Kopin Corporation (NASDAQ:KOPN) Q4 2022 Earnings Call Transcript

Kopin Corporation (NASDAQ:KOPN) Q4 2022 Earnings Call Transcript March 14, 2023

Brian: Richard Sneider – Treasurer and Chief Financial Officer Michael Murray – President and Chief Executive Officer

Operator: Good morning everyone, and welcome to the Kopin Corporation’s Fourth Quarter and Full Year 2022 Earnings Call. Please note that this event is being recorded.

Brian:

Brian Prenoveau: Thank you, Paul. Good morning everyone. Before we get started, I’d like to remind everyone that today’s call taking place on Tuesday, March 14, 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, Richard Sneider, will review the company’s fourth quarter and full year returns.

I would now like to turn the conference call over to Michael Murray. Michael?

Michael Murray: Thank you very much Brian and to all the folks at MZ Group. Welcome to the Kopin family. Good morning everyone. Welcome to our fourth quarter earnings call. I’m in Asia at the moment, so I hope my line is clear. I’ve been having some technical difficulties from time-to-time, but since this is only my second earnings call as CEO of Kopin, I wanted to start today’s call with a little more background information on what Kopin does and how we plan to do it. For anyone who is less familiar with Kopin, we are leading provider of specialized solutions combining advanced micro-display and optical technologies, with these proprietary technologies to create augmented and virtual reality products for use in defense, commercial and consumer applications.

As the field of optics continues to expand, the real world application in micro-displays continues to broaden and new industries are discovering ways to use these technologies constantly and consecutively. Two years ago the market was estimated to be about $1.6 billion in size and is expected to grow to over $5 billion by 2027, a 20% annual growth rate roughly speaking. We believe our company is well positioned to take advantage of this large and quickly growing market. For over 30 years Kopin’s scientists and engineers have created innovative technologies that have enhanced the way people see, hear and communicate. This history and focus on innovation and creativity was one of the biggest selling points for me to join Kopin. While the company’s restructuring initiatives continue at pace with our renewed focus on quality and operational excellence, preserving that culture of innovation remains paramount to us capturing more of this exciting and growing market.

Today, Kopin’s revenue largely comes from defense-oriented customers and projects with additional revenue from commercial and consumer product customers. I’ll now provide a high level recap of the quarter and the year before turning the call over to Rich to dive deeper into the financial results. This year, Kopin turned in a solid 2022 despite the supply chain issues and lingering COVID issues we discussed in previous calls. We are cautiously optimistic that we are now positioned to mitigate the supply chain challenges we’ve been faced throughout the year, while supply chain challenges still are prevalent, we’re hoping that they’ll become part of the past. We continue to see intermittent quality challenges, which we have plans to resolve through product redesign, adjusted inventory levels, new equipment, and increased focus on quality and reduce scrap.

Revenues for the year were up 3.8% year-over-year, completing the company’s fourth consecutive year of growth. The bulk of the revenue increase came from the defense sector sales, sales in defense ended the year up 36% year-over-year, driven by higher shipments within the weapon sight programs of our top customers. The defense revenue increase was offset somewhat by decrease in demand with our industrial channel due to an over inventory position with their customer base, as we saw reduced orders for spatial light modulators, which are used in our 3D AOI machines and industrial wearables. As I mentioned in our last call, our focus will be driving yield improvement, achieving on-time, and full deliveries while seeking opportunities to reduce costs.

I wanted to discuss some of the strategic initiatives we here at Kopin are focused on to improve margins, cash flows, customer experience, and ultimately return to our shareholders. Our first focus is increasing our order book for application specific solutions. Now, when I speak of application specific solutions, I refer to integrated products that accomplish a particular task. An example is our International Family of Weapon Sight Long Range device whose full rate production was announced in the third quarter. In this IWSILR, we produced the entire weapon sight eyepiece not just the screen/optical components, building an order book of similar high level value added products that ultimately result in higher order amounts, increased customer partnership, reorder reliability and better margins.

Next, improving and achieving on-time and full deliveries. Customers should expect their orders to be received on time and in full at 100% quality. In a supply chain constrained environment like the one we operate in, achieving on-time and full delivery is difficult. Towards achieving this goal, we’re investing in data-driven analysis and advanced manufacturing equipment to automate and improve our performance to ensure demand is met with supply. For any delays we’re performing a sense of root cause analysis to ensure the nature of those delays is understood and effectively acted upon immediately. We are pleased to say that we have shipped our AMLCD product to Collins at 100% on-time in full for 2022, a great achievement for the team and our folks at FTD Scotland have recently achieved the same level with their 3D AOI customer base.

Cost and cash discipline will be a particular point of focus. To this end, we have initiated several projects to reduce OpEx. In addition, all business and technology programs are being evaluated against our new financial models and corrective actions are being taken. These tough decisions taken in Q1 of 2023 will be evident and ripple through our Q1 and the rest of 2023 financial results. Fourth, we’re looking to derive yield improvements. Yield improvements will be accomplished merely by focusing on quality, improving our rate of material to unit conversion and building efficiencies into the fab, increasing quality and ultimately reducing costs, improve margins and on-time delivery. As part of our quality review in Q4, it was determined that we needed to improve our internal processes, automation and clean room cleanliness through additional investment, which was the catalyst for our capital raise in Q1 of this year.

