Kopin Corp Q4 FY2024 Earnings Call

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

Thank you, and good morning, everyone. Before we get started, I'd like to remind everyone that today's call is taking place on April 17, 2025, and we'll 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 can 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 reconciliations 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 Sneider, will review the company's fourth quarter and full year 2024 financial 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 fourth quarter and full year earnings call. I want to begin by expressing my thanks and gratitude to our shareholders for their patience as this year's audit took longer than anticipated, but we filed our 10-K, and we're happy with our new audit firm, who took on a significant task with adding Kopin late in the fiscal year. Today, Kopin is reporting an all-time record year from both a revenue perspective and for orders since the disposition of our HBT business. The momentum from strong fourth quarter results, our existing order book and new contract wins in 2025 gives us confidence that our strategic pivot, transformation, and focus is gaining real momentum. Before I provide insights into our future, I wanted to highlight some of the positive results from 2024 before turning the call over to Rich to go through a detailed analysis of our financial results. I want to highlight a few areas I think are important to keep in mind. In our second year of our transformation plan, we achieved 25% year-over-year growth in 2024. Fourth quarter revenue increased 71% when compared to 2023. Our quality rates have greatly improved and now are more predictable. The structure in fourth quarter 2024 was much closer to normalized expense levels given the lower legal costs, and we believe automation in the manufacturing plants can further leverage and reduce our cost structure. As a reminder, the $46 million loss includes $24.8 million in reserve for the Blue Radios litigation and associated legal costs in 2024. Excluding the reserve for litigation costs and associated legal expenses, the adjusted loss per share was negative $0.09. We've continued to significantly narrow the loss and gain momentum to become cash-flow positive. Under our One Kopin strategy, we reorganized our Virginia and Europe teams, which unified our focused capabilities while reducing redundancies. We also formed new business development, program management and quality teams. Under the fab-lite strategy, we brought online new OLED and micro-LED vendors to strengthen our source of supply for U.S. Department of Defense applications, while keeping our lower-cost medical and consumer supply strategy intact. We rebranded the company, launched a new website and reinvigorated our marketing outreach, customer service and support models. Indeed, I am very proud of our progress in 2024. And as we now look to 2025 and beyond, we remain very optimistic and excited about our future. Despite the delays in defense budget processes, geopolitical and supply chain uncertainties, we reaffirm our belief that in 2025, Kopin will continue to grow and generate between $52 million to $55 million in revenue. Now let me discuss everyone's favorite topic, tariffs. On the pricing side of our business, our government contracts allow us to seek price increases if tariffs affect our costs. On the supply side, our raw wafer inventory levels can support our demand in 2025. Further, Kopin began our fab-lite strategic initiative in 2023 with the goal of reducing our exposure to the Asian supply chain. Since then, we have created dual-supply chains for OLED-on-silicon display specifically, which are already supporting customer demands. No company will be immune to the effects of tariffs. However, we believe Kopin is in a much better position than most due to these decisions. Now in 2025, we will continue to execute on our One Kopin strategy as this supports and directs more resources to the rapidly expanding European and Southeast Asian defense markets. This focus should provide us with a lift in global opportunities and a more balanced pipeline for growth as we continue to witness additional and significant project funding in parts of Europe and Korea specifically. As an early indicator of our progress, we are seeing an influx of new and challenging opportunities that fit our strategic plan, our priorities and our capabilities. Furthermore, we are actively exploring strategic partnerships with leading firms in high-growth markets and regions to expedite this growth. Coupled with our engineering, production and program management teams, we must also execute more profitably on our current programs and anticipated new product introductions. Thus, our strategic initiative for 2025 is the implementation of AI-assisted factory and process automation. Improving manufacturing efficiency, increasing automation and reducing redundancies are critical areas of improvement for our company. Several of these automation projects were funded and began development in early 2024. We believe these initiatives will enable higher factory absorption rates, better data-driven decisions, and lead to greater throughput in our current facilities. As we capture more of our opportunity pipeline, our ability to leverage our manufacturing facilities to handle greater demand, improve product quality while reducing overhead cost is critical for our success. We are excited to share that we expect a significant milestone achievement in our factory automation plan to be achieved this quarter as we introduce new AI-enabled inspection systems. We are making these improvements to increase our manufacturing capacity without significant headcount increases, to create a cost structure that turns volume into profits and to have capacity to achieve our goal of at least $5 million in annual net income by 2027. Our existing pipeline is very strong, with programs that have congressional budget demand throughout 2030. Additionally, several of the program contracts we have are IDIQ, or Indefinite Delivery, Indefinite Quantity, which allows for even greater revenue potential than we currently have on order. Again, considering the recent tariff news and geopolitical tensions, it is important to note that our top three programs are built here in the United States. Much of our active opportunity pipeline will also be built here as well, while our NATO and European demands can be supported through our Scotland facility. All of this to say that we're very excited about the company's prospects, and we believe that in today's geopolitical environment, demand for microdisplays, optics, and application-specific solutions has increased steadily in defense, medical and industrial markets. We're also incredibly proud of our expanding customer base that is equally well-positioned to deliver outstanding products and technologies to their end customers. Now along those lines, recent reports surrounding the IVAS version 1.2 program being novated to ANDRO have generated several questions about Kopin's ability and ambition to capture some or all of these types of opportunities. As a reminder, IVAS is a $22 billion U.S. Army program aimed at enhancing soldier capabilities through a body-worn mixed reality system, leveraging augmented and virtual reality for improved situational awareness, lethality and mobility. In January, it was reported that requests for information were issued regarding a technical update to the program now called Soldier Borne Mission Command, or SBMC. Kopin has submitted our responses to this program, along with contributing to several other Tier 1 firms who have also responded. We have quoted these firms with our microdisplays, and in several cases, we have included fully integrated modules, which include displays, optics, drive electronics and our neural software in some cases. From the Kopin perspective, these are both positive reports about the overall program and our ability to contribute to it. But more importantly, the soldier-worn visual acuity market in defense is maturing and growing at a rapid rate within the U.S. and globally. While SBMC remains a significant opportunity for Kopin, we can focus on developing our own integrated visual acuity system, which we call IVAS Now solutions, that allow warfighters both a daytime and a nighttime solution that works seamlessly with their fielded gear like the current versions of night vision goggles or NVGs and popular helmet-worn systems. These new products allow Kopin immediate access to significant market potential since there are millions of NVG goggles in use today, which require additional information sources to be visible through the goggles during operation. IVAS Now utilizes currently available information systems and connections and data through the Android Team Awareness Kit (ATAK) and our DVAS solution, which is being offered with the Wilcox Fusion-class system. This new strategy was affirmed recently as Kopin was awarded a multimillion-dollar research and development contract for a new XR off-the-visar optical prototype for the Army we announced recently. Other exciting developments include our work on the micro-LED product portfolio and the progression to our neural display architecture, a highly advanced display that includes embedded sensors to track eye movement and position, while simultaneously processing the tracking data within an AI that resides in the backplane of the display. The system adjusts the displayed information in real time to optimize user experience and performance in high-stakes use cases. Current demonstrable silicon is an OLED on silicon. However, we also will offer this technology as a micro-LED as well. We believe that this display system will be a great fit for the next generation of defense visual augmentation systems. It is also receiving significant interest from medical and consumer spatial computing manufacturers. For example, our solution would reduce several internal cameras within the current Apple Vision Pro headsets, resulting in reduced size, weight and power consumption while still offering great image quality, eye and people tracking with dynamic controls. We now have operational prototypes of this innovative hardware and software platform and expect to announce more details on that very shortly. Now with respect to our order book so far in 2025, we have announced further contract wins, including a $14 million purchase order for thermal imaging assemblies, which has an additional $5 million for materials procurement; $4 million in orders for pilot helmet augmented reality systems; a $2 million follow-on order for helmets in rotary and fixed wing pilot applications; and we've been awarded several million dollars in research funding for extended reality prototypes. We are excited about the tremendous opportunities that are in front of Kopin and believe the next few years will be an exciting time as we continue our pursuit to save lives. Our technology ultimately leads to increased safety for our warfighters, which means more of our men and women in uniform come home. Surgeons who use our CR3 headset from HMD will perform their operations more effectively, efficiently and accurately, providing better patient outcomes. And firefighters who use our technology to see through dense smoke will find people in need. We take that work very seriously and have an incredibly dedicated and passionate team that comes to work every day with this mission top of mind. I'll now turn the call over to our CFO, Rich Sneider, to review our results from the fourth quarter and full year of 2024 in further detail. Rich?

