Kopin Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 26, 2020 (52 weeks); comparable period ended December 28, 2019. This is an annual filing, not a standalone fourth-quarter filing. Amounts are U.S. dollars.
Business context
Kopin develops and sells miniature AMLCD, LCOS and OLED displays, optical components and subassemblies for defense, industrial, enterprise and consumer applications. It also earns revenue from funded research and development (R&D) contracts, primarily related to U.S. defense programs. Defense customers represented 50% of total revenue, excluding R&D contracts. DRS Network & Imaging Systems and Collins Aerospace represented approximately 35% and 27% of total revenue, respectively.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $40.1 million | $29.5 million |
| Net product revenue | $28.5 million | $20.3 million |
| Net loss attributable to Kopin | $4.4 million | $29.5 million |
| Loss from operations | $4.8 million | $26.4 million |
| Net cash used in operating activities | $4.4 million | $21.0 million |
| Cash, cash equivalents and marketable securities at year-end | $20.7 million | $21.8 million |
| Working capital at year-end | $22.6 million | $22.5 million |
Revenue increased 36% year over year. Product cost was 75% of net product revenue, implying product gross margin of approximately 25%, versus negative product gross margin in 2019 when product cost was 103% of net product revenue. The filing reports no borrowings; balance-sheet obligations include operating leases. Lease payments totaled approximately $1.9 million, including $1.1 million due within one year.
Fourth-quarter revenue was $13.9 million, gross profit (defined as product revenue less product cost) was $3.3 million, operating income was $1.0 million and net income attributable to Kopin was $1.3 million, or $0.02 per share. The first three quarters reported losses attributable to Kopin.
Changes versus the prior year
- Defense application revenue rose to $20.2 million from $8.7 million, driven by higher shipments for the Family of Weapon Sights—Individual and Joint Strike Fighter programs.
- R&D revenue rose to $10.1 million from $5.0 million, mainly reflecting new and completed funded defense development work. Funded R&D revenue exceeded funded R&D expense by approximately $2.4 million, compared with $0.8 million in 2019.
- Industrial/enterprise revenue declined to $6.9 million from $9.7 million, and consumer revenue declined to $0.9 million from $1.8 million.
- License and royalty revenue fell to $1.5 million from $4.3 million; 2019 included a one-time $3.5 million RealWear license.
- Operating expenses fell substantially, including SG&A of $11.8 million versus $21.3 million. Product costs also improved as a share of product revenue, which management attributed to higher manufacturing yields.
Outlook, risks and unusual items
- Management estimated available liquidity would fund operations at least through Q1 2022, while warning that continued operating losses or lower-than-expected results could require further expense reductions, a strategic transaction or additional capital. Operating cash flow was negative in each of 2018–2020, and management expected negative operating cash flow in 2021.
- Management expected some products then in R&D to enter production in 2021. Initial yields were expected to be lower, potentially worsening product costs as a percentage of product revenue. It also expected significant 2021 development spending on OLED and defense products and capital expenditures of $1–$2 million.
- In Q1 2021, after year-end, Kopin sold 2.4 million shares through its ATM program for $16 million gross proceeds, less $0.5 million in broker expenses. The ATM agreement terminated after the available shares were sold. The issuance provided liquidity but diluted existing shareholders.
- Key risks include customer and program concentration, cancellable orders and government contracts, defense budget and qualification uncertainty, reliance on Taiwanese and Chinese foundries and other suppliers, manufacturing yields, competition, COVID-19-related disruption, and the need for future capital. The F-35 program was evaluating alternative display technologies.
- A BlueRadios lawsuit alleges contract, fiduciary-duty and trade-secret violations and seeks monetary and other relief. The court denied BlueRadios’ partial-summary-judgment motion in September 2020; trial had not been set. Kopin stated that a loss was not considered probable and recorded no accrual.
- The company reported an accumulated deficit of $305.6 million. Equity investments totaled $4.5 million, including a Lenovo New Vision investment carried at $3.8 million and a Solos investment written down to $0.4 million. A $5.2 million RealWear investment impairment had been recorded in 2019.
- Management said disclosure controls and internal control over financial reporting were effective at year-end and that a previously identified material weakness had been remediated. The auditor identified R&D revenue recognition estimates as a critical audit matter because of significant judgment in estimating total contract costs.
Important facts for investors to verify
- Whether defense program shipments and customer concentration remain strong, particularly for DRS, Collins Aerospace, FWS-I and Joint Strike Fighter programs.
- Whether new products achieve expected production yields and whether 2021 development spending converts into production revenue.
- Actual operating cash burn, liquidity runway and any subsequent financing or share dilution.
- Customer order cancellations, foundry and supplier capacity, and progress on qualifying products for defense programs.
- Developments in the BlueRadios litigation and any change in the company’s assessment of potential loss.
- Quarterly performance and contract-cost estimates underlying R&D revenue, a significant area of management judgment and the auditor’s critical audit matter.