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Edited Transcript of KOPN earnings conference call or presentation 7-May-19 12:30pm GMT

Q1 2019 Kopin Corp Earnings Call

TAUNTON May 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Kopin Corp earnings conference call or presentation Tuesday, May 7, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chin Chiang Fan

Kopin Corporation - Co-Founder, Chairman, CEO & President

* Richard A. Sneider

Kopin Corporation - Treasurer & CFO

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Conference Call Participants

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* Glenn George Mattson

Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research

* Jeffrey M. K. Bernstein

Cowen Inc. - VP

* Matthew Evan Galinko

National Securities Corporation, Research Division - Senior Research Analyst

* Patrick Metcalf

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Presentation

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Operator [1]

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Greetings, and welcome to Kopin First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rich Sneider, Chief Financial Officer. Thank you, Mr. Sneider. You may begin.

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Richard A. Sneider, Kopin Corporation - Treasurer & CFO [2]

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Thank you, operator. Welcome everyone, and thank you for joining us this morning. John will begin today's call with a discussion of our strategy, technology, and markets. I'll go through the first quarter 2019 results at a high level. John will conclude our prepared remarks and then we'll be happy to take your questions.

I would like to remind everyone that during today's call taking place on Tuesday, May 7, 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 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 it over to John.

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [3]

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Thank you, Richard. Thanks -- thank you for joining us this morning to review our first quarter results.

It has been a good start to 2019. Our sales to enterprise customers were solid and we are pleased with how the year is shaping up in the segment. As the momentum reinforces, the enterprises are fully embracing the value of augmented reality, AR. A very important development for Kopin is that we have received a large follow-up order from the Tier 1 company we mentioned in last quarter, which was an early mover for AR.

You may remember that we have shipped 5,000 displays to that company in 2018. And we have been waiting for them to announce their next generation AR smart glasses targeted to enterprises. While this announcement is still pending, we received an additional, significantly larger purchase order and we just began shipping their order.

Companies like Boeing, GE, DHL, and Volkswagen all see the value of headsets provided to their customers other than workers in places like factories, plants and warehouses. As their sole display supplier, we look for this key customer to help drive our enterprise business.

But their salary growth goes beyond this customer as well receiving increasing orders and forecasts for many of our other enterprise partners. AR's ability to boost productivity, reduce cost, and improve working conditions is driving business for Kopin such as -- Kopin partner such as RealWear and Vuzix. Because there is increasing demand forecasts, we expect to triple the number of displays we ship to enterprise customer in 2019.

We are optimistic that industry trends will allow the consumer market to match the enterprise market in the coming years. As we have previously discussed, the VR market could grow rapidly with 5G. Micro-OLED displays will be the display of choice for VR because of their superior performance. For VR and AR, micro-OLED display will also be very, very desirable if these OLED displays can achieve high brightness, very high brightness for the current 1,000 nits to about 400 -- 4,000 to 5,000 nits. This increase will enable innovative optical designs. For example, the VR headset can be made much thinner. Recently, significant new technical approaches have been identified. And we believe such a large increase could be obtained in production quantities sometime next year. In fact, even higher brightness, up to 8,000 to 10,000 nits may also eventually be possible in micro-OLED displays.

Today, one of the major challenges for micro-OLED display has been the lack of OLED deposition factories for volume production. This will change since there is a $150 million manufacturing facility being built by our joint venture partner, BOE, is starting to play, and their initial results are encouraging. We believe that BOE's facility and other factories, which are also coming online, will help drive interest in developing consumer applications and systems by creating a cost-effective supply chain that can take advantage of the promise of 5G.

In my recent trips to China and Asia, I saw increased investments in AR/VR. We're optimistic, this view, especially around consumer AR/VR will spread to the U.S. in the coming years. Our own consumer headset, SOLOS smart glasses, was perhaps a bit ahead of the schedule and ahead of the market. While we continue to work to increase the distribution channel, we wrote down some of the inventories in Q1. Specifically, the older generation products.

Our virtual business again made strides in the first quarter primarily due to shipments of displays embedded in the helmets attached to the F-35 fighter jet. I know I have discussed the F-35 program various times before. But it's not only a key element of our current military business, it is a good example of a successful military program that we have developed. We move through the early design cycles to meet the very demanding specifications for F-35. Then we work through the low-rate initial production stage. We know we're onto volume production where we are today. The global demand for the F-35 fighter jet will keep on increasing. And we look at this program as one of our core military business and we expect to be shipping into this program for years to come.

