Kopin Corporation (NASDAQ:KOPN) Q3 2021 Earnings Conference Call November 2, 2021 8:30 AM ET

Company Participants

Richard Sneider - Chief Financial Officer
John Fan - Chief Executive Officer

Conference Call Participants

Glenn Mattson - Ladenburg Thalmann
Spencer Cushman - H.C. Wainwright
Craig Rose - Axiom Asset Management

Operator

Good day, and welcome to the Kopin Corporation Third Quarter 2021 Earnings Call. Today's conference is being recorded.

At this time, I would turn the conference over to Mr. Richard Sneider, Chief Financial Officer. Please go ahead, sir.

Richard Sneider

Thank you, operator. Welcome everyone and thank you for joining us this morning. John will begin today's call with a discussion about our strategy, technology, and market. I will then go through the third 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 Tuesday, November 2nd, 2021, we will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on 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, supply chain issues, operating results for our subsidiaries, market conditions, and other factors discussed in our most recent Annual Report on Form 10-K 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 will turn the call over to John.

John Fan

Good morning and thank you all for joining this morning. To start, it is undoubtedly very interesting few weeks for AR/VR. First, Facebook, came out with a Facebook Ray-Ban Smart glass product. And then last week, Facebook changed its corporate name to Meta for the coming metaverse world.

We of course, have been pursuing this world for quite some time. However, I will first focus on our Q3 update as we do have so many great advances in this quarter. So, we'll be happy to take questions on Metaverse during our Q&A session.

We are very pleased with our strong third quarter results with revenues increasing 14% year-to-year, reflecting resetting, particularly strong growth in industrial product revenues and customer spends funded development activities, which post year-over-year growth of 65% and 60% respectively. This quarter what our ninth straight quarter of year-to-year growth.

Here's another reference. Revenue grew about 24% in the past three quarters year-to-year. We feel very good about our position in the market and our ability to continue our strong performance.

We are on track with our defense development programs. In the second quarter 2021, we mentioned that two development programs and a low rate initial production. In the third quarter, we received an order for one of these programs, the Joint Effects Targeting System or JETS. More details on that in a moment.

We expect another program to enter low rate production within the next few months. If this occurs, it will be our sixth production program. In addition, we continue to have an active and robust pipeline of defense programs in development, which will further fuel our revenue growth in the coming years.

Let me give you some additional detail on a few of our growth programs and market areas. First, the FWS-I program, we announced during our second quarter call that will reduce shipment of eyepieces for the FWS-I thermal weapon sight program, while we worked with our customer to develop better processes for increased production rates.

I am pleased to report that these improvement activities have gone very well. We are now ramping production and we expect one of the highest production in shipping rate for this program in the fourth quarter. In addition, we expect to receive a significant new order for our FWS-I eyepieces showing.

As a reminder, the FWS-I thermal weapon sight uses a very high-precision video see-through AR optical module, using our CyberDisplay and our custom designed sophisticated Pancake optics. These optics have some glass element compact.

As we discussed in the last earning call, a new invention all-plastic Pancake optics for VR, AR, MR applications is an exciting innovation and achievement for Kopin. Hence we believed to be the first all-plastic Pancake optics in the world, producing better image quality in a much lower cost and much lighter weight.

For the coming consumer AR/VR headset markets, such all-plastic optics will be very useful. 3D Automated Optical Inspection is another bright area for us. During the third quarter, we’ve decided to announced a $3.4 million order commitment from JUTZE in Intelligence Technology to provide Spatial Modulators, or we call SLM for JUTZE's Edge series of 3D Automated Optical Inspection, and Mirage series for 3D Solder Paste Inspection system.

It's important to note that SLM key components for 3D Automated Optical Inspection, which are referred to 3D AOI equipment. Our SLM is used in this quality inspection systems for Printed Circuit Board Assembly or PCB -- PCBA. The SLM projects structured light onto the PCBA, being measured by 3D AOI/SPI equipment to find flaws or defects. This approach enable circuit board manufacturers who are now using 2D AOI machines to move into 3D. So, as the improve PCBA use and product quality, while reducing waste and cost.

