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Precision Optics Corporation, Inc. (OTCQB:PEYE) is a supplier of customized micro precision optical and endoscopic digital imaging solutions for military and medical device manufacturers. This is a follow-up article to "Precision Optics Has A Game Plan That Isn't Obvious At First Glance ," where I discussed how CEO Dr. Joe Forkey had modified the company's business plan to build the product pipeline by removing the lumpiness that POCI had been experiencing due to the long sales cycle associated with sales to military contractors and companies pending FDA approval of proposed devices. The new strategy was centered on only accepting work orders within POCI's core competence and only accepting contracts that would result in annual revenue of at least a million dollars.

Dr. Forkey's original strategy aimed to develop at least one new product per year through the engineering phase of the product pipeline and into the production pipeline. POCI's products are customized to customer specifications and therefore command high-profit margins and have a long shelf life resulting in a reliable year after year revenue stream, similar to recurring revenue. Dr. Forkey's strategy aimed at developing at least one new product per year through the engineering phase of the product pipeline and into the production pipeline. The strategy has been successfully executed, placing the company on a path to revving up revenue. The market hasn't recognized POCI's improvements which offer a timely investment opportunity to consider.

Dr. Forkey's strategy was implemented seven years ago when he took over as CEO. The plan has delivered on the target of establishing a pipeline of products that goes through the engineering phase into production for the foreseeable future, but the situation has improved beyond what I recognized in my introductory article. Several share price catalysts exist, including:

POCI's ability to offer, if not the smallest, among the smallest components has allowed it to compete in a fragmented industry. The company has an advantage in competing for U.S. military contracts as U.S. companies receive favorable consideration. Management has increased the company's competitive advantage through acquisitions which allow for additional product offerings.

POCI acquired Ross Optical in June 2019. Ross Optical offered an unparalleled ability to locate and deliver optical parts sourced from anywhere in the world to meet customer specifications but lacked an engineering department to satisfy customers when parts meeting requirements did not exist. Dr. Forkey told me in a recent conversation that a recent contract from a large defense contractor took two years to win and would not have been winnable without the addition of Ross Optical.

POCI acquired Lighthouse Optics, a company focused on the medical device industry, in October 2021. Lighthouse boosted POCI's product pipeline. Dr. Forkey is eager to see results of applying Lighthouse's engineering prowess to enhance work on military applications, but more importantly, due to the acquisitions, POCI is now in a position to offer end to end solutions for its customers and is now able to compete against a smaller group of competitors that can match the range of services offered and for larger contracts encompassing whole projects instead of partial deals.

In several quarterly earnings reports, Dr. Forkey mentioned that two products on the pipeline had been stalled out due to Covid imposed conditions. One product that was delayed due to pending government approval for a defense/aerospace program has recently resulted in a production order for delivery this year. Management expects this order to result in a $3 million annual run rate. The second delayed product, an optical component for a medical device camera, was revealed at the Q2 earnings call to have received 510K clearance from the FDA.

The postponement of many elective surgery procedures slowed customer demand for POCI. At the Q2 call, Dr. Forkey reported that conditions have improved:

Precision Optics has supplied this product to the customer for more than ten years, with an average yearly run rate for fiscal years 2019 and 2020 of approximately $625,000. Due to the impact of pandemic-related restrictions on elective surgeries, fiscal year 2021 deliveries dropped to $160,000. With the relaxation of these restrictions, elective surgeries have increased, and this customer has continued to take an aggressive position to expand market share in certain product and geographic markets. Orders received by Precision Optics for this product in fiscal year 2022 have reached $2.5 million. The Company expects to deliver approximately $1.2 million through the end of fiscal year 2022, and $1.3 million in fiscal year 2023. Order rates for virtually all of our customers with mature medical device products are increasing back to pre-pandemic levels or higher to address the backlog in elective medical procedures.

Engineering revenue is a forecaster for production revenue. POCI reported that revenues from engineering almost doubled in the second quarter on a year-over-year comparison. There are several products expected to receive orders shortly, such as:

There are about 17 million shares outstanding. Insiders and funds own about half of the shares. The market cap is about $33 million. The company last reported $2.7 million in debt and $1.3 million in cash. The EV is about $34 million.

Based on the production pipeline, POCI should be able to bring in revenue of at least $15 million for this fiscal year. The company has low expenses as R&D is mostly paid by the customer as engineering expenses. The current cash position along with estimated revenue, is sufficient to fund company operations for the next twelve months.

The market is currently pricing the stock at 2X EV/Sales. The projected revenue growth is a potential catalyst for treating the stock at a higher stock price as products advance from engineering to production.

Management plans to uplist to Nasdaq upon shareholder approval at the annual meeting scheduled for April 8th. A reverse split will probably be necessary to meet the Nasdaq share price listing requirements. I am concerned about the lack of liquidity as there will be less than five million shares available for daily trading.

The company is dependent upon Dr. Forkey's leadership, and it would create a hardship should he, for any reason, leave the company. Supply chain issues suffered from any customer will have an adverse impact on POCI, as would a resurgence of Covid. There isn't any guarantee that customers will continue to renew their existing contracts or that POCI will continue to develop its product pipeline successfully.

POCI's strategy of building its pipeline and its product offerings via organic activity and acquisitions is ready to deliver strong revenues growth. The stock sells at a cheap multiple and should rerate as investors witness the projected growth.

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Disclosure: I/we have a beneficial long position in the shares of PEYE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.