We are working through the same process, with the Family of Weapon Sight program. As discussed, the FWS-I program is now in production and shipping. The FWS Crew, sea crew program in the mid-stage of development and we aspire to move into production in 2020.

Our newest program is developing display systems for armored vehicle. This is a brand-new design win and we will reach full production in 18 months or so. As we continue to pursue other military programs, our experience in working with the Defense Department is invaluable as it benefit Kopin -- as the benefit -- as the defense budgets increase.

In addition, our company is now experienced with defense system companies, our excellent track record with them is also critical factor in our leadership in this industry. For example, in 2 consecutive years, we received top platinum award from Collins Aerospace who makes the F-35 helmets, which are now -- which does this higher award, the platinum award, only award to less than 2% of their suppliers. Our consistent delivery performance provides confidence to our customers looking for reliable supplier of innovative and ruggedized display products.

So while we have still a military footprint embedded from the acceleration of enterprise market, especially with Kopin's position as the leading supplier of displays to this market, we are realistic that this volume need to match the current state of the market.

In first quarter, we commenced a strategic realignment of the company. This included special review all our operations and to consolidate the programs and reduce costs wherever possible. After years of development and investments, most of our programs are now ready for commercialization. We're being very thoughtful in delivering as we decide which programs will move to monetization.

In the first quarter, we took some financial charges as part of this strategy. We continue to review elements of our operating structure over the coming months, and expect to make additional steps, including further reductions to our expense structure through our DCO. We will also raise approximately a million dollars debt in Q, pursuing our balance sheet and provide additional financial stability as we undertake this review of our business.

So in summary, we're off to a very good start of the year. We're growing our core business by taking careful steps in reviewing our operations, and monetizing our technology and products to successfully position Kopin for the long term.

Now I'll turn the call to Rich.

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Richard A. Sneider, Kopin Corporation - Treasurer & CFO [4]

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Thank you, John.

For the quarter, total revenues for the first quarter of 2019 were $5.5 million compared with $5.7 million for the first quarter of 2018. While revenues for Q1 were essentially flat, the makeup of revenue changed year-over-year. In the first quarter of 2018, our subsidiary, NVIS, contributed approximately $1 million of revenues for programs that were ending. In the first quarter of 2019, industrial wearable revenues and military R&D revenues increased approximately $1 million. I would also remind listeners that under ASC 606 revenue standards, revenue recognition for our military programs, specifically FWS and F-35, is not tied to shipments but a model that includes the levels of width and finished goods inventories.

Cost of goods sold for the first quarter of 2019 was $5.9 million or 127% of product revenue compared with $4.1 million or 81% for the first quarter of last year. Including cost of product revenues for Q1 2019 is $1.2 million of write-off of excess inventory. Included in the write-off, as John noted, was a charge for older versions of SOLOS.

R&D expense in the first quarter of 2019 was $5 million compared with $4.5 million in the first quarter of '18 -- 2018. Included in R&D for the quarter ended March 30, 2019 is approximately $500,000 of material associated with development programs, which are being curtailed as part of the program John discussed to consolidate programs.

SG&A expenses were $6.3 million in the first quarter of 2019 compared to $6.9 million in the first quarter of '18 primarily due to a decrease in compensation expense including stock-based compensation and amortization of intangible assets.

Other income expense of approximately $300,000 in the first quarter of 2019 compared with $4.3 million for the first quarter of 2018. For the three months ended March 30, 2019, and March 31, 2018, we recorded about $200,000 foreign currency gains.

Other income for the period in 2018 reflects a gain of $2.9 million from the transfer of intellectual property and exchange equity interest and investment, along with $1 million of insurance proceeds. Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $11.3 million or $0.15 per share, compared with a net loss of $5.5 million or $0.08 per share for the first quarter of 2018.

First quarter amounts for depreciation and stock compensation expense are attached to a table to the Q1 press release. As previously announced during the quarter, we completed sale of approximately 8 million shares of our stock for approximately $8.8 million of gross proceeds. Our weighted average shares for the balance of the year will be approximately 83 million. In addition, in Q1 2019, we adopted ASC 842, which is the new lease recognition standard.

