Kopin Corporation — FY2012 Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2012 (52 weeks). This is an annual filing, not a standalone fourth-quarter report. Comparatives were recast to present the III-V product line as discontinued operations. Amounts below are U.S. dollars.
Business context
Kopin develops miniature displays and Golden-i hands-free wearable computing technology. Its continuing business is focused on display products and Golden-i licensing and components. Golden-i licensing revenue remained de minimis through 2012. On January 16, 2013, after year-end, Kopin completed the sale of its III-V product line, including its interest in Kopin Taiwan Corporation, for approximately $75 million, subject to adjustments. The sale materially changes the company’s scale and business mix.
Key financial metrics
| Metric | FY2012 | FY2011 |
|---|---|---|
| Continuing-operations revenue | $34.6 million | $64.7 million |
| Operating loss | $20.6 million | $7.5 million |
| Loss from continuing operations | $21.8 million | $6.0 million |
| Net income (loss), including discontinued operations | $(19.0) million | $3.7 million |
| Net loss attributable to Kopin shareholders | $(18.4) million | Net income of $3.1 million |
| Net cash provided by operating activities | $3.8 million | $19.3 million |
| Capital expenditures | $9.8 million | $7.1 million |
| Cash, cash equivalents and marketable debt securities | $92.5 million | $105.4 million |
| Working capital | $106.8 million | $123.3 million |
| Total assets / total stockholders’ equity | $176.2 million / $155.1 million | $193.9 million / $170.1 million |
FY2012 product cost was 70.3% of revenue, versus 58.2% in FY2011; management attributed the deterioration to lower military sales, price declines and lower unit volumes. Product gross profit was approximately $9.3 million, or 29.6% of net product revenue. The filing reports long-term obligations of $0.9 million in selected financial data; the balance sheet separately reports asset retirement obligations and does not present a material borrowing balance.
In FY2012, discontinued III-V operations generated $58.8 million of revenue and $2.8 million of net income. On a non-GAAP basis that adds back III-V revenue to continuing revenue, total revenue was $93.4 million versus $131.1 million in FY2011; this measure is not GAAP revenue. Fourth-quarter FY2012 revenue was $8.6 million, gross profit $2.4 million, and continuing-operations loss $5.8 million.
Material changes versus prior period
- Continuing revenue fell 46% from FY2011, with military-application revenue declining from $38.9 million to $19.6 million. Consumer electronics and other revenue fell from $16.5 million to $8.6 million; R&D revenue declined from $5.2 million to $3.4 million.
- Military customers represented 57% of total FY2012 revenue, compared with 60% in FY2011. Raytheon and DRS represented 22% and 21%, respectively, of total revenue.
- Operating loss widened to $20.6 million. SG&A increased to $17.2 million from $16.0 million, while R&D expense decreased to $14.3 million from $16.6 million. A $1.7 million goodwill impairment related to Forth Dimension Displays was recorded in 2012.
- Cash, cash equivalents and marketable debt securities declined $12.9 million year over year. Operating cash flow was positive, but capital expenditures and other investing and financing uses exceeded it.
- The III-V sale terms provide for $55 million paid at closing, $5 million in escrow pending adjustments, and $15 million payable on the third anniversary. The III-V business contributed $58.8 million of FY2012 revenue, making the sale a major strategic transition.
Outlook, commentary and risks
- Management forecast FY2013 revenue of $18–$22 million and a consolidated net loss of $15–$19 million, while warning losses could exceed that range. It expects U.S. government defense-related product revenue to decline by approximately $8–$10 million and TWS display sales to fall significantly.
- Management expects significant Golden-i development and marketing spending in 2013, but emphasized developing technology and customer relationships over achieving a specific financial metric. Golden-i commercialization and customer adoption remain unproven.
- Kopin expected to spend $2–$3 million on capital expenditures over the following 12 months and stated its available resources, including III-V sale proceeds, should fund operations and capital needs for at least 12 months.
- The company planned to close its Korean subsidiary’s facility, Kowon, in 2013. It expected approximately $14.2 million of Kowon cash and marketable debt securities eventually to be remitted to the U.S.; the filing also reports a subsequent purchase increasing Kopin’s Kowon ownership to 93% for $3.7 million.
- Kopin expected to repay the remaining Massachusetts employment grant balance, approximately $0.8 million, because it did not expect to meet future milestones. It repaid $1.1 million related to the grant during FY2012.
- Key risks include reduced defense spending and program funding, customer concentration, unpredictable orders and limited long-term customer commitments, reliance on a small number of foundries and suppliers, competitive and adoption risk for wearable displays, foreign-exchange exposure, and potential further impairment at FDD or Ikanos. The company reported $1.0 million of foreign-currency transaction losses in FY2012 and does not hedge currency risk.
- The company disclosed an immaterial restatement relating to intercompany inventory-profit eliminations. It increased the reported first-quarter 2012 loss by approximately $0.4 million; the filing states it did not change net cash flows from operating, investing or financing activities. Deloitte issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Final working-capital adjustments and escrow release from the III-V sale, and collectability/security of the $15 million deferred payment.
- Post-sale cash, liquidity and burn rate, including the timing and tax effects of repatriating Kowon funds and the cost of the facility closure.
- Actual FY2013 revenue and loss against guidance, especially defense/TWS declines and the conversion of Golden-i development and licensing into commercial sales.
- Customer retention and concentration, supplier/foundry continuity, and whether FDD and Ikanos meet operating expectations or require further impairment charges.
- Repayment of the Massachusetts grant and any subsequent liabilities, taxes or significant contingencies.