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Operator
Good day and welcome to the COVID 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 Snyder. Please go ahead.
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 the market environment that we see in our progress in executing our strategies. 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 in our most recent annual 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
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 coping.
Richard
despite the challenges of the pandemic, past shortages, and FWSI production retooling in the mid-year, we still had a 14% revenue growth in 2021.
John
This growth represents our fourth consecutive year of growth, and we expect this growth trend should 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. However, like 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 special light modulators using our ferroelectric L-cores 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 manufacturer 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 cells of our organic light-emitting diode display, or OLED products. But the absolute dollar amount of our OLED 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 continues to have strong demands in 2021, with revenue of $18.2 million. We achieved 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 FWSI thermal weapons site program, which should have positive long-term effects on our revenue and margins.
spk01
These process enhancement activities are now completed.
John
Our shipments in Q2 and Q3 and our yield in Q4 were adversely affected. However, I'm pleased to say that the FWSI 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 eyepiece sub-assembly, a critical component in the U.S. Army's family of weapons site individual thermal site system.
spk01
The majority of this order is scheduled to ship in this year.
John
Other progress in the fourth quarter, including additional 2.8 million follow-up orders for a high-brightness and super-rugged liquid crystal display for the F-35 drone strike fighter program. The F-35 is the world's most advanced jet fighter combat aircraft, with much of the functionality enabled through an advanced AR or augmented reality helmet, which provides the pilot with critical flight, tactical, and sensor information for advanced situation awareness and precision 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 display technology.
spk01
As a reminder, we are so soft to this incredible AR helmet.
John
Finally, we announced that we received 1.1 million orders to provide eyepieces for the Joint Effects Targeting System, JETS, with a scheduled delivery through this year. While the orders I just discussed are a testimony to our advanced display technology, One area of coping excellence that may not well be understood is our optical capability.
spk01
We provide displaying optics in modules and advanced assemblies.
John
In many ways, optics are just as critical as displays in achieving a great AR and VR experience. To this end, we announced in the fourth quarter our pending panning all-plastic pancake optics with excellent performance that enables smaller, lighter-weight VR and metaverse headsets.
spk01
We believe our all-plastic pancake optics are the first in the world.
John
Providing critical components for VR headsets that are thin, lightweight, comfortable, and easy to use has been a critical objective of ours.
spk01
Pancake optics are excellent choices for VR headsets.
John
However, previous pancake optics needed at least one spherical glass lens to avoid image artifacts caused by the bioframed use of plastic materials. Such spherical glass lens added weight, caused production issues, and reduced optical design feasibility. compared to aspherical plastic lens.
spk01
I'm glad to say we have solved the plastic birefringes issue.
John
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 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 pancreas optics provide not only the clear advantages mentioned above, but most importantly, provide a very sharp image with very good eye relief and eye box, especially with our novel P18 optics.
Richard
We believe our all-plastic pancake optics combined with our micro-display represent the perfect match, providing a magnification of 30,000 to 50,000 times while remaining a very sharp, maintaining a very sharp image.
John
Our goals, they always remain the same. which is to lead into critical areas that are needed for AR, VR, optics, and micro-displays. I also wanted to highlight our recent in-person participation in CES this January. We demonstrate our second generation 2.6K by 2.6K OLED display, combined with our new plastic optics. GIFOL, the wholly owned Cecilia Panasonic, demonstrated at CES the VR glass incorporating Coping's 2.6K by 2.6K OLED display. and our own plastic pancake optics. We also had a fireside chat at CES, focused on our views and approaches to the exciting metaverse world. The discussion was chaired by Chris Chernock, 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're actively managing our supply chain challenges. We will continue our momentum on innovating in 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 presents. We entered 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 Coping, 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 the full year.
Richard Snyder
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 statement 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 record most of our defense revenues based on percentage of completion. Accordingly, our revenues are based on both the units we ship 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 the ASC 606 Q4 2021 adjustment was in negative $308,000 as compared to a positive adjustment of $1.3 million in Q4 of 2020. Essentially, this means our whip and finish 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 due to an increase of approximately 400,000 for 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 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 by increases of industrial and enterprise revenues of 41% and consumer revenues 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, 83.8% and 75% respectively. Cost of product revenues increases as 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 quarters of fiscal 21, we reduced production of our products for the FWI 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 2021 increased 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 a 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 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, 2021 was $13.7 million, or $0.15 per share, versus a net loss of $4.4 million, or 5% 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. Copen's cash and equivalents and marketable securities were approximately $29.3 million at December 25, 2021. compared to $20.7 million at December 26, 2020, and we continue to 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 for any possible changes and, of course, any additional filing. With that, operator, we'll be happy to take questions.
Operator
Of course. Thank you. And if you would like to ask a question, please signal that person star 1 on your telephone keypad. If you're using a speaker phone, please take up your handset and make sure your mute function is turned off so that your signal reaches our equipment. Again, it is star one if you'd like to ask a question. And we'll pause just for a moment to allow everyone an opportunity to signal for questions. And we'll go ahead and take our first question from Glenn Mattson with Lindbergh Salmon. Please go ahead.
Glenn Mattson
Yeah, thanks for taking the questions. So curious first on the optical inspection market, is that, you know, is solid growth in that space this year really helped in the industrial enterprise space? So is that, you know, 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?
