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Operator
At this time, we are still gathering additional participants. We will get started momentarily. We thank you for your patience and ask that you please continue to hold. Ladies and gentlemen, please stand by. We're about to begin. Good day and welcome to COPEN's first quarter 2022 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. 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 progress in executing our strategy and then I will go through the first quarter of 2022 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 3, 2022, 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. 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
Thank you, Richard. Good morning.
Richard
And thank you all for joining us to discuss our first quarter results of 2022.
John
I am speaking from Hong Kong this evening, which is 12 hours ahead of Boston time. And hopefully, my phone connection is good. I must say, I'm very happy to be able to travel again and to meet with customers, which is so important in developing our business.
Richard
On my way home, I will be screened by the 2022 Society of Information Displays, or SIT, trade show, which is taking place in early May.
John
in San Jose.
Richard
Turning to our former business, we are pleased with the results of the first quarter of 2022. Overall, year-over-year revenue was flat as our product sales were lowered but were offset by our strong funded research and development revenues. Our product revenues were affected by the global supply chain issues, particularly during the last couple of weeks of the quarter. As a result, we're 12 or 14% lower than Q1 of last year. In the past few quarterly earnings calls, we have mentioned our concern of the global supply chain production issues. While 14% year-over-year decline in product revenues is not something that we're pleased with, given the circumstances we're in now, we're also not discouraged by it.
John
Demand for our products remains strong. Let me explain why this issue is challenging to deal with.
Richard
because we make very complex components and assemblies which go into extremely sophisticated interdependent defense and industrial systems.
John
We cannot simply switch a component that's in short supply with another component.
Richard
When we identify an issue and see a need to switch to a different component, we must notify our customer, explain our plan, and in most cases, have to obtain their formal approval. Then we must perform extensive testing on our revised product to ensure its compliance. and the specifications and provide the testing results to our customers for their review. Then our customers may be required to perform extensive system testing and obtain their own customers' approval. This process is time-consuming, and it means that in addition to our normal development activities, we must allocate resources to identify replacement components and perform additional testing. In spite of all this, we were able to achieve relatively high level of manufacturing while allocating resources to address these historic issues and also make progress in our development activities. which are really crucial to our long-term growth. That's why overall, we're satisfied with the first quarter results. We continue to actively manage the supply chain issues. And while we expect intermittent supply chain disruptions of some of our materials, we will have sufficient components to continue our 2022 growth over 2021. As we previously discussed in the fourth quarter of 2021, we announced new orders of our current production program, F-35, and our major weapon-sized program. And this gives us a strong foundation for 2022 product revenues.
John
Looking now into the future of our current programs, we'll receive feedback that the very unfortunate situation in Ukraine may eventually result to more product demand.
Richard
Turning to our organic light-emitting dial or OLED product line, our recent press release indicated we're making good progress in building this business. As discussed in the press release, we've received production orders for our 720p lightning OLED micro-displays. And in other cases, a founder customer is buying our 2K OLED wafers, which are the fundamental building block to make OLED display. We believe these two new orders are testable to the competitive advantage of a highly advanced silicon backplane design and display performance It also validates the power of our fabulous business model. Under our model, we either sell finished OLED displays to our customers by working with our OLED Foundry partners, or we sell our highly advanced proprietary backplane wafers to our OLED OEM partners who complete the micro-displays for sale to their own customer base. This business model provides us a lot of flexibility to meet customer demands without incurring the major fixed capital investment associated with the OLED deposition process. We continue to work on design wins with other new customers. Regarding to our research and development programs, we continue to make excellent progress on our customer-funded defense development programs, which include armored vehicle targeting systems, rotary wing aircraft pilot helmets, and additional weapon-side programs. We expect the rotary
John
wing program to go to production in the second half of this year, and the armored vehicle program to go to production after 2023.
