Start Time: 08:30 January 1, 0000 9:12 AM ET

Kopin Corporation (NASDAQ:KOPN)
Q4 2018 Earnings Conference Call
March 12, 2019, 08:30 AM ET

Company Participants

John Fan - Chairman, CEO and President
Richard Sneider - CFO and Treasurer

Conference Call Participants

Glenn Mattson - Ladenburg Thalmann
Jeffrey Bernstein - Cowen
Matthew Galinko - National Securities
Patrick Metcalf - Newbridge Securities

Operator

Good morning, and welcome to Kopin Corporation’s Conference Call to provide a Business Update and Results for the Fiscal Fourth Quarter and Year-Ended December 29, 2018. Today’s call is being recorded for Internet replay. You may access an archive version of the call on Kopin’s Web site at www.kopin.com.

With us today from the company are Chairman and Chief Executive Officer, Dr. John C.C. Fan; and Chief Financial Officer, Mr. Richard Sneider. 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 of our strategy, technology and market. I will go through the fourth quarter and 2018 results at a high level. And then John will conclude our prepared remarks and we'll be happy to take your questions.

I would like to remind everyone that during today's call, taking place on Tuesday, March 12, 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, Rich. Thank you for joining us today to discuss our fourth quarter and full year results. 2018 was a solid year for both our military and enterprise customers. We look to leverage this progress in 2019, with these two product lines driving our growth.

In 2018, our military revenues were closely tied to the progress in the F-35 fighter jet program. The global demand for the world’s most advanced fighter jets continue to grow. We are pleased to see the announcement from Collins Elbit Vision Systems who have manufactured the helmet that they just delivered the 1,000th HMD for the F-35.

The unmatched situational awareness provided by the HMD has been a key factor in driving the strong demand for the jet. In order to see the image in very bright sky, HMD requires displays with extreme brightness and readiness and Kopin is the sole display provider to this program.

The F-35 is expected to be our Defense Department’s primary fighter jet program throughout at least 2035. So we’re still a bit early in monetizing this program. The F-35 programs are also being sold to friendly governments around the world.

In 2018, we also began shipping into the Family of Weapon Site Individual military program or FWS-I. The shipments are expected to continue to ramp in 2019 for this program. Another Family of Weapon Site program, FWS-CS or Crew Served met its expected milestones in the development phase.

With continued success in this phase, we expect FWS-CS to have initial production shipments starting in 2020. These two FWS programs are the follow-up programs after our very successful TWS program.

We’re very pleased with the win for the armored vehicle display program for General Dynamics. This win was a joint effort with our wholly owned subsidiaries of Forth Dimension Displays and NVIS. It is early days for the armored vehicle display program. The development and test will continue through 2020 followed by production.

We are sole source to this program which provide us a revenue potential of about $100 million over the decade. We launched a 2K x 2K LCOS imager. This imager will be very useful for high-end 3D optical metrology applications.

Forth Dimension Displays already has a majority share in 3D optical in special systems which inspect small mechanical parts on printed circuit board during the assembly process. In addition, the 2K x 2K square format will be ideal for specialized near-to-eye applications such as surgical microscopes and electronic viewfinders for medical imaging.

As we expected, our enterprise customers had a very good year as many of the products are moving from testing to commercialization. The benefits of HMD to the enterprise are being recognized by many companies around the world for safety, for efficiency and for cost saving matters.

As we have discussed, our partner RealWear has been leading much of the growth is now selling to companies across many different industries and markets. In just the past few weeks, we have seen very exciting development at RealWear.

They really understand opportunity that combines data with all the benefits of hands-free uses whereby the human machine interface provides safety and cost savings I just mentioned all within a very harsh environment. Kopin display modules are a key element in creating RealWear HMD headsets.

We also expect our global Tier one enterprise customer which we mentioned last quarter and which has purchased 5,000 units in late 2018 to begin shipments commercially shortly. As their sole display supplier, we look for this customer to help drive our enterprise business and further our leadership in the market.

The initial feedback on Golden-i Infinity Evaluation Program has been very positive. We began shipping Evaluation units to a wide range of customers, including over a dozen Fortune 500 companies and leaders in oil, gas, transportation, wireless telecom, logistics and manufacturing industries as part of our Golden-i Infinity Evaluation Program.

