Good day, and welcome to the Kopin Corporation Second Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would turn the conference over to Mr. Richard Sneider. Please go ahead, sir..

Thank you, operator. Good morning and welcome everyone, and thank you for joining us this morning. John will begin today's call with a discussion about our strategy, technology, and market. I will then go to the first -- second quarter results in 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 3, 2021, we will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are based on 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 these forward-looking statements made during today's call. And with that, I will turn the call over to John..

The Paradigm Shift to Smartglasses Starts Now, which drew over 500 participants during the live event. Many homes are actively involved in the next-generation smartglasses and headsets. During the three-part series, we discussed the past covering the initial efforts to create AR/VR solutions.

The present addressing the current state-of-the-art technologies and the future, which address the future AR/VR smartglasses offering a roadmap to successful product development. All three events have active and engaged participation on the -- and the attendee and are available on Kopin's website@www.kopin.com.

We are pleased and committed to our strategy. In short, while we maintain our strong momentum in our growing revenue generating businesses. In defense and enterprise sector, we continue aggressively to innovate and advance our technology for what we see as a growing wave of consumer AR, VR and MR products applications.

Many of you may have followed the increasing discussion of the transformational arrival of the Mettler [ph]. Mettler's definition is still not too well-defined.

However, in my view, as we discussed in my webinar, it is composed of AR/VR hardware to my glasses and platform and the application software, providing a unique exciting user experience to consumers. This very good transformation will happen and is already happening in defense and enterprise segments, and will soon arrive in the consumer sector.

As we stress, have stressed, the AR/VR hardware would come first. The technology advances and market conditions are very favorable and Kopin is very well-positioned to capitalize. Now, I'll turn the call over to Rich to discuss the financial details of the quarter..

Thank you, John. Turning our financial results. Total revenues for the second quarter ended June 26th, 2021 were $9.9 million compared with $8.8 million for the second quarter of June 27th, 2020, a 12% increase year-over-year.

Product revenues for the second quarter ended June 26th, 2021 were $6.9 million compared with $6.7 million for the second quarter June ended 27, 2020. Our defense product revenues for the second quarter ended June 26th, 2021 were $3.8 million compared with $4.5 million for the second quarter ended June 27th, 2020.

As John previously discussed during the three months ended June 26th, 2020, we reduced shipments of our thermal weapons sight systems to a customer who was making system and production enhancement. We expect the lower shipment rates to continue during the third fiscal quarter and then increase in the fourth quarter of 2021.

Whether we can make up the revenues during the remainder of 2021 is depends on how quick the customer completes their process.

Our industrial product revenues for the second quarter ended June 26, 2020 were $2.6 million compared with $1.4 million for the second quarter ended June 27th, 2020, and approximate 86% increase on the strength of the seller products used for 3D metrology and headsets used for applications in manufacturing distribution, partly offset by a decline in public safety wearable headsets.

Project, research and development, and other revenues were $3 million for the second quarter ended June 26th, 2021 compared with $12.1 million for the second quarter ended June 27th, 2020, primarily due to an increase in fundings for U.S. defense programs.

Cost of product sold for the second quarter ended June 26th, 2021 was $6 million compared to $4.8 million for the second quarter ended June 27th, 2020.

The increase in product revenues as a percentage of net product revenues for the three months ended June 26th, 2021 as compared to three months ended June 27th, 2020 was primarily to lower manufacturing efficiencies driven by the lower FWS-I volumes, regarding global shortage of semiconductor components and production capacities affecting many industries.

While we have, in some cases, had to find alternatives for sources, we have not experienced any shortage issues during the first six months of 2021. In some cases, we have seen some price increases. The shortage of semiconductor components was a very dynamic situation and we continue to work the issue that presents.

