Kopin Corp (KOPN) 2017 Q1 法說會逐字稿

Good morning, and welcome to the Kopin Corporation's conference call to provide a business update and results for the fiscal first quarter ended April 1, 2017.

Today's call is being recorded for Internet replay.

You may access an archived version on the call on Kopin's website at www.kopin.com.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.

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John will begin today's call with a discussion of our strategy, technology and market.

I will go through the first 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 that during today's call, taking place on Tuesday, May 9, 2017, 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.

Thank you for joining us to discuss our first quarter results.

Since we have reviewed our first year -- our full year results only 6 weeks ago, I will briefly update you on the same topics today.

Many of my comments are tied to my most recent trip to Asia.

I just came back this past weekend from another productive trip.

I met all our major partners on this trip, Goertek, BOE, Lenovo, Olightek, among others.

Once again, they have great interest in Kopin's technology and products for virtual reality and augmented reality solutions.

Now allow me to go over some of the key developments.

First, I'm very, very pleased with the progress achieved in our agreement with Goertek.

As a reminder, Goertek is the world's largest manufacturer of wearables.

And we are partnering with Goertek to design and manufacture smart headsets.

The 2 companies are working very well together and I'm very pleased by the design and schedules.

My visit to their facility confirmed that we are on track to introduce the initial products for our partnerships later this year.

A few weeks ago, we also announced that we had closed the sales of approximately 7.6 million shares of our common stocks for USD 24.6 million, with Goertek taking a 10.1% in Kopin.

We view Goertek's decision to be a significant investor to be a very strong endorsement of our technology.

Our agreement with Goertek also includes the manufacturing of Solos.

Solos is our innovative smart headsets for cyclists.

And we are very proud that Kopin is the official sponsor of U.S. cycling.

Solos was used by U.S. Olympic cycling team for training, and in Rio, their cycling team won 2 silver medals.

From the training studies, we have refined Solos.

It has begun shipping through the Kickstarter's customers, and early responses have been very positive.

Solos has the look and feel of athletic sunglasses, yet integrates Kopin's proprietary LCD technology -- display technology and Pupil optics that allows a rider to assess metrics such as speed, distance, cadence, heartbeat, elevation, carry and even [match], viewed through a sunlight-readable, see-through heads-up display.

We are now working with Goertek for the next generation Solos to advance these capabilities to target other significant applications such as running.

We look to introduce this model later this year.

In Asia, I also have had many meetings related to our Lightning OLED micro display for virtual reality.

Since introducing this 2K x 2K OLED display at CES just a few months ago, we have demonstrated the technology of VR manufacturers around the world.

And the response there has always been that our Lightning technology is a huge leap forward for VR.

The speed, the image quality and elimination of the latency, which caused motion sicknesses for VR users, have created many new opportunities for VR projects.

Kopin is the only company providing transmissive LCD, low cost, and OLED back-lit displays.

Primarily in Asia, we're very productive.

One of the many unique attributes of Lightning displays is our use of the world's first OLED fabless approach.

In Q1, we took active steps to establish OLED deposition capability and capacity.

We signed an agreement with Olightek in China to jointly purchase an advanced production OLED deposition machine.

We anticipate the model production will be available for this machine early next year.

Kopin will get 50% of that capacity.

We have signed an even more far-reaching agreement with Olightek and BOE Technology Group.

BOE is the largest manufacturer of smartphone and TV display in China.

This agreement is to create the world's largest OLED-on-silicon manufacturing center.

Lack of manufacturing capacity for OLED micro displays has delayed the widespread adoption of micro display technologies.

So this agreement is particularly important in meeting future demand for VR/AR users.

The combination of improved quality and enhanced volume expanded from this new facility may well have a significant impact in the development of global wearable market.

Our new SiMax battery was also an important part of our discussion.

As a compact high-capacity battery, it is one of the missing components in creating mobile headsets and wearables.

Developed under an agreement with Hitachi Maxell, the battery has completed all certification requirements, which as we can understand, became even more difficult now after Samsung's battery failure issues.

We are currently in discussion to develop a manufacturing plant for the battery.

We'll continue to penetrate the enterprise market, working with customers such as Scott Safety.