With approximately 100 companies already registered, the Evaluation program is designed to assist enterprise customers in making an informed purchasing decision when it comes to wearable mobile computing and assisted reality solutions. Golden-i Infinity is purpose-built for enterprise level clients who want a voice-enabled, hands-free wearable computing system designed to increase worker productivity, efficiency and safety.

We continue our marketing efforts in SOLOS Smart Glasses by teaming with TrainingPeaks, a global leader in structured workouts who provide complete solutions for smart and effective endurance training. The structured workout is synced to our SOLOS Smart Glasses by sporting the workout programs to SOLOS Smart Glasses on the user’s smartphone.

Real-time performance such as duration, intensity and compliance is easily communicated via a video and audio prompt to athletes who can quickly know if they are meeting or missing their workout time.

SOLOS also partnered with CTS, a pioneer company in the endurance coaching business industry. CTS will provide its coaches, athletes, training camp participants access to innovative, high-performance SOLOS Smart Glasses. This partnership will bring together a company at the leading edge of performance-enabled wearable technology with a leader in the endurance sports coaching space.

We look forward to the spring season to see these partnerships bear fruits. While despite the disappointing speed of the adoption of VR and AR by the consumer market in 2018, we are optimistic that the organic light emitting diode or OLED business will begin to ramp this year.

There’s no question that consumer demand for VR and AR has not developed at the rate industry experts and Kopin expected, but with our history of sitting at the center of developing technology markets we have already seen the necessity of lower cost, high performance components before a market can develop.

Most recently, we saw this with LED who did not really begin traction [ph] until the price of the LED chips were driven down by increased supply. We expect completion shortly of BOE $150 million state-of-the-art OLED fabrication system. We believe we’ll see a substantial increase in the supply of low cost displays.

We believe the scale of the BOE facility along with other new fabs coming online shortly will increase the necessary component pricing curve which will really help stimulate the new applications for VR and AR.

Recently, I shared Kopin’s view at MIT Media Lab as part of AR in Action Conference and also at Harvard as part of a Dean’s Lecture Series. I outlined our rules on AR/VR. We support everything we have developed at Kopin.

We showed the benefits of taking a human-first approach, voice approach as the next touch and be selective by what you expect people to wear on the head among other rules. I’m very, very encouraged by very positive feedback from the audience.

To summarize, our goal in 2019 is to continue to drive our military and enterprise business as a way for the consumer market to gain traction. To help to drive the consumer demand, our development efforts will be focusing on our OLED technology.

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

Richard Sneider

Thank you, John. Beginning with the results for the quarter, total revenues for the fourth quarter of 2018 were 7.7 million compared with 11.4 million for the fourth quarter of 2017. The decrease in sales in 2018 compared to 2017 was primarily due to the completion of a military program at our subsidiary NVIS in 2017.

Cost of sales for the fourth quarter was 76.2% of product revenues compared with 64.8% for the fourth quarter of last year. Cost of product revenues increased as a percentage of revenues in 2018 as compared to 2017 because of a decline in sales of our military product which have higher gross margins than the average gross margin of our other products sold during the same period in 2017.

R&D expenses in the fourth quarter of 2018 were 3.9 million compared with 4.7 million in the fourth quarter of 2017. Internal R&D expenses for 2018 decreased 1.1 million as compared to the prior year primarily due to the products moving into the commercialization phase. This was partially offset by funded R&D expense increase of 0.3 million for 2018 as compared to the prior period due to an increase in spending on military programs.

SG&A expenses were 6.2 million in the fourth quarter of 2018 compared with 4.4 million in the fourth quarter of 2017. SG&A for 2018 increased as compared to the prior year period primarily due to an increase of 1.7 million in non-cash stock-based compensation.

Included in Q4 2018 operating expenses are 2.2 million from the write-down of fixed assets and 1.4 million from the impairment of goodwill. Included in Q4 2017, operating expenses is a 600,000 charge for the impairment of goodwill.

Other income and expense was expense of approximately 250,000 in the fourth quarter of 2018 as compared with 1.3 million in the fourth quarter of 2017. The fourth quarter of 2017 includes a 1.7 million gain from the mark-to-market of a warrant we received when we licensed technology to a customer.

