Kopin - Earnings Call - Q2 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 second 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 Thursday, 08/08/2019, 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 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 1

Thank you, Richard. Good morning. I would like to begin by giving you a brief summary of the strategic and the cooperation changes we have undertaken. And because the importance of these moves, we will then expand on each of these topics. Over the past month, the management team working closely with our Board of Directors has taken a very thoughtful approach in analyzing and evaluating every aspect of our business.

We weighted the technology expertise, session leadership leadership and competitive landscape as well as the maturity of the relevant AR and VR markets. Our analysis confirms that Koping's greatest asset is our ability to develop innovative technology with a superior engineering capabilities to turn innovations into high quality component products. We have used this innovation and engineering skill over the past few years in developing advanced concept wearable systems for both enterprise and consumer markets. Leveraging this concept systems, we were uniquely positioned to understand the needs of the market. This led to the development of industry leading micro displays such as our product, which is now included recently in the new Google Glass.

Our technology also helped accelerate the growth of enterprise market, which we believe is now the fastest growing application for AR. Much of this momentum has come through RealWear, an early Yahya coping as customer, which is recognized as one of the leaders in the emerging market. In fact, Kopin's early generation GoldenEye technology was key to RealWear's position as we licensed GoldEye technology to RealWear for an equity position and ongoing royalty stream as well as for component sales. This model works so well that we have long looked for to replicate this. One of the strategic steps put in place this quarter is a result of our goal to repeat our success with RealWear, along with reducing our cost structure while strengthening our precision microdisplay.

Our strategy and focused mission is to become the leading microdisplay component and IP company following the various successful examples of great semiconductor IC companies. Let me outline four key parts of our strategy. First, our focus will be on our core LCD display module and subsystem products for military, enterprise and public safety customers as well as developing our Lightning OLED microdisplay products. Our unique product portfolio was specifically developed to address the requirements of the military enterprise segments as well as also fulfilling the demand for the emerging consumer applications for AR and VR. Second, we have entered agreement with RealWear to commercialize our Golden Infinity product.

Also, we anticipate reaching an agreement shortly that will add our direct participation in the consumer system business. Third, we have streamlined operational elements of our core display business with corresponding reductions in expenses. Finally, with all these changes outlined including our expected Solos transaction, by the '3, we anticipate reducing our total company payroll expenses by about 30% and eliminate significant product development costs. COVID-nineteen will still benefit from our prior investments in the wearable system technology and products as we focus more tightly on our core microdisplay business. Let's look at each of the elements of the plan in more detail.

Our LCD business currently serves many military, enterprise and consumer customers, which designed our components into their finished products. Our military business comprised of both display components and what we call HLA or higher level assemblies, which includes sophisticated electronics and ruggedized hardware design elements. The HLA provides significant value to our military customers as well as some of enterprise customers. Currently, our military revenues reflect investment in key military programs such as FWS I and F-thirty five Joint Strike Fighter. We expect revenue from our military programs to continue increasing.

In addition, we're making excellent progress in developing programs such as the FWS Crew, Serve and Armored Vehicle. In the enterprise area, we are seeing a good growth for our microdisplay. We have long discussed that enterprise market for AR is developing faster than the consumer market, which is reflected in our success with partners such as RealWear. RealWear sells to Fortune 500 companies across industries, including Pepsi Cola, Georgia Pacific, Cisco, Hillebaker and Colgate to name only a few. Of course, we have talked about our success in Google Glass, which is deploying their glass in many enterprise applications.

The consumer application for AR, however, has been slow to develop. But just recently, we're seeing some series of announcements. In addition to our own cycle activities solutions, there are other they are now displaced using swimming goggles and motorcycle helmets for just a few examples. Coping dominates this area of the market We continue to invest in development of our Lightning Micro OLED technology, which has unique capabilities that we believe will meet the needs of customers across a range of market applications, military, enterprise and consumer.