Richard Snyder
So, yeah, I mean, this is a momentum that's been building for a period of time. And we'll see what happens in 2022. You know, 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, you know, 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.
Richard
Yeah, this is John Fay. This is a very good question. The short-term, of course, supply chain questions is affecting our customers, too. So, however, the long-term trend to move from 2D to 3D continued. As you all know, electric cars and everything are getting very complicated. So their PCB boards are very complicated. So the trend going to 3D is not going to be stopped. In fact, it's going to continue increasing. So the short-term effect of past shortage is going to be very just short-term.
John
And even that we're overcoming most of the time.
John
Right.
Glenn Mattson
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, I think it was in December. And when you add that, plus the, you know, 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 two factors would at least put you to somewhat flat for defense in 2022, flat to up perhaps. and then you have these other low-rated 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.
Richard Snyder
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 we'll be working on during the course of the year. And, you know, the timing of the – those four 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.
John
Okay.
Glenn Mattson
And lastly for me, can you just remind us, or 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 chip against them and then you have a standard breakdown of component revenue versus R&D revenue of kind of like two-thirds to one-third or slightly better than that, you know, the target model for what kind of gross margins would be when you get to certain volumes and where breakeven is. Just some, you know, color around that to remind us all would be great.
Richard Snyder
Sure. So breakeven, basically getting to the mixed question that you were asking about, can be anywhere from 50 to 60 million. And so we're fast approaching that number. And I think you're ratios of product revenues to contract revenues is pretty close to what we've historically been running at.
Glenn Mattson
And so in light of that, just as 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 raised activity?
John
We have sufficient cash to execute our strategy where we are right now.
John
Okay, great. That's it for me. Thanks.
Operator
And as a reminder, it is star one if you would like to ask a question. And we'll go ahead and move on to our next question. This is Kevin Deedy with HCW. Please go ahead.
Kevin Deedy
Good morning, gentlemen. Thanks for taking our call. John, could you just offer, I mean, 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-a-vis Solos, RealWear, Scott, some of the enterprise and consumer products. 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 grow this year?
Richard
Yeah, thank you, Kevin. It's a very interesting question. In the earlier days, I think the last earning call, I mentioned that we actually use Pancake United Defense products in several places. In fact, FWSI, our biggest production program, is using pancake optics. Except that case, we use glass. One of the lenses is a glass lens. Now, we always believe the pancake is the way to go for VR headsets. But however, in the consumer world, we think the glass lens that must go away because of that weight and lightweight and also the shape. So the all-plastic optics will be working for several years to develop a special material and a process that allows it to do that. Now, fast forward now. We have P95 and P80. We introduced the CES. I must say, the response from the field is very strong. Not only that they would like to have our pancake optics to couple with our OLED display. In fact, people who have their own displays want our optics. So we're now actively planning how to get the pancake optics or plastic pancake optics to satisfy our customers' need. So we're very optimistic about pancake optics
John
This is really a separate problem for us.
Kevin Deedy
Okay. 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 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'd give us a better read on its track to market?
John
Yeah, my feeling is that Oculus 2 is actually a very interesting system.
Richard
They use LCD there, and they use a large LCD, like two, two and a half inches LCD, and they use a Fresnel lens. It's a plastic lens, but it's a Fresnel lens, which actually gives it a bulky and thick effect. So ultimately, I think the Fresnel lens will go to pancake, and you will go to 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 our trademark. We trademarked the pancake many years ago because we've been working on it in the defense area. We believe this is the best way to give your seniors 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 to think about that, to go to this incredible goal. Just as a reminder, 2.6K by 2.6K OLED, 1.3-inch display, we are in Generation 2. Nobody else in the world has that yet, and we are already in Generation 2 and 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 will ramp next year.
Kevin Deedy
Okay. Thanks, John. I appreciate that. I appreciate that.
Richard
Yeah. BioDefense and other programs are doing well, so we still anticipate growth. a good growth year this year.
Kevin Deedy
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 know FWSI 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.
Richard Snyder
Yeah, I mean, something like FWSI is a very rare program because it goes into, you know, most of the soldiers get it in one form or another. You know, the rest of the programs are, you know, 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'll see how that goes. But they are, as I said, lower units but higher prices.
Richard
Yeah, I think just to give you some more light to the situation, one of the programs is for international gun sites. So the current situation going on, we don't know how fast that market will grow.
John
Okay.
Kevin Deedy
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 some insight, maybe from a Scott perspective or a Vuzix perspective, on the adoption of Pancake? I understand consumer is a little way out, but I know that your enterprise business is growing. Is there a chance that pancake gets adopted there and is the price point lower? How does that translate?
Richard
Yeah, the pancake, one of the pancake has many, many advantages, but 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, 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 really decide it's a pancake. So it is a very different case how you 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 ship a shipping display with optics packaging to a module. So it depends which application. Remember, we have a whole range of it. We have all the range of display, LCD, L-COS, OLED. Of course, we're working on LED. And optics, we have glass optics, special optics, pancake optics, all plastic optics. So we also provide whatever optics people need to give for the application.
Kevin Deedy
Thank you, John.
John
I appreciate it. Thanks, Rich. Thanks for taking our questions.
Rich
All right.
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 closing remarks.
Richard
Thank you very much for joining us, and I hope to see you at the next meeting. Thank you. Bye-bye.
Operator
And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.
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