Kopin - Earnings Call - Q2 2020

Transcript

Speaker 0

day, and welcome to the Copen Corporation Second Quarter twenty twenty Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Rich Snyder, Chief Financial Officer. Please go ahead, sir.

Speaker 1

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'd like to remind everyone that during today's call, place on Tuesday, 08/04/2020,

Speaker 2

we will

Speaker 1

make the 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 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 ks and other documents filed with the Securities and Exchange Commission. 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.

Good morning,

Speaker 2

and 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 by hope that all of you and your families are staying well and safe. We are very pleased with our Q2 results, both from our operation and technical standpoint, with a solid Q1 momentum continuing into the 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, and our cost structure continued a decline significantly as we continue to execute our strategy that we introduced here.

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 also made a very exciting announcement this morning in a separate press release about further technology developments and announcements in OLED. I will discuss that more in a minute. So 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. Well, let's look more closely at our defenses.

As I have discussed previously, we have commenced production in our two important programs, the F-thirty five fighter jet program and the FWS I program. These two programs again drove our defense business and revenue 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, armored vehicles and outfitting our soldiers directly.

We gained additional leverage from this 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. So there's no guarantee all of those programs will reach production phase. We expect three additional programs will reach production by the 2021. So COPI should have 5% program generating production revenues at that time.

Shipping the initial production order for our Onet backplane wafers was an important step in our expanding Onet business. We're also pleased to receive a follow-up order. Shortly after last quarter end, we introduced the Breakthrough Lightning 2.6 ks x 2.6 ks OLED display based on our color map technology. This technology, this display, utilizes what's referred to as a dual stack OLED, which is really two OLED structures going on top of each other. The two OLEDs we are connecting in series, so the carry pass through the dual stack OLED will generate photon tri instead of west like in conventional single stack OLED.

The dual stack provides a number, however, a lot more flexibility in the OLED design and material selection versus a single stack, which can result in much higher efficiency, brightness and yet still use low power consumption and has longer lifetime. What is particularly impressive by this dual stack display is the ratio of mix per amp. Now let me explain this. Mix is the measure of brightness. Historically, you can achieve very high brightness on this by running a lot of current through the display.

But the problem was that the high current significantly shortens the life of the display, in addition, of course, to small power. Cooper has developed a unique technology. We call it ColorMax. It allows the Lightning 2.6 ks x 2.6 ks display to achieve remarkably color fidelity greater than 115% RGB brightness from a very low current. The ratio of candela per amp, which is really the index, how good they are, was over six, which is particularly exciting.

While the press release we issued this morning take the next discussion to an higher new level, our results came in about a month ago and took us a month to understand and confident is real. So it is hot off the press, But the quantum jump has such a high reaching, far reaching application for VIAR that we want to share with you today. Essentially, Copenhagen achieved 7,000 nits with our new Lightning 720p OLED display. Go back to the figure of merit. The candela per add has gone up from six at our 2.6 ks by 2.6 ks, which at that time was a very impressive number, now it has gone to 14 in two months.

The brand of the dual stack technology really not addresses the challenging issues around brightness for AR VR. Since COVID-nineteen has accelerated interest around ARVR, 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 Copain employees who have continued to work throughout this challenging time. Their dedication has made results possible, and we appreciate all of their efforts to stay safe and healthy.

With that, I will turn the call to Rich.

Speaker 1

Thank you, John. Turning to our financial results. Product revenues for the second quarter ended 06/27/2020, were $6,700,000 compared with $4,400,000 for the second quarter ended June 2939, a 50% increase year over year. Budget research, development and other revenues were $2,100,000 for the second quarter ended 06/27/2020, compared with $4,700,000 for the second quarter ended June 2939. Included in the $4,700,000 of revenues for the 2019 was a onetime license fee payment of $3,500,000 Total revenues for Q2 twenty twenty were $8,800,000 versus $9,100,000 the prior year, with twenty nineteen reflecting the $3,500,000 onetime payment.

