Kopin (NASDAQ:KOPN) Q1 2020 Earnings Call

0:00 Good day and welcome to the Copen Corporation First Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Richard Snyder, Chief Financial Officer. Please go ahead, sir.

0:17 Thank you, Operator. Welcome, everyone, and thank you for joining us this morning. I will begin today's call with a discussion about strategy, technology, and markets. 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 5th, 2020, 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 The company undertakes no obligation to update the forward-looking statements made during today's call. With that, I'll turn the call over to John.

1:07 Good morning.

1:29 and thank you for joining us to discuss our first quarter results. Given the unprecedented circumstances we are facing, I want to start by expressing my hope that all of you and your families are staying safe and well. Before I discuss our strong start to the year, I first want to review our response to COVID-19 and how he has impacted our business. Like all companies, in March, we quickly shifted our employees to remote work where possible.

2:16 Our teams adjusted quickly and that structure has worked well. But as a defense-related company, we have many employees are considered essential, and they have continued to work every day. I cannot tell you how grateful I am to this group, their positive attitude and their commitment to see COVID succeed. While our EMLCD products are making a Class 10 clean room, which provides an inherent level of safety and protection with masks, gloves, and gowns.

3:07 We did take extra precautions. The COVID team has rallied and are directly responsible for a strong first quarter and the momentum we have carried into the second quarter. We have had a very good start to the year with demand holding steady. Our suppliers keep us in stock with only a few minor bumps and interruptions. Our dedicated employees keeping the business on track and output flowing. We are very pleased with the results.

3:58 In particular, our defense business is strong, with product revenues increasing 144%. In the enterprise sector, while some applications area has slowed recently, others have remained strong, particularly in the public safety. Our total revenue increased about 42% compared with the first quarter of 2019. In addition, we have reduced our R&D and SG&A expenses by 49% and continue to look at ways to streamline our cost structure.

4:53 We expect our momentum to continue in the second quarter, barring any surprises for either customers or suppliers, or unless there's some unexpected change in the circumstances with our workforce related to the virus. We continue to shift under our two defense production programs, the FWSI program and also the F-35 Joint Strike Fighter program. We recently announced another fall on order for the F-35 program, which now includes shipments into 2021.

5:44 The 500th F-35 jet was delivered in the past March with the DOD expected to purchase a minimum of 2,400 jets over the life cycle of the program. And there are also international markets for the F-35. U.S. allies are expected to purchase hundreds of jets in the coming years. So it is still really early days and Coping's monetization of F-35 opportunity.

6:32 We also see continued progress of defense-related development programs, where we have more than 10 programs in various stages of development. While some of them may not contribute significantly to prior revenues for the next year or two, In fact, not all were rich production after moving through development. It is by far the strongest defense program portfolio in our history. And obviously, our interest here is for the programs to evolve into full-scale production programs that utilize our technologies.

7:24 In almost all these programs, our micro-displays are the only displays chosen. As previously mentioned, we have streamlined our internal R&D activities to focus on our core micro-display business. In particular, our current R&D investments are primarily focused on our organic light-emitting dial, or ONET in short, displays. As the Consumer Electronics Show in past January, we demonstrated the world's first monochrome double-step ONET, which emits more than 20,000 nits.

8:18 We also demonstrated are early samples of the world's first full-color 2.6, 1.3-inch diagonal OLED displays using our proprietary double-step tonology. In addition, in the first quarter, we'll receive our first production order for our OLED backplane wafers, which we expect to begin shipping in late second quarter of 2020. An interesting effect of the COVID-19 situation, wearable headset customers see their products being used in hospitals and in areas of high infection by medical and public safety responders.

9:18 Enterprises are accelerating their use of AR as companies looking for ways to train people and work collaboratively in a socially distant environment. Remote collaboration and remote training are all gaining acceptance.

9:40 These applications are demonstrating the power of technology in allowing collaborative responses by minimizing the number of people on site.

9:54 Global pandemic is driving increased interest in AR and VR technology for all customer segments, defense, enterprise, and customers. Interest for a number of customers in this area remains very strong for our micro-displays. particularly for our micro audit displays. Though it's not clear at this time how quickly these customer engagements will convert to product levels. While we're experiencing unusual times to say the least, we believe our strong defense business on the micro display development activities and continued emphasis on efficiently managing our cost structure to carry our momentum into the second quarter.

11:01 Now I'll return the call to Blitch.

