Good day. Welcome to the Kopin Corporation second quarter 2020 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Richard Sneider, Chief Financial Officer. Please go ahead, sir.
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 will go through the second quarter results at a high level, 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, August 4, 2020, we will make 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, are subject to a number of risks and uncertainties that could cause actual results to materially differ 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. With that, I'll turn the call over to John.
Good morning. Thank you for joining us to discuss our second quarter results. Given the continued unprecedented circumstances that we all are currently facing, I want to start by expressing our hope that all of you and your families are staying well and safe. We're very pleased with our Q2 results, both from our operation and technical standpoint. With our solid Q1 momentum continuing into our second quarter, we had very strong revenue growth driven by our defense business, which increased 150% over the prior year. We saw expanding gross margins for improved manufacturing efficiencies. Our cost structure continued and declined significantly as we continue to execute our strategy that we introduced last year. The second quarter also saw the first production shipment of our OLED backplane wafers, an important step as we increase our focus on OLED displays.
We'll also make a very exciting announcement this morning in a separate press release about further technology developments and advancements in OLED. I will discuss that more in a minute. We had a very successful first half of the year, and we look forward for continued momentum into the second half of this year and beyond. Let us look more closely at our defense business. As I have discussed previously, we have commenced production in our two important programs, the F-35 fighter jet program and the FWS-I program. These two programs again drove our defense business and revenue in the last quarter. We also made further progress on a number of other development programs, moving them closer to production, as the scope of some of these programs continue to expand.
It is important to stress our defense programs are actually related to many different areas, including fixed-wing and rotary planes, armor vehicles, and outfitting our soldiers directly. We gain additional leverage for these development dollars as we can use the knowledge in the future industrial and consumer applications. This large portfolio of programs points to significant revenue opportunities, though there's no guarantee all of those programs will reach production phase. We expect three additional programs will reach production by the end of 2021. Kopin should have five defense programs generating production revenues at that time. Shipping the initial production order of our OLED backplane wafers was an important step in our expanding OLED business. We're also pleased to receive a follow-up order. Shortly after last quarter end, we introduced the breakthrough Lightning 2.6K x 2.6K OLED display based on our ColorMax technology.
This technology, this display utilizes what's referred to as a dual-stack OLED, which is really two OLED structures go on top of each other. The two OLEDs were connected in a series. The carriers pass through the dual-stack OLED, which generates photon twice instead of once, like in conventional single-stack OLED. The dual-stack provides, however, a lot more flexibility in the OLED design, in material selection versus a single stack, which can result in a much higher efficiency, brightness, and yet still use low power consumption and has longer lifetime. What is particularly impressive about this dual-stack display is the ratio of nits per amp. Well, let me explain this. Nit is the measure of brightness. Historically, you can achieve very high brightness on it by running a lot of current through the display. The problem was that the high current significantly shortens the life of the display.
In addition, of course, it uses a lot of power. Kopin has developed a unique technology. We call it ColorMax. That allows the Lightning 2.6K x 2.6K display to achieve remarkable color fidelity, greater than 115% RGB brightness from a very low current. The ratio of candela per amp, which is really the index of how good they are, was over six, which is particularly exciting. The press release we issued this morning take the nit discussion to an entirely new level. Our results came in about a month ago. It took us a month to understand and confident it is real. It is hot off the press. The quantum jump has such a far-reaching application for VR/AR that we want to share with you today. Essentially, Kopin has now achieved 7,000 nits with our new Lightning 720p OLED display. Go back to the figure of merit.
The candela per amp has gone up from six at our 2.6K by 2.6K, which at that time was a very impressive number. Now it has gone to 14 in two months. The brightness of dual-stack technology really now addresses the challenging issues around brightness for AR/VR. Since COVID-19 has accelerated interest around AR and VR, this important technology breakthrough could be the turning point. We're still early with this technology development and look forward to sharing more, much more, in the coming months. Finally, I have to thank the Kopin employees who have continued to work throughout this challenging time. Their dedication has made our results possible, and we appreciate all of their efforts to stay safe and healthy. With that, I will turn the call to Rich.
Thank you, John. Turning to our financial results. Product revenues for the second quarter ended June 27th, 2020, were $6.7 million, compared with $4.4 million for the second quarter ended June 29th, 2019, a 50% increase year over year. Bundled research, development, and other revenues were $2.1 million for the second quarter ended June 27th, 2020, compared with $4.7 million for the second quarter ended June 29th, 2019. Included in the $4.7 million of revenues for the second quarter of 2019 was a one-time license fee payment of $3.5 million. Total revenues for Q2 2020 were $8.8 million versus $9.1 million the prior year, with 2019 reflecting the $3.5 million one-time payment. Cost of goods sold for the second quarter of 2020 was $4.8 million, or 72% of product revenue, compared with $5.3 million or 118% for the second quarter of last year.
