Kopin - Earnings Call - Q4 2019
March 10, 2020
Transcript
Speaker 0
Good day, and welcome to the Kupin Corporation Fourth Quarter and Full Year twenty nineteen Earnings Conference Call.
Today's conference is being recorded. At this time, I would like to turn the conference over to Rich Schneider, CFO. Please go ahead, sir.
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 market. I will go through the fourth quarter and twenty nineteen results at a high level. John will conclude our prepared remarks, and then we'll be happy to take your questions. I would like to remind everyone that during today's call, taking place on Tuesday, 03/10/2020, we'll be making forward looking statements as defined 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. The company undertakes no obligation to update the forward looking statements made during today's call. And with that, I'll turn it over to John. Thank you, Richard.
Thank you for joining us
Speaker 2
this morning to discuss our fourth quarter and 2019 results. We are very pleased with the way the year ended. From an operations perspective, we saw strong demand for our products from the military and public safety segments.
Speaker 1
And we
Speaker 2
continued to make improvements in our cost structure. From a technology perspective, we had a very successful consumer electronics show in January, at which we highlighted our proprietary double stack organic light emitting diode or OLED microdisplay, including a super bright monochrome green display that emits over 20,000 nits. Honestly, it was too bright that it's difficult to look at. For the fourth quarter, military was the key revenue driver with the F-thirty five Joint Striker Joint Strike Fighter and FWSI programs representing the majority of those revenues, consistent with our experience all year. As we noted in our earnings call of third quarter twenty nineteen, we received a new FWSI order and begin filling it in fourth quarter.
In 2020, we expect FWSI CrewServe and our Armor Vehicle Developer Programs to be completed. And they will join the f f 35 and FWSI product revenue generation. Historically, we have had only one or two major merger programs in place in any given time. Today, we have in place over 10 military programs that are either in smaller production or advanced development stage. While some of them may not impact revenue generation until 2021 to 2023 time frame, and we cannot be sure how we'll reach production after moving through development.
The overall strength of our military program and our success in winning programs over competition is the strongest in our history. Turning to public safety, we had a very strong q four for shipments of our display product for the fireman mask application. We believe this is a great application for our technology, and we expect new products to be developed for public safety applications in 02/2020. You may recall in the 2019, we took significant steps to reduce our cost structure. These reductions have improved our cash for operations, reducing it from $7,800,000 of cash used in operation in 2019 to $200,000 of cash used in operation in Q4.
We're making good progress in rationalizing the business and expect further progress as we move through 2,020. As I mentioned, we had a very good showing at our CES event. We demonstrate two k seven twenty p display using our new double stack OLED micro display technology, which has a much higher brightness and longer lifetime. We also gave a preview of our new and the world's first 1.3 diagonal, 2.6 k by 2.6 k display. That means 2,560 pixels by 2,560 pixels resolution for the next generation AR, VR and XR applications.
OLED technologies advances include padding planning, silicon backplane technology, which enables the creation of double stack OLED structures for microdisplay. A double step OLED is two OLED structures on top of each other. They connect it in series so that the charge carriers pass through the double step OLED and generate photon trust instead of once in a conventional single step OLED structure. This result in much higher efficiency, higher brightness, lower power consumption, and longer life. While this approach have been used for large panels displays, maintaining a good color fidelity, having has been a very serious barrier for small pixel microdisplay.
We have succeeded in solving this with a unique method in our silicon backplane design and process. In addition, our patented backplane design architecture enables a superior dynamic range, which allows our display to be used in a very bright sunlight and pitch black darkness. This display can meet the demand of consumer enterprise applications being developed for the five g's network. Finally, our stock is below $1. They will receive a notice from NASDAQ that the company is not in compliance with NASDAQ minimum bid price listing rules.
On 03/02/2020, we held a special shareholder meeting in which the shareholders authorized the company to affect a reverse split. The Board will decide the timing and size of the reverse split. Once we have clarity in a number of pending opportunities, in a month in time, we we expect to request an extension for Nasdaq to enable our options. To summarize, we had a strong 2019. We are excited by the CoBank's long term opportunities as we see increased revenues and the benefits of our continuous cost reduction efforts.
To further increase our efficiency, at year end, we created a new position of VP of Operations and hired Eric Wimman. Eric brings extensive experience gained from operation position at several aerospace, defense and technology companies and is focused on improving our manufacturing efficiency. Now I'll turn the call over to Rich, so he can provide additional details, especially around the cost structures.
