Kopin Corporation (KOPN) Earnings Call Transcript & Summary

Good day and welcome to the Kopin Corporation's Second Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Richard Sneider. Please go ahead, sir.

Thank you, operator. Good morning and welcome, everyone, and thank you for joining us this morning. John will begin today's call with a discussion of our strategy, technology and markets. I will then go through the first -- second 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 during today's call taking place on Tuesday, August 3, 2021 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 & Exchange Commission. The company undertakes no obligation to update the forward-looking statements during today's call. And with that, I'll turn it over to John.

Thank you, Rich. Good morning and thank you for joining us to discuss our second quarter results. I first want to start by express our hope that you and your families continue to stay safe. We continue to see growing demand for our products across our key business segments, including defense, industrial and consumer. In our defense business, we remain on track on many development programs. 2 new programs entered low-rate initial production during our second quarter and the third expect to enter low-rate production in the fourth quarter. During this quarter, we announced an additional $1.6 million follow-up order for our high brightness liquid crystal display for the F-35 Joint Strike Fighter program with deliveries scheduled through the second quarter of 2022. Additional orders are expected throughout the lifetime of this program. For the FWS-I thermal weapon sight program, at our customer requests we reduced shipments of our product during the quarter, while our customers making system and production enhancements. We are working closely with our customer, but expect the lower shipment rate to continue during the third quarter. We expect to increase the rate and make up some of the shortfall in the fourth quarter. Despite this short-term slowdown, there's no change in the overall profile of the program and demands remains very strong. I would like to stress that there is no change in the overall outlook and the profile of the program, and in fact we expect soon to receive a significant follow-up order for this program. It will continue delivery into 2022. Also we are pleased with strong demand from our enterprise customers in Q2 and expect the momentum to continue. As discussed with our previous call, we have continued to increase our R&D activities as we see great opportunities in the coming augmented and virtual reality space. In fact, our customer fund R&D revenue increased approximately 60% year-over-year as a result of growing interest is in our next-generation displays and display technologies. We achieved several very important display technology advancements in the quarter, including the world's first 35,000 nit HDR green OLED microdisplay. This leading-edge display can incorporate our dual stack OLED structure for ultra-high brightness and unique patent-pending pixel structure backplane architecture for super-high dynamic range operation. This is a big milestone, not just for Kopin, but for AR and VR applications across all sectors. Our new HDR green OLED microdisplays is ideal for use in conditions ranging for very dark night to very bright daylight. In addition, we recently announced the successful development of All-Plastic Pancake Optics for VR, AR and MR applications. This is another exciting achievement for Kopin and is believed to be the first All-Plastic Pancake Optics in the world. While the Pancake Optics are much thinner, they are conventional optics. It is important to note that previous Pancake Optics need at least one spherical glass lens to avoid image [indiscernible] caused by birefringence of currently available plastic material. Our new patent-pending All-Plastic Pancake Optics with aspherical lens is sufficiently lighter than Pancake glass optics while also providing a better image quality at a much lower cost. For years, bulky and heavy headset had hindered consumer adoption AR and VR glasses. Our new plastic Pancake optics enable an entirely new avenue for the industry to design, manufacture and manufacture stylish, super light, compact VR, AR and MR high-performance smart glasses and headsets that we believe consumers will want to have. We have received strong interest from the market. As in Q2 also, we announced a multiyear development agreement with a leading global electronic company for full color led microdisplays on silicon and expect to demonstrate a 1-inch diagonal full color 2K x 2K LED microdisplay within 24 months. As a reminder, LED microdisplays have a potential for super high brightness, low power consumption, high contrast and wide viewing angle, which are all important features for many applications, including see-through augmented reality and mixed reality applications. We're excited to collaborate with our partner, which already has achieved some important milestones in color led microdisplays. It's also important to note that this collaboration will expand our microdisplay portfolio, making us the world's only provider of a complete suite of LCD, LCOS, OLED and LED microdisplay on silicon. Our breadth of technology and product capability put Kopin in the unique position of being able to provide our customers solutions that best fit their product and application needs. I would also like to stress my recent participation in the 3 part webinar series AR and VR: The Paradigm Shift to Smart Glasses Starts now, which drew over 500 participants during the live event. Many of them are actively involved in the next-generation smart glasses and headsets. During the 3-part series, we discussed the past, covering the initial efforts to create AR, VR solutions. The present addressing the current stick of the active technologies and the future, which address the future of AR, VR smart glasses, offering a road map to successful product developments. All 3 segments have active and engaged participation from the attendees and are available on Kopin's website at www.kopin.com. We are pleased and committed to our strategy. In short, while we maintain our strong momentum in our growing revenue-generating businesses in defense and enterprise sectors, we continue aggressively to innovate and advance our technology for what we see as a growing wave of consumer AR, VR and MR products and applications. Many of you may have followed the increasing discussion of the transformational arrival of the Metaverse. Metaverse definition is still not too well defined. However, in my view, as we discussed in my webinar, it is composed of AR, VR hardware, smart glasses and platform and application softwares, providing a unique exciting user experience to consumers. This radical transformation will happen and is already happening in defense enterprise segments and will soon arrive in the consumer sector. As we have stressed, the AR, VR hardware would come first. The technology advances and market conditions are very favorable, and Kopin is very well positioned to capitalize. Now I would turn the call over to Rich to discuss the financial detail of the quarter.