Richard
Perhaps it is important to point out the breadth of the scope of our defense business. As a reminder, Coping provides advanced medical displays optics, and rugged dust-free assemblies. For fighter jets, such as F-35 or rotary wing aircrafts, we provide displays. For gun sites, we provide displays, optics, and module assemblies. Now, for armored vehicles, we actually provide the whole full system units. They include displays, optics, electronics, etc., etc. Currently, all our defense business and enterprise business are based on our advanced LCD on silicon displays. However, We have been actively developing OLED on silicon displays for over five years, and now one of the leading OLED on silicon displays developers. I must mention again, we have a longer-term development project, and that's focused on micro-LED. LED micro-displays has potential for super high brightness and low power consumption, which can make them ideal for many applications, including see-through, augmented reality, and mixed reality applications. In summary, consumer demand is strong on all our core product groups, and we're actively managing our supply chain challenges. We continue our momentum on innovating and advancing our technology for AI, VR, and MR applications. We believe strong interest in the metaverse is just getting started, and we feel we are very well positioned to capitalize on the opportunities it provides. We entered 2022 with very strong backlog of orders. And we believe 2022 will be another year of good growth. We are excited for the growth of Copain as we see a wave of growing interest in AR, VR, and MR products and applications. Our technology advances and current market conditions are very favorable. and we believe coping is very well positioned to capitalize it. Finally, I would like to make a comment on the equity gain in Q1. As some of you know, coping is very strong in IPs with over 200 patents and patent applications. Providing displays, optics, and module assemblies. One of our IP monetization strategy is to license some of our IPs to startup companies. And as a copy, as a part of a compensation, we often receive equities in the startups.
John
We have completed a few of those transactions. And our goal is to do more.
Richard
Some of the early transactions are not going to a more mature stages. We're actually very excited with this IP business model. Now we turn the call to Rich to discuss the financial aspects of the quarter and the full year. Rich, go ahead.
Richard Snyder
Thanks, John. Total revenues for the first quarter ended March 26, 2022 were $11.6 million compared with $11.7 million for the first quarter ended March 27, 2021, essentially flat year over year. Cost of products sold for the first quarter ended March 26, 2022 were $7.8 million compared with $6.4 million for the first quarter ended March 27, 2021. The increase in cost of sales as a percent of product revenues for the first quarter of 2022 as compared to the first quarter of 2021 was due to lower production efficiencies resulting from lower volume of units produced, approximately $450,000 of warranty cost reserves, and approximately $300,000 of additional reserves for excess material. The lower production volumes resulted in less absorption of overhead costs, The additional warranty cost reserves relate to units shipped before the new production processes the company implemented in 2021. And the additional reserves for excess material is the result of the company procuring materials for contingency purposes as a result of the supply chain situation. Research and development or R&D expenses for the first quarter of 2022 were $5.4 million compared to $3.6 million for the first quarter of 2021. a 52% increase year-over-year. R&D expenses for the three months ended March 26 increased as compared to three months ended March 27, 2021, primarily due to increased spending on U.S.-funded development programs and internal R&D expenses for organic light-emitting diode or OLED development. Selling, general, and administrative expenses were $4.4 million for the first quarter of 2022, compared to $5.9 million for the first quarter of 2021. SG&E expenses ended March 27, 2021 at approximately $2.4 million of stock-based compensation costs as compared to $440,000 for the same period in 2022. Excluding the stock-based compensation costs, SG&E expenses were $4 million for the first quarter of 2022 compared to $3.5 million for the first quarter of 2021. The increase are attributable to marketing expenses, which were curtailed during the COVID and additional compensation costs. Other income was approximately $4.7 million for the first quarter of 2022, primarily resulting from the mark-to-market of an equity investment. As John discussed, part of Copen's strategy is to monetize our deep intellectual property portfolio, and as part of that, we receive an equity interest in certain licensee companies when we license the IP to them. During the three months ended March 26th, 2021, we recorded $35,000 of foreign currency gains as compared to $28,000 of foreign currency gains for the three months ended March 27th, 2021. In the bottom line, our net loss attributed to Copen Corporation for the first quarter of 2022 was approximately $1.4 million, or $0.02 per share, compared to net loss attributed to Copen Corporation of $4.1 million, or $0.05 per share for the first quarter of 2021. Kobin's cash and equivalents and marketable securities were approximately $26.3 million at March 26, 2022, as compared to $29.2 million at December 25, 2021. First quarter amounts for depreciation, stock comp, and expense are attached in the table to the Q1 press release. The amounts discussed above are based on current estimates, and listeners should review our Warm 10Q for the first quarter 2022 for any possible changes and additional disclosures. Operator, we will now take questions.