Speaker 1
Beginning with the results for the quarter, total revenues for the 2019 was 8,700,000.0 compared with 7,700,000.0 2018, a 13% increase year over year. The increase in sales in 2019 compared to 2018 was primarily due to increased sales of products for public safety applications funded military programs. Cost of sales for the fourth quarter was 81.1% of product revenues compared with 76.2% for the fourth quarter of last year. Cost of product revenues increased as a percentage of revenues in 2019 as compared to 2018 because of the lower than historical yields from our manufacturing process. R and D expense in the 2019 was $2,700,000 compared with $3,900,000 in the 2018, a 31% reduction.
Material R and D expense for Q4 twenty nineteen decreased $1,700,000 as compared to the prior year, primarily due to the licensing of certain products and other development programs being curtailed. This decrease was partially offset by an increase in funded R and D expense of $500,000 for Q4 twenty nineteen compared to the prior year due to an increase in funded R and D revenue for military programs. SG and A expenses were $4,500,000 in the 2019 compared with $6,200,000 in the 2018, a reduction of 27%. SG and A for Q4 twenty nineteen decreased as compared to the prior year, primarily due to a decrease in non cash stock based compensation of approximately $500,000 compensation expenses of $700,000 marketing expenses of 400,000 and IT and consulting spending of approximately $400,000 which were partially offset by approximate increase of $500,000 in professional fees and $800,000 of bad debt expense. Included in Q4 twenty eighteen operating expenses are $2,500,000 from the write off of fixed assets and 1,400,000.0 from the impairment of goodwill charge.
Other income expense was expense of approximately 3,700,000.0 in the 2019 as compared to 1,100,000.0 of income in the 2018. Included in the 2019 was a net write down of equity investment of 4,600,000.0. The 2019 includes approximately 238,000 foreign currency gains as compared to approximately 1,400,000.0 of foreign currency gains in 02/2018. Turning to the bottom line, our net loss controlling interest for the quarter was approximately $7,300,000 or $09 per share compared with a loss of $10,000,000 or $0.14 per share for the 2018. Turning to the results for the full year.
Total revenues for 2019 were $29,500,000 compared with $24,400,000 for 2018, a 21% increase. The increase in 2019 revenues as compared to 2018 was primarily due to an increase of sales for industrial applications and funded development programs, partially offset by a decline in sales of our products for consumer applications. Cost of goods sold for 2019 was 103% compared with 82% of product revenues for 2018. Cost of product revenues increased as a percentage of revenues in 2019 as compared to 2018 due to lower than historical yields from our manufacturing process as a result of the initial volume production of our FWS program and a charge for inventory obsolescence. This charge was due to discontinuance of certain products and the write off materials as we found substitute materials that will provide for better long term manufacturing yield.
The FWS program went into volume production in 2019 and our yields were lower than historical levels as our supply chain works to consistently meet quality standards. R and D expense in 2019 was $13,300,000 a 23% decrease compared with $17,400,000 in 2018. Funded R and D expense for 2019 decreased $700,000 as compared to 2018, primarily due to completion of performance obligations on funded U. S. Military programs.
Internal R and D expense for 2019 decreased $3,400,000 as compared to the prior year, primarily due to the licensing of certain products and other development programs being curtailed as part of our strategic realignment. SG and A expenses were $21,300,000 for 2019, a 22% decrease compared with $27,200,000 for 2018. SG and A for 2019 decreased as compared to the prior year, primarily due to a decrease of $2,000,000 in non cash stock based compensation, 1,000,000 in product promotion and marketing expenses, spending, 900,000 amortization of intangibles and $800,000 of accrued contingent consideration, which were partially offset by an increase of $1,000,000 in professional fees. Included in twenty nineteen eighteen operating expenses was approximately $300,000 and 1,400,000.0 respectively from the impairment of goodwill and in 2018, 2,500,000.0 from the write down of fixed assets. Other income expense was expense of $2,900,000 for 2019 as compared with income of $5,500,000 for 2018.
In 2019, we recorded a net write down of equity investments of $3,900,000 In 2018, we recorded a non cash $2,800,000 gain on equity investments as we and we received $1,000,000 of insurance proceeds. 2019 included approximately $200,000 foreign currency gains as compared to 2018, which had approximately 1,200,000 of foreign currency gains. Turning to the bottom line, our net loss attributable to controlling interest for 2019 was approximately $29,500,000 or $0.37 per share compared with a net loss of $34,500,000 or $0.47 per share for 2018. Fourth quarter and year end amounts for depreciation and stock compensation are attached in the table to the year end press release. We concluded the year with approximately $21,800,000 of cash and marketable securities and no long term debt.
