Kopin Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 12, 2024

There are 7 speakers on the call.

Operator

Good morning, everyone, and welcome to the Kopin Corporation Third Quarter 2024 Earnings Call. Please note that this event is being recorded. At this time, I would like to turn the conference over to Brian Pennineau, Investor Relations for Kopin. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Before we get started, I'd like to remind everyone that during today's call taking place on Tuesday, November 12, 2024, we will be making forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on the company's current expectations, projections, beliefs and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those forward looking statements. Potential risks include, but are not limited to, demand for our products, operating results of our subsidiaries, market conditions and other factors discussed in our most recent annual report on Form 10 ks and other documents filed with the Securities and Exchange Commission. Although the company believes that the assumptions underlying these statements are reasonable, any of them can be proven inaccurate and there can be no assurances that the results will be realized.

Speaker 1

The company undertakes no obligation to update the forward looking statements made during today's call. In addition, references may be made to certain non generally accepted accounting principles or non GAAP measures for which you should refer to the appropriate disclaimers and reconciliation in the company's SEC filings and press releases. Kopin Corporation's Chief Executive Officer, Michael Murray, will begin today's call with an overview of Kopin's progress within the company's strategy. Following Michael, Kopin's CFO, Richard Snyder, will review the company's Q3 2024 results. I would now like to turn the conference over to Michael Murray.

Speaker 1

Michael?

Speaker 2

Thank you, Brian. Good morning to everyone, and welcome to our Q3 2024 earnings call. We'd like to take a moment to express our gratitude to all the veterans both within and outside of our organization, as well as those currently serving in the armed forces. Their dedication and service are invaluable to Kopin's ongoing mission to save lives and enhance human performance through advancements in optical solutions. We are proud of the substantial progress we've made on our transformation plan, which is gaining momentum and achieving key milestones.

Speaker 2

We now project over $75,000,000 in orders for 2024 and beyond, potentially the highest annual order total in our company's 40 year history. This order book includes repeat orders from existing customers as well as significant new orders from both U. S. And international clients demonstrating our growth in revenue, customer base and market reach. In the Q3, we achieved $13,300,000 in revenue, a 26% increase over Q3 2023, with continued sequential revenue growth.

Speaker 2

Defense products delivered $10,400,000 in revenue, a 109% year over year increase. Notably, 5 new customers placed development orders, which we expect will drive multimillion dollar production orders in the years ahead, given these are multi year indefinite demand and quantity or IDIQ contracts secured by our customers. In defense, our order book has shown significant strategic progress. We reached the final production qualification milestone for our high performance organic light emitted diode on silicon display designed for Collins Aerospace F-thirty five Lightning II Helmet Mounted Display System or HMDS. As a sole source supplier of high brightness AMLCD displays for this system, we are fulfilling a multiyear agreement that should continue on for several more years.

Speaker 2

Recently, we received a $2,000,000 follow on production order for these AMLCD displays, extending our backlog and preparing us for next generation OLED on silicon micro display production. We anticipate both display types will be in production for an extended period of time. We also secured a $1,300,000 follow on order for our Emerald microdisplay module for a major weapon site product as part of a multiyear production program. This positions us for strong revenue growth, especially as our larger thermal weapon site program and subsequent production is expected to increase into fiscal year 2025. In the industrial market, we secured a $1,500,000 follow on contract for our near eye thermal imaging system integrated into firefighters' masks.

Speaker 2

This system featuring a miniaturized AMLCD and optics within the face piece enhances safety and effectiveness for firefighters. Turning to our 3 d AOI, automated optical inspection segment. We launched our next generation SXGA FL cost micro display system called the R15. Myrtech, a leading provider of 3 d AOI technology in South Korea, secured our first purchase order for this device. This affordable compact solution positions us well to meet growing demand in Asia and globally.

Speaker 2

Additionally, we received a production order for our high resolution 4 megapixel 2 ks SLM system, also for 3 d AOI integration. With the global 3 AOI market projected to grow from $700,000,000 to $3,000,000,000 by 2,030, Koppen is positioned to serve various segments budget sensitive with the R15, mid range with our SXGA model and high resolution with the 2 ks R11 model as well. In the medical market, our growth continues with another production order for the CR3 wearable surgical monitor from HMDMD. Supported by positive feedback from surgical equipment manufacturers, we expect adoption to increase as more surgeons try the CR3 through HMDMD's Tier 1 partnerships. Overall, our book to bill ratio has exceeded expectations and we are negotiating additional substantial orders anticipated by year end.

