Q3 2024 Kopin Corp Earnings Call
Bye, your program is about to begin. Should you require operator assistance during today's program, please press star zero.
For more information visit www.FEMA.gov
Speaker Change: Good morning everyone and welcome to the Copin 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 Prenoveau, Investor Relations for Copin. Please go ahead.
Thank you, operator, and good morning, everyone.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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 Change: 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.
Speaker Change: Koppen Corporation's Chief Executive Officer Michael Murray will begin today's call with an overview of Koppen's progress within the company's strategy. Following Michael, Koppen CFO Richard Schneider will review the company's third quarter 2024 results. I would now like to turn the conference over to Michael Murray. Michael?
Michael Murray: Thank you, Brian. Good morning to everyone and welcome to our third quarter 2024 earnings call.
Michael Murray: 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 COPAN's ongoing mission to save lives and enhance human performance through advancements in optical solutions.
Michael Murray: We are proud of the substantial progress we've made on our transformation plan, which is gaining momentum and achieving key milestones. We now project over $75 million in orders for 2024 and beyond, potentially the highest annual order total in our company's 40-year history.
Michael Murray: 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.
Michael Murray: In the third quarter, we achieved $13.3 million in revenue, a 26% increase over Q3 2023, with continued sequential revenue growth.
Michael Murray: Notably, five new customers placed development orders which we expect will drive multi-million 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.
Michael Murray: We reached the final production qualification milestone for our high-performance organic light emitted diode on silicon display designed for Collins Aerospace F-35 Lightning II helmet mounted display system or HMDS
Michael Murray: As the sole source supplier of high-brightness AMLCD displays for this system, we are fulfilling a multi-year agreement that should continue on for several more years.
Michael Murray: Recently, we received a $2 million 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.
Michael Murray: We also secured a $1.3 million follow-on order for our Emerald micro-display module for a major weapons site product as part of a multi-year production program.
Michael Murray: This positions us for strong revenue growth, especially as our larger thermal weapons site program and subsequent production is expected to increase into fiscal year 2025.
Michael Murray: In the industrial market, we secured a 1.5 million dollar follow-on contract for our near-eye thermal imaging system integrated into firefighters' masks.
Michael Murray: This system, featuring a miniaturized AMLCD and optics within the face piece, enhances safety and effectiveness for firefighters.
Michael Murray: We launched our next generation SXGA FLCOS micro display system called the R15.
Michael Murray: MirTech, a leading provider of 3D AOI technology in South Korea, secured our first purchase order for this device.
Michael Murray: This affordable, compact solution positions us well to meet growing demand in Asia and globally. Additionally, we received a production order for our high-resolution 4-megapixel 2K SLM system, also for 3D AOI integration.
Speaker Change: With the Global III AOI market projected to grow from 700 million to 3 billion by 2030, COPAN is positioned to serve various segments, budget-sensitive with the R15, mid-range with our SXGA model, and high-resolution with the 2K-R11 model as well.
in the medical market.
Speaker Change: 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.
Speaker Change: Overall, our book-to-bill ratio has exceeded expectations, and we are negotiating additional substantial orders anticipated by year-end. This progress reaffirms our strategy to focus COPAN on defense and high-performance integrated products.
Speaker Change: Notably, our new internal processes aimed at enhancing return on investment for internally funded research and development are showing promise and early results.
Speaker Change: Internal R&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.
Speaker Change: Quality improvements also continue. Incoming inspection rates at our top customers reach 94% in Q3 and October as well, up from 86% in the previous quarter, positively impacting product gross margins and customer satisfaction. We're making significant strides in quality and organizational evolution with more progress to come.
Speaker Change: A new strategic focus for 2025 will be enhancing manufacturing and systems automation.
Speaker Change: They now promote the full range of coping 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 in foreign customers entering our pipeline.
Speaker Change: One of our foundational strategic initiatives, the FabLight strategy, remains on track. COPAN continues to partner with multiple fabrication facilities across Asia, Europe, and the United States, specifically for U.S. DOD applications and our four display types.
Speaker Change: 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.
