Please standby, we are about to begin. Good day, and welcome to the Kopin Fourth Quarter and Full year 2021 Earnings Conference Call. [Indiscernible].

[Audio gap] and thank you for joining us this morning. John will begin today's call with a discussion of the market environment that we see and 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'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 our subsidiaries, market conditions, and other factors discussed [audio gap] 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, parts shortages, and FWS-I production retooling in the midyear we still had a 14% revenue growth in 2021.

This growth represent our fourth consecutive year of growth. And we 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 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. [Audio gap] 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 41% over 2020.

Demand for our Spatial Light Modulators, using our Ferroelectric LCOS, was particularly strong as contract manufacturers continued the trend of converting their production lines to use 3D automatic optical inspection, referred to as AOI machines for quality controls.

And the manufacturers of these 3D AOI machines are choosing our solutions in higher numbers than ever before. Our consumer product revenue increases 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.

While the absolute dollar amount of our OLED revenues is still modest, the increase represent continued market traction and progress in developing these new product lines, which we believe there's strong competitive advantages and significant market opportunities 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 in the beginning of 2021 with four development programs entering to low rate initial production phase.

Furthermore, we continue to maintain a growing a 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 towards FWS -I thermal weapon sight program, which should have positive long-term effects on our revenue and margin. These 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. In Q4, we achieved the highest shipping rate of these products in 2021. Also, during the fourth quarter, we received a follow-up $19.8 million order for this eyepiece subassembly, a critical component in the U.S.

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 lot order for our high brightness and super rugged liquid crystal display for the F-35 Joint Strike Fighter Program.

The F-35 is the worlds most advanced [audio gap] enabled through advanced AR or augmented 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.

As a reminder, we are sole source to this incredible AR helmet. Finally, we announced that we received $1.1 million order to provide eyepieces for the Joint Effects Targeting System, JETS, with scheduled deliveries through this year.

While the orders I just discussed are a testimony to our advanced display technology, one area of Kopin excellence that may not well be as understood, is our optical capability. We provide display optics in modules and advance 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 pending all-plastic Pancake optics with excellent performance that enables smaller, lighter weight VR and Metaverse Headsets.

We believe our all-plastic Pancake optics are the first in the world providing critical components for VR Headsets that are [seen] (ph), lightweight, comfortable and easy to use, as being a critical objective of ours. Pancake optics are excellent choices for VR headsets.

However, previous Pancake optics needed at least one spherical glass lens to avoid image effects caused by the birefringence of plastic materials. Such spherical glass lens added weight, costs, production issues, and reduce optical design sensibilities compared to aspherical plastic lens.

I'm glad to say, we have solved the plastic birefringence 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 we will translate thoroughly 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 micro display. Our All-Plastic Pancake Optics provide not only the clear advantages mentioned above, but most importantly provide very sharp image with very good eye relief and eye box, especially with our novel P80 Optics.

We believe our All-Plastic Pancake Optics, combined with a microdisplay represent the perfect match, providing a magnification of 30,000 to 50,000 times while remaining a very sharp -- maintaining a very sharp image. Our goals they always remain the same, which is to lean into critical areas that are needed for AR/VR optics and microdisplays.

I also wanted to highlight our recent in-person participation in CES this January. We demonstrate our second-generation 2.6 K by 2.6 K OLED display combined with our new [audio gap] plastic optics [subsidiary of] (ph) Panasonic, demonstrated at CES their VR glass incorporating Kopin's 2.6 K by 2.6 K OLED display. And all-plastic Pancake optics.

We also had a fireside chat at CES, focus on our views and approaches to the exciting Metaverse world. The discussion was chaired by Chris Chinnock President of Insight Media and 8K 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 presents. We entered 2022 with a very strong backlog of orders. And we believe this year will be another year of growth.

We're 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. [Audio gap] discuss the financial details of the quarter and the full-year..

Thank you, John. Beginning 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 shipped rate of FWS-I units in 2021 in the fourth quarter, with a slight decline in defense revenues.

As we've 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 were the highest in the year, however, the impact of AFC 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 implanted 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 at development cost and to a lesser extent and 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 asset to the fourth quarter of 2020 primarily due to increase for possibly $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 2021 and 2020, of $46,000 and $286,000 respectively.

Turning to the bottom line, Net loss attribute 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 full-year results.

The 2021 revenues increased as compared to 2020 was driven by increases of industrial enterprise revenues of 41% and consumer revenues of a 120%. We were partially offset by a decrease in defense product revenues up 10%. Cost of product revenues as a percentage of net product revenues for 2021 and 2020 to 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. As we've made process changes to the product.

Also affected were our production yields in during '21 as implanting the process changes affected productivity in 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 [Indiscernible] 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 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, $0.3 million in insurance, and $0.9 million in bad debt expense, partially offset by $0.6 million of lower professional fees.

Other income for fiscal 2021 and 2020 were income of $0.1 million and $0.4 million, 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 25th, '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 25th, 2021, compared to $20.7 million at December 26th 2020. And we continue we have no long-term debt.

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

Of course, thank you. [Operator Instructions]. If you're using a speakerphone, please pick up your handset and make sure mute function is turned off so that your signal reaches our equipment. [Operator Instructions]. And I'll pause just for a moment to allow everyone to signal for questions.

