Kopin - Earnings Call - Q2 2018

Transcript

Speaker 0

Greetings, and welcome to Copeland Corporation Second Quarter 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, Rich Nader, CFO.

Thank you.

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 markets. I will go through the second quarter twenty eighteen results at a high level. John will conclude our prepared remarks, and then we'll be happy to take the questions. I would like to remind everyone that during today's call, place on Monday, 08/06/2018, you 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

Thank you for joining us this morning to review our continued progress as we maintain our leadership position in providing display and optics to the companies driving the adoption of AR and VR, especially across military, enterprise and industrial applications. On the consumer side, we're driving the growth ourselves with the commercialization of Solos glasses this quarter. In this way, Solos, our smart glasses for fitness, became available for purchase on our website. As we have discussed, this new generation of solos includes the many feedbacks that we received from users who participate in our Kickstarter campaign last year as well as from U. S.

Olympic cyclists who partnered with us. With the new feature incorporated in this Solos has been described as the most advanced AR smart glasses available for sports and fitness. Solos offer many unique capabilities that appeal to athletes who cycle or ride. The ability to receive critical performance information on a display that makes it look like the data is floating in front of them. A group communication feature that can communicate with friends and teammates on group drive or runs and the ability to listen to music without the distraction of headphones, utilizing our innovative audio projection speakers embedded in the solos.

Coping pupil display modules and whisper chip voice extraction technology make this all possible. Currently, Solos is available at our website soloswearables.com. We're also taking steps to establish distribution channels that have entered into agreements with a number of specialized retailers such as Backcountry, which is a widely known online fitness retailer. We are also working with beta, a new concern in retailing where customers can try and purchase new technology products. Solos will be available in selected locations in beta locations.

We're also raising visibility for Solos by partnering with active ethics groups. In addition to U. S. Cycling, we recently announced that Solos is the official smart glasses partner of IRONMAN, which hosts enduring sports events around the globe. We continue to identify other organizations that can appreciate the unique capabilities of Solos and can help us grow visibility and demand.

In the second quarter, we also introduced our second revolutionary product, the GoldenEye Infinity, targeted for industrial workers. GoldenEye Infinity SmartScreen is the first wearable device that supports Android and Windows 10 based computer solutions. Specifically designed to leverage off the investments already made by large enterprise industrial corporations, Total Eye Infinity added a smart headwarmed display and hands free voice control to smartphones and mini PCs for improved workers' productivity. Gonai Infinity combines Kopi's industrial industry leading display and whisper voice extraction technologies to provide a smart screen that's easily controlled by head gesture and voice even under very noisy working environment. GoLine Infinite does not require any touch, tapping or swiping.

User simply controlled by voice. Kopi's innovative pattern pending user interface software enables Go9 Infinity to work with existing applications of home devices right off the back of the box. No need to create product specific software. The CodeLine Infinity connects to a worker's smartphone or mini PC via cable to make the headset lighter and less costly. We have very strong interest for many large industrial corporations, especially in the manufacturing and repair segments.

Go nine Infinity is expected to begin pilot tests in September with Fortune 500 companies and very added reseller channels, and we expect sales starting in the 2019. Similar to the past few quarters, our military business represented the majority of our current revenues. We're encouraged by the recent joint announcement by the Defense Department and Lockheed Martin about a new agreement for 141 F-thirty five fighter jets. With Coping as the sole source providing displays to pipe helmets, the F-thirty five is a $100,000,000 plus million revenue opportunity for CoBank over multiple years. During this quarter, we became fully qualified for FWSI program.

This is quite a challenging engineering accomplishment. When we are manufacturing a viewing assembly for thermal imaging rifle site that clips directly in front of the The streaming type of viewing assembly requires a pointing accuracy to reach and maintain within less than a single pistol during operation. But the the light of the testing and qualifications have finally been completed, and we have now reached received the first production order. The units are expected to start shipping this October, which is several months later than we had planned at the beginning of this year.

