Kopin (KOPN) Q1 2022 Earnings Call Transcript

Kopin (KOPN -10.93%)
Q1 2022 Earnings Call
May 03, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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.

Richard Sneider -- Chief Financial Officer

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 today's call taking place on Tuesday, May 3rd, 2022. 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 of 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'll turn the call over to John.

John Fan -- Chief Executive Officer

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 phone 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 swing by the 2022 Society Information Displays, or SIT, trade show, which is taking place in early May in San Jose. Turning to the formal 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 lower, but were offset by a strong funded research and development revenues.

Our product revenues were set by the global supply chain issues, particularly during the last couple of weeks of the quarter. As a result, we're 12% or 14% lower than Q1 of last year. In the past few quarterly earnings calls, 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 are pleased with. Given the circumstances were out now, we're also not discouraged by it, demand for our products remain strong.

Let me explain why this issue is challenging to deal with. Because we make very complex components and the assemblies, which go into extremely sophisticated interdependent defense and industrial systems. We cannot simply switch a component that ensure supply with another component. When we identify an issue and see a need to switch to a different component, we must notify our customers, playing our plan in most cases, have to attend their formal approval.

Then we must perform a tense testing on our revised product to ensure its compliances and the specifications and provide the testing results to our customers for their review. There are customer may be required to perform extensive system testing and in their own customers' approval. This process is time consuming, and it means that in addition to our normal development activities, we must allocate resources to identify replacement components and perform additional testing. In spite of all this -- we were able to achieve relatively high level of manufacturing while allocating resources to address these historic issues and also made progress in our development activities, which are really closer to our long-term growth.

That's why overall, we are satisfied with the first quarter results. We continue to actively manage the [Inaudible] supply chain issues. And while we best intermittent supply chain disruptions of some in our materials, we will have sufficient components to continue our 2022 growth over 2021. As we previously discussed in the fourth quarter in 2021, we announced new orders of our current production program, F-35 and our major weapon site program.

And this gives us a strong foundation for 2022 product revenues. Looking now into the future of our current programs. We'll receive feedback that's a very unfortunate situation in Ukraine may eventually result to more product demand. Turning to our Organic Light-Emitting Dial or OLED product line.

Our recent press release indicated, we are making good progress in building this business. As discussed in the press release, we released -- we received procession orders for our 2,000 -- for our F2720P lightning OLED microdisplays. And in other cases, a funded customer is buying our 2K OLED wafers, which are the fundamental building block to make OLED display. We believe these two new orders are testable to the competitive advantage of a highly advanced silicon backplane design and display performance, and also validates the power of fabless business model.

Under our model, we either sell finished OLED displays to our customers, working with OLED funded partners or we sell our highly advanced proprietary backplane wafers to our OLED OEM partners who complete the microdisplays for sales to their own customer base. This business model provides us a lot of flexibility to meet customer demands without incurring the major fixed capital investment associated with the OLED 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 the 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 microdisplays, optics, and rugged dust-free assemblies.

For five jets such as F-35, or rotary-wing aircraft, we provide displays. For gun sights, we provide display, optics, and module assemblies. Now for armored vehicles, we actually provide the whole full system units. They include displays, optics, electronics, etc., etc.

Currently, all our defense business and enterprise business are based on our advanced LCD on silicon displays. However, we're being actively developing OLED silicon displays for over five years and now one of the leading OLED on silicon display developers. I must mention gears, we have a longer-term development projects and just focus on micro-LED. The LED microdisplays has potential for super high brightness and low power consumptions, which can make them ideal for many applications, including see-through, home reality and mixed reality applications.

In summary, consumer demand is strong on all our core product groups, and we're actively managing our supply chain challenges. We continue our momentum on innovating and advancing our technology for AR/VR and MR applications. We believe strong interest in the Metaverse is just getting started, and we feel we're 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 are excited for the growth of coping as we see a wave of growing interest in AR/VR and MR products and applications. Our technology advances in current market conditions are very favorable, and we believe Kopin 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, Kopin is very strong in IPs. We're over 200 patents and patent applications, providing displays optics and module assemblies. One of our IP monetization strategy is to license some of our IPs to start our companies. And as a copy as a part of a conversation, we often receive equities in the start-ups.

