Kopin (KOPN) Q4 2021 Earnings Call Transcript

Kopin (KOPN -3.17%)
Q4 2021 Earnings Call
Mar 08, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Kopin fourth quarter and full year 2021 earnings conference call. Today's conference is being recorded. At this time, I'd like to hand the call over to Mr. Richard Sneider.

Please go ahead.

Richard Sneider -- Chief Financial Officer

Thank you, operator. Welcome everyone, and thank you for joining us this morning. John will begin today's call with a discussion of the market environment that we see in our progress in executing our strategy, including our sales activity and technology development. I [Inaudible] fourth quarter and 2021 results at a high level.

John will conclude our prepared remarks, and we'll be happy to take your questions. I'd like to remind everyone that during today's call taking place on Tuesday, March 8, 2022, we'll 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 for subsidiaries, market conditions, and other factors discussed in our most recent report on Form 10-K and other documents filed with the Securities Exchange Commission.

The company undertakes no obligation to update the forward-looking statements made during today's call. With that, I'll turn the call over to John. 

John Fan -- Chief Executive Officer

Thank you, Richard. Good morning, and thank you all for joining us to discuss our fourth quarter and full year fiscal 2021 financial results. 2021 was an exciting and productive year for Kopin. Despite the challenges of the pandemic, parts shortages and FWS-I production retooling in the mid-year, we still had a 14% revenue growth in 2021.

This growth represent our fourth consecutive year of growth. And we're expect this growth trend to continue this year. The demand for our product is excellent, and our 2022 bookings are very strong. However, our optimism must be balanced with the issues around the global supply chain, which many industries are continue -- continuously facing.

During fiscal 2021, through hard work and use of industry contacts, we have managed to largely maintain supplies of unnecessary components. However, by many other companies, we continue to face the challenges, and the situation remains quite dynamic. As I've stressed, we continue to see growing demand across all our key product lines. Our industrial enterprise products drove growth in 2021 with a revenue of $9.7 million.

An increase of 4% over 2020. It may have forced spatial light modulators using our ferroelectric L cost was particularly strong, as contract manufacturers continue to train of converting their production lines to use 3D automatic optical inspection. Referred to as AOI machines for quality controls. And the manufacturer of this 3D AOI machines are choosing our solutions in higher numbers than ever before.

Our consumer revenues increase up from approximately $900,000 in fiscal year 2020, to $1.9 million in 2021, a 120% increase on the strength of sales of our organic light emitting diode display, or OLED products. By the absolute dollar amount of our OLED revenues is still modest. The increase represent continued market traction and progress in developing these new product line, which we believe has strong competitive advantages, a significant market opportunity [Inaudible] Our defense product line continue to have strong demands in 2021, with revenue of $18.2 million. We achieve the goal which we have stated at the beginning of 2021 with four development programs entering the low rate initial production phase.

Furthermore, we continue to maintain a growing and robust pipeline of defense programs in development, which we believe will continue to drive our defense revenue growth in the coming years. Also, I'm delighted that during 2021, we have achieved the process enhancements to our FWS-I thermal weapon sight program, which should have positive long-term effects on our revenue and margins. Its processing enhancement activities are now completed. Our shipments in Q2 and Q3, and our yield in Q4 were adversely affected.

However, I am pleased to say that FWS-I production rate and yield are now recovering well. And in Q4, which shipped the highest shipping rate of this product in 2021. Also during the fourth quarter we receive a follow-on of $19.8 million order for these eyepieces of assembly. A critical component in the U.S.

Army's family of weapons -- weapons site individual thermal sight system. The majority of these order is scheduled to ship in this year. And the progress in the fourth quarter, including additional $2.8 million follow-on order for a high-brightness and super [Inaudible], liquid crystal display, or the F-35 Joint Strike Fighter Program. The F-35 is the world's most advanced jet fighter combat aircraft with much of the functionality enables through advanced AR or augmented reality helmet, which provides the pilot with critical flight, tactical and sensitive information for advanced situation awareness, precision and safety.

This new order [Inaudible] of scheduled deliveries into the third quarter of 2022 [Inaudible] to the quality of our display technology. As a reminder, we are so source to this incredible AR helmet. Finally, we announced that we received $1.1 million order to provide eye pieces for the Joint Effect Targeting System, JETS, with the scheduled deliveries through this year. [Inaudible] orders I just discussed are testimony to our advanced display technology.

One area of Kopin excellence, it may well be understood as are up -- is our optical capability. We provide display -- optics in modules and advanced assemblies. In many ways, optics are just as critical as displays in achieving a great AR/VR experience. To this end, we announced in the fourth quarter our patent pending All-plastic Pancake optics were excellent performance, it enables smaller, lighter weight VR [Inaudible] headset.

