Kopin Corporation (KOPN) CEO John Fan on Q1 2022 Results - Earnings Call Transcript

Call Start: 08:30 January 1, 0000 8:39 AM ET

Kopin Corporation (NASDAQ:KOPN)

Q1 2022 Earnings Conference Call

May 3, 2022, 8:30 AM ET

Company Participants

John Fan – Chief Executive Officer

Richard Sneider – Treasurer and Chief Financial Officer

Conference Call Participants

Glenn Mattson – Ladenburg Thalmann

Kevin Dede – H.C. Wainwright & Co.

Operator

Ladies and gentlemen, please standby. We're about to begin. Good day and welcome to Kopin's first-quarter 2022 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Richard Sneider, Chief Financial Officer. Please go ahead, sir.

Richard Sneider

Thank you, Operator. Welcome, everyone. And thank you for joining us this morning. John will begin today's call with a discussion of our progress in executing our strategy. And then I will go through the first quarter of 2022 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 todays call taking place on Tuesday, May 3rd, 2022, we'll 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 the forward-looking statements made during today's call. And with that, I will turn the call over to John.

John Fan

Thank you, Richard. Good morning. And thank you all for joining us to discuss our first quarter results of 2022. I am speaking from Hong Kong this evening, which is 12 hours ahead of Boston time. And hopefully, my home connection is good. I must say, I'm very happy to be able to travel again and to meet with customers, which is so important in developing our business. On my way home, I will be streamed by the 2022society of Information Displays Ossid Trade Show, which is taking place in early May in San Jose. Turning to that form of business, we are pleased with the results of the first quarter of 2022. Overall, year-over-year revenue was flat as our product sales were lowered. They were offset by our strong funded research and development revenues.

Our product revenues were affected by the global supply chain issued. Particularly during the last couple of weeks of the quarter. As a result, were 12% or 14% lower than one of last year. In the past few quarter earning costs, we have mentioned our concern of the global supply chain production issues. While 14% year-over-year decline in product revenues is not something that we're pleased with given the circumstances we're are now, we're also not discouraged about it. Demand for our products remains strong. Let me explain why this issue is challenging to deal with. Because we make very complex components and its assembly -- assemblies, which going into extremely sophisticated interdependent defense in the industrial systems, we cannot simply switch a component just to ensure supply with another component.

When we identify an issue and see a need to switch to a different component, we must notify our customer, displaying our plan, and in most cases have to obtain their formal approval. Then we must perform extensive testing on our revised product to ensure its compliances with the specifications, and provide the testing results to our customers for their review. Then our customer may be required to perform extensive system testing and obtain their own customer's approval. This process is time consuming. It means, that in addition to our normal development activities, we must allocate resources to identify replacement components and perform additional testing.

Inspite, of all this, we were able to achieve relatively high level of manufacturing, while allocating resources to address these historic issues, and also make progress in our development activities, which are really crucial to our long-term growth. This why overall, we're satisfied with the first-quarter results. We continually to actively manage the supply chain issues. And while we expect intermittent supply chain disruptions of [Indiscernible] materials, we will have sufficient components to continue our 2022 growth over 2021. As we had previously discussed in the fourth quarter 2021, we announced new orders of our current production program, F-35, and our major weapon sight program.

[Indiscernible], this gives us a strong foundation for 2022 product revenues. Looking out into the future of our current programs, we received feedback that the very unfortunate situation in Ukraine may eventually result to more product demand. Turning to our Organic Light-Emitting Diode [Indiscernible] Our briefing press release indicated we're making good progress in building this business. As discussed in the press release, we release that we received production order for our 2000 -- for our 2720p lightening OLED [Indiscernible] displays. And in other cases, a foundry customer is buying out [Indiscernible] Paulett Wafers, which are the fundamental building block to make OLED display. We believe these two new orders are [Indiscernible] to the competitive advantage of [Indiscernible] silicon backplane design and display performance, and also validates the power of [Indiscernible] business model.

Under our model, we either sell finished OLED displays to our customers, working with our OLED foundry partners or we sell a [Indiscernible] wafers to our OLED OEM partners who complete the micro displays for sale to their own customer base. This business model provides us a lot of visibility to meet customer demands without incurring the major fixed capital investment associated with our lead deposition process. We continue to work on design wins with other new customers. Regarding to our research and development programs. We continue to make excellent progress on our customer funded defense development programs, which include armored vehicle targeting systems, rotary wing aircraft, pilot helmets, and additional weapon sight programs.