The significant decrease in cost of product revenues as a % of net product revenues for the year for the three months ended June 27th, 2020, as compared to the three months ended June 29th, 2019, was primarily due to lower material costs, along with improving manufacturing yield efficiencies due to higher sales volumes. Which reduced fixed cost per unit at our U.S. plant. As a reminder, we were commencing production of certain products and we experienced higher than normal scrap for the first three and six months of 2019 as compared to the same periods of 2020. R&D expenses in the second quarter of 2020 were $2.2 million, compared with $3.3 million for the second quarter of 2019.
The lower R&D cost for the second quarter of 2020 as compared to the prior year was a result of IP commercialization strategies put in place in 2019, specifically the licensing of Golden-i Infinity and Solos Smart Glass. SG&A expenses were $2.9 million in the second quarter of 2020 compared to $5.4 million in the second quarter of 2019. The decrease was primarily due to lower compensation expenses including stock-based compensation, bad debt expense, professional fees, information technology expenses, travel, and the accretion of the Nvis contingent consideration. Other income expense was expense of approximately $6,000 in the second quarter of 2020 compared with $627,000 income for the second quarter of 2019. During the three months ended June 27, 2020, we recorded $10,000 of foreign currency gains as compared to $184,000 of foreign currency losses for the three months ended June 29, 2019.
The 3 months ended June 29, 2019 also included a mark-to-market gain on an investment of $768,000. Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $1 million or $0.01 per share, compared with a net loss of $4.3 million or $0.05 per share in the second quarter of 2019. A 77% improvement. Kopin's cash equivalent and marketable securities was approximately $15.3 million at June 27, 2020, as compared to $21.8 million at December 28, 2019. Second quarter amounts for depreciation and stock compensation are included in the Q2 press release. The above amounts discussed are based on current estimates, listeners should review our final Form 10-Q for the second quarter of 2020 for any possible changes or additional disclosures. With that, operator, we'll take questions.
Thank you. If you would like to ask a question, please press star one. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, star one, and we'll take our first question from Glenn Mattson with Ladenburg.
Hi, thanks for taking the question and congrats on the results. A couple, I guess for Rich first. You just mentioned some of the operating highlights, the decrease in cost of goods sold. It sounds like a lot of that was due to efficiencies related to volume. I guess, the gross margin was being impressive, better than what we expected. Is that kind of the run rate we should expect as ballpark going forward for a while here, or just some color there, please?
The current gross margin percentage is a good barometer of the next couple quarters.
Great. On the sale, SG&A expense being lower also, some of that is like you said reduced travel and things, but is that also maybe there's a lower sales expense related to selling to military perhaps, being that that's a bigger portion of the pie right now, or is that also sustainable?
Yeah, we would expect SG&A may bump up a little bit over the next couple of quarters. We do have some litigation, which frankly has been on the back burner as the courts have been closed. Assuming they come back, there's probably going to be some additional legal expenses of $200,000-$300,000 a quarter. Otherwise, it should be relatively consistent.
Okay. Do you have the operating cash burn and CapEx for the quarter or operating cash flow?
Yeah. The burn for the quarter, our cash used in operations was $2.9 million. CapEx was de minimis for the $100,000.
Lastly, on the top line, was there anything in terms of the order flow that would have boosted this quarter? Any pull in on the military side or is this just a function of the programs kicking in?
Well, yeah, I mean, you do see that the contract assets on the balance sheet is up. That's a function of the ASC 606 revenue recognition standard. 2 years ago, units that we would've made, they would've been sitting in finished goods. Today, those are sitting in contract assets, and there's revenue recognized on them. That's really probably the only difference. The other piece, of course, is that we have a significant number of R&D programs going on, and that revenue is also recognized on a percent completion basis. Until we hit a billing milestone, the "unbilled receivable" collects in that contract asset account. That's fairly consistent with what we've been doing for the last 20 years.
Right. On the military side, I missed the quote, was it three programs to reach production by the end of 2020 or 2021? Three new programs.
we'll end 2020 with the two programs in production, and we expect 2021 to end with five programs in production.
Right. Can you give us any, since you're on the call, some sort of order of magnitude about either what that incrementally adds or what the total pie would look like with those five programs running, revenue-wise?
We're not going to give any revenue guidance for 2021 today. These are all very large programs, I can say that, but they have to go through qualification. When and if, during the course of next year they go into production, it will be dependent upon the Army qualifying them. We do feel confident that we'll exit the year with them in production, but exactly when the Army puts it in production is up to them.
