Kopin Corporation (NASDAQ:KOPN) Q2 2022 Earnings Conference Call August 2, 2022 8:30 AM ET
Corporate 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
Welcome to Kopin’s Second Quarter 2022 Earnings Conference Call. [Operator Instructions].
I would now like to turn the conference over to Rich Sneider, Chief Financial Officer. Please go ahead.
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 second quarter of 2022 results at a high level. John will conclude our prepared remarks, and we’ll be happy to take your questions. I’d like to remind everyone that during today’s call taking place on Tuesday, August 2, 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, Rich. Good morning. And thank you all for joining us to discuss our second quarter 2022 operating results.
We are very pleased with the results of the second quarter, our 2022. Total revenues were up 20% year-over-year, driven by about 30% growth of our product revenues. In addition, our customer funded research and development revenues remain strong, which we will view as a indicator of our future growth opportunities as we expect most of these development programs, which are efficient to production in time.
Our revenue from defense products were particularly strong, growing 87% year-over-year in the second quarter. During the second quarter of 2022, we’ve now additional orders for the spatial F35 pilots helmets and in imaging systems for armored vehicles. In July, we announced a production order for our brilliant high brightness color displays for helicopter pilot helmets.
During the second quarter, we’re also announced the expansion of an industrial customer base adding a new Korean 3D automated optical inspection system customer. They use our spatial light modulator or SLM as a critical components in their system. With this particular win we’re not supplying a high-speed, high performance, SLM, which are based off proprietary ferroelectric liquid crystal display to all the three leading Korean 3D AOI equipment manufacturers.
In addition to other market, leading manufacturers in China, Japan and Germany. These announcements are being important in several ways. To add to our already strong backlog of orders, but equally important, those progress represent the variety of micro display technology, Kopin offers.
We believe we are the only company in the world. There are also active matrix liquid crystal display, very electric liquid display and organic light emitting diodes or OLED displays. And we are working with partners to develop in organic light emitting diode displays, our company named Micro LEDs. All our micro displays [indiscernible] on silicon. Just as important as our breadth of display technologies to meet customer needs, is a variety of advanced specialized objects which we offered and which provides our customer with an integrated turnkey solution. This allows our customer to offer high-quality visual solutions to meet a variety of needs in the market.
For example, our new patent pending All-Plastic Pancake Optics enables smaller, much lighter weight VR headsets, also Metaverse headsets. Compared to the optics used in the headsets today. We believe our All-Plastic Pancake Optics are the first in the world providing critical components for Metaverse headsets got thinner, lighter, comfortable and easy-to-use has been one of our critical objective. Our all-plastic pancake optics provide not only the clear advantages mentioned before. But most importantly, they provide a very sharp image with good eye relief. We believe combining our all-plastic pancake optics with our 2.6 OLED microdisplays representing a perfect match providing magnification about 30,000 to 50,000 times by maintaining a very sharp image.
Our goal has always remained the same which is to lead in these two critical technologies area, are the essential for great VR AR experiences this is a good place to put the importance on microdisplays and pancakes in the proper context. These two technologies are analogous in importance as lithium battery technologies to add to the electric vehicle industry.
Our second quarter growth occurred, we are still with global supply chain issues. While we are pleased with our growth, it did come at a cost. As our press release indicates, will incur more costs to keep our customer running and operations running than we would normally expect. Typically, a defense product design has a lifecycle about five to seven years. But given to supply chain issues, and our limited visibility as to when the supply chain issues will get resolved.
As a contingency we designed several products, we will automate semiconductor components. So we have flexibility and a back-up plan. This has increased our engineering impact costs. And we also incurred those alternative semiconductor components as we also [indiscernible] those semiconductor components. The positive news is based on discussion with our vendors now. It appears the supply chain issues are improving. And we believe our operation in the second half of 2022 will run closer to normal. Furthermore, we expect our second half revenue will be high in the first half revenue as our defense business, it’s best to be stronger.
