Kopin Corporation — FY2016 Form 10-K
Business context and reporting period. Kopin develops and sells miniature displays, optics, ASICs, audio chips and wearable headset systems for military, industrial, consumer and enterprise applications. Its fiscal year ended December 31, 2016 and comprised 53 weeks; FY2015 comprised 52 weeks. The filing was signed March 22, 2017.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $22.6 million | $32.1 million |
| Net component revenue | $21.1 million | $28.2 million |
| Research and development revenue | $1.5 million | $3.9 million |
| Operating loss | $20.5 million | $25.2 million |
| Net loss attributable to Kopin | $23.4 million ($0.37 per share) | $14.7 million ($0.23 per share) |
| Net cash used in operating activities | $26.2 million | $16.9 million |
| Cash, cash equivalents and marketable debt securities | $77.2 million | $80.7 million |
| Working capital | $70.0 million | $89.9 million |
| Long-term obligations | $0.25 million | $0.30 million |
- Component gross profit was approximately $3.3 million, or 15.6% of component revenue, versus approximately $6.6 million, or 23.6%, in FY2015. Lower military sales and reduced overall volume increased fixed overhead per unit.
- FY2016 operating results included a $7.7 million gain on the sale of the Korean subsidiary’s plant and land. The company also reported a $1.0 million gain from release of escrow related to an earlier investment sale.
- Cash used in investing activities was $22.8 million, primarily reflecting receipt of the final $15 million payment for the 2013 III-V product-line sale and approximately $8.1 million from the Korean property sale. Capital expenditures were $0.4 million.
Material changes versus FY2015
- Revenue declined 29%. Military applications revenue fell to $5.3 million from $10.2 million, and wearable applications revenue fell to $7.4 million from $12.3 million. Industrial applications revenue rose to $6.3 million from $4.0 million; consumer applications revenue increased to $2.1 million from $1.7 million.
- Research and development revenue fell to $1.5 million from $3.9 million, while total R&D expense decreased to $16.0 million from $17.6 million. Internal R&D expense increased to $15.3 million from $14.6 million.
- Net loss attributable to Kopin widened despite a smaller operating loss, reflecting the prior-year $9.2 million gain on investment sales, a $3.1 million FY2016 tax provision, foreign-exchange losses and other items.
- Cash and marketable securities decreased by $3.5 million. Operating cash use increased, partly offset by proceeds from property and asset sales.
Outlook, risks and unusual items
- Management expected negative operating cash flow in 2017, projected capital expenditures of $2.0–$3.0 million over the next 12 months, and stated that available cash resources were expected to support operations and capital needs for at least 12 months.
- Management said military programs, including Family of Weapon Sight and avionic programs, could increase production over coming years, but noted that awards, procurement timing and funding are uncertain. Significant procurement increases in the FWS program were not expected until 2020.
- Kopin began offering its Solos fitness-oriented wearable in 2016. Management described licensing and Solos revenue as de minimis to date; commercialization and adoption of wearable headsets remain uncertain.
- On December 28, 2016, Kopin agreed to sell 7.589 million unregistered shares to a Chinese company for approximately $24.7 million and entered a related strategic/joint-venture arrangement. These transactions remained subject to closing conditions and government approval as of the filing date. A separate proposed joint venture involved a $1 million investment plus intellectual property for a minority interest and was also pending conditions and approval.
- The company disclosed approximately $1.589 million of embezzlement at its Korean subsidiary spanning 2011–2016, including $480,000 in 2016. Prior-period corrections reclassified expenses but did not change previously reported net losses; recovery of assets and insurance proceeds remained uncertain.
- Management concluded disclosure controls were ineffective due to material weaknesses in segregation of duties over cash and journal entries and in financial-reporting oversight. The auditor issued an adverse opinion on internal control over financial reporting, while giving an unqualified opinion on the financial statements. Management targeted remediation by December 30, 2017.
- Kopin had received a Nasdaq deficiency notice after filing its third-quarter 2016 Form 10-Q late. The 10-Q was filed with this annual report, but the company had not received formal confirmation that it had regained compliance.
- Key business risks include reliance on a Taiwanese foundry and other limited suppliers, customer and program concentration, competitive and still-developing wearable markets, government-contract funding and termination risk, and foreign-exchange exposure. The company did not hedge foreign-currency risk.
Investor verification priorities
- Verify whether the proposed $24.7 million share issuance and related Chinese strategic arrangement closed, and assess resulting dilution, cash proceeds and obligations.
- Track operating cash burn against management’s 12-month liquidity statement, including the composition and accessibility of marketable securities and foreign-held funds.
- Confirm implementation and independent testing of internal-control remediation, and review any subsequent filings for further errors or control findings.
- Monitor recovery or insurance proceeds relating to the Korean embezzlement and any resulting financial-statement impact.
- Assess whether military and wearable customer demand recovered, whether major programs received funding and awards, and whether customer concentration changed.
- Check Nasdaq listing compliance and any updates to the pending joint-venture transactions, tax exposures or material contingencies.