Okay, great. Thanks. On the industrial side, whoever wants to answer this would be great, I guess two things. One, the way I think about it, correct me if I'm wrong, is that 2019 was a year when a lot of these head-mounted display headsets were put into various corporations, Honeywell, people like that. Perhaps, they went into the field kind of quickly. In 2020, maybe there's a bit of a digestion period where these companies are just deciding just where they want to put the product, how to most efficiently use it, how to maybe work around some safety and security issues or things like that. Then maybe 2020 becomes a digestion year. In 2021, maybe there's a bit of a bounce back. Is that the right way to think about it for the head-mounted display market?
Yeah, I think that's exactly right. In other revenues for the quarter is $300,000-$400,000 of royalties, and that's consistent with prior years. It tells us that they're selling units, our customers are selling units, but they may be working off of inventory, because as you said, the products were introduced last year, you're really doing a lot of guesswork as to inventory levels. It looks like they are selling through at the end point because they are paying us royalties.
Okay, great. I guess lastly, I don't know if, John, I know you had the new product announcement today, but I guess one of the exciting things about Kopin is that, at some point down the line, when VR or some sort of mixed reality or maybe it's related to sports or general entertainment, when it gets a hold on the consumer side, you guys are stand to benefit. Is this product announcement today one step closer to getting to that point? Just can you give us some outlook or timeframe on when you think that kind of market could come alive for you guys?
Thank you for asking the question. I think it's important to understand in the world of AR/VR, which of course is actually getting very strong interest because of the pandemic, the biggest problem facing everybody is really the brightness and the efficiency, power efficiency of the display. We've been focusing on for the last few years, how to get very high brightness with very low current. What happened today, this announcement, in fact, what happened the last nine months is, the log jam seems to be broken, and we actually can very rapidly improvement. There'll be a lot more discussion about it because what happened today needs a lot of explanation in physics, because it's not intuitive, obvious. Took us a couple of months to understand it.
I think we will explain to the world what really happened, and I think it could be the turning point now.
Okay, great. That's it for me. Thanks, guys.
Next, I'll move to Jeff Bernstein with Cowen.
Hi, nice work, guys. A couple of questions for you. The FWS-C, I was thinking production might start by the end of this year. It sounds like it's strapped into 2021. Is that right?
I'm sorry, Jeff, you broke up a little bit. Could you repeat the question?
Yeah, the FWS-C program, I guess you've won that, but we're waiting for production to begin, and is that now early 2021?
Yeah. We're still through development, but we expect production in 2021. Yep.
Got you. Early or late 2021?
That ultimately depends upon the military, but we would think it's in the first half.
Great. Then on the FWS-CS, I guess you're still contending for that. Have you won that yet, or what's the progress look like there?
Okay. Jeff, I misunderstood you. I thought your first question was the CS.
Whoa. You talked the IP.
Okay. I'm sorry, Jeff, I misunderstood you. I thought the first question was CS, and the first question was FWS-I, we're in production in that.
Right, I knew that. I thought there were two more. I thought there was a C, and I think a crew serve, the CS or something.
No, it's two pieces. It's the FWS-I and the CS, crew serve.
Got you. Okay. That's production in 2021, potentially at that time. The Elbit helicopter helmet.
That's still in development. They've actually been awarded the program. We've been awarded the contract, it's still in development. Again, we expect that to go into production in 2021.
Okay. Forth Dimension Displays, it looked like industrial took a little bit of a step down. Pretty understandable considering what's going on out there. Can you just give a little update on what's going on in terms of design wins there? How you expect that to bounce back as the economies reopen?
Yeah. Actually, FDD was pretty consistent with the prior year. As Glenn just mentioned, on the industrial, it was really more of the wearable headsets. FDD, as a reminder, does a significant volume of business for 3D metrology, and that, as I said, was pretty consistent. They also do military development for us. Some of their displays go, for instance, the General Dynamics armored vehicle, FDD's displays go into that. It was really the wearable headset, and I really believe, as Glenn alluded to, that's more of a function of the units just came out last year, for the most part, people kind of guessing at the inventory levels and adoptions. Sales of their displays, two of them were down, but as I mentioned, the royalties were consistent with the prior period last year, which tells us they're selling end units.
Yeah.
It's just they're getting their inventory managed.
On those Forth Dimension LCOS displays that go into machine vision, we've been waiting for a ramp year, with the Chinese buyers being kind of the biggest market for this. Where are we on that?
I think the question for Jeff is, how is Chinese kicking into that FDD metrology. They're still working on it. As you well know, China also had the COVID-19, and they did slow down for a few months. They're getting back to work right now. I would cautiously optimistic about the situation right now.
