Precision Optics Corporation, Inc. (POCI) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Precision Optics Third Quarter Fiscal Year 2020 Financial Results Conference Call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please proceed, sir.

Thanks so much, Eric, and thank all of you for joining us today to discuss the financial results of Precision Optics for the third quarter of fiscal year 2020 ended March 31, 2020. 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 the 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 statement. 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 as 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 of Precision Optics. Joe, please proceed.

Thank you, Robert. And thank you all for joining our call today to discuss our third quarter fiscal year 2020 financial results. First off, I hope everyone on the call and all of your families are safe and healthy. I am proud of the efforts of our team during the third quarter as we were able to meet the demands of our customers while placing a high priority on the safety of our employees. As I mentioned in the press release today, both of our operations in Massachusetts and Texas were deemed essential businesses due to our focus on serving customers in the medical device and defense industries. Therefore, both remained open with strong social distancing and other workplace precautions in place. While the operations remained open, like many other businesses, we certainly had our challenges in the third quarter, which ended March 31, and we continued to work through impacts of COVID-19 on our business today. Despite the challenges presented by COVID-19, we remain committed to our overall strategic operating plan and continue to be focused on 4 key investment areas for the business. First is our sales and marketing capacity, where we believe we can reach more customers and generate more opportunities. Second is the development and protection of intellectual property, which we believe in the long run can drive growth at substantially higher profit levels and ultimately defines the value of the business. Third is the development of automation and production, which we believe will be required as high-volume markets develop for our products. And finally, the potential acquisition of related companies as we seek to take advantage of consolidation of a fragmented industry and expand our capabilities and customer base. As in any quarter, a lot was going on in the third quarter, which ended March 31, and we have positive news on many fronts. But I recognize that the impact of COVID-19 is likely in the forefront of everyone's thinking these days. So let me start with a summary of the impact of the pandemic on our operations, and then I'll talk in more detail about the third quarter results. Our revenue for the third quarter was $2.4 million, which was down by about $400,000 from the previous quarter, but approximately flat when compared to the combined revenue of POC and Ross Optical on a pro forma basis for the previous year. We estimate that the impact of COVID-19 on our revenues for the quarter was approximately $300,000 to $400,000. While we would certainly prefer to be reporting a higher revenue number, given the overall operating environment for the third quarter, we are feeling rather optimistic about these results. Our Ross Optical division continues to perform at a high level, contributing $1.2 million in revenue during the quarter, which was an increase year-over-year from their $1.0 million in the March quarter of last year when they were still a stand-alone company. Given the nature of the Ross Optical business, with many customers taking regular releases against blanket orders, we took the initiative in March to contact customers with an offer to reduce the risk of potential interruptions due to COVID-19 by accelerating deliveries that could -- that we could fill from existing inventory. We were pleased to have a few customers take advantage of this offer. And while the amount of third quarter revenue realized from this effort was a modest $50,000, it was a very good example of one of the benefits of this acquisition. The additional diversification in customer base and overall business model of the Ross Optical division would significantly help to limit the impact of COVID-19 on our overall company results. At our Precision Optics operations in Massachusetts, revenue was also about $1.2 million, which was a decrease from $1.4 million in the prior year and $1.6 million in the previous quarter, which ended December 31. We saw a pretty significant impact in this division due to COVID-19. The impact came primarily from 2 areas. First, for one of our new production products that we have discussed on recent calls, which is used in otoscopy, the build materials and supply chain is fairly complex. One component that we use in building this product was severely delayed by a couple of months. Because this component was coming from a supplier in China, the delay began early in the quarter and prevented us from shipping approximately 2 months' worth of product. During this time, we continued to build sub assemblies to the level of completion possible, but we were unable to ship or recognize revenue on this limited work that had been completed. One consequence of this was a reduction in revenues, but another was an increase in inventory due to the partially completed product waiting for critical components. While the delays with this one component are not yet fully resolved, we have received a couple of shipments since the end of the third quarter, and we expect to be back on track in time to ship a complete set of finished units during the current quarter. You may recall that I have talked on earlier calls about a ship hold on our customers' deliveries to end users for this product. I'm pleased to report that the ship hold has now been fully resolved. Our customer is anxious to ramp up their shipments, and the long-term market prospects of this product remain very high. The second issue impacting the third quarter revenues from the Massachusetts Precision Optics division was a decrease in overall operational efficiency due to the adoption of certain workplace safety guidelines. While all of our employees worked diligently to limit the impact of these new policies, the abrupt change in work approach with limited time to prepare resulted in us missing scheduled production and engineering deadlines for a number of products, which resulted in lower-than-anticipated revenues. Again, this resulted also in an increase in inventory for the products that were in process at the quarter end. In the last couple of months, we have all learned to work more efficiently even as we continue to operate under these new conditions. That, along with an expectation that we will begin to revert back to historical operating practices, give us confidence that the inefficiencies experienced in the third quarter will largely be resolved before the end of the current