The fourth quarter of 2018 includes approximately 90,000 of foreign currency gains as compared to approximately 700,000 of foreign currency losses in 2017.

Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately 11 million, or $0.15 per share, compared with a loss of 1.8 million, or $0.02 per share, in the fourth quarter of 2017.

Turning to results for the full year, total revenues for 2018 were 24.5 million compared with 27.8 million for 2017. Again, the decrease in sales of products for military applications in 2018 compared to '17 was primarily due to the completion of the military program at our NVIS subsidiary in the fourth quarter of 2017.

Cost of goods sold for 2018 was 82.4% compared with 72.8% of product revenues in 2017. The decline was due to an increase in the sale of military products which have higher gross margins than our other products.

R&D expense in 2018 was 17.4 million compared with 18.9 million in 2017. The decrease in R&D expense year-over-year was primarily by a decrease in internal R&D expenses for 2018 of 3 million as compared to the prior year again primarily due to the products moving into the commercialization phase. And again, this was partially offset by an increase in funded R&D expense of 1.5 million as compared to 2017 for military programs.

SG&A expenses were 27.2 million for 2018 compared with 20.5 million for 2017. SG&A for 2018 increased as compared to the prior year primarily due to an increase of 2.6 million in non-cash stock-based compensation, 1.2 million in product promotion, 0.8 million or 800,000 of accrued contingent consideration and 800,000 of legal expense and patent maintenance costs.

Included in 2018 operating expenses are 2.2 million from the write-down of fixed assets and 1 million for the impairment of goodwill. Included in 2017 operating expense is 600,000 for the impairment of goodwill.

Other income expense was income of 4.2 million for 2018 as compared to 2 million in 2017. In 2018, we recorded a non-cash 2.8 million gain on equity investments and we received $1 million of insurance proceeds.

In 2017, we recorded a non-cash 2 million gain on the fair value adjustment of a warrant we received as part of licensing of our technology. 2018 includes approximately 200,000 of foreign currency losses as compared to 2017 which had approximately 700,000 of foreign currency losses.

Turning to the bottom line, our net loss attributable to controlling interest for 2018 was approximately 35.6 million, or $0.49 per share, compared with a net loss of 25.2 million, or $0.36 per share, for 2017.

10% of customers for 2018 was Collins Aerospace at 20% and General Dynamics at 11%. Fourth quarter and year-end amounts for depreciation and stock compensation are attached in a table to the Q4 and year-end press release. We concluded the year with approximately 37.2 million of cash and marketable securities and no long-term debt.

And with that, we’ll take calls, operator.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Glenn Mattson with Ladenburg Thalmann. Please proceed with your questions.

Glenn Mattson

Hi. Good morning. Thanks for taking the questions. John, you mentioned the global Tier one. Congratulations on shipping those 5,000 units. You mentioned that you expected that a broader shipment would commence shortly. Can you talk about just a general sense on timing? Do you think it’s more first half of second half? And then can you give us any sense at all on what kind of volumes we’re talking about as it relates to 2019?

John Fan

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

Glenn Mattson

Okay, great. That’s helpful.

John Fan

I think the initial response is very good.

Glenn Mattson

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

John Fan

We still standby the number from the forecast for our customers is still very, very bullish.

Glenn Mattson

Okay, great. Thanks. And then one more on the defense side for the Family of Weapon Site Individual side, I think you began shipping on the – I think it was a $4.2 million contract. Is there a lot of leeway left in that contract to go still and is there any talk yet on a follow-on order or any type of timing on that?

John Fan

Rich, why don’t you comment?

Richard Sneider

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

John Fan

Yes, I think I’ll just add on to that and put a little bit of color to it. It is a very interesting program. This program is actually to replace many armored vehicles still using CRT tubes as imaging. So we’re going to replace it with solid state and that’s just the initial tip of the iceberg. A lot of vehicles have CRTs in the military vehicles and again we’re the sole source for that.

Glenn Mattson

Okay. Sorry, back to the – I’m curious about the Whisper chip. Any feedback from a product that’s perhaps in the field now on how it’s performing?

John Fan

Yes, of course Whisper is actually now in the Golden-i Infinity and SOLOS and we have also licensed Whisper technology to RealWear. So there are additional activities going on right now which we cannot talk about right now.

