Kopin Corporation (KOPN) Q2 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to Kopin Corporation second quarter earnings call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rich Sneider, CFO. Thank you.

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 second quarter 2018 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 Monday, August 6, 2018, 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 the call over to John.

Thank you for joining us this morning to review our continued progress as we maintain our leadership position in providing display and optics to the companies driving the adoption of AR and VR, especially across military, enterprise and industrial applications. On the consumer side, we're driving the growth ourselves with the commercialization of SOLOS glasses this quarter. In this May, SOLOS, our smart glasses for fitness, became available for purchase on our website. As we have discussed, this new generation of SOLOS includes the many feedbacks that we received from users, who participated in our Kickstarter campaign last year as well as from U.S. Olympic cyclists, who partnered with us. With the new features incorporated in this SOLOS, as we described, it is the most advanced AR smart glasses available for sports and fitness. SOLOS offers many unique capabilities that appeal to athletes who cycle or ride. The ability to receive critical performance information on a display that makes it look like the data is floating in front of them. A group communication feature that can communicate with friends and teammates on group rides or runs, and the ability to listen to music without the distraction of hassles utilizing our innovative audio projection speakers embedded in the SOLOS. Kopin's Pupil display modules and Whisper chip's voice extraction technology made this all possible. Currently, SOLOS is available at our website solos-wearables.com. We're also taking steps to establish distribution channels and have entered into agreements with a number of specialized retailers such as Backcountry, which is a widely known online fitness retailer. We're also working with b8ta, a new concept in retailing where customers can try and purchase new technology products. SOLOS will be available in selected locations in b8ta locations. We're also raising visibility for SOLOS by partnering with athletes groups. In addition to U.S. Cycling, we recently announced that SOLOS is the Official Smart Glasses Partner of IRONMAN, which hosts endurance sporting events around the globe. We continue to identify other organizations that can appreciate the unique capabilities of SOLOS and can help us grow visibility and demand. In the second quarter, we also introduced our second revolutionary product, the Golden-i Infinity, targeted for industrial workers. Golden-i Infinity smart screen is the first wearable device that supports Android and Windows 10-based computer solutions, specifically designed to leverage off the investments already made by large enterprise and industrial corporations. Golden-i Infinity added a smart head-worn display and hands-free voice control to smartphones and mini PCs for improved workers' productivity. Golden-i Infinity combines corporate industrial - industry-leading display and Whisper voice extraction technology to provide a smart screen that's easily controlled by head gesture and voice, even under very noisy working environments. Golden-i Infinity does not require any touch, tapping or swiping. Users simply control it by voice. Kopin's innovative patent-pending user interface software enables Golden-i Infinity to work with existing applications of host devices right off the box. No need to create product-specific software. The Golden-i Infinity connects to a worker's smartphone or mini PC via a cable to make the headset lighter and less costly. We have very strong interest from many large industrial corporations, especially in the manufacturing and repair segments. Golden-i Infinity is expected to begin pilot tests in September with Fortune 500 companies and value-added reseller channels, and we expect sales starting in the first quarter of 2019. Similar to the past few quarters, our military business represented the majority of our current revenues. We're encouraged by the recent joint announcement by the Defense Department and Lockheed Martin about a new agreement for 141 F-35 fighter jets. With Kopin as the source of providing displays to pilots' helmets, the F-35 is a $100 million plus revenue opportunity for Kopin over multiple years. During this quarter, we became fully qualified for FWS-I program. This is quite a challenging engineering accomplishment. When we are manufacturing a viewing assembly for thermal imaging rifle sight, that clips directly in front of the rifle's optical telescope, extremely tight alignment - sorry, a viewing assembly requires a pointing accuracy to reach and maintain within less than a single pixel during operation. But I'm delighted that testing and quantifications have finally been completed. And we have now reached - received the first production order. The units are expected to start shipping this October, which is several months later than we have planned at the beginning of this year. Yet, this does not change the size of the opportunity, an over $100 million revenue product for multi-years, similar to its predecessor, TWS program. Finally, in Q2, we commenced development work for the armored vehicle program, which we were recently awarded. This could become another $100 million program. Our objective is to have multiple production orders for various different defense settings reducing the unevenness of revenue from a single large program. We continue to hear very positive projections from our panel source supply enterprise customers. The AR inflection point does seem to be taking place, which benefits not only our component business, but also the opportunity for our Golden-i Infinity. We're seeing strong follow-up orders from partners such as Vuzix and RealWear and look for that to continue for the balance of the year. Finally, we see good demand for the OLED 2k x 2k display. Many of these displays are going to test units for global companies, but we're encouraged by the potential demand as these products go from test to production, with the BOE [OLED factory] [ph] constructions on track and to be completed later on this year and they are planning for pilot production at the beginning of next year. We believe we'll be able to fulfill the coming demand for OLED displays. While we're making good progress in this quarter in transitioning from development to commercialization of SOLOS and Golden-i Infinity, it is frustrating that the delays in military business was slower [indiscernible] revenue growth in the second half of this year. We now expect revenues to be between $30 million to $35 million, about $5 million less than we earlier projected for this year. However, the orders are now into production. Just that the ramping-up schedule is a bit later than planned. As we have discussed many times, the development of a new technology or new product isn't often nearly as fast or as linear as hoped. I'd also like to stress we also recognize the need to conserve our financial resources to match with the schedule for the time line of the emergence of AR and VR industries. The good news is, as we move to next year, our development road map will slow considerably. The high expenses will also be reduced. So with that, let's turn the call to Rich to review the financial details of this quarter.