We've been focusing in this area for several years, is now bearing good fruit. Seeing the growing demand for 3D AOI machines in a number of key areas, in particular

manufacturers of previous circuit board for electrical -- electric vehicles are moving from 2D to 3D AOI equipment to the high quality standard needed to achieve automotive safety requirements. Currently Kopin and one other company assess the instrument, equally supply approximately 80% of the SLM market, leader for 3D AOI market.

We have grown over 50% in this market in the past two years. With a staggering growth in electric vehicles, we believe this is an increasingly important opportunity for Kopin in the coming years. We plan to host the Webinar early next year to go in depth into this technology and demand for Spatial Light Modulator.

Let's quickly review a few more recent successes. As I just mentioned a few moments ago, we recently announced a 1.1 million order to provide eyepieces for JET System which are scheduled for delivery next year. The JET system is a portable, handheld product designed to rapidly acquire, precisely locate and accurately engage targets with precision-guided munitions. We are providing the programme with a high resolution, low power ruggedized eyepiece using our specialized optics in micro space.

We also announced our cyber display, WQVGA display has been designed into types of new -- newly launched optical display adapter for divers and provide easy access to critical diving area of data. Our display offers user a bright, clean, easy readable image in a small form factor. This win is an example of many industrial and medical areas looking to integrate the capability of a microdisplay and optics for utility and safety in their AR/VR products.

Turning to our Organic Light Emitting Diode activities. We received approximately $850,000 follow up order for our proprietary Lightning 2K silicon backplane wafers. As a reminder, our Lightning 2k backplane support all its microdisplays with 2048 x 2048 resolutions in a 1-inch diagonal size and can run at up to 120 Hz with low power consumption. This repeated audit is in line with our expectations of growing market demand for our backplane wafers for OLED microdisplays and validate our fabulous business model.

Now let me take a time -- a few minutes to discuss our microdisplays strategy. Since our early days with funding from DARPA Kopin has advocates strongly the microdisplays to reside on silicon IC backplanes. In fact, our advanced microdisplays to be on silicon IC backplanes. Therefore, from the very beginning all our microdisplays are on silicone IC backplanes. We believe that it was only provider of LCD, LCOS, Micro OLED in the future micro led, microdisplays all on silicon backplane. In fact, our key feature and differentiation is in the silicon semiconductor backplane designs and processing steps.

Kopin had focus on silicon semiconductor backplanes for two decades. They have been vigorously integrating sophisticated and complex IC and display driving design into the backplanes. To enable display for that matter our spatial modulators, we have layered our designed, specially designed IC silicone backplanes with either the liquid crystals, ferroelectric liquid crystal, Organic light emitting diode or inorganic light emitting diode to meet what we trademark as Display on Chips, DoC.

We plan -- we would plan to showcase many of such DoC in our suite in the upcoming CES in January 2022. In short, our revenue generating business is strong, driving good momentum into Q4 and next year. At the same time, we're actively innovating to advance our technology roadmap, paving the path for the future growth of AR, VR, and MR applications. The current market trades indicate exciting and growing opportunities, especially in the Metaverse VR platform. Kopin is an active and persistent pioneer in furthering this technology.

Beginning many years ago in defense and in enterprise and now in customer applications. We are very well positioned to capitalize on those opportunities. We're looking forward to the coming in-person CES in January, when in addition to our display on chips, we plan to exhibit many of our recent exciting developments related to AR, VR.

Interestingly, I was asked a few days ago, whether we can even show the F-35 helmet. This is the world's most advanced protection AI helmet in the world. As many of you know, our fiber display is the sole source in the helmet. We will try – it’s most likely impossible to achieve that. Regardless, we have many other interesting devices to show you future OLED at CES.

Now I will turn this call to Rich, to review the financial details.

Richard Sneider

Thank you, John. Turning to our financial results. Total revenues for the third quarter ended September 25, 2021 were $10.9 million compared with $9.5 million for the third quarter of September 26, 2020, a 14% increase year-over-year. Product revenue for third quarter ended September 25, 2021 was $6.6 million compared with $6.5 million for the third quarter September 26, 2020. Our defense product revenues for the third quarter ended September 25, 2021 with $3.5 million compared with $4.8 million for the third quarter ended September 26, 2020.

