Q2 2019 Earnings Call
Greetings and welcome to cope in second quarter 2019 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Rich Snyder Chief Financial Officer.
Welcome everyone and thank you for joining us this morning.
John will begin today's call, we'll discuss our strategy technology and markets.
I will go through the second quarter results at a high level.
John we're prepared remarks, and they'll be happy to take your questions.
I would like to remind everyone that during today's call taking place on Thursday August 18 2019.
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 materially differ differ.
Most 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 report annual report on Form 10-K .
And other documents filed.
[noise], the security 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 .
Thank you Richard.
Good morning.
I would like to begin by giving you a brief summary of the strategic and a corporation changes we have undertaken.
And because they can partner up your schools.
We would then expand on each of these topics.
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Over the past month.
The management team working closely with our board of directors.
Has taken a very thoughtful approach in analyzing and evaluating every aspect of our business.
With that technology.
Expertise.
Session leadership.
And competitive landscape.
As well as the maturity of the relevant.
A RMB our at the market.
Our analysis concern.
The coatings Grace assets is our ability to develop innovative technology.
With a superior engineering capabilities.
Deterrence innovations into high quality component products.
We have used this innovation engineering skill over the past few years in developing a vast concept wearable systems.
For both enterprise and consumer markets.
Leveraging these conferences, we wait unit uniquely position.
To understand the needs of the market.
This has led to the development of industry, leading microdisplays.
Such as our product, which is now included recently in a new Google glass.
I cannot you also help accelerate the growth the enterprise market, which we believe is now the fastest growing application for air.
Much of this momentum has come through real where.
In early.
Coping as customer.
Which is recognized as one of the leaders in the emerging markets.
In fact.
Copies early generation Golden I technology was key to real with precision.
As we licensed Golden I technology.
Two real where for an equity position.
And ongoing royalty stream.
As well as for component sales.
This model works so well.
We have long, we'll look for to replicate this.
One of the strangest steps put in place this quarter due to resolve our goal to repeat outflow says we're real wet.
Allow we're reducing our cost structure, while strengthening our positioning in microdisplay.
Our strategy and focused mission.
Is to become the leading.
Micro display component and IP company.
Following the very successful examples of great semiconductor IC companies.
Let me outline four key part of our strategy.
First.
Our focus will be on our core LCD display module and subsystem products.
For military.
Enterprise and public safety customers.
As was developing our lightning OLED microdisplay products.
Hi unique product portfolio.
Was specifically developed to address the required to admit requirements of the military enterprise segment.
As well as also fulfilling the demand for the emerging consumer applications for a Armenia.
Second.
We have entered an agreement.
We will add to commercialize our corridor infinity product.
Also.
We anticipate reaching and.
Agreement shortly there were and our direct participation in the consumer system.
Good.
We have streamlined operational elements of our court this display business.
We corresponding reductions in expenses.
Finally.
With all these changes outlined including ice bowl, especially solos transaction by the end of quarter three.
We anticipate reducing our total company payroll expenses.
Hi, Bob.
30%.
And the eliminate significant product development costs.
Clearly the Topia was still benefit.
For our prior investments.
In the wearable system technology and products.
As we focus more tightly our core microchip space business.
Let's look at each of the elements that play any more detail.
Hi, LCD business currently serve many military enterprise and consumer.
Customers.
Which designed.
Components into their finished products.
Our military bases come hi.
Our both display component.
And what we call H.L.A. or higher level assemblies.
Which includes sophisticated electronics and Ruggedized highway design elements.
Hey, Joe Hey, provide significant value to our limited military customers.
As well as some of our enterprise customers.
Currently our military revenues grew fitness reflect.
Investment in key military programs, such as F Devry as high.
And F 35 joint strike fighter.
We expect revenue foreign military programs to continue increasing.
In addition.
We're making excellent progress in developing programs such as the SWS.
Crew served.
And on the vehicle.
In the Amtrust Temprite the area, we're seeing good growth farm equity space.
We have long discussed.
The enterprise market for Aer is developing faster than to consume like.
Which is reflected in our success.
With partners such as real Whit.
We will cells to fortune 500 companies across many industries.
Including Pepsi Cola.
George and joins Georgia Pacific Cisco, Hewlett back and Colgate.
Your name on the field.
Of course, we have to talk about our success Google glass.