Thank you, Michael. Turning to our financial results for the fourth quarter. Total revenues for Q4 were $14.6 million versus $8.6 million for the prior year, a 71% increase year-over-year. Product revenue for the fourth quarter ended December 28, 2024, were $12.6 million compared to $6.8 million in the fourth quarter ended December 30, 2023. The increase in product revenue was the result of higher defense product revenues, which increased by $6 million year-over-year, a 100% increase. In the fourth quarter of 2024, funded research and development revenue was $1.7 million, a decrease of $60,000 as compared to Q4 2023, essentially flat. Cost of product revenues for the fourth quarter of 2024 were $10.6 million or 84% of net product revenue compared to $7.2 million or 106% of net product revenues for the fourth quarter of 2023. The improvement in cost of product revenues was due to higher volumes, which provided fixed cost leverage. R&D expenses for the fourth quarter of 2024 were $3.1 million compared to $2.2 million a year ago. This was primarily due to an increase in internal costs to establish OLED deposition capabilities in Europe and new display development. SG&A expenses were $3.1 million in the fourth quarter of 2024 compared to $5.9 million in the fourth quarter of 2023. The decrease was primarily due to a decrease in fees of $2.9 million, most of which was legal expense. Turning to the bottom line. The net loss for the fourth quarter of 2024 was $1.9 million or $0.01 per share compared with a net loss attributed to Kopin of $6.5 million or $0.06 per share for the fourth quarter of 2023. Turning to the full year results. Total revenues for the year were $50.3 million compared to $40.4 million for the year ended December 30, 2023, a 25% year-over-year increase. Product revenues for the year ended December 28, 2024, were $43.6 million compared to $25.9 million for the year ended December 30, 2023. The increase in product revenue was a result of an 82% increase in defense product revenues. R&D revenues were 3% lower, again essentially flat. Cost of product revenues decreased as a percentage of revenues in 2024 as compared to 2023 primarily due to an increase in unit volume of thermal weapon sights from higher sales in 2024 as compared to 2023, which resulted in a lower fixed overhead cost per unit. Kopin also implemented several programs and hired additional resources to improve manufacturing quality and efficiencies. R&D expenses for 2024 were $9.6 million compared to $10.8 million for 2023, an 11% decrease year-over-year. Funded R&D for 2024 decreased $3.3 million as compared to 2023, primarily due to the completion of contracts for defense programs awarded prior to 2024. Internal R&D expenses for 2024 increased $2.2 million as compared to the prior year, primarily due to an increase in display development costs and costs incurred to establish European foundry services. Selling, general and administrative expenses were $22.8 million for 2024 compared to $21.8 million for 2023. SG&A expenses for 2024 increased as compared to 2023 primarily due to an increase of $1.4 million in legal and professional fees and $2 million in excise taxes, partially offset by $400,000 of lower bad debt expense and $200,000 decrease in noncash stock-based compensation. Net loss attributed to Kopin for the year ended 2024 was $43.9 million or $0.33 per share, compared with a net loss attributed to Kopin Corporation of $19.7 million or $0.18 per share for the year ended 2023. Excluding the $24.8 million of litigation accrual, the adjusted net loss attributed to Kopin would have been $19.1 million or $0.14 per share. Net cash used in operating activities for 2024 was approximately $4.2 million. Kopin's cash and equivalents and marketable securities were approximately $36.6 million at the end of the year. Listeners should review our Form 10-K for the year ended 2024 for additional financial disclosure. And with that, I'll turn it back to Michael.

