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Operator
Good day and welcome to the Copen Corporation third quarter 2021 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Richard Snyder, Chief Financial Officer. Please go ahead, sir.
Richard Snyder
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 then go through the third quarter results at a high level. John will conclude our prepared remarks, and then we'll be happy to take your questions. I would like to remind everyone that during today's call taking place on Tuesday, November 2, 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, supply chain issues, operating results of our subsidiaries, market conditions, and other factors discussed in our most recent annual report on Form 10-K and other documents filed with the Securities and Exchange Commission. The company undertakes no obligation to update the forward-looking statements made during today's call. And with that, I'll turn the call over to John.
John
Good morning. And thank you all for joining us this morning.
Rich
To start, it is undoubtedly very interesting few weeks for AR VR. First, Facebook came up with the Facebook Ray-Ban smart glass product.
John
And then last week, Facebook changed its corporate name to Meta. for the coming metaverse world. We, of course, have been pursuing this world for quite some time.
Rich
However, I will first focus on our Q3 update, as we do have so many great advances in this quarter.
John
But we'll be happy to take questions on metaverse during our Q&A session.
Rich
We are very pleased with our strong third quarter results, with revenues increasing 14% year-to-year, reflecting particularly strong growth in industrial product revenues and customer-funded development activities, which post year-over-year growth of 65%
John
and 60% respectively. This quarter was our ninth strict quarter of year-to-year growth. Here's another reference. Revenue grew about 24% in the past three quarters year-to-year. We feel very good about our position in the market. and our ability to continue our strong performance. We are on track with our defense development programs.
Rich
In the second quarter, 2021, we mentioned that two development programs enter low-rate initial production. In the third quarter, we received an order for one of these programs. the Joint Effect Targeting System, or JETS.
John
More details on that in a moment.
Rich
We expect another program to enter low-rate production within the next few months.
John
If this occurs, it will be our fifth production program. In addition, we continue to have an active
Rich
and robust pipeline of defense programs in development, which will further fuel our revenue growth in the coming years.
John
Let me give you some additional detail on a few of our growth programs and market areas.
Rich
First, the FWSI program. We announced during our second quarter call that we'll reduce shipment of eyepieces for the FWSI thermal weapons site program, while we work with our customers to develop better processes for increased production rates.
John
I am pleased to report that these improvement activities have gone very well.
Rich
We are now ramping production, and we expect to have our highest
John
production and shipping rate for this program in the fourth quarter. In addition, we expect to receive a significant new order for our FWSI eyepieces shortly.
Rich
As a reminder, the FWSI thermal weapon site uses a very high precision video see-through AR optical module using our cyber displays and our custom-designed sophisticated pancake optics.
John
These optics have some glass elements incorporated.
Rich
As we discussed in the last earning call, a new invention, all plastic pancake optics for VR, AR, MR applications is an exciting innovation and achievement for Coping. And it's believed to be the first all-plastic pancake optics in the world, producing better image quality in a much lower cost and much lighter weight. For the coming consumer AR, VR headset markets,
John
such all-plastic optics will be very useful. 3D automatic optical inspection is another bright area for us.
Rich
During the third quarter, we're excited to announce a 3.4 million order commitment from Jesu Intelligence Technology to provide spatial modulators, or what we call SLM, for GESU's H-series of 3D automatic optical inspection and Mirage series for 3D solder paste inspection system. It's important to note that SLM are key components for 3D automatic optical inspection, which are referred to 3D AOI equipment. Our SLM is used in this quality inspection system for printed circuit board assemblies, or PCBA. The SLM projects structured light onto the PCBA being measured by 3D AOI SPI equipment to find flaws or defects. This approach enables circuit board manufacturers who are now using 2D AOI machines to move into 3D so as to improve PCBA use and product quality while reducing waste and cost.
John
We have been focusing on this area for several years. It is now bearing good fruit. There is a growing demand for 3D AOI machines in a number of key areas.
