Kopin Corporation (KOPN) Q2 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to Kopin’s Q2 Earnings Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Rich Sneider. Thank you. You may begin.

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 markets. I will go through the fiscal second quarter results at 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, August 02, 2016, we will make some 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 these forward-looking statements made during today's call. And with that, I'll turn it over to John.

Thank you for joining us today. We made progress in many areas in Q2, especially in marketing of solos, our smart glasses partly to the unique Elite Cyclists. And in getting started our production of our very big military program to F35 as well as the progress in our designing and [indiscernible] discussion on the Whisper Chip and in solidifying our leadership in the fast growing [indiscernible] market. Beside the assignment around Kopin technology, the Augmented Reality the AI industry itself received a huge boost with the frenzy around Pokemon Go over the last month. Pokémon Go is the first mass adopted AR engine [indiscernible] helping to show consumers how to get interact with the technology. Usually a location base information the game crosses the boundary between the imaginary and real world. And in fact has been called the mixed reality. This ties directly to Kopin, because even before our moving to wearables we have been providing critical components for such mix reality aspect for the military. Recognizing the large opportunity were presented by Pokémon Go and the consumer refinement around AR, Goldman Sachs recently increased its estimate for the AR/VR market size to 95 billion by 2025 up from 80 billion. While one may agree with the premise the AR/VR could potentially become a replacement for smartphones. This view requires the consumers actually want to wear headset to get information they needed instantaneously or during as they are playing games for example. As we have been saying for some time, most consumers will wear only a lightweight and attractive headset or glasses. And yet still contains all the relevant features. This will apply with [indiscernible] the progress made in Q2 in ruling out solos. Our kick start program reached its goals in 24 hours, but more importantly we gain important data about the target market and its users. We are now moving to the next phase in our marketing plan as solo is on track for initial shipments in October. As I mentioned last quarter with our official sponsor of the U.S. cycling and if any key members have been training using solos to monitor real time performance data such as speed, power, pace, and heartbeat. We are excited to see how well the U.S. cycling team will perform in Brazil. More recently, in fact just last week Softbank in Japan introduced solos to their Japanese audience. Our key differentiation for solos headset is [indiscernible] which has a unique performance features of being solar readable see through, timely and energy efficient. Pupil Optics is perfect for mobile AR headset, and solo is the world’s first headset utilizing our Pupil Optics. The other technology that’s very important for the substantial wearables is a reliable voice user interface. What stressed for me now the voice will be the next touch. Our Whisper Technology enables voice engines perform much better especially in noisy environments. Our Whisper Technology is based on artificial intelligence. It identifies and differentiate voice and noise in any acoustic environment using neural network processing. It does not use a traditional noise cancellation approach. Our Whisper Technology’s potential is close to 30 patents and patents pending. It has been used for industrial and military headsets for several years, and now we have incorporated the Whisper Technology into a Whisper Chip and are ready to move into commercial and customer adaptations. We are expect the chip to have broad applications. In the second quarter we have embarked on design and productivities with various Tier 1 global companies for consumer voice applications. And the early response is very positive. We will continue our push to integrate our Whisper Chip into their products, as well as to other Tier 1 companies. Our current focus for Whisper market segments range from public safety to communications. In the second quarter, we increased our activities on executing a system program and getting qualified for future [military] (Ph) programs. We started a low rate production for the world’s most advanced pilot helmet system Head-Mounted Display HMD used in the Joint Strike Fighter F35. These advanced visor projected HMD is truly a mix reality display system that works both in the daytime under extremely bright conditions, as well as in nighttime. It provides a 360-degree view of the fighter jet’s surroundings using video provided from aircraft-mounted thermal sensors, together with computer generated symbology. During night operations an integrated digital night vision camera sensing system provides all-around night vision imagery in the helmet display system. Therefore it is a mixed reality as I said both AR and VR. Our display is the only one qualified for this military program and we are the sole display supplier. This is a very important program for us and we expect revenue growth starting in 2017. This program is projected to continue until 2037, and has the revenue potential comparable to our previous military programs that provided us several hundreds of millions of dollars in revenue. In addition, as we previously announced, we have been chosen by one of the prime contractors to provide display products for the Family of Weapon Sight Individual FWS-I program. It is a follow up program after our very successful Thermal Weapon Sight program. As a result of these programs, we expect strong military revenue growth in 2017. In the second quarter, we invited president of business development for Asia. We also hired direct of business development for government programs. This continues our transition to more emphasis on business development and sales as we have now already streamed our product in the pipeline. We are also delighted that we had 17 new patents issued and filed two new applications filed in the second quarter. We have more than now 300 patents issued and pending, with the vast majority related to wearables. We have been prudently maintaining our financial strength even as we move on development to commercialization. And with the sales of our Korean facility, we have now additional 8.1 million to invest in marketing Kopin’s wearable technologies. While, financial results do not yet reflect our progress, our opportunities with $91 million cash with results to close with our [indiscernible] technology to their needs. With the coming launch of solos the ramping of F-35 and FWS-I the positive feedbacks we now have on our Whisper Technology and Chip, a strong financial and IT positions and why we expect the second half of 2016 to be comparable to the first-half. We are very well positioned and optimistic about revenue growth prospects in 2017 and beyond. I will now turn the call back to Rich to discuss our Q2 results in greater details.