Research and development expenses for the second quarter of 2021 were $3.9 million compared to $2.2 million for the second quarter of 2020, a 75% increase year-over-year. R&D expenses for the three months ended June 26, 2021 increased as compared to three months ended June 27th, 2020, primarily due to an increased spending on U.S.

funded development programs and internal R&D expenses for OLED development. Selling, general and administrative expenses were $4 million for the second quarter of 2021 compared with $2.9 million for the second quarter of 2020.

Excluding the non-cash stock-based compensation costs, SG&A expenses were $3.7 million for the second quarter of 2021 compared with $2.8 million for the second quarter of 2020, a 30% increase. The increase in SG&A, excluding non-cash stock compensation costs, was due to an increase in other compensation costs and bad debt expense.

Other income expense was income of approximately $249,000 for the second quarter of 2021 compared with $6,000 of expense in the second quarter of 2020. During the three months ended June 26, 2021, we recorded $100,000 of foreign currency gains as compared to $10,000 of foreign currency gains for the three months ended June 27, 2020.

Turning to the bottom line. Our net loss attributable to the controlling interest for the second quarter of 2021 was $3.8 million or $0.04 per share compared with a net loss to controlling interest of $1.1 million or $0.01 per share for the second quarter of 2020.

Non-GAAP net loss attributable to controlling interest for the second quarter of 2021 was $3.6 million or again, $0.04 per share compared with non-GAAP net loss to controlling interest of $1 million or $0.01 per share for the second quarter of 2020.

Kopin's cash and marketable securities were approximately $30.7 million at June 26, 2021, as compared to $20.7 million at December 26, 2020. Net cash used in operating activities for the second quarter ended June 26, 2021 was approximately $5.4 million.

During the three months ended June 26, 2020, we sold 92,335 shares of our stock under our ATM program for gross proceeds of approximately $832,000 before deducting expenses of us -- paid by us of $24,000.

For the six months ended June 26, 2020, we sold 2,496,690 shares for gross proceeds of approximately $16.8 million before deducting broker expenses paid by us of approximately $500,000 pursuant to our existing ATM and previous ATM agreement.

On June 28, 2021, the first day of our fiscal third quarter, we sold 600,000 shares of common stock for gross proceeds of $4.8 million before deducting broker expenses paid by us of approximately $145,000 pursuant to our existing ATM program.

Second quarter amounts for depreciation and stock compensation expense are attached in the table into the Q2 press release. The amounts discuss above our current estimates and listener should review our Form 10-Q for the second quarter 2021 for any possible changes and, of course, additional disclosures. And with that, operator, we'll take questions..

Thank you. [Operator Instructions] We'll now take our first question. It comes from Glenn Mattson of Ladenburg Thalmann. Please go ahead..

Yeah. Hi. Thanks for taking the questions.

So, just as far as the delays go for this quarter and I guess, next, can you give us some sense, just a little more color on kind of what kind of changes your end customer had to make, I guess, trying to get at how confident you are? Or what gives you the confidence that there's going to be a bounce back in the fourth quarter on that? And just some color on the degree of bounce back, whether or not you think you can make up a majority of the revenue loss or if you need to -- or if there'll be some further push out at 2020..

Sure. So, first of all, this is a very long-running program. This is going to go for multiple years, and this is not unusual that now they've made some number of full units, and they're looking to improve yield. Keep in mind, a lot of the government contracts today are firm fix price.

And so to the extent that you can make yield improvements, drive costs down, that all falls to the bottom line. And we share in that. And so, they've come through some ideas for yield improvement on the overall system. They slowed shipments down as they implemented those improvements.

It requires us to do some engineering to work with them to make sure there's no downstream effects. And that's what we're doing. And so, how fast we can make it up. We've talked to the customer, they are very eager to make it up themselves. It affects their revenues, too. So, our interest in their interests are aligned.

So, it's just a matter of going through and making sure all the testing gets done properly and that the -- as we mentioned, no downstream effects. And then, once that happens, we hopefully can turn this thing on.