Thanks very much, Rich. Again, I would just like to thank our audit firm, our investors and the great employees of Kopin for turning in a fantastic result in 2024, and we look forward to a great 2025. And with that, operator, we'll open it up for some questions.

We'll take our first question from George Gianarikas with Canaccord Genuity. Please go ahead.

Good morning, everyone and thanks for taking my question. I'd like to ask a little bit about the neural display, and maybe you can outline any technical improvements and how close you think we are to commercial deployments and commercial readiness.

Neural display right now is demonstrable. We are generating signals, processing signals and interpreting signals, which is a huge step. We've also been working on our software. We plan to produce a neural display in a headset and demonstrate this year so that folks can see the capability actually while they're wearing the displays. So that's the next big milestone: actually putting this new technology into a headset so people can see it, feel it and use it. That's the next big milestone, George. We're hopeful to announce that milestone this quarter or next.

Maybe just as a follow-up, just a question on the financials. You've given guidance on revenue for 2025. Can you give a little more detail on what you expect OpEx development to be? You made a remark about Q4 being the milestone. So is it about $6 million a quarter we should expect in 2025?

What's your definition of OpEx? Some folks include cost of sales and some folks do not. So I just want to make sure. Are you adding SG&A and R&D?

Correct. Correct.

Yes. So we should be in the range for SG&A of around $10 million to $12 million. R&D fluctuates, and our internal R&D is roughly $2.5 million. Funded R&D is always variable because it's dependent upon the revenues themselves. But our goal for internal R&D is about 7% of revenues; that's what we're budgeting. So plan for approximately $10 million to $12 million of SG&A and internal R&D at roughly 7% of revenues, with the funded R&D piece bouncing around depending on customer programs.

And our next question comes from Jason Schmidt with Lake Street.

Thank you for taking my questions. Just curious if you've seen any impact in customer engagement or contract pushouts with DOD budget changes and the government changes that are going on? And relatedly, could you comment on what you saw from an order activity perspective here in Q1?