As John previously discussed, during the third quarter, we reduced shipments of our product using thermal weapons sight systems to a customer who want to make process enhancement. We expect to increase our shipping rates for this product in the fourth quarter.

Our industrial product revenues for the third quarter ended September 25, 2021 was $2.7 million compared with $1.7 million for the third quarter ended September 26, 2020 and approximate 65% increase on the strength of sales of products used in 3D metrology equipment, the 3D AOI that John referred to, and it was partially offset by decline in sales of our products used in headsets, used for applications in manufacturing, distribution and public safety.

Funded research, development and other reviews were $4.1 million for the third quarter ended September 25, 2021 compared with $2.6 million for the third quarter ended September 26, 2020 and approximate 60% increase year-over-year, primarily due to an increase in customer funded programs for US defense.

Cost of product sold for the third quarter ended September 25, 2021 were $5.1 million compared to $4.8 million for the third quarter ended September 26, 2020. Gross margin for the third quarter ended September 25, 2021 were 22% compared to 26% for the third quarter ended September 26, 2020 reflecting the manufacturing inefficiencies due to lower sales volume of our products for the FWS-I program.

Regarding global supply chain issues affecting many industries, we have not experienced any material product shipping delays related to supply chain issues during the first nine months of 2021. However, like most companies we are facing challenges. The situation is very dynamic, and we can turn -- continue to work around the issues it presents.

Research and development expenses for third quarter 2021 were $3.8 million compared to $2.7 million for the third quarter of 2020, a 38% increase year-over-year. R&D expenses for the three months ended September 26, 2021 increased as compared to three months ended September 26, 2020, primarily due to an increase in customer funded development program and internal R&D expenses for OLED development.

Selling, general and administrative expenses were $4 million for the third quarter of 2021, compared to $3.1 million for the third quarter of 2022 -- 2020, excuse me. Excluding the non-cash stock base cost, SG&A expenses were $3.6 million for the third quarter of 2021 compared with $2.9 million for the third quarter of 2020, a 25% increase. The increase in SG&A excluding non-cash stock compensation costs was due to an increase in other compensations costs and bad debt expense.

Other income was approximately 51,000 of expense for the third quarter 2021 compared to 168,000 of income for the third quarter of 2020 during the three months ended September 25, 2021, we recorded $29,000 of foreign currency losses as compared to 183,000 of foreign currency gains for three months ended September 26, 2020.

Turning to the bottom-line. Our net loss attributable to the controlling interest for the third quarter of 2021 was $2.1 million or $0.02 per share compared with a net loss to controlling interest of $957,000 or $0.01 per share for the third quarter of 2020.

Non-GAAP net loss attributable to controlling interest for the third quarter of 2021 was $1.7 million or again, $0.02 per share compared with non-GAAP loss attributable to controlling interest of $760,000 or $0.01 per share for the third quarter of 2020.

Kopin's cash and marketable securities were approximately $31.7 million at September 25, 2021, as compared to $20.7 million at December 26, 2020. Net cash used in operating activities for the third quarter ended June 25, 2021 was approximately $3.5 million.

During the three months ended September 26, 2020, we sold 600,000 shares of our stock under our ATM program for proceeds of approximately $4.8 million before deducting expenses paid by us of $145,000.

For the nine months ended September 25, 2021 we have sold 3,960,697 shares for gross proceeds of approximately $21.7 million before deducting broker expenses paid by us of approximately $700,000 pursuant to our existing and previous ATM agreement.

Third quarter amounts for depreciation stock compensation are attached in the table to the Q3 press release. The amounts discussed above our current estimates and the listener should review our Form 10-Q for the third quarter 2021 any possible changes, and of course additional disclosures.

That concludes our prepared remarks. Operator, we’ll not take questions.

Question-and-Answer Session

Operator

All right. Thank you. [Operator Instructions] And we'll go ahead and take our first question from Glenn Mattson with Ladenburg Thalmann. Please go ahead.