And then, it will just be a matter of how many weeks are left and how much volume we can get out of the facility over the rest of the quarter. We're optimistic we can put a pretty good dent in the fourth quarter if we can get this thing turned on soon..

Okay. Great.

And as far as the new programs that I went into low-rate initial production, can you talk about any specifics about what exactly programs as are? And just kind of a sense of how it will ramp in the back half and into next year?.

Yeah. So, it's a weapon sight. It's an avionic product. As soon as we get clearance from the customer, maybe hopefully we can give a little more color exactly who they are and what the programs are. So, we did recognize product revenues -- initial product revenues in the quarter, and hopefully, it will just continue on.

Again, this is initial low-rate production. So, there is still engineering going on as these units are being shipped. So having gone to full-rate production, which will happen next year..

Thanks Rich. And so, there was a -- gross margin was a little softer, and I guess that's a combination of those two factors. In the early stages, obviously, the initial production doesn't have the same margin as something in full production. So -- and obviously, the downtick in the weapons sights.

So, being that, that will continue in Q3, should we expect kind of similar margins in Q3 and then perhaps started to improve in Q4 and beyond? Is that a good way to think about the model?.

Yes..

Great. And then I just had a question about the new LED microdisplay, you talked about kind of a global leader there as the partner.

Maybe, I don't know, Rich, John, the best person to talk about it, but just love to get more insight into how big that could be down the road? And just any other color on the upside that opportunity presents, would be great..

Yeah. Glenn, this is John Fan. This is a very interesting program, very, very exciting progress. You will know. We obviously have been working on LCDs and our costs and recently really focused on micro OLED. But micro LED has a peculiar feature. It can be very, very bright in some way, people think it's an ultimate display.

If you can do the micro LED, then the brightness is so high. It can be so efficient, they'd be very, very good for see-through AR optics, optical systems. As you well know, the OLED reality optical see-through system, in many ways, is the ultimate dream for everybody. So, this is it. This is the ultimate dream, but technology is very difficult.

We actually pioneer invented this process on silicon in 1991 with partner [indiscernible] actually from day one. Just going back 1991, they extend us to do that. We stop it because we don't think we can do a call very well. And now, we're reactivating the whole process as they will fund from customer. And we have a very big company.

We already disclosed it, it’s from Japan. As a global consumer and consumer is enterprise consumable, both type of company. And we've cited, I think in two years, we will have that one-inch 2K x 2K full-color. If we achieve that, that will be the world's leading display. There's no such ambitious program yet and will be the first one.

We provide the backline design. It's a very unique design that we are patterning right now. Yeah..

Great. That’s helpful. Okay. That’s it for me. Thanks guys..

Our next question comes from Kevin Dede of H.C. Wainwright. Please go ahead..

Good morning, gentlemen and thank you for taking my questions. John, just to go back on to the -- looking at the -- Glenn brought up the LED display. You mentioned a consumer company helping you develop that two-year program.

What exactly are the design requirements, the full display? Do you have to include optics in that? Can you give us a little more insight on what your deliverables are?.

It's a very good question, Kevin. Thank you for asking the question. For this particular project is a focus on just display, the full-color one-inch 2K x 2K display. Not the end user system. As you well know -- it's a very good question, because a lot -- just a display alone we solve the problem of the AR/VR consumer application. It is not true.

Optics is just as important. You never -- signal optic is going to be or display maybe 30,000 times by the optics and give you a very clear image. And that's why the Pancake optics helps. Pancake optics that is actually -- we actually use Pancake optics in the defense industry for quite a while.

But because it doesn't make it in seeing high-performance optics. But in those cases, they usually have glass in there, glass lens, which is heavy, it's okay for the soldiers, but it's not okay for consumers. So that this all-plastic optics to go with a very high-performance way.

Together, we will provide the whole unit to -- yeah, for the product play only, we have individual -- a separate program on optics..

Okay. So that was going to be my next question, John. Thanks for leading me in.