Thank you, John. Turning to our financial results, total revenues for the second quarter ended June 26, 2021 were $9.9 million compared with $8.8 million for the second quarter of June 27, 2020, a 12% increase year-over-year. Product revenue for the second quarter ended June 26, 2021 were $6.9 million compared with $6.7 million for the second quarter of June ended 27, 2020. Our defense product revenues for the second quarter ended June 26, 2021 were $3.8 million compared with $4.5 million for the second quarter ended June 27, 2020. As John previously discussed, during the 3 months ended June 26, 2020, we reduced shipments of our thermal weapon site systems to a customer who is making system and production enhancement. We expect the lower shipment rate to continue during the third fiscal quarter and then increase in the fourth quarter of 2021. Whether we can make up the revenues during the remainder of 2021 is dependent on how quickly the customer completes their process. Our industrial product revenues for the second quarter ended June 26, 2020 were $2.6 million compared with $1.4 million for the second quarter ended June 27, 2020, an approximate 86% increase on the strength of the sale of products used for 3D metrology and headsets used for applications in manufacturing distribution, partly offset by a decline in public safety wearable headsets. Project research, development and other revenues were $3 million for the second quarter ended June 26, 2020 compared with $12.1 million for the second quarter ended June 27, 2020 primarily due to an increase in funding for U.S. defense programs. Cost of products sold for the second quarter ended June 26, 2020 were $6 million compared to $4.8 million for the second quarter ended June 27, 2020. The increase in product revenues as a percentage of net product revenues for the 3 months ended June 26, 2020 as compared to 3 months ended June 27, 2020 was primarily to lower manufacturing efficiencies driven by the lower FWS-I volumes. Regarding global shortage of semiconductor components and production capacities affecting many industries, while we have in some cases had to find alternative sources, we have not experienced any shortage issues during the first 6 months of 2021. In some cases, we have seen some price increases. The shortage of semiconductor components is a very dynamic situation and we continue to work the issue it presents. Research and development expenses for the second quarter of 2021 were $3.9 million compared to $2.2 million for the second quarter of 2020, a 75% increase year-over-year. R&D expenses for the 3 months ended 26, 2021 increased as compared to 3 months ended June 27, 2020 primarily due to an increased spending on U.S.-funded development programs and internal R&D expenses for OLED development. Selling, general and administrative expenses were $4 million for the second quarter of '21 compared with $2.9 million for the second quarter of 2020. Excluding the noncash stock-based compensation costs, SG&A expenses were $3.7 million for the second quarter of '21 compared with $2.8 million for the second quarter of 2020, a 30% increase. The increase in SG&A, excluding noncash stock compensation cost, was due to an increase in other compensation costs and bad debt expense. Other income expense was income of approximately $249,000 for the second quarter of 2021 compared with $6,000 of expense in the second quarter of 2020. During the 3 months ended June 26, 2021, we recorded $100,000 of foreign currency gains as compared to $10,000 of foreign currency gains for the 3 months ended June 27, 2020. Turning to the bottom line. Our net loss attributable to the controlling interest for the second quarter of 2021 was $3.8 million or $0.04 per share compared with a net loss to controlling interest of $1.1 million or $0.01 per share for the second quarter of 2020. Non-GAAP net loss attributable to controlling interest for the second quarter of 2021 was $3.6 million or again $0.04 per share compared with non-GAAP net loss attributable to controlling interest of $1 million or $0.01 per share for the second quarter of 2020. Kopin's cash and marketable securities were approximately $30.7 million at June 26, 2021 as compared to $20.7 million at December 26, 2020. Net cash used in operating activities for the second quarter ended June 26, 2021 was approximately $5.4 million. During the 3 months ended June 26, 2020, we sold 92,335 shares of our stock under our ATM program for gross proceeds of approximately $832,000 before deducting expenses of us -- paid by us of $24,000. For the 6 months ended June 26, 2020, we sold 2,496,690 shares for gross proceeds of approximately $16.8 million before deducting broker expenses paid by us of approximately $500,000 pursuant to our existing ATM and previous ATM agreement. On June 28, 2021, the first day of our fiscal third quarter, we sold 600,000 shares of common stock for gross proceeds of $4.8 million before deducting broker expenses paid by us of approximately $145,000 pursuant to our existing ATM program. Second quarter amounts for depreciation and stock compensation expense are attached in the table into the Q2 press release. The amounts discussed above are current estimates and listener should review our Form 10-Q for the second quarter 2021 for any possible changes and of course additional disclosures. And with that, Operator, we'll take questions.