We have 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 I'll turn the call to Rich to discuss the financial aspects of the quarter and the full year. Rich, go ahead.

Richard Sneider -- Chief Financial Officer

Thanks, John. Total revenues for the first quarter ended March 26th, 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 26th, 2022, were $7.8 million, compared with $6.4 million for the first quarter ended March 27th, 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 warranty cost 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 cost reserves related to units shipped before the new production processes the company implemented in 2021. And the additional reserves for excess material is the 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 diodes or OLED development. Selling, 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, had 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 of our attributes 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's strategy to monetize our deep intellectual property portfolio.

And as part of that, we receive an equity interest in certain licensee companies when we license the IP to them. During the three months ended March 26th, 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. Turning to the bottom line, our net loss attributed 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. Open 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 and stock comp expense are attached in the table to 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 2022 for any possible changes and additional disclosures. Operator, we'll now take questions.

Questions & Answers:

Operator

Thank you [Operator instructions]. We'll take a question from Glenn Mattson with Ladenburg Thalmann. Your line is open. Please go ahead.

Glenn Mattson -- Ladenburg Thalmann and Company -- Analyst

Yeah. Hi. Thanks for taking the question. So just in terms of the top line, can you just talk about the lower component revenue is pretty evenly split, I guess, between military and industrial.

Was 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 ramped back up and got back to normal production? Is that still the case with that customer as well?

Richard Sneider -- Chief Financial Officer

So in both cases, yes, it was supply chain issues in both the defense and the industrial and it really was the last couple of weeks of the quarter when it kind of hit us. And so as John indicated in the prepared remarks, we think we're in good shape going forward. We do expect intermittent supply chain issues now. And again, we're not out of the woods.

There are some indications that the situation is getting better. 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 kind of the last piece of it. It was kind of 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 -- Ladenburg Thalmann and Company -- Analyst

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 -- Chief Financial Officer

That's definitely the goal.

John Fan -- Chief Executive Officer

Yes. That's why we anticipate growth.

Glenn Mattson -- Ladenburg Thalmann and Company -- Analyst

Yes. Right. So a question also for John. Can you talk about the new Oculus that's coming out? I believe it's -- they're 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 -- Chief Executive Officer

Yes. Of course, this is still kind of not totally official, but we can guess what it is, right? So it is OLED. Our guess is all on glass. It's the OLED on silicon.

But OLED, that's still a happy news that may -- the one current one is LCD on glass. So you can see the shift from LCD to OLED, which we always anticipate. So the next move, of course, we believe will be OLED go to silicon, that's one. This is very good news.

I think that another very good news is we now believe it is a Pancake Optics that we have a global trademark on pancakes and one in event on pancake is actually in our company. But it is not all plastic pancake, that pancake has some glass in it. So that conversion, you really indicate where the market is moving, the technology is moving. Optics is going to pancake, display is going to OLED, but it's not fully displays got OLED on glass, not OLED on silicon and pancake is with glass in it not plastic.

So I hope I answered your question. It's a good trend.

Glenn Mattson -- Ladenburg Thalmann and Company -- Analyst

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 -- H.C. Wainwright and Company -- Analyst

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

John Fan -- Chief Executive Officer

We probably may not be reviewed this way they care for Rich. There's so much involved with defense.

Richard Sneider -- Chief Financial Officer

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 involving information around it. And they referenced us through the DARPA, which prohibit really discussions about systems and how they operate.

John Fan -- Chief Executive Officer

Yeah. I think, Kevin, as you well know, the supply chain issue is not unique to Kopin. It's a semiconductor chips are missing. And some of the chips are really not advanced, but they are missing.

