Kopin - Earnings Call - Q1 2020

Transcript

Speaker 0

day, and welcome to the Kopin Corporation First Quarter twenty twenty Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Richard Snyder, Chief Financial Officer. Please go ahead, sir.

Speaker 1

Thank you, operator. 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 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, 05/05/2020, 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 the call over to John.

Speaker 2

Good morning and thank you for joining us to discuss our first quarter results. Given the unprecedented circumstances we are facing, I want to start by expressing my hope that all of you and your families are staying safe and well. Before I discuss our strong start to the year, I first want to review our response to COVID-nineteen and how it has impacted our business. Like all companies in March we quickly shifted our employees to remote work where possible. Our teams adjust quickly and that structure has worked well.

But as a defense related company, we have many employees considered essential and they have continued to work every day. I cannot tell you how grateful I am to this group, their positive attitude and their commitment to see propane succeed. While our AMCLCD products are making a class 10 clean room which provides an inherent level of safety and protection with masks, gloves and gowns. We did take extra precautions. The COVID team has rallied and responsible for our strong first quarter and the momentum we have carried into second quarter.

We have had a very good start to the year with demand holding steady. Our suppliers keep us in stock with only a few minor bumps and interruptions. Our dedicated employees keeping the business on track and output flowing. We are very pleased with the results. In particular, our defense business is strong with product revenues increasing 144%.

In the enterprise sector, while some applications area has slowed recently, others have remained strong particularly in the public safety. Our total revenue increased about 42% compared with the 2019. In addition, we have reduced our R and D and SG and A expenses by 49% and continue to look at ways to streamline our cost structure. We expect our momentum to continue in the second quarter barring any surprises from either customers or suppliers or unless there is some unexpected change in the circumstances with our workforce related to the virus. We continue to shift under our two defense production programs, the FWS I program and also the F-thirty five Joint Strike Fighter program.

We recently announced another for our order for the F-thirty five program which now includes shipments into 2021. The 500 F-thirty five jet was delivered in the past March with the DoD expected to purchase a minimum of 2,400 jets over the life cycle of the program. And there are also international markets for the F-thirty five. U. S.

Airlines expect to purchase hundreds of Jacks in the coming year. So it is still really early days in Coping's monetization of F-thirty five opportunity. We also see continued progress on our defense related development program where we have more than 10 programs programs in various stages of development. While some of them may not contribute significantly to prior revenues for the next year or two, In fact, not all will reach production after moving through development. It is by far the strongest defense program portfolio in our history.

And obviously our interest here is for the program to evolve into full scale production programs that utilize our technologies. In almost all these programs our microdisplays are the only displays chosen. As previously mentioned, we have streamlined our internal R and D activities to focus on our core microdisplay business. In particular, our current R and D investments are primarily focused on our organic light e beam diode or OLED in short displays. At the Consumer Electronics Show in past January, we demonstrated the world's first monochrome double stack OLED which emits more than 20,000 nits.

We also demonstrate our early samples of the world's first full color 2.6, 1.3 inches diagonal OLED displays using our proprietary double stack technology. In addition, in the first quarter we received our first production order for our OLED backplane wafers, which we expect to begin shipping in 2020. An interesting effect of the COVID-nineteen situation, wearable headset customers see their products being used in hospitals and in areas of high infection by medical and public safety responders. Enterprises are accelerating their use of ARR as companies looking for ways to train people and work collaboratively in a socially distant environment. Remote collaboration and remote training are all gaining acceptance.

These applications are demonstrating the power of technology in allowing collaborative responses by minimizing the number of people on-site. The global pandemic is driving increased interest in AR and VR technology for all customer segments, defense, enterprise and customers. Interest for a number of customers in this area has remained very strong for our microdisplay, particularly for our micro OLED displays. So it's not clear at this time how quickly this customer engagements will convert to product levels. While we're experiencing unusual times to say this, we believe our strong defense business, OLED microdisplay development activities and continued emphasis on efficiently managing our cost structure to carry our momentum into the second quarter.

Now I'll return the call to Bridge.

Speaker 1

Thank you, John. Turning to our financial results. Total revenues for the 2020 were $7,900,000 compared with $5,500,000 for the 2019, an increase of 42%. Cost of goods sold for the 2020 was $5,600,000 or 95% of product revenues compared with $5,900,000 or 127% for the first quarter of last year. The decrease in cost of product revenues for the three months ended 03/28/2020 as compared to three months ended March 3039 was primarily due to improved manufacturing yields and higher volumes, which reduced fixed cost per unit at our U.