Rich
In particular, manufacturers of pretty circuit boards for electric vehicles are moving from 2D to 3D AOI equipment due to high quality standard needed to achieve automobile safety requirements. Currently, Coping and one other company, Access Instruments, equally supply approximately 80% of the SLM market. needed for a 3D AOI market. We have grown over 50% in this market in the past two years. With the accelerating growth in electric vehicles, we believe this is an increasingly important opportunity for coping in the coming years. We plan to host a webinar early next year
John
to go in depth into this technology and demand for spatial light modulators. Let's quickly review a few more recent successes.
Rich
As I just mentioned a few moments ago, we recently announced a 1.1 million order to provide eyepieces for jet systems. which are scheduled for delivery next year. The JET system is a portable handheld product designed to rapidly acquire, precisely locate, and accurately engage targets with precision-guided missions. We are providing the program with a high-resolution, low-power, ruggedized IP using our specialized optics and micro displays. We also announced our cyber display WQVGR display has been designed into DiveSoft's newly launched optical display adapter for divers and provide easy access to critical diving area data. Our display offers users a bright, clean, easy-readable image in a small form factor. This wind is an example of many industrial and medical areas looking to integrate the capability of a micro-display and optics for added utility and safety in their AR, VR products. When turning to our organic light-emitting dial or other activities, we receive approximately $850,000 follow-up order for our proprietary Lightning 2K silicon backplane wafers. As a reminder, a Lightning 2K backplane supports OLED micro-displays with 2048 by 24-48 resolutions in a one-inch diagonal size and can run up to 120 hertz with low power consumption. This repeated audit is in line with our expectation of growing market demand for backplane wafers for OLED micro-displays and validates our fabulous business model.
John
Now, let me take a time, a few minutes, to discuss our micro-display strategy.
Rich
Since our early days with funding from DARPA, Hoping has advocated strongly that micro-displays should reside on silicon IC backplanes. In fact, all advanced micro-displays should be on silicon IC backplanes.
John
Therefore, from the very beginning, all our micro-displays are on silicon IC backplanes.
Rich
We believe we are the world's only provider of LCD, ELCOS, micro-OLEDs, and in the future, micro-LED micro-displays, all on silicon backplanes.
John
In fact, our key feature and differentiation is in the silicon semiconductor backplane designs and processing steps. Coping has focused on the silicon semiconductor backplanes for two decades.
Rich
They have been vigorously integrating sophisticated and complex IC and display driving designs into the backpanes to enable display for that matter, are spatial modulators. We have layered our designed, our specially designed IC silicon backplanes with either liquid crystals, ferroelectric liquid crystals, organic light-emitting diode, or inorganic light-emitting diode to make what we trademarked as displays on chips. We would like to plan to showcase many of such DOCs in our suite in the upcoming CES in January 2022.
John
In short, our revenue generating business is strong, driving good momentum into Q4.
Rich
and next year. At the same time, we're actively innovating to advance our technology roadmap, paving the path for the future growth of AR, VR, and MR applications. The current market trends indicate exciting and growing opportunities, especially in the Metaverse VR platform. Open is an active and persistent pioneer in furthering this technology, beginning many years ago in defense, then in enterprise, and now in consumer applications.
John
We are very well positioned to capitalize on those opportunities.
Rich
We're looking forward to the coming in-person CES in January, where in addition to our display on chips, we plan to exhibit many of our recent exciting developments related to ARVR. Interestingly, I was asked a few days ago whether we can even show the F-35 helmet. This is the worst most advanced production AI helmet in the world. As many of you know, our cyber display is so soft in the helmet. We will try, but it's most likely impossible to achieve that. Regardless, we have many other interesting devices to show you. to join us at CES. Now, we turn this call to Rich to review the financial details.