Last, and certainly not least, is our efforts to ensure R&D is aligned with our strategic plan. Return on investment on funded R&D will face increased scrutiny to ensure unprofitable projects are avoided and profitable projects are pursued and prioritized. Additionally, our focus on internal research and development should be toward value-added application-specific projects and disruptive leading edge technologies and capabilities developed with our customers. As an example, our fully integrated surgical head-mounted display is progressing well and attracting significant interest in the healthcare market. We’ve also made significant progress recently on our micro LED programs, which we will provide technical updates throughout the year. We believe this is transformative technology which will be able to not only unlock fully integrated day and nighttime AR/VR applications.

Now, during our recent restructuring, we separated the business development and program management disciplines and added more resources to both, in order to grow our order pipeline and manage several significant programs moving from R&D and qualification to low rate initial production through this year and next year.

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Backplane: We’ve also made significant progress on our Abrams SEPv4 upgrade and expect to move that program into final PPAP qualification shortly. PPAP is an automotive readiness qualification standard. This is the last step before production and a significant step and solidification for Kopin since we believe this program could be one of the largest revenue contributions for the company in the future years. Furthermore, it provides Kopin with the pedigree and the proof points to enter into further mobile defense and automotive applications. We’re excited and hopeful to announce this in the final phase of the program very shortly. I’ll now turn the call over to our CFO, Rich Sneider, to review our results in further detail. Rich?

Richard Sneider Thank you, Michael. Turn to our financial results. Total revenues for Q4 2022 were $12.2 million versus $13.2 million for the prior year, and overall 8% decrease year-over-year. Product revenues for the fourth quarter ended December 31, 2022 were $8.7 million compared with $8.8 million for the fourth quarter ended December 25, 2021, essentially flat. Defense product revenues increased $1.2 million or 19.6% year-over-year, while industrial product revenues decrease approximately $1.1 million or 46% year-over-year. Funded research and development revenues were $3.3 million for the fourth quarter of 2022, compared with $4.3 million for the fourth quarter of 2021, a 24% decline. The decline in our funded research development programs is to our funded R&D programs maturing and entering to low rate initial production or LRIP.

Cost of goods sold for the fourth quarter of 2022 was $8.9 million or 103% of product revenues compared with $7.5 million or 85% for the fourth quarter of last year. The increase in cost of product revenues as a percent of net product revenues for the three months ended December 31, 2022, as compared to the prior year, was primarily due to lower absorption of costs as we reduced production to make changes in the manufacturing of products and additional material costs. R&D expenses in the fourth quarter of 2022 were $4.7 million compared with $5.2 million for the fourth quarter of 2021. The decrease in 2022 fourth quarter R&D expense as compared to the prior year was due to lower funded R&D expense caused by programs moving to LRIP, partially offset by higher internal R&D expenses.

SG&A expenses were $4.9 million in the fourth quarter of 2022 compared to $4.1 million in the fourth quarter of 2021. The SG&A increase for the three months ended December 31, 2022 as compared to the prior year was primarily due to an increase in compensation and professional fees, which were partially offset by lower stock based compensation costs. Turning to the bottom line, the net loss attributed to Kopin for the fourth quarter was approximately $6.2 million or $0.07 per share compared with $3.3 million or $0.04 per share for the fourth quarter of 2021. Now, turning to the full year results, total revenues for 2022 were $47.4 million compared with $45.7 million, a 4% increase. 2022 revenue increase as compared to 2021 was driven by an increase in defense revenues of $6.6 million or 36%, which was partially offset by a decline in industrial enterprise revenues of $3.6 million or 37%, and consumer and other revenues, which declined approximately 500,000 or 24%.

Cost of product revenues as a percentage of net product revenues for 2022 and 2021 were 100% and 84% respectively. Cost of product revenues increased as a percentage in 2022 as compared to 2021, primarily due to excess material costs and inefficiencies caused by supply chain disruptions.

Lightning Silicon: SG&A expenses were $18 million in 2022 compared to $18.1 million for 2021, essentially flat. SG&A expenses for 2022 had increases as compared to 2021 in professional and compensation costs, which were partially offset by lowered stock based compensation costs. Other income for fiscal 2022 and 2021 were income of $2.6 million and $436,000 respectively. In 2022, we recorded a write-up of an investment of $4.7 million and an impairment write-down of $4362.2 million in another investment. Other income for fiscal 2022 includes $323,000 foreign currency losses compared to $139,000 of foreign currency gains recorded in fiscal 2021. Turning to our bottom line, net loss for controlling interest for the fiscal year ended December 31, 2022 with $19.3 million or $0.21 per share versus a net loss of $13.4 million or $0.15 per share for 2021.