Yet this has not changed the size of the opportunity, a over $100,000,000 revenue product for multi years. Similar to its predecessor, TWS program. Finally, in Q2, we commenced development work for the armored vehicle program, which we were recently awarded. This could become another $100,000,000 program. Our objective is to have multiple production orders for various different defense segments, reducing the unevenness of revenue from a single large program.

We continue to hear very positive projections from our partners who supply enterprise customers. The AI inflection point does seem to be taking place, which benefits not only our component business, but also the opportunity for our Golden I Infinity. We're seeing strong follow-up orders from partners such as Vuzix and RealWeb and look for that to continue for the balance of the year. Finally, we see good demand for the OLED two ks x two ks display. Many of these displays are going to tax units for global companies.

So we're encouraged by the potential demand as this product go from test to production. With the BOE, all the factory constructions on track and to be completed later on this year, and their plan for pilot production is to begin next year. We believe we'll be able to fulfill the coming demand for OLED displays. While we are making good progress in this quarter in transitioning from development to commercialization of Solos and Golar Infinity. It is frustrating that the delays in the military business will slow our plan for rapid revenue growth in the second half of this year.

We now expect revenue to be between 30,000,000 to $35,000,000 about $5,000,000 less than we earlier projected for this year. However, the orders are now into production. Just that the ramping up schedule is a bit later than planned. As we have discussed many times, the development of a new technology or new product is often never as fast or as linear as hoped. We all I'd also like to stress, we also recognize the need to conserve our financial resources to match the schedule for the time line of the emergence of AR and VR industries.

The good news is, as we move to next year, our development roadmap will slow considerably, so higher expenses will also be reduced. So with that, let's turn the call to Rich to review the financial details of this quarter.

Speaker 1

Thank you, John. Beginning with the results for the 2018, total revenues were $5,900,000 compared with $5,900,000 for the 2017. Our industrial revenues were impacted by lower demand from customers who purchased our products for three d metrology applications. This decrease was offset by an increase in sale of our products for consumer applications. Cost of sales for the second quarter was 78% of product revenues compared with 83% of second quarter of last year.

Gross margins increased slightly due to higher absorption of overhead costs. R and D expenses in the 2018 was $4,500,000 compared with $4,700,000 in the 2017, essentially flat. SG and A expenses were $6,900,000 in the 2018 compared with $5,200,000 in the 2017. SG and A increased for the three months ended June 30 as compared to the three months ended 07/01/2017, primarily due to an increase in compensation expenses, including stock based compensation, product promotion expenses and information technology expenses, partially offset by consultant usage and patent maintenance fees. Other income expenses was expense of $52,000 in the 2018 as compared with income of approximately $800,000 in the 1837.

The 2018 includes approximately 2 and $36 of foreign currency losses as compared with approximately $556,000 of foreign currency gains in the 2017. Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $9,200,000 or $0.13 per share compared with a loss of $7,300,000 or $0.10 per share for the 2017. Second quarter amounts of depreciation and stock compensation are attached in the table to the Q2 press release. Turning to 2018, we continue to expect 2018 revenues to be in the range of 30,000,000 to 35,000,000 We believe operating expenses will be largely flat compared with 2017. We concluded the quarter with approximately $53,000,000 of cash, marketable securities and no long term debt.

The amounts I have just discussed are our current estimates, so I would remind our listeners to review our Form 10 ks for the second quarter June 3038, when final amounts are filed. With that, operator, we'll take questions.

Speaker 0

Our first question is Patrick Betcalf with Newbridge. Please proceed.

Speaker 3

Hey, good morning, guys.

Speaker 2

Good morning.

Speaker 3

Hello, John. Can you give me an update on the Lenovo joint venture, the licensing relationship you have there on AR, VR and possibly MR with that relationship?

Speaker 2

The question is the relationship with Lenovo and the joint venture. The relationship is going strong. They are coming out with the AR glass, not just one. There are several AR glasses for different industries. I think they also announced also for a security for police security also a glass.

So, we are providing them not only display, also the whisper chip.

Speaker 3

Okay. Will that will that relationship be a licensing relationship?

Speaker 2

It is a licensing relationship in for equities, yes. Actually have equity in the company, yes, over 10%, yes.