Richard Snyder
Thank you, John. Turning to our financial results, total revenues for the third quarter ended September 25, 2021, with $10.9 million, compared with $9.5 million for the third quarter of September 26, 2020, a 14% increase year-over-year. Product revenue for the third quarter ended September 25th, 2021 was $6.6 million compared with $6.5 million for the third quarter September 26th, 2020. Our defense product revenues for the third quarter ended September 25th, 2021 were $3.5 million compared with $4.8 million for the third quarter ended September 26th, 2020. As John previously discussed, during the third quarter, we reduced shipments of our product used in thermal weapon site systems to a customer but in order to make process enhancement. We expect to increase our shipping rates for this product in the fourth quarter. Our industrial product revenues for the third quarter ended September 25, 2021, with $2.7 million, compared with $1.7 million for the third quarter ended September 26, 2020, an approximate 65% increase on the strength of sales of products used in 3D metrology equipment, the 3D AOI that John referred to. And it was partially offset by client sales of our products used in headsets, used for applications in manufacturing, distribution, and public safety. Funded research, development, and other reviews were $4.1 million for the third quarter ended September 25, 2021, compared with $2.6 million for the third quarter ended September 26, 2020, an approximate 60% increase year-over-year, primarily due to an increase in customer-funded programs for U.S. defense. Cost of products sold for the third quarter ended September 25, 2021, were $5.1 million, compared to 4.8 million for the third quarter ended September 26, 2020. Growth margins for the third quarter ended September 25, 2021 were 22% compared to 26% for the third quarter ended September 26, 2020, reflecting the manufacturing inefficiencies due to lower sales volume of our products for the FWSI program. Regarding global supply chain issues affecting many industry, We have not experienced any material product shipping delays related to supply chain issues during the first nine months of 2021. However, like most companies, we are facing challenges. The situation is very dynamic, and we continue to work around the issues it presents. Research and development expenses for third quarter 2021 were 3.8 million compared to 2.7 million for the third quarter of 2020, a 38% increase year over year. R&D expenses for the three months ended September 26, 2021 increased as compared to three months ended September 26, 2020, primarily due to an increase in customer-funded development programs and internal R&D expenses for OLED development. Selling general administrative expenses were $4 million for the third quarter of 21 compared to $3.1 million for the third quarter of 2020, excluding the non-cash stock-based costs SG&A expenses were 3.6 million for the third quarter of 2021, compared with 2.9 million for the third quarter of 2020, a 25% increase. The increase in SG&A, excluding non-cash stock compensation costs, was due to an increase in other compensation costs and bad debt expense. Other income was approximately 51,000 of expense for the third quarter of 2021, compared to 168,000 of income for the third quarter of 2020, During the three months ended September 25th, 2021, we recorded 29,000 of foreign currency losses as compared to 183,000 of foreign currency gains for the three months ended September 26th, 2020. Turning to the bottom line, our net loss attributable to the controlling interest for the third quarter of 2021 was 2.1 million or 2 cents per share compared with a net loss to controlling interest of 957,000 or $0.01 per share for the third quarter of 2020. Non-GAAP net loss attributable to controlling interest for the third quarter of 2021 was $1.7 million, or again, $0.02 per share, compared with non-GAAP loss attributable to controlling interest of $760,000, or $0.01 per share for the third quarter of 2020. Copeland's cash marketable securities were approximately $31.7 million at September 25, 2021, as compared to 20.7 million at December 26, 2020. Net cash use and operating activities for the third quarter ended September 25 was approximately 3.5 million. During the three months ended September 25, 2020, we sold 600,000 shares of our stock under our ATM program for proceeds of approximately 4.8 million before deducting expenses paid by us of 145,000. For the nine months ended September 25, 2021, we have sold 3,096,697 shares for gross proceeds of approximately $21.7 million for deducting broker expenses paid by us with approximately $700,000 pursuant to our existing and previous ATM agreements. Third quarter amounts for depreciation, stock compensation are attached in the table to the Q3 press release. The amounts discussed above are current estimates, and the listener should review our Form 10-Q for the third quarter 2021 any possible changes and, of course, additional disclosures. That concludes our prepared remarks. Operator will now take questions.
Operator
All right, thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.
spk01
And we'll go ahead and take our first question from Glenn Madsen with Leidenberg Ellman.
Operator
Please go ahead.
spk10
Yes. Hi. Thanks for taking the questions and congrats on the quarter. The bounce back that you expect in the FWS revenue, do you think that's – Is that just kind of a bounce back that makes up kind of some of the push out from Q3? Or is that, you know, is there a higher level of production now that the facility that had been retooled has completed that process? Just general sense of the pace of a business from that contract, thanks.