We expect the rotary wing program to go to production in the second half of this year and armored vehicle program to go to production after 2023. Perhaps it is important to point out the breadth of the scope of our defense business. As a reminder, Kopin provides advanced back warded space, optics and rugged, dust free assemblies. For fighter JETS, such as F35 or rotary wing air-crafts, we provide displays. For gun sites, we provide displays, optics, and module assemblies. Now, for armored vehicles, we actually provide the whole full system units that include displays, optics, electronics, etc., etc. Currently, all our defense business and enterprise business are based on events, LCD on silicon displays. However, we've been actively developing OLED-On-Silicon displays for over five years, and now one of the leading OLED-On-Silicon displays developers.

I must mention [Indiscernible]. We have a longer termed development projects and just focus on Macro LED. LED macro displays has potential for super high brightness and low-power assumption -- consumptions, which can make them ideal for many applications, including see-through, augmented reality and mixed reality applications. In summary, customer demands is strong of all our core product groups, and we are actively managing our supply chain challenges. We will continue our momentum on innovating and advancing our technology for AR/VR and MR applications. We believe strong interest in the Meta verse is just getting started. And we feel we are very well positioned to capitalize on the opportunities it provides.

We entered 2022 with very strong backlog of orders, and we believe 2022 will be another year of good growth. We're excited for the growth of coping as we see a wave of growing interest in AR/VR and MR product applications. Our technology advances and current [Indiscernible] conditions are very favorable. And we believe coping is very well-positioned to capitalize it. Finally, I would like to make a comment on the equity gain in Q1. As some of you know, coping is very strong in IPs with over 2,000 -- with over 200 patents and patent applications providing display optics and module assemblies.

One of the IP monetization strategy is to license some of our IPs to startup companies. As -- and as a copy, as a part of a conversation, we often receive equities in the startups. We've completed a few of those transactions and our goal is to do more. Some of the early transactions are not going to a more mature stages. We're actually very excited with this IP business model. Now, we turn the call to Rich to discuss the financial aspects of the quarter and a full-year. Rich, go ahead.

Richard Sneider

[Indiscernible] John. Total revenues for the first-quarter ended March 26, 2022 were $11.6 million compared with $11.7 million for the first-quarter ended March 27, 2021, essentially flat year-over-year. Cost of products sold for the first-quarter ended March 26, 2022 were $7.8 million compared with $6.4 million for the first-quarter ended March 27, 2021. The increase in cost of sales as a percent of product revenues for the first quarter of 2022 as compared to the first quarter of 2021, was due to lower production efficiencies resulting from lower volume of units produced. Approximately $450,000 of warranty costs reserves and approximately $300,000 of additional reserves for excess material. The lower production volumes resulted in less absorption of overhead costs.

The additional warranty costs reserves relate to units shipped before the new production processes the company implemented in 2021, and the additional reserves for excess material is a result of the company procuring materials for contingency purposes as a result of the supply chain situation. Research and development, or R&D expenses for the first quarter of 2022 were $5.4 million compared to $3.6 million for the first quarter of 2021, a 52% increase year-over-year. R&D expenses for the three months ended March 26th increased as compared to three months ended March 27th, 2021, primarily, due to increased spending on U.S.-funded development programs and internal R&D expenses for Organic Light Emitting Diode or OLED development.

SLM general and administrative expenses were $4.4 million for the first quarter of 2022 compared to $5.9 million for the first quarter of 2021. SG&A expenses ended March 27th, 2021, at approximately $2.4 million of stock-based compensation costs as compared to $440,000 for the same period in 2022. Excluding the stock-based compensation costs, SG&A expenses were $4 million for the first quarter of 2022 compared to $3.5 million for the first quarter of 2021. The increase are attributed to marketing expenses, which were curtailed during the COVID, and additional compensation costs.

Other Income was approximately $4.7 million for the first quarter of 2022, primarily resulting from the mark-to-market of an equity investment. As John discussed, part of Kopin strategies is monetize our deep intellectual property portfolio, and as part of that, we received an equity interest in certain licensee companies when we licensed the IP to them. During the three months ended March 26, 2021, we recorded 35,000 of foreign currency gains as compared to 28,000 of foreign currency gains for the three months ended March 27th, 2021. [Indiscernible] the bottom line, our net loss attributable to Kopin Corporation for the first quarter of 2022 was approximately $1.4 million or $0.02 per share compared to net loss attributable to Kopin Corporation of $4.1 million or $0.05 per share for the first quarter of 2021.