fourth quarter. Subsequent to the end of the third quarter, we were notified by one of our major customers, for whom we make an endoscope that is used for a cardiac procedure, of the need to significantly modify deliveries for the next 3 quarters due to the impact of COVID-19 on their operations. The long-term prospects for their product in the market remain positive, but hospitals are committing resources to the COVID-19 response and postponing nonessential surgical procedures temporarily, but severely impacting our customer sales. The customer agreed to a delay in deliveries rather than a complete cancellation of the purchase order. We will decrease production by approximately $150,000 to $200,000 per quarter starting in the fourth quarter of fiscal 2020 and continuing partway through the third quarter of fiscal 2021, at which point, we expect delivery rates to revert back to their historical levels. We have now spoken with all of our key customers and are encouraged that so far, this appears to be the only customer for which COVID-19 has impacted their ability to maintain historical levels of production deliveries. As the risk from COVID-19 to our business began to become apparent a few months ago, even before the full impact became clear, we took some actions to ensure that we would have the resources required to deal with whatever was coming. First, we aggressively managed our cash position to increase our cash balance from $348,000 on December 31 to $632,000 on March 31, the end of the third quarter. Second, we quickly raised $250,000 from existing accredited investors with the sale of 200,000 shares at $1.25 per share, the same price at which we previously raised money. I am grateful to our shareholders, led by the Pessin family, along with Hershey Strategic Capital and others, for their quick support during the early days of the pandemic and for their continued confidence in the company and our strategic plan. Finally, we applied for and received $809,000 from the Paycheck Protection Program. These funds will be utilized to maintain payroll and for other applicable expenses. With the cash balance of $632,000 at the end of the third quarter, along with post quarter additions of capital from the equity financing in PPP, we feel confident in our cash position for the foreseeable future. As many of you are aware, our unique vertically integrated capabilities are rooted in the development of innovative and custom medical device in defense products based on our proprietary 3D endoscope technology as well as Microprecision lenses and imaging systems. Our business model enables us to create growth as new products come to market, while maintaining an ongoing base of business from products that have been in production for many years. Not surprisingly, things began to slow down from the standpoint of initiating new product development projects in late February. Meetings with customers to discuss new pipeline projects slowly slowed significantly. However, we have been pleased to see over the last couple of weeks things start to pick up as customers begin to reengage. In contrast, work on existing development projects continued with only limited slowdowns due to the efficiency issues I mentioned above. Across the board, existing customers with whom we are developing new products were anxious to have us continue our design work. Let me provide a quick update on the lead products in our pipeline. First, for the colonoscope product that relies on Precision Optics' micro-camera enabling technology, our customer has completed a second round of responses to the FDA with regard to their 510(k) application. We have received word that the FDA's original questions that related to our parts of the system, which we helped our customer answer a couple of months ago, have been resolved to the FDA's satisfaction. Our customer is confident that they will receive 510(k) clearance soon, and they have told us that they are planning to place a stocking order with us in the next couple of weeks. The second project in our pipeline is the 3D endoscope for use in robotic surgery. As we have discussed in earlier calls, this project has been very challenging technically. On our last call, I reported that we had successfully resolved a number of issues and planned delivery of a complete prototype by the end of the third quarter. Our efforts to complete that prototype confirmed that we had indeed solved a number of major technical issues, but the prototype was ultimately delayed by complications associated with the final fabrication step. We believe we have now resolved these complications and expect to deliver the prototype in the next few weeks. The next product in the pipeline is for a single-use micro endoscope for ophthalmology. This program is progressing nicely as we continue to successfully meet key milestones. As we move further along the development path of this project, the future time line is becoming better defined. And while there is still significant work to do, our customer is currently targeting regulatory submission and commercial launch in the next 12 months. This is a very positive advancement from our last quarter's conference call. With that high-level review of our overall results for the third quarter and status of pipeline projects, I would now like to spend a few minutes diving a bit more into the details of the financial results. As I have already mentioned, revenue during the third quarter ended March 31 was $2,375,000, an increase of 71% compared to Precision Optics' $1,386,000 in the third quarter of last year, but about equal to the pro forma revenue from last year and down about $400,000 from the most recent second quarter ended December 31, 2019. As I have already discussed, these lower revenues were due in large part to supply chain and efficiency issues caused by the impact of COVID-19. Our Ross Optical operations had a very nice quarter, up more than $50,000 from the second quarter and up 18% from the year ago third quarter when Ross Optical was still a private company. Historical Precision Optics operations will be impacted in the fourth quarter by the reduction in deliveries of $150,000 to $200,000 to one of our largest customers that I discussed above. However, with a return to normalized levels of production with the otoscopy product and relief from the impact of some of the COVID-19-related operational policies, we believe revenue in the fourth quarter will significantly rebound from the dip that we saw in the third quarter. Again, this is despite the impact from the one customer and their issues related to COVID 19. Our gross margin of 34% for the third quarter was an improvement compared to 33% in the previous year and 33% in the most recent second quarter. Ross Optical margins were in line with their historical averages, and the margins for 2 of the 3 production products we have discussed in the past were also in line with expectations. Despite these positives, our overall margins were impacted by the lower