Operator
Thank you. Ladies and gentlemen, if you have a question or comment, it is star 1 on your touchtone telephone. Again, that is star 1 for any questions or comments at this time.
John
We'll take a question from Glenn Mattson with Latimer Exhalman.
Operator
Your line is open. Please go ahead.
John
Yeah, hi. Thanks for taking the question. So just in terms of the top line, can you just talk about the lower component revenue? You know, it's pretty evenly split, I guess, between military, industrial. Was that all related to supply chain issues and there was nothing around demand around that? And then also, can you just touch on the status of the customer where mid-last year you had to kind of retool the facility and that kind of ramped back up and got back to normal production? Is that still the case with that customer as well?
Richard Snyder
So in both cases, yes, it was supply chain issues in both the defense and the industrial. And it really was the last couple of weeks of the quarter when it kind of hit us. And so as John indicated in the prepared remarks, We think we're in good shape going forward. We do expect, you know, intermittent supply chain issues now and again. We're not out of the woods. There's some indications that the situation is getting better, but we want to be cautious to the investors. And at this point, yeah, the process changes have been made that we discussed in 2021. The $450,000 of additional warranty costs was kind of the last piece of it. It was kind of a negotiated settlement. of units shipped before the process changes. So we think, for the most part, it's behind us now. And now it's just fulfilling demand, which, as John indicated, we start the year off with a very strong backlog.
John
I guess, would there be any, you know, catch-up in revenue over the next couple quarters based on the fact that the demand was there and now the supply chain issues perhaps are in a better situation? Is that something to think about?
Kevin
That's definitely the goal. Yeah, that's why we say it's a big growth.
John
Yeah, right. So a question also for John. Can you talk about the new Oculus that's coming out? I believe they're talking about an OLED display there. Can you just give your thoughts on what you think about the new product and what that means for the stuff that you're doing, You know, it doesn't seem like it's with them perhaps, but maybe with the industry shifting in that direction, if that would be a benefit to you guys.
Richard
Yeah, of course, this is still kind of not totally official, but we can guess what it is, right? So it is OLED. Our guess is OLED on glass. It's not OLED on silicon. But OLED, that's still happy news. The one current one is LCD on glass. So you can see the shift from LCD to OLED, which we always anticipate. So the next move, of course, we believe will be OLED go to silicon. That's one. That is very good news. I think that another very good news is we now believe it is a pancake optics that we, you know, we have a global trademark on pancakes. One of the inventors of pancakes is actually in our company, but it is not all plastic pancake. That pancake has some glass in it. That conversion really indicate where the market is moving, the technology is moving. Optics is going to pancake. Display is going to OLED, but not fully. Display is going to OLED on glass, not going to OLED on silicon. And a pancake is pancake with glass in it, not plastic. So I hope I answered your question. It's a good trend.
Kevin
Right. No, that's very helpful. That's it for me. Thanks. I'll get back in the queue.
Operator
Once again, it was star one if you had a question. We will go next to Kevin Deedy with HC Wainwright. Your line is open. Please go ahead.
Kevin Deedy
Hi, gents. Thanks for having me. Could you comment on maybe the number of devices that you had to re-engineer the supply chain on? I guess the number of components that had to go through additional testing?
Richard
We probably may not be able to do this with care for the rich. There's so much involved with defense.
Richard Snyder
Yeah. Yep. Yeah, honestly, Kevin, we did get a notification from the U.S. government that there's a lot of supply chain issues out there, and they are somewhat concerned about companies divulging information around it. And they referenced us to the DFARs, which prohibit really discussions about systems and how they operate.
Richard
Yeah, I think, Kevin, as you well know, the supply chain issue is not unique to coping. It's a semiconductor chips are missing. And some of the chips are really not that advanced, but they are missing. And this affects everybody, whether it's defense industry, industrial industries. And in many ways, I'm pleased that our people actually manage it reasonably well.
Kevin
Okay.
Kevin Deedy
Rich, you mentioned you didn't think you were out of the woods yet. What... what do you think we should look out for?
