Kopin Corp Q1 FY2021 Earnings Call

Good day, and welcome to the Kopin Corporation First Quarter 2021 Earnings Call. Today’s conference is being recorded. At this time, I would 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 about our strategy, technology, and market. I will then go to 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 during today’s call taking place on Tuesday, May 4, 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 for 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 will turn the call over to John.

Thank you, Richard. Good morning and thank you for joining us to discuss our first quarter results. I want to start by expressing our 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. The continued increasing demand for our 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 program and our funded development programs. We now have more than 10 programs in various stages of development, but some of them may not contribute significantly to product revenue for the next year or two. This is by far the strongest defense program portfolio in Kopin’s history. They set 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 see in the augmented and virtual reality space. In particular, our customer-funded R&D revenues 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 optical inspection systems, which are recovering nicely following a slowdown in the early days of the 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 F-35 Fighter Jet programs. We expect these two defense programs, which are still quite early in their product phases to continue as a core component of our revenue in the coming years. We also remain on track to transition several more products to early low-rate production this year with better revenues beginning in the second half. As mentioned, Kopin has over 10 defense programs in various stages of development. These programs are all using our microdisplays and are increasingly utilizing our specialized optical systems and ruggedized assemblies. We believe we are the sole source supplier to most of these programs. All defense programs are either AR or VR applications, and Kopin continues to explore additional AR and VR applications in defense, industrial, and consumer areas. One example is in the first quarter of 2021, we are now the Kopin CyberDisplay WQVGA display/backlight module and A230 Driver ICs, which are now incorporated into the Canada-based Shearwater wearable near-eye remote display diving 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 a need using Kopin's microdisplay product, which is the only microdisplay company in the world. With product and technology solutions utilizing each of the leading macrodisplay technologies: OLED, micro LEDs, LCDs, as well as LCOS, Kopin is nearly positioned to offer the right technology solution for expanding markets and applications for AR and VR. As mentioned last quarter, we received our first production order from a U.S.-based customer and began shipment of our 720p patent-pending duo-stack, ColorMax OLED microdisplays, with high brightness and bringing color fidelity combined with very low power consumption. This new technology represents a milestone for Kopin, as we exhibit a record 7000 nits of brightness with 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 our customer in Q1. Meanwhile, we continue to innovate and improve further our RF technology to meet the market demands. In addition to our customer base on these activities, we have increasing R&D spending to meet the timing of AR and VR. We believe this is a once-in-a-decade opportunity; if the device was spent for handheld or hands-free devices, Kopin is ready to meet market demand. Finally, we are highlighting our long history and leadership in wearables with a three-part webinar series entitled AR and VR: The Paradigm Shift to Smartglasses Starts Now hosted by Insight Media. The first segment, called AR/VR, The Past, was held on April 27 and is now available on YouTube. It was very well received with over 500 registrants, and I must apologize, we were oversubscribed for the last event, which was unfortunately limited to 300 attendees. Therefore, everyone who wanted to attend live was recorded right away, and we did provide a link to the recording to all the registration people shortly afterward. We have since increased the capacity for lack of participation in the next session. In Part 2 of this trilogy, to be held on May 12, we will focus on the current state of art, analyzing interesting 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 will look to the next stages of AR/VR smart glass product offering a roadmap to develop products with the right form factor, technology, performance, features, and costs to succeed in this exciting market. We present our views of the next three to five years, taking lessons learned from all these paths in present AR and VR product marketplaces. We learned so much from what the defense systems have been doing. We’ll see in the next two webinars, you will not be disappointed. Registration links and details can be found on our website as well as our Insight Media website. In short, we’ll continue to make great progress to execute our strategy and we’re showing our performance. The market conditions are favorable as AR and VR are gaining strong traction throughout the past year. We believe Kopin is in a good 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 ended March 28, 2020, a 48% increase year-over-year. Cost of products sold for the first quarter ended March 27, 2021, was $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 three months ended March 27, 2021, as compared to three 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-year. R&D expenses for the three months ended March 27, 2020, increased as compared to three months ended March 28, 2020, primarily due to an increased spend on U.S.-funded development programs and internal R&D expenses. 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 three months ended March 27, 2021, included approximately $2.4 million of stock-based compensation costs as compared to $89,000 for the same period in 2020. Excluding the non-cash 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 2021 compared with $87,000 of expense for the first quarter of 2020. During the three months ended March 28, 2021, we recorded $28,000 of foreign currency gains as compared to $172,000 of foreign currency losses for the three months ended March 28, 2020. Turning to the bottom line; our net loss attributable to 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 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 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 27, 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 to the Q1 press release. As discussed above, our current estimates may change, and listeners should review our form 10-Q for the first quarter 2021 for any possible changes and additional disclosures. Finally, I’d 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 semiconductor suppliers and have placed orders well into the future. We continue to monitor this current dynamic environment and manage accordingly.

We will now take questions.

Hi, thanks for taking the question and congrats on the great results. So first question the two areas about performance versus my model were in the industrial side and the R&D. Can you guys give 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 there any commercial or consumer related R&D revenue?

