Kopin (NASDAQ:KOPN) Q1 2021 Earnings Call

0:00 Good day and welcome to the Copeland Corporation first quarter 2021 earnings call. Today's conference is being recorded. At this time, I will turn the conference over to Mr. Richard Snyder, Chief Financial Officer. Please go ahead, sir.

0:16 Thank you, Operator. Welcome, everyone, and thank you for joining us this morning. John will begin today's call with a discussion on our strategy, technology, and market. I will then go to the first quarter results at a high level. John will conclude our prepared remarks, and then we'll be happy to take your questions. I'd like to remind everyone that during today's call taking place on Tuesday, May 4th, 2021, 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.

1:12 The company undertakes no obligation to update these forward-looking statements made during today's call. And with that, I'll turn the call over to John.

1:20 Thank you, Richard. Good morning. And thank you for joining us to discuss our first quarter results. I want to start by expressing our wish that you and your families continue to stay well and safe as we hopefully are closer to the end of this awful pandemic. We are pleased with our strong start to the year reflecting continued increasing demand for our customers across multiple segments. Revenue increased approximately 40% in the first quarter of 2021 as compared to the first quarter of 2020, with growth led by our defense production programs and our funded development programs.

2:19 We now have more than 10 programs in various stages of development. While some of them may not contribute significantly to product revenue for the next year or two, this is by far the strongest defense program portfolio in COVID's history. They set the stage well for the coming years. We continue to aggressively pursue additional opportunities in the defense market and expect to make some announcement regard these opportunities in the coming months. Our R&D activities have been increasing in the past several quarters, reflecting the significant opportunities we're seeing in the augmented and virtual reality space.

3:15 In particular, our customer-funded R&D revenue jumped more than 80% year over year. primarily because of the interest in our next generation of displays and display technology activities. Additionally, we continue to see strength in our enterprise market segments with strong volume growth in enterprise AR and 3D automated optical inspection systems. which are recovering nicely following a slowdown in the early days of the pandemic.

4:05 The growth in these areas was offset by a decrease in the public safety sector as municipal government budgets were affected by the pandemic. Our defense revenues in the first quarter of 2021 increased by 42% compared to the first quarter of 2020. Our defense revenues continue to be driven by FWSI thermal weapons site and the F-35 fighter jet program. With that, these two defense programs, which are still quite early in their product phases, to continue as core component of the revenue in the coming years.

4:59 We also remain on track to transition several more products to early low rate production this year. We expect the revenues beginning in the second half. As mentioned, Coping has over 10 defense programs in various stages of development. These programs are all using our micro-displays and are increasingly utilizing our specialized optical systems and recognized assemblies. We believe we're the sole source supplier for most of these programs. All our defense programs are either AR or VR applications.

5:52 and Coping continues to explore additional AR and VR applications in defense, industrial and consumer areas. One example is in the first quarter of 2021, we announced the Coping Cyber Display, why QBGA displayed that like the modules and 8233 and more. These 230 driver ICs are now incorporated into the Canadian-based, Canada-based, shearwater wearable near-eye remote display driving computer. These products are near-eye display for underwater divers and provide critical dive information including depth, dive time, and Brivobo Ghez Lavros.

6:55 This is just one example of the many areas of the market finding a solution to a need using Copen micro-display products. It's the only micro-display company in the world with product and technology solutions utilizing each of the leading micro-display technologies, OLED. Micro-LEDs, LCDs, as well as LCOF. Coping is nearly proficient to offer the right technology solution for the expanding markets and applications for AR and VR. As mentioned last quarter, we received our first production order from a U.S.-based customer and began shipment of our 720p panning-panning dual-stack ColorMax OLED micro-display with high brightness and brilliant color fidelity, combined with very low power consumption.

8:06 This new technology represents a milestone for coping, as we exhibit a record 7,000 nits of brightness with a much lower power than previous technologies. This is a huge achievement for the OLED micro-display. We continue to ship our 720p micro-OLED display to our customer in Q1. Meanwhile, we continue to innovate and improve further our OLED technology to meet the market demand. In addition to our customer-based R&D activities, we have been increasing our R&D spending to meet the requirement of AR and VR.