10% customers for 2022 were DRS Network & Imaging at 40% and Collins Aerospace at 28%. Kopin’s Cash and equivalent to marketable securities were approximately $12.6 million at December 31, 2022. Subsequent to the year end, we raised capital where we sold 17 million shares of Kopin’s 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 are based on our current estimates and listeners should review our Form 10-K for the year ended December 31, 2022 for any possible changes and of course any additional filing. And with that, I’ll turn the call back over to Mike.

Michael Murray: Thanks, Rich. I’m really pleased with the progress we’re making as a company and as an organization. The partial spinout of our OLED development unit aligns with our intention to focus on long-term sustainable and profitable growth, while we remain able to support our customers with a full portfolio of eight-inch OLED devices and access to 12-inch devices in the future. Our FO costs remains competitive in the 3D AOI market. It’s finding its way into new applications like the Abrams tank program. Our AMLCD product remains in demand for the foreseeable future while our micro-LED product line is becoming a reality and offers exceptional revenue potential for this company in all of our markets. These initiatives, along with our secondary equity offering in January where we raise $21.5 million, will serve to improve our quality, provide financial flexibility over the near-term and drive Kopin into the future.

With regards to 2023, our focus is at strengthening our order book, achieving higher on-time and full and cost controls, which in the aggregate will improve cash flow and get us to profitability. The partial spinout of the OLED team in our recent reductions in force, along with a number of new internal processes, are our first step and we’ll keep you updated as we progress through 2023. I’d like to thank everyone for your time today and for showing interest in Kopin. I’d like to thank our employees, our stakeholders in all their hard work and dedication. Indeed, embarking on new strategic directions is never easy, but I’m really proud of the team we have here at Kopin. With their continued work, persistence and patience, I think we can achieve great things and grow the business to new heights, and we’re truly excited about the future.

So with that operator, I’ll turn it over to you and take some questions.

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Q&A Session

Operator: Thank you. Our first question is from Glenn Mattson – Ladenburg Fallon. Please proceed with your question.

Glenn Mattson: Yes, hi. Thanks for taking the questions. So I’m curious Mike, you laid out a lot of moving parts around the cost cuts and the different changes to the model between the workforce reduction and the kind of plans for better kind of on time deliveries and all that stuff. So if you kind of boil it all together, can you just kind of lay out a sense for what the margin profiles should look like, kind of the — how long it’s going to take to get to where you need, where you think you should be and what the ultimate goal will be for where you tend to get to?

Michael Murray: Sure. Thanks Glenn. I think the Q1, I’ll start there, is really the kitchen sink. We’ve put in a lot of effort and a lot of pace into change in Q1. I did that intentionally, firstly because I felt like there was no time to waste number one. Number two, the cost cutting that we needed to put in place was there. I could see it. There was low risk to it, albeit unfortunate. No one likes to reduce force, but that was done mindfully with the thought process around reducing our costs, not just for cost of goods sold and so we have a program in terms of looking at our cost base from our supplier set, our quality base from our supplier set, as well as our re-sales, meaning we’re working with our customers actively to look at our contracts that are underperforming and negotiate those contracts again for higher re-sales if possible.

So all of those things are going on all at once, so it provides a little bit less certainty into Q1, but we’ll see those cost reductions, those improvements in our on-time and full into Q2. So we’re very much looking forward to Q2 and Q3 from a cost perspective. So where we want to be over the course of the next, I’d say two quarters, is improving our margin base by 5% to 10%. That’s an aggressive, aggressive goal for us based on the business that we’re in. But I think if you look at where we’ll be at the end of Q1 after the LS spin-out of the partial spin-out of the OLED team, the reduction in force, we put a lot of pressure on our supply chain to reduce costs. We’re negotiating contracts that are not beneficial for Kopin and either exiting them or increasing price and we have had some successes in some of our smaller account base with that.

So probably too early to tell or too early to claim any victories, but I think we’re on the right track.

Glenn Mattson: Great, that’s very helpful. I’m curious you laid out a lot on the defense side, can you talk about maybe the industrial, the AOI stuff, maybe what the pace of that kind of cycle looks like, number one? And then on the, consumer, I’m sorry, on the, on like the head-mounted display side there was talk of a glutted product in 2022. Do you expect that market to bounce back in 2023? Thanks.

Michael Murray: Sorry, I missed that last part Glenn. Could you repeat it?

Glenn Mattson: On the head-mounted display, like things like your partners with realware and people like that, they will talk about product in 2022, is that you expect to bounce back this year?

Michael Murray: So let’s start with 3D AOI. We actually expected this year to be somewhat flat to down in 3D AOI just because of the semiconductor cyclicality that goes along with it. However, we’ve been increasing pace of orders. And the last I checked, which was last week, we have 70% order cover for the 3D AOI business out of Scotland and the FTD folks. So that’s a good place to be for this year. Excuse me, I do expect that we’ll see increases in order rates for 3D AOI later on this year. So we have a good opportunity to actually grow in that business. It’s very cyclical, but I do feel comfortable now that we’re sitting in a run of 70% order rate for this year to say that that business will be flat to slightly up. I think we’re being a little too pessimistic thinking that that market won’t come back this year.