Kopin's cash and equivalents and marketable securities were approximately $26.3 million at March 26th, 2022 as compared to $29.2 million at December 25th, 2021. First quarter amounts for depreciation stock comp expense are attached in the table for the Q1 press release. The amounts discussed above are based on current estimates and listeners should review our Form 10-Q for the first quarter of 2022 for any possible changes and additional disclosures. Operator, we will now take questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, [Operator Instructions] I'll take a question from Glenn Mattson with Ladenburg Thalmann. Your line is open. Please go ahead.

Glenn Mattson

Hi, thanks for taking the question.so I've just seen that, in terms of the top-line, can you just talk about the lower component revenue is pretty evenly split, I guess, between military industrial, is that all related to supply chain issues and there was nothing around demand around that? And then, also can you just touch on the status of the customer where mid last year you had to kind of retool the facility and that kind of ramp back up and got into -- back to normal production, is that still the case with that customer as well?

Richard Sneider

So in both cases, yes, it was supply chain issues in both the defense and the industrial. And really was the last couple of weeks of the quarter when it hit us. And so as John indicated in prepared remarks, we think we're in good shape going forward. We do expect intermediate supply chain issues now and again, we're not out of the woods. There's some indications that the situation is getting better, but we want to be cautious to the investors. And at this point, yes, the process changes have been made that we discussed in 2021. The 450,000 of additional warranty costs was the last piece of it. It was a negotiated settlement of units shipped before the process changes.so we think for the most part it's behind us now and now it's just fulfilling demand, which as John indicated, we start the year off with a very strong backlog.

Glenn Mattson

I guess, would there be any catch-up in revenue over the next couple of quarters, based on the fact that the demand was there and now the supply chain issues perhaps are in a better situation? Is that something to think about?

Richard Sneider

It's definitely the goal.

John Fan

Yeah, that's why we said it's a big growth.

Glenn Mattson

Yeah, right. A question also for John. Can you talk about the new Oculus that's coming out? I believe it's -- they are talking about an OLED display there. Can you just give us your thoughts on what you think about the new product and what that means for the stuff that you're doing, whether it be with -- it doesn't seem like it's with them perhaps, but maybe with -- if the industry is shifting in that direction, if that would be a benefit to you guys?

John Fan

Yeah. Of course, this is still not totally official. But we can guess what it is. It is OLED. Our guess is OLED on glass. It's not OLED on silicon. But OLED, that's still happy news. They may be -- the one current one is LCD on glass.so you can see the shift from LCD to OLED, which will always anticipate.so the next move, of course, would believe it will be OLED [Indiscernible] silicon. That's one. This is a very good news. I think that another very good news is we would now believe it is a Pancake optics that we, you know, we have a global trademark on Pancakes.

And in one of the event on Pancake is in our company. But it is not all-plastic Pancake. That Pancake has some glass in it.so that current version, if we indicate where the market is moving, the technology is moving, optics is going to Pancake. Displays going to OLED, but not fully displays going to OLED on glass not OLED on silicon and Pancake is -- Pancake with glass in it not plastic.so I hope I answer your question. It's a good trend.

Glenn Mattson

Right. Now, that's very helpful. That's it for me. Thanks. I'll get back in the queue.

Operator

[Operator Instructions] We will go next to Kevin Dede with H.C. Wainwright. Your line is open. Please, go ahead.

Kevin Dede

Hi, gents. Thanks for having me. Could you comment on, maybe, the number of devices that you had to re-engineer the supply chain on and, I guess, the number of components that had to go through additional testing?

John Fan

[Indiscernible]. There's so much involved with defense.

Richard Sneider

Yeah. Honestly, Kevin, we did get a notification from the U.S. government that there's a lot of supply chain issues out there, and they are somewhat concerned about companies defaulting information around it. And they referenced us through the [Indiscernible], which prohibit, really, discussions about systems and how they operate.

John Fan

I think, Kevin, as you well know, the supply chain issue is not unique to KOPN. It's just a semi-conductor chips are missing. And some of the chips, they're really not advanced, but they are missing. And this affect everybody, whether it's Defense Industry, Industrial Industry. And in many ways, I am pleased to have people actually manage it reasonably well.

Kevin Dede

Okay. Rich, you mentioned you didn't think you were out of the woods yet. What -- what do you think we should look out for?

