Kopin (NASDAQ:KOPN) Q2 2020 Earnings Call

0:00 Please stand by, we're about to begin. Good day and welcome to the Copen Corporation's 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. Rich Snyder, Chief Financial Officer. Please go ahead, sir.

0:17 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 taking place on Tuesday, August 4th, 2020, we will 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 that purely differ from those forward-looking statements. Potential risks include, but are not limited to, demand for our products, operating results for 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 the call over to John.

1:20 Good morning, 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 my 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 our solid Q1 momentum continuing into our second quarter.

2:06 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 and declined significantly. As we continue to execute our strategy that we introduced here. The single quarter also saw the food production shipment of our OLED backplane wafers an important step as we increase our focus on OLED displays.

2:59 We also made a very exciting announcement this morning in a separate press release about our further technology developments and advancements in ONIX. I will discuss that more in a minute. So we had a very successful first half of the year. And we look forward to continuing momentum into the second half. up to 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-35 silo jet program and the FWSI program.

3:56 These two programs again drove our defense business their 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 continues 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.

4:47 We gain additional leverage from these development dollars as we can use the knowledge in the future industrial and consumer applications. These large portfolio programs punch 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 end of 2021. So coping. should have 5% programs generating production revenues at that time.

5:40 Tripping the initial production order of our Barnett backlink waivers was an important step in our expanding Barnett business. We're also pleased to receive a follow-up order. Shortly after the last quarter end, we introduced the breakthrough lightning, 2.6K by 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 going on top of each other.

6:33 The two OLEDs were connected in a series, so the carry part through the dual-step OLED would generate photon tracts instead of waste, like in conventional single-step OLEDs. The dual-step provides a lot more flexibility in the OLED design and material selection versus the single-step. which can result in much higher efficiency, brightness, and yet still do slow power consumption and have a longer lifetime. What's particularly impressive about this duke stack display is the ratio of nicks per ounce.

7:22 Well, let me explain this. This is the ratio of brightness. Historically, You can achieve very high brightness by running a lot of current through the display. But the problem was that the high current significantly shortened the life of the display. In addition, of course, to smaller power. Coping has developed a unique technology. We call it ColorMax. That allows the lightning 2.6K by 2.6K display to achieve remarkably color fidelity. Graded at 115% RGB brightness from a very low current.

8:14 The ratio of candela per amp, which is really the index how good they are, was over six, which is particularly exciting. What the press release will issue this morning will take the next discussion to entirely a new level. Our results came in about a month ago. It took us a month to understand that confidence is real. So it is hot off the press. But the quantum jump has such a and many other high-riching applications for VIAR that we want to share with you today.

9:09 Essentially, coping has now achieved 7,000 nits with our new Lightning 720p OLED display. Go back to the figure of merit. It's gone up from 6 to 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 stacks technology really not addresses the challenging issues around brightness for AR3 VR.

10:02 Since COVID-19 has accelerated interest around AI and VR, this important technology breakthrough could be the turning point. We're too early with this technology development and look forward to sharing more, much more, in the coming months. Finally, I have to thank the COVID 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.

10:50 With that, I will turn the call to Rich.

10:53 Thank you, John. Let's turn to our financial results. Product revenues for the second quarter ended June 27, 2020 were $6.7 million compared with $4.4 million for the second quarter ended June 29, 2019, a 50% increase year-over-year. Funded research, development, and other revenues were $2.1 million for the second quarter ended June 27, 2020 compared with $4.7 million for the second quarter ended June 29, 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 this $3.5 million one-time payment.

11:49 Cost of goods sold for the second quarter of 2020 was $4.8 million, or 72% of product revenues compared with $5.3 million or 118% for the second quarter of last year. The significant decrease in fossil product revenues as a percent of net product revenues for the year for the three months ended June 27, 2020 as compared to the three months ended June 29, 2019 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 2019 as compared to the same periods of 2020.

12:40 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 the result of IP commercialization strategies put in place in 2019, specifically the licensing of GoldenEye Infinity and Solo Smart Glasses. 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 end-us contingent considerations.

13:26 Other income expense was expense of approximately $6,000 for the second quarter of 2020 compared with $7,000 of 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 foreign currency losses for the three months ended June 29, 2019. The three 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 of two controlling interests 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.