Speaker 2

This progress reaffirms our strategy to focus Copenon Defense and high performance integrated products. Notably, our new internal processes aimed at enhancing return on investment for internally funded research and development are showing promise and early results. Internal R and D investments have led to initial purchase orders and strong demand signals for our new products, which are robust, offer broader functionality and command higher average selling prices due to the value they provide. Quality improvements also continue. Incoming inspection rates at our top customers reached 94% in Q3 and October as well, up from 86% in the previous quarter, positively impacting product gross margins and customer satisfaction.

Speaker 2

We're making significant strides in quality and organizational evolution with more progress to come. As our quality standards continue to improve, becoming more stable and predictable, we also need to innovate our systems, design processes and manufacturing workflows to meet the rising demand and higher volume production expectations. A new strategic focus for 2025 will be enhancing manufacturing and systems automation. Now turning to other key initiatives, including our One Copen initiative. In response to increased defense spending in Southeast Asia, Europe and NATO countries, we have expanded the scope of our European based 3 d AOI sales team.

Speaker 2

They now promote the full range of Kopin products and capabilities to defense customers in Europe and Southeast Asia as well. Early indicators show this strategy is succeeding as we're seeing new opportunities and foreign customers entering our pipeline. One of our foundational strategic initiatives, the Fab Lite strategy remains on track. Kopin continues to partner with multiple fabrication facilities across Asia, Europe and the United States, specifically for U. S.

Speaker 2

DoD applications and our 4 display types. Our decision to strengthen OLED on silicon and our microLED capabilities for U. S. Department of Defense applications has been proven timely, given the possibility of further supply chain security requirements and potential tariffs under the new administration. Additionally, we're collaborating closely with government and industry partners to build a long term, higher volume and more innovative manufacturing approach within the United States.

Speaker 2

Now I'd like to highlight a few additional notable accomplishments from the quarter. This quarter, we expanded our medical technology portfolio by introducing proprietary high resolution fast spatial light modulators or SLMs for use in fluorescence super resolution microscope systems for biomedical research. These advanced SLMs enhance image resolution often down to the molecular level, significantly advancing research capabilities at leading biomedical institutions worldwide. In the defense sector, we partnered with Wilcox Industries on the Fusion Claw, a cutting edge head borne information system offering integrated day and night heads up display solutions. This partnership is the cornerstone of our IVAS Now strategy, which introduces an integrated visual acuity system for war fighters supporting day and night capabilities compatible with current night vision goggles and helmet mounted systems.

Speaker 2

With millions of night vision goggles in use today, this solution provides immediate market potential by enhancing telemetry and thermal imaging in a heads up configuration, improving situational awareness. Additionally, at AUSA, we awareness. Additionally, at AUSA, we were featured in the Kinetic suite to showcase our Neural Display technology platform. Neural Display is a sophisticated OLED or MicroLED hardware and software system that includes embedded sensors for eye tracking, position and gaze detection with the ability to process this tracking data in real time through Kopin's proprietary AI powered software within the display's backplane. This real time data just optimizes user experience in high stakes environments.

Speaker 2

The platform has now reached alpha testing, marking a major milestone in the development of our neural display architecture. We believe this display system will be an ideal fit

Speaker 3

for the next generation of defense visual augmentation systems. It also has attracted significant interest from consumer spatial computing manufacturers, thanks to its ability to reduce size, weight and power consumption while maintaining high image quality, high in pupil tracking and dynamic controls. We're extremely excited about this new technology. Currently, we are collaborating with several defense and consumer companies on innovative design approaches, software integrated pardon me, software integration strategies and exploring potential new business models. As we look to the future and see our business fundamentals strengthening, we're experiencing favorable market dynamics in the ARVR sector that align with our mission and technology roadmaps.

Speaker 3

Additionally, geopolitical factors and the new administration have created strong tailwinds for our business. Given these factors, we're increasingly optimistic about our financial trajectory for 2025 and beyond. With that, I'll now turn the call over to our CFO, Rich Snyder, to review our results from the Q3 in further detail. Over to you, Rich.

Speaker 4

Thank you, Michael. Turning to our financial results for the Q3 of 2024. Total revenues from Q3 2024 were $13,300,000

Speaker 5

versus

Speaker 4

$10,600,000 for the prior year, a 26% increase year over year. Product revenues for the Q3 ended September 28, 2024 were $10,900,000 compared to $5,500,000 in the Q3 of September 30, 2023. The increase in product revenues was the result of higher defense product revenues, which increased $5,400,000 year over year. In the Q3 of 2024, funded research and development revenues were $2,300,000 a decrease of $2,700,000 as compared to Q3 of 2023 due to the completion of several programs like the monochrome microLED program, which is now entering low volume initial production. Cost of product revenues for the Q3 of 2024 were $8,300,000 or 76% of net product revenues compared with $5,400,000 or 99 percent of net product revenues in the Q3 of 2023.

