Kopin - Earnings Call - Q1 2019

Transcript

Speaker 0

Welcome everyone and thank you for joining us this morning. John will begin today's call with a discussion of our strategy, technology and markets. I will go through the first quarter twenty nineteen 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, 05/07/2019, 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 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 it over to John.

Speaker 1

Thank you, Richard. Thank you for joining us this morning to review our first quarter results. It has been a good start to 2019. Our sales to enterprise customers were solid and we're pleased with how the year is shaping up in that segment. As the momentum reinforces the enterprises are fully embracing the value of augmented reality AR.

A very important development for Kopin is that we have received a large follow-up order from the Tier one company we mentioned last quarter, which was an early mover for AR. You may remember that we have shipped 5,000 displays to that company in 2018. And we've been waiting for them to announce the next generation AR smart glasses targeted to enterprises. While this announcement is still pending, we received an additional significantly larger purchase order and we just begin shipping to the order. Companies like Boeing, GE, DHL and Volkswagen all see the value of headsets provide to their customer other than workers in places like factory, plants and warehouses.

As they are sole display supplier, we look for this key customer to help drive our enterprise business. But the accelerated growth goes beyond this customer as we're receiving increasing orders and forecasts for many of our other enterprise partners. AR's ability to boost productivity, reduce costs and improve working conditions is driving business for coping as coping partners such as RealWear and Vuzix. Because this increasing demand for our gasses, we expect to triple the number of displays we shipped to enterprise customer in 2019. We're optimistic the industry trends will allow the consumer market to match the enterprise market in the coming years.

As we have previously discussed, the VR market could grow rapidly with five gs. Micro OLED displays will be display of choice for VR because of their superior performance. For VR and AR, micro OLED display will also be very, very desirable if this OLED displays can achieve high brightness, very high brightness. For the current 1,000 nits to about 4,000 to 5,000 nits. This increase will enable innovative optical designs.

For example, the VIS that can be make much thinner. Recently, significant new technical approaches have been identified and we believe such a large increase could be obtained in production quantities sometime next year. In fact, even higher brightness up to 8,000 to 10,000 nits might also eventually be possible in micro displays. Today, one of the major challenges for micro OLED display has been the lack of OLED deposition factories for volume production. This will change.

This is 150,000,000 manufacturing facility being built by joint venture partner BOE is tracking to plan and their initial results are encouraging. We believe the BOE factory facility and other factories which are also coming online, we help drive interest in developing consumer applications and systems by creating a cost effective supply chain that can take advantage of the promise of five gs. In my recent trips to China and Asia, I saw increased investments in ARVR. We're optimistic this view especially around consumer AR and VR will spread to The U. S.

In the coming years. Our own consumer headsets solos for cyclists was perhaps a bit ahead of schedule and ahead of the market. While we continue to work to increase the distribution channel, we wrote down some of the inventories in Q1, specifically the older generation products. Our mature business again met plan in the first quarter, primarily due to shipments of displays embedded in the helmet attached to the F-thirty five fighter jets. I know I have discussed the F-thirty five program various times before, But it's not only a key element of our current military business.

It is a good example of a successful military program and how it develops. We move through the early design cycles to meet the very demanding specifications in F-thirty five. Then we work through the low rate initial production stage. We now went on to volume production where we are today. The global demand for the F-thirty five fighter jet will keep on increasing.

And we look at this program as one of our core military business and we expect to be shipping into this program for years to come. We're working through the same process with the family of weapon sites program. As discussed, the FWS I program is now in production and shipping. The FWS Crew program in the mid stage of development and we expect it to move into production in 2020. Our newest program is developing the space systems for armored vehicles.