Now let me provide an update on the progress of developing a micro-OLED product line. We’re currently designing multiple backplanes for partners and customers. And we also in discussion with partners for more advanced OLED designs for use in virtual reality and augmented reality systems. Planes draw customers to us is a unique industry leading 2.6k OLED display and deep knowledge of the display and optics as a system.
Customers of course like the high-resolution but [indiscernible] is 1.3-inch size because it enables better optics. The 2.6 display is really a display on a chip, the name is DoC. DS embedded with these circuits and digital processing circuits which make the interface will send a video signal simpler and much less power consuming.
One additional technical advantage and advance we have is [indiscernible] are now beginning to understand the value of [built-in] [ph] drive in OLED displays is opposed to the current drive. Kopin designed our 2.6 OLED display using built-in 4-inch drive. While most others use current drive. Built-in versus current drive are now hotly debated in the industry. And that indicates that built-in drive results significantly in lower power consumption. Especially as micro display resolution increase.
Kopin micro OLED displays have been shown to be using significantly lower power in OLED by other customers, other suppliers. We are now in discussion with folks to take advantage of our 2.6 display design to higher resolution that says 4K HDR displays. As we have previously discussed, our OLED product line is based on a fabless business model. Using our model will either sell finished OLED microdisplays by customers by working with our OLED foundry panels. We sell our highly advanced proprietary backplane wafers to OLED OEM partners who complete the microdisplay for sale to their own customer base. This business model provides us more flexibility to meet customers demands.
Turning to our research and development activities. We continue to make excellent progress in developing a micro LED display. This is a customer funded project that has many partners. This consortium partners working on different elements of displays is how we create our current LCD in the early 1990s with a $50 million funding from DARPA to us. To be clear, this is a longer-term development project. But it is successful, the display opens us tremendous opportunities.
In summary, customer demand is strong in our core product line, especially in our defense sector. And we’re aggressively managing our supply chain challenge. We’ll continue our momentum on innovating and advancing our technology for Metaverse applications. We continue to see strong interest in developing products, targeted fundamentalists. And we feel we’re very well positioned to capitalize the opportunities it presents. We are excited for the growth of Kopin as we see a wave of rapidly growing interest of our microdisplay and optics across AR VR in our products and application.
First in defense bank enterprise are now starting in consumer sectors. Our technology advances, our current market conditions are very favorable. And we believe Kopin is well positioned to capitalize.
Now, we turn the call to Rich to discuss the financial aspects of this quarter and the full year.
Richard Sneider
Thank you, John.
Turning to our financial results, product revenues for the second quarter ended June 25, 2022 were 9 million compared with 6.9 million for the second quarter ended June 26, 2021, 30% increase year-over-year.
Funded research and development revenues were 2.8 million for the second quarter ended June 25 2022, compared with 2.7 million for the second quarter ended June 26, 2021 essentially flat. Total revenues for Q2 2022 were 11.9 million versus 9.9 million on the prior year and overall 20% increase year-over-year.
Cost of Goods Sold for the second quarter 2022 was 7.9 million or 88% of product revenues, compared with 6 million or 87% for the second quarter of last year. The slight increase in cost for the product revenues as a percent of net product revenues for the three months ended June 25, 2022 as compared was primarily due to manufacturing inefficiencies caused by supply chain disruptions.
R&D expenses in the second quarter of 2022 were 5.1 million, compared with 3.7 million for the second quarter of ’21. The increase in the ’22 second quarter R&D expense as compared to the prior year was equally split between R&D, internal R&D expense and customer funded R&D activities.