Glenn Mattson

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

Richard Sneider

So we expect development expenses to decline particularly – as we’ve said, we finished a lot of the SOLOS and a lot of the Golden-i Infinity, so we’re really moving those into commercialization stage. And as John mentioned in his prepared remarks on the OLED, we do expect that to increase, however, we’re in discussions with a number of folks who are looking to potentially fund a lot of that development.

Operator

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

Jeffrey Bernstein

Yes. Hi, guys. Just wanted to follow up on that line. Can you just talk about when you think BOE will start to ship? And I know, John, you guys have been doing a lot of work on brightness while you’ve been waiting for the factory to get built, et cetera. Where do you think you’ll be when you start to ship product in terms of brightness?

John Fan

Thank you, Jeff. It’s a very good question on this. BOE’s factory is actually finished. The equipments are in. They are at this moment test running now. I think I will be there hopefully in 10 days to hopefully celebrate the first run to coming out. So I expect they will be very, very good in brightness. In fact, I think just to give you the scope of the situation. BOE is the biggest supplier of displays for smartphones. Their market share in the world is now over 20% in the whole world of the displays coming out is from them. So they have teams of engineers that can turn a factory on very quickly and the factory’s also very fully automatic. So I think the world of AR/VR will be different in the next – certainly by second half this year everybody will be very surprised what’s happening to the world. So first of all, AR/VR is basically limited as I’ve talked about it. They don’t have any constant supply of display of low cost, high performance displays. I think this [indiscernible] is going to be opened in the second half of this year.

Jeffrey Bernstein

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

John Fan

Yes.

Jeffrey Bernstein

Great. Thanks.

Operator

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

Matthew Galinko

Hi. Good morning. Thanks for taking my questions. I guess firstly on you talked about needing to drive sort of component pricing on the display down to enable consumer AR/VR, but I guess I’m just curious if you could opine on what else needs to happen to drive that business, whether it’s application design or form fact, or what needs to happen to move that business along?

John Fan

Now you touch up on the five rules I outlined for AR/VR. Anything to point ahead, there’s a lot of ergonomic fashion, willingness, comfort. The necessary condition is to put that people will be willing to put it on the head and stay on the head. And those ergonomic issues are being solved right now. And I think the enterprise will be the first one that will see it. In the military, we’re already seeing it. To give you some idea, our market share on military and enterprise are pretty large. So we know what people are willing to wear for benefits. Consumer is always a much bigger target because consumers are much more fussy what they will put on their head. I think that issue also coming will be conquered. Now once you’ve had that particular issue, the people willing to put on their head, the next thing is really the cost of the elements. How expensive it is? Consumer does not want to pay too high a cost just because they have supply. Nobody wants to go to a customer product if you don’t have a constant supply. At the BOE we have solved that problem. They will have the supply, they will have to bring the cost down, the curve – the journey will start. So with supply chain solve – problem solved, I will say the consumer headset will begin to show up at the second half of this year.

Matthew Galinko

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

Richard Sneider

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

Matthew Galinko

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

Richard Sneider

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

Matthew Galinko

All right. Thank you.

Operator

Thank you. [Operator Instructions]. Our next question comes from the line of Patrick Metcalf with Newbridge Securities. Please proceed with your questions.

Patrick Metcalf

Hi. Good morning, guys. Congratulations on the BOE fab coming online a little bit early.

John Fan

Thank you, Patrick.

Patrick Metcalf

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

John Fan

The question from Patrick is about this global Tier one company that have got 5,000 units late last year and they expect to announce soon. I expect this is going to be a reasonable shock to the system. It will really kind of encourage the enterprise world to really grow. I assume when the announcement comes, there will be lot of good data that comes with the announcement to show that people are in fact getting a lot of good benefits from it both in software, hardware and the return on investment you have in those entire systems. So we’re all expecting it to happen soon and I think it will.

Patrick Metcalf

Okay, great. I look forward to it. And then my next question is for Rich on the balance sheet. I see you have an equity investment line of about $5.5 million up from zero a year ago. Can you highlight where that comes from?