overall revenue, inefficiencies associated with the impact of COVID-19 and cost overruns for the 3D endoscope robotic surgery project in our pipeline. As these issues are resolved, we expect our gross margin to improve. Operating expenses were $1,282,000 during the third quarter of fiscal 2020 as compared to $1,469,000 during the immediately preceding second quarter. Removing stock-based compensation and services expenses of $64,434 and $263,473, respectively, puts the remaining operating expenses for the 2 quarters about even. In both cases, however, operating expenses were higher than those of a year ago due to strategic investments we have made during the year to position the company for future growth. These investments fall into the categories I've mentioned before that we believe are critical for future success and growth of the company. Over the last year, we have added to our sales and marketing efforts considerably to both increase customer coverage, company visibility and communication efficiency. We have added a West Coast direct sales resource, added a junior East Coast sales resource and integrated Ross Optical's go-to-market efforts. This is a huge increase from the modest sales resources we had previously. We have also added an external marketing firm and begun to broaden our efforts for digital customer engagement. We have implemented a CRM so that we are more efficient in how we manage customers and prospect for new ones. These are considerable investments for us that are already generating new sales opportunities. Our engineering resources have increased by about 50% over the last 18 months and are used on a mix of design work for specific customer projects, along with internal R&D efforts to generate proprietary intellectual property. For years, we spent very little on internal R&D. However, with the technical resources we have added over the last year, we have ramped up these efforts with positive results. Currently, we have 9 new patent applications in process or recently submitted to the patent office. This is the highest level of patent activity the company has had in many years. As we commercialize our technology through engagements with customers on specific products, we find that many of the applications of our unique technology lend themselves to proprietary IP, some of which could be the basis of additional unique products over time. We will continue this investment even in times of high customer-related deliverables as it is a key element to building the intrinsic value of the company. The single-use endoscope market continues to be an area of significant interest to us, and we are already working on initial customer-funded projects in this area. As we anticipate moving these projects from development into production, there are supply chain questions that must be addressed to be able to produce products at prices that satisfy the market. This will require very efficient manufacturing, which may be achieved by investment in automation capabilities for certain processes that are proprietary to Precision Optics and through partnerships developed to gain access to low-cost manufacturing resources. COVID-19 has slowed progress in investigating some of these options as travel is not possible to visit potential partners in particular locations and with key capabilities. More on these efforts in quarters to come as the impact of COVID-19 subsides. With respect to M&A opportunities, our acquisition of Ross Optical is nearing its 1-year anniversary and has so far been a great success. The team in El Paso has approached our combination with a great attitude, and they have executed very well. Our integration is turning up new opportunities to combine forces and delivery to legacy customers and new customers alike. We expect the economy to improve as the effects of COVID-19 subside, but we also believe that there may be a longer-lasting impact on the desirability of smaller companies to remain independent, having recently lived through the actual effects and consider the potential impact of an external crisis like COVID-19. While activities on the M&A front have necessarily slowed given the overall environment in recent months, we are now beginning to explore the landscape in new opportunities. All told, on the net income line, we reported a GAAP net loss of $466,000 during the third quarter, including about $75,000 of stock-based compensation. Backing out the stock-based compensation as well as depreciation, amortization and interest, our adjusted EBITDA for the quarter was a loss of $360,000. This result was driven largely by the loss of revenue caused by supply chain and efficiency issues related to COVID-19, as I discussed above. Because we believe these issues will be alleviated to a large extent in the fourth quarter, we expect considerably better EBITDA performance going forward. Turning now to our balance sheet. As I mentioned at the beginning, our cash balance at the end of March 31 was higher by almost $300,000 compared to the end of December despite the adjusted EBITDA loss. This was due to the normal ebbs and flows of working capital, along with our efforts to ensure greater liquidity as we entered the uncertain times of the COVID-19 pandemic. This increase in cash was accompanied by a reduction in accounts receivable by almost $500,000 as we diligently collected on some overdue receivables and by an increase of almost $400,000 in accounts payable as we worked with our suppliers to manage cash flow. This cash balance was then further enhanced by the $250,000 private placement completed on April 14 and the receipt of the PPP loan of $809,000 on May 6. As we work to recover from some of the impacts of the COVID-19 pandemic, we are prepared to take steps to reduce expenses if necessary. But our goal is to bring revenues of existing and new products back in line as quickly as possible and to continue our strategic plan for growth without delay. Given our cash balance at the end of the third quarter, augmented by the proceeds from the financing in the PPP, we believe that this will be possible. Overall, I am incredibly proud of our entire team, which has banded together to maintain a safe overall workplace for our employees and strive to meet the expectations and demands of our customers. We have taken quick action from a financial standpoint to strengthen our balance sheet for the benefit of all of our stakeholders, and we are optimistic that as operations return to a more normalized level, we can achieve the long-term goals we have for the company. One final note, with travel restrictions limiting our ability to meet with investors in person, I will be participating in a virtual investor conference hosted by the team at Lytham Partners. This will include a presentation next Wednesday, May 20, details of which were announced earlier this week as well as virtual one-on-one meetings on Thursday, May 21. Please contact Robert Blum for additional information. And now I'd be happy to take any questions.

