Kopin Corporation (NASDAQ:KOPN) Q1 2021 Earnings Conference Call May 4, 2021 8:30 AM ET

Company Participants

Richard Sneider – Chief Financial Officer
John Fan – Founder, Chairman, President and Chief Executive Officer

Conference Call Participants

Glenn Mattson – Ladenburg Thalmann
Kevin Dede – H.C. Wainwright
Craig Rose – Axiom Asset Management

Operator

Good day, and welcome to the Kopin Corporation First 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 to the first quarter results in a high level. John will conclude our prepared remarks, and then we’ll be happy to take your questions.

I’d like to remind everyone that during today’s call taking place on Tuesday, May 4, 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, 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 these forward-looking statements made during today’s call.

And with that, I will turn the call over to John.

John Fan

Thank you, Richard. Good morning and thank you for joining us to discuss our first quarter results. I want to start by expressing our wish that you and your families continue to stay well and safe, as we hopefully are closer to the end of this awful pandemic.

We are pleased with our strong start to the year. The second continued increasing demand for our customers across multiple segments. Revenue increased approximately 48% in the first quarter of 2021 as compared to the first quarter of 2020 with growth led by our defense production program, and our funded development programs. We now have more than 10 programs in various stages of development, but some of them may not contribute significantly to product revenue for the next year or two. This is by far the strongest defense program portfolio in Kopin’s history. They set the stage well for the coming years. We continue to aggressively pursue additional opportunities in the defense market and expect to make some announcements regarding these opportunities in the coming months.

Our R&D activities have been increasing in the past several quarters, reflecting the significant opportunities we see in the augmented and virtual reality space. In particular, our customer-funded R&D revenues jumped more than 80% year-over-year, primarily because of the accelerating interest in our next generation of displays and display technology activities.

Additionally, we continue to see strength in our enterprise market segments with strong volume growth in enterprise AR and 3D automatic optical inspection systems, which are recovering nicely following a slowdown in the early days of pandemic. The growth in these areas was offset by a decrease in the public safety sector as municipal government budgets were affected by the pandemic.

Our defense revenues in the first quarter of 2021 increase by 42% compared to the first quarter of 2020. Our defense revenues continue to be driven by FWS-I thermal weapon sight and F-35 Fighter Jet programs. We expect these two defense programs, which are still quite early in their product phases to continue a core component of our revenue in the coming years. We also remain on track to transition several more products to early low rate production this year with better revenues beginning in the second half.

As mentioned, Kopin has over 10 defense programs in various stages of development. These programs are all using our microdisplays and are increasingly utilizing our specialized optical systems and ruggedized assemblies. We believe we are the sole source supplier to most of these programs. All defense programs are either AR or VR applications and Kopin continues to explore additional AR and VR applications in defense, industrial and consumer areas.

One sample is in the first quarter of 2021, we are now the Kopin CyberDisplay WQVGA display/backlight module and A230 Driver ICs are now incorporated into the Canadian-based – Canada based Shearwater wearable near eye remote display diving computer. This product is our near-to-eye display for underwater divers and provides critical dive information including depth, dive time, compass and breathable gas levels.

This just one example of the many areas of the market finding a solution to a need using Kopin microdisplay product is the only microdisplay company in the world. With product and technology solutions utilizing each of the leading macrodisplay technologies. OLED, micro LEDs, LCDs as well as LCOS, Kopin is the nearly position to offer the right technology solution for expanding markets and applications for AR and VR.

As mentioned last quarter, we received our first production order from a U.S.-based customer and begin shipment of our 720p patent-pending duo-stack, ColorMax OLED microdisplays, with high brightness and bringing color fidelity combined with very low power consumption. This new technology represent a milestone for Kopin, as we exhibit a record 7000 nits of brightness with a much lower power than previous technology. This is a huge achievement for the OLED microdisplay. We continue to ship our 720p micro OLED display to our customer in Q1.