And I'll go ahead and take our first question from Glenn Mattson with Ladenburg Thalmann. Please go ahead..

Yeah. Thanks for taking the questions.

Curious first, on the optical inspection market, is that -- is solid growth in that space this year really helped in the industrial enterprise space? Is 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?.

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 forecasts 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 head-wind 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 John Fan. All right, Glenn, this is a very good question. At a short-term cost supply chain questions are affecting that -- our customers too. So, however the long term trend to move from 2D to 3D is continued. As you all know, the electric cars are getting very complicated. So their PCB boards are very complicated.

So the trend goal to 3D is not going to be stopped, in fact it's going to continue increasing. So this short-term effect of short-term pass shortage is going to be there just short-term. And even that we're overcoming it most of the time..

Right. Great. Thanks for that color. And then just quickly moving on the defense. The -- congrats on the big order, the $19.8 million order that you received that it 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 were at least put you to somewhat flat for defense in 2022 and flat to up perhaps.

And then you have these other low rate industrial production orders to provide some upside of 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..

I think that is the correct way to think about it. Plus, we have a very healthy backlog of R&D contracts that we will be working on during the course of the year. And the timing of the four programs that are an LRIP, low-rate initial production, when they go into full production, that determines on how well they LRIPs go.

But they should provide us, if things go according to plan with additional revenues during the course of this year. Probably more in the second half of the year..

Okay. And lastly, for me, can you just remind us? Can maybe, or just give everyone an update as to, assuming taking out the caveat that there 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 ship against them and then you have a standard breakdown of component revenue versus R&D revenue of 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 on that to remind us all, would be great..

Sure, so break-even, basically getting to the mix question that you're asking about can be anywhere from $50 million to $60 million, and 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 like as a final follow-on would be the -- with the balance sheet having 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 -- capital raise activity?.

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

Okay, great. That's it for me. Thanks..

[Operator Instructions]. And we'll go ahead and move on to our next question from Kevin Dede with HCW, please go ahead..

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 sort of offer some color on that advancement vis-à-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 in consumer revenues this year, how are you seeing that grow this year?.

Thank you, Kevin this is a very interesting question. In the earlier days, I think the last earning call l mentioned that we actually use Pancake in our defense products in several places. In fact, FWS-I, are biggest production program is using our Pancake optics. Except that case, we use one of the lens is a glass lens.

Now we always believed the Pancake is the way to go for VR headsets and however in consumer world, we think the glass lens must be go must go away because their weight and lightweight and also the shape. So the all-plastic optics will be working on for several years to develop a special material and a process allowed to do that.

Now, fast-forward down, we have P95 and P80. We'd get used to CES. I must say that the response on the field is very strong. Not only that they would like to have our Pancake optics to couple with our OLED display. It's people who have their own displays, while optics.

Though 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, is it really a separate product line for us..

Okay. Can you talk a little bit about 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. You've got the Oculus quest to headset out there, it's using a clunky cell phone display.

You're developing technology that's clearly a light year ahead and I was hoping you give us a better read on its track to market..

Yeah. My feeling is that Oculus 2 is accurate into the system. And they use LCD there. Had to use a large LCD, like two or two and a half inches LCD. [Indiscernible] to use for now lens, it's a plastic lens but a fennel lens, which actually gives its bulky and thick effect.

So ultimately, I think the funnel 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 field, is pretty much not acknowledged, it will be Pancake. So that's very important. As we well 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 gives you the thinnest, lightest optics and magnified display for you. On the display side, I think they were working on this 2.6k, which we'll hope to get into production this year.

And then, the ultimate display for VR, is around 3.5 maybe 4k. And we definitely stop planning with our partners thinking about that, due to go to this incredible 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 ready for protection. So we're very optimistic we see that the future is very bright for the year, but possibly not this year. The product would be coming more at the end of the year or maybe next year, and our revenue would ramp next year..

Okay. Thanks, John. I appreciate that..

But our defense and other programs going well, so we still anticipate growth -- a good growth year this year..

Can you -- 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..

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 a 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 rolled out, particularly given what's happening around the world today, we will see how that goes, but they are, as I said, lower units, but higher prices..

I think just to give you some more light to the situation. One of the programs is the [Indiscernible] for international gun sites. So the current situation going on. We don't know how fast that will actually grow..

All right gentlemen, I can't think of anything at the moment, but I might hop back in, but yet -- no, I'm sorry. Yes. Just on the enterprise side, John, could you offer some insight, maybe from a Scott perspective or a views perspective on the adoption of Pancake.

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?.

The Pancake -- one of the Pancake's many, many advantage. But the one area they have a disadvantage, the optical efficiency is quite low, it's around 10%. So for some of the AR enterprise applications where you're outdoor, 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 as 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 the enterprise world. And that's what's being used right now. So when we ship to our customers, we normally shipping display with optics packaging through 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. In optics, we have glass optics, special optics, Pancake optics, all-plastic optics. So we also provide web optics people need to give effort for the application..

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

All right..

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 in the next meeting. Thank you, bye bye..

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