Which is if we're just applying the echo has you many apps enterprise applications.
The comp similar applications for a our high however.
It has been slow to develop.
But just recently, we've seen some series of announcements.
In addition to our own cycling activities.
As solutions.
Yeah as it is but they are not just spade juicy, the swimming cargoes and motorcycle helmets.
For just a few examples.
Coping dominate this area of the market for Microdisplays.
We continue to invest in development on Lightning Micronet technology.
Well it has unique capabilities.
We believe would meet the needs of customers.
ACOG across a range of market applications.
Military enterprising consumers.
As Weve described previously.
We have a unique fabulous business model with the on net.
Which gives us flexibility and supplies and requires less working capital.
Why enabling us to deliver highly sophisticated olive displayed with key performance advantages.
You see a way of Intel to give out of a conscious customers.
While coping is really the only micro display company into wells the office three different types of display technologies.
Transmissive LCD.
Reflective LCD.
And on that Michael just base.
This is a unique competitive advantage.
As that customer can work with us no matter what specific display they need for the application that product.
As I mentioned earlier.
Our mission is to beat the macro dibacco display provider to the well.
Thank God and commercialize goldeneye infinity and solos.
We have executed transaction for our go to infinity product designs.
And technology were real wet.
With this assessing enterprise they are.
They have disputes in developing products with Golden eye Infinity technology.
And the infrastructure and relationships in place to maximize the distribution and drive the adoption of the product.
In the most recent transaction.
Coburn receive.
3.5 million.
We then use the tools have millions to investing real where series B equity.
Similar to our first agreement with them.
Copel will sell displays for them for their systems.
And receive a royalty for each unit sold.
I spent days he is that.
Coping with benefit.
As real well.
And ramps their sales.
As well as for any increase in value of real were due to the equity position.
Real with both most recent series B equity offering.
He is a good indication.
Of the strength of the company.
Jordan coping employees.
Connected to go that high.
Joined three aware.
Which also reduce staff will reduce our cost structure.
We have also engage in negotiation to spin out solos.
Along with our Whisper technology.
To a group of employees and outside investors.
If the transaction is completed.
With respect to his received equity.
Right.
Either new enrollees in the new company.
In exchange for the constantly intellectual property.
Inventory equipment.
In addition.
Copious better maintain the right.
To utilize.
Andy subsidy asset license.
The current Whisper audio audio technology.
As well as any future enhancements for defense and enterprise applications.
We anticipate this transaction.
We're close by the end of the quarter this year.
We did anticipate transactions.
We spent to eliminate all spending all solos.
And with the technology development.
We believe the focus.
And flexibility available to a new company.
Allow me to monetize the growth of consummate a our Alco eyeglasses.
Similar.
We should emphasize here.
Similar to real Weird case.
We will be providing supplying microdisplay to your company.
To turn into more operational issues.
During quarter two revenue.
Well were not online meeting, which includes 3.5 million in proceeds for commercializing.
Go to our Infinity.
During the quarter Ross and Dallas.
Google is that Q1 enterprise customer.
As we have heard from elsewhere.
Well also be please.
Coping, it's a kind of display for Google glass too.
As you well know we have been asked to be supplying to Google has one.
In Q2, the enterprise market was a true.
As a key contributor to our results.
And we will continue to drive growth in the second habits, yes.
Our military business continued to develop in line with the plan.
The F 35 program, it's been consistent.
As demand for the planned over the plane continue this thing globally.
We are confident.
This is a significant revenue opportunity for us long term.
We currently receive I need a purchase order for the past couple of years.
Now we have currently do you have orders of both F 35, and F debris I am I.
Which would go through the middle of 2000 and training.
On the development side, both FWS C S.
And I'm a vehicle program continuing to be on schedule.
He shot.
Working with military takes a long term commitment.
And our partnership they have established we U.S. military for the last 30 330 540 years is there may in paulding assets.
Hey will continue to drive our growth.
I call that as I mentioned.
We'll beat the calming, Michael just space of choice.
The many AR and VR applications.
We are now.
The leading Michael on it.
Michael audit companies in the World.
We currently have two development contracts.
For their advanced micro is Michael on the display.
And we'll continue to engage aggressively.
Additional customers.
For other opportunities.
To summarize.
This strategy true changes accomplish a number above.
Yep.
This allows us to monetize the higher and you Vasily.
