Good day, and welcome to the Kopin Corporation third quarter 2021 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Richard Sneider, Chief Financial Officer. Please go ahead, sir.
Thank you, operator. Welcome, everyone, and thank you for joining us this morning. John will begin today's call with a discussion of our strategy, technology, and markets. I will then go through the third quarter results at a high level. John will conclude our prepared remarks, and then we'll be happy to take your questions. I would like to remind everyone that during today's call taking place on Tuesday, November 2nd, 2021, 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, supply chain issues, 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. With that, I'll turn the call over to John.
Good morning, and thank you all for joining us this morning. To start, it is undoubtedly a very interesting few weeks for AR/VR. First, Facebook came up with the Facebook Ray-Ban smart glass product. Last week, Facebook changed its corporate name to Meta for the coming metaverse world. We of course have been pursuing this world for quite some time. However, I will first focus on our Q3 update, as we do have so many great advances in this quarter. We'll be happy to take questions on metaverse during our Q&A session. We are very pleased with our strong third quarter results, with revenues increasing 14% year-to-year, reflecting particularly strong growth in industrial product revenues and customer funded development activities, which posted year-over-year growth of 65% and 60% respectively. This quarter was our ninth straight quarter of year-to-year growth.
As another reference, revenue grew about 24% in the past three quarters year- to- year. We feel very good about our position in the market and our ability to continue our strong performance. We are on track with our defense development programs. In the second quarter, 2021, we mentioned that two development programs enter low rate initial production. In the third quarter, we received an order for one of these programs, the Joint Effects Targeting System or JETS. More details on that in a moment. We expect another program to enter low rate production within the next few months. If this occurs, it will be our fifth production program. In addition, we continue to have an active and robust pipeline of defense programs in development, which will further fuel our revenue growth in the coming years.
Let me give you some additional detail on a few of our growth programs and market areas. First, the FWS-I program. We announced during our second quarter call that we reduced shipment of eyepieces for the FWS-I thermal weapon sight program while we work with our customer to develop better processes for increased production rates. I am pleased to report that these improvement activities have gone very well. We are now ramping production, and we expect one of our highest production and shipping rates for this program in the fourth quarter. In addition, we expect to receive a significant new order for our FWS-I eyepieces shortly. As a reminder, the FWS-I thermal weapon sight uses a very high-precision video see- through AR optical module using our CyberDisplay and our custom-designed sophisticated Pancake optics. These optics have some glass element incorporated.
As we discussed in the last earnings call, a new invention, All-Plastic Pancake optics for VR, AR, MR applications, is an exciting innovation and achievement for Kopin. It's believed to be the first All-Plastic Pancake optics in the world, producing better image quality in a much lower cost and much lighter weight. For the coming consumer AR, VR headset markets, such All-Plastic optics will be very useful. 3D automatic optical inspection is another bright area for us. During the third quarter, we're excited to announce a $3.4 million order commitment from JUTZE Intelligence Technology to provide spatial modulators, what we call SLM, for JUTZE's H-series of 3D automatic optical inspection and Mirage Series for 3D solder paste inspection system. It's important to note that SLM are key components for 3D automatic optical inspection, which are referred to 3D AOI equipment.
Our SLM is used in these quality inspection systems for printed circuit board assemblies, or PCBA. The SLM projects structured light onto the PCBA, being measured by 3D AOI SPI equipment to find flaws or defects. This approach enables circuit board manufacturers who are now using 2D AOI machines to move into 3D so as to improve PCBA yield and product quality while reducing waste and cost. We've been focusing in this area for several years. It's now bearing good fruit. There is a growing demand for 3D AOI machines in a number of key areas. In particular, manufacturers of printed circuit boards for electric vehicles are moving from 2D to 3D AOI equipment due to high quality standard needed to achieve automobile safety requirements. Currently, Kopin and one other company, Texas Instruments , equally supply approximately 80% of the SLM market needed for 3D AOI market.