11:05 Thank you, John. Turning to our financial results, total revenues for the first quarter of 2020 were $7.9 million compared with $5.5 million for the first quarter of 2019, an increase of 42%. Cost of goods sold for the first quarter of 2020 was $5.6 million, or 95% of product revenues, compared with $5.9 million, or 127% for the first quarter of last year. The decrease in cost of product revenues for the three months ended March 28, 2020, as compared to the three months ended March 30, 2019, was primarily due to improved manufacturing yields and higher volumes, which reduced fixed costs per unit at our U.S. plant, Partially offset by lower manufacturing efficiencies at our Scotland plant caused by some supply issues.

11:57 R&D expenses in the first quarter of 2020 were $2.3 million compared with $5 million in the first quarter of 2019. The low R&D costs for the first quarter of 2020 as compared to the prior year was a result of containment of certain programs. SG&A expenses were $3.4 million in the first quarter of 2020 compared to $6.3 million in the first quarter of 2019. The decrease was primarily due to a decrease in compensation expenses, including stock-based compensation, add debt expense, professional fees, information technology expenses, and the increase of the Envis continued consideration. Other income slash expense was expense of approximately $86,000 for the first quarter of 2020 Thank you very much.

13:13 for $0.15 per share in the first quarter of 2019, a 68% improvement. Cash and marketable securities were approximately $17.6 million at March 28, 2020, compared with $21.8 million at December 28, 2019. Subsequent to the end of the quarter, COVID received a $2.1 million payment protection plan loan under the CARES Act which is not included in the $17.6 million cash position as of March 2020. We currently do not have plans on raising additional capital. First quarter amounts of depreciation and stock compensation are attached in the table to the Q1 press release.

14:01 The amounts discussed above are based on current estimates and listeners should review our Form 10-Q for the first quarter of 2020 for any possible changes and additional disclosures. Finally, with regard to the NASDAQ minimum listing requirements, we have until December 2020 to regain compliance. Operator will not take calls. Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. We'll take our first question from Glenn Mattinison with Ladenburg-Thalman.

14:54 Hi, good morning. Nice to see the good results. I'm curious on the enterprise side, you know, just kind of a... I guess a couple things. First of all, is the thermal imaging technology that you have, is there an application for that as far as judging people at high temperatures from a distance? Is there any possibility for an uptake in that? Secondly, I'm curious just about, in general, the fire and safety and the first responders part of the business. I know that's had a big portion of the Q4 response. and just curious as to the breakdown between that versus some of the more industrial applications in the current quarter.

15:44 So we have talked to some of our customers and there are folks experimenting with the thermal applications as kind of a first line of defense when people are coming into a building to identify their temperatures and so on and so forth. I don't know if anyone's actually implemented that but they have talked about that extensively. What was the second piece of the question?

16:05 Yes, sir. Just on the first responders for firemen, people like that, just the breakdown between that versus the more industrial applications on the enterprise side.

16:18 So in both Q4 of last year and Q1 of this year, we had a significant increase in volume in that application. As we'll say in the planning queue tomorrow when we file it, we anticipate filing it, we don't expect the run rate that we had in Q1 to continue through the year. I don't know if it was just them filling some of the supply chain or what have you, but it was a very good quarter for that application.

16:47 Okay, thanks. I'm curious on the gross margin. It was down a little squinchly. I guess that's more as the business gets a little more heavily weighted towards defense. Can you talk about outlook for gross margin for the rest of the year?

17:00 Yeah, we continue to see yield improvements during the course of the year and hopefully higher volumes, and all of that will result in improved gross margins. The product revenues were slightly down in the quarter sequentially, which is why the gross margin was down slightly sequentially. It's the fixed cost per unit aspect of it.

17:25 Right, great. And just last on sales and marketing, do you expect that this level is kind of a baseline from here? Do you expect it to grow significantly as you try and penetrate more enterprise applications, things like that?

17:42 Yeah, that $3.8 to $4 million is kind of the baseline that we're shooting for. The wild card in there is only stock compensation, which can be affected by the stock price. obviously, but on a cash basis, I guess, we would expect it to be in that type of level.

18:02 Okay, that's it for me. Thanks. And once again, that is star one to ask a question. and it appears we have no further questions at this time. I'd like to turn the conference back to Dr. John Fan for any additional or closing remarks.

18:35 Thank you for joining us this morning and I hope to talk to you in the next quarter. Bye-bye. And that does conclude today's conference. We thank you for your participation. You may now disconnect.