IP and product design.
Hi, reducing operating and maintenance costs.
Panel with companies that would drive the adoptions.
We are allowing us to benefit of growth in the industry through component sales.
Royalties lie piece.
Equity position in those target physicians.
Also significantly reduce our cost structure.
Allowing us to focus time.
And resources.
Paul Strensiq Microdisplay.
With us throughout your strategic realignment.
Coping as a streamlined.
Simplified company.
Laser focused.
Our position as a leading micro display supplier.
'cause companies Booties, a next generation after your I pod.
We are excited by the opportunities ahead and greatly appreciate your royalty and support for our next chapter the journey.
Now rich can provide additional details.
And then I will take your questions.
Thank you John .
For the quarter total revenues for the second quarter of 2019 were 9.1 million compared with 5.9 million for the second quarter of 2000.
Hey, Pete.
And the second quarter of 2019, we license our goal 950, IP to real where for 3.5 million.
Under the agreement we received future royalties based on sales of products and we will sell them display components.
Cost of goods sold for the second quarter, 2019 was 5.2 million or 118% or product revenues compared with $3.5 million or 78%.
For the first quarter last year included in cost of product revenues for Q2, 2019 is a 1.2 million write off of excess inventory.
R&D expenses in the second quarter of 2019, with 3.3 million compared with 4.5 million in the second quarter 2018, reflecting some of the expense reductions John previously discussed.
Yes, you know expenses were $5.4 million in the second quarter of 2019 compared to 6.9 in the second quarter of 2018.
Yes gene a decrease for the three months ended 2019 as compared to three months ended June 2018, primarily due to a decrease in compensation expenses, including stock based compensation amortization of intangible assets marketing expenses.
Including product promotion and the accretion of endless earn out.
All which were partially offset by an increase in legal expenses.
As mentioned in our press release, we made certain expense reductions anticipate further reductions if we can complete the solos transaction.
To give you a sense of the amount of direct solos whispered Goldeneye Infinity expenses included.
For the six month period ended June 29, and the fiscal year ended December 29, 2018 were approximately $4.4 million and $9 million respectively.
Other income expense was approximately 627000 for the second quarter of 2019.
Compared with an expense of approximately 52000 for the second quarter 2018.
During the three months ended June 29 2000.
19, and June Thirtyth 2018, we recorded $200000 of foreign currency losses.
In the second quarter of 2019, we recorded a gain on our rear wheel investment of 768000.
Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $4.3 million or five cents per share.
Compared with a net loss of $9.2 million or 13 cents per share in the second quarter of 18.
Second quarter amounts for depreciation stock compensation expense are attached in the table to the Q2 press release.
The amounts discussed above are based on current estimates and listeners to review our form should review our Form 10-Q for the first quarter or the second quarter of 2019.
For any possible additional disclosures.
And with that we'll take questions operator.
At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone might indicate your line is in the question queue. You May Press Star two if you would like to move your questions on the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
One moment, please while we pull for questions.
Our first question comes from the line of Glenn Mattson with Ladenburg Thalmann. Please proceed with your question.
Hi, guys. Thanks for taking my question lot going on obviously for you guys in the quarter.
Curious, we haven't heard much there's been a lot of publicity from Google on the glass to maybe you can give us some feedback on how you guys think it's doing in the marketplace and I think last quarter you said.
That you received an order from Google glass and that he thought another one would be forthcoming relatively shortly so perhaps you could update us on whether or not that came through or if you still expect that in the short run.
So Glenn you really have to talk to Google about you know their perception of the success of the product to the market, we don't really talk about our customers.
Individual products and we continue to ship to Google.
Okay.
Thanks, and then <unk> question on this a deal with a real where on the on the Infinity product.
As far as eat how how long to market before they release of product there and ends as far as you know getting display revenue in royalties and whatnot is there a lot of development still for on their side or is it something else they'll turn.
Over pretty quickly.
Uh huh.
The question is about your Feeney Guggenheim Your city now costs are.
The introduction of the proud of with the pets are the real schedule or of course with Oh, we see a lot of activities on their part and we're seeing growing with time and find them now.
Oh, but their overall product Tonight.
So.
But I think you'd have to talk to real weird directly for their product launch yeah, I think they put out a press release. Shortly after we did I think they would say so.
Again this is really a.
Situation belongs to them you know.
