Kopin - Earnings Call - Q4 2018

Transcript

Speaker 0

Good morning, and welcome to Kopin Corporation's Conference Call to provide a Business Update and Results for the Fiscal Fourth Quarter and Year Ended December 2938. Today's call is being recorded for Internet replay. You may access an archived version of the call on Kopen's website at www.kopen.com. With us today from the company are Chairman and Chief Executive Officer, Doctor. John C.

C. Fan and Chief Financial Officer, Mr. Richard Snyder. 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 fourth quarter and 2018 results at a high level. And then John will conclude our prepared remarks and we'll be happy to take your questions.

I would like to remind everyone that during today's call taking place on Tuesday, March 1239, 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

Speaker 2

over to John. Thank you, Rich. Thank you for joining us today to discuss our fourth quarter and full year results. 2018 was a solid year for both our military and enterprise customers. We look to leverage this progress in 2019 with these two product lines driving our growth.

In 2018, our military revenues were closely tied to the progress in the F-thirty five fighter jet program. The global demand for the world's most advanced fighter jets continue to grow. We are pleased to see the announcement from Collins' Albert Vision Systems who have manufactured the helmet that they just delivered the thousandth HMD for the F-thirty five. The unmatched situational awareness provided by the HMD has been a key factor in driving the strong demand for the jet. In order to see the image in very bright sky, the HMD requires displays with extreme brightness and regulars and Koping is the sole display provider to this program.

The F-thirty five is expected to be our Defense Department's primary fighter jet program throughout at least to 02/1935. So we're still very early in monetizing this program. The S-thirty five programs are also being sold to friendly governments around the world. In 2018, we also began shipping into the family of weapon sites individual military program or FWSI. The shipments are expected continue to ramp in 2019 for this program.

Another family of weapon site program, FWS CS for crew serves met its expected milestones in the development phase. We continue success in this phase. We expect FWS CS to have initial production shipments starting in 2020. These two FWS programs are the follow-up programs after our very successful TWS program. We're very pleased with the win for the armored vehicle display program for General Dynamics.

This win was a joint effort with our wholly owned subsidiaries of Fourth Dimension Displays and Envis. It is early days for the Armored Vehicle Display program. The development and test will continue through 2020 followed by production. We are sole source of this program, which provide us a revenue potential of about $100,000,000 over the decade. Fourth Dimension Display recently also announced, it has launched a two ks by two ks LCOS imager.

This imager will be very useful for high end three d optical metrology applications. Post Dimension Display already has the majority share in three d optical inspection systems, which inspect small mechanical parts or printed circuit board during the assembly process. In addition, the two ks by two ks square format will be ideal for specialized near eye applications such as surgical microscope and electronic viewfinders for medical imaging. As we expect it, our enterprise customers have a very good year as many other products are moving from testing to commercialization. The benefit of HMD to the enterprise are being recognized by many companies around the world for safety, for efficiency and for cost saving among others.

As we have discussed, our partner RealWear has been leading much of the growth, is now selling to companies across many different industries and markets. In just the past few weeks, we have severe exciting development at RealWear. They really understand the opportunity to combine data with all the benefits of hands free users whereby the human machine interface provide the safety and cost savings I just mentioned, all within a very harsh environment. Cocktailing display modules are key element in creating real wear HMD asset. We also expect our global Tier one enterprise customer, which we mentioned last quarter and which has purchased 5,000 units in late twenty eighteen to begin shipping commercially shortly.

As their sole display supplier, we look for this customer to help drive our enterprise business and further our leadership in the market. The initial feedback on GoldenEye Infinity evaluation program has been very positive. We began shipping evaluation units to a wide range of customers, including over a dozen Fortune 500 companies and leaders in oil, gas, transportation, wireless telecom, logistics and manufacturing industries as part of our Golden I Infinity evaluation program. Well, approximately 100 companies already registered, the evaluation program is designed to assist enterprise customers in making informed purchasing decisions when it comes to wearable mobile computing and assisted reality systems solutions. Go9 Infinity is purpose built for enterprise level clients who wants a voice enabled hands free wearable computing system designed to increase workers' productivity, efficiency and safety.