As we have described previously, we have a unique fabless business model with our OLED, which give us flexibility as well as and requires less working capital, while enabling us to deliver highly sophisticated OLED displays with key performance advantages. This year we have entered to develop a culture of customers. While Kopin is really the only microdisplay company in the world, that offers three different types of display technologies, transmissive LCDs, reflective LCDs and OLED microdisplay. This is a unique competitive advantage as our customer can work with us no matter what specific display they need for the application of product. As I mentioned earlier, our mission is to be the microdisplay provider to the world.

Regarding commercialized GOLANI Infinity and Solos, we have executed a transaction for our Golden I Infinity product designs and technology with RealWeb. With their success in enterprise AR, they have the experience in developing product with Golden I Infinity technology and infrastructure and relationships in place to maximize the distribution and drive the adoption of the product. In the most recent transaction, Copeland received $3,500,000 We then used the $2,500,000 to invest in RealWear Series B equity. Similar to our first agreement with them, Kopin will sell displays to them for their systems and receive a royalty for each unit sold. Our expectation is that Kopin will benefit as RealWear ramps their sales as well as for any increase in value of RealWear due to their equity position.

RealWear's most recent Series B equity offering is a good indication of the strength of the company. Certain coping employees connected to GoldenEye joined RealWear, which also reduced which therefore reduced our cost structure. We have also engaged in negotiation to spin our solos along with our Whisper technology to a group of employees and outside investors. If the transaction is completed, we expect to receive equity royalties in the new and royalties in the new company in exchange for the transfer intellectual property, inventory and equipment. In addition, Copeland expects to maintain the right to utilize and sublicense the current Whisper audio technology as well as any future enhancements for defense and enterprise applications.

We anticipate this transaction will close by the end of third quarter this year. With this anticipated transaction, we expect to eliminate all spending on solos and whisper technology development. We believe the focus and flexibility available to new companies will allow you to monetize the growth of consumer eyeglasses. Similar, we should emphasize here, similar to RealWear case, we will be providing supplying microdisplay to the company. Turning to more operation issues.

During quarter two, revenue were $9,100,000 which includes $3,500,000 proceeds for commercializing Golden I Infinity. During the quarter, we also announced Google as our Tier one enterprise customer well. We're also very pleased that Kopin is supplying the display for Google Glass two. As you well know, we have also been supplying the Google Glass one. In Q2, the enterprise AI market was a key contributor to our results and will continue to drive growth in the second half of the year.

Our military business continued to develop in line with the plan. The F-thirty five program has been consistent as demand for the plane continue to expand globally. We're confident this is a significant revenue opportunity for us in long term. We currently receive another purchase order for the FWSI. Now we currently have orders of both F-thirty five and FWSI, which will go through the 2020.

On the development side, both FWS, CS and armored vehicle progress continue to be on schedule. In short, working with military takes a long term commitment and our partnership that I have established with U. S. Military for the last thirty years is a very important asset and it will continue to drive our growth. Micro OLED, as I mentioned, will be the coming microdisplays of choice in many AR and VR applications.

We are now the leading micro OLED companies in the world. We currently have two development contracts for their advanced micro OLED display and we'll continue to engage aggressively aggressively with additional customers for other opportunities. To summarize, these strategic changes accomplish a number of our objectives. First, they allow us to monetize the higher investment in IP and project design, while reducing our pending maintenance costs, Partnered with companies to drive the adoptions of ARVR allowing us to benefit from the growth in the industry through component sales, royalties for IPs and our equity position in those pilot positions. Also significantly reduced our cost structure, allowing us to focus time and resources on our cost strength in microdisplay.

With our strategic realignment, Koping is a streamlined, simplified company, laser focused our position as a leading microdisplay supplier to the company's building the next generation ARVR products. We are excited about the opportunities ahead and greatly appreciate your loyalty and support for our next chapter of the journey. Now Rich can provide additional details and then I will take your questions. Thank you, John.

Speaker 0

For the quarter, revenues for the 2019 were $9,100,000 compared with $5,900,000 for the 2018.