Speaker Change: 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 Change: Now I would like to highlight a few additional notable accomplishments from the quarter.
Speaker Change: This quarter we expanded our medical technology portfolio by introducing proprietary high-resolution fast spatial light modulators, or SLMs, for use in fluorescent super-resolution microscope systems for biomedical research.
Speaker Change: These advanced SLMs enhance image resolution, often down to the molecular level, significantly advancing research capabilities at leading biomedical institutions worldwide.
Speaker Change: 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.
Speaker Change: This partnership is the cornerstone of our iVASNOW strategy, which introduces an integrated visual acuity system for warfighters supporting day and night capabilities compatible with current night vision goggles and helmet-mounted systems.
Speaker Change: 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
Speaker Change: We were featured in the Kinetic Suite to showcase our Neural Display Technology Platform.
Speaker Change: Neural display is a sophisticated OLED or micro-LED 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 Koppen's proprietary AI-powered software within the display's backplane.
Speaker Change: This real-time data adjusts, optimizes user experience in high stakes environments. The platform has now reached alpha testing, marking a major milestone in the development of our neural display architecture.
Speaker Change: 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.
Speaker Change: We're extremely excited about this new technology. Currently, we are collaborating with several defense and consumer companies on innovative design approaches, software integration strategies, and exploring potential new business models.
Speaker Change: As we look to the future and see our business fundamentals strengthening, we're experiencing favorable market dynamics in the AR VR sector that align with our mission and technology roadmaps.
Speaker Change: 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.
Speaker Change: With that, I'll now turn the call over to our CFO, Rich Snyder, to review our results from the third quarter in further detail. Over to you, Rich. Thank you, Michael. Turning to our financial results for the third quarter of 2024, total revenues from Q3 2024 were $13.3 million.
Speaker Change: versus 10.6 million for the prior year, a 26% increase year over year.
Speaker Change: Product revenues for the third quarter ended September 28, 2024 were $10.9 million compared to $5.5 million in the third quarter of September 30, 2023.
Speaker Change: The increase in product revenues was the result of higher defense product revenues, which increased $5.4 million year over year.
Speaker Change: In the third quarter of 2024, funded research and development revenues were 2.3 million, a decrease of 2.7 million as compared to Q3 of 2023 due to the completion of several programs like the monochrome micro LED program, which is now entering low volume initial production.
Speaker Change: Cost of product revenues for the third quarter of 24 were $8.3 million, or 76% of net product revenues, compared with $5.4 million, or 99% of net product revenues in the third quarter of 23.
Speaker Change: 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.
Speaker Change: R&D expenses for the third quarter of 24 were $2.6 million compared to $3.1 million in the year ago quarter.
Speaker Change: This was primarily due to a decrease in funded R&D expense of approximately $1.2 million on U.S. defense programs that were previously noted were completed. This was partially offset by an increase of $700,000 in internal R&D expense for process improvement.
Speaker Change: SG&A expenses were $5.2 million in the third quarter of 24 compared to $4.8 million in the third quarter of 23. 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.
Speaker Change: Legal expenses associated with the Blue Radios matter in the third quarter of 2024 and 2023 were $1.5 million and $1.2 million respectively.
Speaker Change: 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.
Speaker Change: We believe the appeals process involves much less expense than funding a trial.
Speaker Change: Other expense net for Q3 of 24 includes a 1.1 million impairment loss on equity investments.
Speaker Change: Turning to the bottom line, the net loss for the quarter of 24 was $3.5 million or three cents per share compared with a net loss of $2.5 million or two cents per share for the third quarter of 23.
Speaker Change: The amounts discussed above are based on our current estimates and listeners should review our Form 10-Q for the nine months ended September 28, excuse me, 24 for any possible changes and of course additional information and filings.
Michael Murray: And with that, I'll turn it over to Michael for closing remarks. Thanks, Rich. This quarter's results demonstrate our ongoing success in delivering solutions which improve the human experience, performance, and save lives.
Michael Murray: Our operational improvements, stronger customer relationships, and momentum in orders give us greater visibility and a clear plan towards achieving sustainable net income profitability.