So mostly, with the industrial headsets, folks like RealWear were the strength in the industrial segment as well, including our 3D AOL; it 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 as well.

Okay, great, thanks. On the defense side, you’ve been talking about for a while 10 programs in development. So, 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 when – have you won that yet? Or what would you announce that when you win it, or you’re 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 three 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 ramp up in 2022. But our programs are on schedule, as John indicated in his prepared remarks.

Hey, Glenn, we will announce when the time comes and our customer announces them, so things are going pretty well.

Great. Thanks, John. 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 – 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, Glenn. I mean, I’ve been preparing this trilogy webinar. And as I prepare for it, I would say that the opportunity is actually bigger than initially thought; I knew it was going to be a good opportunity. Now, I’m almost 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. Well, I will talk about that. The first – the second and third, especially the third one where talking about the future, which allows us to speculate, that’s going to be a very interesting seminar. I remember that the last seminar, we had about 30 minutes of Q&A. It was very active; a lot of people asked questions, and we were cut off because time was up. So we will continue to have a very active Q&A session after that webinar. And I think the third one will maybe have less demand going into our Q&A.

Right, great, thanks. We look forward to that, for sure. And the last question for me, just 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 then 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 you're like, what the auto industry is experiencing, 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 we always 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 thought it was going to be shortages, and they started stuffing their classes 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 problem. So, we’re monitoring this 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. Congrats again on the results. I’ll pass it on.

We will now take our next question from Kevin Dede from H.C. Wainwright. Please go ahead.

Good morning, gentlemen. Thanks for taking my question. John, could you just talk a little bit more about the Canadian near-to-eye diving display? Which display are you using there? Is there an extra light source? This may be some more details on that?

Yes. Kevin, yes, using our micro LCD display and using our special backlight that allows them to see very well. So this is a module that we’ve been providing to other applications. Yes, so this one – is just second thing, you obviously have a bag in the water, and you have this special teller modules, but they’re doing well, and I think the product just came out in the market with that; the response is very good. I don’t do diving, so I’ve never tried it myself.

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

As a Scott helmet allows you to see that. The Scott helmet is not so different; it has different sensors. The Scott helmet is with different sensors, all those things are 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 had to go through enterprise to learn what’s needed; it's the biggest explanation from handheld to hands-free, so we're happy with the opportunity.

Well, yes, no, that’s sort of the way I was looking at it and how – I mean, what are the features that you see coming from this development and the use of the micro LCD display, as applicable in the consumer market?

Yes. You actually present another topic to talk about for next week, which I’m giving the seminar to really look at what’s going on when you move from a handheld to hands-free. A lot of components developed for their handheld, for the cell phones are already there; they usually use all the components they already developed on the cell phone. The problem is that the display has to be addressed, because it displays and needs to be lightweight and fashionable. For consumer introduction for AR glasses, the best approach is going to be presented in the next few months.

Okay, John, appreciate that. And thank you for the invitation. And Rich before I let you go, what was the official share count at the end of the quarter and not the average, but the official full payment?

I said, I don’t have that at the top of my head. Wasn’t that number was – it’s pretty close to the average.

Oh, okay. Thank you. Thank you, gentlemen. That’s all my questions.

Yes. We didn’t have a lot of stock activity in the quarter other than what we saw. Yes.

Yes. So, I write, I guess if it’s closed and it was really close to the early part of the quarter, I guess I just have to go look at the date. When’s the Q come out?

Thursday.

Thursday. All right. Thank you, gentlemen.

Thank you.

We’ll now take our next question from Craig Rose from Axiom Asset Management. Please go ahead.

Hello, John.

Hello.

From my point of view, there’s no shortage of R&D dollars spent on products revolving around AR and VR. So when I saw it, 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’s trying to get where you think the market’s going to go?

Yes. Thank you for the question. The biggest challenge to get into a wearable on the head is, as mentioned before, is the display and optical system. How do you get a good display and optical system on the head? And the display has to be tiny, much smarter, much higher resolution than what you display on the cellphone, and it will not be the same technology. The biggest research mainly now and all over the world right now is searching for how do you display every piece that’s as compact as possible.

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

The screen is number one, because it’s really, really high. The number two is the whole packaging. How do you assemble it? It actually, one thing people don’t know, you’re magnifying 10,000 times. So your housing is not carefully looked at, particle vendor on the display. Then it looks like it's bloated to you, because like defense activities, we did recognize that being the result of problems during the operation of that assembly. Few people know about it, including even making it difficult for our customer. So, nowadays they just say, please stand up the whole assembly then have the optics chance the display and say that’s the housing assembly. And that’s why we’re so involved with the defense industry; they didn’t want to touch it anymore. And I can assure the consumer people do not understand yet, enterprise people know, and I won’t go into detail, almost all enterprise customers have 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 claims?

I think it’s safe to say that we are or have worked with all the major Silicon Valley players. I mean, I think you have 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. So we have interactions with all of them at this point.

Okay. Thank you very much, guys.

Thank you.

And 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. We should be receiving the proxy vote soon. So please hold. And we are able to attend our Annual Meeting. After the Annual Meeting at noon, I would give our trilogy webinar. Thank you.

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