Okay and then last for me is just.
As far as like what your guidance was prior as far as the gross in unit volume and things like that we're we're.
Goldeneye Infinity, and so that was part of that.
Calculation it is.
<unk>, <unk>, <unk> or not and could you give us some sort of a.
Feedback on how you're feeling about that former.
Guidance as far as unit growth this year.
Well, we think overall this year will grow about 60% a unit volume based on current estimates Oh, the better part or 6% growth is very good and on top of that.
It's been more favorable or the sales that we've been making are two more or what we call value added customers as opposed to straight display sales.
So a good mix has been very favorable along with good growth.
Okay. Thanks, I'll jump back in the queue.
Our next question comes from the line of Matthew Galinko with National Securities. Please proceed with your question.
Hi, good morning, Thanks for taking my questions.
You mentioned two OLED development contracts.
Can you say whether those are.
Hi, military or enterprise or they are perfect can talk about that and maybe if.
I'd say similar timelines to.
Military program.
Oh, sorry, I I try to I think I just had a question on the all the contracts we have.
I would too companies I'd relate to their day to day out consumer reading calmly she'll be data is that the question.
Yeah.
These two programs our consular related.
No it will be late you accomplish overnight.
Okay and do you have a sense of what the timeline is on the development is that you know a multi year kind of set up or is it something that might be you complete your work on it in the next you know by year end, let's say.
Ah day anticipation is they will be finishing up by you analysts early next year.
Got it.
All right and then just a couple days, it's all probably in mind. It is all product Okay, Mike Yeah.
Got it and I mean is there a lot of heavy lifting that you need to do to sort of get the product a in shape for.
For those products or are you pretty much have they're technically.
Yeah, we have been engaging a contract by year end is that.
It will be the most advanced display for both a and b.
Got it okay.
I guess just asking it another way is there anything you know dependent on you to to get that out the door or is it purely you know the customers' timeline at this point to start shipping units.
It isn't mountable equation staff, but Uh huh.
I.
Yes, I care, we feel that these displays whack blackaby Vicky Cody.
Not just these two customers that maybe many so.
Got it all right and just a quick clean up on the math here.
Did you say you had a a inventory write off in Q2 did I hear that correctly.
Yes 1.2 million.
Okay excellent and then you also had realized gain on real where this quarter as well.
That's correct.
768000.
Okay, and then last one from me before I jump back in the queue. So you've talked about about a 30% reduction.
Taking sort of everything into account.
Can you kind of share what the.
Hey, that's burning from kind of the over 2018, opex number or how what should we be framing that again.
Well for us.
I try to give you some direction there and it's very hard to predict what future savings would have been because their cost. It never were incurred so that's why I try to give you. The 9 million for last year, just to give you a sense of magnitude.
Right, but but I think you also executed some or getting some.
Sort of core cost reductions, but it sounded like so I mean, so for the all in number.
Hi, I'm, just trying to get a sense of you know if we take kind of a.
Q2, Opex number ones that look like in a you know in Q4.
So it's so the 9 million is direct program cost and.
I don't have a go or an estimate that I could reasonably give you that obviously certain overhead costs from corporate are going to go down certain insurance costs. So all that.
Certain fringe benefits will go down.
There was a lot of subjectivity in using that in coming up with that type of number and so I. Just we went with the hard costs. So we expect additional savings. In addition to the nine but I honestly couldn't come up with a number that I thought.
It was possible for lack of a better term.
Fair enough. Thank you.
Hi, Sarah I Wonder if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Patrick Metcalf with Newbridge. Please proceed with your question.
Good morning, guys.
Hi, Patrick.
Well My question. My first question would be what percent of real where does coping own posted 2.5 million dollar investment.
Or less than 10%.
Less than <unk>.
Okay, and what is the royalty rate you get some.
We'll we'll per device.
Well, we couldn't disclose that yeah. We're obviously, we negotiate with other customers. So we would never.
At that rate and okay, and it was the licensing deal with Golden I don't see any exclusive.
Or is it open to licensed to others.
So for certain fields, it's exclusive.
<unk>, Okay. So I guess the goal here is to get real where as profitable as fast as possible.
I deal with.
As quickly as possible.
Yes talk to real where.
Okay, and then you guys haven't else.
VR headset.
No you designed maybe a year and a half ago.
