Kopin Corp Q1 FY2023 Earnings Call

Good morning, everyone, and welcome to the Kopin Corporation First Quarter 2023 Earnings Call. Please note that this event is being recorded. At this time, I'd like to turn the conference call over to Brian Prenoveau, Investor Relations for Kopin. Please go ahead.

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 Thursday, May 11, 2023, 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-K 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 could be no assurances that the results will be realized. 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, Rich Sneider, will review the company's first quarter results. I would now like to turn the conference call over to Michael Murray. Michael?

Thank you, Brian. Good morning to everyone. And welcome to our first earnings call, which is the first call under the new management organization transformation plan in my first quarter with both hands on the wheel as CEO. It's good practice for anyone less familiar with Kopin to explain who we are, what we do, and who we sell to. After the brief overview, I'll update everyone on some of our strategic initiatives and discuss the last quarter and some opportunities on the horizon before turning the call over to Rich. Kopin designs and manufactures several different types of microdisplays. Our proprietary AMLCD technology, our broad portfolio of OLED displays, our FO cost displays, and our soon-to-be-released micro LED technology. What makes Kopin unique and valued by our customers is our ability to couple the right display technology and advanced optics, drive electronics, and housings to solve our customer's needs in defense, commercial, and consumer applications. Our products overlay critical digital information on the analog world. Every day, the application of optics continues to broaden, and new industries are discovering ways to use these technologies. Kopin is at the forefront of optical advancements, creating innovative technologies that enhance how people see, hear, and communicate. Today, Kopin applies much of its expertise as a critical supplier for many of the world's largest defense contractors, but we also look to capitalize on commercial and industrial opportunities wherever and whenever they arise. The global microdisplay market is estimated to grow at over 20% per year for the next five to seven years. As microdisplay technologies continue to improve, more industries are finding ways to apply the technology to their end applications and businesses. Beyond aerospace and defense, healthcare, automotive, and consumer electronics are adopting the practical applications of microdisplays. The growing adoption means growing demand for high-resolution displays with low power consumption and a compact size for wearable devices. We believe our technology puts Kopin at the forefront of companies that can take advantage of this growing market. Now touching on some of our strategic priorities, I've often commented on the need for Kopin to improve our quality, which we refer to as on-time in full delivery. This is a measure of how often we deliver products to a customer on time, in full quality, and without the customer identifying any quality issues. This singular focus on quality ultimately leads to a more profitable Kopin by improving margins and increasing customer satisfaction. We began to see some dividends from this focus in the first quarter of this year, as our product costs in the first quarter were lower than in the first quarter of 2022. To give you an idea of our progress with on-time in full delivery, in September of last year, we were around approximately 60%, meaning of every 100 products delivered at that time, approximately 40% were delivered late or had quality issues. I’m happy to report that we are achieving rates in the high-80s to low-90 percentiles as we are continuing to improve. We believe these rates will remain consistently above 90% after the first phase of our new equipment is installed this quarter. Our improved quality and efficiency also mean that we can produce the same amount with fewer labor resources, which resulted in a reduction in force in the first quarter of 2023. In addition to our efforts to improve profitability through improvements in quality, rationalization, and R&D is also a strategic initiative. Kopin's R&D spend for the quarter declined by more than half. This occurred because we are moving certain activities from R&D into production and we've introduced higher hurdles for assuming new R&D projects. Regarding internal R&D spend, our philosophy has changed as we are now investigating projects that have a higher probability of success that are less speculative, and offer more value than just a great display. Now, I will discuss some of the developments since the last time we spoke and some opportunities we see on the horizon. In April, we announced a $1.1 million follow-on production order for the long-range version of an international weapons site, a fantastic program that gives soldiers critical information with clear bright symbols overlaid directly on the real world. Also, in April, we announced a $4.4 million PPAP award for an armored vehicle program. For those of you who don't know, PPAP stands for Production Part Approval Process, which is normally the process before going into production, which we can expect to happen at the end of this year. The program represents a significant opportunity for Kopin that could exceed total lifetime revenue of over $100 million, due to the significance of the design integration, the number of systems per vehicle, and the volume demand projections. The PPAP certification also provides the pedigree necessary for Kopin to compete in other armored and mainstream consumer automotive applications and solutions. We have previously discussed that Kopin is a leader in providing display and optical sub-assemblies for head-mounted industrial wearables and 3D automated optical inspection markets. The semiconductor demand cycle is signaling that demand has reached its lowest point, which is cyclically when 3D AOI markets tend to increase spending. We are starting to see those signals now. A market that we have not discussed much that Kopin supports currently is the military training and simulation market, which is served by our NVIS division. We are seeing strong demand signals as training precedes deployment and are working with several repeat and new customers who look to support the issues in Europe. I previously mentioned that we are entering the medical field. As an update, we have recently begun demonstrating a head-mounted display system used by surgeons so they can zoom into a specific area while performing surgery. The initial feedback has been very strong, and the final production of this product is brilliantly designed. Turning to another strategic initiative, the Integrated Visual Augmentation System, otherwise known as IVAS, is the United States Department of Defense program to provide soldiers with an augmented reality headset, which provides a wide variety of capabilities to soldiers. The current IVAS program funding is $2.5 billion, with long-term plans for $21 billion. There have been several delays in the program, which provide a real opportunity for Kopin to intersect this program. If you look at the IVAS head-mounted display, it is essentially a head-mounted display weapons site, where we have significant expertise and pedigree to serve this market. The IVAS opportunity is significant, and success here would be monumental for the company. Now I have discussed recent contract wins, our strong existing positive book-to-bill ratio in Q1, the indications of a positive book-to-bill in Q2, expense rationalization, all of which provide our positive momentum. However, to meet our strategic goal of exiting 2023 at cash flow breakeven and achieving operating income profitability in 2022, we need an organizational structure that can execute. Now, to this end, we continue to invest in our people. We've implemented outreach programs to our existing employees to understand impediments to their productivity, and we have established teams to solve specific issues. These teams are comprised of all levels of the organization rather than a solution from above. We've also recruited top professionals in program management, quality control, and business development. We've instituted a quality action program that allows everyone to suggest and be rewarded for quality, cost, and efficiency improvements. We feel very good about our team, our products, and our customer base. With our recent equity offering, we believe we have sufficient cash to make the necessary quality and personnel investments required for our transformation and execute on our strategic initiatives. I'll now turn the call over to our CFO, Rich Sneider, to review our results in further detail. Rich, over to you.