Speaker 4

The decrease in cost of product revenues as a percent of sales was a result of a decrease in expected costs because of lower estimated rework costs, essentially improved quality. R and D expenses for the Q3 of 2024 were $2,600,000 compared to $3,100,000 in the year ago quarter. This was primarily due to a decrease in funded R and D expense of approximately $1,200,000 dollars on U. S. Defense programs that were previously noted were completed.

Speaker 4

This was partially offset by an increase of $700,000 in internal R and D expense for process improvement. SG and A expenses were $5,200,000 in the Q3 of 2024 compared to $4,800,000 in the Q3 of 2023. The increase was primarily due to an increase in legal fees of 400,000 partially offset by a decrease in public relations fees of $100,000 Legal expenses associated with the Blue Radios matter in the Q3 of 20242023 were $1,500,000 $1,200,000 respectively. With the trial portion of the lawsuit behind us and potential appeals process in front of us, we expect legal fees to normalize at a much lower level than recently experienced. We believe the appeals process is all much less expense than funding the trial.

Speaker 4

Other expense net for Q3 of 2024 includes a $1,100,000 impairment loss on equity investments. Turning to the bottom line, the net loss for the quarter of 2024 was $3,500,000 or $0.03 per share compared with a net loss of $2,500,000 or $0.02 per share for the Q3 of 2020. The amounts discussed above are based on our current estimates and listeners should review our Form 10 Q for the 9 months ended September 28, excuse me, 24 for any possible changes and of course additional information and filings. And with that, I'll turn it over to Michael for closing remarks.

Speaker 2

Thanks, Rich. This quarter's results demonstrate our ongoing success in delivering solutions which improve the human experience, performance and save lives. Our operational improvements, stronger customer relationships and momentum in orders give us greater visibility and a clear plan towards achieving sustainable net income profitability. We continue to strengthen margins through improved quality rates, cost controls and strategic investments in our products, automation and our talented and dedicated workforce. Our pipeline of qualified opportunities has grown significantly in recent quarters, largely driven by the U.

Speaker 2

S. Need to replenish stockpiles, modernization of defense technology and weaponry and respond to recent geopolitical developments. Increased sovereign and NATO spending further boosts this trend. We anticipate that these new partnerships and progress will fuel full rate production and they'll lead to contributing larger future returns. To capture these opportunities and accelerate our market momentum, we've recently expanded our North American business development team with 2 new hires and we retained a consultant specializing in consumer applications.

Speaker 2

Thank you all for your time today, for your interest in Kopin. I'd also like to thank and extend our gratitude to our employees, our customers and stakeholders for their dedication and continued support. With that operator, we'll now offer time to take some questions.

Speaker 3

Thank

Operator

you. We'll take our first question from Jaeson Schmidt with Lake Street. Your line is now open.

Speaker 5

Yes. Thanks for taking my questions and congrats on the strong results. Michael, I want to dig in a little bit on the international market. You noted some nice traction there. Just curious where you're seeing that?

Speaker 5

And I guess relatedly, is your sales infrastructure to address the international market fully built out at this point?

Speaker 2

So international, I think is a growth opportunity for us, Jason. Thanks for the question. Right now, the international business is actually, I'd say, less than 5% of our total revenue this year. We do exceed see that exceeding our expectations next year and the year after just simply because of geopolitical issues in Israel, Ukraine and some other hotspots that currently need the technology that we have. We also see the perturbation of NATO requesting and demanding 2% of GDP actually be spent.

Speaker 2

So I think as we move forward, international business for us in defense specifically is going to grow exponentially. Moreover, we also see interesting trends in the medical side of the business with future potential medical customers globally here looking at the CR3 module as well as those displays for high end microscopes as we talked about. So overall, I think international is going to grow for us and that's the pivot that we made with the 3 day AOI team, which resides mostly in Europe. But we're not fully built out for international sales just yet. We expect to make some small investments and augmentations, if you will, to service that business next year and in the future.

Speaker 5

Okay. That's helpful. And then I know you noted kind of a strong book to bill year to date. Just curious what that number was for Q3?

Speaker 2

Q3, it was slightly below 1 to 1.