Using our display and imaging technology, Scott Sight creates a breathing mask that incorporates a real-time, lightweight imaging camera with a display screen inside the mask.

This is the first and only hands-free thermal imaging system for firefighters.

And it allows firefighters to see the dark and through smoke.

Kopin is the sole supplier of the display screen.

We are working closely with Scott Sight in August to continue to develop the next generation of these type of products.

We see this is a good example of the real-world applications of AR and anticipate to announce additional enterprise partnerships in the coming years.

The military business continued to be on track in Q1.

The F-35 Joint Strike program, with Kopin as the sole display supplier for the AR helmets used by the fighter pilots, continued to ramp on schedule.

The cadence for Family Weapons Sight Program is also on track for Kopin to provide a weapon sight eyepieces assembly.

We are shipping under the Low Rate Initial Production segment of FWS-I, and production volumes should ramp during this year.

We are also working through the development phase of FWS Crew Served program.

The military continues to be a partner for Kopin.

We are optimistic with the current administration's budget will increase military spending.

We are well-positioned to benefit.

The Goertek investment further strengthens our financial position, even as we continue aggressively to invest in our technologies and to establish the commercialization strategy for our products.

We have close to $90 million in cash and marketable securities and no debt.

As I said at the beginning of my remarks, my travel and meetings in Asia only reconfirms that the mass adoption of AR/VR is near.

I must say that we are beginning to be recognized as one of the leaders in wearables.

I will be giving a keynote presentation in the AR/VR symposium in the annual Society of Information Displays conference on May 24 in Los Angeles.

Now we have another keynote speech on AR in the coming Augmented Reality World Expo in Santa Clara, California on June 1. Both of these 2 events are key conferences for AR/VR this year.

I hope to see some of you there.

I will now turn the call back to Rich to discuss our first quarter results in greater details.

Thank you, John.

Today's -- total revenues for the first quarter of 2017 were $4.4 million compared with $6.1 million for the first quarter of 2016.

The decrease in Q1 revenues year-over-year was primarily driven by a decrease in sales of our products for drone applications.

First quarter 2017 revenues also included approximately $400,000 from a company we acquired late in the quarter.

Cost of goods sold for the fourth (sic) [first] quarter was 79% of product revenues compared with 78% for the first quarter of last year.

R&D expenses in the first quarter of 2017 were $4.3 million compared with $4 million in the first quarter of 2016.

SG&A expenses were $5.6 million in the first quarter of 2017 compared with $3.8 million in the first quarter of 2016.

The increase in first quarter 2017, as compared to the same quarter in '16, was primarily due to an increase in stock-based compensation of $1.1 million and professional fees of $800,000.

Other income expense was approximately $400,000 for the first quarter of 2017, consistent with $400,000 for the first quarter of 2016.

The first quarter of 2017 included approximately $280,000 partial restitution from the fraud in our Korean subsidy that we discussed last year and $234,000 from the mark-to-market of a warrant we received as part of the technology license transaction.

The first quarter of 2017 included approximately $1.2 million of foreign currency losses as compared to approximately $500,000 of currency losses in '16.

In March, we acquired a small company that produces systems for military-industrial simulation test equipment for $3.25 million in cash, as well as a $2 million earn out if they achieve certain milestones by March of 2020.

Kopin has net deferred tax assets for the full valuation allowance.

As a result of the acquisition, we recorded approximately $1 million of deferred liabilities, tax liabilities.

This resulted in Kopin reducing its valuation allowance and recording a tax benefit of approximately $1 million in the first quarter of 2017.

Turning to the bottom line.

Our net loss for the quarter was approximately $7.9 million or $0.12 per share compared with a net loss of $6.9 million or $0.11 per share for the first quarter of 2016.

First quarter amount for depreciation stock compensation expense are in a table in the Q1 press release.

As previously announced, we completed the sale of approximately 7.6 million shares of our stock to Goertek.

The company is finalizing accounting for this transaction so we success -- we suggest you review our final 10-Q for any changes in estimates.

Turning to 2017.

We are not providing guidance due to lack of visibility inherent in any new -- in any newly developing market like wearables.

However, just to give you a sense of how we see the year developing, we expect revenues will be back-end loaded as the products John discussed ramp in the fourth quarter.