It resulted in leased assets and liabilities being put on the balance sheet and there was a de minimis P&L impact. The amounts discussed above are based on our current estimates and listeners should review our Form 10-K for the first quarter of 2019 for any possible changes or additional disclosures.

And with that, we'll take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Glenn Mattson with Ladenburg Thalmann.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [2]

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Curious, John, good news on the follow-on order from the Tier 1. I guess perhaps we would have thought there might have been an announcement from that Tier 1 at this point as far as making an announcement on the product. So I just wondered, do you have any sense of timing of when they're going to release this, and just kind of can you give us a better idea of the order flow as it progresses throughout the year?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [3]

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Yes. I mean we obviously also anxious for the announcement. We do not know exactly why the announcement has been delayed. Certainly, it does not impact us. We certainly got -- this is a very large -- a very significantly large order, and we actually not expect another order coming in. So it is not impacting us. I still believe the announcement will be quite imminent. So we just hold our horses and wait.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [4]

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Okay. And will it be a steady kind of revenue rec over the course of the year on these orders? Or is there kind of a back-half surge or how does that play out in your model?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [5]

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Well, I think -- I obviously cannot really describe in detail, but it will be a more steady order, so it is a real production.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [6]

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Okay. Great. And perhaps...

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [7]

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I may be able to make a comment. I think certainly, our customer is very optimistic by their response from the customers.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [8]

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Okay. Great. And Rich, could you give us an idea of the spend reduction as it plays out the rest of the year given the program you put in place this quarter?

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Richard A. Sneider, Kopin Corporation - Treasurer & CFO [9]

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So we've been running -- last year, we ran about -- OpEx was between $11 million and $12 million per quarter. And we would expect that to continue to drop each quarter throughout the rest of the year.

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Operator [10]

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Our next question comes from the line of Jeff Bernstein with Cowen.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [11]

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So just on the AR orders, I think you had talked about 100,000 units this year. Are we still on track for that? Is there upside to that, downside to that?

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Richard A. Sneider, Kopin Corporation - Treasurer & CFO [12]

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So right now -- as John said in his prepared remarks, last year, we did around 30,000 units and we expect that to triple so that's the 90,000, 100,000 number that you just referenced. And so as John said in his prepared remarks, the forecast from our customers have been very bullish. We've seen some of our customers like RealWear had a number of significant announcements with guys like Shell, Colgate-Palmolive, et cetera. And as John just said, the Tier 1 customer has been sampling their product for a period of time and the response has been very strong. So we are hoping our numbers are conservative.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [13]

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Okay. Great. And the Tier 1 customer, are they currently making an AR unit with 2 of your displays? Or is there more than one model and one has 2 of your displays in it?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [14]

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I think I can only answer it this way, the customer we're talking about using one of our display in each system.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [15]

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Got you. Okay. And then I'm just wondering, the Golden-i Infinity design, has that ever gotten any traction or what are the plans for that?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [16]

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As we've discussed, we're still sampling it and the initial response from some of the customers we are talking to ultimately are very positive. The whole overall enterprise market is getting pretty hard. Everybody not understand the value of the systems to them, so it's no longer curiosity. It is a booming business.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [17]

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Got you. Okay. Great. And then you mentioned you wrote down inventory of old design SOLOS, implying that there is a new design of SOLOS. What's different there, et cetera?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [18]

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Jeff, a very good question. You're so alert. Unfortunately, we cannot reveal the new design, which obviously we're very excited about.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [19]

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Okay. So that's a new product that's coming?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [20]

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Interesting product, yes.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [21]

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Okay. And then I believe on the military side, you guys were engaged with Elbit on like a multi-mission helmet for various aircraft. Any progress there? What can you tell us about that?

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Richard A. Sneider, Kopin Corporation - Treasurer & CFO [22]

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Yes. That's the combat helmet program and we're in development with Elbit, and it's on track as far as we know.

