Kopin Corp (KOPN) 2021 Q4 法說會逐字稿

Good day, and welcome to the Kopin Fourth Quarter and Full Year 2021 Earnings Conference Call. (Operator Instructions)

At this time, I'd like to hand the call over to Mr. Richard Sneider. Please go ahead.

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 will go through the 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 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.

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, part shortages and FWS-I production retooling in the midyear, we still had a 14% revenue growth in 2021. This growth represents our fourth consecutive year of growth, and we expect this growth trend to continue this year. The demand for our product is accident 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 continuously facing. During fiscal 2021, through hard work and use of our industry contacts, we have managed to largely maintain supplies of our necessary 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 and enterprise products drove growth in 2021 with a revenue of $9.7 million, an increase of 41% over 2020.

Demand for our spatial light modulators using our fair electric LCOS was particularly strong as contract manufacturers continue the trend of converting their production lines to use 3D automatic optical inspection referred to as AOI machines for quality controls. As the manufacture of these 3D AOI machines are choosing our solutions in higher numbers than ever before. Our consumer product revenues increased 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.

But the absolute dollar amount of our audit revenues is still modest, the increase represents continued market traction and progress in developing these new product lines, which we believe has strong competitive advantages and significant market opportunity ahead. Our defense product line continued to have strong demand in 2021 with revenue of $18.2 million. We achieved the goal, which we have stated at the beginning of 2021 with 4 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. This process enhancement activities are now completed. Our shipments in Q2 and Q3 and our yield in Q4 were adversely affected. However, I'm pleased to say that the FWS-I production rate and yield are now recovering well. And in Q4, we achieved the highest shipping rate of this product in 2021.

Also during the fourth quarter, we received a follow-up $19.8 million order for these eyepieces subassembly. A critical component in the US Army's Family of Weapon Sight-Individual Thermal Sight System. The majority of this order is scheduled to ship in this year. Other progress in the fourth quarter, including additional $2.8 million full order for our high brightness and super rugged liquid crystals display for the F-35 on Joint Strike Fighter program. The F-35 is the world's most advanced jet fighter compact aircraft. With much of the functionality enabled through an advanced AR or armed reality helmet which provides the pilot with critical flight, technical and sensitive information for advanced situation awareness, and position and safety.

This new order extends our backlog of scheduled deliveries into the third quarter of 2022 and is a true testimonial to the quality of our technology. As a reminder, we are so soft 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 yet with a scheduled delivery through this year. One of the orders I just discussed are a testimony to our advanced display technology. One area of Kopin excellence that may not well be understood is our optical capability.

We provide display optics in modules and advanced assemblies. In many ways, optics are just as critical as displayed in achieving a great AR/VR experience. To this end, we announced in the fourth quarter our pendant panning all-plastic Pancake optics with excellent performance that enable smaller, lighter weight, VI and metal assets. We believe our all-plastic Pancake optics are the first in the world providing critical components for VR headsets that are seeing lightweight comfortable and easy to use has been a critical objective of ours. Pancake Optics are excellent choices for VR headsets.

However, Pancake Optics needed at least once vertical glass lens to avoid image events caused by the bio-fringes of plastic materials. Such cylindrical glass lens and weight, cost, production issues reduce optical design feasibilities compared to a circle plastic lens. I'm glad to say we have solved the plastic bio-fringes issue. Our new P95 and P80 all plastic Pancake optics provide better image quality, smaller size, lighter weight and lower cost than anything previously available. And we believe that will translate directly to a better metaverse experience for the user.

P95 provides a fewer view of 95 degrees and P80 provides a fuel field of 80 degrees with a 1.3 inch diagonal microdisplay. Our all past Pancake Optics provide not only the clear advantages mentioned above. But most importantly, provide a very sharp image with very good eye relief and iBox, especially with a novel PAD optics. We believe our all plastic Pancake optics combined with the microdisplay represent a perfect match, provide a modification of 33,000 to 50,000 tons by remaining a very sharp -- maintaining a very sharp image. Our growth always remains the same, which is to lead into critical areas that are needed for AR via optics and microdisplays.

I also wanted to highlight our recent in-person participation in CES this January. We demonstrated our second-generation 2.6K x 2.6K OLED display combined with our newer plastic optics. Shiftall, a wholly owned subsidiary of Panasonic demonstrated at CES, a via glass, incorporating Kopin's 2.6K x 2.6K OLED display and an all plastic Pancake Optics. We also had a fire-side chat CES, focused on our views and approaches to the exciting Metaverse world.