[Operator Instructions] We'll now take our first question. It comes from Glenn Mattson of Ladenburg Thalmann.

Yes. So just as far as the delays go for this quarter and I guess next, can you give us some sense, just a little more color on kind of what kind of changes your end customer had to make, I guess trying to get at how confident you are or what gives you the confidence that there's going to be a bounce back in the fourth quarter on that? And just some color on the degree of bounce back, whether or not you think you can make up a majority of the revenue loss or if you need to -- or if there'll be some further push out in '22?

Sure. So first of all, this is a very long-running program. This is going to go for multiple years and this is not unusual that now they've made some number of full units, and they're looking to improve yield. Keep in mind, a lot of the government contracts today are firm fixed price and so to the extent that you can make yield improvements, drive costs down, that all falls to the bottom line and we share in that. And so they've come through with some ideas for yield improvement on the overall system. They slowed shipments down as they implemented those improvements. It requires us to do some engineering to work with them to make sure there's no downstream effects and that's what we're doing. And so how fast we can make it up, we've talked to the customer, they are very eager to make it up themselves. It affects their revenues too. So our interest and their interests are aligned. So it's just a matter of going through and making sure all the testing gets done properly and that there are, as we mentioned, no downstream effects and then once that happens, we hopefully can turn this thing on and then it will just be a matter of how many weeks are left and how much volume we can get out of the facility over the rest of the quarter. We're optimistic we can put a pretty good dent in the fourth quarter if we can get this thing turned on soon.

Okay. Great. And as far as the new programs that went into low-rate initial production, can you talk about any specifics about what exactly programs as are and just get a sense of how it will ramp in the back half and into next year?

Yes. So it's a weapon sight, it's an avionic product. As soon as we get clearance from the customer, maybe hopefully we can give a little more color exactly who they are and what the programs are. So we did recognize product revenues, initial product revenues in the quarter and hopefully it will just continue on. Again this is initial low-rate production. So there is still engineering going on as these units are being shipped. So having gone to full-rate production, which will happen next year.

And so the -- there was a -- gross margin was a little softer and I guess that's a combination of those 2 factors. In the early stages, obviously the initial production doesn't have the same margin as something in full production. So -- and obviously, the downtick in the weapons sites. So being that that will continue in Q3, should we expect kind of similar margins in Q3 and then perhaps started to improve in Q4 and beyond? Is that a good way to think about the model?

Yes.