Thank you, Michael. Turning to our financial results. Product revenues for the first quarter ended April 1, 2023, were $7.7 million, compared with $6.5 million for the first quarter ended March 26, 2022, a 17.6% increase year-over-year. The increase in product revenues was driven by a $1.7 million or 35% increase in defense revenues over the prior year, which was partially offset by a $605,000 or 39% decrease in industrial revenues over the prior year. Funded research and development revenues were $2.9 million for the first quarter of '23 compared with $4.9 million for the first quarter of 2022, a 41% decline. Included in the funded R&D revenues for the first quarter of 2023 is $400,000 of R&D revenue related to an OLED development program. Any future work on this program will be done by Lightning Silicon. The decline in funded research and development revenue is primarily due to certain defense programs moving into production. Total revenues for Q1 '23 were $10.8 million versus $11.6 million for the prior year, a 7% decline year-over-year. Cost of goods sold for the first quarter of '23 was $6.6 million, or 87% of product revenues, compared with $7.8 million or 120% for the first quarter of last year. The decrease in cost of product revenues as a percent of net product revenue, compared to prior years, was primarily due to reduced material costs for warranty issues, as well as the usage of material that was previously written off. R&D expenses in the first quarter of '23 were $2.3 million, compared with $5.4 million during the first quarter of 2022. Funded R&D expense for Q1 '23 was $1.6 million as compared to $3.4 million for Q1 2022. The decrease in expense was the result of certain programs moving into production. Internal R&D expense for Q1 '23 was $672,000 as compared to $2 million for the first quarter of 2022. As we previously announced, our former CEO and approximately 20 employees started a new company developing high-resolution displays with Asian partners. These individuals were primarily involved with R&D projects, and the termination of these projects is the primary reason for the decrease in internal R&D. Included in internal R&D in Q1 of '23 was $195,000 related to development activities these individuals are not working on. SG&A expenses were $4.6 million in the first quarter of 2023, compared to $4.5 million in the first quarter of 2022. SG&A increased for the three months ended April '23, as compared to the three months ended March 26, '22, primarily due to an increase in professional fees, which were partially offset by lower compensation, employee benefits, and stock-based compensation. Included in this quarter's SG&A are $495,000 of reserves for receivables from terminated R&D projects. Other expenses were approximately $237,000 in the first quarter of 2023, compared with income of $4.7 million in the first quarter of 2022. In the first quarter of 2023, we recorded foreign currency gains of less than $100,000. During the three months ended March 26, 2022, we recorded a $4.7 million gain on an equity investment due to an observable price movement. Turning to the bottom line, the net loss attributed to Kopin during the first quarter was approximately $2.6 million, or $0.03 per share, compared with $1.4 million or $0.04 per share for the first quarter of 2022. Net cash used in operating activities for the three months ended April '21 was approximately $4.2 million. Kopin's cash marketable securities were approximately $29.6 million at April 1, 2023, compared to $26.3 million at March 26, 2022. During the first three months of the year, we had a capital raise, where we sold 17 million shares of common stock and issued pre-funded warrants for another 6 million shares. The net proceeds were approximately $21.5 million. We have no long-term debt. The amounts discussed above were based on our current estimates, and listeners should review our Form 10-Q for the quarter ended April 1, 2023, for any possible changes, and of course, any additional filings and disclosures. And with that, I'll turn the call back over to Michael for closing remarks.