We have grown over 50% in this market in the past two years. With the accelerating growth in electric vehicles, we believe this is an increasingly important opportunity for Kopin in the coming years. We plan to host a webinar early next year to go in depth into this technology and demand for spatial light modulators. Let's quickly review a few more recent successes. As I just mentioned a few moments ago, we recently announced a $1.1 million order to provide eyepieces for JETS, which are scheduled for delivery next year. JETS is a portable handheld product designed to rapidly acquire, precisely locate, and accurately engage targets with precision-guided munitions. We are providing the program with a high resolution, low power, ruggedized eyepiece using our specialized optics and microdisplays.
We also announced our CyberDisplay WQVGA display has been designed into Divesoft's new, newly launched optical display adapter for divers and provide easy access to critical diving data. Our display offers user a bright, clean, easy readable image in a small form factor. This win is an example of many industrial and medical areas looking to integrate the capability of a microdisplay and optics. For added utility and safety in their AR/VR products. When turning to our Organic Light Emitting Diode activities, we received approximately $850,000 follow-up order for our proprietary Lightning 2K silicon backplane wafers. As a reminder, a Lightning 2K backplane supports all its microdisplays with 2048 by 2048 resolutions in a one-inch diagonal size and can run up to 120 hertz with low power consumption.
This repeated order is in line with our expectation of growing market demand for backplane wafers for all that microdisplays and validates our fabless business model. Now let me take a few minutes to discuss our microdisplay strategy. Since our early days with funding from DARPA, Kopin has advocated strongly for the microdisplays to reside on silicon IC backplanes. In fact, all advanced microdisplays should be on silicon IC backplanes. Therefore, from the very beginning, all our microdisplays are on silicon IC backplanes. We believe we are the world's only provider of LCD, LCOS, micro-OLED, and in the future, micro-LED microdisplays, all on silicon backplanes. In fact, our key feature and differentiation is in the silicon semiconductor backplane designs and processing steps. Kopin has focused on the silicon semiconductor backplanes for two decades. They have been vigorously integrating sophisticated and complex IC and display driving designs into the backplanes.
To enable displays with the matter of spatial light modulators, we have layered our specially designed IC silicon backplanes with either liquid crystals, ferroelectric liquid crystals, organic light-emitting diodes, or inorganic light-emitting diodes to make what we trademarked as Display-on-Chip, DoC. We plan to showcase many of such DoC in our suite in the upcoming CES in January 2022. In short, our revenue-generating business is strong, driving growth, man, good momentum into Q4 and next year. At the same time, we're actively innovating to advance our technology roadmap, paving the path for the future growth of AR, VR, and MR applications. The current market trends indicate exciting and growing opportunities, especially in the metaverse VR platform.
Kopin is an active and persistent pioneer in furthering this technology, beginning many years ago in defense, then in enterprise, and now in consumer applications. We are very well positioned to capitalize on those opportunities. We're looking forward to the coming in-person CES in January, where in addition to our Display-on-Chip, we plan to exhibit many of our recent exciting developments related to AR/VR. Interestingly, I was asked a few days ago whether we can even show the F-35 helmet. This is the world's most advanced production AR helmet in the world. As many of you know, our CyberDisplay is the sole source in that helmet. We will try, but it's most likely impossible to achieve that. Regardless, we have many other interesting devices to show you. Do join us at CES. Now we turn this call to Rich to review the financial details.
Thank you, John. Turning to our financial results, total revenues for the third quarter ended September 25th, 2021 were $10.9 million, compared with $9.5 million for the third quarter of September 26th, 2020, a 14% increase year-over-year. Product revenue for the third quarter ended September 25th, 2021 was $6.6 million, compared with $6.5 million for the third quarter, September 26th, 2020. Our defense product revenues for the third quarter ended September 25th, 2021 were $3.5 million, compared with $4.8 million for the third quarter ended September 26th, 2020. As John previously discussed, during the third quarter, we reduced shipments of our product used in thermal weapon sight systems to a customer in order to make process enhancement.