The discussion was chaired by Chris Chinnock, President of Insight Media and 8-K association. The fireside chat was live streamed and can now be seen on YouTube. In summary, customer demands are strong in all our core product lines and we are actively managing our supply chain challenges. We will continue our momentum on innovating and advancing our technology in AR/VR/MR applications. We believe interest in the Metaverse is strong, and we believe and we feel they are 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 and 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.

Thank you, John. Sitting 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. Comparing the fourth quarter of 2021 with the fourth quarter of 2020, our product and royalty revenues were down $648,000 and $552,000, respectively. These were partially offset by an increase in funded R&D revenues of $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 revenues. As we said, under the revenue recognition standard, ASC 606, we recorded 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 shipped in the fourth quarter of 2021 was the highest in the year.

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 of 2020. Essentially, this means our WIP 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 implemented in the second and third quarters affected productivity and scrap amounts in the fourth quarter of 2021.

R&D expense in the 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 for 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 as compared to the fourth quarter of 2020, primarily to an increase of approximately $400,000 of 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 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 of foreign currency gains in the fourth quarter of fiscal 2020.

Turning to the bottom line, net loss attributable to controlling interest for the fourth quarter of 2021 was $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 the full year results, total revenues for 2021 were $45.7 million compared to $40.1 million for 2020, a 14% increase. The 2021 revenue increase as compared to 2020 was driven, but partially offset by a decrease in defense product revenue up 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 increased as a percent of revenues in 2021 as compared to 2020, primarily due to lower production volumes in the second and third quarter of fiscal '21. In the second and third quarter of fiscal '21, we reduced production of our products for the FWS-I products as we made process changes to the product. Also affected were our production yields during '21 as implementing the process changes affected productivity and scrap amounts.

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 increased as compared to 2020, primarily due to an increase in number of defense-related contracts we have been awarded, and therefore, they were driven by increased revenue associated with those contracts. Internal R&D expense was $6.3 million for 2021 as compared to $3.9 million for 2020, a 61% increase.

Internal R&D expense for '21 increased as compared to the prior year, primarily due to 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 increased 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 of lower professional fees.

Other income for fiscal 2021 and 2020 were income of $100,000 and $400,000, respectively. Other income for fiscal '21 included $100,000 of foreign currency gains compared to $300,000 of foreign currency gains recorded in fiscal 2020. Turning to our bottom line, net loss for controlling interest for fiscal year-end 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%.

Quarter and year-end amounts for depreciation and stock compensation are attached in the table to the press release. Kopin's cash equivalents and marketable securities were approximately $29.3 million at December 25, '21 compared to $20.7 million at December 26, 2020, and we continue to have no long-term debt. The amounts discussed above our current estimates and listeners should review our Form 10-K for the year-end December 25 for any possible changes and of course any additional filings.

With that operator, we'll be happy to take questions.

(Operator Instructions) We'll go ahead and take our first question from Glenn Mattson with Ladenburg Thalmann.

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

So yes, I mean, 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 the 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 its way out.

This is John. This is a very good question. And the short-term cost supply chain questions affecting that our customers too. So however, the long-term trend to move from 2D to 3D has continued. As you well know, these electric cars and everything are getting very complicated. So their PCB boards are very complicated. So the trend go to 3D is not going to be stopped. In fact it's going to continue increasing. So the short-term effect of short-term part shortage is going to be, they are just short term. And even that, we're overcoming it most of the time.

And then just quickly moving on to defense. 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 kind of -- the combination of those 2 factors would at least put you to somewhat flat for defense in 2022 flat to out perhaps? And then you have these other low-rate industrial production orders to provide some upside to that number. Is that basically the good way to think about it? And maybe just some color around how that flows out through the year would be great.

Yes. No, I think that is the correct way to think about it, plus we have a very healthy backlog of R&D contracts that we'll be working on during the course of the year. And the timing of the -- those 4 programs that are in LRIP, low rate initial production, when they go into full production, that determines on how well the LRIPs go, but they should provide us if things go according to plan with additional revenues during the course of this year, probably more than the second half of the year.