The increase in internal R&D was primarily due to an increase in OLED development costs and the redesign of certain products to incorporate alternative semiconductor components as a result of the shortage of legacy semiconductor components. The increase in funded R&D was in support of customer funded activities related to defense programs. SG&A was 4.3 million in the second quarter of 2022, compared to 4 million in the second quarter of ’21. SG&A increase for three months ended June 25, 2022, as compared to three months ended 2021 primarily due to an increase in compensation, information technology and travel costs, which were partially offset by lower bad debt expense and stock-based compensation expense.
Other income expense was expense of approximately 141,000 for the second quarter of 2022, compared with 104,000 of income for the second quarter of ’21. During the three months ended June 25 2022. We recorded 150,000 of foreign currency losses as compared to 101,000 of foreign currency gains for the three months ended June 26, 2021.
Turning to the bottom-line, our net loss [indiscernible] controlling interest for the quarter was approximately 5.6 million or $0.06 per share, compared with a net loss of 3.8 million or $0.04 per share in the second quarter of 2021. Net cash used in operating activities for the six months ended June 25, 2022 was approximately 11.4 million. As John and my discussions indicated supply chain issues affected our manufacturing efficiencies, which increased cost and negatively affected working capital flow in the first half of the year.
In addition, as we discussed, we received a production order for beryllium displays for rotary wing aircraft. And we expect another program to transition into production in the second half of 2022 and these may require additional working capital. Accordingly management team approved partially fund our working capital needs to the use of our — at the market equity offering program or ATM. And so during the second quarter of 2022, we sold one 1.7 million shares of common stock and gross proceeds of 2.1 million before deducting broker expenses of less than 100,000, pursuant to the company’s ATM.
Going forward, we’re reviewing other funding alternatives. Kobin’s cash equivalents and marketable securities were approximately 18.6 million at June 25, 2022 as compared to 29.3 million at December 25, 2021. We have no long-term debt. Second quarter amounts of depreciation and stock comp expense are attached in a table to the Q2 press release. The amounts discussed above are based on current estimates and listeners should review our Form 10-Q for the second quarter 2022 any possible changes and additional disclosures.
And with that operator, we’ll be happy to take questions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Glenn Mattson with Ladenburg Thalmann. Please go ahead.
Glenn Mattson
Hi, yes, thanks for taking the question. First, Rich, you just touched on it. I was curious about — a little bit about kind of the cash burn and where you sit today. So I guess, you expect a stronger second half, some of these new orders coming through and continued strong defense. Do you expect, but then you commented kind of like also having to build working capital. So is your expectation that you’ll be continuing to burn at a rate at this level? Or that it would be a burn but not as bad or that flip to positive in terms of the cash flow from operations? Just what’s your sense in the second half? Thanks.
Richard Sneider
Yes. The first half, we look at as an anomaly. We had supply chain disruptions in the end of the first quarter that carried into the second quarter. And so what happened it was the receivables got collected during the second quarter, but then had to get rebuilt at the end of the second quarter. So there was this — so if you actually, when you see the cash flow statement coming out, what you’ll see is a change in the receivables is really what caused the issue. So we expect that to moderate and we’ve rebuilt the receivables. So our working capital looks more normalized what it should be. So you’re not going to have those working capital fluctuations we don’t expect in the second half. And so with improving operations, and the fact that we’re not going to have this anomaly of the receivables getting burned down, we expect the cash flow to be better in the second half.
Glenn Mattson
Okay. And I’m curious about the decision to do stock sales at that level and what kind of signal it sends. And I understand that you adjust to grow more comfortable around preparing for these bigger orders. But also, on top of that, could you maybe elaborate, have you done any more sales since the quarter ended? And are you — also kind of mentioned that there’s other options for capital raising activity if need be. So can you just kind of elaborate on that? Thanks.
