Kopin Corporation (NASDAQ:KOPN) Q3 2023 Earnings Call Transcript
Kopin Corporation (NASDAQ:KOPN) Q3 2023 Earnings Call Transcript November 9, 2023
Kopin Corporation beats earnings expectations. Reported EPS is $-0.01, expectations were $-0.04.
Operator: Good afternoon, everyone, and welcome to the Kopin Corporation Third Quarter 2023 Earnings Call. Please note that this event is being recorded. All lines have been placed on mute to prevent any background noise. And after the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I'd like to turn the conference call over to Quinn Callahan [ph], Investor Relations for Kopin. Please go ahead.
Unidentified Company Representative: Thank you. Good afternoon, everyone. Before we get started, I'd like to remind everyone that during today’s call taking place on Thursday, November 9, 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 third quarter results.
I would now like to turn the conference call over to Michael Murray.
Michael Murray: Thank you, Quinn. Good afternoon to everyone and welcome to our third quarter earnings call. I want to start with a brief explanation for rescheduling our call. A technical accounting issue was raised on revenue recognition of a development contract that required additional research to ensure proper accounting and was resolved earlier today. Moving on, I would like to welcome David Nusma, who joined our Board of Directors this week. David joins us from Collins Aerospace where he spent over 32 years in several key senior leadership roles and is a former Air Force officer. He understands our customers, our technology, and our culture deeply. We welcome David to the team and believe he will be a great asset for Kopin and our shareholders.
Now I'm proud to announce that we've made significant progress on our transformation plan and turned in $10.6 million in revenue for the quarter. Our fourth consecutive positive book-to-bill quarter at improved margins. Turning to our first strategic initiative, building the backlog, in the third quarter of 2023, we booked follow-on orders of approximately $12.8 million, $3.4 million, and a $1.9 million NRE order, as well as several smaller orders, which resulted in a book-to-bill ratio of approximately two to one for the quarter. We believe this is a record order level for Kopin over the last 10 years. Our continually growing order book translated into good third quarter revenues at $10.6 million as compared to $11.7 million for the third quarter of 2022.
Our industrial revenue were down $1.4 million year-over-year due to continued weakness in the 3D automated test market, specifically in China. I'll now introduce Kopin to those who might be less familiar before diving more deeply into the events of the last quarter. Kopin is the only U.S. manufacturer of human-centric AR and VR application-specific optical solutions and micro displays used primarily to provide situational awareness for warfighters, for surgeons and gamers alike. You can find our solutions in weapon sites, armored vehicles, pilot helmet visors, and soon, surgical head-mounted displays. The heart of these visual systems and solutions is composed of a micro display no larger than the human thumb. Kopin offers four different types of micro displays, our proprietary AM LCD, FLCOS, OLED, and micro LEDs, which are the absolute cutting edge of display technology.
Kopin is the vanguard of this technology and has developed a monochrome micro LED and has a color version within reach. If a micro display is the heart of our application-specific optical solutions, then the software that controls the knobs of the solution, that's the brain. Software will be critical to the next stage in Kopin's growth as we adapt our technologies to each individual unique user. Indeed, our new mission is to adapt technology to the user and not force the user to adapt to the technology. This compares to companies that require users to insert specialized lenses into their displays or systems to adapt that person's vision to the device. Software and artificial intelligence are new endeavors for Kopin and we recognize that we lack certain capabilities to tackle these on our own.
This recognition has led Kopin to partner with MIT's CSAIL lab. This lab is the premier institution of technology and AI development. With this partnership, Kopin is looking to augment our internal software capabilities and to turbocharge our firmware powering all of our products and ultimately resolve the AR-induced nausea that currently bedevils users by allowing those knobs of the display to be turned either automatically or by the user. Custom optics and ruggedized solutions and housings are the eyes and skeletons of an application-specific solution. Arrays of custom optical lenses need to work harmoniously with the rugged housing to transmit crystal clear image produced by our micro displays. And that is where Kopin's expertise shines.