So, the -- this optics development, is the plastic cast, number one, is the development there, sponsored by a consumer company? Or was this something that open endeavored to solve on its own? And could you give us a little insight on how you're pairing it with both this LED development and the OLED development in AR and VR?.

Yes. Thank you for asking the question. I think for any AR/VR systems, you need a display and you need optics, and you need a very, very well-designed package assembly. And we learned this, and we have been doing this for defense and enterprise well.

In fact, for defense world, therefore, for instance, avionics, defense side, we have delivered hundreds of thousands of units to the defense industry. It is not just display, but you need the optics and you need the packaging. How do you package so that you have to free and magically sale? And with those know how, Kopin accumulated a lot.

And therefore, when we start looking at the consumer well, we recognize not only at a very high-performance display, you need a very thin, very well imaged optics and Pancake optics -- remember in the defense industry, we use very different type of optics. We actually provide optics to our customers. So, we'll take Pancake as the one for consumer.

And then, we'll also try to work with a vendor, material company, and we developed a special material that it has no bio-printed effect, and therefore, the whole plastic optics is unique. And we're pattern like.

I think we have already filed three patents on it, and we're finding more and I think with this, a very lightweight base high -- we have said, is very nicely now, very likely. It's safe..

Okay..

The amount we are saving is, as we mentioned, it's significant. I think it's at least more than 10 grams per eye. So, you have very significant savings as well that to make a better -- actually better image quality to your eyes. This is something that people dream about it, nobody can crack and that -- except that we did..

So, John, was it really a drive in trying to shave weight? Or is it also a safety factor?.

Okay. We never mentioned safety event. It's also a safety factor. That's absolutely true. The glass, however, it is pretty strong, usually, unless you have some strange effect, but it is really -- it's actually everything, cost, size, weight, image quality. And now, of course, as Kevin mentioned, it is certainly safe..

Okay.

So, just getting back to sort of my thinking on this, John, was this something that you wanted to take your team to develop in addressing all of those things? Or did you get a -- do you have a company that's helping you develop it and help sponsoring some of this development work?.

The plastic optics is totally internally funded. We consider that plastic optics either we license it or we will be hoping product. So, because our technology optics is so advanced, we decided to do that ourselves. Now, of course, we have partners. We have partners to develop the material. I mean, we're certainly not a chemical company.

So, we designed it. We have own software design lens and we get people to build it, to mode it and we deliver to our customer the final product. .

Okay.

Do you see it -- do you see this development, John, transferring to some of the other programs that you have, like with the Scott, fire helmet and those types of environments where maybe plastic hasn't worked so well before?.

We -- it is a very good question. We are so -- I have to say, we have a lot of strong interest after we announced it.

And the range from enterprise all the way to consumers, I must say the consumers are more -- more extreme both -- everybody will work on consumer type headsets, we would like to try -- to drive these kind of optics because it seems on paper, it is the ultimate display. Actually opposite, I am sorry..

Okay. Yeah. Yeah. Good..

Yeah..

So that sort of going to another line of questioning, John. Help me understand how Kopin is looking at LED versus OLED? I just want to understand where you see -- I mean, obviously, you've mentioned that LED becomes the ultimate in solving see-through AR.

But I'm wondering how you see OLED embracing VR, maybe nearer term? Or maybe you could just help me make sure that I understand the way that you're thinking about it..

Yeah. I think in my webinar, I tried to outline, of course, nobody knows exactly how the future will hold. My feeling -- our feeling is for VR application -- consumer VR applications, micro OLED is good enough. Micro OLED can give you the low-cost, high brightness, enough fitness and the resolution you need.

And we'll, of course, continue to try and improve the brightness of the micro OLED. So, as you well know, our 35,000 nits micro OLED is a world record. We're using duo-stack. So that is one area. But we want to go anything over to about 100,000 nits. We feel that micro OLED will not achieve, certainly not in the next five to 10 years.

