Kopin (KOPN) Q2 2022 Earnings Call Transcript

Kopin (KOPN -3.52%)
Q2 2022 Earnings Call
Aug 02, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Kopin second quarter 2022 earnings conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator instructions] I would now like to turn the conference over to Rich Sneider, chief financial officer.

Rich 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, August 2, 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, 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 of 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 view as an indicator of our future growth opportunities as we expect most of these development programs will transition 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 announced additional orders for our displays for F-35 pilot helmets an imaging systems for armored vehicles. In July, we announced a production order for a Brillian high-brightness color displays for helicopter pilot helmets.

During the second quarter, we also announced the expansion of our industrial customer base, adding a new Korean 3D automated optical inspection system customer. They use our spatial light modulator or SLM as a critical component in their system. With this particular win, we are not supplying a high-speed high-performance SLM, which are based on proprietary Ferroelectric Liquid Crystal Display to the all the three leading Korean 3D AOI equipment manufacturers. In addition to other market leading manufacturers in China, Japan, and Germany.

These announcements are very important in several ways. To add to our already strong dialogue of orders. But equally important, those progress represent the variety of microdisplay technology Kopin offers. We believe we are the only company in the world to offer active metrics liquid crystal display, ferroelectric liquid display and organic light-emitting diode or OLED display.

And we are working with partners to develop inorganic light emitting displays or commonly named micro LEDs. All our microdisplays as reminder are displays pure on silicon. This is important as our breadth of display technologies to meet customer needs. It's a variety of advanced specialized optics, which we offered and which provides our customers with an integrated turnkey solution.

This allows our customers to offer high-quality visual solutions to meet the variety of needs in the market. For example, our new all-plastic Pancake optics enables smaller, much lighter weight VR headsets and also metaverse handsets. 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, they are thinner, lighter, comfortable and easy to use has been one of our critical objectives.

Our all-plastic Pancake optics provide not only the clear advantages mentioned before. But most importantly, they provide a very sharp image with good high relief. We believe combining our all-plastic Pancake optics with our 2.6 OLED microdisplays, representing a perfect match, providing magnification of 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.

They are essential for great VR/AR experiences. This is a good place to put the importance of micro displays and Pancakes in the proper context. These two technologies are analogous in importance as leasing battery technologies to the electric vehicle industry. Our second quarter growth occurred and will start with global supply chain issues.

While we are pleased with that growth, it becomes a cost. As our press release indicates, we've incurred more costs to keep our customers running and operations running than we will normally expect. Typically, a defense product design has a life cycle of about five to seven years. But given the supply chain issues, our limited visibility as to when the supply chain issues will get resolved as a contingency, we redesigned several products will alternate semiconductor components, so we will have flexibility and a backup plan.

This has increased our engineering and part costs. And we also incurred those automotive semiconductor components as we also occurred 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, we ran closer to normal. Furthermore, we expect our second half revenue will be higher than our first half revenue as our defense business expects to be stronger. Now let me provide an update on the progress in developing our micro OLED product line. We're currently designing multiple backplanes for partners and customers.

And we are also in discussion with partners for more advanced other designs for use in virtual reality and augment reality systems. While strong customers to us is a unique industry-leading 2.6K OLED display and deep knowledge of the display and optics is a system. Customers, of course, like high resolutions -- but they also value is 1.3 inch size because it enables better optics. The 2.6 display is really a display on a chip.

We name it DoC. It has embedded MIPI circuits and digital processing circuits, which met the interface with standard video signal simpler and much less power consuming. One additional technical advantage we have  is that folks are now beginning to understand the value of knowledge drive in OLED displays as opposed the current drive. Coping designed our 2.6 OLED display using voltage drive, but most others use current drive.

Voltage current drive are now hotly debated in the industry. An analysis indicate that voltage drive results significantly in lower power consumption, especially as microdisplay resolution increased. Kopin micro OLED displays have been sure to be using significantly lower power than OLEDs by other customers -- other suppliers. We are now in discussion with folks to put the advantage of our 2.6 display design to higher resolutions such as 4K HDR displays.