Meanwhile, we continue to innovate and improve further our RF technology [ph] to meet the market demands. In addition to our customer base on these activities, we have increasing R&D spending to meet the timing of AR and VR. We believe this is a once in a decade opportunity, if the device was spent for handheld or hands free devices Kopin is ready to meet a market demand.

Finally, we are highlighting our long history and leadership in wearables the three-part webinar series entitled AR and VR: The Paradigm Shift to Smartglasses Starts Now hosted by Insight Media. The first segment called AR/VR, The Past was held on April 27. And now is available on YouTube. It was very well received with over 500 registrants and I must apologize, we were oversubscribed for the last event, which was unfortunately limited to 300 attendees. Therefore, that everyone who want to attend live [indiscernible]was recorded right away and we did provide a link to the recording to all the registration people shortly afterwards. We have since increased the capacity for lack participation in the next session.

In Part 2 of this trilogy to be held on May 12. We focus on the print would tackle the current state-of art-analyzing interesting success stories today and concluding that the tipping point has arrived for some markets to begin mass adoption. In Part 3 to be held on May 26, will be focus on the future. We’ll look to the next stages of AR/VR smart glass product offering a roadmap to develop products with the right form factor technology, performance, features and costs to succeed in this exciting conformation. We present our views of the next three to five years without engraved breathing from lessons we learned for all these paths in presence AR and VR product is a marketplace. Who were [indiscernible], how to get to the ultimate consumer base smarter is hopefully the Holy Grail, really, one can learn so much from what the defense systems have been doing. We’ll see in the next two webinars, you will not be disappointed. Registration links and replace can be found on our website as well as our Insight website.

In short, we’ll continue to make great progress to make good enough strategy and we’re showing our performance. The market conditions are favorable if AR and VR are gaining strong fashion throughout the past year. We believe Kopin is in a good position to capitalize on this growing trend.

With this, I will turn this call to Rich.

Richard Sneider

Thank you, John. Turning to our financial results. Total revenues for the first quarter ended March 27, 2021 were $11.7 million compared with $7.9 million for the first quarter of March 28, 2020 a 48% increase year-over-year. Cost of products sold for the first quarter ended March 27, 2021 was $6.4 million, compared with $5.6 million for the first quarter ended March 28, 2020.

Gross margin for the first quarter of 2021 was 15% compared with 5% for the first quarter 2020. The increase in gross margin for the three months ended March 27, 2021. As compared to three months, ended March 28, 2020 was primarily due to improved manufacturing efficiencies driven by higher volumes.

Research and Development expenses for the first quarter of 2021 were $3.6 million, compared with $2.3 million for the first quarter of 2020, a 52% increase year-over-year. R&D expenses for three months ended March 27, 2020 increased as compared to three months ended March 28, 2020. Primarily due to an increased spending on U.S. funded development programs and internal R&D expenses for over development.

Selling, general and administrative expenses were $5.9 million for the first quarter of 2021 compared with $3.4 million for the first quarter of 2020. SG&A expenses for the three months ended March 27, 2021 at approximately $2.4 million of stock-based compensation costs as compared to $89,000 for the same period in 2020. Excluding the non-cash stock based compensation costs SG&A expenses were $3.5 million for the first quarter of 2021 compared with $3.3 million for the first quarter of 2020, a 5% increase year-over-year.

Other income expense was income of approximately $37,000 for the first quarter 2021 compared with $87,000 of expense for the first quarter of 2020. During the three months ended March 28, 2021, we recorded $28,000 of foreign currency gains as compared to $172,000 of foreign currency losses for the three months ended March 28, 2020.

Turning to the bottom line; our net loss attributable to Kopin Corporation for the first quarter of 2021 was $4.1 million or $0.05 per share, compared with a net loss attributable to Kopin Corporation of $3.6 million or $0.04 per share for the first quarter of 2020.

Non-GAAP net loss attributable to Kopin Corporation for the first quarter of 2021 was $1.8 million or $0.02 per share, compared with non-GAAP net loss attributable to Kopin Corporation of $3.5 million or $0.04 per share for the first quarter 2020.