Glenn Mattson

Yes. Hi. Thanks for taking the questions and congrats on the quarter. The bounce back that you expect in the FWS revenue, do you think that's -- is that just kind of a bounce back that makes up kind of some of the push up from Q3 and or is that -- is there a higher level of production or -- now that the facility that had been retooled is -- has completed that process with just a general sense of the piece of business from that contract? Thanks.

Richard Sneider

Yes. So we are going to try making up as much of the Q3 as possible in the fourth quarter

And going forward, our overall production rates should be higher on a weekly basis, because of the profit rate.

Glenn Mattson

Yes. The better R&D revenue is that a signal that -- I think, John spoke to a number of defense programs that you're in, is that number increasing, or is it just that the scope of the work within those programs has picked up this quarter and is there -- you expect that to continue for a little while or -- some color there?

Richard Sneider

Just in this particular quarter. So we have a number of contracts that go out for an extended period of time, and it was just a reflection of the amount of work that was done this quarter, it's on percentage of completion basis. So it's -- that piece of business is somewhat lumpy. Depends on what you achieve in particular quarter.

Glenn Mattson

Right. Great. And as far as the industrial side, nice pickup there, you mentioned that the optical inspection side of the business is doing well, but that the headsets were -- is offset by lower weakness in headsets. Is the -- I guess, is the first trend sustainable? And second, is the headset something you expect to bounce back, or is that just kind of -- that business kind of quiet right now?

Richard Sneider

Yes. So as it relates to the 3D AOI, we do believe that is sustainable. And we've had good backlog in orders for that business right now. As it relates to the headset business, our customers tell us they do expect that to get stronger going forward.

Glenn Mattson

Great. Last one for me. I don't know if Rich for you or for John, but on the metaverse stuff. I guess the Facebook's putting some kind of 10 billion or so investment in this space. So, obviously, they're going to be building some of the best products out there.

So I guess, John, do you expect that to be competing to get into those headsets, so to speak. And then just generally speaking with the pace that Facebook is going at it, do you expect that's going to accelerate the whole industry in general and force other major tech players to kind of dance their projects within the VR space and that as well could potentially serve you guys well. Just some color there would be great.

John Fan

It's a very good question, Glenn, on the metaverse. As we all know, we have been believing -- I've always believed that the next generation of transformation is going from that cellphone to the metaverse world. We certainly cannot compete with Facebook, let's face it.

Facebook say they have more than 10,000 people working on it. And -- but they spent a lot of time -- most of the activities of software and applications as we’re not. That showed such a new platform as a lot of hardware that needed. The most important hardware needed as a displays and optics. And we've been focusing on that since day one sold out day.

We also believe that's what the most important is a hardware. After hardware of course software applications, app and Facebook are very good at that, and we are not doing that. We always be focusing on how to provide the best image to view from a smaller form factor and that exactly what defense and enterprise guys want and we dominate these two areas. And hopefully we will be providing the critical components for the metaverse.

In fact, it's interesting we have trademarked the glass. Our trademark for the VR Glass is called the metaverse glass. We have the trademark. We are way ahead on the metaverse. Our trademark of VR glass is called the metaverse glass. So I will not go into a lot of details. What needed for display -- maybe somebody will ask that. That for the metaverse, the requirement for displays of optics are quite different on the AR glass, which we do for the F-35. So, maybe I would let other people ask the questions. But the views are very interesting and I think we're very well situated for that.

Glenn Mattson

Great. Thanks for all the color and congrats on the quarter.

Operator

[Operator Instructions] We'll go ahead and take our next question from Spencer Cushman with H.C. Wainwright. Please go ahead.

Spencer Cushman

Hi, John, Rich. This is Spencer Cushman in for Kevin Dede. Congrats on the quarter. I was kind of curious to get some more thoughts on the difference between the glass setup for components for the F-35 and coming metaverse, you were just talking about John.

John Fan

Yeah. I think in the case of the F 35, which is the AR glass, what do you need is very rugged, overly rugged. In fact, all the displays for defense applications, ruggedness, high precision are most important. And the other cases like F-35, also has to be very bright in the daylight. But in nighttime, it is a video AR, isn't camera. This is quite different. Okay. As I say, I wish that we could show you the helmet but I'm not sure. I'm afraid that we will not be allowed to do that.