The pairing of micro displays, optics, housings, and firmware continue to progress our application-specific solutions far from where we began. But as I mentioned, empowering software and algorithms will drive Kopin into the future. What is missing from this anatopical pairing is the optical nerve that transmits to the brain or the software in this case, what the eyes see and what the user needs from the display to reduce eye fatigue, nausea, and enhance the user experience. Kopin has the solution to bridge this gap and enable AR and VR marketplaces. We recently patented a revolutionary new display architecture that will be embedded within what we refer to as our neural display. This architecture will feature a non-standard RGB pixel setup as in OLED or micro LEDs, but we've added several other elements including sensors that relay to the firmware what is happening with the user's situational environment, their ergonomics, and their eyes.
As an example, are the user eyes dilating quickly, implying that they're in a state of fight or flight? In that case, the display's brightness should go down quickly and contrast must increase. Conversely, if the eyes of the user are reverting normally, the display should react in the opposite direction. This complete chain of heart, brain, optical nerve, eye, and skin, and skeleton provides the framework that we will allow the future realization of augmented realities yet unfulfilled promise. Other companies have their own approach to monitoring the status of a user's eyes that rely largely on an array of cameras pointed back at the user. Our approach incorporates sensors within the display itself, which has the benefit of reducing size, weight, power consumption, design complexity, and ultimately cost.
We'll provide more information on this platform and our partnerships to deliver it to the market very soon. Now, turning to the third quarter, we announced a follow-on order for one of our IP subassemblies to a Department of Defense prime contractor that integrates our IPs into a very sophisticated augmented reality module. This $12.8 million follow-on order represents a significant increase in year-over-year volume and revenue from the strategic customer, and we expect significant additional orders shortly for the same product. The order is scheduled for delivery in 2024, but we can deliver earlier if we're able to procure the necessary raw materials. If we receive this expected additional demand, Kopin will potentially ship triple the volume of weapon sites within the calendar year of 2024.
If so, we do not require additional machinery in our plant, but we may need to take additional steps to prepare and potentially reconfigure the production line and subsequently clean it in this quarter to support the significant increase in volume and demand. These orders are a result of improved customer relationships, program management focus, and the dedication to improving on-time in full processes, and a great customer who has been very patient and supportive of our transformation plan. We also received a $3.4 million follow-on order for our high brightness liquid crystal display for the F-35 Joint Strike Fighter program. With the F-35 scheduled for production through 2030, we expect additional orders over the program's life. This follow-on order extends our backlog of scheduled deliveries into the fourth quarter of 2024, providing steady production rates.
As we previously stated, the F-35 helmet is scheduled to transition to an OLED display. We're also in process of finalizing that required production tooling and contractual agreements to support that transition. Now, turning to our ongoing armored vehicle program, we've been told by General Dynamics that Kopin’s weapons site program developed under the Step 4 upgrade will continue as planned since our system reduces size, weight, power consumption, while improving accuracy. We are progressing well against our PPAP milestones and continue to engage with General Dynamics on opportunities for the platform to be integrated into previous upgrade packages and into light armored vehicle programs as well. Now, I've said in the past, this year's focus is on returning the operation to cash break-even levels as a milestone of our transformation plan, and we've progressed well against that milestone in Q3.
We approach closer to this milestone by improving margins and closely scrutinizing R&D and SG&A, spending by continually focus on what we can control and deliver, and we expect to deliver solid margins and the growth our investors look for. We now have the contracts in place for solid revenue growth, and our goal remains to become a more predictable and profitable firm in the coming year. I'll now turn the call over to our CFO, Rich Snyder, to review our results in further detail. Over to you, Rich.
Rich Sneider: Thank you, Michael. Turning to our financial results, total revenues for Q3 2023 were $10.6 million versus $11.7 million for the prior year, a 10% decrease. Product revenues for the first quarter ended September 30, 2023, were $5.5 million compared with $8.3 million for the third quarter ended September 30, 2022. The decrease in product revenues was driven by a 1.7 million or 82% decrease in industrial revenues over the prior year due to continued weakness in the Chinese 3D automated test market. Defense revenues decreased $800,000 or 14% year-over-year. Decrease relates to the conclusion of the current purchase order and beginning of the next purchase order. Funded research and development revenues were $5.1 million for the third quarter of 2023 compared with $3.5 million for the third quarter of 2022, a 47% increase.