We believe operating expenses will remain largely flat with 2016.

We conclude the year -- the quarter with approximately $67.8 million of cash and marketable securities, and subsequent, as I mentioned, we completed the sale of the stock to Goertek for approximately $24.7 million.

Again, we have no long-term debt and we continue to be in a very strong cash and marketable security position, allowing us to execute our strategy.

And with that operator, we will take questions.

(Operator Instructions) Our first question comes from the line of Matthew Robison with Wunderlich.

Congratulations for closing the Goertek investment.

Can you comment on if you're seeing any restocking orders and what kind of applications those might involve?

Also, provide the CapEx and if you can, the current cash balance.

And also, please repeat what you said for currency losses.

As far as restocking orders, so in the first quarter, we mentioned that the drone sales were down due to the fact that the customers are switching to higher-resolution displays.

And so in the first quarter, we had kind of a slowdown as we start to ramp up the new displays.

ForEx loss for the quarter was $1.2 million.

The cash balance, as I mentioned, was $67.8 million at the end of the quarter.

We then received roughly the $25 million from Goertek.

We're burning cash at a rate of approximately $6 million.

So you can see we're halfway through the quarter, so you can deduct $3 million and you can get somewhere between $87 million and $90 million currently.

You -- on the higher-res displays for the drones, have you seen orders for the newer products yet?

We are shipping now.

Okay.

So you didn't get the restocking revenue in the first quarter but you've gotten the orders for those kind of products, it sounds like.

Confirm that?

And then let me know if you've got any other applications that are reordering at this point?

Yes.

So we have received orders on the higher-resolution, and as John mentioned, on things like the Scott Sight, a lot of those were new products last year and we're in design efforts for the second generation of those products that should come out this year.

Okay, so going from -- still thinking in terms of going from Gen0 in '16 to Gen1 in '17 with a ramp in the fourth quarter?

Yes.

And when we think about the military business, do you expect to see a step up there in the third quarter?

Or do you expect we'll have to wait for the fourth quarter for that?

No.

We expect that to step up in the third.

Our next question comes from the line of Jeff Bernstein with Cowen Prime Investors.

Can you just talk a little bit about the Whisper chip and when we might see some design wins?

I guess you're also working on the (inaudible) applications, but will we potentially see some designs in your applications?

This is John Fan, Jeff.

The Whisper chip and Whisper technology is already designed into headsets.

So a bunch of headsets, as I think we announced in the last 6 weeks ago, there are 4 headsets of products coming out with the Whisper chip.

So that's not a surprise because Whisper was developed for smart headsets.

What we're doing now is improve our technology and algorithm and chip to address for what they call home use, for the (inaudible) of home use, this personal assistance in the home.

And that we will -- as I said, we will hope to and we'll expect to announce those benefits of our new technology at the end of this year.

Okay.

And I guess you guys are supplying Vuzix on there, M300, I think their new generation AR for commercial industrial use.

Did you have orders there in this quarter?

We cannot comment on our customer's product.

But we are providing optical modules for them, yes.

(Operator Instructions) Our next question comes from the line of Robert Mertens with Needham & Company.

I'm here on behalf of Raji Gill.

I want to get a little bit more clarity into your Whisper chip technology.

You just mentioned that you're looking into using it in home use, maybe having design wins by the end of the year.

Can you give me clarity as to any sort of roadblocks you might face in that technology?

Is there a fundamental difference between the algorithms used for close-up voice recognition in the home use where you might be dealing with a lot more background noise?

And then I have one follow-up after that.

Yes.

The question is about the difference between the near field, which is the headset case, vs.

the far field.

That's basically all in the beam forming how to attract the beams of the voice.

And we have a patented approach to take care of far field, and which of course we are not ready to disclose yet.

We believe that new technology will be superior to what is now in the market.

Okay.

And then, just as a follow-up, I wanted to see if you have any clarity into your industrial applications and any sort of outlook for the year with that product line?

We believe that the [harness] helmet kind of approach is beginning to catch a lot of attention.

So it's not just Scott helmets doing it now, we are working with other companies to develop those type of helmets.

So this is vehicle industrial AR use.

Military use will continue.

And then we have 3 new smart headsets coming out by the end of this year with Goertek.

