Kopin - Earnings Call - Q3 2018

Transcript

Speaker 0

Welcome everyone and thank you for joining us this morning. Will begin today's call with a discussion of our strategy, technology and markets. I will go through the 2018 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, 11/08/2018, 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 differ materially from those forward looking statements. Potential risks include, but are not limited to, demand of 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. Commune 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. Thank you for joining us this morning to discuss our third quarter results and the industry developments that point to accelerating dust options or AR glasses in the enterprise industrial space. The adoption of enterprise wearables in the enterprise space was a highlight for Kopin in Q3 as well as for many of our partners. Let me review some of the events that occurred in Q3. First, we are very pleased with the initial development of our shipments of display modules to a Tier one U.

S. Customer, who was an early mover in the development of smart glasses. The shipment of 5,000 display modules to that company for its soon to be launched next generation AR smart glasses was a major milestone for Kopin. The benefits of AR headsets to enterprise is improved productivity and safety by enabling workers to communicate with remote experts to document data and to provide other functions in a hands free manner. AR Smart Glasses are also very useful for training, medical applications and in manufacturing environments.

We expect shipments to ramp in 2019 rapidly as that product moves to full possession. We're also seeing significant order increases by other enterprise headset customers, reflecting the expanding interest from companies across many verticals that are seeing the benefits of AR. For example, our partner RealWear has recently announced deals for its HMT-one assets with consumer product companies like Colgate Polymer, where it's being deployed in 20 manufacturing facilities in 11 countries to industrial leaders like Honeywell. RealWear is also working with a number of auto companies such as Volkswagen and Lexus, which show how ARR is being utilized across many verticals, each with unique applications and goals in using the technology. Another Coping customer, Vizix has announced similar broad demand for its M300 device.

We expect to ship over 100,000 units of our display modules for enterprise AR smart glasses in 2019. We also anticipate our own Go9 Infinity smart glasses targeting the enterprise market will begin field testing with customers this quarter. We have demonstrated Infinity to many potential customers, including approximately 30 Fortune 500 companies and their interest has been very strong. GoNow Infinity is quite different from what our partners are providing. It has a unique form factor and connects directly to a smartphone or mini PC by cable.

He has a very high resolution display, a high resolution camera and a multi axis head tracker. But it has no radio or battery residing on the device. GoDown utility the Infinity utilized Koping's patented core technologies, including our display, our whisper voice extraction by improved speech recognitions and advanced hands free user interface controls. To integrate the benefits of AR into an industrial worker's daily task. We look for commercial shipments to begin in Q1 twenty nineteen.

Let's now discuss military business. F-thirty five sales again was a significant contributor to our military business. We announced in September that we have received a production contract for F-thirty five pilot helmets through late next year. Our FWSI unit has been fully qualified and we received the first production order. We expect to begin shipping in November under the $4,200,000 contract, And we have just been informed that imminent follow-up order is coming.

Our shipment was slightly delayed because they issued one of our suppliers. We believe the issue is now resolved and the supplier is getting on track. Let's turn to the development program for our next defense contract defense products. We continue to achieve the milestones for both the FWS CS and the Armored Vehicle programs. These two programs are the two previous products, I expect to bring coping very significant production revenues.

In summary, we're seeing very strong demand for enterprise AR smart glasses and we continue to be the dominant supplier for the military applications. While enterprise AR is gaining traction, it is certainly a challenging time for VR and AR wearables, especially VR is undergoing a reassessment by market. After the initial VR assignments and strong push for consumer adoption, we noticed a sharp pause in the momentum. It's likely that VR applications similar to AR will move to enterprise industrial applications before becoming a wide spectrum consumer product. Further complicating the matter is the tariff situation in China, which we believe negatively affected our Chinese customers, especially those who buy our components for drone applications.

I'm flying over to Asia tonight to discuss with our partners, customers and suppliers to further understand the effect of this trade war and what can be done to minimize its impact. Now I will turn the call to Rich to discuss the financial details of this quarter.