We expect to increase our shipping rates for this product in the fourth quarter. Our industrial product revenues for the third quarter ended September 25th, 2021 was $2.7 million, compared with $1.7 million for the third quarter ended September 26th, 2020, an approximate 65% increase on the strength of sales of products used in 3D metrology equipment, the 3D AOI that John referred to. It was partially offset by a decline in sales of our products used in headsets used for applications in manufacturing, distribution, and public safety.
Funded research, development, and other reviews were $4.1 million for the third quarter ended September 25th, 2021, compared with $2.6 million for the third quarter ended September 26th, 2020, an approximate 60% increase year-over-year, primarily due to an increase in customer-funded programs for U.S. defense. Cost of products sold for the third quarter ended September 25th, 2021 were $5.1 million compared to $4.8 million for the third quarter ended September 26th, 2020. Gross margins for the third quarter ended September 25th, 2021 were 22% compared to 26% for the third quarter ended September 26th, 2020, reflecting the manufacturing inefficiencies due to lower sales volume of our products for the FWS-I program.
Regarding global supply chain issues affecting many industries, we have not experienced any material product shipping delays related to supply chain issues during the first nine months of 2021. However, like most companies, we are facing challenges. The situation is very dynamic, and we can continue to work around the issues it presents. Research and development expenses for the third quarter of 2021 were $3.8 million compared to $2.7 million for the third quarter of 2020, a 38% increase year-over-year. R&D expenses for the three months ended September 26th, 2021 increased as compared to three months ended September 26th, 2020, primarily due to an increase in customer-funded development programs and internal R&D expenses for OLED development.
Selling, general, and administrative expenses were $4 million for the third quarter of 2021 compared to $3.1 million for the third quarter of 2020. Excluding the non-cash stock-based cost, SG&A expenses were $3.6 million for the third quarter of 2021 compared with $2.9 million for the third quarter of 2020, a 25% increase. The increase in SG&A, excluding non-cash stock compensation costs, was due to an increase in other compensations costs and bad debt expense. Other income was approximately $51,000 of expense for the third quarter of 2021 compared to $168,000 of income for the third quarter of 2020.
During the three months ended September 25th, 2021, we recorded $29,000 of foreign currency losses as compared to $183,000 of foreign currency gains for the three months ended September 26th, 2020. Turning to the bottom line, our net loss attributable to the controlling interest for the third quarter of 2021 was $2.1 million, or $0.02 per share, compared with a net loss to controlling interest of $957,000, or $0.01 per share for the third quarter of 2020. Non-GAAP net loss attributable to controlling interest for the third quarter of 2021 was $1.7 million, or again $0.02 per share, compared with non-GAAP loss attributable to controlling interest of $776,000, or $0.01 per share for the third quarter of 2020.
Kopin's cash and marketable securities were approximately $31.7 million at September 25th, 2021, as compared to $20.7 million at December 26th, 2020. Net cash used in operating activities for the third quarter ended September 25 was approximately $3.5 million. During the three months ended September 25th, 2020, we sold 600,000 shares of our stock under our ATM program for proceeds of approximately $4.8 million before deducting expenses paid by us of $145,000. For the nine months ended September 25th, 2021, we have sold 3,096,697 shares for gross proceeds of approximately $21.7 million before deducting broker expenses paid by us of approximately $700,000 pursuant to our existing and previous ATM agreements.
Third quarter amounts for depreciation, stock compensation are attached in the table to the Q3 press release. The amounts discussed above are current estimates, and the listener should review our Form 10-Q for the third quarter of 2020 on any possible changes and of course, additional disclosures. That concludes our prepared remarks. Operator, we'll now take questions.
All right, thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll go ahead and take our first question from Glenn Mattson with Ladenburg Thalmann. Please go ahead.