[Operator Instructions] While we do so, I would like to turn the conference back to Robert Blum for any pre-received questions.

Yes. Thank you very much, Eric. [Operator Instructions] I did have a couple of questions come in here, Joe, that I thought we might use as an opportunity to address. The first one here was you mentioned that there was some pull-through here from Ross, I guess, in the third quarter just now. What impact, if any, might that have on the fourth quarter?

Yes, that's a good question. And it's something that we've been watching because we did have some concern about that. The first point I'd make is that the pull in was a fairly modest amount of $50,000. But the broader answer is that in the month of March, we did see some slight reduction in the revenue that was coming through Ross Optical as compared to historical levels, but it was not particularly significant. We think it was caused in part by the pull-through of the $50,000, but also because we got word from a couple of customers that they were experiencing shutdowns and asked us to hold off on shipping some things. Given all the information we have, we're pretty confident that these shutdowns will be resolved in time to make the shipments before the fourth quarter. And so all in all, we expect the Ross Optical level of sales to be pretty similar to their historical levels.

Okay. And last quarter, you talked a bit about being able to create some sales synergies between the Ross organization and the historical Precision Optics organization. Any updates that you can provide on any new opportunities that may have developed in that area?

Yes, sure. So obviously, I can't say anything about specifics. We wouldn't do that until things were certain. But what I can say is, is along with my comments in the script, the integration is going extremely well. And I will say there are a number of opportunities that the teams are working on together, really as a joint team. They're representing themselves as part of one organization in presenting the combined capabilities of what I now call the 2 divisions as opposed to the 2 companies. I will also say that it's not -- it's not only the sales groups that are working together. The sales groups are certainly working together, but they're pulling in the resources that they need from either of the 2 divisions. And so there has been -- there have been contributions in conversations with customers in these handful of opportunities where we're working together across the 2 divisions. There have been contributions, I would say, from a whole host of departments, including quality and regulatory. Some of the operating, manufacturing groups have gotten involved, the engineering group for sure from POC, as we expected, has been involved. So across the board, there's really been a great cooperation. And again, I can't go into specifics right now, but there are a number of opportunities that are being pursued together between the two teams. So it's really great to see.

All right. Perfect. And I just have 2 more here -- 2 additional questions here, Joe, I wanted to maybe have you address, and I'll turn it back over to Eric for any questions that might be on the -- queued up there. Is there any more specificity, I guess, you can provide on the potential pipeline projects in terms of timing? Are there hurdles that need to be met in order for commercialization to occur?