Speaker 0

Thank you, John. Beginning with results for the 2018, total revenues were $5,100,000 compared to $6,100,000 for the 2017. As a reminder, in 2017, we acquired Envis and they had certain military contracts in place. In the 2017, two of those contracts were essentially filled in Q3 and 2017, represented about $1,500,000 of the $6,100,000 of 2017 revenues. Cost of sales for the third quarter was approximately 100 percent of product revenues compared with 74% for the third quarter of last year.

Gross margins decreased due to lower absorption of overhead costs as a result of lower volumes. R and D expense in the 2018 was $4,600,000 compared with $5,300,000 in the 2017, reflecting a $1,200,000 increase in funded R and D expense offset by a $1,900,000 decrease in internal R and D. SG and A expenses were $7,200,000 in the 2018 compared with $5,300,000 in the 2017. SG and A increased for the three months ended September 2938 as compared to the three months ended September 3037, primarily due to an increase in stock based compensation, legal expenses, product promotion expenses and patent maintenance fees. Other income expense was $175,000 in the 2018 as compared with income of approximately $300,000 in the 2017.

The 2018 included approximately $227,000 of foreign currency losses as compared to approximately $224,000 of foreign currency gains in the 2017. Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $9,800,000 or $0.13 per share compared with a loss of $8,200,000 or $0.11 per share in the 2017. While we expect strong results in military and industrial sales in the fourth quarter with the weakness in consumer AR and VR demand and the slight delay in FS1 shipments, we are reducing our full year revenue outlook to $24,500,000 to $26,500,000 from the previous 30,000,000 to $35,000,000 We conclude the quarter with approximately $46,000,000 of cash from marketable securities and no long term debt. The amounts I just discussed are our current estimates, so I remind listeners to review our Form 10 ks for the third quarter ended September 1938 when filed for final amounts. And with that, I'll turn the call over to John excuse me, I'm sorry.

With that operator, we'll take questions.

Speaker 2

And our first question comes from the line of Matthew Galinko from National Securities. Your line is open.

Speaker 3

Good morning. Thank you for taking my questions. Guess morning, Matt. Good morning. So just one quick one on the I think you mentioned you expect to ship 100,000 of display modules for enterprise AR in 2019.

Is that inclusive of what you expect to ship as part of the ramp in Goldeneye?

Speaker 0

No, that's external customers.

Speaker 3

Okay, got you. And then on the consumer wearables front, particularly your internal product that you developed, I didn't hear you touch on that. Curious how commercialization is going there? And in the past, we've talked a little bit about sort of building a distribution channel for it. So how are efforts going on that front?

Speaker 0

So as we mentioned, we expect, well we showed the product originally at AWE several months back. The reception has been very strong as we noted in our remarks, up to over 30 Fortune 500 companies have looked at it and are awaiting samples and we expect to get those into people's hands this quarter with production and shipments starting in Q1. We're going to use a VAR model as we've discussed to distribute it. And we've also identified and signed contracts with fulfillment centers. So the distribution network is coming together and for the most part it's in place.

So those issues should all be behind us as we enter Q1. So at this point we just need the initial feedback on the product and then as we expect shipments in Q1 start generating revenue. Matt, are

Speaker 1

you talking about GoldenEye Infinity or are you talking about the consumer aspect of the AR glass?

Speaker 3

The consumer athletic wearable.

Speaker 1

I think this is about Solos. Let me ask, this is John Fan speaking, Matt. And the Solos actually introduced late I think late second quarter, sometime late second quarter. And there are two things that are happening. One is that the hardware, we actually found the hardware is actually pretty good.

In fact, we're the only one now in the market that everybody reviews it, the hardware is very good. What we are doing now is connecting with people for the benefits with people's software, application software, and we're making very good inroads. And I'm sure people will be seeing a lot of additional partnerships with software companies and are coming soon. With that, I think the benefits to the user, cyclists, runners become very clear. So actually we're very happy with the hardware and we're busily and rapidly working with the benefits.

