Kopin Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 30, 2017 (52 weeks). The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context
Kopin develops and sells miniature displays, optics, chips, audio components, and headset systems for military, industrial, training and simulation, and consumer applications. The company is investing in wearable technology and introduced its Lightning OLED microdisplay in 2017. Its March 2017 acquisition of NVIS expanded its professional virtual-reality and military training and simulation business.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $27.84 million | $22.64 million |
| Net product revenue | $24.89 million | $21.12 million |
| Gross profit on product revenue | $6.78 million; 27.2% margin | $3.30 million; 15.6% margin |
| Operating loss | $30.30 million | $20.47 million |
| Net loss | $25.38 million | $23.03 million |
| Net loss attributable to Kopin shareholders | $25.24 million; $0.36 per share | $23.43 million; $0.37 per share |
| Cash used in operating activities | $25.91 million | $26.17 million |
| Cash and marketable debt securities | $68.76 million | $77.20 million |
| Working capital | $67.64 million | $70.03 million |
Revenue rose about 23% year over year, while the operating loss widened. The 2016 operating result included a $7.7 million gain on sale of property; excluding that gain, the year-over-year deterioration in operating loss was smaller. Improved product gross margin reflected a greater mix of higher-margin military products. Kopin reported no off-balance-sheet arrangements. The balance sheet lists $1.84 million of long-term obligations; the filing does not present this figure as borrowings.
Fourth quarter: Revenue was $11.40 million, gross profit was $3.65 million, operating loss was $4.96 million, and net loss attributable to Kopin shareholders was $1.80 million ($0.02 per share). The quarter included a $1.7 million impact on attributable results from the warrant gain.
Material changes and unusual items
- Military application revenue increased to $13.4 million from $5.3 million, primarily reflecting $8.8 million of NVIS revenue in that category. Consumer application revenue declined to $4.4 million from $7.4 million, largely due to lower drone-headset and health-and-fitness sales.
- Research and development revenue increased to $2.95 million from $1.53 million. Total R&D expense rose to $18.9 million from $16.0 million.
- NVIS was acquired for $3.7 million. It contributed approximately $9.1 million in revenue and $0.2 million in net income after acquisition; Kopin also recorded a $0.6 million goodwill impairment related to NVIS.
- Kopin sold 7.589 million treasury shares to Goertek for $24.7 million, or $3.25 per share, and entered into product development, supply, and manufacturing arrangements with Goertek.
- A $2.0 million noncash gain was recognized for the fair-value adjustment of a warrant received under a technology license.
- The company disclosed approximately $1.6 million of embezzlement at its Korean subsidiary, discovered in 2016, and recognized a $0.3 million restitution recovery in 2017.
- The 2017 tax benefit was $3.0 million, versus a $3.1 million tax provision in 2016. Tax Act accounting remained provisional; management reported that further analysis and guidance could change tax estimates.
Outlook, risks, and contingencies
- Management expected negative operating cash flow in 2018, but believed available cash resources would fund operations and capital needs for at least 12 months. Planned capital expenditures were $2.0–$3.0 million over the next 12 months.
- Management expected increased development spending in 2018 for wearable technologies and military products. It anticipated that the Family of Weapon Sights program could enter production in 2018, but Kopin was still qualifying for parts of the program and had only low-volume orders for FWS-I.
- Three joint ventures were under development. Disclosed expected 2018 cash contributions included approximately $5.3 million and, if a third agreement closes, $2.0 million; a separate $1.0 million contribution was made after year-end. Certain arrangements also involve intellectual property contributions and approvals.
- Military customers accounted for 48% of 2017 revenue, excluding funded R&D contracts. Revenue is exposed to government funding, procurement timing, program qualification, competition, and contract termination risks. Customer concentration and the limited, often cancelable order backlog also make revenue difficult to forecast.
- Kopin relies on a limited number of external foundries and suppliers for display fabrication and key materials. Capacity, delivery, quality, geopolitical, and supplier-discontinuation issues could disrupt production.
- BlueRadios sued Kopin alleging contract, fiduciary-duty, and trade-secret violations related to Golden-i, among other claims. Kopin had not concluded a loss was probable and recorded no accrual; no trial date had been set.
- Management and the auditor reported effective internal control over financial reporting at year-end, but NVIS was excluded from the assessment. Previously reported weaknesses relating to cash controls and financial reporting oversight were reported as remediated.
Most important facts for investors to verify
- Whether 2018 wearable and military programs generate revenue at the pace assumed, particularly FWS qualification, awards, and production orders.
- Whether operating cash burn declines and liquidity remains sufficient after planned capital spending, joint-venture funding, and other investment commitments.
- Whether NVIS sustains its contribution and whether further goodwill or intangible-asset impairments are needed.
- The final effects of Tax Act accounting and the adoption of the new revenue-recognition standard, which management said could change revenue timing and required a 2018 adoption adjustment.
- Developments in the BlueRadios litigation, Goertek arrangements, and joint ventures, including approvals, funding, and any obligations not reflected in the year-end balance sheet.