Kopin - Earnings Call - Q1 2018

Transcript

Speaker 0

Everyone, and welcome to Copen's Q1 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Rich Snyder, Chief Financial Officer. Please go ahead.

Speaker 1

Welcome everyone and thank you for joining us this morning. John will begin today's call with a discussion of our strategy, technology and market. I will go through the first quarter twenty eighteen results at a high level. John will conclude our prepared remarks and then we'll be happy to take your questions. I would like to remind everyone that during today's call taking place on Tuesday, 05/08/2018, 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 materially differ 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 ks and other documents filed with the Securities and Exchange Commission. The company undertakes no obligation to update the forward looking statements made during today's call. And with that, I'll turn the call over to John.

Speaker 2

Thank you for joining us this morning to discuss our first quarter results. Strengthening our military operations primarily drove performance in this quarter. As we have talked about in the past, our displays and optics have been developed initially for military, meaning its demand for quality and reliability. So the military has always been a key market for COVID. In Q1, we have the continued ramp of the F-thirty five fighter jet program, where Koping is the sole supplier of displays for the Pilot's helmets.

In addition to our current purchase agreement, we have been notified that we will be received will receive shortly follow-up orders through 2019. After quarter end, we received the initial production authorization for the FWS I program consisting of 5,000 eyepieces to be delivered over the next year with shipments beginning in this August. The second part of the program, the FWSC is also tracking on plant in the initial phase of development. At the same time, we're moving through the early development process on the armored vehicle program we won the last quarter. And we're pleased that the program was just suspended to include the development of additional eyepiece scopes, increasing the potential total value of the program for coping from $40,000,000 to $80,000,000 Finally, our new brilliant LCD microdisplay product line, which was created specifically to meet the extremely high brightness requirements of the next generation avionic AR applications, and they have been well received by our customers.

We expect follow on orders as development continues on the new helmet using this new display. We're also seeing good uptake in the industrial enterprise AR business. Many of our partners have indicated strong recession for their new industrial products. In addition, we are excited to report a major design win with a global USA high Tier one company for a new AR smart glass for enterprise applications. Perhaps it is appropriate for us to discuss briefly the current status of AR and VR headsets.

Without any doubt, the developments of ARVR have been undergoing major adjustments, winners and losers. So there should be no doubt that the transformation of a handheld smartphones to a hands free wearable will certainly happen. Like all major disruptive transformations, there will be many twists and turns along the way. It always has been our belief that adoption and transformation will start with the military. They move to enterprise industrial applications where the benefits are clearly substantial.

In this respect, Kopin has been very successful as we are dominant providers of critical displays and other components to both military and enterprise markets. The adoption of smart glasses to consumer has also begun. We are excited by the reception of our Solo Smart Glasses, which starts shipping tomorrow. Solo has been called the world's lightest and most advanced AR Smart Glasses for sports and consumer fitness and was designed using Kopin's unique insight into AR forms and functions. We're targeting cyclists, triathlons and trainers with those smart glasses, which contain a heads up see through pupil display optics module so athletes can see real time updates such as speed, power, and pace and measure their progress.

This generation of solos added new features such as music, voice control, group chats and phone calls. Solos includes our Whisper Voice chip so the users can make phone calls or communicate with others in their group, benefiting from our unique noise cancellation technology so loud noises do not ruin their audio experience. We anticipate rolling our solo through a number of distribution formats during 2018. Last month, we announced U. S.

Cycling Association has teamed up with Solos to train for the twenty twenty Olympic Games. We have high expectations for Solos as this is the one AR glass available that sets our main rules for developing AR glasses. For VR, we have been working with the military for many years. And for the past twelve months, we have been working on consumer products, including advanced VR glass handsets such as Elf, which utilize COPI's Lightning, the world's leading two ks x two ks OLED displays. We believe we have gained much insight and experience and plan to discuss these insights in my keynote address in the coming AWE conference in Santa Clara, California at the end of this month.

Well, let's discuss the status of OLED on silicon microdisplays. It has been our conviction that successful cloud transformation for smartphones to hands free wearables assets requires small, high resolution, low power consumption microdisplays. For AR applications, we believe LCD microdisplays will be effective for these applications and both our military and enterprise customers certainly have adopted our LCD displays. For VR applications, we believe OLED on silicon offer many performance advantages, including especially in speed and image quality. We have been focused on providing such OLED displays for the VR world, including developing the world's leading two ks x two ks one inch display to establishing a supply chain through a joint venture with BOE, the world's leading smartphone display supplier.

We're delighted that the world's largest alloy silicon factory has broken ground in Kunming, China, and we expect it to be operational by the end of next year. In summary, we continue to be excited about the opportunities for AR and VR. As we discussed last quarter, we believe the continued ramp of our military displays, the growing adoption of AR systems for industry and enterprise and the demand for solos along with other new product offerings will allow us to increase revenue in 2018 by 25% to 40%. And there's no change in our expectation that revenue for 2018 will be between $35,000,000 to $40,000,000 In addition, we remain confident that the anticipated increased demand for our products and components should allow us to achieve breakeven probability by year end 2019. As always, we are carefully utilizing our capital, so over $60,000,000 in cash now and no debt will continue to move forward on our global vision for AR and VR.