Richard Snyder
Well, so we have commitments from vendors which would indicate that we're in good shape for the rest of the year, but we're just putting the but caveat there that I think given the situation, I think it's unrealistic to think that, you know, we're out of the woods. We do see, you know, we talk to people in the industry. They do see light at the end of the tunnel. But we just want to make sure that we get a couple more quarters under our belt before anyone starts declaring that we're out of the woods.
Kevin Deedy
Okay, fair enough. You've referenced backlog a number of times. I guess you don't want to quantify it, which is fair, but can you give us a relative move versus the end of the year?
Richard Snyder
Well, so we did indicate that we had a $19.8 million B.O. in December. In November, we had a 2.3, and then there was another million-something for another program. So those were all in November, December, so you can assume that's all shipping this year and possibly into the beginning of next year, but the bulk of it will be this year.
Kevin
Okay. Okay.
Kevin Deedy
John, you touched on, you know, the micro LED. And if I remember correctly, you're developing both in Japan and China. Can you give us a status on that? What's your view to having... Yeah.
Richard
So what do you want me to tell you?
John
Well, first of all, I'm not sure we...
Richard
Yeah.
Kevin Deedy
I'm just kind of curious about the development and the time to market, that kind of stuff.
Richard
Yeah. See, micro-LED, as you all know, some people always consider it the ultimate display, which it is true. If it can be developed and produced in a cost-effective way, it probably solves everything that we want to do AR, VR, and MR. We work with a Chinese company called on monochrome micro-LEDs. We work with a Japanese company to do full-color micro-LEDs. Both of them are super, very high-advanced micro-LEDs. A lot of them are customer-funded. These are customer-funded activities. And the progress is good. I think China was, again, because of the lockdown in China, probably affects us a few weeks. Otherwise, we might already have something exciting to announce for this quarter. So in general, things are going well, and some lockdown has slowed down some of the things, but we're still making good progress.
Kevin Deedy
So how would you recommend we look at time to market?
Richard
Well, I can market for micro every day. Nobody can give you, nobody's going to get the real market micro every day this year. Zero. All over the world. Right. Okay. But we're making good progress. I think we should be one of the leading team coming out, but not this year. For product, for development, for show and tell, for demo, yeah, you'll get it this year.
Kevin Deedy
Okay. That means you could have product next year, maybe, right, 23?
Richard
God willing. Okay, fair enough. It's a tough technology. Our goal is to demonstrate the potential of this display and show display this year. If we can do that, it could be a major achievement, not just for coping, for the industry.
Kevin
Okay.
Kevin Deedy
I know you referenced the conflict in Europe. I was wondering if you've seen any, I guess, change in thinking because of that from your you know, your defense-related customers?
Richard
Well, I mean, nobody want to celebrate for such a disaster, but we are in defense industries, and we do make systems and help components for the systems, which are used extensively in the world.
Kevin Deedy
Right. So I guess what I'm wondering is, is there greater interest in part of your customers and some of the product that you're making involved?
Richard
Well, just for a simple argument, as an example, that was announced. So we can say that Germany announced that they want to buy more F-35. Okay. Okay. And we're also F-35. So you can, I think we can connect that.
Kevin Deedy
Right. Thank you. I appreciate you helping me with that, John. Now, am I also correct in assuming that that supply chain is predominantly in the U.S.? Or are you still sourcing product from Asia that goes into, you know, defense-related components?
Richard
Yeah. I think, as you well know, a lot of supply chain problem is agonizing because the automobile industry is affected by it too. What you're missing is like a microcontroller, which is a very low-tech product. It's made by everybody in the whole world, Taiwan, Korea, China, Japan. But they're short. And once they're short, you can't even make a car too. Everybody's affected by a microcontroller, not advanced ICs. It's a really kind of mundane ICs. So for us, just like automobile, you can't buy another IC. They're put in there. You have to get your customers approved and get your compliances. So it slows down things. But it's not fundamental. It's not like an IC, you cannot get it anywhere. It's a very common IC. IC. So there's no situation that you cannot get it. For instance, the office owners, it comes from China. No, those ICs come from everywhere in the world. It's just that it's short. Everybody's double, triple buying it.
Kevin Deedy
I see. Okay, I got it. I got it. Thank you. Just maybe your take on the progress that RealWear and Solos are making. Sort of just to finish up.
