Kopin Corporation (NASDAQ:KOPN) Q1 2019 Results Earnings Conference Call May 7, 2019 8:30 AM ET

Company Participants

John Fan - CEO
Richard Sneider - CFO

Conference Call Participants

Glenn Mattson - Ladenburg Thalmann
Jeff Bernstein - Cowen
Matthew Galinko - National Securities
Pat Metcalf - Newbridge Securities

Operator

Greetings, and welcome to Kopin First Quarter 2019 Earnings' Conference Call. [Operator Instructions] As a reminder this conference is being recorded.

It is now my pleasure to introduce your host Rich Sneider, Chief Financial Officer. Thank you, Mr. Sneider. You may begin.

Richard Sneider

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 market. I will go through the first quarter 2019 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, May 7, 2019, 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-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'll turn it over to John.

John Fan

Thank you, Richard. Thank you for joining us this morning to review our first quarter results. It has been a good start to 2019. Our sales to enterprise customers were solid and we were pleased with how the year is shaping up in this summit. As the moment reinforces, the enterprises are fully embracing the value of coming to reality.

A very important development for Kopin is that we have received a large follow-up order for all the tier 1 company we mentioned at last quarter which was a early mover for AR. You may remember that we have shift 5,000 displays to that company in 2018. And we have been waiting for them to announce the next generation AR Smart Glasses target to enterprises.

While this enterprise is still pending, we received n additional typically larger supportive order and we just began shipping through the order. Company slides Boeing, GE, DHL and Volkswagen all see the value of assets provide to their customer other than workers in places like factory, plant and warehouses. As they are so displace the prior, we look for this key customer to help drive our enterprise business. But the accelerated growth goes beyond this customer as we are receiving increasing orders and forecast for many of our other enterprise partners.

AR's ability to boast productivity reduce costs and improve working conditions is driving business for Kopin such as Kopin partners such as RealWear and Vuzix. The cost is increasing demand for glasses we expect to triple with the number of displays which shift to enterprise customer in 2019. We are optimistic to industry trend where large consumer market to match the enterprise market in the coming years.

As we have previously discussed, the VR market to grow rapidly with 5G. Micro OLED displays will be display of choice for VR because of their superior performance. For VR and AR micro OLED display will also be very, very desirable if this OLED displays can achieve high brightness, very high brightness for the current 1,000 units to about 4,000 to 5,000 units. This increase will enable innovative optical designs. For example the VR handset can be made much thinner.

Recently, [indiscernible] approaches have been identified and we believe such a large increase could be obtained in potential quantities from next year. In fact even higher brightness up to 8,000 to 10,000 units might also eventually be possible in micro OLED displays.

Today one of the major challenges for micro OLED display has been the lack of other disposition factories for more production. This will change result since the $150 million manufacturing facility will be in joint venture partner BOE is struck into to play and their initial results are encouraging.

We believe the BOE facility and other factories which are also coming online will help drive interest in developing consumer applications and systems by creating a cost effective supply chain to take advantage of the promise of 5G. In my recent trip to China and Asia, I saw increase investments in AR/VR. We are optimistic this will especially around consumer AR/VR will spread to the U.S. in the coming years.

Our own consumer assets SOLOS Smart Glasses was perhaps a bit ahead of schedule in our aftermarket but we continue to work to increase the distribution channel with wrote down some of the inventories in Q1 specifically the older [indiscernible] product.

Our military business again met higher in the first quarter. Primary to the shipments of displays embedded in the helmet attached to the F-35 fighter jet. I know I have discussed the F-35 program various times before but it is not only a key element of our current military business, it is a good example of a successful military program and how we develop.

We move to the early design cycles to meet the very demanding specifications in F-35. There we work thorough the low rate initial production stage. We’re now into volume production where we are today. The global demand for the : F-35 Fighter Jet will keep on increasing and we look at this program as one of our core military business and we expect to be shipping into this programs for years to come.

We’re looking through the same process with the family of weapon sights program. As discussed, the FWS-I program is now in production and shipping. The FWS-Crew, C Crew program is in mid stage of development and we expand to move into production in 2020.

Our news program is developing space systems for armored vehicle. This is a trend you design win and we will reach full protection in 18 months or so. As we continue to pursue other military programs, our experience in working with the defense department is invaluable. As you benefit Kopin as the benefit as the defense budget increase.

In addition, our companies now experience with defense system companies our excellent track record with them is also critical factor in our leadership in this industry. For example, in two consecutive years, we received top pattern award from Collins Aerospace to make the F-35 helmets which are now - which is just high award of customer awards only awards who less than 2% of their suppliers.

Our consistent delivery performance grew by confidence to our customers looking for reliable supplier of innovative and recognized display product. So while we spend our military footprint and belief on the acceleration of the enterprise market especially we position as the leading supplier of display to this market.