Richard Sneider
Sure. Yes. I mean, nobody was really particularly happy exercising at that price, the ATM that we had down a quarter, but we did think it was prudent. There’s a lot of talk about recession. We really weren’t sure what supply chain was going to go. As John in his prepared remarks, the good news is, it looks like from what we’re hearing that supply chain issues, for us, at least, seem to have been for the most part sorted out for the rest of the year. So we took a lot of actions, just in case, we redesigned some of the boards that we use in the products. So this was incremental development costs we hadn’t anticipated. We bought alternative semiconductor materials, which now looks like we probably won’t use, at least in the short-term. So there was just expenses associated — making sure that we could fulfill our contractual obligations. But we don’t see any of that in the second half of the year.
We have in the past, when we had sufficient time to do other types of funding, usually around getting pre-payments on long-term contracts from customers. And so we’ll continue to explore those opportunities. And I think the other important factor is that, sitting here today, we have two programs F-35 and FWS-I, which are in solid production and we have three emerging production programs and we are sole-source to all those programs And so maintaining a very strong balance sheet is very important so that those programs continue. So for those reasons we thought it was the right move to exercise the ATM.
Glenn Mattson
Yes, clearly…
John Fan
I think Glenn — more things, I think yes, we are looking other way but our customers because we are sole-source to them they also, some of them are actually helping us to alleviate some of those part procurement and other stuff. So we’ll have much better performance next half.
Glenn Mattson
Great. That’s it for me. Thanks for color guys and defense business seems to be going really well and so exciting to watch that continue. Thanks.
John Fan
Yes. We are winning. I mean, we have a lot more orders coming in and this is certainly the most important thing that technology and order we do have them, yes and we’re also saw so much on them.
Operator
The next question comes from Kevin Dede with H.C. Wainwright. Please go ahead.
Kevin Dede
Good morning, gentleman. Thanks for having me on the call. A couple of things, I guess one is tied to inventory. I understand the supply chain issue and sourcing, inventories seem to be up right sequentially where they were probably depressed in the March quarter. I know Rich you just said that you probably acquired material you won’t sell. What do you suspect happens with inventory and the tie to margin just through the balance of the year?
Richard Sneider
So we expect improving gross margin and the inventory level we would expect to maintain where it is. We don’t see any major fluctuations in inventory levels at this time.
Kevin Dede
Okay. The defense product or projects that aside from the FWS-I and F-35, can you talk to the three that you mentioned Rich and I guess where you see them in terms of their development cycle and perhaps going to full production?
Richard Sneider
Yes. We would expect all of them in full production in the first half of next year. As we mentioned, one is the beryllium display for rotary aircraft another is an international weapons site similar to in some respect to the FWS-I that we currently sell. And as we said in the press release, the recent results the chaos in Europe right now is actually sparking demand for those types of products. And so we’re getting positive feedback from customers about future orders on those. And the other ones kind of a unique targeting system that we sell that I really can’t get into a lot of details about what it does.
Kevin Dede
Okay. Fair enough. Has the chaos in Europe spurred development? It’s interesting when you look at the sequential change in research and development down $2 million, I left the March quarter call thinking that military development might increase. I guess I just was hoping you could help me understand that.
Richard Sneider
Well, again, we recognize revenue based upon percent completion and as John mentioned for instance the micro LED program is a consortium of companies that are developing that display and so in some respects, our revenues are tied to how well they complete their tasks. So to the extent that they get stuff done, and we move further down the road, we recognize more revenue. So it’s really — that’s why it’s always difficult to project that funded R&D line because as I said, particularly in the micro LED, we’re relying on a number of other subcontractors to perform.
Kevin Dede
So is that the lion share then Rich of that line?
Richard Sneider
Well, it’s a good piece of it and then part of it is the fact that the beryllium display according to the production was winding down.
Kevin Dede
Okay. All right, that helps. John, could you talk a little bit about micro LED development, understand partners in Japan and China, I’m wondering if you’ll be able to transition that technology and its development into defense related products given in a lot of the development or at least it seems to me at this from outside, a lot of that development is happening outside of the U.S.?