Yes. Hi, thanks for taking the questions and congrats on the quarter. The bounce back that you expect in the FWS revenue, do you think that's just kind of a bounce back that makes up kind of some of the push out from Q3 or is that, you know, is there a higher level of production or now that the facility that had been retooled has completed that process with just general sense of the pace of a business from that contract? Thanks.
Yeah. We are gonna try making up as much of the Q3 as possible in the fourth quarter. Going forward, our overall production rate should be higher on a weekly basis because of the profit rate.
Okay. Yeah. The better R&D revenue, is that a signal that, you know, I think John spoke to a number of defense programs that you're in. Is that number increasing or is it just that the scope of the work among within those programs is picked up this quarter and you expect that to continue for a little while or some color there?
Yeah, just in this particular quarter. We have a number of contracts that go out for an extended period of time, and it was just a reflection of the amount of work that was done this quarter. It's done on a percentage of completion basis. It's that piece of the business is somewhat lumpy. Depends on what you achieve in a particular quarter.
Right. Great. As far as the industrial side, nice pick up there. You mentioned that the optical inspection side of the business is doing well, but that the headsets were, you know, it was offset by a little bit of weakness in headsets. Is the first trend sustainable? And second off, is the headset something you expect to bounce back or is that just kind of that business kind of quiet right now?
Yeah. As it relates to the 3D AOI, we do believe that is sustainable. We've had good backlog and orders for that business right now. As it relates to the headset business, our customers tell us they do expect that to get stronger going forward.
Great. Last one for me. I don't know if Rich for you or for John, but on the Metaverse stuff, you know, I guess if Facebook's putting some kind of $10 billion or so investment in this space, so obviously they're going to be building some of the best products out there. I guess, John, do you expect that you'd be competing to get into those headsets, so to speak? Then just generally speaking with the pace that Facebook is going at it, do you expect that's going to accelerate the whole industry in general and force other major tech players to kind of advance their projects within the VR space and that as well could potentially serve you guys well? Just some color there'd be great.
It's a very good question, Glenn, on the metaverse. As we know, we have been believing, I always believe that the next generation of transformation is going from the cellphone to the metaverse world. We certainly cannot compete with Facebook. Let's face it. Zuckerberg say they have more than 10,000 people working on it. They spend a lot of time on most of the activities on software applications. As you well know, such a new platform that a lot of hardwares are needed. The most important hardware needed are the display and the optics, and we've been focusing on that since day one. The other day, they also believe that's what the most important is the hardware. After hardware, of course, software, the applications, apps.
Facebook are very good at that, and we are not doing that. We'll always be focusing on how to provide the best image to you from a smallest form factor. That's exactly what defense and the enterprise guys want, and we dominate these two areas. Hopefully we will be providing the critical components for the Metaverse. In fact, it's interesting, we have trademarked the glass. Our trademark for the VR glass is called the Metaverse Glass. We actually have the trademark. We are way ahead on the Metaverse. So I will not go into a lot of details what's needed for display. Maybe somebody will ask that. For Metaverse, the requirement for displays of optics are quite different from the AR glass, which we do for the F-35.
Maybe I would let other people ask the questions, but the requirements are very interesting, and I think we're very well situated for that.
Great. No, thanks for all the color and congrats on the quarter.
We'll go ahead and take our next question from Spencer Kirschman with H.C. Wainwright. Please go ahead.
Hi, John, Rich. This is Spencer Kirschman in for Kevin Dede. Congrats on the quarter. I was kind of curious to get some more thoughts on the difference between the glass setup for components for the FWS-I and then the coming Metaverse you were just talking about, John.