Great. And then I just had a question about the new LED microdisplay. You talked about kind of a global leader there as the partner. Maybe, I don't know, if Rich or John are the best person to talk about it, but just love to get more insight into how big that could be down the road and just any other color on the upside that that opportunity presents would be great.

Yes, Glenn, this is John here. This is a very interesting program, very exciting progress. You well know we obviously have been working on LCDs and LCOS and recently really focused on micro-OLED. But micro-LED has a peculiar features. It can be very bright. In some way, people think it's an ultimate display. If you can do the micro-LED, then the brightness is so high it can be so efficient, they'll be very, very good for see-through AR optics -- optical systems. As you well know, the augmented reality optical see-through systems in many ways is the ultimate dream for everybody. So this is it, this is the ultimate dream, but technology is very difficult. We actually pioneered and invented this process on silicon in 1991 with [ PAPA ]. PAPA actually wanted from day 1. Just going back 1991, they funded us to do that. We stopped it because we don't think we can do a color very well and now we're reactivating the whole process as they will fund from customer and we have a very big company and we already disclosed it from Japan. As a global consumer and consumer -- as enterprise consumer, both kind of company and we are excited having 2 years we will have that that one inch 2K x 2K full color. If we achieve that, that will be the world's leading display. There's no such ambitious program yet and will be the first one. We will provide the backplane design. It's a very unique design that we are patenting right now, yes.

Our next question comes from Kevin Dede of H.C. Wainwright.

John, just to go back on to the -- looking at the -- Glenn brought up the LED display. You mentioned a consumer company helping you develop that 2-year program. What exactly are the design requirements, the full display? Do you have to include optics in that? Can you give us a little more insight on what your deliverables are?

It's a very good question, Kevin. For this particular project is a focus on just display the full color 1-inch 2K x 2K display, not the end user system. As you well know, it's a very good question because just a display alone will not solve the problem of the AR, VR consumer application. It is not true. Optics is just as important. You need basic optics going to partly fluid a display, maybe a 30,000x by the optics and give you a very clear image and that's why the Pancake Optic helps. Pancake Optics is a [ HR trademark ] that we -- we actually use Pancake Optics in the defense industry for quite a while because it does make it everything high-performance optics. But in those cases, they usually have glass in there, glass lens, which is heavy. It's okay for the soldiers, but it's not okay for consumers. So thus this all-plastic optics that go with our way of high-performance display. Together, we will provide the whole unit to [indiscernible] for the product display only. We have individual separate programs on optics.

Okay. So that was going to be my next question, John. Thanks for leading in. So the -- this optics development is the plastic cast, #1, is the development there sponsored by a consumer company or was this something that Kopin endeavored to solve on its own and could you give us a little insight on how you're pairing it with both this LED development and the OLED development in AR and VR?

Yes. Thank you for asking the question. I think for any AR, VR systems, you need a display and you need optics, and you need a very, very well-designed package assembly. And we learned this and we have been doing this for defense and enterprise world. In fact, for defense world therefore, for instance, avionics or gunsight, we have delivered hundreds of thousands of units to the defense industry. This is not just display, but you need the optics and you need the packaging. How do you package so they have dust free and they are medically sealed? And with those know-hows, Kopin has accumulated a lot. And therefore when we start looking at the consumer world, we recognized not only that they are very, very high-performance display. You need a very thin, very well imaged optics. And Pancake Optics -- remember in the defense industry, we use very different type of optics. We actually provide optics to our customers. So we'll take Pancake as the one for consumer and then we'll also try to work with a vendor, a mature company, and we develop that special material, that edges has no birefringence effect. And therefore the whole plastic optics is unique and we're patenting it. I think we already filed 3 patents on it and we're filing more. and I think with this, a very lightweight, very stylish VI headset is very likely now, very likely. It's safe. The amount that we are saving is as we mentioned, it's significant. I think it's at least more than 10 grams per eye. So you have very significant savings as well that to make good and better -- actually better image quality to your eyes. This is something that people dream about it, nobody can crack the nut, except that we did.

So, John, was it really a drive in trying to shave weight or is it also a safety factor?

Okay. We never mentioned safety factor. In fact it is also a safety factor. That's absolutely true. The glass, however, is pretty strong. Usually, unless you have some strange event, but it is really -- it's actually everything, cost, size, weight, image quality and now, of course, thank you Kevin you mentioned it, it's certainly safer.