This is a brand new design win and we will reach full production in eighteen months or so. As we continue to pursue other military programs, our experience in working with the defense department is invaluable and should benefit coping as the benefit as the defense budgets increase. In addition, our company's long experience with defense system companies, our excellent track record with them is also a critical factor in our leadership in this industry. For example, in two consecutive years, we received top platinum award from Collins Aerospace who makes the F-thirty five helmets, which are now which does this high award, the platinum award only awarded to less than 2% of their suppliers. Our consistent delivery performance provide confidence to our customers looking for reliable supplier of innovative and recognized display products.

So while we expand our military footprint and benefit from the acceleration of enterprise market, especially with Kopin's position as the leading supplier of display to this market. We're realistic that business model needs to match the current state of the market. In first quarter, we commenced a strategic realignment of the company. This included steps to review all our operations and to consolidate programs and reduce costs wherever possible. After years of development and investment, most of our progress are now ready for commercialization.

We're being very thoughtful and deliberate as we decide which programs will move to monetization. In the first quarter, we took some financial charges as part of this strategy. We continue to review elements of our operating structure over the coming months and expect to make additional steps including further reductions to our expense structure throughout this year. We also raised approximately $8,000,000 net in Q to swing our balance sheet and provide additional financial flexibility as we undertake this review of our business. So in summary, we are off to a very good start of the year.

We're growing our core business by taking careful steps in reviewing our operations and monetizing our technology and products so as to successfully position coping for the long term. Now I'll turn the call to Rich.

Speaker 0

Thank you, John. For the quarter, total revenues for the 2019 were $5,500,000 compared with $5,700,000 for the 2018. While revenues for Q1 were essentially flat, the makeup of revenue changed year over year. In the 2018, our subsidiary Envis contributed approximately $1,000,000 of revenues for programs that were ending. In the 2019, industrial wearable revenues and military R and D revenues increased approximately $1,000,000 I would also remind listeners that under ASC six zero six revenue standards, revenue recognition for our military programs, specifically FWS and F-thirty five is not tied to shipments, but a model that includes the levels of width and finished goods inventory.

Cost of goods sold for the 2019 was $5,900,000 or 127 percent of product revenues compared with $4,100,000 or 81% for the first quarter of last year. Including cost of product revenues for Q1 twenty nineteen is $1,200,000 of write off of excess inventory. Including the write off, as John noted, was a charge for older versions of Solos. R and D expense in the 2019 was $5,000,000 compared with $4,500,000 in the 2018. Included in R and D for the quarter ended March 3039 is approximately $500,000 of material associated with development programs, which are being curtailed as part of the program John discussed to consolidate programs.

SG and A expenses were $6,300,000 in the first quarter twenty nineteen compared to $6,900,000 in the 2018, primarily due to a decrease in compensation expense including stock based compensation and amortization of intangible assets. Other income expense was an expense of approximately $300,000 in the 2019 compared with 4,300,000.0 for the 2018. During the three months ended March 3039 and March 3138, we recorded about $200,000 foreign currency gains. Other income for the period in 2018 reflects a gain of $2,900,000 from the transfer of intellectual property in exchange for equity interest in an investment along with $1,000,000 of insurance proceeds. Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately 11,300,000.0 or $0.15 per share compared with a net loss of $5,500,000 or $08 per share for the 2018.

First quarter amounts for depreciation and stock compensation expense are attached to a table to the Q1 press release. As previously announced during the quarter, we completed the sale of approximately 8,000,000 shares of our stock for approximately $8,800,000 of gross proceeds. Our weighted average shares for the balance of the year will be approximately 83,000,000. In addition, in Q1 twenty nineteen, we adopted ASC eight forty two, which is the new lease recognition standard. It resulted in lease assets and related liabilities being put on the balance sheet and there was a de minimis P and L impact.

The amounts discussed above are based on our current estimates and listeners should review our Form 10 ks for the first quarter twenty nineteen for any possible changes or additional disclosures. And with that, we'll take questions.

Speaker 2

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Glenn Mattson with Ladenburg Thalmann. Please proceed with your question.

