Kopin(KOPN) - 2021 Q4 - Annual Report

Part I Business Kopin develops high-resolution microdisplays and components for defense, enterprise, industrial, and consumer AR/VR applications - Kopin is a developer and provider of high-resolution microdisplays and components for defense, enterprise, industrial, and consumer products, including AR and VR systems[14] - The company's core display technologies include transmissive AMLCDs (CyberDisplay®), reflective LCOS displays (Time Domain Imaging), and emissive OLED displays (Lightning® displays)[15][16] Significant Customer Sales as a Percentage of Total Revenue | Customer | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Defense Customers in Total | 40% | 50% | 30% | | DRS Network & Imaging Systems, LLC | 31% | 35% | 17% | | Collins Aerospace | 30% | 27% | * | | RealWear, Inc. | * | * | 20% | | Funded Research and Development Contracts | 32% | 25% | 17% | - Kopin's strategy involves leveraging funded R&D from U.S. defense programs to develop technology that can be adapted for industrial, enterprise, and consumer applications[48] - The company faces significant competition from large Asian-based electronics companies such as Sony, Samsung, and LG Display, as well as specialized microdisplay manufacturers like eMAGIN[64] Risk Factors The company faces risks including historical losses, negative cash flow, supply chain issues, fixed-price defense contracts, and reliance on U.S. government programs - The company has a history of significant net operating losses, with an accumulated deficit of $319.1 million as of December 25, 2021, and has experienced negative cash flow from operations in fiscal years 2021, 2020, and 2019[97] - Kopin is exposed to a global shortage of critical semiconductor components and other raw materials, which could prevent product manufacturing and sales. The company's reliance on a select number of third-party suppliers, particularly for defense products, heightens this risk[98] - A significant portion of revenue is derived from U.S. defense programs like the Family Weapon Sight (FWS) and the F-35 Joint Strike Fighter. These revenues are at risk due to potential program cancellations, funding changes, or loss of contracts to competitors[105] - Most defense sales are on a fixed-price basis, exposing the company to potential losses from cost overruns, especially given rising raw material and labor costs due to inflation[99] - The company relies on a Taiwanese foundry for defense display integrated circuits and Chinese foundries for OLED displays. Any disruption to these foundries due to political instability, natural disasters, or other factors could severely limit manufacturing capabilities[119][120] Properties Kopin leases all its facilities, including a 74,000 sq. ft. production facility in Westborough, MA, and other international locations - The company leases a 74,000 sq. ft. facility in Westborough, MA, which includes 10,000 sq. ft. of clean rooms[157] - Subsidiaries lease facilities in Reston, VA (NVIS, 6,100 sq. ft.) and Dalgety Bay, Scotland (FDD, 20,000 sq. ft.)[158] Legal Proceedings The company is involved in a legal dispute with BlueRadios, Inc. concerning breach of contract and trade secret misappropriation related to a joint venture - BlueRadios, Inc. filed a complaint against Kopin in 2016 alleging breach of contract, misappropriation of trade secrets, and other claims related to a joint venture[161] - As of December 25, 2021, the company has not recorded a litigation accrual, as it has not determined that a loss is probable[162] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Kopin's common stock trades on Nasdaq, and the company does not anticipate paying cash dividends, preferring to retain earnings for business development - The company's common stock trades on the Nasdaq Capital Market under the symbol KOPN[165] - Kopin has not paid cash dividends and does not expect to in the foreseeable future, intending to retain earnings for business development[166] Equity Compensation Plan Information (as of Dec 25, 2021) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 2,077,592 | $2.78 | 1,795,311 | Management's Discussion and Analysis of Financial Condition and Results of Operations Total revenues increased by 13.8% in fiscal 2021, driven by Industrial/Enterprise and R&D growth, but net loss widened due to higher operating expenses and negative operating cash flow Results of Operations Total revenues increased to $45.7 million in fiscal 2021, driven by Industrial/Enterprise and R&D, while operating expenses rose significantly, leading to a $13.8 million operating loss Revenues by Application (In thousands) | Category | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Defense | $18,180 | $20,231 | $8,729 | | Industrial/Enterprise | $9,710 | $6,882 | $9,717 | | Consumer | $1,871 | $852 | $1,777 | | Research and Development | $14,669 | $10,123 | $4,983 | | License and royalties | $1,115 | $1,487 | $4,252 | | Total Revenues | $45,666 | $40,128 | $29,519 | - FY2021 revenue from defense customers decreased due to lower shipments for the Joint Strike Fighter program, while Industrial/Enterprise revenue increased from higher sales for 3D metrology equipment and industrial headsets[199][200] Cost of Product Revenues Analysis | (In thousands, except