Speaker 1

In the 2019,

Speaker 0

we licensed our Golden I Infinity IP to RealWear for $3,500,000 Under the agreement, we will receive future royalties based on sales of products and we will sell them display components. Cost of goods sold for the second quarter twenty nineteen was $5,200,000 or 118% of product revenues compared with $3,500,000 or 78% for the first quarter last year. Included in cost of product revenues for 2019 is a $1,200,000 write off of excess inventory. R and D expenses in the 2019 were $3,300,000 compared with $4,500,000 in the 2018, reflecting some of the expense reductions John previously discussed. SG and A expenses were 5,400,000 in the 2019 compared to $6,900,000

Speaker 1

in the 2018. SG and A

Speaker 0

decreased for the three months ended 2019 as compared to three months ended June 2018, primarily due to a decrease in compensation expenses, including stock based compensation, amortization of intangible assets, marketing expenses, including product promotion and the accretion of Envis earn out, all which were partially offset by an increase in legal expenses. As mentioned in our press release, we made certain expense reductions and anticipate further reductions if we can complete the Solos transaction. To give you a sense of the amount of direct Solos, Whisper and Golden Eye Infinity expenses included in the six month period ended June 29 and the fiscal year ended December 2938 were approximately $4,400,000 and $9,000,000 respectively. Other income expense was approximately $627,000 for the 2019 compared with an expense of approximately $52,000 for the 2018. During the three months ended June 2939 and June 3038, we recorded $200,000 of foreign currency losses.

In the 2019, we recorded a gain on our rear wheel investment of 768,000 Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $4,300,000 or $05 per share compared with a net loss of $9,200,000 or $0.13 per share in the 2018. Second quarter amounts for depreciation and stock compensation expense are attached in the table to the Q2 press release. The amounts discussed above are based on current estimates and listeners should review our Form 10 Q for the 2019 for any possible additional disclosures. And with that, we'll take questions, operator.

Speaker 2

At this time, we will be conducting a question and answer session. Our first question comes from the line of Glenn Madsen with Ladenburg Thalmann. Please proceed with your question.

Speaker 3

Hi, guys. Thanks for taking my question. A lot going on, obviously, for you guys in the quarter. Curious, we haven't heard much. There hasn't been a lot of publicity from Google on the Glass two.

Maybe you can give us some feedback on how you guys think it's doing in the marketplace. And I think last quarter you said that you received an order from Google Glass and then you thought another one would be forthcoming relatively shortly. So perhaps you could update us on whether or not that came through or if you still expect it in the short run?

Speaker 0

So Glenn, you really have to talk to Google about their perception of the success of the product in the market. We don't really talk about our customers' individual products. And we continue to ship to Google.

Speaker 3

Okay. Thanks. And then a question on this deal with RealWear on the Infinity product. As far as how long to market before they release product there? And as far as getting display revenue and royalties and whatnot, is there a lot of development still on their side?

Or is this something they'll turn over pretty quickly?

Speaker 1

The question is about Infinity Golden Line Infinity. Now of course, the introduction of the product will depend on the real schedule. Of course, see a lot of activities on their part and we're seeing growing requirement from them now of their overall products.

Speaker 0

But I think you'd have to talk to RealWear directly for their product launch. I think they put out a press release shortly after we did. Yes, I think they were. So

Speaker 1

again, this is really a situation that belongs to them, yes.

Speaker 3

Okay. And then last for me is just as far as like what your guidance was prior as far as the growth in unit volume and things like that, Goldeneye Infinity and Solos part of that calculation and is so or not? And could you give us some sort of feedback on how you're feeling about that former guidance as far as unit growth this year?

Speaker 0

Well, we think overall this year will grow about 60% unit volume based on current estimates. Better part 6% growth is very good. And on top of that, it's been more favorable. The sales that we've been making are to more of what we call value added customers as opposed to straight display sales. So the mix has been very favorable along with the good growth.

Speaker 1

Okay, thanks. I'll jump back in the queue.

Speaker 2

Next question comes from the line of Matthew Galinko with National Securities. Please proceed with your question.

Speaker 4

Hi, good morning. Thanks for taking my questions. You mentioned two OLED development contracts. Can you say whether those are military or enterprise or if they are or if you can talk about that maybe if you might see similar timelines to military program?

