Kopin Corp (KOPN) 2021 Q1 法說會逐字稿

Good day and welcome to the Kopin Corporation First Quarter 2021 Earnings Call. Today's conference is being recorded.

At this time, I will turn the conference over to Mr. Richard Sneider, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Welcome, everyone, and thank you for joining us this morning. John will begin today's call with a discussion on our strategy, technology, and markets. I will then 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'd like to remind everyone that joined today's call taking place on Tuesday, May 4th, 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 the 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 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 the call over to John.

Thank you, Richard. Good morning and thank you for joining us to discuss our first quarter results. I wanted to start by expressing I wish that you and your families continue to stay well and safe as we hopefully are closer to the end of this awful pandemic.

We are pleased with our strong start to the year, reflecting continued increasing demand from customers across multiple segments. Revenue increased approximately 48% in the first quarter of 2021 as compared to the first quarter of 2020 with growth led by our defense production programs and our funded development programs. We now have more than 10 programs in various stages of development. While some of them may not contribute significantly to product revenue for the next year or two, this is by far the strongest defense program facility in Kopin's history,

and sets the stage well for the coming years. We continue to aggressively pursue additional opportunities in the defense market and expect to make some announcements regarding these opportunities in the coming months. Our R&D activities have been increasing in the past several quarters, reflecting the significant opportunities we're seeing in the augmented and virtual reality space. In particular, our customer-funded R&D revenue jumped more than 80% year over year, primarily because of the accelerating interest in our next generation of displays and display technology activities.

Additionally, we continue to see strength in our enterprise market segments, with strong volume growth in enterprise AR and 3D automatic -- automated optical inspection systems, which are recovering nicely following a slowdown in the early days of pandemic. The growth in these areas was offset by a decrease in the public safety sector, as municipal government budgets were affected by the pandemic. Our Defense revenues in the first quarter of 2021 increased by 42% compared to the first quarter of 2020. Our defense revenues continue to be driven by FWS-I Thermal Weapon Sight and the F-35 Fighter jet program. We expect these 2 defense programs, which are still quite early in their product phases, to continue as core components of our revenue in the coming years. We also remain on track to transition several more products to early low rate production this year; we expect the revenues beginning in the second half. As mentioned, Kopin has over 10 defense programs in various stages of development. [It's proving] they're all using our microdisplays. I include in that increasingly utilizing our specialized optical systems [as well as our] assemblies.

We believe we are the sole source supplier for most of these programs. On our defense programs, i.e., the AR or VR applications, and Kopin continues to explore additional AR and VR applications in defense, industrial and consumer area. One example is in the first quarter of 2021 we announced that Kopin's CyberDisplay WQVGA display backlighted modules and A230 driver ICs are now incorporated into the Canada-based Shearwater wearable, near eye remote display driving computer. This product is our near-to-eye display for underwater divers and provides critical dive information, including depth, dive time, compass and breathable gas levels. This is just one example of the many areas of the market finding a solution to their needs using Kopin microdisplay products. It's the only microdisplay company in the world with product and technology solutions utilizing each of the leading microdisplay technologies, OLED, microLEDs, LCDs as well as LCOS.

Kopin is uniquely positioned to offer the right technology solution for the expanding markets in applications for AR and VR. As mentioned last quarter, we received our first production order from a US-based customer and begin shipment of our 720p patent-pending duo-stack ColorMax OLED micro display, with high brightness, and brilliant color fidelity combined with very low power consumption. This new technology represents a milestone for Kopin as it will exhibit a record 7,000 nits of brightness with a much lower power than previous technology. This is a huge achievement for the OLED microdisplay. We continue to ship our 720p micro OLED display to customer in Q1. Meanwhile, we continue to innovate and improve further our OLED technology to meet the market demands. In addition to our customer-based R&D activities, we have been increasing R&D spending to meet the requirements of AR and VR. We believe this is a once-in-a-decade opportunity, as the devices will expand from a hand-held to a hands-free devices.

So Kopin will be ready to meet the market demand. Finally, we are highlighting our long history and leadership in wearables in a 3-part webinar series entitled AR and VR: The Paradigm Shift to Smartglasses Starts Now, hosted by Insight Media. The first segment, called AR and VR: The Past, was held on April 27 and now is available on YouTube. It was very well received with over 500 registered. And I must apologize. We were oversubscribed for the live event, which was unfortunately limited to 300 attendees. Therefore not everyone who wanted to attend live connected. The [webcast, however], was recorded right away, and we did provide a link to the recording, to all the registration -- people shortly afterwards.