We’re realistic that this is going to match the current state of the market. In first quarter we commenced a strategic realignment with the company. This included that to review all our operations and to consolidate programs and reduce cost wherever possible. Our key use of development and investment most of our programs are now ready for commercialization.

With the [indiscernible] programs will move to monetization. In the first quarter we took some financial charges as positive strategy. We continue to review elements of our operating structure over the coming months and expect to make additional stats including further reductions to our expense structure throughout this year.

We also raised [indiscernible] in Q to sooner our balance sheet and provide additional financial stability as we undertake this review our business. So in summary, we are off to a very good start of the year. We are growing our core business by taking careful steps in reviewing our operations and amortizing our technology and products through successfully positioned Kopin for the long term.

Now I will turn the call to Rich.

Richard Sneider

Thank you, John.

For the quarter total revenues for the first quarter of 2019 were $5.5 million compared with $5.7 million for the first quarter of 2018. While our revenues for Q1 were essentially flat, the makeup of revenue changed year-over-year.

In the first quarter of 2018 our subsidiary NVIS contributed approximately $1 million of revenues for programs that were ending. In the first quarter of 2019 industrial wearable revenues and military R&D revenues increased approximately $1 million.

I would also underline that under ASC 606 revenue standards revenue recognition for our military programs specifically FWS and F-35 is not tied to shipments but a model that includes the levels of goods and finished goods inventory.

Cost of goods sold for the first quarter of 2019 was $5.9 million or 127% a product revenues compared with $4.1 million or 81% for the first quarter of last year. Including cost of product revenues for Q1 2019 is 1.2 million of write-off of excess inventory. Including the write-off as John noted was a charge for all the versions of SOLOS.

R&D expense in the first quarter of 2019 was $5 million compared with $4.5 million in the first quarter of 2018. Included R&D for the quarter ended March, 30 2019 is approximately 500,000 of materials associated with development programs which are being curtailed as part of the program John discussed to consolidate programs.

SG&A expenses were $6.3 million in the first quarter of 2019 compared to $6.9 million in the first quarter of 2018, primarily due to a decrease in compensation expense including stock-based compensation and amortization of intangible assets.

Other income expense was approximately 3,000 in the first quarter of 2019 compared with 4.3 for the first quarter of 2018. During the three months ended March 30, 2019 and March 31,2018 we recorded about 2,000 foreign currency gains.

Other income for the period in 2018 reflects a gain of 2.9 million from the transfer of intellectual property and exchange for equity interest through an investment along with the $1 million of insurance proceeds.

Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $11.3 million, or $0.15 per share, compared with a net loss of $5.5 million, or $0.08 per share for the first quarter of 2018.

First quarter amounts for the depreciation stock compensation expense are attached to the table to the Q1 press release. As previously announced during the quarter we completed the sale of approximately $8 million shares of our stock for approximately $8.8 million in growth proceeds.

Our weighted average shares for the balance of the year will be approximately 83 million. In addition in Q1 2019 we adopted ASC 842 which is the new lease recognition standard. It resulted in lease assets and later liabilities being put on the balance sheet and there was a diminimis P&L impact.

The amounts discussed above are based on the current estimates and listeners should review our Form 10-K for the first quarter of 2019 for any possible changes or additional disclosures.

And with that we’ll take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Glenn Mattson with Ladenburg Thalmann. Please proceed with your question.

Glenn Mattson

Curious, John, good news on the follow on order from the Tier 1 I guess, perhaps we put a thought there might be an investment from that Tier 1 at this point as far as making an announcement on the product so I was just wonder do you have any sense of the timing of when they are going to release this. So just kind of can you give us a better idea of the order flow as it progresses throughout the year.

John Fan

Yes. I mean, we obviously offer any shift for the announcement we do not know exactly why the announcement has been delayed, which certainly does not impact us. We certainly got this very large - very significantly large order and we actually not expect that all to coming in. So it is not impacting us. I still believe that national would be quite imminent. So we just pull our horses off late.

Glenn Mattson

And will it be a study kind of revenue rec over the course of year on these orders or is the kind of back half surge or how is that plays?

John Fan

Well I think I obviously - I cannot really describe in detail but it will be most steady order so it is real production.

Glenn Mattson

Okay great.

John Fan

And maybe to may comment I think it’s only our customer is very optimistic by their response for the customers.

Glenn Mattson

And Rich could you give us an idea of really the spend reduction as it plays out towards the year given the program you put in place this quarter?

Richard Sneider

So we've been running last year we ran about - our OpEx was between 11 million and 12 million per quarter and we would expect that to continue to drop each quarter throughout the rest of the year.