Yeah. I think in the case of the F-35, which is the AR glass, what they need is very rugged, overly rugged. In fact, all the displays for defense applications, ruggedness, high precision are most important. The other cases like for F-35, it also had to be very bright in the daylight. At nighttime, it is a video AR. It's using camera. It's quite different, okay? As I say, I wish that we could show you the helmet, but I'm afraid that they will not be allowed to do that. In the case of VR for the Metaverse Glass, it's very different. Metaverse glasses is totally immersive, okay? The way to a good analogy is go to an IMAX theater 'cause you wanna see a very immersive large image.
The current IMAX theater is very interesting. If you've ever go to see an IMAX theater, they have two 4K projectors going to the screen, 4K. The brightness is not that important. It's always bright enough for immersive. It's not the brightness that's most important. It's the image quality. What happens, you need high resolution. You also need very high dynamic range. If you go outside to buy a TV today, the high-end TV all have this called HDR. What does that mean? High dynamic range. They will give you 10 bits of dynamic range. 10 bits, not 8 bits, okay? Another thing people want is very high speed, 120 hertz, to reduce the latency and get fast action for games. Again, for metaverse activities, the display do not need to be very bright.
It is immersive. You need to have the HDR 10 bits, and you need to go to 120 hertz. I think that's the most important. When you look for display for metaverse, you say, "How fast can you go? How many dynamic range?" This is that. I think that's the thing we would like to show you in the coming CES. Ask for how good the image is, how good the color is. These are the key things, just like a TV or IMAX theater. The second thing for metaverse is really the optics. You have to get very, very thin optics and give you a very large magnification because in metaverse world, everybody wants a huge image like IMAX theater. There's only two current technology that's good for optics.
One is the Fresnel lenses, which now Oculus Two is using. The other one is pancake optics. Talk about pancake optics is our trademark, as you well know. Also one of the inventors of the pancake optics is actually in our company, okay? We always very good in, at pancake optics for the, especially for defense. Now we use pancake optics for consumer, and we turn that all into plastic optics. The important thing for metaverse, you got to have a wonderful optics to give you a huge magnification and very thin optics, very lightweight. The second one, you get a display that give you a very high dynamic range, very high resolution, very good color, and high speed. These are the things that's needed. Of course, in the consumer world at the end, you know how to produce them in quantities.
I hope I explained that. Metaverse, the hardware is optics and displays.
Yeah, that's really great color . I really appreciate it. Shifting gears a little bit, just curious on the number of productions that are currently in LRIP and then those that you expect to go to full rate production, either in the balance of the year or in 2022?
We have two in production, F-35 and FWS-I. We have two in LRIP. We talked about one of them, JETS. We expect in this fourth quarter, in the next few weeks, hopefully, an award for a third. With a little luck, they're all by the end of the first quarter into production. Out of LRIP and into full production.
Okay. Thank you. Great color . I really appreciate it. I'll jump back into queue.
Thank you.
All right. We can go ahead and take our next question from Craig Rose with Axiom Asset Management. Please go ahead.
Hey, John. Good quarter.
Thank you, Craig.
You said you had 50% market share of the optical inspection equipment. Did you say how large that market is?
I wanna make it clear, we do not have 50% market share. We have actually about 40%, okay? We grew about 50% in the last two years in the revenue. The current market is still relatively small, okay, actually. It's still meaningful. As remember, we provide the spatial light modulator. Currently, the whole market, we have two strong players, ourself. The second player is TI. Each one of them owns about 40% of the market share. We're actually gonna have a webinar coming out early next year because I think this is a very interesting area because as you well know. All the inspection systems right now, whether it's PCB, maybe even semiconductors, they are all using 2D inspection machines. As it comp the things are getting too complicated in electronics, so 3Ds are the need. It's just very early right now. We're seeing a very early stage.
In the electric vehicles, the PCB boards are so complicated and so robust. We believe all the equipments eventually are gonna go from 2D to 3D. The market could be very big. We're gonna have a webinar early this January, maybe February, to discuss the technology, the comparative competitive world and where it's gonna go. We're still studying how big the market is and why it's growing so fast.