Kopin’s cash and marketable securities were approximately $35.6 million at March 27, 2021, as compared to $20.7 million at December 26, 2020. During the quarter ended March 27, 2021, we issued $2.4 million shares our then-existing At-The-Market or ATM program, and generated $15.5 million in net cash proceeds, which concluded our $20 million ATM program.

First quarter amounts for depreciation and stock compensation expense are attached in the table to Q1 press release. And as discussed above our current estimates and listeners should review our form 10-Q for the first quarter 2021 for any possible changes and additional disclosures.

Finally, I’d like to address the global semiconductor shortage, Kopin did not experienced any significant effects caused by the shortage in the first quarter of 2021. We have been proactive in our actions and communications of semiconductor suppliers, and have placed orders well into the future. We continue to monitor this current dynamic environment and manage accordingly.

Operator, we will now take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] So we will now take our first question from Glenn Mattson from Ladenburg Thalmann. Please go ahead.

Glenn Mattson

Hi, thanks for taking the question and congrats on the great results. So first question the two areas about performance versus my model we’re in the industrial side and the R&D, can you guys give a little more colors that was the industrial bounce back in the fire and safety stuff? Or was it more of the RealWear type end user? And then on the R&D front, I’m curious, is that all government related or some of that – is there any commercial or consumer related R&D revenue?

Richard Sneider

So mostly, with the industrial headsets folks like RealWear were the strength in the industrial segment as well, including our 3D AOL was very strong in the first quarter. And as far as R&D, the majority of it is defense related, but there is some commercial consumer R&D and that also.

Glenn Mattson

Okay, great, thanks. On the defense side, you’ve been talked about for a while 10 programs in development. So, and I think I’m not sure if you reiterated it this quarter or not. But in the past you said you expect one of those to kind of contribute, initial production volumes, but contribute meaningfully towards the second half. Is that still the case? And when – have you won that yet? Or what would you announce that when you win it or you’re not allowed to or just some thoughts about how that news flow is going to play out over the course of the year?

Richard Sneider

Yes, so we would actually expect right now our estimate is about three programs in the second half of the year to go into what’s called LRIP, low rate initial production and start providing revenues. It is low rate initial production, and then it would really ramp up in 2022. But our programs are on schedule, as John indicated in his prepared remarks.

John Fan

Hey, Glenn, we will announce when the time comes and our customer [ph] announce them, so things are going pretty well.

Glenn Mattson

Great. Thanks, John. So moving on to the AR/VR stuff, John, you talked about it being once in a lifetime opportunity. I mean, Kopin has been a part of other opportunities like that in the past, I’m thinking about, like, digital cameras and displays – would you categorize this, as similar to that kind of a situation, maybe even on a scale larger, just based on this versus what you’ve seen through the Kopin’s past?

John Fan

Very good question, Glenn. I mean, I’ve been preparing this trilogy webinar. And as I prepare for, and I was to say that the opportunity is actually bigger than initially thought, I knew is going to be a good opportunity. Now, I’m almost thinking it could be turned out to be bigger than even a cell phone business. So it could be a $1 trillion business in 15 years. Well, I will talk about that. The first – the second and third, especially the third one where talking about the future, which allowed to speculate, that’s going to be very interesting seminar. I remember that the last seminar we have about 30 minutes of Q&A. It was very active, a lot of people ask questions, and where to cut off because of time’s up. So, we will continue to have very active Q&A session after that webinar. And I think the third one will maybe less predominant to when our Q&A.

Glenn Mattson

Right, Great, thanks. We look forward to that, for sure. And the last question for me, just as on the chip supply side, you’ve said that you guys feel pretty comfortable about the pre orders that you’ve made and things like that, and then you don’t – didn’t have any effects in Q1. But can you just give us a better sense of just the – how concerned investors should be if at all about potential disruptions in supply?