So I think that's a very interesting problem because as we say, AR, even for consumer, people are still hesitating. Remember, everything has to go from military to enterprise to consumer. The AR class has nearly transitioned to the enterprise world now. I think the next stage is it is going to the consumer. VR has jumped from military immediately to consumer.

I think now they are pausing and then departing to work for the enterprise first.

Speaker 4

Got you.

Speaker 3

Okay. Appreciate that. And then maybe on the Golden you have discussed and sort of established that it's a fairly different design and approach to industrial wearable than kind of what your partners are doing. How is reception? And are the potential customers you're talking to kind of lining up the existing design of wearables against GoldenEye and sort of comparing?

Or are they sort of looking at their first industrial wearable and sort of evaluating on its own merit without necessarily looking at other units on the market?

Speaker 1

Let me answer this question. See, in the wearable world, especially the enterprise, I think eventually, even for consumer world, it's going to different layers. Yes, especially industrial world. They are very ruggedized industrial applications and they are applications and they are just very broad industrial workers where they really want mobile assistance. So what we are targeting is in fact the truly very mobile workers.

So they are lightweight, probably very low much lower cost because they had no battery, no radio and no processor. It just hook up to the existing cell phone while the existing mini PC people industrial were already using. So it's a very different category. It's actually in some way contrary to normal thoughts is that you're actually tied to a phone or mini PC and don't have any battery in it. So it's a different thing and I think appealing to different type of workers.

They are mobile, they broadly distributed segments. There's no such thing in the market right now. And as we know, we work with our partners and it was nice to do the pioneer job. And also because we did talk to the customers and the ultimate customers, the industrial world a lot because we we have probably have about 80% of all the enterprise headsets kind of in the world right now, which were in production. So we know our customers and that some of the customers and actually many of the customers say, this is what we'd like to see a very broad lower cost lighter weight more in many ways also I would say really because it's just really like a smart screen with a camera.

So all the PCs and phones, if they change their performance, it's already piggybacking. It don't get outdated. It's very, very good system for enterprise world. Yes. Maybe I speak too much of that.

So I'll take the next question.

Speaker 3

I think I'll stop hogging the mic and I'll jump back in the queue. So I appreciate the color.

Speaker 2

And our next question comes from the line of Patrick Metcalfe from Newbridge. Your line is open.

Speaker 4

Hey, good morning guys.

Speaker 0

Good morning. Good morning, Patrick.

Speaker 4

John, can you give us an update on the product roadmap for WhisperChip? How you see it playing out and how good the technology is, the feedback you're getting from customers and maybe some more information on that? And then my next question is on The U. S. Internet company that you shipped 5,000 units to, have you done business with this customer before or is this a brand new customer?

Speaker 1

Okay. This is Jonathan. Thank you, Peter, that question. I will answer the customer question first. There's a customer that we know and have been doing business with before.

It's a good partner to us for many years. Back to the Whisper, actually one of the purpose of my treat is to Asia is to talk about whisper. What we have now noticed is it's both in the AR world, in the whole wearable world, people begin to recognize one of the human important human interface is going to be voice. Not going to be done by touch. The touch screen is very, very good for handheld smartphones, and it was a wonderful thing that they have invented for smartphones.

But once it goes wearable, you really don't wanna touch your eyeglasses or touch anything if you can avoid it. So is voice. And so a lot of activities now are on the voice. As they will know, the voice is gonna be the next touch. So we actually, in our product, both in our Golden Eye Infinity, in fact, that's why we want to show the power of the whisper is actually in the GoldenEye Infinity.

GoldenEye Infinity GoldenEye, the whisper is also, of course, in solos and go Whisper is also in rear wear headsets. So but there are other activities going on. And we check our Whisper now and our customer and partner check it. The performance is better than anything in the market right now, especially in a noisy environment. So we are very active right now.