Richard
Yeah, I mean, I'm glad you mentioned it. Those are the companies that were licensed and in fact take equities in. I don't want to go too far into it. Obviously, some of them are already making progress, so we're right up the equity game, and I think that will continue. The one that was formed three, four, five years ago, it's just like a VC situation. Some of them become mature stage now, and you're going to have a series of, hopefully, monetizing event, like VC, we're going to get things come back, and with some significant equity gain. But remember, our goal is more than just equity gain. We dip it in three ways. We have royalties, and we also sell them components, plus equity gain. So this way, our business model is very good. So I think this is one area that is not well known by the shareholders, We have several ways to make money for the shareholders. Once we do sell products, we do sell a lot of product defense, but our product is not only just selling display now, we're getting more and more into assemblies. In the armored vehicles, that's just the full system. And you can count how many armored vehicles it's going to be, right? And then we have IP models.
Kevin
Okay.
Kevin Deedy
Well, thank you. Thanks for taking my questions, gentlemen. Appreciate it.
Richard
Second question. Thank you. I wish that you were also in Asia traveling. It's not easy traveling in Asia. I got locked down, got quarantined for seven days. I just got out.
Operator
We'll move next to Patrick Metcalf with iBankers Direct. Your line is open, Patrick. Please go ahead.
Patrick Metcalf
Hey, good morning, guys. Good evening, John. Rich, I want to give Rich credit for being conservative the past few quarters on the supply chain issues, and it sounds like that's now behind us with the but caveat, but I want to thank you as a shareholder. And then secondly, John, I want to talk to you about a couple of events that happened in the marketplace recently and what you can or cannot speak to. Google made an acquisition for $1 billion for a micro LED engineering company. And then Snap acquired an optics company for $500 million called Wave Optics. Supposedly, Samsung made an investment into DigiLens, another optics company. So with Copen sitting at $150 million, having a portfolio of micro displays, and supposedly having the exclusivity on plastic pancake optics, I just wanted to see if you can talk to that or speak to it.
Richard
Well, I guess the market temporarily is not very efficient, I guess.
Patrick Metcalf
Okay. All right. I'll take that as a positive. Okay. And then I wanted to ask you, as far as plastic pancake optics is concerned, how do you plan to go to market with that? Because if we go back to the HBT days, if I understand it correctly, you had the greatest technology in the HBT, but the competition came in and stepped on it. So are you going to go to market in a different approach, a different strategy to try and you know, get that 100% market share, if you will?
Richard
Yeah. If you recall to the HPT, I think some of the shareholders may not know, it is a transistor we invented, and then for cell phones, it's a power transistor, and Skywork and Qualcomm use it for five years was exclusive to it. And then, of course, somebody, we actually didn't patent it. stupid me, and then somebody in Asia actually can start making it. Then we got jinxed, so we sold the business, but in fact, probably we should have kept it, because we still, that particular business that we sold to, the company still owned about 50, 60% of the market share in the world, and it's actually quite profitable. So I'm learning my lesson, so you know, even the people come in, you're the leader. You don't get displaced that quickly. Okay. So I don't know where to answer you.
Patrick Metcalf
Yeah. Okay. Okay. And then lastly, on the research and development side of the equation, the revenue side of the equation, how many VR customers do you have? Can you answer to that or is that secret?
Richard
Well, I mean, there's how many units, how many component revenue. Just listen, the F-35 is the most advanced VRA assist helmet in the entire world. They don't build too many of them, but they pay well. They do pay well, and we're making profit on it. So there's not really how many units, it's how many the customer is willing to pay you for the value, right? So to this point, no question about it, Oculus sell a lot of revenues. They probably paid component guys. I think the component guys probably not making money, maybe not losing money. But Oculus, I don't want to speak for Facebook. I don't think they make money selling every unit they sell. Thank you, guys.
John
We sell to Avionics, and we make money. Okay, thank you, John.
John
With no other questions holding, Dr. Fan, I'll turn the conference back to you for any additional or closing comments.
Richard
Well, thank you very much for joining us this evening or this morning. I would like to remind everybody that we are having an annual meeting on May 26, 2022. I'll be back in Boston. So you will be receiving our process soon. So do please vote. And if you are able to come to attend our annual meeting, I think this year most likely it's going to be in person. So thank you very much for joining me this evening.
Operator
And ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.
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