Michael Murray: We continue to strengthen margins through improved quality rates, cost controls, and strategic investments in our products, automation, and our talented and dedicated workforce.
Michael Murray: Our pipeline of qualified opportunities has grown significantly in recent quarters, largely driven by the U.S. need to replenish stockpiles, modernization of defense technology and weaponry, and respond to recent geopolitical developments.
Michael Murray: Increased sovereign and NATO spending further boost this trend. We anticipate that these new partnerships and progress will fuel full rate production and they'll lead to contributing larger future returns.
Michael Murray: To capture these opportunities and accelerate our market momentum, we've recently expanded our North American business development team with two new hires and we retained a consultant specializing in consumer applications.
Michael Murray: Thank you all for your time today, for your interest in COPIN. I'd also like to thank and extend our gratitude to our employees, our customers, and stakeholders for their dedication and continued support.
Michael Murray: With that, operator, we'll now offer time to take some questions.
Speaker Change: Thank you. At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one. If you would like to ask a question, we'll take our first question from Jason Schmidt with Lake Street. Your line is now open.
Jason Schmidt: 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. I'm just curious where you're seeing that. And I guess relatedly, is your sales infrastructure to address the international market fully built out at this point?
Speaker Change: 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
Speaker Change: of geopolitical issues in Israel, Ukraine, and some other hot spots that
Speaker Change: currently need the technology that we have. We also see the perturbation of NATO requesting and demanding 2% of GDP actually be spent, so I think
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: and that's the pivot that we made with the 3D AOI team, which resides mostly in Europe.
Speaker Change: 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 Change: Okay, that's helpful. And then I know you noted a kind of a strong book to bill year-to-date. Just curious what that number was for Q3.
Q3, it was slightly below one-to-one.
Speaker Change: Gotcha, and then just the last one from me and I'll jump back into queue. Obviously it's early, but we'd just love to hear your thoughts on how your business might be potentially impacted with the change in administration.
Sure. So I think, firstly, I think
Speaker Change: The new administration, based on what we understand today, which is early, is going to be good for COPA in the long run.
Speaker Change: 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.
Speaker Change: Number one. Number two, I see the budget process, including plus-up requirements for defense spending in the United States.
Speaker Change: So, I think that's the second tailwind that we see. And then the third tailwind that we see with the new administration is just the ability for smaller companies, small cap companies like Koppen, 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 Koppen.
Perfect, appreciate the caller. Thanks a lot, guys.
Speaker Change: 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.
Okay, thank you.
Speaker Change: Thank you. We'll take our next question from Victor Santiago with CFL. Your line is now open.
Speaker Change: Hey, good morning guys. This is Victor Ahn from Matt Sheeran. Just a question on revenue in the quarter is a bit better than we had expected of that kind of mid-single-digit sequential growth. Was that a function of pull-in orders from Q4 or was that just your ability to ramp new programs in the quarter?
Speaker Change: It was a combination of product mix and our ability to produce.
Speaker Change: Remember we're on 606 so essentially our revenues are not based on shipment they're really based on percent completion.
Speaker Change: So to the extent the supply chain is flowing nicely, it allows us to get ahead and build product.
Speaker Change: and so the supply chain worked very well this quarter and also we had a favorable product mix.
Speaker Change: some of the smaller orders that you see actually have much bigger gross margins.
and are much more profitable.
Speaker Change: Got it. And then I think last quarter you had talked about growing gross margins 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?
That's the plan
Got it. Fair enough. That's all I have. Thank you.
Speaker Change: Thank you and once again that is star and one if you would like to ask a question we'll take our next question from Kevin Deeney with HC Wainwright your line is now open.
Thanks gentlemen for having me on. I'm Michael Rich
Speaker Change: Michael, would you mind driving into the neural display a little bit more? I mean you spoke to specific interests both on DoD and the consumer side
You've got a new consumer.
applications consultant
Speaker Change: 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 COPIN.
Speaker Change: Sure. From a standpoint of neural display, we see the market going...
Speaker Change: basically repeating history. If you look at original cell phones as an example.