So that's why micro LED comes in. Now if you need AI application where you need maybe anywhere between 50,000 to 100,000 nits or higher, I think micro LED will come in. The technology is still quite immature right now. I think we are talking about three to five years away for micro LED to begin to come into the market.

So, right now, the next five years, the micro OLED for VR and some AR applications. And we're making great progress there too. So, at the end, we -- our business model is very simple. We provide the optical solutions, the modules, the optics, display, packaging for AR/VR, MR.

We do not make the end user systems with licenses, so people who make end user systems. The often time get equities in there. I mean, as you well know, we have made a few arrangement already, and we're going to continue to make arrangements licensing to people who make end user systems, but we do not sell and market end user systems in Kopin..

Okay. Another question on LED, if you'll allow me, John, please. Can you categorize the IP that you're going to lend to the Japanese company and what you'll be able to control versus the IP that I still believe you're working with a company in China in the development of micro LED.

So, could you just sort of frame those two deals for us, please?.

Yeah. As you all know, we announced several times, the initial work of LED out of silicon actually was patented by myself and people in Kopin many years ago. Unfortunately, the three patents that we filed and issued to us expired two years ago, okay? The one the fundamental patent expired three years ago.

So, however, we do have improved patterns and then what we have is we actually design the backplane. As you well know, displays are becoming display on chips. It's really an IC chip with LCD or OLED or maybe in the case LED on top of the silicon chip. So to drive the LED microdisplay, it will be a different type of architecture than micro OLED.

So we designed that we patent that and such architecture are used either for monochrome, which is the Jabil in China is putting their LED array on our backplane. So our backplane is ours, okay, and then the display itself when you come back to as Kopin.

Now using similar tile of backplane, we actually work with the Japanese global company LED array and the line, we have display -- micro LED display, the shipset for us. So, we control the backplane. And we design it, especially unique design and we actually use the product. We are in as a display product..

Okay. Okay. So, it's fair to assume or ….

Jabil is on monochrome. Not ….

Okay. Monochrome. Right. The Japanese ones color..

Full-color, yeah..

Okay. Okay. And then you'll -- and working with both those companies, you'll preserve the IP in the design of the backplane, and that won't be shared..

Yeah. In many ways, display, right now, silicon, the brain is in the silicon. Silicon is a brain. And now you put different materials to make it emit different color, a different case, LCD, OLED or for the matter, LED, but the brain is in the silicon, and we believe silicon is a driving force for all those displays..

Okay. Thank you. You gentlemen mentioned avionics has sort of the umbrella for the three programs going -- well, I guess two or an LRIP now. I just want to clarify, are all three in avionics or help me make sure that I have that in my little brain correctly..

You have it incorrectly. So, I said one of them is a scope and one is an avionics. Of the two that are in LRIP now..

Okay. And the third that's going to LRIP expected in the December quarter.

Can you speak to that one, Rich, or no?.

No. We'll discuss that in the fourth quarter..

In due course. Very well. Okay.

Can you clarify how many customers are contributing to research and development revenue, with specific focus on AR and VR?.

Well, almost all our applications are AR/VR..

Yeah. I'm sorry. Let me clarify.

Was specific intention to address the consumer market?.

Well, that's a hard question to answer, Kevin. Because if you think about it -- I mean, everything that we do, particularly in the military, we have an eye towards the consumer. That's the whole idea that you develop in the military, moves to industrial and then ultimately ends up in the consumer..

No, I understand, Rich. I understand. But you -- as I -- I mean, as I try to interpret what you've been saying, you do have particular customers from the consumer side, funding development.

And I was just wondering, how many of those customers you had?.

It's a very good question. Maybe we could step back. It's very difficult to answer, too. But not going to answer it by, answer in this way. As you all know, there are companies who make Google Glass, and in fact, we are a supplier of Google Glass. It could be a consumer. In fact, it was a consumer, if they turn to enterprise.