We continue our marketing efforts in Solo's smart glasses by teaming with TrainingPeak, a global leader in structured workouts who provide complete solutions for smart and effective endurance training. The structured workout is synced to our Solo Smart Glasses by supporting the workout programs to Solo Smart Glasses on the user's smartphone. Real time performance such as duration, intensity and compliances is easily communicated via visual and audio prompts to athletes who can quickly know if they are meeting or missing their workout targets. Those also partnered with CTS, a pioneer company in the endurance coaching business industry. CTS will provide its coaches, athletes, training camp participants to assess to our innovative high performance to hold Soul Smart Glasses.

This partnership will bring together a company at the leading edge of performance and durable wearable technology, we're a leader in the endurance sports coaching space. We look forward to the spring season to see these partnerships will bring a lot of fruits, bear fruits. While despite the disappointing speed of the adoption of VR and AR by the consumer market in 2018, we're optimistic that our organic light emitting diode or OLED business will begin to ramp this year. There's no question the consumer demand for VRAR has not developed at the rate industry experts and coping expected. But with our history of sitting at the center of developing technology markets, we have already seen the necessity of lower cost, high performance components before a market can develop.

Most recently, we saw this with LEDs, who did not really begin tractions until the price of LED chips were driven down by increased supply. With the expected completion shortly of BOE $150,000,000 state of the art OLED fabrication system, we believe we'll see a substantial increase in the supply of low cost display. We believe the scale of BOE facility along with other new fabs coming online shortly we increased the necessary component pricing curve, which will really help stimulate the new application for VR and AR. Recently, I shared coping view at MIT Media Lab as part of AI in Motion, the inaction conference and also at Harvard as part of a Dean's Lecture Series. I outlined our rules on ARVR.

We support everything we have developed in a coping. We show the benefits of taking a human first approach, voice approach as the next touch and be selective about what you expect people to wear on the head among other rules. I'm very encouraged by very, very positive feedback from the audience. To summarize, our goal in 2019 is continued to drive our military enterprise business as we wait for the consumer market to gain traction. To help to drive the consumer demand, our development efforts will be focusing on our OLED technology.

With this, let me turn the call to Rich to review the financial details.

Speaker 1

Thank you, John. Beginning with the results for the quarter, total revenues for the 2018 were $7,700,000 compared with $11,400,000 for the 2017. The decrease in sales in 2018 compared to 2017 was primarily due to completion of a military program at our subsidiary Envis in 2017. Cost of sales for the fourth quarter was 76.2% of product revenues compared with 64.8% for the fourth quarter of last year. Cost of product revenues increased as a percentage of revenues in 2018 as compared to 2017 because of a decline in sales of our military products, which have higher gross margins than the average gross margin of our other products sold during the same period in 2017.

R and D expense in the 2018 was $3,900,000 compared with $4,700,000 in the 2017. Internal R and D expenses for 2018 decreased $1,100,000 as compared to the prior year, primarily due to the products moving into commercialization phase. This was partially offset by funded R and D expense increase of $300,000 for 2018 as compared to the prior period to an increase in spending on military programs. SG and A expenses were $6,200,000 in the 2018 compared with $4,400,000 in the 2017. SG and A for 2018 increased as compared to the prior period, primarily prior year period, primarily due to an increase of $1,700,000 in non cash stock based compensation.