Yes, sure. So for all the pipeline projects, there are other -- always milestones that we have to reach. As I said in my comments, there's one project in particular that is getting to a point where we can see with some more clarity what the time line looks like, and this is the single-use micro endoscope for ophthalmic applications. I said in my comments that it looks like we're about a year away from submission to the FDA and subsequent launch. There are -- and just to give you a sense, there are a number of milestones that we still have to reach. We expect in the next few weeks to deliver prototypes that are -- have the final functional design. We still have some design work that we have to complete on the procedures and the tooling and fixturing. That will take a few more months. Then we have to go through design verification and validation that we expect to happen in the beginning of December time frame. In parallel with that, we've got a partner company that's working on a console. They're doing similar things on the same time line. The verification and validation is anticipated to be completed in the February time frame so that we can submit the 510(k) to the FDA in March. So as you can see, there are still a number of milestones we have to hit. But as I say, as we get closer and closer, we see with more and more clarity what the time line looks like and what the dates for those particular milestones look like they'll be. I want to caution everyone there is still risk as we go through this. At each one of those milestones, there can be issues that come up. But the farther we go, the closer we get, the more certain the time line is and the more likely that we get to final completion. So we're pretty excited about that.

All right. Sounds good, Joe. And then the last one here for me before I turn it back over. With some of the cost overruns that have occurred on the one pipeline project and as you move closer to commercialization of that product, how should we think about the impact to gross margins in fiscal year '21, and you being able to achieve the goals that you've stated before of sort of 40% plus blended gross margins there in '21?

Yes. So we've talked about this on calls before that the overruns for that pipeline project as well as lower-than-anticipated revenue levels, particularly for the third quarter as well as some hiccups that can happen when a new product goes into production, all of those things can have a negative impact on our margins. I have to say, with the particularly low revenues that we had in the third quarter, I was actually pleased to see that the margins held up at 34%. That's not where we expect they'll be in the long run. That's not where we want them to be. But given the overall environment in the third quarter, it was much better than it might have been. With regard to the specific question, absolutely, as we get through the challenges we've had with this pipeline project and more generally, as we get products into production and have more experience with them, we absolutely expect that the build process and build procedures to become more predictable. And for all of those reasons, we expect the margins to get up closer to the 40-plus range, which is where we expect things to be when things are running more smoothly. So yes, absolutely.

All right. Perfect. Eric, I'm going to go ahead and turn it back over for any questions that have come in.

[Operator Instructions] Our first question will come from Ralph Weil of R. Weil Investment Management.

I have a few questions, short ones, I think. The first one is how does the robotic surgery product that you're going to deliver the prototype soon for it differ from other such products currently in the marketplace? I know there's robotic surgery, but how does this differ?

Yes. So the product that we are making, which is the 3D endoscope, is a product that has similar performance to the endoscopes -- 3D endoscopes that are being used in other robotic systems. There are some 3D endoscope designs and approaches that we are working on that, I would say, fit into that overall category of developing new IP, new intellectual property. So in a general sense, in a strategic sense, we're developing IP to build on the sort of base capability of making a 3D endoscope, which already is something that only a handful of companies can do. So the scope that we're making in this case has functionality that's pretty similar to other scopes that we've made, but the size and shape are a little smaller and a little more streamlined, which is part of the reason that it's given us some challenges technically. I think the other part of the question really is what is unique about the robotic system that our customer is making. And of course, we have confidentiality agreements in place, so I can't tell you enough detail that you can go out and find -- look up who they are. But suffice it to say, there are a whole host of robotic surgery companies that are coming online now, both from well-funded start-ups as well as many of the large med device companies, all of whom are trying to get into this space that Intuitive Surgical has really demonstrated can be very large. And each one of these robotic systems has something unique about them. Either they're looking at a particular surgical procedure in a particular place in the body or they're looking at modifying the characteristics of the robot to make it faster or lower cost or more modular or with different augmented controls. There's all sorts of different things that differentiate the robotic system. So again, I can't go into detail about what's different for our customers' robot, but I can tell you that they've had some pretty significant success so far. And they've been very, very well-funded and a lot of people think that their approach is a winning approach.

Okay. Second question is the new colonoscope that you're working on, or I should say, that you expect the approval or the company expects the approval from the FDA, what type of -- why is this different? And what type of value -- I mean there are other colonoscopes on the market. What type of volume might this mean to Precision Optics in the next year or two?

Yes. Yes. So this colonoscope is unique because it looks -- and it has a greater viewing area than traditional colonoscopes. And so the basic idea here is that a traditional colonoscope has one camera that's in the front of the colonoscope. And even with a very large field of view, you can have some pretty large fields of view with this camera that's in the front of the colonoscope, even with a large field of view, you can only look forward. And there have been studies that have shown that in the colon, there are folds and with the colonoscope that's looking forward, you can't see the back of these folds unless you turn the colonoscope around, you turn the tip of the colonoscope around by articulating it, and then looking backwards. And that, of course, takes an awful lot of time and often is not done. And there have been studies that find that polyps can be missed when using a traditional colonoscope that's only looking forward. So the innovation of this colonoscope is that it can also look backwards. And the way that it's able to look backwards is by having 1 camera looking forward and 4 cameras looking backwards. And so now you can imagine with 5 cameras in the colonoscope, nobody wants the colonoscope to get any bigger. And so the only way to have more endo -- more cameras in 1 colonoscope without growing the size of it is if you use very, very small cameras, and that's the piece that POC is contributing.