And I'm truly excited about them.

I think they are very unique and people will be surprised.

We have a follow-up question coming from Matthew Robison with Wunderlich.

So can you talk a little bit more about this acquisition?

I know it's small but you took the time to do it.

And seems like it's -- how does it fit in with the military business?

I know you described it briefly in the press release, but a little more detail would be of interest, and whether there's any revenue from the company now.

Yes.

So as I mentioned in this quarter, there was $400,000 of revenue, not much other than the $1 million of benefit we got, noncash benefit we got from the recording of the deferred tax liabilities.

The actual results of operation did not contribute much to the bottom line at all because of all the step-up of the assets and the amortization and all that good stuff.

It is a company that actually was a customer of ours.

They brought our displays for training and simulation.

They were primarily a customer of our subsidiary in Scotland, FDD, which has also -- which has always had training simulation customers, like the 3D metrology and such.

So it was something that we were familiar with already and we just thought that combining our know-how with their know-how, we could significantly expand into additional markets in the test and simulation.

So while they are military customers, again it's training and simulation, it's not fielded units.

And that $400,000 reflects the quarterly run rate?

Or is there some other stuff?

That's the stuff.

That's what -- we acquired them on March 7. So it's from that period.

But I wouldn't (inaudible) big market.

(inaudible)

We have another follow-up from the line of Jeff Bernstein with Cowen Prime Investors.

On the -- just on the subject of FDD.

Can you talk a little bit about what's going on with 3D machine vision, how it was impacting the quarter?

And what's happening with China adoption?

Jeff Bernstein's question was about FDD, who makes LCoS display.

And their major customers are using it for 3D metrologies in the equipments to look at -- in the manufacturing.

Right now, they're growing.

We have about 60 some percent market share in the world.

The other competitor -- the only one competitor is from [P.

I.'s] DLP.

In China, which is really the market that really our focus on, are beginning to build those machines with our display and optics.

And currently, we will be the only one there.

DLP is not designing it in China.

So once that took off, that particular growth will be even steeper.

So is that more of a 2018 phenomena?

Yes.

Late this year and in 2018.

Yes.

Okay.

And then just back on the SiMax battery.

So you would think there would be a lot of interest in this.

Is there potential for an end product guide to put capital in on the manufacturing side?

Give us a little color about who you guys are talking to about manufacturing?

And has it been spec-ed in, in any of the designs that you have in the pipeline?

Well, right now, first producer's technology is now proven and certified, which is always the toughest battle.

Now the question is how to get manufacturer involved in price points that people can use for consumers.

And that's where we are now negotiating -- help them to negotiate do we install such a production line.

This is still early-stage negotiation with multiple companies.

So it's too early to talk about it.

Any prediction for when we would have some actual design wins of that battery?

No, until we solve the manufacturing, I don't think people will put in their real systems.

Then, could you just -- you mentioned the F-35 ramping.

There was, I guess, a significant development there with movement from LRIP-ed kind of orders to higher volume orders by the U.S. There's been a lot of interest overseas, et cetera.

Any change to your view?

I think you were talking about kind of a stair-step $5 million into eventually $10 million annual kind of run rate.

Has that changed at all?

No.

I mean what we quote is the program of record that we know.

So there's no international in that?

Well, we're not privy to exactly who's going to get what planes and things like that.

We are just given a program of record by our contract and we match that up against what we see in the federal budget to make sure it's accurate.

And that's what we plan on.

How it's divvied up, we are not really sure.

Yes, I think on the point of F-35, since we are the sole supplier of the display system to the helmet, so it's actually very easy to calculate once we know how many are being shipped to internationally.

Got you.

Okay.

And then just on FWS-C, so you're in a development contract right now.

When would the program actually be awarded for volume production?

I believe middle of next year.

There are no further questions at this time.

I'd like to turn the floor back to Dr. Fan for closing comments.

Yes.

In summary, we have the right partners, we have the right products and we have the right technology.

The timing is also right.

And we are now being recognized.

Finally, we have our annual meeting on May 31.

Our shareholders, please send in your votes as soon as possible for our annual meeting.

Anyway, thank you for joining us this morning, and hope to see you in the conferences.

Thank you all.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.