market next-generation applications that they would otherwise be unable to accomplish on their own.

Due to the proactive measures taken to increase investment in sales and marketing and research and development, our pipeline is as robust as it has ever been. We have a number of projects approaching near-term commercialization from which we anticipate production orders soon.

Fiscal year 2021 for POC, as for much of the world, was all about managing our operations to minimize the impact of COVID-19 on our employees and on our business. In both of these, Precision Optics performed well. We were able to maintain our workforce and continue operations while keeping everyone safe. Through creative and diligent efforts, we were able to pull the company back to breakeven, even while the pandemic impact on some production projects continued. Much of this, as I've said, was accomplished through the increase in engineering pipeline activities.

We expect these increased engineering revenues to continue into fiscal year 2022 and beyond. And as the impact of the pandemic begins to lighten as we all hope, we expect to recover long-term production orders for products currently running at reduced levels or on hold. While the timing of this recovery is difficult to predict, and while we expect some ups and downs in future quarters due to this uncertain timing, we believe that the advancements we have made during fiscal 2021, combined with the success of our overall strategy, positions us very well for the future.

One final note, I will once again be available for virtual one-on-one meetings at the upcoming Lytham Partners Fall 2021 Investor Conference, which will be held next week on October 7 -- on October 5 through to October 7. As usual, please contact Robert Blum for additional information.

Thank you for your time today, and I'll now be happy to take any questions.

(Operator Instructions)

Ailee, while we, maybe wait to see if there's any questions here, Joe, I've got just a couple of them for you here this quarter. Any impact of the supply chain issues that we've seen as it relates to any electronics and international shipping or with labor shortages in general? Anything that's affecting the business?

Yeah. So we are aware of all of those issues that we all hear about in the news. We certainly see some impact in some of those areas with the business, but we work very hard to minimize those. As far as the product shortages, we've not been impacted too significantly. We do use some electronics, but not so many of them that are in short supply. In many of the electronics we use, we can find alternatives for.

Some of the international shipping and even domestic shipping has delayed some of the products that we're working with. But those delays are a matter of days, not weeks or months. So there hasn't been a huge impact there. I think, of the ones that you mentioned, the labor shortage is the one that we see potentially having the biggest impact. There are a couple of places where we're looking for some new employees, and those searches have taken a little longer than we would have expected. But I wouldn't say that any of that falls in the category of significant enough to have major impact on the business.

Okay. Great. And then just one more here. Do you see any sort of, let's call it, a second round of impacts on any of the production rates or anything else due to sort of maybe the Delta variant or other iterations here that we've seen from pandemic?

Yeah. So we've been watching for this closely. We've been talking with our customers. We talked with some folks who work inside of the hospitals. And of course, we watch the papers and the news as all of us do. I think that there's -- while there are clearly some increases in the number of COVID cases, and while there are some -- there seem to be some isolated incidents of hospitals that are being somewhat overburdened, I guess, by these, the sense that we get is that there's not a systemic pullback on the kinds of surgeries that our products are used in.

And so, again, while it's hard to predict with any kind of certainty when these things are happening, it does seem that the overall impact on the surgical procedures that our products are used in is not having a major impact on our customers' nearer-term plans.

Now, I think there may -- where there may be an impact is on the rate at which our customers start to burn off their inventory may increase or decrease a little bit, but it's nowhere near the kind of situation that we saw at the beginning of the pandemic where surgery stopped completely and our customers were not able to use their inventory at all. I think at the end of the day, it will impact to some degree the rate at which they come back, but it doesn't seem at this point to be causing a complete stop like it did in the past.

All right. Perfect. That's all I had. Ailee, I'll turn it back over to you.

(Operator Instructions) Seeing no further questions, I'd like to go ahead and turn it back over to management for any closing remarks.

Thank you, operator. And thank you everyone for joining us on the call today. I look forward to speaking with many of you again during our virtual one-on-one meetings next week. And I hope we can all visit face-to-face again in the near future. Thanks everyone, have a good evening and stay safe.

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