Operator

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

Jeff Bernstein

So just on the AR orders I think you had talked about 100,000 units this year are we still on track for that, is there upside to that downside to that?

Richard Sneider

So right now as John said in his prepared remarks last year we did around 30,000 units and we expect that to triple so that's the 90,000, 100,000 number that you just referenced. And so as John said in his prepared remarks the forecast from our customers have been very bullish. We've seen some of our customers like RealWear had a number of significant announcements with guys like Shell, Colgate Palmolive et cetera.

And as John just said, the Tier 1 customer has been sampling their product for a period of time and the response has been very strong. So we're hoping our numbers are conservative.

Jeff Bernstein

And the Tier 1 customer are they currently making an AR unit with two of your displays or is there more than one model and one has two of your displays in it?

John Fan

I think I can only answer that in this way, the customer we are talking about using one of our display in each system.

Jeff Bernstein

And then I'm just wondering the Golden-i Infinity design is that ever gotten any traction or what are the plans for that?

John Fan

As we discussed with to sampling it and the initial response from some of the customers we are talking to intimately are very positive. The whole overall enterprise unit - enterprise market is getting pretty hot everybody now understands the value of the systems to them. So it’s no longer a curiosity, it is a booming business.

Jeff Bernstein

And then you mentioned you wrote down inventory of old design SOLOS implying that there's a new design of SOLOS what different there et cetera?

John Fan

I can't relate question just to alert unfortunately - actually we cannot review with the new design which obviously with their side about.

Jeff Bernstein

So that's a new product that's coming.

John Fan

It’s interesting product yes.

Jeff Bernstein

And then I believe on the military side you guys were engaged with Elbit on a like a multi mission helmet for various aircraft. Any progress there what can you tell us about that?

Richard Sneider

Yes, that's a common helmet program and we're in development with Elbit and it's on track as far as we know.

John Fan

Yes, I think to - I think we may have already announced we complete a design wins but yes we’re doing well over the program right now, yes.

Jeff Bernstein

And then lastly you talked about some new technology to be applied in the OLED space, did you say you thought that you could be delivering that mid next year or is that mid this year?

John Fan

Next year in production quality as I think the key matter is how do you take those variance technology into a production kind of readiness, it is a very long way but we are very optimistic sometime next year those very innovative design can be free to production.

Jeff Bernstein

And is that open technology or is that like new material like gallium nitride or something give us a little more information on that?

John Fan

It's simply to bring - I think we would try to bring it to production so my own feeling is fly everything out is always rely on the previous one so was that’s an argue we are actually making very rapid improvement right now so we just see - would you only think your big part of it.

Jeff Bernstein

Your big part of it, okay. And then lastly you had talked about OLED design for a Tier 1 for BOE and how is that progressed?

John Fan

So could you repeat the question Jeff I just want to make sure that I got the right question.

Jeff Bernstein

Yes at a conference recently you talked about having an OLED design from a Tier 1 to be made at the BOE factory and I just wanted to get an update on that?

John Fan

Yes, that okay, that was a design we have a program with the Tier 1 customer product company and that's going on track that’s why we come on it. There are, I would say big secretive program yes.

Operator

Our next question comes from the line of Matthew Galinko with National Securities. Please proceed with your question.

Matthew Galinko

Thanks for taking my questions. I guess firstly, did the 0.5 million chunk R&D expense that relates to curtail programs, is that a one-time charge or is that something that's going to be a recurring at all?

Richard Sneider

So the size and the amount is unusual for us. I'm always looking at any one-time charge we are always evaluating programs on a continuous basis and inventory levels. And so every quarter there is some adjustment through obsolete inventory some sort but in the R&D sector for that size it's very unusual amount and that's something that we would expect we think we’ll recur.

Matthew Galinko

On the potential reprice of your consumer product, are they going to be any changes to how you bring the product to market or are any potential for increase investment in your go-to-market spend on that over the course of 2019 as your kind of going through this cost realignment process?

John Fan

Yes, I’ll make comment there, I think Matt as I said in my remarks earlier we're looking for all expense from our business and deciding where we will consolidate our programs in a different commercialization strategy right now. So we really consider whole bunch of different strategies at this point really whole thing we can accommodate any further today.

Matthew Galinko

Maybe just a one more you highlighted and I think you have in the past you've talked about 5G is covered and enabler for VR. Can you talk about that in maybe a little bit more gap then maybe particularly relating it to you're talking about bringing kind of OLED volumes off maybe 2020 timeframe to sort of enable that market from a improved supply chain perspective. How does 5G come in enable it and what do you see the timeframe for that?