We have since increased the capacity for live participation in the next 2 sessions. In part 2 of the trilogy, to be held on May 12, we focus on the present. We will tackle the current state of the art, analyzing each of these success stories today and concluding that the tipping point has arrived for some markets to begin mass adoption. In part 3, to be held on May 26, we will focus on the future. We'll look to the next stages of AR/VR smartglass products, offering a road map to develop products with the right form factor, technology, performance, features and costs to succeed in this exciting transformation.

We'll present our views of the next 3 to 5 years. We (inaudible) from the lessons we've learned from all these past and present AR and VR products in the marketplace. We will then speculate how to get to the ultimate consumer base [smarter]. This will be the holy grail. Really, we can learn so much from what the defense systems have been doing. Do join us for the next 2 webinars. You will not be disappointed. Registration links and replays can be found on our website as well as on Insight website. In short, we continue to make great progress in executing our strategy and in showing our performance. The market conditions are favorable, as AR and VR gaining strong traction throughout the past year. We believe Kopin is in a great position to capitalize on this growing trend. With this, I will turn this call to Rich.

Thank you, John. Turning to our financial results. Total revenues for the first quarter ended March 27, 2021, were $11.7 million compared with $7.9 million for the first quarter of March 28, 2020, a 48% increase year over year. Cost of products sold for the first quarter ended March 27, 2021, were $6.4 million compared with $5.6 million for the first quarter ended March 28, 2020.

Gross margin for the first quarter of 2021 was 15% compared with 5% for the first quarter of 2020. The increase in gross margin for the 3 months ended March 27, 2021, as compared to 3 months ended March 28, 2020, was primarily due to improved manufacturing efficiencies driven by higher volumes. Research and development expenses for the first quarter of 2021 were $3.6 million compared with $2.3 million for the first quarter of 2020, a 52% increase year over yes. R&D expenses of the 3 months ended March 27, 2020, increased as compared to the 3 months ended March 28, 2020, primarily due to an increased spending on US-funded development programs and internal R&D expenses for OLED development.

Selling, general and administrative expenses were $5.9 million for the first quarter of 2021 compared with $3.4 million for the first quarter of 2020. SG&A expenses for the 3 months ended March 27, 2021, had approximately $2.4 million of stock-based compensation costs as compared to $89,000 for the same period in 2020. Excluding the noncash stock-based compensation costs, SG&A expenses were $3.5 million for the first quarter of 2021 compared with $3.3 million for the first quarter of 2020, a 5% increase year over year. Other income expense was income of approximately $37,000 for the first quarter of 2021 compared with $87,000 of expense for the first quarter of 2020. During the 3 months ended March 28, 2021, we recorded $28,000 of foreign currency gains as compared to $172,000 of foreign currency losses for the 3 months ended March 28, 2020.

Turning to the bottom line, our net loss attributable to the Kopin Corporation for the first quarter of 2021 was $4.1 million or $0.05 per share compared with a net loss attributable to Kopin Corporation of $3.6 million or $0.04 per share for the first quarter of 2020. Non-GAAP net loss attributable to the Kopin Corporation for the first quarter of 2021 was $1.8 million or $0.02 per share compared with non-GAAP net loss attributable to Kopin Corporation of $3.5 million or $0.04 per share for the first quarter of 2020.

Kopin's cash and marketable securities were approximately $35.6 million at March 27, 2021, as compared to $20.7 million at December 26, 2020. During the quarter ended March 27th, 2021, we issued 2.4 million shares under our then-existing at-the-market or ATM program, and generated $15.5 million in net cash proceeds, which concluded our $20 million ATM program. First quarter amounts for depreciation and stock compensation expense are attached in the table in the Q1 press release. The amounts discussed above are our current estimates and listeners should review our Form 10-Q for the first quarter 2021 for any possible changes and additional disclosures.

Finally, I would like to address the global semiconductor shortage. Kopin did not experience any significant effects caused by the shortage in the first quarter of 2021. We have been proactive in our actions and communications with our semiconductor suppliers and have placed orders well into the future. We continue to monitor this current dynamic environment and manage accordingly.

Operator, we will now take questions.

(Operator Instructions) So we will now take our first question from Glenn Mattson from Ladenburg Thalmann.

Congrats on the great results. So first question, the 2 areas of outperformance versus the model were in the industrial side and the R&D. Can I get a little more color? Was the industrial bounce back in the fire and safety stuff? Or was it more of the RealWear-type end user? And then on the R&D front, I'm curious, is that all government related, or is some of that -- is there any commercial or consumer related R&D revenue?

So mostly it would be industrial headsets to folks like RealWear were the strength in the industrial segment, as long -- and including our 3D AOL was very strong in the first quarter. And as far as R&D, the majority of it is defense related, but there is some commercial -- consumer R&D in that also.