We believe our all-plastic Pancake Optics are the first in the world, providing critical components for VR headsets I've seen lightweight, comfortable, and easy to use, has been a critical objective of ours. Pancake optics, our excellent choices of VR headsets, however, previous Pancake optics need at least one circle glass lens to avoid image eye defects caused by birefringence of plastic materials. Such circle glass lends add a weight cause production issues and reduced optical design sensibilities, compared to aspherical plastic lens. I'm glad to say, we have solved the plastic birefringence issue.

Our new  and P95 and P80, all-plastic Pancake optics, provide better image quality, smaller size, lighter weight, and lower costs than anything previously available. And we believe that would translate directly to a better metaverse experience for the user. P95 provides a field-of-view of 95 degrees, and P80 provides a field-of-view of 80 degrees with a 1.3 inch diagonal microdisplay. Our All-plastic Pancake optics provide not only to clear advantages mentioned above, but most importantly, provide a best shot image with very good eye relief, an eye box, especially with our novel P18 optics.

We believe our all-plastic Pancake optics, combined with a microdisplay, represent the perfect match, provide the [Inaudible] of 3,000 to 50,000 times by remaining of a sharp -- maintaining of a sharp image. Our goals always remained the same, which is [Inaudible] in critical areas that needed for AR/VR optics and microdisplay. I also wanted to highlight our recent in-person [Inaudible] in CES this January. We demonstrate a second generation 2.6K, and by 2.6K OLED display, combined with our all-new plastic optics.

Shiftall, a fully owned subsidiary of Panasonic, demonstrated at CES. [Inaudible] incorporating Kopin's 2.6K by 2.6K OLED display, and our all -- our all plastic optics. We also had a fire -- fireside chat at CES, focus on our views and approaches to those metaverse world, the discussion was shared by Chris Chinnock, president of Insight media & 8K Association. The fireside chat was live streamed, it can now be seen on YouTube.

In summary. Customer demands are strong in all our core product lines. And we're actively managing a supply chain pipe -- challenges. We will continue our momentum on innovating and advancing our technology in AR/VR/MR applications.

We believe the interest in the metaverse is strong. And we believe and we feel very well-positioned to capitalize on the opportunities it present. We enter 2022 with a very strong backlog of orders, and we believe this year will be another year of good growth. We are excited by the growth of Kopin, and we see a wave of increasing interest in our AR/VR/MR products.

Our technology advances have been excellent, and the current market conditions are very favorable. We believe we are very well positioned. Now we turn the call to Rich to discuss the financial details of the quarter and full year.

Richard Sneider -- Chief Financial Officer

Thank you, John. -- With  the results of the fourth quarter of 2021. Total revenues were $13.2 million, compared to $13.9 million in the fourth quarter of 2020, a 5% decrease year-over-year. [Inaudible] in the fourth quarter of 2021 with the fourth quarter of 2020, our product and royalty revenues $648,000 and $552,000, respectively.

These were partially offset by an increase in funded R&D revenues for $476,000. Let me take a second to reconcile our statements that we had the highest unit ship rate of FWI units in 2021 in the fourth quarter, with a slight decline in defense revenue. As we said, under the revenue recognition standard ASC 606, we record most of our defense revenues based on percentage of completion. Accordingly, our revenues are based on both the units we shipped in the quarter, plus the amount of work in process and finished goods inventory we have at the end of the quarter.

As we discussed the units shift in the fourth quarter of 2021 with the highest near, however, the impact of the ASC 606 Q4 2021 adjustment was a negative $308,000 as compared to a positive adjustment of $1.3 million in Q4 2020. Essentially, this means our whip and finished goods inventory levels were lower at the end of the fourth quarter of 2021 as compared to the third quarter of 2021. Cost of product revenues as a percent of net product revenues for the fourth quarter of 2021 and 2020, 84.9% and 65.1%, respectively. Cost of product revenues increased as a percentage of net product revenues in the fourth quarter of 2021 as compared to the fourth quarter of 2020, primarily due to lower yields as process -- changes we input into the second and third quarters, affected productivity and scrap amounts in the fourth quarter of 2021.

