Kopin Corporation (KOPN) — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 29, 2018. The filing also provides unaudited fourth-quarter results. Kopin develops and sells miniature displays and related components, wearable headset systems, and military and training-and-simulation products.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $24.5 million | $27.8 million |
| Operating loss | $40.0 million | $30.3 million |
| Net loss attributable to Kopin | $35.9 million | $25.2 million |
| Basic and diluted loss per share | $0.49 | $0.36 |
| Cash, cash equivalents and marketable securities | $37.2 million | $68.8 million |
| Working capital | $39.0 million | $67.6 million |
| Total assets | $59.5 million | $91.3 million |
- Product revenue was $19.2 million; research and development and other revenue was $5.3 million. Cost of product revenue was $15.8 million, implying product gross profit of about $3.4 million and a 17.6% product gross margin.
- Research and development expense totaled $17.4 million, including $12.6 million of internally funded work. Selling, general and administrative expense rose to $27.2 million from $20.5 million.
- Operating cash use was $28.2 million, versus $25.9 million in 2017. Investing activities provided $18.8 million, including proceeds from sales of marketable debt securities; capital expenditures were $1.2 million.
- The filing reports $1.5 million of long-term obligations at year-end. It does not provide a separate conventional borrowings or debt total in the summarized balance-sheet data.
Material changes and unusual items
- Revenue fell 12% year over year. Military application revenue decreased to $8.7 million from $13.4 million, primarily reflecting completion of NVIS programs; industrial revenue increased to $6.1 million, while consumer revenue declined to $4.1 million.
- R&D contract revenue increased to $5.3 million from $2.9 million and represented about 20% of total revenue. Military customers overall accounted for 36% of revenue, excluding R&D contracts.
- Operating loss widened by $9.7 million. The filing attributes SG&A growth in part to compensation, including increased stock-based compensation, product promotion, contingent consideration, and legal and patent costs. Kopin also recorded $1.4 million of goodwill impairment and $2.5 million of equipment impairment.
- Non-operating income included a $2.8 million non-cash gain on equity investments and $1.0 million of insurance proceeds related to embezzlement at its Korean subsidiary. These items partly offset operating losses.
- Fourth-quarter revenue was $7.7 million, gross profit $1.4 million, operating loss $10.9 million, and net loss attributable to the controlling interest $11.3 million. The year-earlier quarter had revenue of $11.4 million and operating loss of $5.0 million; its net loss was lower in part due to a warrant gain.
- Kopin adopted ASC 606 using the modified retrospective method in 2018. The company said the new standard materially affects revenue timing: approximately $4.1 million was recognized through the opening retained-earnings adjustment rather than as 2018 revenue. Reported prior-year figures were not restated.
Outlook, risks and contingencies
- Management expects negative operating cash flow in 2019 and anticipates significant R&D spending on display and military products. Planned capital expenditures are $1.5 million to $2.0 million.
- The company and its auditor disclosed substantial doubt about Kopin’s ability to continue as a going concern, citing recurring losses, negative operating cash flows, and falling cash and securities. Management said it may need to reduce expenses, including R&D, or raise additional capital if it cannot achieve positive cash flow and profitability. The audited financial statements remain prepared on a going-concern basis.
- Remaining performance obligations were $8.0 million, expected to be recognized over the next 12 months; these government contract amounts are subject to cancellation. Kopin also disclosed an approximately $5.1 million capital contribution commitment routed through its Chinese subsidiary, subject to Chinese investment restrictions.
- Key business risks include uncertain adoption of wearable headsets, dependence on military programs and government funding, limited or cancellable customer orders, supplier and foundry concentration, competition, and exposure to tariffs, foreign exchange, export controls, and environmental regulation.
- Collins Aerospace represented 20% of FY 2018 revenue. RealWear accounted for 31% of year-end gross receivables. The BlueRadios dispute seeks monetary, declaratory and injunctive relief; Kopin had not concluded a loss was probable and recorded no litigation accrual.
- Kopin discontinued operations at its wholly owned Kopin Software Ltd. subsidiary after year-end. The Korean manufacturing operation had ceased and Kowon was liquidated at fiscal year-end.
Important facts for investors to verify
- Cash burn and the company’s ability to fund operations and commitments without additional capital.
- Whether military programs, including Family of Weapon Sights and aviation programs, generate sustained orders and improve product margins.
- Revenue growth and customer adoption for wearable, industrial and consumer products, including the timing and economics of licensing and supply agreements.
- How much of future reported revenue and earnings reflects ASC 606 timing, non-cash investment gains, or other unusual items.
- Potential financial exposure from the BlueRadios litigation, the Chinese capital contribution, and contingent NVIS payments.