And I think by the time people see and experience the Golden Eye Infinity, which is really there's no touch, there's no tapping that you're accustomed to, it's going to be totally hands free. It's all done by control, by voice, by whisper voice as well as by the head gesture. The whole thing, the whole human interface in GoldenEye Infinity is no touch. And this is the first thing, first time ever has come up in any product. So we shall see, Whisper is doing well, it has very good performance and it has been proven.

It is going to the product. It has been starting to go into the product and I'll be in Asia talking more about it.

Speaker 4

Okay, great. And then one follow-up on the Whisper chip. You had granted a patent with the Whisper chip to be embedded in a Bluetooth chip I believe. Is there any chance the roadmap would have you licensing the Whisper software to a Bluetooth company like a Qualcomm or something like that? Is that possible?

Speaker 1

Yes. A way appears I think it's more importantly the Whisper can be loaded into any processes of its many kinds. Microcontrollers can be loading in there too. So there is a licensing model. We also have a Whisper chip, so it's a chip model.

And then, of course, there is a model that people will get our algorithm into a standard processor of which they will sell the processor. So they all have different kind of models coming up and in many ways I'm very excited by WISPER, it takes a little time because I think people begin to have to recognize the voice is really our next interface.

Speaker 4

Okay, great. And I just saw you signed a partnership with medical That's cool.

Speaker 1

And to you, we have about 30 patents around WISPER. Most of them have a lot of them have already issued. So we're very excited about WISPER. I'm glad that you asked the question, yes.

Speaker 4

Okay, good, good, good. And then lastly, you had signed a deal with a company just recently in the medical device for an AR device for surgeons. Did you guys give your IP up to them for equity stake in that company like you have done with RealWear, BOE, NuVision, Lenovo's joint venture? Can you give us a little bit of idea or color on how you're using your IP to build up your equity stakes in so many different ventures in the ARVR world? Because I don't think the market appreciates that.

Speaker 1

Yes. Let me answer that. It's an important question actually. In the BOE case, it is joint venture, but there's no IP transfer at all. If there's no technology or IP transfer, and so that is a very clear case.

In the Lenovo case, it's a joint venture with Lenovo, of which we actually licensed one of our models. Remember, we do a lot of concept models, a reference model of smart glasses. They license one of our models, okay, and of which we get some equity. We do get significant equity there. In the RealWear, the involvement is deeper with not only license reference model, which again is a reference model is somewhere between a constant model, they have a full product like Infinity, somewhere in between.

So they licensed the reference model, also licensed some of our patents, non exclusive of course. And then on top of that, they promised to buy components for us as well as pay royalties. And we also get a very significant part of our equity. And this is a model that we kind of favor right now anyway, especially for small, very aggressive startups. We would license them in way, especially reference models.

Speaker 4

Okay. Well, I like what you're doing. And I think when the tide turns, this is going to

Speaker 0

be a big opportunity. Keep up the

Speaker 1

good work. I think we're certainly disappointed. Think the whole industry is disappointed with what's happening, especially in the VR wearables. The VR wearables was a huge spike and then everybody fell to the earth. And it happened very rapidly and everybody's examining it.

And if you recognize and look around between the trade war and what's happening to VIA, many of the stocks companies here as well as the overseas, have seen some significant impact. However, it's different for like three d TV. We think it's a pause and reassessment regroup and things will come back out again.

Speaker 4

Okay, great, John. And you just brought up one last point. With the market seem ARVR market seems to be bottoming here, it would be great like you've done in the past step in and buy your stock. It would be greatly appreciated.

Speaker 1

Thank you. Thank you very much.

Speaker 2

And we have no further questions at this time. I will turn the call back over to John Fan for closing remarks.

Speaker 1

Thank you very much for joining us this morning and I hope to see some of you in the coming CES next January. Thank you.

Speaker 2

This concludes today's conference call. You may now disconnect.