Speaker 5

Got you. And then just the last one for me and I'll jump back into queue. Obviously, it's early, but would just love to hear your thoughts on how your business might be potentially impacted with the change in administration?

Speaker 2

Sure. So I think firstly, I think the new administration based on what we understand today, which is early, is going to be good for Koppen in the long run, mainly because of the strong emphasis on NATO to spend 2% of GDP, which was the previous administration's big focus. And I think that's going to continue, number 1. Number 2, I see the budget process including plus up requirements for defense spending in the United States. So I think that's a second tailwind that we see.

Speaker 2

And then the 3rd tailwind that we see with the new administration is just the ability for smaller companies, small cap companies like Kopin to grow. And I think that's a big focus of the new administration. So pound for pound, we see this as a positive for Kopin.

Speaker 5

Perfect. Appreciate the color. Thanks a lot, guys.

Speaker 2

And one other note, Jason, real quick. Although our book to bill this quarter was not positive, the book to bill for the year remains ahead of schedule and positive. So I wanted to make that distinction.

Speaker 5

Okay. Thank you.

Operator

Thank you. We'll take our next question from Victor Santiago with Stifel. Your line is now open.

Speaker 6

Hey, good morning guys. This is Victor on for Matt Sheerin. Just a question on revenue in the quarter. It's a bit better than we had expected of that kind of mid single digit sequential growth. Was that a function of pulling orders from Q4?

Speaker 6

Was that just your ability to ramp new programs in the quarter?

Speaker 4

It was a combination of product mix and our ability to produce. Remember, we're on 606, so essentially our revenues are not based on shipment, they're really based on percent completion. So to the extent the supply chain is flowing nicely, it allows us to get ahead and build product. And so the supply chain worked very well this quarter and also we had a favorable product mix. Some of the smaller orders that you see actually have much bigger gross margins and are much more profitable.

Speaker 6

Got it. And then, I think last quarter you had talked about growing gross margin sequentially through the year. You guys saw a nice bump here in Q3. Can we continue can we expect that to continue going to Q4?

Speaker 4

That's the plan.

Speaker 6

Got it. Fair enough. That's all I had. Thank you.

Operator

Thank you. We'll take our next question from Kevin Dede with H. C. Wainwright. Your line is now open.

Speaker 3

Thanks gentlemen for having me on. Hi Michael, Rich. Michael, would you mind diving into

Speaker 2

the neural display a little bit more? I mean you spoke

Speaker 3

to specific interest both on DoD and the consumer side. You've got a new consumer applications consultant. I know it's early. I get it. But if you could give us a little more color there, we see that as an exciting opportunity for Kopin.

Speaker 2

Sure. From a standpoint of neural display, we see the market going basically repeating history. If you look at original cell phones as an example, they were built with individual components, not much integration. And then over time, ICs won the day, integrated circuits won the day. We see that same sort of trend with spatial computing devices or ARVR goggles that sensor fusion systems or integrated circuits need to drive that innovation.

Speaker 2

And neural display is a great example of that. It removes 6 cameras from some of the spatial computing devices. 6 cameras is very costly, very high power and creates a lot of weight on the nose. So we think neural display has a tremendous value proposition in both consumer and medical as well as obviously defense. On the consumer side of things, we think all the consumer companies at this point in ARVR are back to the drawing board, which is good news for us because we're farther down the path with neural display.

Speaker 2

I can't talk about some of the things we're working on because they are under NDA at this point, but we are making pretty substantial progress thus far.

Speaker 3

Has the company decided on whether it might or might not offer a demo of it at CES? I know that had or was being considered at some point.

Speaker 2

We're still trying. It's up for debate. We're struggling with it, quite frankly, to get a better image quality out of it. And we still have a pretty strong plan to make it to CES with the neural display as an actual display running our software and the AI. As you can imagine, in the last 18 months, that's been a Herculean lift for our engineering teams.

Speaker 2

So still TBD, where that's the plan, but we are struggling with it.

Speaker 3

Regarding, I think it was Victor's question on the change in the administration. I'm wondering if you've looked sort of the next layer of the onion and your supply chain and the potential for tariffs to impact that. How might you be hedging yourself?

Speaker 4

Great

Speaker 2

question. Thankfully, one of the first strategic initiatives that we had, Kevin, was our fab light model and the concern around our Chinese OLED deposition supply chain. I'm very pleased to report that we've moved our sensitive U. S. DoD applications to a new provider that is U.