Richard Sneider

Well, the reality is, we saw an article by the CEO of Intel, and you’re like, what the auto industry is experiencing, you just need one chip missing, and the whole product doesn’t chip. Now, we’re not in that type of situation. We have multiple products. But it is pretty dynamic, and we always think is that there’s some panic in the market. And people are over buying this is somewhat like we saw, frankly, in the tech bubble, where people thought it was going be shortages, and they started stuffing their classes with every chip they could get. And of course, we see people taking the opportunity to raise prices, there’s no doubt about that. But so far, we haven’t had any of our suppliers, say, hey, listen, this is a real big problem. So, we’re monitoring literally on a daily basis. And we’re trying to get into our sub – our vendors to make sure that they’re on top of their suppliers as much as we can.

Glenn Mattson

Okay, great. Congrats again, on the results. I’ll pass it on.

Operator

We will now take our next question from Kevin Dede from H.C. Wainwright. Please go ahead.

Kevin Dede

Good morning gentlemen. Thanks for taking my question. John, could you just talk a little bit more about the Canadian near-to-eye diving display, which display are using there? Is there an extra light source? This may be some more pardon upon color on that?

John Fan

Yes. Kevin yes, using our micro LCD display and using our special backlight that allows them to see very well. So this is a module that we’ve been providing to other AI applications. So yes, so this one – is just second thing, you obviously has a bag in the water and you have this special teller modules, but they’re doing well and I think the product just came out in the market with that the response is very good. I don’t do diving, so I’ve never tried myself.

Kevin Dede

Okay. I can’t imagine there’s a huge market for it. But I was just hoping that you could get maybe give us a little more insight. How would you say it compares to the Scott helmet that firefighters use?

John Fan

As a Scott helmet allow you to see that Scott helmet is not so the different, it has different sensor, the Scott helmet is with different sensors, all those things are not something that you can sell millions per year. Okay. That’s why I say, at the end of the day, you the Holy Grail is consumer base. So, you have to go through defense, and you had to go through enterprise to learn what’s needed, is the biggest explanation from handheld to hands free, so were they happy with opportunity.

Kevin Dede

Well, yes, no, that’s, sort of the way I was looking at it and how – I mean, what are the features that you see coming from this development and the using of the micro LCD display, as applicable in the consumer market?

John Fan

Yes. You actually present other [ph] topic talk for next week, which I’m giving the seminar to really look at what’s going on, when you move around a handheld to hands free. A lot of components developed for their handheld, for the cell phones are already there, they usually use all the components they already developed on the cell phone, the problem is that display, you really look at it, because it displays the display to be. And in the early days afterwards to the whole display on your hand, the customer will never accept that in the top a new day, even 30 years ago, when they find that to be the safe model display. For displays right now, you still have that special optic magnifiers especially housing, to take care of the water, to care of the particles, together anything had to be read what our defense business that has a lot of things, but can’t ask it to me, but can’t to be play, what kind of recognize, how things you need so can go into the fire. You can go to the wall or these things we learn. So, I think people not understand this is really the microdisplay module they had to rephrase that has to be have their cellphones is a biggest challenge and we are leading it these areas starting three years ago.

Kevin Dede

Okay. All right. So granted your discussion and your answer for Glenn’s questions pointed to consumer development in AR/VR, can you be more specific? How are you taking what you’ve done here for the Scott helmet or you’ve done for the diving helmet and what specific kinds of R&D are you doing to develop the consumer side?

John Fan

Yes. In the consumer side, I think first of all, consumer as we know, I have – I’m a big preacher of the fan side rules. The rule number one is, we have to be human for the second technology. So major things of the human is just put on the [indiscernible] if you had to do by natural, if they small, thin, lightweight, fashionable and so the consumer introduction for reality high glasses is best. And I will talk about that next week. What had the special high class has to come in as consumer and go such classes are coming up. And then you will be radiant available in the next few months ago. And it will be every way, the next 12 months. And after that, you will – you were going to more and more customer applications. So, how is the consumer application starting right now in the few months ago, and it’s going to be there then. So we’ll talk about that, I choose that, I don’t want to give that. Just comes down there [indiscernible].

Kevin Dede

Okay, John, appreciate that. And thank you for the invitation. And Rich before I let you go, what was the official share count at the end of the quarter and not the average, but the official full payment?