9:01 We believe this is a once-in-a-decade opportunity as the device world expands from handheld to hands-free devices. We're hoping we'll be ready to meet the market demand. Finally, we are highlighting our long history and leadership in wearables in a three-part webinar series entitled AR and VR, The Paradigm Shift, The Smart Glasses, Starts Now, hosted by InSight Media. The first segment, called AR VR, The Path, was held on April 27th and now is available on YouTube.

9:52 It was very well received with over 500 registrants. And I must apologize. We were oversubscribed for the last event, which was unfortunately limited to 300 attendees. Therefore, not everyone who wants to attend live connected. The webinar, however, was recorded right away, and we did provide a link to the recording to all the registration people shortly afterwards. We have since increased the capacity for live participation in the next two sessions.

10:43 In part two of this trilogy, to be held on May 20th at Bell Trout. We'll focus on the present. We will tackle the current state of the art, analyze the interesting success stories today, and concluding that the tipping point has arrived for some markets to begin mass adoption. In part three, to be held on May 26th, We'll focus on the future. We'll look to the next stages of ARVR smart glass products, offering a roadmap to develop products with the right form factor, technology, performance, features, and cost to succeed in this exciting transformation.

11:40 We'll present our views of the next three to five years We started grading from the lessons we learned for all these past and present AR and VR products in the marketplace. We would then speculate how to get to the ultimate consumer-based smartphone. This would be the whole regret. Really, one can learn so much from what the defense system have been doing. Do join us in the next two webinars. You will not be disappointed.

12:27 Registration links and replays can be found on our website as well as on INSIGHT website. In short, we're continuing to make great progress in executing our strategy and is showing our performance. The market conditions are favorable as AR and VR are gaining strong traction throughout the past year. We believe Copay is in a good position to capitalize on this growing trend. With this, I will turn this call to Rich.

13:09 Thank you, John. Turning to our financial results, Total revenues for the first quarter ended March 27, 2021, were $11.7 million, compared with $7.9 million for the first quarter of March 28, 2020, a 48% increase year-over-year. Cost of products sold for the first quarter ended March 27, 2021, was $6.4 million, compared with $5.6 million for the first quarter ended March 28, 2020. Growth margin for the first quarter of 2021 was 15%, compared with 5% for the first quarter of 2020. The increase in gross margin for the three-month end of March 27, 2021 as compared to three months ended March 28, 2020 was primarily due to improved manufacturing efficiencies driven by higher volumes.

14:00 Research and development expenses for the first quarter of 2021 were $3.6 million compared with $2.3 million for the first quarter of 2020, a 52% increase year-over-year. R&D expense for the three months ended March 27, 2020 increased as compared to the three months ended March 28, 2020, primarily due to an increased spending on U.S.-funded development programs and internal R&D expenses for OLED development. Selling general administration expenses were $5.9 million for the first quarter of 2021, compared with $3.4 million for the first quarter of 2020. SG&A expenses for the three months ended March 27, 2021 had approximately $2.4 million of stock-based compensation costs as compared to $89,000 for the same period in 2020.

14:52 Excluding the non-cash stock-based compensation costs, SG&A expenses were $3.5 million for the first quarter of 2021 compared with $3.3 million for the first quarter of 2020, a 5% increase year over year. Other income expense was income of approximately $37,000 for the first quarter of 2021 compared with $87,000 of expense for the first quarter of 2020. During the three months ended March 28, 2021, we recorded $28,000 of foreign currency gain as compared to $172,000 of foreign currency losses for the three months ended March 28, 2020. Turning to the bottom line, Our net loss attributed to Copen Corporation for the first quarter of 2021 was $4.1 million, or $0.05 per share, compared with a net loss attributed to Copen Corporation of $3.6 million, or $0.04 per share, for the first quarter of 2020.

15:50 Non-GAAP net loss attributed to Copen Corporation for the first quarter of 2021 was $1.8 million, or $0.02 per share, compared with non-GAAP net loss attributed to Copen Corporation of $3.5 million, or $0.04 per share, for the first quarter of 2020. Copeland's cash and marketable securities were approximately $35.6 million at March 27, 2021, as compared to $20.7 million at December 26, 2020. During the quarter ended March 27, 2021, we issued 2.4 million shares under our then existing at-the-market or ATM program and generated $15.5 million in net cash proceeds, which concluded our $20 million ATM program.