Richard Sneider

Well, we have commitments from vendors, which would indicate that we're in good shape for the rest of the year. But we're just putting up the caveat there that I think given the situation, I think, it's unrealistic to think that we're out of the woods. We do see -- we talk to people in the industry, they do see light at the end of the tunnel. And they -- but we just want to make sure that we get a couple of more quarters under our belt before anyone starts declaring that we're out of the woods.

Kevin Dede

Okay. Fair enough. You've referenced backlog a number of times. I guess you don't want to quantify it, which is fair, but can you give us a relative move versus the end of the year?

Richard Sneider

We did indicate that we had a $19.8 million quarter PO in December. In November, we had a 2.3 and then there was another million something for another program.so those were all in November, December.so you can assume that's all shipping this year and possibly into the beginning of next year. But the bulk of it will be this year.

Kevin Dede

Okay. John, you were -- you touched on the Micro OLED. And as I remember correctly, you're developing both in Japan and China. Can you give us a status on that?

John Fan

What do you want me to tell you?

Richard Sneider

First of all.

John Fan

Yeah.

Kevin Dede

I'm just curious about the involvement and the time-to-market, that kind of stuff.

John Fan

Micro OLED, as you all know, some people always considers their ultimate display, which it is true. It became -- we developed and producing a cost effective way. It's hard to solve everything that we wanted to do AR/VR and MR. We work with a Chinese company, Monochrome Micro OLED and we work with Japan's company to do full color Micro - LEDs. And both of them are very super high advanced Micro - LEDs. And a large customer funded.so this is a customer funded activities, and the progress is good. I think China was, again because there's a lot buying in China, [Indiscernible] as a few weeks. Otherwise, you might already have something, [Indiscernible] to announcer for this quarter. In general, things are going well and some lockdown has slowed down some of the things, but we're still making good progress.

Kevin Dede

How would you recommend we look at time-to-market? [Indiscernible]

John Fan

Time-to-market for Macro LED, nobody can give you. Nobody is going to get into real market Macro LED this year, zero.

Kevin Dede

Right, okay.

John Fan

But we're making good progress. I think we should be one of the leading team coming up, but not this year. For products, for development, for show and [Indiscernible] for demo. Yeah, you'll get this, this year.

Kevin Dede

Okay. That means you could have product next year maybe, right '23?

John Fan

God willing. [Indiscernible]. Our goal is to demonstrate the potential of this display and show display this year. If we can do that, it could be a major achievement, not just for coping, for the industry.

Kevin Dede

Okay. I know you referenced the conflict in Europe. I was wondering if you've seen any I guess change in thinking because of that from your defense related customers.

John Fan

Well, I mean, nobody wants to celebrate for such a disaster, but we are in Defense Industry, and we do make systems and -- or help to component for the systems, which are used extensively in the war.

Kevin Dede

Right. I guess what I'm wondering is, is there greater interest in part of your customers in some of the product that you're making involved?

John Fan

It was just for a simple example. You -- that was announced, so we can say that. Germany announced that they want to buy more F-35.

Kevin Dede

Okay.

John Fan

And we're [Indiscernible] to F-35.so you can --

Kevin Dede

Right.

John Fan

I think we connect dots.

Kevin Dede

Right. Thank you. I appreciate you helping me with that, John. Now, I'm I also correct in assuming that supply chain is predominantly in the U.S., or you're still sourcing products from Asia that goes into defense-related components?

John Fan

Yeah. I think as you well know, a lot of supply chain problem is agonizing, because automobile industry is affect by that too. What you're missing is a microcontroller, which is a very low tech product. It's made by everybody in the whole world; Taiwan, Korea, and China, Japan. But they're short. And once they're short, you can't even a car too. Everybody that set the buyer of microcontroller, not advanced IC. Is it really maintain ICs? So for us, it just about the automobile, you can't find an IC that's put in the there. You got to get your customers the proven and date of compliances.so you slowdown things. But it's not fundamental. It's not that IC cannot get it anywhere. It is very common IC.

Kevin Dede

I see.

John Fan

So patiently you cannot get us out. For instance, the obvious one is combine China. No, those IC come from everyone on the world. It just that it short. Everybody's double trouble buying it.

Kevin Dede

I see. Okay. I got it. Again, thank you. Just maybe your take on the progress of Real Wears OLOS for making --

Richard Sneider

Sort of just to finish that --

John Fan

I'm glad you mentioned it. Those are the companies that we license and they in fact, pay equities in. I don't want to go a lot to buy into it obviously, some of them are already making progress and so [Indiscernible] equity gain. And I think that that would continue. The one that will form three, four, five years ago is just like a VC situation. Some of them become mature stage now, and you're going to have a series of hopefully monetizes in [Indiscernible] like VC, we're going get things come back and with some significant equity gain. But remember our goal is more than the equity gain. We'll tip in three ways. We have royalty and we also sell them components plus equity grant gain.so this way [Indiscernible] this is [Indiscernible] very good.