Cost of goods sold for the 2020 was $4,800,000 or 72% of product revenue compared with $5,300,000 or 118% for the second quarter of last year. The significant decrease in cost of product revenues as a percent of net product revenues for the year for the three months ended 06/27/2020, as compared to the three months ended June 2939, was was primarily due to lower material costs along with improving manufacturing yield efficiencies due to higher sales volumes, which reduced fixed costs per unit in 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 twenty nineteen as compared to the same periods of 2020.

Speaker 2

R and D expenses in

Speaker 1

the 2020 were $2,200,000 compared with $3,300,000 for the 2019. The lower R and D cost for the 2020 as compared to the prior year was a result of IP commercialization strategies put in place in 2019, specifically the licensing of GoldenEye Infinity and Total Smart Glasses. SG and A expenses were $2,900,000 in the 2020 compared to $5,400,000 in the 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 Endus contingent consideration. Other income expense was expense of approximately $6,000 for the 2020 compared with $627,000 of income for the 2019.

During the three months ended 06/27/2020, we recorded $10,000 of foreign currency gains as compared to $184,000 foreign currency losses for the three months ended June 2939. The three months ended June 2939, 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 $1,000,000 or $01 per share compared with a net loss of $4,300,000 or $05 per share in the 2019, a 77 percent improvement. Copland's cash equivalent marketable securities was approximately $15,300,000 at 06/27/2020, as compared to $21,800,000 at December 2839. Second quarter amounts for depreciation and stock compensation are in cash and payable to the Q2 press release.

The above amounts discussed are based on current estimates, and listeners should review our formal final Form 10 Q for the 2020 for any possible changes and additional disclosures. And with that, operator, we'll take questions.

Speaker 0

Thank you. And we'll take our first question from Glenn Mattson with Ladenburg.

Speaker 3

Hi, thanks for taking the question and congrats on the results. So a couple for I guess for Rich first. Just 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 gross margin was pretty impressive, better than what we expected.

So is that kind of the run rate we should expect as ballpark going forward for a while here? Just some color there, please.

Speaker 1

Yes. The current gross margin percent is a good barometer over the next couple of quarters.

Speaker 3

Great. And on the SG and A expense being lower also, is that 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?

Speaker 1

Yes. We would expect SG and 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, a couple of 100,000, $203,100,000 a quarter. Otherwise, it should be relatively consistent.

Speaker 3

Okay. And do you have the operating cash burn in CapEx for the quarter or operating cash flow?

Speaker 1

Yes. So the burn for the quarter cash used in operations was $2,900,000 CapEx was de minimis for

Speaker 2

the $100,000 And

Speaker 3

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?

Speaker 2

Well, yes, I mean, you

Speaker 1

do see that the contract assets on the balance sheet is up, and that's a function of the six zero six revenue recognition standard. So two years ago, units that we would have made that they would have been sitting in finished goods. Today, those are sitting in contract assets, and there's revenue recognized on them. And that's really probably the only difference. The other piece, of course, is that we have a significant number of R and D programs going on, and that revenue is also recognized on a percent completion basis.

So until we hit a billing milestone, unbilled receivable collection at contract asset account. But that's fairly consistent with what we've been doing for the last twenty years.

Speaker 3

Right. And 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?

Speaker 1

So this we'll end 2020 with two programs in production, and we expect 2021 to end with five programs in production.

Speaker 3

Right. And can you give us any or do you give investors on the call some sort of order of magnitude about how the size of what the either what that incrementally adds or what the total pie would look like with those five programs running revenue wise?

Speaker 1

No. We're not going give any revenue guidance for 2021 today. I mean these are all very large programs, I can say that. But they have to look at qualification. And so when and if during the course of next year they get go into production will be dependent upon the Army qualifying them.

So we can only make we do feel confident that we'll execute with them in production, but exactly when the Army puts them in production is up to them.

Speaker 3

Okay, great. On the industrial side, whoever wants to answer this would be great. Is just the 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. And perhaps they went into the field kind of quickly.

And in 2020, maybe there's a bit of a digestion period where these companies are kind of 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 and 2021, maybe there's bit of a bounce back. Is there any

Speaker 1

is that the right way

Speaker 3

to think about it for the head mounted display market?

Speaker 1

Yes. I think that's exactly right. In other revenues for the quarter, it's 300 to $400,000 of royalties, and that's consistent with prior years. So 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, and so you're really doing a lot of guesswork as to inventory levels. But it looks like they are selling through at the end point because they are paying us royalties.