16:36 First quarter amounts for depreciation stock compensation expense are attached in the table to Q1 press release. The amounts discussed above are our current estimates and listeners should review our form 10Q for the first quarter 2021 for any possible changes and additional disclosures. Finally, I would like to address the global semiconductor shortage. Copen did not experience any significant effects caused by the shortage in the first quarter of 2021. We have been proactive in our actions and communications with our semiconductor suppliers and have placed orders well into the future. We continue to monitor this current dynamic environment and manage accordingly. Operator, we will now take questions. Thank you.

17:21 If you would like to ask a question, please signal by pressing star 1 on the telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to be able to signal a chance to reach our equipment. Again, press the star 1 to ask a question. We'll now pause for just one moment. So, we will now take our first question from Glen Mattson from Lattenburg, Panama. Please go ahead.

17:55 Hi. Thanks for taking the question and congrats on the great results. So first question, the two areas about performance versus my model were in the industrial side and the R&D. Can I just get a little more color? Was the industrial bounce back in the fire and safety stuff, or was it more the real wear type end user? And then on the R&D front, I'm curious, is that all government-related, or is there any commercial or consumer-related R&D revenue?

18:25 So mostly it was the industrial headsets, folks like real wear. were the strength in the industrial segment, including our 3D AOL was very strong in the first quarter. And as far as R&D, the majority of it is defense-related, but there is some commercial consumer R&D in that also.

18:50 Okay. Great. Thanks. On the – On the defense side, you've talked about for a while 10 programs in development, and I think, I'm not sure if you reiterated it this quarter or not, but in the past you said you expect one of those to kind of contribute initial production volumes, but contribute meaningfully towards the second half.

19:14 Is that still the case? And when, you know, have you won that yet?

19:18 Or would you announce that when you win it? Or are you not allowed to? Or just some thoughts about how that news flow is going to play out over the course of the year?

19:28 Yeah, so we would actually expect right now our estimate is about three programs in the second half of the year to go into what's called LRIP, low rate initial production, and start providing revenues. It is low rate initial production and then it would really ramp up in 2022. But our programs are on schedule as John indicated in his prepared remarks.

19:52 And Glenn, we will announce Glenn when the time's up and as time's there and our customer allows us to announce them. But things are going pretty well.

20:03 Great. Great. Thanks, John. Moving on to the AR, VR stuff, John, you know, you talked about it being a, you know, a once-in-a-lifetime opportunity. I mean, coping has been a part of other opportunities like that in the past. I'm thinking about, like, digital cameras and displays and things like that. You know, would you – categorize this as similar to that kind of a situation, maybe even on a scale larger, just based on this versus what you've seen through the Copen's past?

20:41 This is a very good question, Glenn. I mean, I've been preparing this Trilogy webinar, and as I prepare for it, and I would just say that The opportunity is actually bigger than I initially thought. I knew it was going to be a good opportunity. Now I'm more and more thinking it could turn out to be bigger than even a cell phone business. So it could be a $3 trillion business in 15 years. I will talk about that in the second and third one, especially the third one, where it talks about the future, which are allowed to speculate. That's going to be a very interesting seminar. Remember that the last seminar we had about 30 minutes of Q&A, and it was very active.

21:29 A lot of people asked questions, and we had to cut it off because the time's up. So we will continue to have very active Q&A sessions after the webinar, and I think the third one, we might even have to prolong it to a one-hour Q&A.

21:46 Right. Great. Thanks. We look forward to that for sure. And the last question for me just is on the chip supply side. You know, you've said that you guys feel pretty comfortable about the pre-orders that you've made and things like that, and that you didn't have any effects in Q1. But, you know, can you just give us a better sense of just, you know, how concerned investors should be, if at all, about potential disruptions in supply?