Included in Q4 twenty eighteen operating expenses are $2,200,000 from the write down of fixed assets and $1,400,000 from the impairment of goodwill. Included in 2017, Q4 twenty seventeen operating expenses is a $600,000 charge for the impairment of goodwill. Other income and expense was expense of approximately $250,000 in the 2018 as compared with 1,300,000 in the 2017. The 2017 includes a $1,700,000 gain from the mark to market of a warrant we received when we licensed technology to a customer. The 2018 includes approximately 900,000 excuse me, 90,000 of foreign currency gains as compared to approximately $700,000 of foreign currency losses in 2017.

Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately 11,000,000 compared with a loss of $1,800,000 or $02 per share in the 2017. Turning to results for a full year. Total revenues for 2018 were $24,500,000 compared with $27,800,000 for 2017. Again, the decrease in sales of products for military applications in 2018 compared to 2017 was primarily due to the completion of the military program at our Envis subsidiary in the 2017. Cost of goods sold for 2018 was 82.4% compared with 72.8% of product revenues for 2017.

The decline was due to an increase in the sale of military products, which have higher gross margins than our other products. R and D expense in 2018 was $17,400,000 compared with eighteen point nine million dollars in 2017. Decrease in R and D expense year over year was primarily by a decrease in internal R and D expenses for 2018 of $3,000,000 as compared to the prior year, again primarily due to the products moving into commercialization phase. And again, this was partially offset by an increase in funded R and D expense of $1,500,000 as compared to 2017 for military programs. SG and A expenses were $27,200,000 for 2018 compared with $20,500,000 for 2017.

SG and A for 2018 increased as compared to the prior year, primarily due to an increase of $2,600,000 in non cash stock based compensation, 1,200,000.0 in product promotion, dollars 800,000.0 or $800,000 of accrued contingent consideration and $800,000 of legal expense and patent maintenance costs. Included in 2018 operating expenses are $2,200,000 from the write down of fixed assets and $1,100,000 for the impairment of goodwill. Included in 2017 operating expense is $600,000 for the impairment of goodwill. Other income expense was income of $4,200,000 for 2018 as compared to $2,000,000 in 2017. In 2018, we recorded non cash $2,800,000 gain on equity investments and we received $1,000,000 of insurance proceeds.

2017, we recorded a non cash $2,000,000 gain on the fair value adjustment of a warrant we received as part of licensing of our technology. 2018 includes approximately $200,000 of foreign currency losses as compared to 2017, which had approximately $700,000 of foreign currency losses. Turning to the bottom line, our net loss attributable to controlling interest for 2018 was approximately $35,600,000 or $0.49 per share compared with a net loss of $25,200,000 or $0.36 per share for 2017. 10% of customers for 2018 was Collins Aerospace at 20% and General Dynamics at 11%. Fourth quarter and year end amounts of depreciation and stock compensation are attached in the table to the Q4 and year end press release.

We conclude the year with approximately $37,200,000 of cash and marketable securities and no long term debt. And with that, we'll take the call with operator.

Speaker 0

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. John, on the you mentioned the global Tier one, congratulations on shipping those 5,000 units. You mentioned that you expected that a broader shipment would commence shortly. Can you talk about just a general sense on timing?

Do you think it's more first half or second half? And then can you give us any sense at all on what kind of volumes we're talking about as far as it relates to 2019?

Speaker 2

Yes. Obviously, this is still a program that has not been officially announced yet. The general fee the general plan is to have regular shipments throughout the year. And I we're we're expecting that they will announce the product very soon.

Speaker 3

Okay, great. That's helpful.

Speaker 2

I think the initial response is very good.

Speaker 3

Great. In the past, you've talked about on the commercial kind of headset space that you perhaps would grow to about 100,000 units in 2019. Would you still stand by that number? Do you think it's too difficult to tell at this point?

Speaker 2

We still stand by the number from the forecast from our customers, they're still very, very bullish.

Speaker 3

Okay. Great. And then one more on the defense side. For the family weapon sites for the individual side, I think you began shipping on the I think it was a $4,200,000 contract. Is there a lot of leeway left in that contract to go still?

And is there any talk yet on a follow on order or any type of timing on that?