14:19 and others. Copen's cash equivalent in marketable securities was approximately $15.3 million at June 27, 2020 as compared to $21.8 million at December 28, 2019. Second quarter amounts of depreciation and stock compensation are in cash and available to the QT press release. The above amounts discussed are based on current estimates and listeners should review our final Form 10Q for the second quarter of 2020 for any possible changes and additional disclosures. And with that operated, we'll take questions. Thank you. If you would like to ask a question, please press star followed by the digit 1. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment.

15:04 Once again, star 1. And we'll take our first question from Glenn Mattson with Lattenberg.

15:12 Hi, thanks for taking the question and congrats on the results. So 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 better than what we expected. So is that kind of the run rate we should expect? You know, is ballpark going forward for a while here, or just some color there, please?

15:50 Yeah, the current gross market percent is a good barometer of the next couple quarters.

15:57 Great. And on the tail, SG&A expense being lower also, is that, you know, some of that is, you know, like you said, reduced travel and things, but is that also, you know, 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, you know, is that also sustainable?

16:22 Yeah, we would expect SMA may bump up a little bit over the next couple of quarters. We do have some litigation, which, you know, frankly has been on the back burner as the courts have been closed. Assuming they come back, you know, there's probably going to be some additional legal expenses. A couple hundred thousand, two, three hundred thousand a quarter. Otherwise, it should be relatively consistent.

16:47 Okay. And do you have the operating cash burn and the CapEx for the quarter? Or operating cash flow?

16:54 Yeah, so the burn for the quarter of cash use and operations was 2.9 million. CapEx was the minimum for the 100 grand.

17:05 and 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?

17:22 Well, yeah, I mean you do see that the contract assets on the balance sheet is up and that's a function of the 606 revenue recognition standard. So, you know, Two years ago, units that we would have made, 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&D programs going on, and that revenue is also recognized on a percent completion basis. So until we hit a billing milestone, the quote unquote unbilled receivable collection that contract asset account. But that's fairly consistent with what we've been doing for the last 20 years.

18:10 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.

18:22 So we'll end 2020 with the two programs in production and we expect 2021 to end with five programs in production.

18:32 Right. And can you give us any order of magnitude about how the size of either what that incrementally adds or what the total pie would look like with those five programs running?

18:49 No, we're not going to give any revenue guidance for 2021 today. I mean, these are all very large programs. I can't say that, but they have to look at qualification, and so when and if during the course of next year they go into production will be dependent upon the Army qualifying them. So, you know, 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.

19:17 Okay, great. Thanks. Let me... 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.

20:03 And then maybe 2020 becomes a digestion year, and 2021 maybe there's a bit of a bounce back. Is there any... Is that the right way to think about it for the head-mounted display market?

20:16 Yeah, I think that's exactly right. In other revenues for the quarters, $300,000 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, these 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.

20:50 Okay, great. And then I guess lastly, I don't know, John, I know you have a new product announcement today, but I guess one of the exciting things about Copen is that at some point down the line, You know, in VR or some sort of mixed reality or, you know, maybe it's related to sports or general entertainment, you know, when it gets a hold on the consumer side, you know, you guys are staying to benefit. Is this product now to say one step closer to getting to that point? And, you know, just can you give us an outlook or timeframe on when you think that kind of market could come alive for you guys?

21:31 Yeah, thank you for asking a 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 efficiency, power efficiency of the display. And we've been focusing on for the last few years how to get very high brightness with very low current. What happened today is an announcement. In fact, what happened the last nine months is the lock-chain seems to be broken and we're actually making very rapid improvement. There will be a lot more discussion about it because what happened today needs a lot of explanation in physics because it's not intuitive to the artist.

22:24 It took us a couple of months to understand it. but I think you will be explained. We will explain to the world what really happened and I think it could be the turning point now.

22:37 Okay, great. That's it for me. Thanks, Jeff. And next we'll move to Jeff Bernstein with Cowan.

22:47 Hi, nice to work with you guys. So a couple of questions for you. The FWSC, I was thinking production might start by the end of this year. It sounds like it's got into 2021. Is that right?

23:03 I'm sorry, Jeff, you broke up a little bit. Could you repeat the question?

23:07 Yeah, the FWSC program. I guess you've won that, but we're waiting for production to begin. And is that now early 2021?

23:21 Yeah, we're still through development, but we expect production in 2021. Gotcha.

23:28 Early or late 2021?

23:30 You know, that ultimately depends upon the military, but we would think it's in the first half.

23:40 Great. And then on the FWSCS... I guess you're still contending for that. Have you won that yet or what's the progress so far there?