Regarding the coronavirus, it is affecting delivery of a couple of products, parts that we procure from China. Although it has not yet had a significant effect, we are currently working with our suppliers to establish alternative sources for these components as a contingency plan. We are currently forecasting an increase in military revenues in 2020 as compared to 2019, but this will partially offset by lower forecast demand from our industrial customers. All amounts discussed are estimates and listeners should refer to our Form 10 ks for the year ended December 2839 for final disposition as well as important risk factors. With that, operator, we'll take questions.
Speaker 0
Thank you. Our first question comes from Glenn Matson with Ladenburg Thalmann.
Speaker 3
Hi. Thanks for taking the question. So just to, Rich, for a minute on the guidance, talked about increase in military partially offset by some other factors. So being that's partially offset, I assume you're talking about revenue growth for the year in aggregate. But then just as far as the industrial side, know, in the press release, you talked about issues perhaps around getting supply that you need, but then you say lower demand from industrial customers.
So is supply the issue or demand the issue? And maybe you could give us some more color as to how the quarter performed in some of the other sectors, industrial, notably things like RealWear and perhaps from partners like Google Glass and just how you think that those guys will perform in 2020?
Speaker 1
Sure. So as it relates to the coronavirus on the supply side, we have not yet had any specific issues. Our vendors are meeting their deliveries as required in the purchase orders. I will say though, there are a couple of parts, literally two, that we're living somewhat hand to mouth. They're meeting deliveries, but we are concerned that there might be a hiccup.
And so we are working with our vendors for possibly forcing these parts in The United States. So that's otherwise, no real issues on the supply side. On the demand side, our our customers are forecasting lower demand. I think it's all part of just the industry trends associated with the coronavirus and whatever else they may be factoring in. And so we're using those forecasts from our customers to come up with our guidance.
Speaker 3
Okay. And then as it relates to the military business, you mentioned maybe John mentioned that the you expect to, like, maybe later in the year that the the Cruiser, the FWS crew crew business begins to ramp and the armored vehicle begins to ramp or begins to produce revenue later in the year. Is that those programs kicking in, how confident are you in that? And is that is the guidance relying on those kicking in in the second half? And then I guess the last thing I'll ask is just how gross margins shake out if business is more skewed towards military in 2020.
Speaker 1
So as it relates to the programs, the first half of the year is essentially delivering prototypes. And assuming that those prototypes go through the normal shake and bake, you know, this point, based on our progress on those programs, we do think that Q4 will be generating revenues and that they'll go into production. That's the schedule. We've been meeting the schedule for the most part to date, and so we don't see anything changing on that. As it relates to gross margin, last year, you know, we honestly took some significant hits on the yield on the FWSI program.
And during the course of that development, honestly, we identified better raw materials as the year went along. And so the decision was made to scrap old material rather than run it through the line at low yield. And so we took some significant inventory obsolescence. And so what we're looking for is something in the neighborhood of a 5% improvement in cost of sales, gross margin each quarter during the year.
Speaker 2
And, yes, I just wanna add, of course, we also have additional management. So, Eric, I would know who's very experienced in this particular area as a chart at the end of the year last year.
Speaker 3
Okay. Great. Thanks for the color.
Speaker 0
We'll take our next question from Jeff Bernstein with Cowen.
Speaker 4
Hi, guys. A couple of questions. A number of months back, you had a press release about a customer for fourth dimension that was using the Elcost displays in an optical compute platform. And I was just wondering what the update there was. Has that ever become commercial?
Speaker 1
That's still in development.
Speaker 4
Gotcha. What's the expectation on when that might have a commercial product?
Speaker 1
I I really couldn't talk to what their plans are.
Speaker 4
Okay. And then think you guys were working on a helmet that was more for rotary drive aircraft, helos and stuff. What's the status on that program?
Speaker 1
So that's the common area helmet program that working with on with Elbit. It continues to go through with it's taking our old AML CD and adding an ITO layer to it. I don't know what ITO really means. I'll have to explain that to you. But it's supposed to dramatically improve contrast.
And so that program continues along. And we believe Elbit has already been awarded the program. And so now we're in just the continued development phase. We expect somewhere between the second and third quarter that development phase will be completed.
Speaker 2
Yeah. Just to add it, that that program, Albert already got awarded. Now we are in the preproduction phase, trying to get into production. So there's a number I'll give you a program, and it's big win for them. Yeah.
Speaker 4
Gotcha. So that's one of that's one of the 10 that you talked about that Yeah. That are are in various stages. And then is there a theme among the others? Are there other ones that are additional sort of LCD replacement type contracts?
Or or or or what's is there anything to talk about on the others?