Speaker 1

So I tried to I think I answered that question on the OLED contracts we have with two companies, are they military related or they are consumer related or commercial related? Is that the question? Yes. These two programs are consumer related are commercial Okay.

Speaker 4

And do you have a sense of what the timeline is on the development? Is it a multiyear kind of setup or is it something that might be you'd complete your work on it in the next by year end, let's say?

Speaker 1

The anticipation is that we'll be finishing up by year end or early next year.

Speaker 4

Got it. All right. And then just a

Speaker 1

couple It is for product in mind. It is for product in mind, yes.

Speaker 4

Got it. And I mean, is there a lot of heavy lifting that you need to do to sort of get the product in shape for those products? Or are you pretty much there technically?

Speaker 1

Yes, we have been engaged in that contract by year now. It is it will be the most advanced display for both AR and VR.

Speaker 4

Got it. Okay. I guess just asking that another way, is there anything dependent on you to get that out the door or is it purely the customer's timeline at this point to start shipping units?

Speaker 1

It's multiple equations there, but again, we feel this displays what market needs at this point, not just these two customers, but maybe many customers too.

Speaker 4

Got it. All right. And just a quick cleanup on the math here. Did you say you had a inventory write off in Q2? Did I hear that correctly?

Speaker 0

Yes, 1,200,000.0.

Speaker 4

Okay, excellent. And then you also had realized gain on RealWear this quarter as well?

Speaker 0

That's correct, 768,000.

Speaker 4

Okay. And then last one for me before I jump back in the queue. So you've talked about a 30% reduction taking sort of everything into account. Can you kind of share what the is that starting from kind of our '20 18 OpEx number or how what should we be framing that again?

Speaker 0

Well, I'll to give you some direction there. I mean, it's very hard to predict what future savings would have been since there are costs that never were incurred. So that's why I try to give you the CAD9 million for last year, just to give you a sense of magnitude.

Speaker 4

Right. But I think you also executed some or are getting some sort of core cost reductions, what it sounded like. So I mean, so for the all in number, I'm just trying to get a sense of if we take kind of the Q2 OpEx number, what does it look like in Q4?

Speaker 0

So the $9,000,000 is direct program costs. And I don't have an estimate that I could reasonably give you that obviously certain overhead costs from the corporate are going to go down, certain insurance costs, all that certain fringe benefits will go down. There was a lot of subjectivity in using those in coming up with that type of number. And so I just we went with the hard cost. So we expect additional savings in addition to the 9,000,000 but I honestly couldn't come up with a number that I thought was audible for lack of a better term.

Speaker 4

Fair enough. Thank you.

Speaker 2

Our next question comes from the line of Patrick Metcalfe with Newbridge. Please proceed with your question.

Speaker 5

Good morning, guys.

Speaker 1

Good morning, Patrick.

Speaker 5

My question my first question will be what percent of RealWear does Copen own post the $2,500,000 investment?

Speaker 0

Less than 10%.

Speaker 5

Less than 10%. Okay. And what is the royalty rate you get from RealWear per device?

Speaker 0

We couldn't disclose that. We're obviously we negotiate with other customers. So we would never disclose Okay. That

Speaker 5

And is the licensing deal with Golden I Infinity exclusive or is it open to license to others?

Speaker 0

So for certain fields, it's exclusive.

Speaker 5

Exclusive. Okay. So I guess the goal here is to get RealWear as profitable as fast as possible and maybe IPO it as quick as possible?

Speaker 0

You have to talk to RealWear.

Speaker 5

Okay. And then you guys have an E. F. VR headset that you designed maybe a year and a half ago. Is that design part of Kopen or will that design be part of SOLOS now going forward?

Speaker 1

Yes. Let's talk about the L headset. Oh, the L headset, it's not part of Solos.

Speaker 5

It's not?

Speaker 1

No, I don't think so. No.

Speaker 5

Okay. Then guys, you're breaking up two important pieces of the growth puzzle Solos and Whisper. And you're not giving us any detail on the valuation of them or the investors that are actually participating in them. Would these be large companies that are participating, large tech companies or would it be large venture capital or small time players?