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [23]

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Yes. I think to add, I think we may have already announced with the design wins. But yes, we are doing well with the program right now, yes.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [24]

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Okay. And then lastly, you talked about some new technology to be applied in the OLED space. Did you say you thought that you could be delivering that mid-next year? Or is that mid this year?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [25]

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Next year in production quantities. I think the key matter is how do you keep those very advanced technology into a production kind of readiness. It is a very long way, but we are very optimistic sometime next year those very innovative designs can be put into production.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [26]

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And is that Kopin technology? Or is that like a new material like gallium nitride or something? What's -- give us a little more information on that.

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [27]

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It's something that we will bring into -- I think we will try to bring it to production. So my feeling is like everything else, is we always rely on the previous one. So the technology is actually making a real, rapid improvement right now, so we shall see. A very big part of it, yes. A big part of it, yes.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [28]

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You're a big part of it. Okay. And then lastly, you had talked about a OLED design for a Tier 1 for BOE and how has that progressed?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [29]

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I -- so could you repeat the question, Jeff? I just want to make sure that I got that right.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [30]

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Yes. At a conference recently, you talked about having an OLED design from a Tier 1 to be made at the BOE factory and I just wanted to get an update on that.

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [31]

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Yes. Okay. That was a design. We have a program with a Tier 1 consumer product company and that's going along on track, so there's a lot that can come on. They are -- I will say they are a secretive program, yes.

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Operator [32]

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Our next question comes from the line of Matthew Galinko with National Securities.

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Matthew Evan Galinko, National Securities Corporation, Research Division - Senior Research Analyst [33]

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I guess firstly, is the $0.5 million chunk of R&D expense that relates to curtail program, is that a onetime charge? Or is that something that's going to be recurring at all?

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Richard A. Sneider, Kopin Corporation - Treasurer & CFO [34]

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So the size and the amount is unusual for us. I'm always looking at it as a onetime charge. We are always evaluating programs on a continuous basis and inventory level. And so every quarter, there is some adjustments for obsolete inventory of some sort. But in the R&D sector, for that size, it's not -- a very unusual amount and not something that we would expect to typically reoccur.

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Matthew Evan Galinko, National Securities Corporation, Research Division - Senior Research Analyst [35]

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Okay. Fair enough. On the potential refresh of your consumer product, are there going to be any changes to how you bring the product to market? Or any potential for increased investments in your go-to-market spend on that -- over the course of 2019 as there -- kind of going through this cost realignment process?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [36]

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Yes. I'll make a comment there. I think, Matt, as I said in my remarks earlier, we are looking for all aspect of our business and deciding where we will consolidate our programs and a different commercialization strategy right now. So we're really considering a whole bunch of different strategies. And at this point, I really don't think we can comment any further today.

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Matthew Evan Galinko, National Securities Corporation, Research Division - Senior Research Analyst [37]

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Got it. Okay. Maybe just one more. You highlighted and I think you have in the past, you've talked about 5G as kind of an enabler for VR. Can you talk about that in maybe a little bit more depth? And maybe particularly relating it to, you're talking about bringing kind of OLED volumes of maybe 2020 timeframe to sort of enable that market from an improved supply chain perspective. How does 5G come in and enable it and what do you see the time frame for that?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [38]

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Well, it's a good question, Matt. I think we had a special workshop actually, discussions at the CES meeting a few months ago on 5G. 5G has allowed -- I mean as you know, 5G can go as much as 10x faster than 4G. It really allows mobile, the mobility allows everything that you can do at desktop or kind of a stationary environment will be streaming mobile and that's where we -- the personal wearable becomes very strong. And 5G in some way also can allow you have extremely fast streaming, so all the sports, TV and all the events can be streamed to you at a moment's notice as well as -- as you well know, driverless cars and everything. So they will be creating business that you and I probably cannot dream today. But regardless what it is because it is 5x faster wireless, it is more and more mobile and that's where more and more wearable. So the key matter is what do you really need to do that. I think the wearable case, one key thing is voice is going to be important. And so the display, a small microdisplay is very critical and Kopin is very strong in both.

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Operator [39]

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Our next question comes from the line of Pat Metcalf with Newbridge Securities.

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Patrick Metcalf, [40]

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Okay. So this is the first I heard of a new SOLOS coming out. Is the new SOLOS going to be more specific to the cycling market? Or is it going to be broader to the consumer market? Or to the enterprise market? Can you give us a little detail on how you're going to go about that?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [41]

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We really can't describe too much about it, as the plan is being formulated. It is more tailored toward general consumer market instead of cycles.