Thank you, John. Beginning with the results for the quarter, total revenues for the second quarter of 2016 were $4.4 million compared with $10.9 million for the second quarter of 2015. Including the second quarter of 2015 was $3.8 million related to renegotiated contract terms due to customers’ lower forecast volumes. Cost of goods sold for the second quarter was 114.3% of product revenues compared with 67% for the second quarter of last year. The decline primarily was due to lower sales volume was insufficient to absorb fixed cost. R&D expenses in the second quarter of 2016 were $4.1 million compared with $4.9 million in the second quarter of 2015. The decline in R&D expense year-over-year was primarily driven by lower funding R&D expense. SG&A expenses were $4.3 million in the second quarter of 2016 compared to $5.1 million in the second quarter of 2015. The decrease in the second quarter of 2016 as compared to the same quarter in 2015 was primarily due to decrease in stock based compensation, professional fees and patent amortization expenses. Including in operating income in the second quarter of 2016 was approximately $7.7 million from the gain on sale of our Korean property and plant which we discontinued in 2013. Other income and expense was income of $207,000 for the second quarter of 2016 as compared with $6.2 million for the second quarter of 2015. The second quarter of 2016 included approximately $28,000 of foreign currency gains as compared to approximately $529 of foreign currency gains in Q2 2015. The second of 2015 also included gains on the sale of investments of $5.5 million. Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $3.1 million or $0.05 per diluted share compared with net income of $781,000 or $0.01 per diluted share in the second quarter of 2015. Cash flows used in operating activities for the six months ended June 25, 2016 was $12.2 million. As John mentioned, we concluded the quarter with approximately $91.5 million of cash from marketable securities. We have no long-term debt and we continue to make very strong cash and marketable security position in order to execute our strategy. Operator, we are now ready to take questions.

Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Matt Robison with Wunderlich Securities. Please state your question.

John, that’s an interesting acceleration in the number of patents issued. Is there a deliberate effort on your part to grab associate with the development of the market? And then also on the Weapon Sight business I heard I got on the call a little bit late, but I heard you say that the second half would be comparable to the first. Is that imply a delay in timing for the military business? And I guess the other question I have is, you had a little bit of uptake in the first quarter on the wearable products. And when might we expect to see some reorders for those types of products?

Okay, I’ll answer to the question on the patents and Rich will answer about the military programs. On the patent situation, the recent allowance especially on the Whisper. But remember when a patent got issue and allowed the filing is actually usually is 18 months ago. So 18 months ago we have tremendous amount of filing on the related to headset and Whisper. So they will issue around now. So the Whisper Technology is [indiscernible] we don’t have time to really talk about today it's just nothing like that. So everything we file in Japan, in China, in United States, usually allows right away.