Okay. And lastly for me, can you just remind us and maybe just give everyone an update as to assuming, taking out the caveat that there 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 ship against them and then you have a standard breakdown of component revenue versus R&D revenue kind of like 2/3 to 1/3 or slightly better than that, the target model for what kind of gross margins would be when you get to certain volumes and where breakeven is? Just some color around that to remind us all would be great.

Sure. So breakeven, basically getting to the mix question that you're 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.

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

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

(Operator Instructions) And I'll go ahead and move on to our next question from Kevin Dede with HCW.

John, could you just offer -- I mean, it sounds like you're doing great with the Pancake Optics lightning the weight. I was hoping you could just sort of offer some color on that advancement vis-a-vis Solos, RealWear, Scott, some of the enterprise and consumer applications that you're working on. How are your customers looking at that? How do you see -- especially in light of the doubling of consumer revenue this year, how are you seeing that grow this year?

This is a very interesting question. In the earlier days, I think the last earnings call, I mentioned that we actually use Pancake in defense products in several places. In fact, FWS-I, our biggest production program is using Pancake Optics. Except that case, we use glass, one of the lens is a glass lens. Now we always believe the Pancake is a way to go for VR headsets. And -- but however, in consumer world, we think the glass that must go away because they wait and like we have also the shape. So the plastic optics will be working for several years to develop a special material and a process allowed us to do that.

Now fast forward, we have P95 and P80. We introduced the CES. I must say the response from the fuel is very strong. Not only that they would like to have our tank optics' couple with OLED display. In fact, people who have their own displays, won't have optics. So we are now actively planning how to get the Pancake optics to satisfy our OLED assembly customers' needs. So we're very optimistic about our Pancake optics. It's really a separate product line for us.

Okay. Can you talk a little bit about I guess, the costs 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 the Oculus Quest 2 headset out there. It's used in a clunky cell phone display. You're developing technology that's clearly a light year ahead. And I just was hoping you could give us a better read on its track to market.

Yes. My feeling is that Oculus 2 is actually a very interesting system. They use LCD there, and they use a large LCD 2.5 inches LCD, and they use Farnell lens. It's a plastic lens, but the Farnell lens, which is actually giving a bulky and thick effect. So ultimately, I think the Farnell lens will go to pancake and you will go to power plastic Pancake.

I think this one is pretty much, I must say, in the field is pretty much not acknowledged it will be Pancake. So that's very important. As you well know, Pancake is the -- is our trademark, we trademark the Pancake many years ago, because we've been working on in a defense area. We believe this is the best way to give a thinnest, lightest optics and magnify 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 3.5%, maybe 4K, and we definitely start planning with our partners think about that to go through this incredible goal. Just as a reminder, 2.6K x 2.6K OLED 1.3 inch display, we are in generation 2, we are -- nobody else in the world has that yet and we're already in generation 2 are getting ready for protection. So we're very optimistic. We think the future is very bright for VR, but possibly not this year. I think the product will be coming more like at the end of the year or maybe next year and our revenue would ramp next year. But defense and other program is going well. So we still anticipate a good growth year this year.

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

Yes. I mean something like 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 at 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 launches. So how they roll out, particularly given what's happening around the world today, we'll see how that goes. But they are, as I said, lower units, but higher prices.

Yes. I think just -- to give you some more light to the situation, one of the programs is the edges for international gun sites. So the current situation going on, we don't know how fast that will call grow.

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

Yes. The Pancake, one of the Pancake advantage. But one area to have a disadvantage, the optical efficiency is quite low. It's around 10%. So for some of the AI enterprise applications where outdoor then means that the 10% efficiency means you have a very, very bright display. So that part, usually people don't lean towards Pancake -- in the VR case, people redecide a Pancake. So it is a very different case how we want to use it. We have other optics, which has very high optical efficiency to allow to use it for an enterprise world. And that is what is being used right now.

So when we shipped our customers, we nominally shipping display with optics packaging or module. So it depends which application. Remember, we have a whole range of it. We have all the range of display, LCD, LCOS, OLED. And of course, we're working on LED. And optics, we have glass optics, special optics, Pancake Optics or plastic optics. So we also provide whatever optics people need to give for the application.

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.

Thank you very much for joining us and hope to see you at the next meeting. Thank you. Bye-bye.

And with that, that concludes today's call. Thank you for your participation. You may now disconnect.