Speaker 2
Yeah. I think this is John speaking. Hi, Jeff. The situation with the display microdisplay is, of course, dominoes, the LCD, but there's a significant activity now going on and trying to go through the next generation of microdisplay. So you it it it's very active right now, and I think we're very well positioned because we are the king of microdisplay.
Speaker 4
Okay. And then just to to clarify, there there was the this confusion about the supply side versus demand side in China. So on the demand side, we're talking about the demand for the three d machine vision for board inspection out of China. That's the demand side where customers right now are forecasting some lower demand. Is that right?
Speaker 1
Yes. But we also have, you know, customers who are doing some of the wearable technologies, and they're, you know, they're being cautious on their forecast also at this point in time.
Speaker 4
Gotcha.
Speaker 2
Yeah. I I think I think in near term, you'll see some impact on this particular area. For the longer term, we we think the customers and Chinese customers who are picking the factory we're trying to go for more automation. And some of these instruments, the new instruments we have been developing without these new displays, they're useful for them. So you will see a short term hit and maybe a longer term as you come up better.
Speaker 4
Okay. And then with regard to the Panasonic development, I guess you were showing some some prototype at CES. I think you're still working on getting the color fidelity right on that. That's, I guess, the first contract that would use the BOE capacity that's coming up. Just give us an update on that and talk about what the pipeline looks like for additional people looking to use that BOE capacity potentially?
Speaker 2
Yeah. The the question is on this CES Panasonic as demonstrated. They are they call it eyeglass or eyewear the system. It it is really looks very very very cool. The one we demonstrated openly, of course, is using two k, but we obviously doing 2.6, which is will affect even more.
So the demand for the after the demonstrated following the customers, their customers are very strong. So so they are making very active move movement towards they're making normal systems. I actually personally think that is the the the way it's gonna go. I gave a talk at my key about now it's about three weeks ago, And he's now on YouTube, and he wanna see it. And I say that that's what's gonna happen.
The AVR will come in first, and then comes the AR. So the VR, the AR display is perfect for us, especially the 1.3 inch by, you know, 2.6 k by 2.6 k display. We've been double stack, which we right now, we're the first now, would be the perfect for VR.
Speaker 4
So so, John, but but the issue on on the color fidelity, is that been worked out or or you're working on that now?
Speaker 2
Because color fidelity was a huge problem for double stack, and I set it. We succeeded in solving the problem. I'm using a special scheme on the back plane. So it's it's transparent to the honest guy. The honest acquisition guys do not do anything because we solve it on our back payment side.
Speaker 4
Gotcha. Okay. So so you're saying this this Panasonic 2.6 k by 2.6 k, that that's what they're gonna go to market with, and that that is all ready to proceed.
Speaker 2
I don't know how we define to see because that's our customers' decision, but they are moving very strongly forward. Yes.
Speaker 4
Gotcha. Okay. And then lastly, you talked about something about getting an extension for the reverse split, a number of opportunities. Can you just flesh out exactly what you mean there? Are you saying you expect a lot
Speaker 1
of good news to come
Speaker 4
and you think the stock will be a lot higher and you don't need to do a reverse split? What's this all about?
Speaker 1
Yeah. It's a combination of things. One, you know, this uncertainty over the coronavirus. You know, to be perfectly frank, we don't wanna go through the whole process of reverse split. This corona thing blows up.
And the next thing you know, the whole market's coming down, and we're getting dragged down with it. So we did want more visibility in the overall effect of corona. We also do think that organically, the company is gonna do better over the next few quarters. And so we wanna give that an opportunity to filter into the stock price.
Speaker 4
Okay. All right. And then Rich, I think you've talked about that culturally Copen is an R and D house that people want to spend money on R and D. And you had to fight bring that down. Do you need me to beat up John anymore about that?
Are you guys on track for getting the cost saves you need?
Speaker 2
I will ask you that question, Jeff. I mean, this is a very loaded question. But but remember the last year, so where you say that we have been doing a lot of investment in military programs, in technology, investment like the OLED. And we expect the investment will go down and the revenue generation to stop. And I think we're we're pretty much online.
We see we're finishing up this tenth probably more than 10 now. But the program development and there'll be delivery generation. And we solve the microfinance problem. That the world people had never solved. So we are actually going for our investment to revenue generation with our plan.
It just happened to be we actually did our schedule.
Speaker 1
Okay. Good. We're looking forward to it.
Speaker 0
And it appears there are no further questions at this time. I'd like to turn the conference back to doctor Fan for any additional or closing remarks.
Speaker 2
Well, thank you for joining us, and everybody stay healthy. Thank you.
Speaker 0
And that does conclude today's conference. We thank you for your participation. You may now disconnect.