As it relates to the Weapons Sight, I think it goes back to why we didn’t give guidance on revenues in the year. We have a lot of sophisticated military programs and there is something efficient start and so right now We are looking at them and some weeks are good and then some weeks issues are raised that we have to resolve or our vendor have to resolve, or truly our customer has to resolve. So that’s our current estimate right now.

What do you mean [indiscernible] that means no business from that until next year, is that what you mean?

So first to tell you, you have 35, We are in low rate production now. So We are shipping to that program and how quickly that program ramps in depend upon them resolving issues and that may not necessarily having to do with Kopin per se but maybe the overall demand for the plane or the ability to supply planes.

Yes, I may add on is not this similar what happened to our Weapons Sight program when we first started. There is a very complex program systems to everyone on the food chain has really shape where there targets are. So we are being conservative what may happen in the year.

So what about on the wearable side?

Wearable side is actually interesting. I think the drones are still doing very well and I think drone racing will continue we do talk to and to other drone makers who are using for other type of applications in their racing and which sometime type of designing but I think that’s a next step. On the wearable side solos has been our focus. We believe that solo puts focus on cycling especially for what’s going on in the next few weeks, [indiscernible] now we are ready to use what we learned, keep going the program and ship out in October and we have got another bunch of them and we already have people now attesting for running. So I think that solos, which is the only, the first truly AR headset mobile headset in the world with our Pupil Optics as I say last week Softbank introducing Japan and then I think We are not ready to ship to Japan yet really, but that will be interesting here.

Our next question comes from the line of [indiscernible] with Needham & Company. Please state your question.

This is [Robert Martins ] (Ph) I’m actually here on behalf of Rajiv Gill at Needham & Company. And I just want to get a little bit more clarity with your wearables position, and what sort of demand you see for the rest of the year within the division and do you see there any particular time period that there might be an inflection point for higher growth? And also within the division, just are you mainly focused on the cycling? I know you just spoke about on coming out with wearable devices, or if you kind of look for growth outside of just activities, side of things?

This is John Fan, I will answer the question is that [indiscernible] will be the inflection point. To answer your comment is that said I wish I would know, I wish anybody would know. The wearable area in the military of course is quite as simple. It has already got to inflection point. As mentioned by F35 now of course more and more people get talk about F35 and the helmet is already in Internet now. It is a truly advanced mixed reality helmet. As I say, you can see through 160 degrees around your VR/AR both in bright daylight and also through darkness. It has everything that you ever imagine. So that inflection point already occurred but what is going to happen in the net inflection point in the industrial application, in the police, in the medical, I think that would happen next year I think there are lot of activity is going on. And the truly commercial one I think it would take some time thus far we are focusing on health and fitness, our fitness is [indiscernible] once we start shipping October I think next year [indiscernible] also have the inflection point. There is no question about wearable has been slower than Pupil taking off people expect that especially Google Glass [indiscernible] the last year is so that we can got by one year. But We are seeing other activities now and I think the mixing pieces are you have got to have the vehicle optical system which we do have. You got to have vehicle voice system, which we do have Whisper. And also later on you got to have a vehicle battery to allow you to get truly long lived applications which We are having. So I think we have the missing pieces and I think that military will kick off late this year, industrial and military, industrial and police [indiscernible] activity which we will have next year and they help us in assisting also next year. I hope I answered this, there is a long widening base of very, very current topics which we have meetings on with every week, think about where it's going to happen, when it's going to happen. I think if it takes off, we will be there and we are ready for them. that’s why we are hiring a lot more business development people. Our products are ready it's all in the pipeline now and We are ready for the market to take off.

Mr. Fan, I am showing no further questions at this time. So I will turn it back to you for any closing remarks.