As we have previously discussed, our OLED product line is based on a fabless business model. Using our model, we either sell finished OLED microdisplay to our customer by working with our OLED partners or we sell our highly advanced proprietary backplane wafers to all OLED OEM partners who complete the microdisplay for sale to their own customer base. This business model provides us more flexibility to beat customer demand. Turning to our research and development activities.

We continue to make excellent progress in developing a microLED display. This is a customer-funded project. There is many partners. This consortium of partners working on different elements of displays is how we create a current LCD in the early 1990s with a $50 million funding from DARPA to us.

To be clear, this is a long-term development project, but if successful, the display opens us tremendous opportunities. In summary, customers demand strong in our core product lines, especially in our defense sector, and we are 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 for metaverse.

And we feel we're very well positioned to capitalize the opportunities it presents. We're very excited for the growth of Kopin as we see a wafer rapidly growing interest of our micro displays and optics across AR/VR/MR products and applications. First in defense enterprise and 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'll turn the call to Rich to discuss the financial aspect of this quarter and the full year.

Rich Sneider -- Chief Financial Officer

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, a 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, an overall 20% increase year over year. Cost of goods sold for the second quarter of 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 costs for the product revenues as a percent of net product revenues for the three months ended June 25, 2022, as compared to the primary year, 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 was three months ended June 25, 2022, as compared to three months ended 26,221 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 attributable to 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 our brilliant 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 deemed to prove to partially fund our working capital needs through the use of our at-the-market equity offering program or ATM. And so during the second quarter of 2022, we sold 1.7 million shares of common stock with gross proceeds of $2.1 million before deducting broker expenses of less than $1 million -- $100,000 excuse me, pursuant to the company's ATM. Going forward, we are reviewing other funding alternatives. Kopin's cash and 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 for 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 of 2022 for any possible changes and additional disclosures. And with that, operator, we'll be happy to take questions.

Questions & Answers:

Operator

We will now begin the question-answer session. [Operator instructions] The first question comes from Glenn Mattson with Ladenburg Thalmann. Please go ahead.

Glenn Mattson -- Ladenburg Thalmann and Company -- Analyst

Hi. Yeah, thanks for taking the question. First, Richard, can you just touch on it, I would be curious about -- a little bit about the -- 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 also 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.

Rich Sneider -- Chief Financial Officer

Yeah. The first half, we look at it 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 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 just -- so if you actually -- when you see the cash flow statement coming out, what you'll see is the 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 is more normalized to 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 -- Ladenburg Thalmann and Company -- Analyst

OK. And I'm curious about the decision to do stock sales at that level and what this kind of signal sends and I understand that the issue just 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? Or 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?

Rich Sneider -- Chief Financial Officer

Sure. Yeah. I mean, nobody was really particularly happy exercising at that price, the ATM that we had at the end of the quarter. But we did think it was prudent.

There was a lot of talk about recession. We really weren't sure what the supply chain was going to go. As John said in his prepared remarks, the good news is it looks like from what we're hearing, the 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 to 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 prepayments 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 sourced to all those programs.

And so maintaining a very strong balance sheet is very important so that those programs continue. And so for those reasons, we thought it was the right move to go out and exercise the ATM.

Glenn Mattson -- Ladenburg Thalmann and Company -- Analyst

Yes, clearly.

Rich Sneider -- Chief Financial Officer

I think, Glenn -- to give you more things. I think, yes, we are looking at other way. But our customers, because we are so sought to them, they also are -- some of them are actually helping us to alleviate some of those part procurements and all that stuff. So we'll be heading much better -- will have better performance next half.

Glenn Mattson -- Ladenburg Thalmann and Company -- Analyst

Great. That's it from me. The defense business seems to be going really well. And so we are exciting to what that continue?

Rich Sneider -- Chief Financial Officer

Yeah. We are winning. I mean, we have a lot more orders coming in. And this is certainly the most important thing.

The technology and orders we do have them. And we sole source for almost all of them.

Operator

The next question comes from Kevin Dede with H.C. Wainwright. Please go ahead.

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

Good morning, gentlemen. 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?

Rich Sneider -- Chief Financial Officer

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

OK. 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?

Rich Sneider -- Chief Financial Officer

Yeah, we would expect all in full production in the first half of next year. As we mentioned, one is the Brillian display for rotary aircraft, another is an international weapon site similar to, in some respects, 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 of future orders on those.