R&D expenses fourth quarter of 2021 was $5.2 million, compared with $4.4 million in the fourth quarter of 2020, a 19% increase. The increase in R&D expense for the fourth quarter of 2021 compared to the fourth quarter of 2020 was primarily due to an increase in internal OLED development costs and to a lesser extent, an increase in funded R&D expense from more customer activities. SG&A expenses were $4.1 million in the fourth quarter of 2021, compared to $2.4 million in the fourth quarter of 2020, a 71% increase year-over-year. SG&A for the fourth quarter of 2021 increased [Inaudible] in the fourth quarter of 2020, primarily due to increase of [Inaudible] $400,000 professional fees, $300,000 in non-cash stock based compensation, and $400,000 in compensation and other benefits.

We had other income in the fourth quarter of 2020 and 2020 -- 2021 and 2020 of $46,000 and $286,000, respectively. Other income for the fourth quarter of fiscal 2021 included $38,000 foreign currency gains, compared to $273,000 foreign currency gains in the fourth quarter of fiscal 2020.  To tell you the bottom line, net loss attributable to controlling interest for the fourth quarter of 2021 with $3.6 million or $0.04 per share, compared with net income of $1.3 million or $0.02 per share for the fourth quarter of 2020. Turning to full year results. Total revenues for 2021 was $45.7 million compared to $40.1 million for 2020.

A 14% increase. The 2021 revenue increase as compared to 2020 was driven by increases of industrial and enterprise revenues of 41% and consumer revenue of 120%, which were partially offset by a decrease in defense product revenues of 10%. Cost of product revenues as a percentage of net product revenues for 2021 and 2020 were 83.8%  and 75%, respectively. Cost of product revenues increases as the set of revenues in 2021 as compared to 2020, primarily due to lower production volumes in the second and third quarter of fiscal '21.

And the second, third quarter of fiscal '21, we reduced production of our products with the FWIs but as we made process changes to the product. Also, affected were our production yields during '21 as in the process changes to the affected productivity and scrapping [Audio gap] R&D expense in 2021 was $16.3 million, a 39% increase compared with $11.7 million in 2020. Funded R&D expenses were $10 million for 2021, as compared to $7.7 million for 2020, a 29% increase. Funded R&D expense for '21 increase as compared to 2020, primarily due to an increase in number of defense related contracts we have been awarded, and therefore it was driven by increased revenue associated with those contracts.

Internal R&D expense was $6.3 million for 2021, as compared to $3.9 million in 2020, a 61% increase. And total R&D expenses for '21 increase as compared to prior year, primarily due to an increase in OLED development costs. SG&A expenses were $18.1 million for 2021, a 53% increase compared with $11.8 million for 2020. SG&A for '21 increase as compared to 2020, primarily due to an increase of approximately $3.1 million in non-cash stock based compensation, $1.4 million in compensation and benefits, $300,000 in insurance, and $900,000 in bad debt expense, partially offset by $600,000 low professional fees.

Other income for fiscal 2021 and 2020 were income of $100,000 and $400,000, respectively. Other income for fiscal '21 included a $100,000 of foreign currency gains compared to $300,000 foreign currency gains recorded in fiscal 2020. Turning to our bottom line. Net loss for controlling interest for fiscal year ended December 25, '21 was $13.7 million, or $0.15 per share, versus a net loss of $4.4 million or $0.05 per share for 2020.

10% customers for 2021 were DRS network imaging at 31% and Collins Aerospace at 29% percent. Quarter and year end amount for depreciation and stock compensation are attached in the table to the press release. Opens cash equivalents and marketable securities were approximately $29.3 million at December 26, 2021, compared to $20.7 million at December 26, 2020. And we continue to have no long-term debt.

The amounts discussed above are current estimates and  listeners should review our Form 10-K for the year end December 25th. Any possible changes and of course, any additional filings. With that, operator will be happy to take questions.

Questions & Answers:

Operator

Of course, thank you. [Operator instructions] And we'll go ahead and take our first question from Glenn Mattson with Ladenburg Thalmann. Please go ahead.

Glenn Mattson -- Ladenburg Thalmann and Company Inc. -- Analyst

Yeah. Thanks for taking the questions. So, curious first on the optical inspection market. Is that -- solid growth in that space this year really helped in the industrial enterprise space, so is that that -- I think there's a long tailwind of that growth, but can you give us more color as to how you expect that to play out in 2022?

Richard Sneider -- Chief Financial Officer

So, yeah, this is a momentum that's been building for a period of time, and we'll see what happens in 2022. It's an interesting situation in that -- to supply chain shortage is affecting everybody. And so, forecast that we're getting for customers are not as firm as we've gotten in the past. And frankly, if there continues to be a shortage of chips, that's going to cause a headwind in the demand for 3D automation equipment, because what's the purpose of doing quality control on chips you don't have? So we've really got to see how this whole supply chain works to play out.