Okay, thank you. As far as the plastic Pancake optics, where would you expect that to be used first?
In the Metaverse Glass.
Okay. Is that
Again, yeah. Maybe I should. I'm sorry, I was a little too short. Sorry, I apologize for that. The plastic Pancake optics has this feature. It can magnify your display maybe area wise 30,000 times, okay? You take a postage stamp display, and you look into it. It looks like an IMAX theater. It's also very thin because as you well know, the optics are bouncing inside. As I remember, one of our inventors of Pancake optics is in our company right now. We know how to do that. Third, it had to be very light. We want the headset to be very light, so you can wear them for many hours, not just for 10 minutes or 15 minutes. This is the ideal thing, All-Plastic Pancake optics. You just
It's what everybody's looking for the last four years. Everybody, not just us. It's just that we've invented it first.
Are your prototypes ready for CES?
Yes.
Okay. Anything else you wanna tell us about CES?
We hope to show this not only the prototype, the optics. We hope to show you the early type of Metaverse Glass with this type of optics.
Okay. Thank you very much.
All right. It appears there are no further questions at this time. Mr. Fan, I would like to. Oh, we actually did get one more question. My apologies. We'll go ahead and take our next question from Patrick Metcalf who is a private investor. Please go ahead.
Hey. Good morning, John. You sound fantastic. Exciting times ahead, obviously.
Thank you, Patrick.
Okay. My questions revolve around your hidden treasures. I'd like to know how Lenovo New Vision and RealWear are looking for 2022, and any other of the assets.
Yeah.
Patrick, you know, in all honesty, you really should contact Lenovo and RealWear and ask them to guide you.
I think I answer the question a little bit differently. Patrick, thank you very much for the question. You know, our company has three-legged stool. One leg is the defense and enterprise business, and that's going very well. It's revenue generating. The second stool is really very actively investing in the key components for Metaverse Glass displays and optics. The third leg is our activities in licensing spin-out companies of which we own equities and we also have royalties, and we just sell them the components that they need. There are a bunch of companies that are there, as you well know, and we already announced that RealWear is one of them. In fact, Vuzix was one of them, of course, and Solos in Glass was one of them.
We just announced last year we licensed to a company to make surgical headsets. They're one of them. So on. This is our third leg. We provide people these components, knowledge, license, and equities and component sales. Yeah, I think those companies, we're all praying that they'll be successful, and some of them, and many of them are very successful.
Okay, great. John, the only reason why I ask is, at the end of last conference call, you had made mention to the fact that more licensing deals would potentially come. I just was going to ask, how's that effort going into 2022? Do you see maybe one or two more happening in 2022?
The answer is we're certainly working pretty hard now, especially with the metaverse going, starting going so strong. We expect more deals coming up. Anyway, I do think, again, this could be an in-person CES. Last year, there were no CES. This in-person CES, I think it's gonna be very interesting. Hopefully, we'll be able to show you additional devices. People are using now our components for really beneficial applications, not just for defense or for some enterprise. Now they're using for medical and hopefully very soon for consumer applications.
Okay. One last question, John. Let me get this straight. You have trademarked Metaverse Glass and Pancake optics?
Yes.
Okay.
Pancake Optics, we have a registered trademark. Of course, CyberDisplay, all those are registered trademark. Our Metaverse is not registered yet. It's trademarked. As you well know, registered has gone through a different process, a very vigorous process. That means our Metaverse, yes, with our trademark.
Okay. I now know why you sound like you're 37. Good luck. Congratulations. You sound incredible.
Yeah. I think this is gonna be a very interesting couple of years. Thank you.
All right. Have a good one.
All right. Now it appears there are no further questions at this time. Mr. Fan, I'd like to turn the conference back to you for any additional closing remarks.
No, thank you very much. We hope to talk to you again on the next earnings call. Do come to CES to see us. Thank you.
This concludes today's call. Thank you all for your participation. You may now disconnect.