And the other one is, 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 -- H.C. Wainwright and Company -- Analyst

OK. Fair enough. Has the chaos in Europe spurred development? It's interesting when you look at the sequential change in research and development, down a couple of 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.

Rich Sneider -- Chief Financial Officer

Well, again, it's the -- 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 -- H.C. Wainwright and Company -- Analyst

So is that the lion's share then, Rich, of that line?

Rich Sneider -- Chief Financial Officer

Well, it's a good piece of it. And then part of it is the fact that the Brillian displays that going to production was winding down.

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

OK. All right. That helps. John, can 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 in its development into defense-related products, given a lot of the development or at least it seems to me at this from outside, a lot of that development is happening outside the U.S.

John Fan -- Chief Executive Officer

Yeah. This is a consortium. This is a technology and early demonstration of micro LEDs. This, of course, is run from here, but they are also running in the U.K.

Consortium has a lot of activities in the U.K., which is our -- actually through our subsidiary in U.K. and then in Japan and partially also in China, but almost all the activities are really resided in U.S. and U.K. right now and Japan.

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

OK. I know you said it's 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 -- Chief Executive Officer

Yeah. It is targeted to -- at this point, this is actually the product in mind, targeted to defense and enterprise applications. The first, eventual call consumer. And it's a very aggressive target.

If we succeed, and I can't say that we would definitely succeed, it will be the most advanced micro LED build in the world.

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

OK. But it's too early to offer some type of timeline.

John Fan -- Chief Executive Officer

I think we are optimistic, of course, but we have a bunch of very good people working on it. I think if anybody could use we probably has a good chance.

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

OK. 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 projects, sort of, in the wings and then developed might be moving forward more rapidly?

John Fan -- Chief Executive Officer

Yeah. Well, Kevin, this is Kevin, right? Yes, it's Kevin. I think we did announce not too long ago about some activities that our imaging system for armored vehicles. And that's very, very critical.

I really think all that you political tensions happening is everybody need new imaging systems for using armored vehicles. And again, we're so sourced there. And that activity is actually going full steam as well know, I mean our working capital obviously has increased because a lot of productions, new progress go to production, a lot of activities in R&D, some of them are internally funded. But that's normal when we think we're actually in the winning cycle right now.

And yes, we know either way. ATM is one of our options are raising more money. And I think we'll continue to do so.

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

OK. There was a $2 million development order for the in-vehicle imaging. Is that the one you're referring to, John, appears that it was the -- the second custom development order.

John Fan -- Chief Executive Officer

Yeah, that's exactly, Kevin, you're right. And that program, to me, I'm very excited by that program because I really believe there will be a major, major pipeline of revenue for us as we are so sourced, and we're working with a huge customer.

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

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 -- Chief Executive Officer

I can't speak to that because there are a lot of activities going on. I can't comment on them.

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

OK. 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 -- Chief Executive Officer

Yeah. This is a very interesting cycle question. As you will know, everybody is -- every country is trying to build up a new fab in the semiconductor fab. And you probably read even this weekend, I think there was a -- past weekend, there's an article that semiconductor chip, according – international is taking our chip together on top of each other.

So we are seeing a situation where people no longer look at who think chips in 2D format, in the 3D format. So this is what we call 3D metrology. Currently, it's still a vague emerging business -- the market now is divided to three parts, hoping to of our successfully owned subsidiary, FDD, we own about 40% of the world market. TI using a DLP in 40% of world market.

And the rest of the migration reason are the stuff a small ones. So we have about 40% of the market share of our emerging business return everything from 2D to 3D. And if you can guess everything is going to 3D. It will take some time.

People don't like to change their factories, but that will happen and a new factory definitely needs.

OK. Thank you, gentlemen, for entertaining my questions. I appreciate it.

Rich Sneider -- Chief Financial Officer

OK, Kevin.

Operator

That is all the time that we have for questions. And I would like to turn the conference call back over to Dr. Fan for any closing remarks.

John Fan -- Chief Executive Officer

Thank you for joining us today, and I hope you hear about next time.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Rich Sneider -- Chief Financial Officer

John Fan -- Chief Executive Officer

Glenn Mattson -- Ladenburg Thalmann and Company -- Analyst

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

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