Is that design part of open well that's designed to be part of so loss now I'm going forward.
Yeah, Yeah, [laughter] stocking up ill said Oh, Okay, no. It's all part of the fellow.
It's not.
No I don't I don't think so no.
Okay and then.
Got you you're breaking up.
Two important pieces of the gross puzzle so loss on whisper.
And you're not giving us on deep panel on the valuation of them.
For the investors that are actually participating in that.
Would these be large companies that are participating large tech companies or would it be launch a bunch of capital or small time players.
We're still negotiating with multiple parties right now so we're not prepared to talk about right now.
Can you give us a little bit of.
Flavor to it.
I know I honestly its being negotiated a there are a number of people who have expressed interest how it will shake out.
We hope to know shortly.
Okay, great. So we'll see announcements on that those two situations when they come to closure.
Well I think it's I think it's important to understand we still retain rights to whisper and future improvements for the military industrial applications.
Okay and then my last question is regarding RBC is calling for 31 million enterprise they aren't headsets by 2023.
Recently, you guys will come out and said you had 90% market share in the enterprise Aer.
If you can look out a year or 12 months from now are you seeing new players coming on that you're not participating with are you seeing new players that you will be participating with can you give us some transparency on the whole enterprise market what kind of plays you've seen entering what do you think you've done as you know stand at the end of the day you percentage wise, maybe where do we go down to 50% to go down too.
30%, just some sort of.
30000 seat type of view on the industry would be great [laughter]. It's a very good question because they are black is getting very hot right now.
There are many many different and new entrants or people want to get into.
So we cannot look at the number of people entering the field, we have to look at the number of people the companies who had to go into production and selling to hear it.
Like Google Real where do you think those guys are selling units and therefore, how brackish it pays off if he was going to production.
Okay. So do you see in 12 months do you see you holding firm with a strong double digit percentage the percentage of the market.
That's why we have a laser focus now.
Okay and you should just do you see yourselves getting <unk>.
I guess my question is does John do you have more design wins for the enterprise, but you're not showcasing.
To the public yet.
You guys sitting on you know.
How many design wins are you sitting on for enterprise. They are the type of devices, whether they are low and high end or is this all you had the goldeneye infinity goldeneye.
I don't even know exactly how I came out with a guy without revealing attic company.
We're working with multiple companies at this point, you're right very very busy right now.
Well, obviously I think we I see also I a real engagement on my call on that.
Dan I love her.
Expectations are micro Onyx whoopee.
A display of choice for many applications. So.
Within them away my color on it so.
Hey, good to talk to us and work with them now.
Okay, and then with micro led.
To conclude on those.
Oh, you're already running well.
Go ahead I'm sorry.
Okay. Go ahead is there any way when does the confidence in the business of spinning off some assets.
Becoming what looks to be a holding company.
Is there any way you could maybe.
Work a deal out where you get a big upfront payment on a royalty stream on the micro level or do you plan on keeping the model the way it is.
Hi, good advocating a wish a spin in our library become a holding company [laughter] Oh, yes, I do actually helping us the door formalizing crystallize that strategy I think the Micrel is very interesting right now it is still growing in emerging businesses. It is there a component business.
And is divided into three parts one use of military pod.
And when you say industrial commercial pod.
As the safety Pos and then finally to called Silverpop.
So.
Yeah, well, maybe April I, it depends on the maturity and they'll get pound opportunities.
We may or we may I mean, I'd be opportunistic to slice the salami.
Okay, well I, just think that since you're doing business with Tommy maybe put the money upfront and we think that the world prepayment down the line.
Yeah, I think it is they say well we would like to beat the company.
That's what I'm very much like some of the semiconductor companies.
I did get royalty stream.
Ah and sell components or at least sell technology component technologies.
And in this case also get some equity stake if they trade show Meanwhile will minimize.
So with that capital intensive buckets element intensive costs, which here we are.
Oh, which we like to minimize so I think the strategy. It is it is a coupon.
Okay and lastly, when do you see what we did we see any revenue from the OEM or this past quarter and when do you see revenue come in any kind of I'm going to deal with.
Uh huh.
I can't I would not be able to answer your question, but.
I relationship would be with a very strong.
Okay. Thank you so much.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to management for closing remarks.
Well, thank you very much for joining us this morning and.
I hope to talk to you again, the next time I go.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.