Okay. Great. On the defense side, you've talked about for a while 10 programs in development. And I think, I'm not sure if you reiterated it this quarter or not, but in the past you said you expect one of those to kind of contribute initial production volumes, but contribute meaningfully towards the second half. Is that still the case? And have you won that yet? Or would you announce that when you win it or are you not allowed to, or just some thoughts about how that news flow is going to play out over the course of the year?

Yes, so we would actually expect -- right now, our estimate is about 3 programs in the second half of the year to go into what's called LRIP, low rate initial production, and start providing revenues. It is low rate initial production, and then it would really ramp up in 2022, but our programs are on schedule, as John indicated in his prepared remarks.

We will announce plans when the time's up and the time's there and our customer allows us to make the announcement. (inaudible)

Great. Great. So moving on to the AR/VR stuff, John, you talked about it being a once-in-a-lifetime opportunity. I mean Kopin has been a part of other opportunities like that in the past. I'm thinking about like digital cameras and displays and things like that, but -- would you categorize this as similar to that kind of a situation, maybe even on a scale larger, just based on this versus what you've seen through Kopin's past.

Very good question. I've been preparing this trilogy website -- webinar, and as I've prepared for that -- and I would just say that the opportunity is actually bigger than I initially thought. I knew it was going to be a good opportunity; now I'm more and more thinking it could turn out to be bigger than even the cell phone business. So it could be a $1 trillion business in 15 years. I will talk about that in the first -- in the second and the third one, especially the third one, where it's talking about the future, which allows to speculate. That's going to be a very interesting seminar. Remember at the last seminar we have about 30 minutes of Q&A, and it was very active, a lot of people asked questions and we had to cut off because the time's up. So we will continue to have active Q&A session after the webinar. And I think the third one we'll maybe have to prolong it to one hour Q&A.

Right. Great. We look forward to that for sure. And the last question for me just is on the chip supply side. You've said that you guys feel pretty comfortable about the pre-orders that you've made and things like that. And that you didn't have any effects in Q1, but can you just give us a better sense of just how concerned investors should be, if at all, about potential disruptions in supply?

Well, the reality is, we saw an article by the CEO of Intel and -- what the auto industry has experienced is you just need one chip missing and the whole product doesn't ship. Now we're not in that type of situation -- we have multiple products -- but it is pretty dynamic. And what we think is that there's some panic in the market and people are overbuying. This is somewhat like we saw, frankly, in the tech bubble where people started seeing shortages, and they started stuffing their closets with every chip they could get. And of course, we see people taking the opportunity to raise prices. There's no doubt about that. But so far we haven't had any of our suppliers say, "Hey, listen, this is a real big problem." So we're monitoring it literally on a daily basis, and we're trying to get into our vendors to make sure that they're on top of their suppliers as much as we can.

Okay. Great. Okay. Congrats again on the results.

We will now take our next question, Kevin Dede from H.C. Wainwright.

John, could you just talk a little bit more about the Canadian near-eye diving display? Which display are you using there? Is there an extra light source? Just maybe some more, pardon the pun, color on that?

Yes. Kevin, they are using our micro LCD display and using a special backlight that allows them to see very well, so this is a market that we will be providing to other AI applications. So this one, it's a special thing, you obviously have to dive in the water and has the special type of modules, but again, doing well. And I think the product just came out of the market, that the response is very good. I don't do diving, so I've never tried it myself.

Okay. Look, I can't imagine there's a huge market for it, but I was just hoping that you could maybe give us a little more insight. How would you say it compares to the Scott helmet that the firefighters use?

A Scott helmet allows you to see in the dark, through the smoke. This one is not. So it's different. It has different sensor. The Scott helmet has a different sensor. Also, it's not something that you can sell millions per year. Okay. That's why I say at the end of the day, the holy grail is the consumer base. So you have to go through defense and you have to go through enterprise to learn what you need. This is a major transformation, from hand-held to hands-free. So we're very happy with the opportunity.

Yes, no. That's sort of why I was looking at it. And how -- what are the features that you see coming from this development and the using of the micro LCD display, as applicable in the consumer market?

Yes. You actually present half my -- half the talk for next week I'm giving the seminar to. If you really look at what's going on when you move from hand-held to hands-free, a lot of the components developed for their hand-held, for the cell phones, are already there and you should use all of the components they already developed on the cell phone. The problem is the display. You really look at it, the display, the display is too big. And in the early days you would hold his cell in your hand, the consumer never accept that.

And the DARPA knew that, even 30 years ago, when they were funded to do the displays. Smaller displays. But small display is not enough; you still have to have special optics, magnifiers, a special housing to take care of the water, to take care of the particles, take care of anything (inaudible). Our defense systems taught us a lot of things. What kind of optics you need, what kind of displays you need, what kind of ruggedized housing you need. So you can go into the fire, you can go to the water. All these things we learned. So I think people do not understand this, it's really the microdisplay module that have to replace the touchscreen [you have in] the cell phone is the biggest challenge, and we are leading this area starting 30 years ago.