But in the case of VR for the metaverse glass is that different? Metaverse glasses, is totally immersive, okay. So, the way to good analogy is go to see go or to IMAX theatre, because you want to see a very immersive large image, then current IMAX theatre is very interesting, because you see an IMAX theatre, they have a two 4k projectors go into the screen, 4k.

So but the brightness is not important. It’s always bright enough for immersive. So it's not the brightest is most important. It’s the image quality. So what happens in the high resolution, they also need high dynamic range.

If you go outside by TV today, the high-end TV or this called HDR. What’s that mean? High Dynamic Range, it will give you 10 bits of dynamic range – 10-bits not 8-bits, okay? Another thing people want is high speed, 120 hertz to reduce the latency and get fast action for games. So again, for metaverse activities for the display do not need to be very bright, it is immersive. But you need to have the HDR and bits and you need to go the 120 hertz. So I think that's the most important, when you look for display for metaverse to say how high can you? How fast can you go? How many dynamic range? I think just as I think we would like to show you is a company CS, Asphalt, how good the image is? How good the color is? And these are the key things decide TV or IMAX theatre.

The second thing for metaverse is really the optics. You had to get very, very thin optics and give you a very large magnification. Because in metaverse work everybody watching huge image like IMAX theatre. There's only two current technology that's good for optics. One is Fresnel lenses, which now Oculus 2 is using. The other one is Pancake optics. Pancake optics is our trainer as you all know, also one of the inventors of the Pancake optics is actually in our company. Okay. So we always very good in Pancake optics for the especially for defense. Now we use Pancake optics for consumer, and we turn the ball into plastic optics. So important thing for metaverse, you got to have wonderful optics to be a huge magnification and facing optics very lightweight.

The second ones, you get a display that gives you a very High Dynamic Range, very high resolution, very good color and high speed. So these are the things as needed, of course, consumer wanted – and you have to produce them in quantities. So I hope I explained that. Metaverse hardware is optics and displays.

Spencer Cushman

Yeah. That's really great color. Really appreciate it. Shifting gears a little bit just curious on the number of productions that are currently in LRIP? And then those that you expect to go to full reproduction either in the balance of the year or in 2022?

Richard Sneider

So we have to in production F-35 and FWS-I, we have two in LRIP. We talked about one of them jets, and then we expect in this fourth quarter in the next few weeks, hopefully an award for a third. And then with a little luck there all by the end of the first quarter into production, at a LRIP and into full production.

Spencer Cushman

Okay. Thank you. Great color. Really appreciate it. I'll jump back in the queue.

Richard Sneider

Thank you.

Operator

All right. We can go ahead and take our next question from Craig Rose of Axiom Asset Management. Please go ahead.

Craig Rose

Hey, John. Good quarter.

John Fan

Thank you, Craig.

Craig Rose

You said you had 50% market share of the optical inspection equipment. Did you say how large that market is?

John Fan

Yeah. I want to make it clear, we did not have 50% market share. We have fetched about 40%. Okay. Well, we grew about 50% in the last two years in revenue. So the current market is still relatively small, okay, actually. So as - this still very small, remember, we will provide the spatial light modulator. Currently the whole market, we have two strong players, ourselves, the second player is TI, each one of them owns about 40% of the market share. We’re actually going to have a webinar coming up early next year, because I think this is a very interesting area because this will know the order of inspection systems right now where it is PCB, maybe even semiconductors, they are all using 2D special machines.

As it comes -- the things are getting too complicated in electronics. So 3D is the need, it just little early right now, we're seeing a very early stage, and electric vehicles the PCB boards is so complicated, it's so robust. So we believe all the equipment's, eventually all are going to go to from 2D to 3D. So the so the market could be very big. So we’re going to have the webinar in early January, maybe February to discuss the technology, the competitive world and where it's going to go. And we're still studying how big the market is, and why it’s growing so fast.

Craig Rose

Okay. Thank you. As far as the plastic Pancake optics, where would you expect that to be used first?

John Fan

In the Metaverse glass.