And this affects everybody, whether it's defense industry, industrial industries. And in many ways, I'm pleased to how people actually manage it reasonably well.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

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

Richard Sneider -- Chief Financial Officer

Well, so 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 a but 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 the -- but we just want to make sure that we get a couple more quarters under our belt before anyone starts declaring that we're out of the woods.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

OK. 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 -- Chief Financial Officer

Well, so 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 $1 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 -- H.C. Wainwright and Company -- Analyst

OK. John, you touched on the micro-LED. And if I remember correctly, you're developing both in Japan and China. Can you give us a status on that? What's your view to having this?

John Fan -- Chief Executive Officer

Yeah. What do you want me to tell you?

Richard Sneider -- Chief Financial Officer

Well, first if all --

John Fan -- Chief Executive Officer

Yeah. On a --

Kevin Dede -- H.C. Wainwright and Company -- Analyst

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

John Fan -- Chief Executive Officer

Yes. The micro-LED, as you well know, and some people always consider the ultimate display, which it is true, if it can be developed and producing a cost-effective way, it probably solve everything that we want to do AR/VR and MR. We work with a Chinese company on monocular – monochrome micro-LED, and we work with the Japan company to do full color micro LEDs. And both them are very super very high advanced micro LEDs.

And a lot of them are customer funded. So this is the customer-funded activities. And the progress is good. I think China was again -- because of the lockdown in China, it probably affected for a few weeks.

Otherwise, we might already have something assigning to announce for this quarter. So 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 -- H.C. Wainwright and Company -- Analyst

So how would you recommend we look at time --

John Fan -- Chief Executive Officer

Micro LEDs, Nobody can give you -- nobody is going to get into real market micro-LED this year, zero. All over the world.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

Right. OK.

John Fan -- Chief Executive Officer

And we are making good progress. I think we should be one of the leading team coming out, but not this year. For product, for development, for show, and car for demo, yes, you get it this year.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

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

John Fan -- Chief Executive Officer

God willing.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

OK. Fair enough.

John Fan -- Chief Executive Officer

It is a tough technology, it's a tough technology. 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 Kopin, for the industry.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

OK. 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 -- Chief Executive Officer

Well, I mean, nobody want to celebrate for such a disaster. But we are in defense industries, and we do make systems and help the component for the systems, which are used extensively in the world.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

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

John Fan -- Chief Executive Officer

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

Kevin Dede -- H.C. Wainwright and Company -- Analyst

OK. OK.

John Fan -- Chief Executive Officer

And we are also F-35. So you can -- I think we can connect dots.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

Right. Thank you. I appreciate you helping me with that, John. Now am I also correct in assuming that that supply chain is predominantly in the U.S.? Or are you still sourcing product from Asia that goes into defense-related components?

John Fan -- Chief Executive Officer

Yeah. I think as you well know, a lot of supply chain problem is agonizing because automobile industry is affected by it too. What you missing is like a microcontroller, which is a very low-tech product, it is made by everybody in the whole world, Taiwan, Korea, China, Japan, but they're short. And once they're short, you can't even make a car, too.

Everybody is affected by a microcontroller, not advanced IC. It's a really kind of maintained ICs. So for us, just like automobile, you can't buy another IC, you put in there, you have to get your customers proven and get compliance. So it slowed down things, but it's not fundamental.

It's not like IC cannot get it anywhere. It's a very common IC. So it has no [Inaudible] you cannot get for instance, the office centers come from China. No those IC come from everywhere in the world.

It's just a short, everybody is double trouble buying.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

I see. OK. I got it. I got it.

Thank you. Just maybe your take on the progress that RealWear and Solos are making? Sort of just a finish-up line of questions.

John Fan -- Chief Executive Officer

Yeah. I mean I'm glad you mentioned that those are the companies that we license and in fact, take equities in. I don't want to go lot too far into it. Obviously, some of them are already making progress, so we have to write up the equity gain.

And I think that will continue. The one that were from three, four, five years ago, it's just like a VC situation, some of them become mature stage now and you're going to have a series of hopefully monetizing event like VC, we're going to get things come back and with some significant equity gain. But in member, goals more equity gain. We keep it in three ways.