Got you. Okay. It sounds like you're hitting now with the new dual-stack OLED technology. You're hitting kind of metrics that other people haven't been able to hit, but that people have been saying that this is what you have to get to really to make a mainstream market in AR and VR. I guess the final element is, can you make these things at a cost and a gross margin that's worthwhile?
Yeah. You're kind of breaking up. Jeff, I'm just looking for your question. Your question is that we've been working on the dual stack and how easy it can be manufactured and how much additional cost with this performance. I think I've answered these questions separately. On the Micro OLED, I think we know there's a lot of activities also on the MicroLED, that the latest count is about 200 companies in the world are working on MicroLED. Why is everybody going to MicroLED instead of Micro OLED is because MicroLED potentially can give you the brightness versus current, which is really required for AR/VR now. What we've done is that on dual stack, we basically increased the potential brightness by about four or five times, and that will go into the range where AR/VR people can use.
What happened, additional cost of making this stuff, MicroLED, the dual-stack OLED, is actually quite minuscule because it's all in the same system, and it just grow a little longer, and you get dual-stack OLED. The difficulty is not in the growth. The difficulty is in the technology. How do you maximize and peak it and optimize it? How do you understand the physics? It took us a while to understand the physics. We do understand it now. As I say, we stay tuned. We will come out and explain to the world what we did happened.
Okay. You're saying that from a cost standpoint, you kind of view here that these can be made at a good gross margin and at a reasonable cost to users.
In fact, I would say, in a year or two, nobody will do single stack anymore.
I'm sorry, no one will do single what?
Nobody is going to do single stack because the additional cost of doing double stack versus performance improvement is overwhelming.
Got you. Okay. Thank you.
If there are no further questions at this time, I would like to turn the call back over to Dr. Fan for any additional or closing--. Excuse me, there was one question that came in. Would you like to proceed with it?
Yes.
Okay, we'll hear from Patrick Metcalf with I-Bankers.
Hey, guys. Congratulations on a great quarter. Just wanted to ask you guys, most recently, we saw Facebook invest in Plessey for their technologies. Considering the breakthrough today, do you believe that you can get a partner like a Facebook to come and invest behind you?
The question from Patrick was that there was activities on Facebook into Plessey, which is a MicroLED. As I mentioned, in the last few months, people began to recognize brightness versus current is the most important factor. Theoretically, a MicroLED has a great advantage. What happened today and what happened the last, since we've announcing the 2.6 by 2.6K, which has the index around 6 candela per amp. Today, we announced 14 candela per amp and three current. All these numbers really has never been achieved yet, as far as we know, in the world. It's going to be very fantastic. I think people will digest it. I am sure the first sentiment is people will first not believe it, and second, we have to explain it. I think people will react.
This will now get into a range that most applications of AR can be satisfied. VR, definitely. Go over sort of level of brightness, I think if LED is still going to be useful. MicroLED will be a narrow range. Micro OLED will satisfy a large range of applications now. It is a different world today.
My next question is, I see your investment in RealWear and your licensee in RealWear is gaining real momentum with Microsoft Teams and Cisco Webex now behind them. I want to see, A, does RealWear have an exclusive on the device or on the Golden-i software? B, what is the Golden-i software if they do not have an exclusive? What does it mean to Kopin, to shareholders in the future if AR actually takes hold and goes forward?
They have exclusivity in a field for certain Kopin technology. RealWear, I believe, and you really should talk to RealWear, but they've developed quite a bit of software themselves on their own. We've kind of provided the hardware aspect to it, and I think they've kind of provided the software in the equation.
Maybe I bring a little bit more color to that. The RealWear Golden-i system is actually a very good system. What we did, we have several things we do. We licensed the technology to them. What they licensed is the design for the system as well some of the software. The software allows them is a voice. Everybody, if you listen to it, everybody raves about how good the voice command of that system is. In addition to that, they are required, and they do, in fact, buy our module, our display module, which is very specially designed for that purpose. They're exclusive. They have to buy our modules. They use our software for the audio, and it also licenses the design of the whole Golden-i system they're using.
We have several ways to help them, and they're doing pretty well as far as we know in the market right now.
Okay. Lastly, Lenovo. Does Lenovo have a Golden-i license or is Lenovo a different joint venture in itself?
It's a different kind of a license. Lenovo is also doing pretty well, but they are focused more in the Asia and China market.
Okay. All right. Thank you guys, and I look forward to your next quarter results.
Thank you. Thank you for that, Patric.
There are no further questions at this time. I would like to turn the call back over to Dr. Fan for any additional or closing remarks.
Well, thank you for joining us this morning. Please, everybody stay safe. Thank you.
That will conclude today's call. We thank you for your participation.