Precision Optics Corporation, Inc. (POCI) has reported strong financial results for the third quarter of fiscal year 2024, with revenue coming in at $5.24 million, close to the company's all-time quarterly record. This growth was driven by several new and follow-on production orders that leverage the company's unique micro-optics and digital imaging capabilities for medical device and defense/aerospace applications, coupled with record levels of engineering revenue.

The highlight of the quarter was the announcement of a transformative $9 million high volume production order from a leading surgical company to supply a single-use endoscope assembly for their cystoscopy surgery system. This is the largest single order Precision Optics has ever received and will help sustain a strong production base for future quarters. The company expects this order to generate revenue of approximately $2.2 million in fiscal 2025 and $4.6 million in fiscal 2026, with the remainder in the first half of fiscal 2027.

Beyond the size of the order, this milestone validates Precision Optics' ability to design and manufacture single-use endoscopes with high technical performance at price points consistent with the single-use endoscope market. Studies suggest this market is growing 2x to 3x more rapidly than the endoscope market in general, driven by benefits such as ease of inventory control, guaranteed brand-new image quality, and the elimination of cross-contamination risk.

Financials

Precision Optics' revenue for the nine months ended March 31, 2024 was $14.39 million, down 10.2% from the prior year period. This decrease was primarily due to a $600,000 one-time technology rights sale in the prior year period. Excluding this, revenue would have been relatively flat year-over-year. Net loss for the nine months was $1.54 million, compared to a net loss of $48,488 in the prior year period.

The company's gross margin for the third quarter was 35.4%, up from 34.4% in the prior year quarter, driven by higher revenues absorbing fixed costs. Gross margin for the nine months was 33.2%, down from 37.3% in the prior year period, primarily due to the impact of the one-time technology rights sale. Adjusted EBITDA for the third quarter was $52,000, compared to $9,000 in the prior year quarter.

Liquidity

Precision Optics' cash balance at March 31, 2024 was $925,067, down from $2.93 million at June 30, 2023, primarily due to increases in inventory, accounts receivable, and capital expenditures. The company has a $1.25 million revolving line of credit, of which $850,000 was available as of March 31, 2024.

Recent Developments

In addition to the transformative single-use endoscope order, Precision Optics has also seen increasing traction in the aerospace and defense market, receiving two significant follow-on production orders totaling over $2 million in the past few weeks. The company believes there are additional opportunities in this market, as its products and technologies align well with the industry's focus on reduced size, weight, and power.

Precision Optics has also been updating its marketing approach to the medical device market, developing a concept to provide an existing family of baseline designs to new customers. This gives the company a competitive advantage by offering an accelerated path to market and reduced development risk for customers.

Outlook

Looking ahead, Precision Optics expects sequential quarterly revenue results similar to the third quarter, with revenues at this level, along with improved margins, resulting in higher profitability and positive adjusted EBITDA going forward. The company believes it is better positioned today than at any point in its history, with a strong engineering pipeline, numerous programs transitioning from engineering to production, and the transformative single-use endoscope order.

Business Overview

Precision Optics was founded in 1982 and is headquartered in Gardner, Massachusetts. The company designs and manufactures advanced optical instruments, including proprietary medical instrumentation, custom design and manufacturing capabilities, and expert engineering and development. Its products are used in a variety of applications, including minimally invasive surgical procedures, military and defense, and industrial applications.

Risks and Challenges

The company faces competition from both foreign and domestic competitors, many of which are larger and have greater resources. Precision Optics mitigates this risk through its extensive experience collaborating with other optical specialists worldwide and its focus on developing new and enhanced products and services.

Precision Optics' financial position is relatively strong, with a current ratio of 1.64 and a quick ratio of 1.05 as of March 31, 2024. However, the company has a high debt-to-equity ratio of 0.26 and an interest coverage ratio of -8.86, indicating potential solvency concerns. The company's return on assets and return on equity are also negative at -0.09 and -0.14, respectively.

Conclusion

Precision Optics has reported strong financial results for the third quarter of fiscal year 2024, driven by new and follow-on production orders and record engineering revenue. The highlight of the quarter was the transformative $9 million single-use endoscope order, which validates the company's capabilities in this growing market. Precision Optics is well-positioned for continued revenue growth and improved profitability through fiscal year 2025 and beyond, with a strong engineering pipeline and numerous programs transitioning to production.