We have royalties and we also sell them components plus equity gain. So this way, the business board is very good. So I think this is one area that is not well known by the shareholders. We have several ways to make money for the shareholders once we do sell products we do sell a lot of product defense.

But our product is not only just selling display now. We can do more and more into assemblies in the armored vehicles, actually the full system. And you can count how many armors was going to be, right. And then we have IPs models.

I wish that you are also in Asia and traveling. It's not easy to travel in Asia. I got a lockdown quarantine for seven days. I just got out.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

OK. Thank you. Thanks for taking my questions, gentlemen. Appreciate it.

John Fan -- Chief Executive Officer

Thanks for the good question. Thank you. I wish that you were also in Asia traveling. It's not easy traveling in Asia.

I got locked up, got quarantined for seven days. I just got out.

Operator

We'll move next to Patrick Metcalf with I-Bankers Direct. Your line is open. Patrick, please go ahead.

Patrick Metcalf -- I-Bankers Direct -- Analyst

Hey, good morning, guys. Good evening, John. Rich, I want to --

John Fan -- Chief Executive Officer

I don't want to get [Inaudible]

Patrick Metcalf -- I-Bankers Direct -- Analyst

OK. Rich, I want to give you credit for being -- I want to give Rich credit for being conservative in 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 a 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 and cannot speak to. Google made an acquisition for $1 billion for a micro-LED engineering company. And then Snap acquired an optics company for $500 million called Weave Optics. I mean supposedly Samsung made an investment into DigiLens, another optics company.

So with Kopin sitting at $150 million having a portfolio of microdisplays 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 -- Chief Executive Officer

Well, I guess the market temporary is not very efficient, I guess.

Patrick Metcalf -- I-Bankers Direct -- Analyst

OK. All right. I'll take that as a positive. OK.

And then I wanted to ask you, as far as plastic pancake optics is concerned, how do you plan to go to market with that? Because if we go back to the HBT days, if I understand it correctly, you had the greatest technology in the HBT, but the competition came in and stepped on it. So are you going to go to market in a different approach, a different strategy to try and get that 100% market share, if you will?

John Fan -- Chief Executive Officer

Yeah. With regard to the HPT, I think some of the shareholders may know, it is a transistor we invented and then for cellphones, it's a power transistor and the sky work and Coco used it for five years with exclusive to it. And then, of course, some point we actually didn't patent it, stupid me. And then somebody Asia actually can start making it.

Then we got gins. So we sold the business. But in fact, probably we should to kept it because we still -- that particular business that we sold to that the company still owns about 50%, 60% of the market share in the world is actually quite profitable. So I'm living my lesson.

So even the people come in, you are the leader, you don't get displaced that quickly. So I don't know whether it answers your --

Patrick Metcalf -- I-Bankers Direct -- Analyst

OK. 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 a secret?

John Fan -- Chief Executive Officer

Well, I think this how many units, how many component revenues. Just listen, the F-35 is the most advanced VR/AR system in the entire world. They don't build too many of them, but they pay well. They do pay well and we're making profit on it.

So there's not really how many units, it's how many the customers willing to pay you for the value, right. So to this point, no question about it. Oculus sells a lot of revenue. They probably paid the component guy.

I think the component guys is probably not making money, maybe not losing money, but Oculus is, I don't want to speak for Facebook. I don't think they make money selling every unit it sell. We sell to Avionics and we make money.

Patrick Metcalf -- I-Bankers Direct -- Analyst

OK. Thank you, John.

John Fan -- Chief Executive Officer

Yep.

Operator

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

John Fan -- Chief Executive Officer

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 a process vote process soon, so do please vote.

If they are able to come to attend our annual meeting. I think this year, we -- most IDs is not going to be in person. So thank you very much for joining me this evening.

Operator

[Operator signoff]

Duration: 40 minutes

Call participants:

Richard Sneider -- Chief Financial Officer

John Fan -- Chief Executive Officer

Glenn Mattson -- Ladenburg Thalmann and Company -- Analyst

Kevin Dede -- H.C. Wainwright and Company -- Analyst

Patrick Metcalf -- I-Bankers Direct -- Analyst

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