John Fan -- Chief Executive Officer

Yeah. This is John Fan. Hi, Glenn, this is a very good question. [Inaudible] short-term cost supply chain questions is affecting -- that our customers too.

So, however the long-term trend to move  from 2D to 3D continued, as you all know, electric cars are getting very complicated, so they're PCB boards are very complicated. So the trend go to 3D is not going to be stop if they are going to continue increasing. So this short-term effect of short term parts shortage is going to be just short term, even that we're overcoming most of the time.

Glenn Mattson -- Ladenburg Thalmann and Company Inc. -- Analyst

Right. Great. Thanks for that color. And then, just quickly moving on to defense.

The -- congrats on the big order, the $19.8 million order that you received, that was in December, and when you add that plus the -- you say the majority of that should ship this year, plus the Joint Strike Fighter revenue through the third quarter. That would -- the combination of those two factors would at least put you to somewhat flat for defense in 2022 flat top, perhaps. And then you have these other low rate industrial production orders to provide some upside of that number? Is that's basically the good way to think about it? And maybe just some color around how that flows out through the year. Be great.

Richard Sneider -- Chief Financial Officer

Yeah. No, I think that is the correct way to think about it, plus we have a very healthy backlog of R&D contracts. That will be working on during the course of the year. And the timing of the -- those four programs that are an L rip low rate initial production, when they go into full production, that determines on how well the reps go, but they should provide us if things go according to plan with additional revenue in the course of this year.

Probably more than half of the year --

Glenn Mattson -- Ladenburg Thalmann and Company Inc. -- Analyst

OK. And lastly for me. Can you just remind us, can maybe just give everyone an update as to assuming, taking out the caveat that there's should be could be supply chain disruption or something like that. But, in the normal circumstances, if the defense orders come through on time and you're able to chip against them and then you have a standard breakdown of component revenue versus R&D revenue of like 2/3 to 1/3, or slightly better than that.

The target model for what gross margins would be when you get to certain volumes, and we're breakeven is? Just some color around that to remind us all. Be great.

Richard Sneider -- Chief Financial Officer

Sure. So break even, I basically get into the mix question that you were asking about can be anywhere from $50 million to $60 million. And so we're fast approaching that number. And I think your ratios of product revenues to contract revenues is pretty close to what we've historically been running at.

Glenn Mattson -- Ladenburg Thalmann and Company Inc. -- Analyst

And so in that  -- in light of that, I would just like as a final follow on would be the -- with the balance sheet of almost $30 million in cash and no debt and you guys getting into the ballpark of break even this year. Would I assume that there's not really much need for cash? The capital raising activity?

Richard Sneider -- Chief Financial Officer

We have sufficient cash to execute our strategy where we are right now.

Glenn Mattson -- Ladenburg Thalmann and Company Inc. -- Analyst

OK. Great. That's it for me. Thanks.

Operator

[Operator instructions] And we'll go ahead and move on to our next question. Kevin Dede with HCW. Please go ahead.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

Good morning, gentlemen. Thanks for taking our call. John, could you just offer -- it sounds like you're doing great with the Pancake optics lightening the weight. I was hoping you could just  offer some color on that advancement [Inaudible], solos, real wares scott, some of the enterprising consumer applications that you're working on.

How are your customers looking at that? How do you see, especially in light of the doubling in consumer revenue this year? How are you seeing that growth this year?

John Fan -- Chief Executive Officer

Yeah. Thank you, Kevin, it's a very interesting question. In the earlier days, I think the last earning call, I mentioned that, we use Pancake, defense products in several places. In fact, FWS-I, our biggest protection program, is using our Pancake optics.

Except that case, we use -- whether the lens is a glass lens. Now we always believe the Pancake is the way to go for VR headsets. And but how -- however, in costume world, we think the glass -- that's must be go --must go away because they weight and likely and also the -- shape. So that All-plastic optics would be working on for several years to develop a special material and a process that allowed it to do that.

Now fast forward, we have P95 and P80. We just use CES,  I must say the response on the field is very strong. Not only that they would like to have our Pancake optics, the couple without our OLED display. In fact, people who have their own displays [Inaudible] optics.

So we're now actively planning on how to get the Pancake optics -- All-plastic Pancake optics to satisfy our customer's need. So we're very optimistic about Pancake optics. This is really a separate product line for us.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

OK. Can you talk a little bit about -- I guess, the cost that you're going to offer them at volume, and I'm wondering if you can give us any read at all, in terms of their use this year. Do you think you'll deliver them to the market this year? And at a lower price point than the previous pancake, I'm just -- I guess, the big takeaway John, for me is, how you see VR developing versus Oculus, right? You've got you've got the Oculus Quest two headset out there. It's used in a clunky cellphone display, you're developing technology that's clearly a light year ahead, and I just was hoping you give us a better read on its track to market.