22:16 Well, you know, the reality is, you know, we saw an article by the CEO of Intel. And, you know, like what the auto industry has experienced is you just need one chip missing and the whole product doesn't ship. Now, we're not in that type of situation. We have multiple products. But it is pretty dynamic. And what we think is that there's some panic in the market and people are overbuying. This is somewhat like we saw yesterday. you know, frankly, in the tech bubble where people thought there was going to be shortages and they started stuffing their closets with every chip they could get. And of course, we see people taking the opportunity to raise prices. There's no doubt about that. But so far, we haven't had any of our suppliers, you know, say, hey, listen, this is a real big problem.

23:04 So we're monitoring it literally on a daily basis. And we're trying to get into our vendors to make sure that they're on top of their suppliers and as much as we can. Okay, great.

23:16 Congrats again on the results.

23:17 I'll pass it on. We will now take our next question. Kevin from HC Landry. Please go ahead.

23:27 Ladies and gentlemen, thanks for taking my question. John, could you just talk a little bit more about the Canadian near-eye diving display? Which display are you using there? Is there an extra light source? Just maybe some more, pardon the pun, color on that.

23:52 Kevin Dodd, we are using our micro LCD display and using a special backlight that allows them to see very well. So this is a module that we'll be providing to other AI applications. So yeah, for this one, it's a special thing. You obviously have to dive in the water and you have this special type of module. But they're doing well and I think the product just came out in the market and I think that the response is very good. I don't do diving, so I've never tried it myself.

24:33 Okay. Look, I can't imagine there's a huge market for it, but I I was just hoping that you could maybe give us a little more insight. How would you say it compares to the Scott helmet that the firefighters use?

24:52 A Scott helmet allows you to see in the dark through the smoke. This one is not. So it's different. It has different sensors. The Scott helmet has six different sensors. all those things are not something that you can sell millions per year, okay? That's why I say at the end of the day, the Holy Grail is consumer-based. So you have to go through defense and you have to go through enterprise to learn what's needed. This is a major transformation from handheld to hand-free. So we're very happy with the opportunity.

25:31 Well, yeah, yeah, yeah. That's sort of the way I was I was looking at it and how, I mean, what are the features that you see coming from this development and the using of the micro LCD display as applicable in the consumer market?

25:51 You actually present half the talk for next week, which I'm giving the seminar to. You really look at what's going on when you move from handheld to hands-free. A lot of components developed for the handheld for the cell phone are already there. And you should use all the components that are already developed on the cell phone. The problem is the display. You really look at it. It's just a display. The display is too big. And in the early days, Oculus could hold the display on your hand. The consumer will never accept that. And the doctor knew that even 30 years ago when they fund us to do the display, smaller display.

26:40 But small display is not enough. You still have to have that special magnifier and special housing to take care of the water, take care of the particles, take care of anything. Our defense business taught us a lot of things. What kind of optics do you need? What kind of displays do you need? What kind of recognized housing do you need? So you can go into the fire, you can go to the water. All these things we learn. So I think people do not understand that it's really the micro display module that has to replace the touchscreen that you have in the cell phone is the biggest challenge. And we are leading this area, starting 30 years ago.

27:30 Okay. All right. So granted your, you know, your discussion, your answer for Glenn's questions pointed to consumer development and AR, VR. Can you be more specific? How are you taking what you've done here for the Scott helmet, what you've done for the diving helmet, and what specific kinds of R&D are you doing to develop the consumer side?

27:59 Yeah, in the consumer side, I think first of all, consumer, as you know, I'm a big creature of the fan-side rules. The rule number one is you have to be human first, and second, technology. So major thing of the human is you put it on the head, you should be some kind of eyeglass. It has to be very natural. It has to be very small, thin. and so the consumer introduction for this kind of augmented reality for eyeglasses is very special and I will talk about that next week. What are the special eyeglasses that come in for consumers and those such kind of glasses are coming up and it is already available in a few months ago and you will be everywhere the next 12 months.

29:00 And after that, you will go into more and more consumer applications. So I would say consumer applications is starting right now in the few months ago and it's going to be very big. So we'll talk about that on Tuesday. I don't want to give the talk today. Just come join us. It's a very exciting time.