Speaker 1

We're still negotiating with multiple parties right now. So we're not privy to talk about it right now.

Speaker 5

Can you give us a little bit of flavor to it?

Speaker 0

No, honestly, it's being negotiated. There are a number of people have expressed interest. How it will shake out, we hope to know shortly.

Speaker 5

Great. So we'll see announcements on that, those two situations when they come to closure.

Speaker 0

Again, I think it's important to understand, we still retain rights to Whisper and future improvements for the military industrial applications.

Speaker 5

Okay. And then my question is regarding IDC is calling for 31,000,000 enterprise AR headsets by 2023. Recently, you guys have come out and said you had 90% market share in the enterprise AR. If you can look out a year, twelve months from now, are you seeing new players coming on that you're participating with? Are you seeing new players that you will be participating with?

Can you give us some transparency on the whole AR enterprise market? What kind of players you're seeing entering? Where you think you're going to stand at the end of the day here percentage wise maybe or do we go down to 50%, do we go down to 30%, just some sort of 30,000 seat type of view on the industry would be great.

Speaker 1

This is a very good question because the AR market is getting very hot right now. There are many, many different new entrants or people want to enter. So we cannot look at the number of people entering the field. We have to look at the number of people, the companies who are actually going to production and selling the units like Google, like RealWear, like VZIC, those guys are selling units and therefore our market share is based on the things going to production.

Speaker 5

Okay. So do you see in twelve months, do you see you holding firm with a strong double digit percentage of the market?

Speaker 1

That's why we are laser focused now.

Speaker 5

Do you see yourself getting I guess my question is this, John. Do you have more design wins for the enterprise that you're not showcasing to the public yet? Are you guys sitting on how many design wins are you sitting on for enterprise AR, new type of devices, whether they're low end, high end or is this all you have, the Golden Eye Infinity and the Golden Eye?

Speaker 1

I don't even know exactly how I can without reviewing other companies. We're working with multiple companies at this point. In fact, we're very busy right now. Obviously, I think we are seeing also real engagement on micro OLED. There are a lot of expectation that micro OLEDs will be a display of choice for many applications.

So we're the number one in micro it. So people do talk to us and work with us now.

Speaker 5

Okay. And then with micro OLED, let me conclude on this. Is there any way excuse me?

Speaker 1

Go ahead. I'm sorry. Okay. Go ahead.

Speaker 5

Is there any way you guys could potentially, since you're in the business of spinning off some assets this year, becoming what looks to be a holding company, is there any way you could maybe work a deal out where you get a big upfront payment and a royalty stream on the micro OLEDs or do you plan on keeping the model the way it is?

Speaker 1

Are you advocating if we should spin it out or become a holding company? Are you actually helping us to formalize and crystallize the strategy? I think the Micron is very interesting right now. It is still a growing emerging business. It is a component business and is divided into three parts.

One is the military part and one is the industrial commercial part part

Speaker 0

of the

Speaker 1

safety part and then finally the consumer part. So yes, one might be able depends on the maturity and depending on the opportunity, we may I mean, had to be opportunistic to slice the salami.

Speaker 5

Okay. Well, I just figured since you're doing business with Chinese maybe put the money upfront and get the royalty payment down the line.

Speaker 1

Yes. I think as I say, we would like to be the company that's very much like some of the semiconductor companies. They've got royalty streams and sell components or at least some technology components, technologies. And in this case, get some equity stake in the situation. Meanwhile, we minimize some of the capital intensive or development intensive costs, which we like to minimize.

So I think the strategy is a good one.

Speaker 5

Okay. And lastly, when do you see the first did we see any revenue from BOE this past quarter? And when do you see revenue coming any kind of revenue coming from BOE?

Speaker 1

I would not be able to answer your question, but our relationship with BOE is very strong.

Speaker 5

Ladies

Speaker 2

and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to management for closing remarks.

Speaker 1

Well, thank you very much for joining us this morning, and I hope to talk to you again the next time. Thank you.

Speaker 2

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