John Fan -- Chief Executive Officer

Yeah. My own feeling is that Oculus two is actually a very interesting system. They use LCD there, they to use a large LCD like two or two and a half inches LCD. And they fennel lens, it's a plastic lens but a fennel lens, which is a bulky and thick effect.

So ultimately, I think the fennel lens will go to Pancake, and you will go to our plastic Pancake. I think this one is pretty much -- I must say, in the few is pretty much non knowledge, It will be pancake. So that's very important. As you all know, our Pancake is our trademark.

We trademark the Pancake many years ago, because we have been working on a defense area. We believe this is the best way that we've seen this lightest optics and magnified the display for you. On the display side, I think that we're working on this 2.6K, which we hope to get into production this year. And then the ultimate display for VR is around 3.5K, maybe for 4K, and we definitely start planning with our -- with our partners.

I think about that to go to this incredible our goal. Just as a reminder, 2.6K by 2.6K OLED 1.3-inch display, we are in generation two. We are nobody else in the world has that yet, and we are already in generation two, and getting for production. So we're very optimistic.

We think that the future is very bright for VR, but possibly not this year. I think the product would be coming more and at the end of the year or maybe next year. And our revenue would grab next year.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

OK. Thanks, John. I appreciate that, I appreciate -- 

John Fan -- Chief Executive Officer

Our defense and other program it's going well. So we still anticipate growth a good growth year this year.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

Can you -- that's where I was going next. Can we talk a little bit about the the programs that could go from L rip to full production this year? Could you give us -- just maybe a little more depth on the unit size, I know FWS-I is a huge number of units, and I'm wondering if you can compare some of these other L rip programs on a unit basis? Just to maybe help us understand how large they could be.

Richard Sneider -- Chief Financial Officer

Yeah. It's something like FW -- FWS-I is a very rare program because it goes into most of the soldiers get it in one form or another. The rest of the programs are tend to be more specialized with much lower volumes, but commercially much higher prices. And so the margins on those programs are very good.

And they range from additional scopes to rotary aircraft, pilot helmets and tripod rocket launchers. So, how they roll out particularly given what's happening around the world today, we know we'll see how that goes, but they are, as I said, lower units, but higher prices.

John Fan -- Chief Executive Officer

Yeah. And I think just to give you some more like a light to the situation when the programs adjust for international gun sites. So the current situation going on, we don't know how fast that will actually grow.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

All right, gentlemen, I can't think of anything at the moment, but I might hop back in. Yeah, no, no, I'm sorry, I'm sorry. Yeah, just on the enterprise side, John, could you offer us some insight? Maybe, from a Scott perspective or views of -- views of perspective on the adoption of Pancake? I understand consumers a little way out, but I know that your enterprise business is growing. Is there a chance that Pancake gets adopted there and it's a price point lower? How does that translate?

John Fan -- Chief Executive Officer

Yeah. In the Pancake -- one of the Pancakes many many advantage, but in one area they have a disadvantage, the optical efficiency is quite low, it's around 10%. So far, some of the AR enterprise applications, when you're outdoor getting means that the 10% efficiency means you have a very bright display, so that part usually people don't lean to us Pancake. In the VR case, people decide [Inaudible] as a Pancake.

So, it is a very different case. How do I use it? We have other optics, which has very high optical efficiency that allowed to use it for an enterprise world and as it was being used right now. So when we shipped our customers, we don't really ship a shipping display with optics packaging to a module. So -- so it depends which application.

Remember, we have a whole range of it, we have older range of display, LCD, L costs, OLED, of and course, were working on LEDs. And optics, we have glass optics, special optics, pancake, optics, all-plastic optics. So we also provide way of optics people need to give the effort to application.

Kevin Dede -- H.C. Wainwright and Company -- Analyst

Thank you, John, I appreciate it. Thanks, Rich. Thanks for taking our questions.

Operator

And with that, that does conclude our question-and-answer session. I would like to hand the call back over to our speakers for any additional or closing remarks.

John Fan -- Chief Executive Officer

Thank you very much for joining us, and I hope to see you that next meeting. Thank you. Bye bye.

Operator

[Operator signoff]

Duration: 68 minutes

Call participants:

Richard Sneider -- Chief Financial Officer

John Fan -- Chief Executive Officer

Glenn Mattson -- Ladenburg Thalmann and Company Inc. -- Analyst

Kevin Dede -- H.C. Wainwright and Company -- Analyst

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