Speaker 2

Rich, you want to make comment?

Speaker 1

Yes. So yes, I mean, is going to be a long running program. We're in constant communication with the government. So yes, we expect many follow on orders to the program and we do expect the program to ramp from its current volumes.

Speaker 2

Yeah. Think I'll just add on to that, put a little bit more color to it. It is a very interesting program. This program is actually to replace armored vehicles, many armored vehicles still using CRT tubes as imaging. So we're to replace it with solid state and that this is just the initial of tip of the iceberg.

There are lot of vehicles have CRTs in the military vehicles. And again, we're the sole source for that.

Speaker 3

Okay. And sorry, back to the I'm curious about the Whisper chip. Any feedback from product that's perhaps in the field now and how it's performing?

Speaker 2

Yes, of course, Whisper is actually now is in the GoldenEye Infinity and solos and we have also licensed Whisper chip or Whisper technology to RealWeb. So there are additional activities going on right now, which we cannot talk about right now.

Speaker 3

Lastly, Rich, on the OpEx plans for 2019, can you just talk about directionally or if you want to get more specific, that'd be great too, but just on how you feel about sales and marketing and R and D and what they're going to look like year over year?

Speaker 1

So we expect development expenses to decline, particularly as we said, we finished a lot of the Solos and a lot of the Golden Eye Infinity. So we're really moving those into commercialization stage. And as John mentioned in his prepared remarks on the OLED, we do expect that to increase. However, there we're in discussions with a number of folks who are looking to potentially fund a lot of that development.

Speaker 0

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

Speaker 4

Yes. Hi, guys. I just wanted to follow-up on that line. Can you just talk about when you think BOE will start to ship? And I know John, you guys have been doing a lot of work on brightness while you've been waiting for the factory to get built, etcetera.

Where do you think you'll be when you start to ship product in terms of brightness?

Speaker 2

Thank you, Jeff. It's very good question on this. BOE factory is actually finished. The equipment's already in. They are at this moment start running, test running now.

I think I would be there in hopefully in ten days to hopefully celebrate the first run coming out. So I expect they will be very, very good in brightness. In fact, I think just give you the scope of the situation, BOE is the biggest supplier of displays for smartphones. Their market share in the world is now over 20% in the whole world of the displays coming out is come from them. So they have a teams of engineers that can turn a factory on very quickly.

And the factory is also very big, fully automatic. So I think the world of ARVR will be different in about in the next certainly by second half this year, everybody will be very surprised what's happening to the world. So first of all, the ARVR is basically limited as I talked about it. They don't have any constant supply of display of low cost, high performance display. I think this large end is going to be opened in the second half of this year.

Speaker 4

That's great. Thanks. And then I just wanted to make sure I heard it right. Did you say you have 100 companies now registered for the Golden Eye Infinity evaluations?

Speaker 2

Yes.

Speaker 5

Great.

Speaker 1

Thanks.

Speaker 0

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 questions. I guess firstly, you talked about needing to drive sort of component pricing on the display down to enable consumer ARVR. But I guess I'm just curious if you could opine on what else needs to happen to drive that business, whether it's application design or form factor or what needs to happen to move that business along?

Speaker 2

Now you touch upon the five rules I outlined for ARVR. I mean, anything to point ahead, there's a lot of ergonomics, fashion, willingness, comfort. The necessary condition is to put the people will be willing to put it on the head and stay on the head. And those economic issues are being solved right now. And I think the enterprise world will be the first one that will see it and the military world already seeing it.

To give you some idea, our market share on military and enterprise are pretty large. So we know what people are willing to wear for benefits. For consumer, it's always a much bigger target because consumers are much more fussy what they will put on their head. But I think that issue also coming up being under conquered. Now once you'd have that particular issue, the people are willing to put it on their head, the next thing is really the cost of the elements, How expensive it is, consumer does not want to pay too high a cost plus you've got to have supply.