S. Plant, partially offset by lower manufacturing efficiencies at our Scotland plant caused by some supply issues. R and D expenses in the 2020 were $2,300,000 compared with $5,000,000 in the 2019. The lower R and D costs for the 2020 as compared to the prior year was a result of curtailment of certain programs. SG and A expenses were $3,400,000 in the 2020 compared to $6,300,000 in the 2019.

The decrease was primarily due to a decrease compensation expenses, including stock based compensation, bad debt expense, professional fees, information technology expenses and the accretion of the Envis continued consideration. Other income expense was expense of approximately $86,000 for the 2020 compared with $300,000 of income for the 2019. During the three months ended 03/28/2020, we recorded $200,000 of foreign currency losses as compared to $200,000 of foreign currency gains for the three months ended March 3039. Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $3,600,000 or $04 per share compared with a net loss of $11,300,000 or fifteen percent $0.15 per share in the 2019, a 68% improvement. Cash and marketable securities were approximately $17,600,000 at 03/28/2020, compared with 21,800,000.0 at December 2839.

Subsequent to the end of the quarter, COVID received a 2,100,000.0 payment protection plan loan under the CARES Act, which is not included in the 17,600,000.0 cash position as of March 2020. We currently do not have plans on raising additional capital. First quarter amounts of depreciation and stock compensation are attached in the table to the Q1 press release. The amounts discussed above are based on current estimates and listeners should review our Form 10 Q for the 2020 for any possible changes and additional disclosures. Finally, with regard to the NASDAQ minimum listing requirements, we have until December 2020 to regain compliance.

Operator, we'll now take calls.

Speaker 0

Thank you. We'll take our first question from Glenn Vattennisone with Ladenburg Thalmann.

Speaker 3

I'm curious on the enterprise side, just kind of a guess a couple of things. First of all, is the thermal imaging technology that you have, can that be there application for that as far as judging people at maybe high temperatures from a distance? And is there any possibility for an uptake in that? And then secondly, I'm curious about in general the fire and safety in the first responders part of the business. I know that had a big portion of the Q4 revenue and just curious as to the breakdown between that versus some of the more industrial applications in the current quarter?

Speaker 1

So we had talked to some of our customers and there are folks experimenting with the thermal applications as kind of a first line of defense when people are coming into a building to identify their temperatures and so on and so forth. I don't know that it was actually implemented that, but they have talked about that extensively. Sorry, Matt, what was the second piece of the question?

Speaker 3

Yes, sure. Just on the fire first responders for firemen, people like that, just the breakdown between that versus the more industrial applications on the enterprise side.

Speaker 1

So in both Q4 of last year and Q1 of this year, we had a significant increase in volume in that application. As we'll say in the 10 Q tomorrow when we file it we anticipate filing it, we don't expect the run rate that we had in Q1 to continue through the year. I don't know if it was just them filling some of the supply chain or what have you, but it was a very good quarter for that application.

Speaker 3

Okay, thanks. And curious on gross margin, it was down a little sequentially. I guess that's more as the business gets a little more heavily weighted towards defense. Can you talk about outlook for gross margin for the rest of the year?

Speaker 1

Yes. We continue to see yield improvement during the course of the year and hopefully higher volumes and all of that will result in improved gross margin. The product revenues were slightly down in the quarter from sequentially, which is why the gross margin was down slightly sequentially. It's the fixed cost per unit aspect of it.

Speaker 3

Right, great. And then just last on sales and marketing, do you expect that this level is kind of a baseline from here? Do you expect it to grow significantly as you try and penetrate more enterprise applications, things like that?

Speaker 1

Yes. That 3.8 to $4,000,000 is kind of the baseline that we're shooting for. The wildcard in there is only stock compensation, which can be affected by the stock price, obviously. But on the noncash on a cash basis, I guess, we would expect it to be in that type of level.

Speaker 3

Okay. That's it for me. Thanks.

Speaker 0

And it appears we have no further questions at this time. I'd like to turn the conference back to Doctor. John Fan for any additional or closing remarks.

Speaker 2

Thank you for joining us this morning and I hope to talk to you in the next quarter. Bye bye.

Speaker 0

And that does conclude today's conference. We thank you for your participation. You may now disconnect.