The increase in funded R&D was due largely to a 1.9 million order related to a thermal weapon site program. Cost of goods sold for the third quarter of 2023 was $5.4 million or 99% of product revenues compared with $8 million or 97% for the third quarter of last year, essentially flat. R&D expenses in the third quarter of 2023 were $3.1 million compared with $3.4 million during the third quarter of 2022, a 10% decrease year-over-year. Funded R&D expense for Q3 2023 was $2.3 million as compared to $1.8 million for Q3 2022, which was driven by higher funded R&D revenue. Internal R&D expense for Q3 2023 was $744,000 as compared to $1.6 million for the third quarter of 2022. This reflects the rationalization effort Michael spoke about. SG&A expenses were $4.8 million for the third quarter of 2023 compared to $4.3 million in the third quarter of 2022.
The SG&A increases for the three months ended September 30, 2023 as compared to the three months ended September 2022 were primarily due to an increase in legal expenses and non-cash stock compensation expenses of approximately $1.7 million for the third quarter of 2023 as compared to $500,000 for the third quarter of 2022. These increases were offset by a decrease in compensation and benefit costs of $1.3 million for the third quarter as compared to $2 million for the third quarter of 2022. Other income was approximately $316,000 for the third quarter of 2023 compared with an expense of $2.1 million for the third quarter of 2022. The third quarter of 2023 we had foreign currency losses of $14,000 as compared to a loss of $112,000 in Q3 2022.
Also in the third quarter of 2022 we recorded non-cash mark to market impairment on an equity investment of $2 million. Turning to the bottom line. The net loss attributable to Kopin during the third quarter was approximately $2.5 million or $0.02 per share compared with $6.1 million or $0.07 per share for the third quarter of 2022. As Michael mentioned in his opening remarks, when removing the litigation costs and non-cash items we were very close to cash break even. Net cash used in operating activities for the nine months ended September 30, 2023 was approximately $11.8 million. Kopin’s cash and marketable securities were approximately $21.7 million at September 30, 2023 as compared to $12.6 million at December 31, 2022. We have no long-term debt.
The amounts discussed above are based on our current estimates and listeners should review our Form 10-Q for the quarter ended September 30, 2023 for any possible changes and of course any additional filing. And with that I'll turn the call back over to Michael for closing remarks.
Michael Murray: Thanks, Rich. As evidenced in our third quarter results, our focus continues to be on strengthening our record order book, achieving higher on-time and full rates, cost controls and making the strategic investments in products and people which in the aggregate will improve cash flow and provide long-term sustainable profitability and growth. We've also been working very hard on our brand, external marketing and website development efforts and we are ecstatic to announce that we will have a new website to debut very shortly. Looking forward, we are very fortunate to have world-leading and market-making customers who are supporting Kopin during this transformational period. We have put tremendous focus on working with our customers to move up the value chain and gain more share of their system and spending.
Furthermore, we have carefully selected new strategic partners and customers to work with and are focused on new opportunities and projects which support our strategic plan. To this end, our opportunity pipeline has grown substantially in the past few quarters. We expect several new customers, partners and project awards and announcements soon which will add modestly to our order book but more importantly will fuel larger returns in the future as these new projects move into production. Perhaps the most culturally important transformation is that Kopin remains focused on invention and innovation but with more focus on cost controls and return on investment. These new inventions discussed today will help drive our innovations that solve our customers' most difficult technical problems and serve as the bedrock of our business which will fuel our long-term sustainable growth for our employees, our customers and stakeholders.
Thank you everyone for your time today and for showing interest in Kopin. I'd like to thank our employees, customers and stakeholders for their continued hard work and support and dedication and with that operator I'd like to offer some time to take some questions.
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