Nobody want to go to consumer product if you don't have a constant supply. Well, the BOE will solve their problem. They will have to supply, they will have to bring the cost down, the curve with the journey will start. So with supply chain problem solved, I will say the consumer headset will begin to show up at the beginning at the second half of this year.

Speaker 5

Got it. Thank you. That's helpful. And then maybe on the consumer revenue side for 2019, how should we think about that just given that you are working with some partners on solos? And I guess that could probably move the needle on consumer revenues a little bit quicker than, I guess component sales?

Speaker 1

So on this year, we're really not going to give specific guidance on the growth of the consumer. We'll see how Solos works out and we'll see how Goldeneye. They're really brand new markets, particularly Goldeneye Infinity, where we draw strength from the fact that RealWear has done very well with our first design that we licensed to them. And so we expect GoldenEye to do as well. But we're going to hold off as it is a new market, giving any specific guidance.

Speaker 5

I guess maybe just directional then on the consumer business. I mean do we expect it to sort of be flattish this year? Or I know we talked last quarter about it being under a fair amount of pressure.

Speaker 1

I think the only thing that we would say at this point is that we expect OLED revenues to come into play this year. That's what we're really focused on.

Speaker 5

All right. Thank you.

Speaker 0

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

Speaker 6

Hey, good morning guys. Congratulations on the BOE fab coming online a little bit earlier.

Speaker 2

Thank you, Patrick.

Speaker 6

Okay. So I have a couple of quick questions not quick questions, but I ask you to have a little patience with me like I've been having with you guys. The Tier one customer, is it a customer or is it a partnership? And basically I ask that based on do you believe this Tier one will be coming to the market with the ecosystem, meaning some software partners behind them, maybe their cloud, maybe their AI, maybe your AI? Can you give us a little color on how you see that unfolding maybe?

That's my first question.

Speaker 2

The question from Patrick is about this global Tier one company that has got 5,000 units late last year and I suspect to announce soon. I expect this this is going to be a very reasonable shock to the system. We really can encourage the enterprise world to really grow. I assume when the announcement comes, there will be lot of good data that comes with the announcement to show that people are in fact getting a lot of good benefit from it on a software, hardware and the return on investment having those type of systems. So we're all expecting it to happen soon and I think it will.

Speaker 6

Okay, great. I look forward to it. And then my next question is for Rich on the balance sheet. I see you have an equity investment line of about $5,500,000 up from zero a year ago. Can you highlight where that comes from?

Speaker 1

Yes. So as I mentioned in the prepared remarks, we had a warrant from a customer as part of a licensing of technology. And so we exercised that warrant. And then so that's roughly, not exactly, roughly half of it. And then the other half is a JV that we did in China last year where we contributed $1,000,000 in cash and IP.

Speaker 6

Okay, great. And then you guys keep talking about having 300 plus patents in the portfolio. I mean, it's been going on for one years. Point And we I witnessed these patents coming out quarter after quarter after quarter. I see you have a patent specialist on your Board of Directors.

Can you talk to us about how we can monetize these things like you have with your partner and your Chinese JV. Can you talk about how these patents may come into play in the next three months, nine months, two years? Is there anything you can add to that?

Speaker 2

Yes. I think that we are in what we call monetizing phase right now. As you will know, we mentioned that we have licensed some of our patents or designs to companies in return not only for royalties, but in addition for equities as well as to have contracts of buying our components. And this has been starting carrying on the last eighteen months and it's very successful. And we'll we'll continue this effort.

I think that we recently announced another license to startups to make AR glasses for surgeons for military for medical. So this is another case where we license technology as well as getting equity and royalties. So we'll be doing more and more of that. We found out that more and more people coming to us because as you well know, world cases already pretty well known. So people seen that they licensed a system from us and voila, we will become a very successful company.

So we're going to have a lot more people doing that now.