So what might this mean? And it sounds like a great idea, but what would this mean for Precision Optics over the next year or two? Or what amount -- what is the revenue that you get per colonoscope?

Yes. So our expectation, given some of the discussions we've had with our customer, is that the initial stocking orders and sort of the first year run rate, we expect to be at somewhere around about $1 million, plus or minus. And so there's some expectation that if and when they're successful, that we grow from there. But that's the sort of order of magnitude that we expect as we get started into production.

Okay. A third quick one is you've talked in the past about a defense product. And we've heard recently about -- and I have one other question, that's it for me. The -- we've heard about the defense products in the United States, components coming from China. What is the status of this defense product? You didn't mention it.

Right. So just to be clear, the product that's coming from China is not used in the defense product. That's -- we're very careful with that. That's part of why we're able to work on defense products because we can separate those things. For the defense product, I didn't talk very much about it. I talked in our last call. The defense -- the program for the defense product was delayed because they had to do a redesign of part of their system. And they told us that, that would delay us by 9 to 12 months. That was about 6 months ago. So we expect that they'll be back on track the end of this year or very beginning of next calendar year, December or January. In the meantime, though, a couple of things that have happened that are very positive. The first one is they have told us -- so first of all, we're finishing out the deliveries of the original order. And I expect that the end of the original order will end sometime around the end of the fourth quarter of this year that we're in now or maybe slide into the first quarter of the next fiscal year. What they have also told us, though, is that they are willing to work with us to give us orders even before they're ready for the product because they recognize that we have some long lead times in that our delivery rates are better if we can space things out over multiple months. And so they're -- given the relationship, given the amount that they value, the things that we do, they're willing to work with us and sort of preorder some things even before they need them in January, which gives us a great opportunity to spread out the development -- or not development, but to spread out the production and to be able to do it in a more efficient way. The other thing that's happened, which is really quite promising in terms of long-term opportunities, is that, that same company now has come to us for preliminary prototypes for 2 or 3 other projects. One of them comes from the same group that we had been -- we've been working with all along. But importantly, 1 or 2 of these have come from completely different groups who are introduced to us by the first group. So this is exactly the kind of cascading effect that happens when we're successful in supporting 1 group, and we do a good job, they tell everyone else in the organization. And this is an organization that's large enough that they could bring lots and lots of business to us. So the quick summary is that the project is basically at the same place that it was when we talked about it 3 months ago on the last call. There's a delay in the overall program until the end of this year, beginning of next calendar year, December, January. But our customers working with us to get us new orders probably in the next couple of months' time frame that we can start delivering on in the -- probably the second quarter of fiscal 2021.

Okay. One last quick one. You mentioned the delay in getting components for a -- one of your projects from China. My question relates to have the Chinese companies been significant competitors of the capabilities that Precision has? And if so, might you, at Precision, be a beneficiary of bringing production and the supply chain back for components back to the United States? And I will tell you that a -- someone I know told me that -- who came -- lived in China and knows China, told me that we, in the United States, don't have the capability to produce a lot of components for defense and other areas, and we rely on China. So I'm just wondering whether you think you're going to be a beneficiary at all from this bring this back home attitude.