Speaker 2

S. DoD approved. The vast majority of our components will have a dual source U. S. DoD as well as our Chinese deposition partner specific to OLED moving forward We'll be complete that transition this quarter.

Speaker 2

So very pleased and proud of the team for their progress. And more importantly, we're actually seeing better quality results and better performance out of our new partner on our OLED displays. So tremendous progress in that area. And it was very timely that we took that decision when I came in a couple of years ago. So that strategy is now proving positive for us.

Speaker 3

So have you I guess, I'm wondering maybe if there's any way to quantify that. Do you have to worry about rotating manufacturing with a change in import policy?

Speaker 2

No, not necessarily. Okay. No, it's more about we build our backplanes through either Taiwanese or Korean fabs. Then the deposition process can happen anywhere in the world where we see technology benefit or performance benefit or cost benefit as an example. And that's part of the fablight strategy is we will go to the partners that have the best cost, best quality and best performance.

Speaker 2

So that allows us to do that, which is take our backplane designs and then deposit OLED or micro LED material where it makes best sense for our customer base, the geopolitical issues. So it just makes us much more flexible. But as I mentioned in my prepared remarks, we also have an advocacy for a larger footprint here in the United States for Kopin. And that larger footprint is something that we're actively working on with the government, the government customers. And I'm very pleased to report that the government customer is supporting us in that endeavor, whether that be through DPA or Chips Act funding, but we do have a larger advocacy around building out a footprint here in the United States for all of our technology needs for the U.

Speaker 2

S. DoD.

Speaker 3

Well, I'd imagine that's a pretty long lead time though, right? Correct. Yes. Okay. On backlog, Michael, help me with some of the numbers.

Speaker 3

You mentioned, I think in your prepared remarks, a $75,000,000 order number, which I think is up from $55,000,000 when you last talked about the June quarter. I'm wondering if I'm in the right ballpark on those and what drove the big increase?

Speaker 2

You're exactly right. From Q2, we were sitting with $55,000,000 of purchase orders in the calendar year at that point. Our expectations due to several negotiations that are ongoing that we'll receive in the realm of $20,000,000 of new orders for this quarter. We might see a little bit of creep over the Christmas holiday into Q1, but my sense is right now the negotiations should land us with those orders in Q4. And again, if we do end up with $75,000,000 of purchase orders for this year, that would be a record for our 40 year old company.

Speaker 3

I appreciate that. Congratulations. Is there any more insight? Or should we look to pretty much what you focused on mostly DoD, foreign and domestic and medical?

Speaker 2

I think that's accurate. What we're expecting this quarter is some influx of thermal weapon site orders for production next year as well as our helmet based programs for rotary wing and fixed wing applications. So we're expecting orders. That customer for the fixed wing, we already mentioned earlier in the call, we're expecting orders for carry on production. The rotary wing customer is Elbit and they are otherwise engaged as you can imagine Kevin in Israel at the moment.

Speaker 2

So we've been expecting those orders for quite some time and we are seeing light at the end of the tunnel to receive those orders for our rotary wing applications this quarter.

Speaker 3

Okay. Last question for me before I hop back in. Understand that Judge Cain is going to consider the ruling in Massachusetts and I was wondering number 1 and whether or not you have any insight on how that might be going? And number 2, Rich talked to, I think, $1,200,000 $1,500,000 in litigation related expense, I think, in the September quarter this year and last, but I got confused on which one was which. And what would you expect that litigation expense to fall to in December the December quarter?

Speaker 4

So 1.5 is 24. 1.2 is 23, okay?

Speaker 3

Got it.

Speaker 4

And historically, we're somewhere now at some point, there may be an appeal and there will be a chunk of expense that we estimate will be $500,000 to $600,000 When that's going to happen, we don't know. It's all dependent on when the judge ultimately puts out an opinion. Otherwise, we run about $150,000 to $200,000 a quarter in legal expenses between patents and just normal public company stuff.

Speaker 2

And we do not have any visibility into when Judge Cain in Colorado will render his opinion.

Speaker 3

Thank you for offering that, gentlemen. I appreciate you entertaining my questions. Congrats on the nice job in the quarter.

Speaker 2

Thanks, Kevin. Take care.

Operator

And we have no further questions in the queue at this time. I'll turn the program back over to Michael Murray.

Speaker 2

Thank you, operator. I just wanted to say thank you to the tremendous team here at Kopin for their focus, dedication and exemplary results this quarter. It's a great milestone in our path to further revenue and gross margin expansion. And we thank everyone for joining us today. Thank you very much.

Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful day.

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