Richard Snyder
Yeah, so we are going to try making up as much of the Q3 as possible in the fourth quarter. And going forward, our overall production rate should be higher on a weekly basis because of the profit.
spk10
Yeah. The better R&D revenue, is that a signal that, you know, I think John spoke to a number of defense programs that you're in. Is that number increasing or is it just that the scope of the work within those programs is picked up this quarter? And is that you expect that to continue for a little while or in color there?
Richard Snyder
Just in this particular quarter, so we have a number of contracts that go out for an extended period of time, and it was just a reflection of the amount of work that was done this quarter. It's done on a percentage of completion basis. So it's that piece of the business is somewhat lumpy. It depends on what you achieve in a particular quarter.
spk10
Right. Great. And as far as the industrial side, nice pick up there. You mentioned that the optical inspection side of the business is doing well, but that the headsets were, you know, is offset by a little bit of weakness in headsets. Is the, you know, I guess is the first trend sustainable? And second off, is the headset something you expect to bounce back? Or is that just kind of that business kind of quiet right now?
Richard Snyder
Yeah, so as it relates to the 3D AOI, we do believe that is sustainable. And we've had good backlog and orders for that business right now. As it relates to the headset business, our customers tell us they do expect that to get stronger going forward.
spk10
Great. Last one for me. I don't know, Rich, for you or for John, but on the metaverse stuff, I guess Facebook's putting some kind of $10 billion or so investment in this space, so obviously they're going to be building some of the best products out there. So I guess, John, did you expect that you'd be competing to get into those headsets, so to speak? And then just generally speaking, with the pace that Facebook is going at it, do you expect that's going to accelerate the whole industry in general and force other major tech players to kind of advance their projects within the VR space and that as well could potentially serve you guys well. Just some color there would be great.
Rich
It's a very good question, Glenn, on the metaverse. As we know, we have been believing, I always believed that the next generation of transformation is going from that cell phone to the Metaverse world. We certainly cannot compete with Facebook, let's face it. They have more than 10,000 people working on it. But they spend a lot of time, most of the activities, on software and applications. As you well know, such a new platform, a lot of hardware is needed. The most important hardware needed are the display and the optics. And we've been focusing on that since day one through the upper day. They also believe that's what's most important is the hardware. After hardware, of course, software and applications, apps. And Facebook are very good at that, and we are not doing that. We'll always be focusing on how to provide the best image to you from a smaller form factor. And that's exactly what defense and enterprise guys want. And we dominate these two areas. And hopefully we will be providing the critical components for the metaverse. In fact, it's interesting. We have trademarked the glass. Our trademark for the VR glass is called the metaverse glass. We actually have the trademark. We are way ahead on the metaverse. Our trademark for VR glass is called the metaverse glass. So I will not go into a lot of details what's needed for display. Maybe somebody will ask that. For the metaverse, the requirement for displays of optics are quite different from the AR glass, which we do for the F-35. So maybe I would let other people ask the questions. But the requirements are very interesting, and I think we are very well situated for that.
John
Great. Thanks for all the color and congrats on the quarter.
Operator
Again, that is star one to ask a question. If you find your question has been answered, you may remove yourself from the queue by pressing star two. We'll go ahead and take our next question from Spencer Kirschman with H.C. Wainwright. Please go ahead.
Spencer Kirschman
Hi, John and Rich. This is Spencer Kirschman in for Kevin Deedy. Congrats on the quarter. I was kind of curious to get some more thoughts on the difference between the glass set up for components for the FWSI and the coming metaverse that you were just talking about, John.