Yes. Yes. So there's a couple of things in that question, Ralph. Let me address a couple of things. So first of all, the issue of defense products being made in China is one that is very clear. No defense product can ever be made in China. We do have resources in the U.S. to be able to do that. We have some of those at POC and at Ross. There are also strategic arrangements that we have with other suppliers in other places in the world other than China that allow us to address needs for either defense or medical devices that are required in high volumes. In terms of the competitive position that we have with regard to things that are done in China, what I would say is on the component level, sort of the commodity kinds of products, which is what this one piece that we were delayed by, sort of the category that, that falls into, certainly, China is a strong competitor to us. This is exactly why part of our strategic plan is to develop unique IP and to protect that IP. And we protect it not only with patents, but also with trade secrets and know-how and things that we don't tell people. We have had many customers who have come to us who have said that they can't find what we do anyplace else. That will be in the sort of system level or subassembly level. It's less likely to be in individual components, unless we're talking about the really, really small components that we make, which are some of the smallest in the world that we've not seen from any place else. But now back to your -- sort of the core of your question, Ralph, which is exactly -- which is right on. This particular product or this particular component, in this particular case, is a component that our customer decided to source from China. And what they did was they decided to buy this component, which they were able to buy off-the-shelf from a company in China. They want -- they needed it to be modified in order to go into a medical device, and the Chinese company was not willing to do the modification. So during the development process 2 or 3 years ago, we told our customer that we could build this subassembly from scratch. And we gave them a quote, and they said, no, we'd like you guys to build the big subassembly because, really, no one else can do that. But for this smaller subassembly, we want to buy it from China. And then we'd like you, POC, to take it apart and modify it so it can be used in our medical device. Well, you can imagine what happened a couple of weeks after we started talking to them about the delays that were going to happen of the entire program just after they came off of ship hold, which I talked about before, because of these delays. And I will tell you, without going into detail, we are now talking to them about building from scratch this entire subassembly even though they can get it at a slightly lower cost from China. So the short answer to your question, Ralph, is yes, I do believe that there are opportunities for the big POC, POC and Ross Optical combined, to benefit from some of the efforts that I think will happen to re onshore some of the some of the supply chain that was impacted by the effects of COVID-19.

[Operator Instructions] Our next question will come from [ Veseled Mahaloff ], a private investor.

So you mentioned that you've deployed a new CRM system as well as engaged a new marketing company to generate new sales leads. And you did say that on the call just now that you did have some new sales leads or new sales inquiries. So I was wondering, could you paint a picture for us here on what are you looking for? Who is reaching out to you? How is this going? Any opportunities for kind of like plug-and-play sales or immediate sales opportunities, things where potential new customer will come and give you an order for something that you guys can manufacture right now with existing capacity, existing human capital, existing machinery that's out there in Gardner as opposed to -- sorry to interrupt, as opposed to long lead engineered projects. Something where almost like an OEM engagement to take care of the capacity.

Yes. Yes. It's a good question. From our underlying sort of business model, there are projects that go through our engineering pipeline which, as you know, anyone who's been listening to our calls or following the company will know that those kinds of projects can take multiple years to get into production. During that time, we can generate engineering revenue, and so we're always looking for those kinds of projects. Right now, our engineering team is pretty well saturated, in particular, working on a couple of the things that I've talked about. But we do see some of those things moving through into -- and getting into production in the next 12 months. So we are working already on some new projects that are coming into the projects -- the product pipeline. And some of those have come as a result of some of these new investments in sales. And you'll start to hear about these in our press releases and in the earnings calls, as they start to develop and become more significant pipeline projects, sort of as the ones that we're working on now make their way through, and these new ones come in. I think what you're talking about so, [ Ves ], is projects that we might be able to respond to and generate significant revenue on in a shorter time line. And those projects, just to sort of lay this out, one of the benefits of Ross Optical is that the business -- the sales cycle for the products that are handled by Ross Optical are typically faster because their products are not as engineering-intensive. You recall, that was one of the nice complementary things is that we have a great engineering team here in Massachusetts. And so there are opportunities that are developing for projects that our customers would like to have POC's technical expertise involved with, but that require product development or sales process that's much shorter than a full-blown engineering pipeline project. So either that's because there are simpler assemblies that are more complex than what Ross has typically done, but somewhat similar -- simpler than what POC has done. That with the 2 companies together, the engineering team at POC and the quick supply chain at Ross, together, we can put together these simpler subassemblies and deliver them more quickly and satisfy our customers' requirements. This is precisely the kind of thing that we thought could happen with the combination of the 2 companies, and we're starting to see some of that happen now. Interestingly, most of those opportunities are on the defense side of the business, and that also is one of the places that we've been making some strategic investments. So both because of the investments we've made in the overall sales organization as well as the benefit that our customers see by having the combination of the -- of capabilities of POC and Ross together in one company, because of both of those reasons, and I have to say, again, because of the great teamwork that's happening between the folks in Texas and the folks in Massachusetts, we're starting to see some of those. And I guess all I can say is stay tuned. When they come to fruition, we'll certainly be talking about them in more detail.

Okay. I mean, yes, I would love to hear about this. Look, we've heard a lot about product delays, long cycles, at the original Precision Optics and sometimes, obviously, is right now, we have delays and pushouts and things like that and would love to see some quicker turn projects come online to utilize capacity and physical capacity and so on at Gardner to bring up revenue levels to a better level and better gross margins.

Yes.