percentages) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Cost of product revenue | $25,052 | $21,398 | $20,902 | | Cost of product revenues as a % of net product revenues | 83.8% | 75.0% | 103.0% | - Cost of product revenues as a percentage of sales increased in 2021 compared to 2020, primarily due to lower production volumes in Q2 and Q3 of 2021 related to process changes for FWS-I products[213] Research and Development Expenses (In thousands) | Category | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Funded | $9,976 | $7,746 | $4,216 | | Internal | $6,312 | $3,924 | $9,133 | | Total | $16,288 | $11,670 | $13,349 | - Total R&D expenses increased in 2021 due to a higher number of defense-related contracts (Funded R&D) and increased spending on OLED development (Internal R&D)[217] - Selling, general and administrative (SG&A) expenses increased to $18.1 million in 2021 from $11.8 million in 2020, primarily due to a $3.1 million increase in non-cash stock-based compensation and a $1.4 million increase in compensation and benefits[220][221] Liquidity and Capital Resources Cash and equivalents increased to $29.3 million at year-end 2021, primarily from equity sales, offsetting negative operating cash flow, with management projecting sufficient liquidity through Q1 2023 - Cash, cash equivalents, and marketable securities increased to $29.3 million at year-end 2021 from $20.7 million at year-end 2020[233] - The company raised approximately $21.1 million net proceeds from the sale of common stock in fiscal 2021 through its At-The-Market (ATM) equity offering programs[233][234] - Net cash used in operating activities was $10.7 million in 2021, compared to $4.4 million in 2020 and $21.0 million in 2019[243] - Management estimates sufficient liquidity to fund operations at least through Q1 2023, but may consider raising additional capital if market conditions are favorable[243] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate and foreign currency risks but does not use hedging instruments, deeming the potential impact immaterial - The company's primary market risks are related to interest rate fluctuations on its investment portfolio and foreign currency exchange rate changes from its international operations[247] - Kopin does not currently use hedging instruments to manage its foreign currency exchange rate risk[247] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of December 25, 2021 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 25, 2021[250] - Management concluded that the company's internal control over financial reporting was effective as of December 25, 2021, based on the COSO framework[252] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Information on directors, executive officers, corporate governance, compensation, security ownership, and accountant fees is incorporated by reference from the 2022 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accountant Fees (Item 14) is incorporated by reference from the company's 2022 Proxy Statement[256][258][259][260][261] Part IV Exhibits and Financial Statement Schedules This section presents the consolidated financial statements, notes, and the independent auditor's report, which identifies revenue recognition for R&D contracts as a critical audit matter - The independent auditor, RSM US LLP, issued an unqualified opinion on the consolidated financial statements[269] - The auditor identified revenue recognition for research and development contracts as a Critical Audit Matter, due to the significant management judgment required to estimate total contract costs, which is a key input for the cost-to-cost recognition method[274][275] Consolidated Financial Statements The financial statements show total assets of $63.0 million, a net loss of $13.4 million, and net cash used in operations of $10.7 million for fiscal year 2021 Key Financial Statement Data (Fiscal Year 2021) | Metric | Amount (in millions) | | :--- | :--- | | Total Revenues | $45.7 | | Loss from Operations | $(13.8) | | Net Loss Attributable to Kopin | $(13.4) | | Net Loss Per Share | $(0.15) | | Total Assets (at year-end) | $63.0 | | Total Liabilities (at year-end) | $23.4 | | Total Stockholders' Equity (at year-end) | $39.6 | | Net Cash Used in Operating Activities | $(10.7) | | Net Cash Provided by Investing Activities | $0.1 | | Net Cash Provided by Financing Activities | $20.4 | Notes to Consolidated Financial Statements Notes detail accounting policies, significant customer concentrations, substantial federal net operating loss carryforwards, and related party transactions - In fiscal 2021, 69% of revenue was recognized over time, primarily from government contracts, while 31% was recognized at a point in time[311] - As of December 25, 2021, the company had federal net operating loss carryforwards of $160.3 million expiring between 2021-2038 and $60.1 million with an unlimited carryover period. A full valuation allowance has been recorded against these deferred tax assets[403] - In 2019, the company recorded a $5.2 million impairment charge, reducing its investment in RealWear, Inc. to zero[377][422] - The company's CEO, Dr. John C.C. Fan, and his family members collectively hold a significant ownership interest in Solos Inc., a company with which Kopin has a business relationship and holds a 20% equity stake[423][424]