Kopin Corporation — Q2 2018 Form 10-Q
Business context and period. Unaudited quarterly report for the three and six months ended June 30, 2018, compared with periods ended July 1, 2017. Kopin develops and sells wearable-display components and systems, and serves military, industrial, consumer, and research and development markets.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $5.94M | $5.93M | $11.60M | $10.31M |
| Operating loss | $(8.99)M | $(8.07)M | $(18.79)M | $(16.73)M |
| Net loss attributable to Kopin | $(9.24)M | $(7.33)M | $(14.78)M | $(15.19)M |
| Basic and diluted loss per share | $(0.13) | $(0.10) | $(0.20) | $(0.22) |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $(13.21)M | $(12.68)M |
Revenue and margins. Q2 revenue was nearly flat year over year; first-half revenue increased about 13%. Q2 product revenue declined to $4.47M from $4.98M, while R&D revenue rose to $1.47M from $0.95M. Product gross margin, calculated from product revenue less product cost, was approximately 21.8% in Q2 versus 17.3%; for the first half it was 20.6% versus 18.8%. SG&A increased to $6.91M in Q2 from $5.20M and to $13.84M for the half from $10.84M.
Cash, liquidity, and debt. At June 30, cash and cash equivalents were $22.74M and marketable debt securities were $30.68M, totaling $53.42M, down from $68.76M at year-end 2017. Working capital was $54.8M, versus $67.6M. Six-month operating cash use was $13.21M; investing activities provided $11.33M, primarily from marketable-security sales. The balance sheet does not list borrowings or other interest-bearing debt.
Total assets were $79.34M, down from $91.32M at year-end; stockholders’ equity was $67.85M. The company reported 73.14M common shares outstanding at June 30 and 76.63M as of August 6, 2018.
Material changes and unusual items
- Military revenue fell in Q2, primarily due to completion of programs at NVIS; first-half military revenue increased, including $0.7M from U.S. military simulation and training systems. Consumer revenue grew, primarily from demand for rifle-scope displays and components.
- Adoption of ASC 606 changed revenue timing and comparability. Certain U.S. government contract revenue is now recognized over time using a cost-to-cost method. Management said approximately $4.1M that would otherwise have been recorded as revenue was included in the opening retained-earnings adjustment. The filing says adoption is expected to materially affect revenue on an ongoing basis.
- First-half other income included a $2.85M gain from transferring intellectual property in exchange for an equity investment and $1.0M of insurance proceeds related to a previously discovered embezzlement at the Korean subsidiary. These items contributed to the improvement in first-half net loss despite a larger operating loss.
- The company recorded $5.71M in equity investments, including a 12.5% interest in one investee and an investment acquired through warrant exercise. Valuations include Level 3 measurements.
Outlook, risks, and contingencies
- Management forecast fiscal 2018 revenue of $30M–$35M, expected negative operating cash flow for 2018, and $2.0M–$2.5M of capital expenditures over the next 12 months. It believed available cash resources would fund operations and capital needs for at least 12 months.
- Management expects significant 2018 development spending for wearable technology and military products. Remaining performance obligations were $6.0M, expected to be recognized over two years; these government-contract amounts are subject to cancellation.
- Kopin had an agreement, subject to closing conditions including government approvals, requiring a capital contribution of approximately $5.3M. It was also evaluating a possible purchase of the remaining 7% interest in its Korean subsidiary. Up to $2.0M in contingent NVIS acquisition payments may be due if performance and employment conditions are met.
- The Korean manufacturing operation had ceased. The company expected eventual remittance of about $11.0M held at Kowon and accrued deferred tax liabilities for estimated withholding taxes. The company cited a 16.5% expected foreign withholding rate on repatriation.
- New or higher tariffs on imported components, including potential U.S. tariffs on Chinese integrated circuits, could raise costs or harm sales. Kopin depends on Chinese, Taiwanese, and Korean foundries and does not hedge foreign-currency exposure.
- BlueRadios litigation alleges contract, fiduciary-duty, trade-secret, and patent-inventorship violations and seeks monetary and other relief. Discovery was ongoing; trial had not been set. Kopin said loss was not considered probable and recorded no accrual.
- The company expects lease accounting adoption to materially increase balance-sheet assets and liabilities, but not materially affect results or liquidity. Disclosure controls were reported effective at quarter-end.
Investor verification priorities
- Track revenue conversion and progress toward the $30M–$35M 2018 forecast, particularly government programs and customer demand in consumer and industrial applications.
- Assess operating cash burn, cash and securities balances, and the funding impact of planned capital spending, Korean remittance, and the potential $5.3M contribution.
- Separate recurring operating performance from the IP-related gain, insurance proceeds, and accounting changes under ASC 606.
- Monitor product margins, elevated SG&A, and the cost and commercial prospects of wearable-technology and military development.
- Follow tariff developments, foundry supply exposure, foreign-currency movements, and the outcome and potential exposure of the BlueRadios litigation.