Richard Sneider

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

Patrick Metcalf

Okay, great. And then you guys keep talking about having 300 plus patents in the portfolio. It’s been going on for a year and a half and I witnessed these patents coming out quarter-after-quarter-after-quarter. I see you have a patent specialist on your Board of Directors. Can you talk to us about how we can monetize these things like you have with your partner and your Chinese JV? Can you talk about how these patents may come into play in the next three months, nine months, two years? Is there anything you can add to that?

John Fan

Yes, I think that we are in what we call monetizing phase right now. As you will know we mentioned that we have licensed some of our patents or designs to companies in return not only for royalties but in addition for equities as well as to have contracts of buying our components. And this has been started carrying on the last 18 months and if they’re successful, we will continue this effort. I think that we recently announced another license to startups to make AR glasses for surgeons for medical. So this is another case where we licensed technology as well as getting equity and royalties. So we will do more of that --

Patrick Metcalf

Okay.

John Fan

We found out that more and more people are coming to us because as you will know RealWear case is already pretty well known. So people seen that, they licensed a system from us and we will become a very successful company. So we’re going to have a lot more people doing that now.

Patrick Metcalf

Okay. And just to add one thing. Do you see any Tier one companies looking to license any and asking you about your IP Tier two conversations?

John Fan

Yes, I think maybe we should mention, I don’t know, I assumed people will consider Lenovo as a Tier one company. They spun out called Lenovo New Vision. That particular arrangement is they licensed design from us. They bought components from us as well as they give us equity.

Patrick Metcalf

Okay. And then the BOE fab news, the fact that that’s ahead of schedule as far as I’m concerned I’m really excited about that. I think that it’s going to turn the VR needle up faster than people expect. And I just want to know, John, are you engaged with numerous Tier ones over the past nine months since VR has gone silent or reassessment stage? Are you coming out with better designs? You talk about situational awareness with VR. Can you talk to the audience about how excited you are and how much attention you’re getting maybe from Tier ones regarding your OLEDs and your virtual reality designs?

John Fan

Yes. I think, Patrick, as you said, we are giving the talk at MIT and Harvard the last two months. I don’t like [ph] the situation in the VR. There’s no question about it. VR has been disappointing year in 2018. But out of that – you will know, out of that people began to see the light at the end of the tunnel. What’s missing is a better display. The display has to be a higher resolution, faster even to make sure there’s no latency as you move your head, so you don’t get sick when you wear them and the display should be a higher resolution, maybe even higher than 2k x 2k which we have which is the world record but even that might not be enough, so people have to go to higher resolution and much lower cost. Right now there’s no supply. We’ve got our 2k display in every company that you can name of in VR. I don’t think there’s any VR company that doesn’t have our display in their systems. It’s just that now the order feedback comes back and say, could you give us a little bit better display, faster display, lower power and by the way it better have good supply and better low cost. And we have many and many trademark now by the end of this first or second quarter.

Patrick Metcalf

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

Richard Sneider

Thank you.

John Fan

Thank you very much.

Operator

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

Jeffrey Bernstein

Hi. And I’ll second the last comment. But, John, I just wanted to get an update on Forth Dimension, what’s going on with the 3D vision in terms of ramp in China? I know we’ve been sort of expecting that technology to finally cross the chasm over there. And then just talk a little bit about some of the other things on the display side which I know are kind of higher end but maybe more in the realm of hollow lens and that kind of thing that Forth Dimension is doing?

John Fan

Yes, the question is in the case of a 3D metrology, people are using that 3D machine to look at PCB board. But now people have started looking at it for other applications, looking at 3 dimensional in inspection as well as quality control. The China market we’re seeing some activities there. We actually I don’t know whether – maybe we announced it that there are some activities going on in China right now and positive activities. So again, go back to what you’re saying, we will not make a big deal out of it until we see consistent order from them.

Jeffrey Bernstein

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

John Fan

It’s a very high-end specialized modulator display. That does make a very, very good high end. The thing about Forth Dimension is their market is a lot involved with military and industrial applications and medical applications. The price point by nature will set very, very good price points. So they’re aiming still not for consumers. The consumers are really not going to go for the OLED and hopefully coming from the BOE labs.

Jeffrey Bernstein

Got you. Thank you.

Operator

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

John Fan

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

Operator

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