23:53 Okay, so Jeff, I misunderstood you. I thought your first question was the CF. What was it? You talked about I. I'm sorry, Jeff. I misunderstood you. I thought the first question was CF. If the first question was FWFI, we're in production in that.

24:10 Right, I knew that. I thought there were two more. I thought there was a C and I kind of cruised around the CS or something.

24:17 It's two pieces. It's the FWSI and the CF, crew served.

24:23 Gotcha. Okay. So that's production in 2021, potentially. And then the Elbit helicopter helmet?

24:34 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.

24:46 Okay. And then just to mention 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 how you expect that to bounce back as the economies reopen?

25:12 Yeah, actually, FDD was pretty consistent with the prior year. You know, as Glenn just mentioned, it was really, on the industrial, it was really more of the wearable headsets. You know, 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 displays go into that. But it was really the wearable headset. And I really believe, as Glenn alluded to, that 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.

25:58 So 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 N units. So it's just they're getting their inventory managed.

26:14 So on those fourth-dimension L-cost 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.

26:27 Where are we on that?

26:34 I think the question for Jeff is, how is Chinese taking into that FDD pathology? 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're getting back to work right now. So that's great. Cautiously optimistic about the situation right now.

27:00 Gotcha. Okay, and it sounds like you're hitting now with the new Eurostack technology. You're hitting kind of metrics that other people haven't been able to hit, but people have been saying that this is what you have to get to do to make the mainstream market in AR and VR. So I guess the final element is can you make these things at a cost and a gross margin that's worth more?

27:27 Yeah, I guess... kind of breaking up. So, Jeff, I'm going to go again for your question at once. 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 two questions, these questions separately. On the micro-OLED, I think we know there's a lot of activities also on the micro-LED. In fact, the latest count is about 200 companies in the world are working on microLED. Now, why is everybody going to microLED instead of microOLED? It's because microLED potentially can give you the brightness versus current, which is really required for AR, VR now.

28:21 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 AR reactors can use. Now, what happened, additional cost of making this micro LED, the dual stack, is actually quite a 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, the 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 has happened.

29:11 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 use this.

29:24 In fact, I would say in a year or two, nobody would do single stack anymore.

29:33 I'm sorry, no one would still think of what?

29:35 Nobody was going to do single stack because the additional cost of doing double stack versus performance improvement is overwhelming. Gotcha. Thank you. There are no further questions at this time. I would like to turn the call back over to Dr. Phan 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 iBankers.

30:13 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?

30:37 The question from Patrick was that there was activities from Facebook into Plexi, which is their 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, here's with announcing the 2.6 by 2.6K, which has the index around six over, candela over M. Today we announced 14 Candela over M and 3 is current.

31:24 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 step is people will first will not believe it and second we have to explain it and then I think people will react These will now get into a range that most applications of AR can be certified. Yeah, definitely. They're going to go over a certain level of brightness, I think, if LED is still going to be useful. So micro-LED will be a new range. But we will, micro-OLED will certify a large range of applications now. It is a different world today.

32:18 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 them. I want 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 have an exclusive, what does it mean to COPEN to shareholders in the future if AR actually takes hold and goes forward?

33:00 So they have exclusivity in a field for certain COPEN technology. But, you know, RealWear, I believe, and you really should talk to RealWear, but they've developed quite a bit of software themselves. on their own. So, you know, we've kind of provided the hardware aspect to it, and I think they've kind of provided the software in the equation.

33:29 I mean, maybe I'll bring in a little bit more color to that. The real way it's going to lie system is actually a very, very good system. What we did, we have several things we do. We license the terminology to them. What they're licensing is designed for the system as well as some of the software. The software allows them to use a voice. So everybody listens 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, by our module, our display module, which is very specially designed for that purpose.

34:15 So they're exclusively by our modules. They use our software for the audio. And so we also license the design of the whole go-to-like system they're using. So we have several ways. to help them, and they're doing pretty well as far as we know in the market right now.

34:38 Okay, and then lastly, Lenovo. Does Lenovo have a GoldenEye license, or is Lenovo a different joint venture in itself?

34:47 It's a different kind of license, and Lenovo is also doing pretty well, but they're focused more in the Asia and China market.

35:03 Okay, all right. Thank you, guys, and I look forward to your next quarter results.

35:10 Thank you. Thank you for that. There are no further questions at this time. I would like to turn the call back over to Dr. Phan for any additional or closing remarks.

35:23 Well, thank you for joining us this morning, and please, everybody stay safe. Thank you. And that will conclude today's call. We thank you for your participation.