Okay. Another question is I heard that for the single-use products, you were -- you intended to look for location or subcontractors for mass manufacturing, I guess, of optical components at a lower cost than can be done here in the U.S. So I was wondering you're getting ready to enter this potentially vast market. Is the company still totally focused on using manufactured components manually or machined versus wafer-based products? And so could the company actually -- given its size now, I mean it's not a $3 million run rate operation. It's now $10 million-plus run rate operation. Maybe either acquired the skills or another company with wafer operations to manufacture optical components using semiconductor wafer techniques. And then use its other expertise to develop single-use products based on advanced technologies rather than low-cost, high-volume labor in the third country, so to speak.

Yes. So I think what you're referring to is wafer-level optics, which is a technique for manufacturing lenses in a very cost-effective way by using massively parallel processing as they do in semiconductor manufacturing. And what I would say is this. The folks who have been developing wafer-level technology have done a very good job. And frankly, they've solved technical challenges faster than I thought that they would. And for some applications, that represents competition to the type of lens technology that we have been developing. On the other hand, the companies who typically make the wafer-level lenses do not have the full complement of capabilities. This is our vertical integration that we often talk about. They don't have the full complement of capabilities nor do they want to pursue these capabilities to be able to design and build an entire medical device. And then secondly, the nonrecurring engineering cost to set up a new wafer-level lens that will work for a specific medical device is very, very high. And so setting up a new wafer-level lens for a new single-use application is not practical until you start being -- until the customer is ready to commit to very, very high volumes, like hundreds of thousands of units per year for 3 or 4 or 5 years. And so those 2 things mean that there is still a great opportunity for Precision Optics even without developing the wafer-level lens technology ourselves. And to be clear, I don't believe that's where our future is. There are people who do a really good job with wafer-level lenses. They figured out how to do it. They have the technology. They fill that requirement. What we do is something different, and we should focus on the things that we do best. Because of the two -- the two observations I just ran through, we can embrace the work that the wafer-level lens folks are doing. In cases where the wafer-level lenses that have already been developed for which the nonrecurring engineering has already been paid, we can use the wafer-level lens and build it into our medical devices and still use our proprietary technology to build the entire device and still take part in the single-use market. And that's -- for some of our projects, that's what we're doing. There's going to be another part of the market, for which the existing wafer-level lenses with the existing specifications will not satisfy their need. And there will be parts of that market that are not yet ready to go to 100,000 units a year, but are still ready to do 10,000 or 20,000 units a year, which can still be a very nice size order for Precision Optics. In those cases, we can still use our proprietary lens technology, and the price points we can reach are still compatible with single-use applications, even if they're not quite as low as the wafer-level lens capability. And so we've talked, for instance, with OmniVision, who is one of the companies that makes the sensors, but also makes the wafer-level lenses, and we all see it as being partners in this. In cases where their wafer-level lens will work, we will use that wafer-level lens to help our customer get to the lowest price possible. And we'll use our other IP, our other intellectual property and technology, to build an entire endoscope around that with procedures and techniques and design forms and all the rest that allow that product to become single use. In cases where they haven't done a wafer-level lens yet because they don't see enough demand, we will fill that part of the market with our lens to build a system around that. And if and when that particular lens parameter gets high enough volumes that they want to do a wafer-level lens, we'll take that wafer-level lens, replace our lens, but still have all the other parts of the single-use device that we're responsible for that still has our IP in it and continue to make that for them. So the bottom line is the wafer-level lens technology really, at this point, augments what we do. And so we see it as part of the overall environment that's helping to drive the transition from reusable devices to single-use devices. And I think there's plenty of room for the wafer-level lens as well as the technology that we're using.

Okay. Fantastic. And last very quick question, and this is actually on the finance side. So did the company obtain this PPP loan through a local bank or a bank institution anyways?

We did. We applied for it and received it from Bank of America.

Okay. So I've brought this question before. You now have a banker that knows you at Bank of America. What is the opportunity to get a line of credit for Precision Optics and Ross Optics? I mean for the combined company. Because we just experienced in -- and I'm thankful for shareholders stepping up and giving the company $250,000, but it's still dilution. I believe we're at a level now, at a $10 million run rate in revenues where we can get some attention at Bank of America or another bank and get a line of credit such that next time we have an emergency, we don't have to experience additional dilution, but rather, use a line of credit.

I agree with you 100%, [ Ves ]. And without going into details, I'll tell you, we were well on our way to exploring that in a definitive way when lots of things ground to a halt with COVID-19. So we hope to get back to that as soon as we can.

This concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

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

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