Rich
Yeah, I think in the case of the F35, which is the AR glass, what they need is very rugged, overly rugged. In fact, all the displays for defense applications, ruggedness, high precision, are most important. Then the other cases, like for F-35, it also had to be very bright in the daylight. But at nighttime, it is a video AR. It's using camera. So it's quite different, okay? As I say, I wish that we could show you the helmet, but I'm afraid that they will not be allowed to do that. But in the case of VR for the metaverse glass, it's very different. Metaverse glass is totally immersive. Okay. So the way to good analogy is go to see, go to an IMAX theater. Because you want to see a very immersive, large image. The current IMAX theater is very interesting. If you ever go to see an IMAX theater, they have two 4K projectors going to the screen. 4K. But the brightness is not that important. It's always bright enough for immersive. So it's not the brightness that's most important. is the image quality. So what happens? You need high resolution. You also need very high dynamic range. If you go outside to buy a TV today, the high-end TV all have this called HDR. What does that mean? High dynamic range. They will give you 10 bits of dynamic range. 10 bits, not 8 bits, okay? Another thing people want is very high speed, 120 hertz. to reduce the latency, and get fast action for games. So again, for the metaversal activities, the display do not need to be very bright. It is immersive. But you need to have the HDR 10-bit, and you need to go to 120 hertz. So I think that's the most important. When you look for display for metaverse, they say, how fast can you go? How many dynamic range? I think that's the thing we would like to show you in the coming CES. Ask for how good the image is, how good the color is. And these are the key things, just like TV or IMAX theater. The second thing for metaverse is really the optics. You have to get very, very thin optics and give you a very large magnification, because in metaverse world, everybody wants a huge image like IMAX theater. There's only two current technology that's good for optics. One is the Fresnel lenses, which now Oculus 2 is using. The other one is Pancake Optics. Pancake Optics is our trainer, as you all know. Also, one of the inventors of Pancake Optics is actually in our company. So we're always very good at Pancake Optics, especially for defense. Now we use Pancake Optics for consumer, and we turned that all into plastic optics. So the important thing for metaverse, you've got to have wonderful optics to give you a huge magnification and very thin optics, very lightweight. The second one, you've got a display that gives you a very high dynamic range, very high resolution, very good color, and high speed. So these are the things that's needed. Of course, if the consumer were at the end, you need to have to produce them in quantity. So I hope I explained that. Metaverse, the hardware, optics, and displays.
Spencer Kirschman
Yeah, that's really great, Culler. Really appreciate it. Shifting gears a little bit, just curious on the number of productions that are currently in LRIP and then those that you expect to go to full rate production either in the balance of the year or in
Richard Snyder
So we have two in production, F35 and FWSI. We have two in LRIP. We talked about one of them, JET. And then we expect in this fourth quarter, in the next few weeks, hopefully an award for a third. And then with a little luck, they're all by the end of the first quarter into production out of LRIP and into full production.
Spencer Kirschman
Okay, thank you. Great caller. I really appreciate it. I'll jump back into here. Thank you.
Operator
All right. We can go ahead and take our next question from Craig Rose with Axiom Asset Management. Please go ahead.
Craig Rose
Hey, John. Good quarter. Thank you, Craig. You said you had 50% market share of the optical inspection equipment. Did you say how large that market is?
Rich
Yeah, I want to make it clear, we did not have 50% market share. We have actually about 40%, okay? We grew about 55% in the last two years in the revenue. The current market is still relatively small, okay? Actually, so this is a few meanings for us. Remember, we provide a special live modulator. Currently, the whole market, we have two strong players, ourselves, The second player is TI. Each one of them owns about 40% of the market share. We're actually going to have a webinar coming out early next year, because I think this is a very interesting area, because as you well know, all those inspection systems right now, whether it's PCB, maybe even semiconductors, they are all using 2D inspection machines. As the things are getting too complicated, electronics, So 3Ds are needed. It's just very early right now. We're seeing a very early stage. And in the electric vehicles, the PCB boards are so complicated and so robust. So we believe all the equipment is eventually all going to go from 2D to 3D. So the market could be very big. So we're going to have a webinar early January, maybe February, to discuss the technology, the comparison, the competitive world and where it's going to go. We're still studying how big the market is and why it's growing so fast.
Craig Rose
Okay, thank you. As far as the plastic pancake optics, where would you expect that to be used first?
John
In the metaverse class.