John Fan
Yes. This is a consortium business technology and early demonstration of micro LEDs. Of course, this runs from here but they are also running in the U.K. consortium is a lot of activities in the UK, which is our — access to our subsidiary in U.K., and then Japan and partially also in China but almost all the activities are really resides in U.S. and U.K. right now and Japan.
Kevin Dede
Okay. I know you said it’s a long-term development over the past year or so you’ve added some interesting tidbits on it, could you maybe hone in on the timeline a little bit better? Where you think it might get to commercialization?
John Fan
Yes. It is a targeted tool at this point, this is actually the product you might targeted to defense and enterprise applications the first and then eventually it goes to consumer. And it’s a very, very aggressive target. We succeed and I can’t say that we would definitely succeed. It will be the most advanced micro LED in the world.
Kevin Dede
Okay. But is it too early to offer some type of time line?
John Fan
I mean, we will be optimistic of course, but ideally we have a bunch of very good people working on it. I think if anybody can see we probably have a good chance.
Kevin Dede
Okay. The balance of DoD stuff that you folks haven’t spoken to, I understand the issues in Europe, but is there any way to sort of quantify how project is sort of in the wings and then develop might be moving forward more rapidly?
John Fan
Yes. But Kevin, I guess this is Kevin, right? Yes, its Kevin. I think we did announce not too long ago about some activities that our imaging systems for armored vehicles and that’s very, very critical, we think all political tensions happening is that everybody need new imaging systems for using armored vehicles. And again we are so soft there and the activity is actually going in full speed and as we all know — I mean working capital obviously has increased because of lot of productions — new programs go to production and all the activities in R&D, some of them are internally funded but that’s normal when things are we’re actually in the winning cycle right now. And yes, ATM is just one of our options of raising more money and I think we’ll continue to do so.
Kevin Dede
Okay. There was a $2 million development in vehicle imaging, is that the one you’re referring to John? Appears that it was the second system development order?
John Fan
Yes, that’s exactly, Kevin you are right and that program — to me, I’m very excited about that program, because I really believe there will be a major, major pipeline of revenue for us as we are sole-source and we are working with a huge customer.
Kevin Dede
Right so, just to kind of get back to timing, John, I mean, apologies for harping on this. But do you, would you suppose or is it fair to assume that the second order came in faster than it would have, had there not been issues in Europe? And if so, how much more, or how much faster do you think it came in?
John Fan
I could not speak to that, because we got a lot of activities going on. I can’t comment on them.
Kevin Dede
Okay. All right, can you talk a little bit about the metrology market John? I mean, I know you mentioned that there were that you have three — all three customers, I guess in South Korea but I’d love to hear your perspective on fab development in the U.S. I know that’s a highly controversial topic right now and it would be really interesting to hear your vision on how foundries and semi manufacturing might expand in the U.S. and how that could benefit Kopin?
John Fan
Yes, it is a very interesting insightful question. As you will know, everybody is — every country is trying to improve up a new fab — semiconductor fab. And as you kind of read, even this weekend — I think that was past weekend, this article said semiconductor chips are getting three dimensional just stacking more chips together on top of each other. So we are seeing a situation where people no longer look at within chip in 2D format, 3D format. So but this is what we call 3D metrology currently still a very emerging business. The market now is divided in three parts, hoping through our portfolio owned subsidiary FTD, we own about 40% of the world market. TI using a DLP in 40% of world market and the rest of them are using this and other stuff, the small ones. So we have about 40% of market share of an emerging business but turn everything from 2D to 3D and as you can guess, everything is going to go to 3D it will take some time people don’t like to change their factories, but it will happen and a new factory definitely needs us.
Kevin Dede
Okay. Thank you, gentlemen for entertaining my questions. I appreciate it.
John Fan
Okay, Kevin.
Operator
And that is all the time that we have for questions. And I would like to turn the conference call back over Dr. Fan for any closing remarks.
John Fan
Thank you for joining us today and hopefully you’d hear from us next time.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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