Richard Sneider

I said, I don’t have that at the top of my head. Wasn’t that number was – it’s pretty close to the average.

Kevin Dede

Oh, okay. Thank you. Thank you, gentlemen. That’s all my questions.

Richard Sneider

Yes. We didn’t have a lot of stock activity in the quarter other than what we saw. Yes.

Kevin Dede

Yes. So, I write, I guess if it’s closed and it was really close to the early part of the quarter, I guess I just have to go look at the date. When’s the queue come out?

Richard Sneider

Thursday.

Kevin Dede

Thursday. All right. Thank you, gentlemen.

John Fan

Thank you.

Operator

[Operator Instructions] We’ll now take our next question from Craig Rose from Axiom Asset Management. Please go ahead.

Craig Rose

Hello, John.

John Fan

Hello.

Craig Rose

From my point of view, there’s no shortage of R&D dollars spent on products revolving around AR and VR. So when I sued, it’s great that your R&D is up, but the balance is in defense. Where do you see R&D dollars in the future? How high could that go considering everyone’s trying to get where you think the market’s going to go?

John Fan

Yes. Thank you for the question. The biggest challenge to get into a wearable on the head is as mentioned before is the display and optical system. How do you get good display and optical system on the head? And the display had to be bit tiny, much smarter, much higher resolution can read this to display you have use on the cellphone, and it will not be the same technology is still part of going to be OLED, but not on glass its only on silicon. And now it is quite very clearly in the second display session why he had to be on silicon. So anyway, the biggest research mainly now and all over the world right now is searching for how do you display every pace the touch screen on the head or some kind of display he had to be a microdisplay. They had this advanced special optics, the optics turned out to be a rare Ninja challenge [ph] as Rich just mentioned. We actually not just focus on display. We spent quite a lot of activities now on the optics.

We found that our customers, we cannot use any microdisplays and that optics idea, the optics had to magnify that a thousand times, then thousand times. And yet I could keep units very sharp and you had to be very lightweight and very thin. Now, I think maybe it’s system you see or even the Oculus, I think the big wonderful system Oculusthe most recent was the vapor system they still too big and too thick and too heavy. And I would talk about the next week on the Oculussystem. I would dissect quite a few systems in the market right now and keep the pros and cons and I can paint away for the next step.

Craig Rose

Okay. If you had to list the challenges in order, it would be optics form factor than the screen?

John Fan

Screen number one, screen is because it’s really, really high. The number two and it is the whole packaging. How do you assemble it? It actually one thing people don’t know, you’re magnifying 10,000 times. So your housing is not carefully taken look particle vendor on the display. Then it looks like the bolder to you, because like defense activities, we did recognize that being a result of problems and no conical can come out during operation of that assembly. There few people know about it, including even making it less our customer. So, nowadays they just say, please stand up the whole assembly then has the optics chances display and say that’s the housing assembly. And that’s why we’re so many defense industry, they didn’t want to touch it anymore. And I can consumer people do not kind understanding yet, enterprise people know, and I won’t go into detail, almost all enterprise our companies customers have the whole assembly.

Craig Rose

Are you at liberty to discuss how many consumer product developers you’re working with now in R&D and maybe the lifecycle of such R&D with those claims?

Richard Sneider

I think it’s safe to say that, we are or have worked with all the major Silicon Valley guys that are on everybody’s tongue. I mean I think you have to be honest, I’m sure they’re working with everybody else too. This is a big race it’s going to be a huge market. So we have interactions with all of them at this point.

Craig Rose

Okay. Thank you very much, guys.

John Fan

Thank you.

Operator

And it appears, there are no further questions at this time. I will pass the call back over to you for any additional or closing remarks.

John Fan

Thank you for joining us this morning. I would like to remind everyone that we’ll be having our Annual Meeting on May 26, 2021. We should be receiving the proxy vote soon. So please hold. And we are able to attend our Annual Meeting. After the Annual Meeting and noon time, I would give that our trilogy webinar. Thank you.

Operator

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