Our focus continues to be on strengthening the order book, achieving higher on-time and full delivery, cost controls, and making strategic investments in products and people, which in the aggregate will improve our cash flow and get us to profitability. Lastly, and most importantly, we are fortunate to have world-leading and market-making customers who are supporting Kopin during this transformation. During our quality improvements over the past several quarters, we have additional management focus on strategic customer relationships, and additional experienced business development and program managers. We are now being invited into larger design opportunities that will allow Kopin to move up the value chain within our customer’s applications, solving more of their technical challenges and increasing Kopin's content in these designs. I'd like to thank you and everyone today for your time and for showing interest in Kopin. I'd like to thank our employees and stakeholders for their hard work this past quarter and their dedication. With the continued effort of our team at Kopin, I believe we can achieve great things and grow the business to new heights. And with that, operator, we'd like to take a few questions, and we'll turn it over to you.

Our first question comes from Glenn Mattson from Ladenburg Thalmann.

Curious Michael, you talked about, congratulations also on the armored vehicle order that you referenced in the call. And that was announced a couple of weeks ago. You talked about that being a potential $100 million opportunity. Can you just help everyone get their heads around how you get to that number? And just to get a sense of how that would ramp and also what hurdles need to be cleared before that goes into kind of full production?

Sure. Great question. Thanks, Glenn. So that program is pivotal for us. First things first, we need to go through the process of a quality audit of our design. We feel very confident in that, and we are working with our customer in that process today. That will last for the vast majority of this year. Now, the second part or the first part of your question is how do we get our heads around the volume and the resale? I have to be a bit careful because some of this is what I would consider controlled unclassified information or even classified. But in terms of our content in that design, it’s fairly significant. In terms of the resale of that device that we'll be selling into the program, it’s in the tens of thousands of dollars. Because of the level of integration, there are several products that go into each vehicle, and also a training module that gets sold with each vehicle or each upgrade. We believe that there are going to be roughly a few thousand vehicles that get upgraded, as well as new vehicle production. So if you do the math, it breaks out to the period of performance coming in over $100 million in revenue over the course of a five to seven-year program. So that's the math behind it. I know I'm being a little cautious in my wording, but I'm trying to give you the best clarity I can around the program right now.

And next topic is you talked about the soon-to-be-released micro LED. Can you give us a sense of the timing or just some color on that and also how significant that could be over the medium and long-term?

You bet. So we have our lead customers testing it now. We're seeing tremendous technical achievements out of this product. I would say we'll be announcing the technicals very shortly; I would expect either in this quarter or next, in terms of our performance levels of that product. Outside of our customers, obviously, their program is classified, so we'll be making sure that we work with them so that they're comfortable with it. Secondly, that program with micro-LED is in high demand, mainly from consumer applications. We're seeing a significant amount of demand pull for new or old designs to be redesigned for either AR/VR, consumer Metaverse, or medical applications where brightness along with waveguides are required. Even at the best OLED brightness, it’s just not bright enough to use what we think is a decent waveguide or light guide. So we're seeing a lot of demand pull for that product line and micro-LED, because of the brightness and contrast performance that operates in. We have high expectations for that product line in 2024 for new design activity and certainly, I would say decent revenue and beyond that. So it's a great product for us. We're seeing sustainable and absolutely fantastic performance results out of it currently.

And just one for me on the model. So the solid gross margin in the quarter, but you still have, from what I understand, kind of retooling the facility in Massachusetts. Can you give us maybe a sense of once that facility has been completed and retooled, is this level sustainable, should we expect a little better or just kind of some framework around that?

So I'll give you my answer, and then Rich can respond as well. I'm very optimistic. I think we know now where the issues are and how to improve our quality in the fab. The tools that we're receiving shortly here and will implement in the fab are definitely going to help. We've been working with two of our best customers who have been tremendous to work with. We've been working with them to ensure that we learn from them. They help guide us in developing the next-generation technologies in the fab that will support it. There are two parts to that question. One is doing better work than we are currently on the products that we have. The second part is doing better and being able to support the new products that we're bringing in. I believe that the new equipment we are installing this quarter is going to pay dividends. I believe our margin improvements will continue. I think there's another 5 to 10 basis points of improvement that I am targeting this year, and I think that's very achievable.