Speaker 3

Hi, good morning. Thanks for taking the questions. Curious, John, good news on the follow on order from the Tier one. I guess perhaps we would have thought there might have been an announcement from that Tier one at this point as far as making an announcement on the product. So I just wonder is do you have any sense of the timing of when they're going to release this?

And just kind of can you give us a better idea of the order flow as it progresses throughout the year?

Speaker 1

Yes. Good morning, Glenn. I mean, we obviously also anxious for the announcement. We do not know exactly why the announcement has been delayed. We certainly do not impact us.

We certainly got this very large or very significantly large order and we actually now expect another order coming in. So it's not impacting us. I still believe the announcement would be quite imminent. So we just pull our horses straight away.

Speaker 3

Okay. And will it be a steady kind of revenue rec over the course of the year on these orders or is there kind of a back half surge or how does that play?

Speaker 1

Well, think I obviously cannot read you describing details, but it will be a more steady order. So it is a real production. Great. Perhaps I may be able to make a comment. I think that certainly our customer is very optimistic about their response from the customers.

Speaker 3

Great. Rich, could you give us an idea of the spend reduction as it plays out the rest of the year given the program you put in place this quarter?

Speaker 0

So we've been running last year we ran about OpEx was between 11,000,000 and $12,000,000 per quarter and we would expect that to continue to drop each quarter throughout the rest of the year.

Speaker 3

Okay, great. I'll get back in the queue. Thanks guys.

Speaker 2

Thank you. Our next question comes from the line of Jeff Bernstein with Cowen. Please proceed with your question.

Speaker 4

Hi, good morning guys. So just on the AR orders, I think you had talked about 100,000 units this year. Are we still on track for that? Is there upside to that, downside to that?

Speaker 0

So right now, yes, as John said in his prepared remarks, last year we did around 30,000 units and we expect that to triple. So that's the 90,000, 100,000 number that you just referenced. And as John said in his prepared remarks, the forecasts from our customers have been very bullish. You've seen some of our customers like RealWear have had a number of significant announcements with guys like Shell, Colgate Palmolive, etcetera. And as John just said, the Tier one customer has been sampling their product for a period of time and the response has been very strong.

So we're hoping our numbers are conservative.

Speaker 4

Okay, great. And the Tier one customer, are they currently making an AR unit with two of your displays or is there more than one model and one has two of your displays in it?

Speaker 1

I think I can only answer it this way. The two the customer we're talking about using one of our display in each system.

Speaker 4

Got you. Okay. And then I'm just wondering the GoldenEye Infinity design, has that ever gotten any traction or what are the plans for that?

Speaker 1

As we've discussed with still sampling it and the initial response from some of the customers we're talking to intimately are positive. Whole enterprise unit enterprise market is getting pretty hot. Everybody now understand the value of the systems to them. So it's no longer a curiosity. It is a booming business.

Speaker 4

Got you. Okay, great. And then you mentioned you wrote down inventory of old design solos implying that there's a new design of solos. What's different there, etcetera?

Speaker 1

Just a very good question. Unfortunately, cannot review the new design, which obviously we're very excited about.

Speaker 4

Okay. So that's a new product that's coming?

Speaker 1

It's interesting product, yes.

Speaker 4

Okay. And then I believe on the military side, you guys were engaged with LBIT on like a multi mission helmet for various aircraft. Any progress there? What can you tell us about that?

Speaker 0

Yes, that's the common helmet program and we're in development with Elbit and it's on track as far as we know.

Speaker 1

I think add, think we may have already announced we completed design wins, but yes, we're doing well with the program right now.

Speaker 4

Okay. And then lastly, you talked about some new technology to be applied in the OLED space. Did you say you thought that you could be delivering that mid next year or that mid this year? Next

Speaker 1

year in production quality. I think the key matter is how do you take those very advanced technology into a production kind of readiness. It is a very long way, but we are very optimistic sometime next year those very innovative design can be pre to production.

Speaker 4

And is that Copen technology or is that like a new material like gallium nitride or something? What's give us a little more information on that?