Okay. All right. So granted your discussion, your answers for Glenn's questions pointed to consumer development in AR/VR, can you be more specific? How are you taking what you've done here for the Scott helmet, what you've done for the diving helmet and what specific kinds of R&D are you doing to develop the consumer side?

Yes, in the consumer side, I think, first of all, consumer, as you already know, I'm a big preacher of the Fan 5 rules. Rule #1 is you have to be human first, and second technology. So major thing of the human is, you're used to (inaudible) the eyes on the head, you're used to some kind of eyeglass, you have to be very natural. It has to be very small, thin, lightweight, fashionable. And so the consumer interaction for the entire major reality of eyeglasses is very special, and I will talk about that next week. What the special eyeglasses can mean for consumer and those such kind of glasses are coming up, and they will be -- already available in the next, in a few months ago. And it will be everywhere in the next 12 months. And after that you will go into more and more customer applications. So I would say consumer applications is starting right now in the few months ago, and it's going to be very big. So we'll talk about that on Tuesday. I don't want to do that talk today. Just come join us, it is a very exciting time.

Okay, John, appreciate that, and thank you for the invitation. Now Rich, before I let you go, what was the official share count at the end of the quarter? Not the average, but the official full [penny].

Honestly, I don't have that at the top of my head, what the number was. It's pretty close to the average. We didn't have a lot of stock activity in the quarter other than what we sold.

Yes. So I -- right, if it's close and it was really close to the early part of the quarter. I just have to go look at the date. When does the Q come out?

Thursday.

(Operator Instructions) We'll now take our next question from Craig Rose from Axiom Asset Management.

From my point of view, there's no shortage of R&D dollars spent on products revolving around AR and VR. So when I see that -- it's great that your R&D is up, but the balance is in defense, where do you see R&D dollars in the future? How high could that go considering everyone is trying to get where you think the market's going to go?

Yes. Thank you for the question. The biggest challenge to get into wearable on the head is, as mentioned before, is the display and optical system. How do you get good display and optical system on your head? And that display has to be very tiny, much smaller. Much higher resolution than (inaudible) the display you have to use on the cell phone and it will not be the same technology. It is still probably going to be OLED, but not OLED on glass. It's OLED on silicon. And I will describe very clearly in the second session why it has to be on silicon. So anyway, the biggest research money now, and all over the world right now, is searching for how do you displace and replace the touch screen on your head with some kind of display. It has to be a micro display and it has to be very special optics.

The optics turned out to be a very major challenge, as Rich mentioned. We are not just focused on display. We spent quite a lot of activities now on the optics. We found that our customers really cannot use any microdisplay unless the optics are there, the optics have to magnify that a thousand times, 10,000 times. And you have to keep image very sharp and you have to be very lightweight and very thin. I think that many of the systems you see for users, even the Oculus I think is a very wonderful system, the Oculus. The most recent one is a very good system, but it's still too big and too thick and too heavy. I will talk about that next week on the Oculus system. I will dissect quite a few systems in the market right now and see the pros and cons and actually paint the way for the next step.

Okay. If you had to list the challenges in order, it would be optics, form factor, then the screen?

Screen, number one. Screen is because it's really, really high tech. Optics is number two, and the third is the whole packaging. How do you assemble it? That's actually one thing people don't know. You're magnifying something 10,000 times. So if your housing is not carefully taken, little particles land on your display, then it looks like a boulder to you. Because of our defense activities, we really recognize (inaudible) and I think really solve those problems. And no particle can come out during operation or the assembly. Very few people know about it, including even many of our customers. So nowadays, they just say, please send us the whole assembly, send us the optics, send us the display and send us the housing assembly. And that's why we are in so many different industry. They don't want to touch it anymore. I think consumers, people do not understand it yet. Enterprise people know, and I won't go into detail, almost all enterprise companies -- customers buy the whole assembly.

Are you at liberty to discuss how many consumer product developers you're working with now in R&D and maybe the lifecycle of such R&D with those clients?

I think it's safe to say that we are or have worked with all the major Silicon Valley guys that are on everybody's tongue. I think to be honest, I'm sure they're working with everybody else too. This is a big race. It's going to be a huge market. We have interactions with all of them.

It appears there are no further questions at this time. I will pass the call back over to you for any additional or closing remarks.

Thank you for joining us this morning. I would like to remind everyone that we'll be having our Annual Meeting on May 26, 2021. You should be receiving a proxy vote soon, so please vote. And if you are able, attend our annual meetings. After the annual meeting, in the meantime, I will give the third part of our trilogy webinar. Thank you.

This concludes today's call. Thank you for your participation. You may disconnect.