John Fan

A very good question Matt. I think we had a special workshop actually discussion at the CS meeting a few months ago on 5G. 5G allows I mean as you know 5G can go as much as 10 times faster than 4G. It allows mobile, mobility allows everything that you could do at desktop or kind of a stationary environment will be extremely mobile and that’s where we the personal wearable becomes very strong. And if I see somewhere also get allow you have extremely fast streaming, so all your sports, TV and all the events came to stream to you at the moment, it allows that we are now driving the cars and everything.

So they will be creating business that you probably cannot dream today but because of the five times faster wireless, it is more and more mobile and that’s where more and more wearable. So the key matter is what do you need to do? I think the wearable case one key thing is for instance going to be important and so display small micro displays is critical and Kopin is a very strong in both.

Operator

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

Pat Metcalf

So this is the first I’ve heard of a new SOLOS coming out, the new SOLOS going to be more specific to the cycling market or is it going to be broader to the consumer market or to the enterprise market, can you give us a little detail on how you are going to go about that?

John Fan

We really can’t describe too much about it as the plan is being formulated. It is more tailored to overall consumer market instead of cycles.

Pat Metcalf

And then being that you are cutting costs drastically, I would assume that you’re going to go to market maybe with a different strategy when you did SOLOS ?\

John Fan

Is will fair to assume that.

Pat Metcalf

And then John, I got a chance to see you host, the MIT Media Labs in January show up and you had a company by the name of Google presenting that actually highlighted customers like Boeing, GE, DHL on the screen, were they first one to bring out the device. The follow on order that you receive, is it much bigger than the 5,000 units you received in Q3 of last year?

John Fan

Yes.

Pat Metcalf

And then I saw this past week or couple weeks Qualcomm come with a PR that they got 10,000 units of RealWear units HMT-1 ordered for them and at that point in time it just stuck me as very odd because when I listen to you guys talk about your Whisper Chip technology, you say you win all of the breakoffs against Qualcomm, Maxim and others. However, these purchasing managers never get fired going with Qualcomm. So if Qualcomm is supporting RealWear’s HMT-1 which I really consider the core competency of the HMT-1 is Whisper because it works at decimals that other technologies – voice technologies do not work at. To me Qualcomm supporting Whisper Technology, can you give me some feedback on that?

John Fan

On the Qualcomm mix processes and processes go to HMT-1. So, and we always use Qualcomm processor in our design. Remember that [indiscernible] license our asset and license more than just Whisper. They will license our display module. They license the whole design, the whole design of the HMT-1 was our design. We license them with them. They all design it. And you have the Qualcomm chipping side on day one.

Pat Metcalf

My point is Whisper is more of a – the Whisper chip is more of a software type of product then a hardware product. So I am thinking you had a great relationship with Qualcomm, with the HBT design in there, in the early 2000, 90s. And I am thinking Qualcomm is looking at the Whisper Chip possibly to license that, is that a possibility that someone like Qualcomm could license Whisper or is that far hedged like 2000 match?

John Fan

Well, I think you ask a generic question, is Whisper technology which is of course technology you can go into a chip, you can go to a processor, you can do license and it could be further developing other products. Our answers is definitely true in all the aspects of it. We’re looking at all aspects of it. It is a very wonderful technology, I can see the world appreciating more and more as voice become more and more important.

Pat Metcalf

Have you made any progress on getting someone to license that? Do you have any list of potential licensees coming forward, or was it something that’s going to be years away?

John Fan

I don’t know what patience for years away but we obviously are working on many aspects of it. So as I said earlier we are looking whole bunch of different strategy at this point and I cannot comment, further comment on this but that just speak good…

Pat Metcalf

And then my last question is surrounding RealWear okay. I noticed RealWear has applied for about 11 patterns all software related, actually more Artificial Intelligence, AI intended and I know we have a user interface that we licensed to RealWear. So if they start applying more layers of software on that user interface like maybe make it a software platform where they can license without other players okay, even a Qualcomm. Do we still get royalties if that was to happens or like a scenario like that was to happen?

John Fan

That has really go to IP now, of course how much the IP is embedded in the previous IP. So that we will leave it to IP lawyers but suffice to say we have some very demands and patterns.

Pat Metcalf

And then lastly RealWear licenses Golden-i, why not have RealWear license SOLOS with the enterprise very cool design, you can dummy it up where it could be used in the outdoor type of environment and then Golden-i Infinity won that license back to them as well and help boost our revenues very quickly with a less spend, is that a possibility?

John Fan

Again it burst on to that what we just said we are looking at all aspects of our strategy at this point. Yes.

Operator

Thank you. There are no further questions. At this time I would like to turn the floor back over to management for closing comments.

John Fan

Thank you for joining us this morning. I also want to remind everybody we have a Annual Meeting that is coming up on May 21. I hope to see you guys at the meeting as well as please vote for us. Thank you.

Operator

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