Rich
Okay, and is that... Yeah, because maybe actually, I'm sorry, I was a little too short. Sorry, I apologize for that. The plastic pancake optics has this feature. It can magnify your display maybe in area-wise 30,000 times. Okay, so you take a poster stamp display and you look into it, look like an IMAX theater. But it's also very thin. Because as you all know, the optics are bouncing inside. And remember, one of our inventors of pancake optics is in our company right now. So we know how to do that. And third, you have to be very light. We want the headset to be very light so you can wear it for many hours, not just for 10 minutes or 15 minutes. So this is the ideal thing, all plastic pancake optics. It's what everybody's looking for. for the last four years, everybody, not just us. It's just that we've invented it first.
Craig Rose
Are your prototypes ready for CES?
John
Yes.
Craig Rose
Okay. Anything else you want to tell us about CES?
Rich
We hope to show this, not only to prototype the optics, we hope to show you the early type of metaverse glass with this type of optics.
Craig Rose
Okay. Thank you very much.
Operator
All right. It appears there are no further questions at this time. Mr. Sanna, I would like to turn the call. Oh, we actually did get one more question. My apologies. We'll go ahead and take our next question from Patrick Metcalf, who is a private investor. Please go ahead.
Sanna
Good morning, John. You sound fantastic. Exciting times ahead, obviously.
John
Thank you, Patrick.
Sanna
Okay. My questions revolve around your hidden treasures. I'd like to know how Lenovo NuVision and RealWear are looking for 2022. Any other of the assets?
Richard Snyder
Yeah. Patrick, you know, in all honesty, you really should contact Lenovo and RealWear and ask them for guidance.
Rich
But I think I asked the question, answered the question a little bit differently. Patrick, thank you for the question. You know, our company has three stools. One leg is the defense and enterprise business, and that's going very well as revenue generating. The second is really very actively invest in the key components for metaverse glass, displays and optics. The third leg is how activities in licensing spin out companies of which we own equities and also has royalties, and actually sell them the components that they need. So, therefore, there are a bunch of companies out there, as you all know, and certainly we already announced that. RealWear is one of them. In fact, V6 was one of them, of course, and Solos in glass was one of them. We just announced last year we licensed to a company to make surgical headsets. There's another one of them, and so on and so on. This is our third leg. We provide people these components, knowledge, license, and get equities and component sales. So, yeah, I think those companies, we're all praying that they'll be successful, and some of them, many of them are very successful.
Sanna
Okay, great. And John, the only reason why I ask is at the end of last conference call, you had made mention to the fact that more licensing deals would potentially come. So I just was going to ask, how's that effort going into 2022? Do you see maybe one or two more happening in 2022?
Rich
The answer is we're certainly working pretty hard now, especially with the metaverse going starting going so strong, we expect to be more deal, I mean, more deals coming up. But anyway, I do think, again, there's going to be an in-person CES. Last year, there was no CES. So this in-person CES, I think it's going to be very interesting. Hopefully, we'll be able to show you additional devices. People are using our components for really beneficial applications, not just for the defense, or for some enterprise. Now they're using for medical, and hopefully very soon for consumer applications.
Sanna
Okay, and one last question, John. Let me get this straight. You have trademarked Metaverse glass and pancake optics?
Rich
Yes. Pancake optics, we have a registered trademark. Pancake optics, we have a registered trademark. Of course, CyberDisplay, all those are registered trademark. On the metaverse, it's not registered yet. It's trademarked. As you well know, registered has gone through a different process, a very vigorous process. And of course, so metaverse, yes, with our trademark.
Sanna
Okay. I now know why you sound like you're 37. So good luck. Congratulations. And you sound incredible.
spk06
Yeah. Yeah, I think this is going to be a very interesting couple of years. Thank you. All right. Have a good one.
Operator
All right. Now it appears there are no further questions at this time. Mr. Fan, I'd like to turn the conference back to you for any additional closing remarks.
Rich
No, thank you very much. We hope to talk to you again on the next earning call, but do come to CES. Thank you.
Operator
This concludes today's call. Thank you all for your participation. You may now disconnect.
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