Thank you, John. Beginning with the results for the second quarter of 2018, total revenues were $5.9 million compared with $5.9 million for the second quarter of 2017. Our industrial revenues were impacted by lower demand from customers, who purchase our products for 3D metrology application. This decrease was offset by an increase in sale of our products for consumer applications. Cost of sales for the second quarter was 78% of product revenues compared with 83% of second quarter of last year. Gross margins increased slightly due to a higher absorption of overhead costs. R&D expenses in the second quarter of 2018 was $4.5 million compared with $4.7 million in the second quarter of 2017, essentially flat. SG&A expenses were $6.9 million in the second quarter of 2018 compared with $5.2 million in the second quarter of 2017. SG&A increased for the three months ended June 30 as compared to the three months ended July 1, 2017, primarily due to an increase in compensation expenses, including stock-based compensation, product promotion expenses and information technology expenses, partially offset by consultant usage and patent maintenance fees. Other income expenses was expensed at $52,000 in the second quarter of 2018 as compared with income of approximately $800,000 in the second quarter of 2018 - '17, excuse me. The second quarter of 2018 includes approximately $236 of foreign currency losses as compared with approximately $556,000 of foreign currency gains in the second quarter of 2017. Turning to the bottom line. Our net loss attributable to controlling interest for the quarter was approximately $9.2 million or $0.13 per share compared with a loss of $7.3 million or $0.10 per share for the second quarter of 2017. Second quarter amounts of depreciation and stock compensation are attached in the table to the Q2 press release. Turning to 2018, we continue to expect 2018 revenues to be in the range of $30 million to $35 million. We believe operating expenses will be largely flat compared with 2017. We concluded the quarter with approximately $53 million of cash and marketable securities and no long-term debt. The amounts I have just discussed are our current estimates, so I'll remind our listeners to review our Form 10-K for the second quarter June 30, 2018, when final amounts are filed. With that, operator, we will take questions.

[Operator Instructions]. Our first question is Patrick Metcalf with Newbridge.

Can you give me an update on the Lenovo joint venture, the licensing relationship you have there on AR/VR and possibly MR with that relationship?

The question is the relationship with Lenovo NV joint venture. The relationship is going strong. They're coming out with AR glass, not just one, there are several AR glasses for different industries. I think they also announced also for security - for police security also a glass. So we are providing them not only display, also the Whisper chips.