Speaker 3

Okay, great. And then I guess lastly, I don't know, John, I know you have new product announcements today, but I guess one of the exciting things about Copen 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 hold on the consumer side, you guys are stand to benefit. Is this product now to say one step closer to getting to that point? And just can you give us an outlook for timeframe on when you think that kind of market could come alive for you guys?

Speaker 2

Yeah. 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 display. And we've been focusing on for the last few years how to get very high brightness with very low current.

And what happened today is announcement. In fact, what happened in the last nine months is the logjam seems to be broken, and we're actually seeing very rapid improvement. And there'll be a lot more discussion about it because what happened today needs a lot of explanation in physics because it's not intruders, took us a couple of months to understand it. But I think it will be explained. We will explain to the world what really happened, and I think it could be the turning point now.

Speaker 3

Okay, great. That's it for me. Thanks, guys.

Speaker 0

And next we'll move to Jeff Bernstein with Cowen.

Speaker 4

Yes. Hi, nice quarter guys. So a couple of questions for you. Best in U. Team, I was thinking production might start by the end of this year.

It sounds like it's got into 2021. Is that right?

Speaker 1

I'm sorry, Jeff. You broke up a

Speaker 2

little bit. Could you repeat the question?

Speaker 4

Yes, the FWS C program. Guess you won that, but we're waiting for production to begin. And is that now early twenty twenty one?

Speaker 1

Yes. Mean, we're still through development, but we expect production in 2021. Yes.

Speaker 4

Got you. Early or late twenty twenty one?

Speaker 1

That ultimately depends upon the military, but we would think it's in the first half. Great.

Speaker 4

And then on the FWS CS, I guess you're still contending for that. Have you won that yet? Or what's the progress report there?

Speaker 1

Okay. So Jeff, I misunderstood you. I thought your first question was the CS.

Speaker 2

What was the I? Okay. I'm sorry,

Speaker 1

Jeff. I misunderstood you. I thought the first question was CS. And the first question was FWS I, we're in production in that.

Speaker 4

Right. I knew that. I thought there were two more. I thought there was a C in a kind of cruise term to CS or something.

Speaker 1

No, it's two pieces. It's the FWS I and the CS, cruise served.

Speaker 4

Got you. Okay. So that's production in 2021 potentially. And then the Elbit helicopter helmet?

Speaker 1

So that's still in development. They've actually been awarded the program. We've been awarded the contract, but it's still in development. And again, we expect that to go into production in 2021.

Speaker 4

Okay. Then sort of first dimension, it looked like industrial took a little bit of a step down, pretty understandable considering what's going on out there. But 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?

Speaker 1

Yes. Actually, FDD was pretty consistent with the prior year. As Glenn just mentioned, it was really on the industrial, it was really more of the wearable headsets. FDD, as a reminder, does a significant volume of business for three d 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 FPD displays go into that. But it was really the wearable headset. And I really believe, as Glenn alluded to, that it was 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. But so sales of their displays to 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. So it's

Speaker 2

just they're

Speaker 3

getting their inventory managed.

Speaker 4

So on those sort of fourth dimension, Elacosta's plays that go into machine vision, we've been waiting for a ramp here with the Chinese buyers being kind of the biggest market for this, where are we on that?

Speaker 2

I think the question for Jeff is how is Chinese are taking into that FEP metrology. They're still working on it. As you well know, China also had the pandemic, and they slowed down for a few months, but they are getting back to work right now. So it's great, cautiously optimistic about the situation right now. Got you.

Speaker 4

Okay. And it sounds like you're hitting now with the new viewer stack technology, you're hitting kind of metrics that other people haven't been able to hit that people have been saying the difference that you have to

Speaker 2

get to be able

Speaker 4

to make the mainstream marketing in AR and VR. So I guess the final element is to make these things at cost and gross margin as worthwhile?

Speaker 2

Yes. You're kind of breaking up. So Jeff, I'm just looking at what

Speaker 1

your

Speaker 2

question was. Your question is that we'll working on the dual stack and how EVs can be manufactured and how much additional cost with this performance. I think I've answered these two questions separately. On the micro OLED, I think you know there's a lot of activities also on the microLED. The latest count is about 200 companies in the world are working on microLED.