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Patrick Metcalf, [42]

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Okay. Great. And then being that you're cutting cost drastically, I would assume that you're going to go to market maybe with a different strategy than you did for the last one.

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [43]

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It is fair to assume that.

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Patrick Metcalf, [44]

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Okay. Great. And then John, I got a chance to see you host the MIT Media Labs in January to show up. And you had a company by the name of Google presenting that actually highlighted customers like Boeing, GE, DHL on the screen. They were the first one to bring out a device. The follow-on order that you received, is it much bigger than the 5,000 units you received in Q3 of last year?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [45]

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Yes.

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Patrick Metcalf, [46]

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Okay. Great. And then I saw this past week or a couple of weeks Qualcomm come out with a PR that they got 10,000 units of RealWear's units, HMT-1 ordered for them. And at that point in time, it just struck me as very odd because when I listen to you guys talk about your Whisper chip technology, you say you win all the bake-offs against Qualcomm, Maxim and others. However, these purchasing managers never get fired going with Qualcomm. So if Qualcomm is supporting RealWear's HMT-1, which I really consider the core competency of the HMT-1 is Whisper because it works at decibels that other technologies -- voice technologies do not work at. To me Qualcomm supporting whisper technology, can you give me some feedback on that?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [47]

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On the Qualcomm mix processors and processors go to HMT-1, so -- and we always use Qualcomm processor in our design. Remember that RealWear licensed our headset and licensed more than just Whisper. They licensed our display module, they licensed the whole design. The whole design of the HMT-1 was our design. We licensed to them. We get royalties on it. So -- and you had the Qualcomm chip inside from day one.

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Patrick Metcalf, [48]

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Well, my point is Whisper is a -- is more of a -- the whisper chip is more of a software type of product than a hardware product. So I'm thinking you had a great relationship with Qualcomm with the HBT design in there in the early 2000 -- 90s. And I'm thinking Qualcomm is looking at the Whisper chip possibly to license that. Is that a possibility that someone like Qualcomm could license Whisper? Or is that far-fetched, like it doesn't match?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [49]

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Well, I think you ask a generic question so far. Is Whisper technology, which is of course technology, you can go into a chip, you can go to a processor, you can be licensed and it could be further developed into other product. Our answer is it's definitely true in all the aspects of it. We're looking at all aspects of it. It is a very wonderful technology. I think people will appreciate more and more as voice become more and more important.

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Patrick Metcalf, [50]

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Okay. Great. And have you made any progress on getting someone to license that? Do you have any list of potential licensees coming forward? Or is this something that's going to be years away?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [51]

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I don't know whether we're patient for years away, but we're obviously working on many aspects of it. So as I said earlier, we're considering a whole bunch of different strategy at this point and I can't comment any -- further comment on this but stay tuned.

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Patrick Metcalf, [52]

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Okay. Well -- and then my last question is surrounding RealWear, okay? I noticed RealWear has applied for about 11 patents, all software-related. Actually more artificial intelligence, AI intended. And I know we have a user interface that we licensed to RealWear. So if they start applying more layers of software on that user interface, like maybe make it a software platform where they can license without other players, okay, even Qualcomm. Do we still get royalties if that was to happen -- a scenario like that was to happen?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [53]

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Well, at that time it really goes to IP now of course, how much the IP is embedded in that previous IP. So that part is we'll leave it to IP lawyers, but suffice to say we have some very fundamental patents.

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Patrick Metcalf, [54]

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Okay. Great. And then lastly, RealWear licenses Golden-i, why not have RealWear licensed SOLOS for the enterprise, very cool design? You can dummy it up, where it could be used in the outdoor type of environment. And then the Golden-i Infinity, why not license that to them as well and help boost our revenues very quickly with less spend. Is that a possibility?

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [55]

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Again, we're starting to -- what we just said, we're looking at all aspects of our strategy at this point, yes.

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Operator [56]

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Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

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Chin Chiang Fan, Kopin Corporation - Co-Founder, Chairman, CEO & President [57]

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Well, thank you for joining us this morning. I also want to remind everybody we have a Annual Meeting coming up on May 21, and hope to see you guys at the meeting as well as please vote for us. Thank you.

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Operator [58]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.