We've not seen any impacts from government budget cuts. We do have many requests in for government funding, whether that's through the DPA office, CHIPS Act, or the DIB. Those requests are not yet in plan; we're not forecasting them until we have greater visibility and more interactions. I have spent a tremendous amount of time on Capitol Hill in the past few months pursuing those funding requests, along with our customers. But to be clear, we have not seen any pushouts or cancellations of our backlog or future business at this point in time because of DOD budget issues. Secondly, we've actually seen an influx of requests for training and simulation opportunities. Training and simulation is usually the first indicator of conflict because you want to train your troops, and we're seeing that globally, more specifically in Europe and some here in the United States. Lastly, we're seeing tremendous increases of demand for optical systems for soldier-worn systems and also first-person viewer drone control requests. That's across the world. Korea has increased relative to the United States. So we have not seen a slowdown at this point. We have seen significant orders in Q1 and are expecting to announce several new orders shortly. We couldn't get them out before the call, but we have been receiving fairly significant and steady order activity for 2025 as well as 2026. Look for more press releases shortly.

We'll go next to Glenn Mattson with Ladenburg Thalmann. Please go ahead.

Curious, maybe, Rich, on the gross margin — it has been sequentially going up for a couple of quarters but ticked down this quarter. Can you give some dynamics of what the difference is there? And then your best estimate of how we should think about it for next year?

Yes. As part of the One Kopin initiative and the markets we focused on, we evaluated our product lines and took some reserves on inventories in markets that we didn't plan to pursue going forward. Some products are getting older, and that inventory reserve was an anomaly in the quarter. Otherwise, the quarter reflected a lot of volume. There are some inefficiencies when we're trying to create that much volume, which is why the automation is critical for us. To date, when we try to scale, we have hired people because there's still a lot of touch labor. Automation is the key to leverage margins. The good news is we've got a lot of volume; we just need to make it cheaper to expand margin. We do expect margin expansion throughout 2025.

So would next year look like the range you want to be in around the high point you saw in Q3, roughly mid-20s for product margin? Is that the range to expect, or is that higher with automation?

Yes, that's exactly right. Q3 of 2024 is a good model in terms of margins, and we expect with the inspection systems and automation we're adding to the fab that margins will improve as revenue increases and we hold headcount steady.

And Glenn, there was also a bit of mix in Q4. We had several smaller programs that came into revenue in Q4 that were lower margin than expected. So we think Q3 of 2024 is the model for margins. With the inspection systems and automation we'll add to the fab, margin should improve. As we increase revenue, we want to hold headcount steady and add automation so we can produce more with what we have and capture margin expansion.

Can you give any update on the lawsuit? Do you have any guesstimate on when there might be an update?

No, I have no update at this point. We have not heard from the Colorado court. We have been actively filing motions in Massachusetts, where Blue Radios is involved, and those motions were filed in Q4 to highlight summary judgment arguments and address inconsistencies we've seen in testimonies and between the cases. Those motions are available online. We have not heard any judgments on those motions, there's no hearing scheduled, and we have not heard from the Colorado court as of this time.

Just for clarification for those who may not be aware, not only did Blue Radios sue us, they also sued our law firm, and the lawsuit against our law firm was thrown out on summary judgment with no validity.

It's fair to say that we believe Blue Radios will put in an appeal on the Massachusetts case. We do not foresee any further major expense with the exception of potential appeal costs if a final judgment in Colorado is adverse. I'm becoming more confident in our ability to reduce damages and to appeal any judgment in Colorado based on developments in Massachusetts and the motions our law firm filed in Q4. We expect to move this forward; the battle has just begun but we've put in motions and are preparing an appeal if needed. We do not foresee appeals being an ongoing recurring cost; the appeal process is supported by documents filed in the appellate court and we expect the appeal-related costs to be below $1 million and to be one-time rather than recurring.

Is there much expectation for further legal expense this year as this winds down, or are you expecting less?

Right now, you are correct that it's been about a year since the jury verdict. We don't foresee any further major expense except for the appeal if there's an adverse final judgment in Colorado. We are more confident about reducing damages and confident about our ability to appeal based on what's happening in Massachusetts and our Q4 motions. We expect to return to a more normalized cost structure in Q1 and Q2, and the appeal, if necessary, we expect to be below $1 million in cost as a one-time expense.

Sorry, did you say sub-$1 million?

Yes, sub-$1 million. Below $1 million, and that's a one-time cost. It's not a recurring cost.

We have no further questions in the queue. So, I'll turn the call back over to Michael Murray for any closing remarks.

Wonderful. Thank you, operator. Again, thank you very much to our shareholders, our employees and our customers for their patience with filing our 10-K. We're excited about this year and the future, and we look forward to talking to you very shortly on our Q1 2025 call. Thanks very much, folks.

Thank you, ladies and gentlemen, that does conclude today's program. Thank you for your participation. You may disconnect at any time.