Now 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 ARVR now. So what we've done is that on Bluestack, we basically increased the potential brightness by about four or five times and that will go into the range where ARVR can use. Now what happened, additional cost of making this micro LED, the dual stack, it's actually quite minuscule because it's all in the same system and it just grows a little longer and you get double stack. The difficulty is not in the growth, difficulty is in the technology. How do you maximize and peak and optimize it?

And how do you understand the physics? It took us a while to understand the physics. We do understand it now. And as I say, we stay tuned, we will come out and explain to the world what really had happened.

Speaker 4

Okay. So but you're saying that from a cost standpoint, you've got a view here that these can be made at a good gross margin and a reasonable cost to users?

Speaker 2

In fact, would say in a year or two, nobody will do single segment anymore.

Speaker 4

I'm sorry, no one was still thinking what?

Speaker 2

Nobody was going to do single stack because additional cost of doing double stack versus performance improvement is overwhelming. Got you. Okay.

Speaker 1

Thank you.

Speaker 0

As there are no further questions at this time, I would like to turn the call back over to Doctor. Fan for any additional or closing excuse me, there was one question that came in. Would you like to proceed with it?

Speaker 2

Yes.

Speaker 0

Okay. We'll hear from Patrick Metcalfe with IBankers.

Speaker 5

Hey, guys. Congratulations on a great quarter. Just wanted to ask you guys, most recently, we saw Facebook invest in Plessy 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?

Speaker 2

The question from Patrick was that there was activities on Facebook into plexi, which is a micro LED. As I mentioned, in the last few months, people begin to recognize brightness versus current is the most important factor. And theoretically, LED micro LED has great advantage. But what happened today and what happened last since we're announcing the 2.6 by 2.6 ks, which is have the index around six over candela over M, today we announced 14 candela over M and three is current. All these numbers really has never been achieved yet as far as we know in the world.

So it's going to be very fantastic. I think people will digest it. I'm sure the first segment is people will first will not believe it and second is we have to explain it and then I think people will react. This will now get into a range that most applications of AR can be satisfied. Yes, definitely.

Then when you go over sort of the level of brightness, I think if LED is still going be useful. So microLED will be in the range. So but we will micro OLED will certify large range of applications now. It is a different world today.

Speaker 5

Okay, great. And then 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

Speaker 4

them. I want

Speaker 5

to see, A, does RealWear have an exclusive on the device or on the GoldenEye software? And b, what is the GoldenEye software if they do not

Speaker 1

have an exclusive? What does

Speaker 5

it mean to Copen to shareholders in the future if AR actually takes hold and goes forward?

Speaker 1

So they have exclusivity in the field for certain Copen technology. RealWear, I believe and you really should talk to RealWear, but they've developed quite a bit of software themselves on their own. So we've kind of provided the hardware aspect to it, and I think they've kind of provided the software in the equation.

Speaker 2

And then maybe I'll bring a little bit more color to that. RealWear Gonai system is actually a very, very good system. What we did is we have several things we do. We licensed the technology to them. What the license is the design for the system as well as some of the software.

The software allows them is a voice. So everybody listen to it, everybody raves about how good the voice command of their 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. So they exclusively buy out modules. They use our software for the audio.

And they did also license the design of the whole Golan like system they're using. So we have several ways to help them and they're doing pre Wi Fi we know in market right now.

Speaker 5

Okay. And then lastly, Lenovo. Does Lenovo have a GoldenEye license? Or is Lenovo a different joint venture in itself?

Speaker 2

It's a different kind of a license. Volvo is also doing pretty well, but they are focused more in the Asia and China market.

Speaker 5

Okay. All right. Thank you, guys, and I look forward to your next quarter results.

Speaker 2

Thank you. Thank you, Pat.

Speaker 0

And there are no further questions at this time. I would like to turn the call back over to Doctor. Fan for any additional or closing remarks.

Speaker 2

Well, thank you for joining us this morning. And please, everybody, stay safe. Thank you.

Speaker 0

And that will conclude today's call. We thank you for your participation.