Speaker 6

Okay. And just to add one thing, do you see any Tier one companies looking to license any of your IP or coming to you and asking you about your IP if they're going into wearables or voice? Are you having any Tier one, Tier two conversations?

Speaker 2

Yes, I think maybe we should mention, I don't know, I assume people will consider Lenovo as a Tier one company. They spun out called Lenovo New Vision. That particular arrangement is the license design from us, the buyer components for us as well as they give us equity.

Speaker 6

Okay. And then the BOE, fab news and the fact that that's ahead of schedule as far as I'm concerned, I'm really excited about that. I think that's going to turn the VR needle up faster than people expect. And I just want to know, John, are you engaged with numerous Tier 1s over the past nine months since VR has gone silent reassessment stage? Are you coming out with better designs?

Are you you talked about situational awareness with VR. Can you talk to the audience about how excited you are and how much attention you're getting maybe from Tier 1s regarding your OLEDs and your virtual reality designs?

Speaker 2

Yes. Think Patrick, as you said, we are giving the talk at MIT and Harvard the last two months. I outlined the situation of VR. There's no question about it. VR has been disappointing year, 2018.

But out of that, as you well know, out of that people begin to see the light at the end of the tunnel. What's missing is a better display. The display has to be a higher resolution faster even to make sure there's no latency as you move your head, so you don't get sick when you wear them. And the display should be higher resolution, maybe even higher than a two ks by two ks, which we have, which is a world record, but even that may not be enough. So people have to go to higher resolution and much lower cost.

Right now, there's no supply. I mean, we've got our two ks display in every company that you can name off in VR. I don't think there's any VR companies doesn't have our display in their systems. It's just that doubt that all the feedback comes back and say, could you give us a little bit better display, faster display, lower power? And by the way, it better have good supply and better low cost.

And we have many, many check mark now by the end of this first or second quarter.

Speaker 6

Okay, great. And guys, I'm just going to end it with this, under promise and over deliver, okay? I want to see that in 2019 and I think it's clear skies ahead. Thank you.

Speaker 2

Thank you very much.

Speaker 0

Thank you. Our next question is a follow-up from Jeff Bernstein with Cowen. Please proceed with your question.

Speaker 4

Hey, and I'll second the last comment. But John, I just wanted to get an update on fourth dimension, what's going on with the three d vision in terms of ramp in China? I know we've been sort of expecting that technology to finally cross the chasm over there. And then just talk a little bit about some of the other things on the display side, which I know are kind of higher end, but maybe more in the realm of hollow lens and that kind of thing that fourth dimension is doing?

Speaker 2

Yeah. The question is, in the case of a three d metrology, people are using that three d machines to look at three d look at PCB board. But now people start looking at it for other application, look at the three-dimensional things in inspection as well as quality control. The China market, we're seeing some activities there. We're actually I don't know whether maybe we announced it.

There are some activities going on in China right now and positive activities. So again, go back to what you're saying, we will not make a big deal out of that until we see consistent consistent order from them.

Speaker 4

Okay. And then just on the display side, I think in very high end simulation kinds of systems, etcetera, those fourth dimension LCOS displays are being used even for holographic kinds of things, etcetera. Just talk a little bit about that and where you see the markets for that right now?

Speaker 2

It's a very high end spatial light modulator and display. That does make a very, very good high end. The thing about Fourth Dimension is their market is a lot evolved with military industrial application and medical applications. The price point by nature, we set very, very good price point. So they are aiming still not for consumers.

The consumers are really look go for the OLED hopefully coming from BOE labs.

Speaker 4

Got you. Thank you.

Speaker 0

Thank you. We have reached the end of our question and answer session. I would like to turn the call back over to Doctor. Fan for any closing remarks.

Speaker 2

Well, thank you very much for joining us, and also thank you for the many good excellent questions. Hope to see you in the next quarter. Bye bye.

Speaker 0

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