Speaker 1

It's something that we will bring it to I think we will try to bring it to production. So my feeling is like everything else is you always rely on the previous one. So the technology is actually making real rapid improvement right now. So we just see. We're still in the part of it.

We're a You're big part of a big part of it.

Speaker 4

Okay. And then lastly, you had talked about a OLED design for a Tier one for BOE and how has that progressed?

Speaker 1

Can you repeat the question, Jeff? I just want to make sure that I got the right Yes.

Speaker 4

At a conference recently, you talked about having an OLED design from a Tier one to be made at the BOE factory and I just wanted to get an update on that.

Speaker 1

Yes. Okay. That was a design. We have a program with a Tier one consumer product company and that's going on track. That's all I can comment on.

They are I would say they are secretive program, yes.

Speaker 4

Okay, great. Thanks so much.

Speaker 2

Thank you. Our next question comes from the line of Matthew Galinka with National Securities. Please proceed with your question.

Speaker 5

Hey, good morning. Thanks for taking my question. I guess firstly, did the $05,000,000 chunk of R and D expense that relates to curtail programs, is that a onetime charge? Or is that something that's going to be recurring at all?

Speaker 0

So the size and the amount is unusual for us. I'm always reluctant to say it's a onetime charge. We're always evaluating programs on a continuous basis and inventory levels. And so every quarter, there's some adjustment for obsolete inventory of some sort. But in the R and D sector for that size, it's very unusual amount and not something that we would expect to typically reoccur.

Speaker 5

Okay. Fair enough. On the potential refresh of your consumer product, are there going to be any changes to how you bring the product to market or any potential for increased investment in your go to market spend on that over the course of 2019 as you're kind of going through this cost realignment process?

Speaker 1

Yes, I'll make a comment there. I think, Matt, as I said in my remarks earlier, we're looking for all aspects of our business and deciding where we will consolidate our programs and a different commercialization strategy right now. So we really consider a whole bunch of different strategies and at this point, I really don't think we can comment any further today.

Speaker 5

Got it. Okay. Maybe just one more. You highlighted and I think you have in the past, you've talked about five gs as kind of an enabler for Doctor. Can you talk about that in maybe a little bit more depth?

And maybe particularly relating it to you're talking about bringing kind of OLED volumes up maybe 2020 timeframe to sort of enable that market from an improved supply chain perspective. How does five gs come in and enable it? And what do you see the timeframe for that?

Speaker 1

Well, it's a good question, Matt. I think we had a special workshop actually discussions at the CES meeting a few months ago on five gs. Five gs actually allows I mean, as you know, five gs can go as much as 10 times faster than four gs. It really allows mobile, mobility allows everything that you could do at desktop or kind of a stationary environment will be extremely mobile. And that's where we the personal wearable becomes very strong.

And five gs in some way also can allow you to have extremely fast streaming, so all the sports, TV and all the events can be streamed to you at the moment, so it is as well you know driverless cars and everything. So they will be creating business that you are not probably cannot dream about today. But what regards what is, because it's five times faster wireless, it is more and more mobile and that's where more and more wearable. So the key matter is what do you really need to do it. I think the wearable case, key thing is voice is going to be important and so display, a small micro display is very critical and coping is a very strong in both.

Speaker 5

Got it. Thank you.

Speaker 2

Thank you. Our next question comes from the line of Pat Metcalfe with Newbridge Securities. Please proceed with your question.

Speaker 6

Hey, good morning, guys.

Speaker 1

Morning. Good Good morning.

Speaker 6

So this is the first I heard of a new SOLOS coming out. Is the new SOLOS going to be more specific to the cycling market? Or is it going to be broader to the consumer market or to the enterprise market? Can you give us a little detail on how you're going to go about that?

Speaker 1

We really can't describe too much about it as the plan is being formulated. It is more tailored to general consumer market instead of cyclists.

Speaker 6

Okay, great. And then being that you're cutting costs drastically, I would assume that you're going to go to market maybe with a different strategy than you did SOLAS1?