There are two parts to that question. One is to improve the quality of our current products. The second is to enhance our ability to support the new products we are introducing. I am confident that the new equipment we are installing this quarter will yield positive results. I anticipate that our margin improvements will persist, and I am aiming for an additional 5 to 10 basis points of improvement this year, which I believe is quite achievable.

Just one other comment to Glenn's question. It's important to note, and I don't think I mentioned it is that. In the quarter, we did see some professional fees continue to fall. I think they'll continue to fall in terms of SG&A, as well as some of the runoff on severances that we have in the quarter and some of the costs that we were still incurring in Q1 for the spin-out of Lightning Silicon. I do believe you'll see cost improvements in Q2 that were not in Q1. There were some residuals in Q1 Glenn. I would expect to see those washed through and out of Q2.

And a question now comes from Kevin Dede from H.C. Wainwright.

This is Michael calling on behalf of Kevin Dede. Michael, you mentioned this earlier, but could you elaborate on emerging market opportunities like healthcare applications? Additionally, how should we view Lightning Silicon as we move into 2023?

Sure, it's exciting times. Yeah. To get the question right. Can you repeat it one more time actually? There was some interference.

No problem. Can you talk a bit more about emerging market opportunities, such as healthcare applications? And also about Lightning Silicon, and how we should think about these for the remainder of 2023?

Sure. So first part, we're very excited about the demonstration we provided recently. We're going to have, I think, a customer success story around this; it's a firm called HMDmd. We've been working with them for well over a year on developing a surgical apparatus, a 3D visualization of surgery. I just received the new mockup of the final product, and it's brilliant, absolutely spectacular. We're very excited about that market; the customer is seeing tremendous demand pull for that technology. And it is now emerging out of R&D. Our team down there actually designed it, so kudos to them; they did a fantastic job. We see a good runway of opportunity. In 2024, it's going to take, you know, a solid 9 to 12 months for them to generate revenue, but we think the revenue is going to be exciting because again, Kopin doesn't just provide the displays; we provide the entire assembly, including the molded assembly, optics, LCDs, and displays, as well as the overall assembly. Instead of selling one display for a few hundred dollars, we're selling the entire module to HMDmd for thousands. That’s the business model moving forward that we're excited about. It seems to be affirmed in the medical market. That’s just one of our customers that we think will be going to market in 2023 and 2024. So it's a great market; it's emerging, still somewhat nascent because the demand is there, but the products aren’t, and we're racing to get those products to market. So that's number one. Number two, in terms of Lightning Silicon, our relationship with the foundries— and I mentioned this, I think, in Q3 during my first call with you folks— is that we're developing a fab light strategy here. My view is that we need to have a consumer fab strategy. That would be our friends at Lightning Silicon, who aim to invest in taking OLED devices from 8-inch wafers to 12-inch wafers. The reason that's important is cost and volume. Right now, the market skated by cost and volume at an 8-inch wafer foundry perspective. Lightning Silicon is there to invest in those 12-inch wafer designs. They are complete redesigns of 8-inch material. That's going to unlock the AR/VR Metaverse in a consumer type of marketplace. So we'll still have access to that. They are a partner for consumers. Now, that begs the question around defense and industrial. We have a strategy for that. I'm not ready to announce that strategy today, but look for more from us on a U.S.-Pacific, DoD, NATO strategy for our defense customers moving forward. So it’s a two-pronged strategy, one for consumers, which is Lightning Silicon and the 12-inch wafer foundry that they're developing on their own nickel. We own 20% of that company, and we will also receive royalties for anything they sell into their markets using our technology. We will receive royalties back and also IP back from Lightning Silicon as they develop on 12-inch wafers, which is a tremendous opportunity for us to not incur the research and development dollars, which will be significant, but still reap the rewards of having access to a 12-inch foundry in China. So great strategic move for us, and then we have our U.S. DoD NATO defense strategy that we'll be sharing with you folks in the coming weeks and months.

And this concludes our question-and-answer session. I would like to turn the conference back over to Michael Murray, CEO for any closing remarks.

Thank you very much, operator. I think this quarter is and will become a trend. I think we have a great order book moving forward into Q2, which will be sequential for the company. I see that trend continuing for the remainder of the year. We have tremendous customers that are partnering with Kopin and want us to succeed with them. They're preparing us for future success. We look forward to working with our customers, our stakeholders, our investors, and the family that we're building here at Kopin. Thank you very much for attending. I appreciate it and we'll talk to you in Q2. Thank you very much.

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