Now I'll let Rich provide the details.

Speaker 1

Thank you, John. As you may have seen in our press release, Copa has adopted ASC Topic six zero six using the modified retrospective approach, meaning that the standard was applied only to financial results of the 2018 with a cumulative adjustment to retained earnings. Under this transition method, we applied the standard only to contracts that would not complete the initial adoption date. In the press release for comparative purposes, we also provided results that would have been under ASC six zero five. Alright, so turning to results.

Beginning with the results for the 2018, total revenues were $5,700,000 compared with $4,400,000 for the 2017. The increase in quarterly revenue year over year was primarily driven by military applications. Cost of sales for the first quarter was 80.5% of product revenues compared with 79.3% for the first quarter of last year. Gross margins decreased due to lower utilization in one of our facilities, which was partially offset by the increase in military revenues, which have higher gross margins as compared to our other products. R and D expense in the 2018 was $4,500,000 compared with $4,300,000 in the 2017, essentially flat.

SG and A expenses were $6,900,000 in the 2018 compared with $5,600,000 in the 2017, reflecting incremental SG and A of $600,000 from our acquisition of Envis in the 2017 and an increase in sales and marketing compensation expenses partially offset by lower professional services. The incremental SG and A for Envis for the three months ended March 3138 primarily relates to the amortization of intangibles resulting from the acquisition. Other income and expense was income of $5,000,000 in the 2018 as compared with an expense of approximately $400,000 in the 2017. The 2018 includes approximately $200,000 of foreign currency gains as compared with approximately $1,200,000 of foreign currency losses in the 2017. The 2018 includes $1,000,000 gain from the receipt of insurance proceeds related to our fraud in our Korean subsidiary and a 3,600,000.0 non cash gain from the exchange of certain intellectual property for an equity investment.

In the 2008, we contributed certain patents valued at $3,600,000 and $1,000,000 in cash for a 12.5% equity investment in a joint venture located in China. Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $4,800,000 or $07 per share compared with a loss of $7,900,000 or $0.12 per share in the 2017. Turning to our 2018 guidance, we continue to expect 2018 revenues to be in the range of 35,000,000 to 40,000,000 We expect the revenue ramp to be second half loaded corresponding with the introduction of new products. We believe operating expense will remain largely flat compared to 2017. We conclude the quarter with approximately $61,000,000 of cash and marketable securities and no long term debt.

The amounts we just discussed are our current estimates and we will continue to evaluate Topic six zero six and the equity investment accounting. So I would remind our listeners to review our Form 10 Q for the first quarter March 3138 when filed for all final amounts. With that, operator, we'll take questions.

Speaker 0

Thank you. At this time, we will be conducting a question and answer session. Session. Our first question comes from the line of Jeff Bernstein with Cowen and Company. Please proceed with your question.

Speaker 2

Hi guys. Just a couple

Speaker 3

of questions. What's going on with the Olatec line?

Speaker 2

You're talking about the Olatec line, which is also in Kunming, China. The line is running and I think it will start operational third quarter this year.

Speaker 3

Great. And then just a question on the win that you announced with North America Tier one. Is that a company you've done business with before?

Speaker 2

Jeff, I'm afraid I cannot comment on that. Surprised to say it's a very large global company.

Speaker 3

Got you. Can you say is it an industrial type company or is it a Silicon Valley type company?

Speaker 2

It would be nice to be if it's a Silicon Valley Company, I think.

Speaker 3

Okay. Thanks.

Speaker 0

We have a follow-up question from Jeff Bernstein with Cowen and Company. Please proceed with your question.

Speaker 3

All right. Can you give us an update on what's going on with three d Machine Vision?

Speaker 2

Yes. That's a market we're talking about using displays for three d morphology. The market is still growing very well. I would say they're growing about 30% a year. We're now beginning to penetrate the Chinese market and if that happens, hopefully it happens this coming quarter, it will be very exciting.

Speaker 3

And you had some, I guess, lower factory loading in one of the facilities. Can you just talk about that?

Speaker 1

Sure. So we obviously have facilities in Scotland down in Western Virginia and here in Westborough, Massachusetts. And so in a typical semiconductor model, we have a high fixed cost and so utilization of one of the plants is lower than we had anticipated, so the cost per unit was higher, which negatively impacted gross margins. But the other facilities did well, so it for the most part offset it. We were off about 0.8% on the gross margin.

Speaker 3

And is that just a timing issue?

Speaker 1

Yes. Yes, we thought some orders were going to come through in the first quarter that didn't materialize, but I understand they're showing up in the second quarter.

Speaker 3

Got you. That's great. Thank you.

Speaker 0

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Doctor. John Fan for closing remarks.

Speaker 2

Yeah. Thank you, operator. I would like to remind everybody that tomorrow morning we have our annual meeting at 09:00. That's our annual Copiathmic Meeting. Please hopefully you can attend the meeting.

With that, I will see you guys next quarter. Thank you. Bye bye.

Speaker 0

This concludes today's conference. You may disconnect your lines at this time. Thank you for your