Okay. Will that relationship be a licensing relationship?

It is a licensing relationship in - for equities, yes. We actually have equity in the company, yes. Over 10%, yes.

Okay. And then your other Chinese licensing agreement with Pico Interactive. Where does that stand and when do you see the product coming to market?

That particular product, they're still developing, so I do not know exactly when they're ready to introduce it. Yes.

Okay. And then, lastly, how is Google Glass holding up in the marketplace and do you see a chance where they'll be ordering from you again? And then you talked about a new design win in the last conference call, how's that setting up?

Yes. The question from Patrick is the Google Glass. Google Glass has announced earlier this year that they have good response on their Google Glass. So the rest of the situation, I'm afraid that you should ask Google.

Okay. And then the new design win, any traction there?

There's a lot of activities on AR glass, especially AR glass. And I think the inflection point, as we now notice, is actually arriving. We're seeing a much stronger demand for our components both - especially in our display and optics for the coming year. So I think in our recent presentations, I think, probably, Rich, he projected a significant increase in the AR glass demand. So for now, it's our existing customers, but for some new customers coming online.

Okay, great. And then Whisper chip. I know you have 30-plus patents surrounding Whisper chip, both far field, near field, but we don't hear anything about Whisper chip other than the product being in SOLOS, now in the new Golden-i. Can you give us an idea of how your design wins outside of your current in-house products is looking like? Is there any traction on the Whisper chip possibly going into a pair of earphones or something else?

Yes. The question is about Whisper chip. It's a very good question. The technology is so new, as I say we have over 30 patents issued or pending. So what we find now is that people look at this technology because it is not noise cancellation, it's a voice extraction. There is no such thing in the market yet. So just look at it. So we decided, we have to pioneer the applications and show the advantage. SOLOS and Golden-i are, in fact, devices that show the advantages. I say Golden-i Infinity especially is totally voice controlled. In addition to that, our partners, for instance, RealWear and Lenovo joint venture are incorporating Whisper. So pretty soon next year, you will see a whole bunch of devices using Whisper and I think this by themselves will be a huge demo and promoters for our new technology.

Okay, great. So you feel very comfortable, confident that you have the right products, the right road map to have a successful 2019. This is just a one quarter blip with the military being pushed out, but as far as the commercialization of AR smart glasses, it looks to be right on track for a strong second half.

Yes. Second half and the year beyond. I think we have been planning for that step to incentivize. Remember a few years ago, we had very strong revenue growth from TWS, the earlier thermal gun sight business. I think that we told us the best way is to have multiple sources of incomes. So in the military, we have multiple programs, now the FWS, which is now the follow-up for TWS. We have the armored vehicle, and we have the F-35 ramping up. So we have multiple sources dampening out the unevenness. In addition to that, not only our component business are growing, we are providing both SOLOS and Golden-i next year - for the next year growth. So next year, almost all of development programs are finishing up. Products are into the market and provide multiple sources of revenue. So we look towards next year to be [up still optimistically] [ph].

Okay, great. And then, John, I see a lot of talk on mixed reality and waveguide sockets out there.

Yes. Mixed reality is a very interesting thing. It all becomes very clear now - it is clear that mixed reality sits in the middle of AR/VR. I'm now going to be giving a talk in Asia in September. AI is augmented reality. This allows people - to make people more productive, more informative - have information on the fingertip. And VR is a degree that gives you a new dream world, fantasy world, another universe to you. MR is somewhere in the middle. It's more for good simulations, designs and it is in between, which is very good for enterprise. So I think people discovered that technology may be a little bit easier than AR/VR and I think that might be the second wave after AI has come out of MR for enterprise, industrial applications and then VR will come. Yes, they're all coming in stages. Displays and optics as well as voice are already in those devices.

[Operator Instructions]. We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Thank you joining us this quarter, and we'll see you next quarter. Thank you.