Okay. So just getting back to sort of my thinking on this, John, was this something that you wanted to take your team to develop in addressing all of those things? Or did you get a -- do you have a company that's helping you develop it and help sponsoring some of this development work?

The plastic optics is totally internally funded. We consider that plastic optics either with licenses or we would be Kopin product. So because our technology optic is so advanced, we decided to do it ourselves. Now of course we are partners, we are partners that develop the material and we were certainly not a chemical company. So we designed it. We have our own software designed lens and we get people to build it, to mold it and we deliver to our customer the final product.

Okay. Do you see it -- do you see this development, John, transferring to some of the other programs that you have, like with the Scott fire helmet and those types of environments where maybe plastic hasn't worked so well before?

It is a very good question which we are so -- if I have to say, we have a lot of strong interest after we announced it and the range from enterprise all the way to consumers. I must say the consumers are more extreme. Almost everybody working on consumer-type headsets would like to try this type of optics because it seems on paper. It is the ultimate display. Or it could be opposite, I am sorry.

Okay. Yes. Good. So that sort of gets me to the -- to another line of questioning, John. Help me understand how Kopin is looking at LED versus OLED? I just want to understand where you see -- I mean, obviously, you've mentioned that led becomes the ultimate in solving see-through AR. But I'm wondering how you see OLED embracing VR maybe nearer term? Or maybe you could just help me make sure that I understand the way that you're thinking about it.

Yes. I think in my webinar, I tried to outline, of course, nobody knows exactly how the future will hold. My feeling -- our feeling is for VR application, consumer VR applications, micro-OLED is good enough. Micro-OLED could give you the low-cost, high brightness, enough brightness and the resolution you need. And we'll, of course, continue to try and improve the brightness of the micro-OLED. So as you well know, our 35,000 nits micro-OLED is a world record. We're using dual stack. So that is one area. But we won't go anything over to about 100,000 nits. We feel that micro-OLED will not achieve, certainly not in the next 5 to 10 years. So that's where micro-LED comes in. Now if you need AR application where you need maybe anywhere between 50,000 to 100,000 nits or higher, I think micro-LED will come in. The technology is still quite immature right now. I think we are talking about 3 to 5 years away for micro-LED to begin to come into the market. So right now, the next 5 years, the micro-OLED for VR and some AR applications, and we're making great progress there too. So at the end, we -- our optics is more, let's say, important. We provide the optical solutions to modules, to optic, to display, to packaging, for AR, VR, MR. We do not make the end user systems with licenses. So people who make end user systems, they often have the equities in there. I mean as you well know, we have made a few arrangements already and we're going to continue to make arrangements licensing to people who make end user systems, but we do not sell and market end user systems in Kopin.

Okay. Another question on LED, if you'll allow me, John, please. Can you categorize the IP that you're going to lend to the Japanese company and what you'll be able to control versus the IP that I still believe you're working with a company in China in the development of micro-LED? So could you just sort of frame those 2 deals for us, please?

Yes. As you well know, we announced several times, the initial work of LED or silicon actually was patented by myself and people in Kopin many years ago. Unfortunately, the 3 patents that we filed and issued to us expired 2 years ago, okay? The one, the fundamental patent, expired 3 years ago. So, however, we do have improved patents and then what we have is we actually design the backplane, the silicon as you well know. Displays are becoming display on chips. It's really an IC chip with LCD or OLED or maybe in the case the LED on top of the silicon chip. So to drive the LED micro-displays could be a different kind of architecture than micro-OLED. So we designed that, we patented that and such architecture are used either for monochrome, which is the cheaper in China is putting their LED array on our backplane. So backplane is ours, okay, and then the display itself, when it comes back to us, is Kopin. Now using similar color backplane, we had to work with the Japanese global company to put LED array on that and then [indiscernible] you have display -- micro-LED display that ship with Xbox. So we control the backplane and we designed it, especially with unique design, and we actually has a end user product and a display product.

Okay. Okay. So it's fair to assume or…

[ Jeep ] is on monochrome, not…