Speaker Change: fusion systems or integrated circuits need to drive that innovation. And Neural Display is a great example of that. It removes six...
Speaker Change: cameras from some of the spatial computing devices. Six 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.
Speaker Change: On the consumer side of things, we think all the consumer companies at this point and AR, VR are back to the drawing board, which is good news for us because we're farther down the path with neural display. 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.
Has the company decided on...
Speaker Change: 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 Change: We're still trying. It's up for debate. We're struggling with it, quite frankly,
Speaker Change: 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 Change: So, still TBD, that's the plan, but we are struggling with it.
Thank you.
Speaker Change: regarding I think it was Victor's question on the change in the administration I'm wondering if you've looked
Speaker Change: 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?
Great question. Thankfully,
Speaker Change: One of the first strategic initiatives that we had, Kevin, was our FabLight model and the concern around our Chinese OLED deposition supply chain.
Speaker Change: I'm very pleased to report that we've moved our sensitive U.S. DOD applications
to a new provider that is U.S. DoD approved.
Speaker Change: 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, will be complete that transition this quarter.
Speaker Change: So, very pleased and proud of the team for their progress.
Speaker Change: 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 Change: So have you, I guess I'm wondering if maybe if there's any way to quantify that do you do you have to worry about
rotating manufacturing with a change in import policy.
Speaker Change: No, not necessarily. Okay. No, it's more about we build our backplanes.
through either Taiwanese or Korean fabs.
Speaker Change: and then the deposition process can happen anywhere in the world where we see technology benefit or performance benefit or cost benefit as an example.
Speaker Change: And that's part of the FabLite strategy is we will go to the partners that have the best cost, best quality, and best performance. So that allows us to do that.
Speaker Change: which is take our backplane designs and then deposit OLED or micro LED material where it makes best sense for our customer base.
Speaker Change: 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 COPEN.
Speaker Change: and that larger footprint is something that we're actively working on with the government, the government customers.
Speaker Change: 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.S. DoD.
Speaker Change: Well, I'd imagine that's a pretty long lead time though, right?
perhaps, yeah okay.
Speaker Change: On backlog, Michael, help me with some of the numbers. You mentioned, I think in your prepared remarks, a $75 million order number, which I think
is up from $55 million.
when you last talked about the June quarter.
Speaker Change: I'm wondering if I'm in the right ballpark on those and what drove the big increase.
Speaker Change: You're exactly right. From Q2, we were sitting with 55 million of purchase orders in the calendar year at that point.
are expectations due to several negotiations that are ongoing.
Speaker Change: that we'll receive in the realm of 20 million 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.
Speaker Change: And again, if we do end up with 75 million of purchase orders for this year, that would be a record for our 40-year-old company.
Thank you.
Thank you.
Speaker Change: 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 Change: I think I think that's accurate what we're expecting this quarter
is some influx of thermal weapons site orders.
Speaker Change: 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.
Speaker Change: and they are otherwise engaged as you can imagine Kevin in Israel at the moment 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.
Okay, last question for me before I hop back in.
Speaker Change: I understand that the that Judge Kain is going to consider the ruling in Massachusetts and I was wondering
Number one.
Speaker Change: and whether or not you have any insight on how that might be going.
Speaker Change: and number two Rich talked to I think 1.2 million and 1.5 million 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?
Thank you.
So 1.5 is 24, 1.2 is 23.
Okay.
Speaker Change: got it and historically you know we're somewhere now at some point there may be an appeal
Speaker Change: and there will be a chunk of expense that we estimate will be $500,000 to $600,000.
Speaker Change: 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 Change: And we do not have any visibility into when Judge Kain in Colorado will render his opinion. Thank you for offering that, gentlemen. I appreciate you entertaining my questions. Congrats on the nice job in the quarter.
Thanks, Kevin. Take care.
Speaker Change: And we have no further questions in the queue at this time. I'll turn the program back over to Michael Murray.
Michael Murray: Thank you, operator. I just wanted to say thank you to the tremendous team here at COPIN for their focus, dedication.
Michael Murray: 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.
Speaker Change: This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful day.
Tones
when I'm the one for you.