Speaker 1

It is fair to assume that.

Speaker 6

Okay, great. And then John, I got the chance to see you host the MIT Media Labs in January to show up. You had a company by the name of Google presenting that actually highlighted customers like Boeing, G, DHL on the screen. They were the first one to bring out a device. The follow on order that you received, is it much bigger than the 5,000 units you received in Q3 of last year?

Speaker 1

Yes.

Speaker 6

Okay, great. And then I saw this past week or a couple of weeks, Qualcomm come out with a PR that they got 10,000 units of RealWear's units, HMT-one, ordered for them. And at that point in time, it just struck me as very odd because when I listened to you guys talk about your Whisper Chip technology, you say you win all the bake offs against Qualcomm, Maxim and others. However, these purchasing managers never get fired going with Qualcomm. So if Qualcomm is supporting RealWear's HMT-one, which I really consider the core competency of the HMT-one is Whisper because it works at decibels that other technologies, voice technologies do not work at.

To me, Qualcomm supporting Whisper technology. Can you give me some feedback on that?

Speaker 1

I mean, Qualcomm makes processes and processes go to HM1. So and we always use Qualcomm processor in our design. Remember the grill work is our license our headset and license more than just Whisper, they will license our display module. They license the whole design, the whole design of the HMT-one is our design. We license them, we get royalties on it.

So and you have the Qualcomm chip inside from day one.

Speaker 6

Well, my point is Whisper is more of a the Whisper chip is more of a software type of product than a hardware product. So I'm thinking you had a great relationship with Qualcomm with the HBT design in there, in the early 2000s, late '90s. And I'm thinking Qualcomm is looking at the Whisper chip, possibly to license that. Is that a possibility that someone like Qualcomm could license Whisper or is that farfetched like it doesn't match?

Speaker 1

Well, I think you asked a generic question about is the Whisper technology, which is of course technology, you can go into a chip, you can go to a processor, you can be licensed and you could be further developed into other products. Our answer is definitely true in all the aspects of it. We're looking at all aspects of it. It is a very wonderful technology. I think people will appreciate more and more of it as voice become more and more important.

Speaker 6

Okay, great. And have you made any progress on getting someone to license that? Do you have any list of potential licensees coming forward? Or is this something that's going to be years away?

Speaker 1

I don't know whether we have patients for years away, but we obviously are working on many aspects of it. So as I said earlier, we're looking at a whole bunch of different strategy at this point and I cannot comment and defer the comment on this, but just stay tuned.

Speaker 6

Okay. Well, and then my last question is surrounding RealWear. Okay. I noticed RealWear has applied for about 11 patents, all software related, actually more artificial intelligence AI intended. And I know we have a user interface that we licensed to RealWear.

So if they start applying more layers of software on that user interface, like maybe make it a software platform where they can license it out to other players, okay, even a Qualcomm. Do we still get royalties if that was to happen, a scenario like that was to happen?

Speaker 1

Well, that part is really go to IP now. Of course, how much the IP is embedded in the previous IP. That part is we will leave it to IP lawyers. But suffice to say, we have some of their fundamental patents.

Speaker 6

Okay, great. And then lastly, RealWear licenses, GoldenEye, why not have RealWear license SOLOS for the enterprise, very cool design, you can dummy it up where it could be used in the outdoor type of environment. And then the Golden Eye Infinity, why not license that to them as well and help boost our revenues very quickly with less spend? Is that a possibility?

Speaker 1

Again, it boils down to what we just said. We're looking at all aspects of our strategy at this point, yes.

Speaker 6

Okay. Thank you. I hope we see something sooner than later.

Speaker 1

Okay. Thank you.

Speaker 2

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Speaker 1

Well, thank you for joining us this morning. Also want to remind everybody we have an annual meeting coming up on May 21. I hope to see you guys at the meeting as well as please vote for us. Thank you.

Speaker 2

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.