So I think this is the one area that's not well known by the shareholders. We have several ways to make money for the shareholders. Once we do sell products, [Indiscernible] our products not only just selling display now. We can do more and more into assemblies in the Amex vehicles, [Indiscernible] the full system. And you can [Indiscernible] how many [Indiscernible] going to be. And they're with IP models.

Kevin Dede

Okay. Well, thank you. Thanks for taking my questions, gentlemen. Appreciate it.

John Fan

Very good question, thank you. I wish that you were also in Asia. I was traveling. It's not easy traveling Asia. I got locked down. I got quarantined for seven days, and I just got out.

Operator

We'll have next Ted Patrick Metcalf with [Indiscernible]. Your line is open, Patrick. Please, go ahead.

Unidentified Analyst

Hey, good morning, guys. Good evening, John. Rich --

John Fan

[Indiscernible]. I don't want to be sleepy.

Unidentified Analyst

Okay. Rich, I want to give you credit --

John Fan

Go ahead.

Unidentified Analyst

-- for being -- I want to get Rich credit for being conservative the past few quarters on the supply chain issues, and it sounds like that's now behind us with the but caveat, but I want to thank you as shareholder. And then, secondly, John, I want to talk to you about a couple of events that happened in the marketplace recently and what you can or cannot speak to. Google made acquisition for $1 billion for a Micro LED engineering company. And then, snap acquired an optics company for $500 million called Wave Optics, and supposedly, Samsung made an investment into [Indiscernible], another optics company.so with KOPN sitting at $150 million, having a portfolio of micro displays, and supposedly having the exclusivity on plastic Pancake optics, I just wanted to see if you can talk to that or speak to it.

John Fan

Well, I guess that markets temporary, is not very efficiently, I guess.

Unidentified Analyst

Okay. All right. I will take that as a positive. And then I wanted to ask you, as far as plastic Pancake optics are concerned, how do you plan to go to market with that? Because if we go back to the HBP days, if I understand that correctly, you had the greatest technology in the [Indiscernible], but the competition came in and stepped on it.so are you going to go to market in the different approach, a different strategy to try and get that a 100% market share, if you will.

John Fan

With regard to the HBT, I think some this year has been -- the moment I know is the transistor within vendor. And then for cell phones is the Power Chart transistor in their sky works and Qualcomm and use it for five-years was exclusive to it. And then, of course, somebody which didn't patent it, stupid me. And then somebody in Asia you can start making it. Then we've got [Indiscernible], so we sold the business that you fair probably we should have kept it. We still the particular business that were sold to. The company is still owned above 50%, 60% market share in the world. As do is actually quite profitable.so I'm losing my lesson.so even the people come in, you're just the lead. You don't get displays that quickly.

Unidentified Analyst

Okay.

John Fan

So I don't know what honestly [Indiscernible]

Unidentified Analyst

And then lastly, on the research and development side of the equation, the revenue side of the equation, how many VR customers do you have? Can you answer to that or is that secret?

John Fan

Well, it depends on how many units or how many components revenue. Just listen to the -- F-35 is the most advanced VR/AR system in the entire world. They don't do too many of them, but they pay well. They do pay well, and we're make in profit on it.so there's not really how many units, it's how many of their customers are willing to pay you for the value.so to this point, no question about it. Oculus sell a lot of revenues. They probably paid component guide. I think the component guy is probably not making money, maybe not losing money. But Oculus is -- I don't want to speak for Facebook. I don't think there make money selling every unit itself. Although we still --

Unidentified Analyst

Against --

John Fan

Well to avionics and we made money.

Unidentified Analyst

Okay. Thank you, John.

Operator

With no other questions holding, Dr. Fan, I'll turn the conference back to you for any additional or closing comments.

John Fan

Well, thank you very much for joining us this evening or this morning. I would like to remind everybody that we are having an annual meeting on May 26th, 2022. I'll be back in Boston.so you will be receiving our proxy vote -- a proxysoon.so do please vote. If you're able to come to attend our annual meeting, I think this year would probably -- most likely is going to be in person.so thank you very much for joining me this evening.

Operator

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.