29:21 Okay, John, appreciate that. And thank you for the invitation. Rich, before I let you go, what was the official share count at the end of the quarter? Not the average, but the official full thing.

29:43 Honestly, I don't have that at the top of my head, what the number was. It's pretty close to the average. Oh, okay. Thank you. Thank you, gentlemen. Thank you for my questions. Yeah, we didn't have a lot of stock activity in the quarter other than what we sold. Yeah.

30:03 Yeah, so, right, I guess it's close and it was really close to the early part of the quarter. I guess I just have to go look at the date. Yeah. When's the queue come out?

30:19 Thursday. Thursday.

30:20 Okay. All righty. Thank you, gentlemen.

30:25 Thank you. Just a reminder, if you'd like to ask a question, please press star 1 on the telephone keypad. We will now take our next question from Craig Rose from Axiom Asset Management. Please go ahead.

30:42 Hello, John. From my point of view, there's no shortage of R&D dollars to be spent on products revolving around AR and VR. So when I see that it's great that your R&D is up but the balance is in defense, where do you see R&D dollars in the future? How high could that go considering everyone's trying to get where you think the market's going to go?

31:14 Yeah, thank you for the question.

31:17 The biggest challenge

31:20 to get into wearable on the head. As I mentioned before, it's the display and optical system. How do you get good display and optical system on your head? And that display has to be very tiny, much smaller, much higher resolution than really the display you have used on the cell phone. And it will not be the same technology. It's still probably going to be OLED, but not only on glass, it's only on silicon. And I will describe very clearly in the second display session why it has to be on silicon. So anyway, the biggest research money now and all over the world right now is searching for how do you display and replace the touchscreen on your head with some kind of display. It had to be a micro display.

32:16 and he had this very special optics. The optics turned out to be a very major challenge. As Richard then mentioned, we actually not just focus on display. We spent quite a lot of activities now on the optics. We found out our customers really cannot use any micro-displays unless the optics are there. The optics had to magnify a thousand times, 10,000 times, and they had to keep image very sharp. and it had to be very lightweight and very thin. Now, I think there are many systems you see for even the Oculus. I think it's a very wonderful system, the Oculus. The most recent one, very good system, but it's still too big and too thick and too heavy. Now, I will talk about it next week on the Oculus system.

33:03 I would say I see quite a few systems in the market right now and keep the pros and cons and actually paying the way for the next step.

33:15 Okay, if you had to list the challenges in order, it would be optics, form factor, then the screen?

33:28 Screen, number one. Screen is because it's really, really high-tech. Optics, number two. And the third is the whole packaging. How do you assemble it? It's actually one thing people don't know. You're magnifying sometimes 10,000 times. So if your housing is not carefully taken, little particles land on your display, then it looks like a boulder to you. Because of our defense activities, we recognize that being a resource problem, then no particle can come out during operation of the assembly. Very few people know about it, including even many of our customers. So nowadays, they just say, please, sent us the whole assembly, sent us the optics, sent us the display, and sent us the housing assembly. And that's why we're so, so, so, so many different industries.

34:25 They don't want to touch it anymore. And I think consumer people do not quite understand it yet. Enterprise people know, and I won't go into detail, almost all our enterprise companies, customers, buy the whole assembly.

34:44 are you a liberty to discuss how many consumer product developers you're working with now in R&D and maybe the lifecycle of such R&D with those clients?

35:01 I think it's safe to say that we are or have worked with all the major Silicon Valley guys that are on everybody's tongue. I think you have to be honest, I'm sure they're working with everybody else too. This is a big race. It's going to be a huge market. So we have interactions with all of them at this point.

35:23 Okay. Thank you very much, guys.

35:27 Thank you. It appears there are no further questions at this time. I would pass the call back over to you for any additional or closing remarks.

35:39 Thank you for joining us this morning. I would like to remind everyone that we will be having our annual meeting on May 26, 2021. You should be receiving your proxy vote soon, so please vote. And you'll be able to attend our annual meetings. After the annual meeting at noontime, I will give the third part of our trilogy webinar. Thank you. This concludes today's call. Thank you for your participation. You may disconnect.