I maybe go back to consumer again. In the case of Microsoft HoloLens, it was the consumer, they go to defense and maybe go back to enterprise again. So, it's very high. I think these -- Rich is right. All our customers kind of moving from A to B to C, C to back to B to A again.

So, we are having quite a few customers supporting us for applications which eventually could be consumer and maybe its consumer game, but at the beginning, maybe they will go to enterprise. So, we have a lot of -- we have a very active consumer support right now, and we're very glad that they support us..

Okay. One more question. I'll turn the floor over. I apologize, gentlemen, but thank you so much for indulging me. What's the view on the ATM? Understand -- if I understood -- if I understand correctly, you did sell 600,000 shares already this quarter.

I'm just wondering what's the cash balance you're targeting and how you think we should think about that?.

We're not really going to disclose our capital raising plans on the phone..

Okay. Thank you, gentlemen. I appreciate it..

Thank you, Kevin..

[Operator Instructions] We will now take our next question. It comes from Jeff Bernstein of Cowen. Please go ahead..

Yeah. Hi, guys. Just a couple of quick questions. I know you guys have a JV with Lenovo. Not sure exactly what's come out of that, but they've started to sort of pre-advertise something called the ThinkReality A3.

And I'm wondering if that's under that program or if that's something else with a different vendor?.

There's a different program. We are working with Lenovo NV, which is a joint venture of Lenovo with several other companies in China. The one you mentioned is actually came from Lenovo parent..

Gotcha. Okay. And then, there was strength in the industrial segment.

Can you just differentiate for us, was that from the 3D machine vision side, the fourth dimension LCoS piece? Or was that RealWear?.

Yeah. It was maturity was the FDD..

Yeah. The 3D metrology, which is you're right, the FDD, that business as -- well, we have been working with the last four, five years is really taking off right now. The industry now recognize maybe because of pandemic or not that many of the circuit boards, which are always 2D.

Now moving to 3D, much higher packaging densities and Sina and 3D metrology is perfect in the manufacturing sector for 3D analysis of circuit boards. So that business is really taking off. And we're very excited about it. I think it's going to continue as all the factories start converting. We have about 40% market share.

Our other competitors is TI, TI using DLP. They also own about 40% market share..

That’s great. Thank you..

Our next question comes from Craig Rose of Axiom Asset Management..

Hello, John..

Hi, Craig..

Can you help us understand -- could you help us understand -- well, we know RealWear and SOLOS are under your umbrella anymore.

But could you explain how we benefit from their success? And maybe you could tell us your perception of RealWear's market share maybe in the marketplace?.

royalties, equities and our components. And RealWear doing very well. As you well know, I will say they are really for enterprise world for headsets, I would say they're worth leading now, and we are growing with them. So, we're very happy with that. We're going to have three ways to make our return of technology, we license in large to them.

The second case is SOLOS the same way. SOLOS, again, we license and transfer the technology to them. The product is coming out, they came out once Version 1 last year during the pandemic, and they saw out the first round. So the second round of the product coming out, in fact, in August this year, this month.

So, again, we have equity there, we have royalty there. And so, it's very good. And then we have a third one, which we just announced about six months ago where we are designing and helping them do a headset for surgery, right? It's a company in San Diego, and that company is actually starting to do pretty well.

They're co-funded by a very big medical device company. And so -- and I think this particular strategy will continue. I think we will have more those very interesting event, because what the people want is not just wanting our optical modules, they actually learned that we have so much know how building headsets for them, for special use.

And that's what we do. We get equities, get products, get royalties. And I think this is another segment of our business strategy, which is not well understood. I think this is going to be a very lucrative and successful strategy..

Thank you, John..

It appears we have no further questions at this time. I'd like to turn the call back to John Fan for any additional comments or closing remarks..

Well, thank you for joining us this quarter, and we look forward to see you in the next quarter. Thank you..

This concludes today's call. Thank you for your participation. You may now disconnect..