Speaker 3

Okay. And then your other Chinese licensing agreement with PICO Interactive,

Speaker 2

where does that stand? And when

Speaker 3

do you see the product coming to market?

Speaker 2

That particular product, they're still developing it. So I do not know exactly when they are ready to introduce it.

Speaker 3

Okay. And then lastly, how is Google Glass holding up in the marketplace? And do you see a chance where they'll be ordering from you again? And then you you talked about a new design win in the last conference call. How's that setting up?

Speaker 2

Yes. The question for Patrick is Google Glass. Google Glass has announced earlier this year, but they have a good response on their Google Glass. So the rest of the situation, I'm afraid that you should ask Google.

Speaker 3

Okay. And then the new design win, any traction there?

Speaker 2

There's a lot of activities on AR Glass, especially AR Glass. And I think the inflection point, as we now notice, is is is is actually arriving. We're seeing a much stronger demand for our components, both especially our display and optics for the coming year. So I think in our recent presentations, I think by Rich, he projected significant increase in the AR glass demand. So for now, for our existing customers, but for some new customers coming online.

Speaker 3

Okay, great. And then WhisperChip, I know you have 30 plus patents surrounding WhisperChip, both far field, near field, but we don't hear anything about WhisperChip other than the product being in Solos now in the new GoldenEye. Can you give us an idea of how your design wins outside of your current, you know, your in house products is looking like? Is there any traction on the WhisperChip possibly going into a pair of earphones or something else?

Speaker 2

Yeah. The question is about Whisper chip. It's a very good question. But the technology is so new. As I say, we have over 30 patents issued or pending.

So what we found out is that people look at this technology because it's not noise cancellation. It's a voice extraction. There's no such thing in the market yet. So just looking at it, no. I mean, so we decided we have we're the pioneer, the applications that show the advantage.

Solos that go to our our, in fact, devices show the advantage. As I say, go to I Infinity, especially, is totally voice control. In addition to that, our partners, for instance, RealWear and go and the the normal joint venture are incorporating Whisper. So pretty soon, next year, you will see a whole bunch of devices using Whisper. And I think this by themselves will be a huge demo and promoters for our new technology.

Speaker 3

Okay. Great. So you feel very comfortable, confident that you have the right products, the right road map to have a successful 2019. This is just a one quarter blip with the military being pushed out. But as far as the commercialization of AR smart glasses, it looks to be right on track for a strong second half.

Speaker 2

Yes. Second half and the year beyond. I think we have been planning for that step to instead of I remember a few years ago, we had a strong revenue growth from TWS, the earlier Assumed Gunsight business. And I think that we told us the best way is to have multiple sources of income. So in the military, we have multiple programs.

Now the f w s, which is now the follow-up for g w s, We have the Armor vehicle, and we have the F-thirty five ramping up. So we have multiple sources that's dampening out the unevenness. In addition to that, not only our component business are growing, We are providing both solos and go online next year for the next year growth. So next year, most of almost all the development programs are finishing up, products are into the market and provide multiple source of revenue. So we look towards next year to still be optimistically.

Speaker 3

Okay, great. And then John, I see a lot of talk on mixed reality and waveguide sockets out there.

Speaker 2

Yeah. Mixed reality is a very interesting thing. It's it it all becomes very clear now. It's at least clear that mixed reality sits in the middle of AR. I'm not gonna give a talk in Asia in September.

AR is augmented reality. It's allow people to make people more productive, more informative have information on the fingertips. And VR is to really give you a new dream world, fantasy world, another universe to you. MRs is somewhere in the middle. It's more for good simulations, designs, and it it is in between, which is very good for enterprise.

So I I think people discover that technology may be a little bit easier than MRVR, and I think that might be the second wave after AR has come out at the MR for enterprise industrial app applications. And then we are They all come in stages, displays and optics, as well as voice are all very needed in those devices.

Speaker 0

Our next as a reminder, if you would like to ask a question, please press star one on your telephone keypad. We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.

Speaker 2

Thank you joining us this quarter and with our CEO next quarter. Thank you.

Speaker 0

This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.