Craig Rose

Okay. And is that…

John Fan

Yeah. Because maybe actually -- I'm sorry, I was a little too short. Sorry, I apologize for that. The plastic Pancake optics as this feature, it can magnify your display, maybe in area wise, 40,000 [ph] times, okay. So you take a postage stamp display, and you look into a low level Imax theatre, but it's also very thin, because as you all know, the optics that are bouncing inside and remember when while inventors -- Pancake optics in our company right now.

So we know how to do that. And so there had to be light. We want the headset to be there light. So you can read it for many hours, not for 10 minutes or 15 minutes. So this is the ideal thing, all-plastic Pancake optics. You just is what we -- everybody's looking for it, for the last four years, everybody, not just us. Its just that we've invented first.

Craig Rose

Are your prototypes ready for CES?

John Fan

Yes.

Craig Rose

Okay. Anything else you want to tell us about CES?

John Fan

We hope to show this not only the prototype of optics, we’ll hope to show you the early type of Metaverse glass with this type of optics.

Craig Rose

Okay. Thank you very much.

Operator

All right. It appears there are no further questions at this time. Mr. Fan, I would like to turn the call -- oh, we actually did get one more question, my apologies. We'll go ahead and take our next question from Patrick Metcalf [ph], who's a private investor. Please go ahead.

Unidentified Analyst

Good morning, John. You sound fantastic. Exciting times ahead obviously.

John Fan

Thank you, Patrick.

Unidentified Analyst

Okay. My questions revolve around your hidden treasures. I'd like to know how Lenovo New Vision and RealWear looking for 2020 under the order of the assets?

Richard Sneider

Yeah. Patrick in all honesty, you really should contact Lenovo and Realwear and ask them that.

John Fan

I think I’ll answer the question little bit differently. Patrick, thank you for the question. Our company has three stools. One leg is the defense and the enterprise business. And that's going very well as revenue generating. The second story is really very actively invest in key components for Metaverse glass displays in optics.

The third leg is how activities in licensing pin up companies of which we own equities, and also has royalties, and actually sell them the components that they need. So therefore, they happen to companies out there, everywhere now. And so, we already announced that. RealWear is one of them. In fact, Visa [ph] was one of them, of course, and SOLOS in class was one of them. We just announced last year, we licensed to a company to make a surgical headsets. So that neither one of them, and so on, so on. This is our third leg. We provide people this component, knowledge, license, and equities and component cells. So yeah, I think those companies, we’re all praying that this be successful, and some of them -- many of them are very successful.

Unidentified Analyst

Okay, great. And John, the only reason why I asked is, at the end of last conference call, you had made -- mention to the fact that more licensing deals would potentially come. So, I just was going to ask, how's that effort going into 2022? We see maybe one or two more happening in 2022.

John Fan

The answer is, we're certainly working pretty hard now, especially with the Metaverse going -- starting going so strong. We expect to be more deal. I mean, more deals coming up. But anyway, I do think, again, this could be in personal CES last year. There were no CES. So this in personal CES, this could be very interesting. And hopefully, we'll be able to show you additional devices. People are using now our components for really beneficial applications, not just for the defense or for some enterprise, now they're using for medical and hopefully medicine for consumer applications.

Unidentified Analyst

Okay. And one last question, John. Let me get this straight. You have trademarked Metaverse glass and Pancake optics?

John Fan

Yes. Pancake optics with a registered trademark. Pancake optics were the registered trademark. Of course, cyber display all those are registered trademark. On the Metaverse, it is not registered yet as a trademark. As you will know, register has gone through a different process of a vigorous process, and so Metaverse, yes, without trademark.

Unidentified Analyst

Okay. I now know why you sound like you're 37. So good luck. Congratulations and sound incredible.

John Fan

Yeah. I think this is a very interesting couple of years. Thank you.

Unidentified Analyst

Have a good one.

Operator

All right. Now it appears there are no further questions at this time. Mr. Fan, I'd like to turn the call back to you for any additional closing remarks.

John Fan

No. Thank you, very much. We hope to talk to you again on the next earnings call, but to come to CES. Thank you.

Operator

This concludes today's call. Thank you all for your participation. You may now disconnect.