Kopin Corporation — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with the three months ended April 1, 2017. Kopin develops and sells wearable-display components and systems for military, industrial, consumer, and related markets. It reports Kopin and Industrial segments.
Key financial results
| Metric | Q1 2018 | Prior-year quarter |
|---|---|---|
| Revenue | $5.65 million | $4.38 million |
| Operating loss | $9.79 million | $8.66 million |
| Net loss attributable to Kopin | $5.54 million | $7.86 million |
| Basic and diluted loss per share | $0.08 | $0.12 |
| Net cash used in operating activities | $6.06 million | $6.62 million |
- Revenue rose 29%, led by Industrial segment revenue of $2.66 million versus $1.42 million; Kopin segment revenue was $3.00 million versus $2.96 million. Management attributed much of military-application growth to NVIS, acquired in March 2017.
- Product gross margin was approximately 19.5% of net product revenue, down from 20.7%. Management cited lower utilization at one facility, partly offset by higher-margin military revenue.
- Operating expenses increased to $15.45 million from $13.04 million. R&D expense was $4.45 million, including $3.60 million of internal R&D; SG&A was $6.93 million.
- Other income was $4.32 million, including a $2.85 million gain on an equity investment and $1.10 million of insurance proceeds related to a 2016 embezzlement. These items helped reduce the reported net loss; operating loss widened.
- Cash and cash equivalents were $24.17 million and marketable debt securities were $36.87 million at quarter-end, totaling $61.04 million. Working capital was $62.3 million. Total assets were $86.87 million and stockholders’ equity was $76.10 million. The balance sheet does not clearly identify interest-bearing debt.
- Cash declined by $0.68 million during the quarter. Investing activities provided $5.27 million, mainly from marketable-security sales, partly offset by capital spending and a $1.0 million cash contribution to an equity investment.
Material changes, outlook, and risks
- Kopin adopted ASC 606 using the modified retrospective method; prior-year results were not restated. The company said the standard’s impact would be material on an ongoing basis. For Q1, reported revenue was $1.55 million lower than the filing’s estimate of revenue without ASC 606; reported loss attributable to Kopin was $0.54 million greater. Adoption increased opening accumulated earnings by $3.06 million.
- Remaining performance obligations were $2.7 million, expected to be recognized over the next 12 months. Management expected significant 2018 development spending for wearable technology and military products, and negative operating cash flow for 2018.
- Management expected $2.0–$3.0 million of capital expenditures over the next 12 months and believed available cash resources would support operations and capital needs for at least 12 months. It did not expect to pay dividends in the foreseeable future.
- Kopin acquired a 12.5% interest in an investee for $1.0 million in cash and contributed intellectual property; it valued the interest at $3.9 million. The investment and related gain involved Level 3 valuation inputs.
- The BlueRadios lawsuit alleges contract, fiduciary-duty, and trade-secret violations, among other claims. Discovery was ongoing; no trial date had been set. Kopin said a loss was not considered probable and recorded no accrual.
- Risks include ongoing operating losses and cash burn, reliance on successful commercialization of wearable technologies, uncertainty in estimating contract costs and progress under ASC 606, foreign-exchange exposure without hedging, and possible limits on tax-loss carryforwards. Kopin reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of revenue growth and future demand is attributable to NVIS and military programs, versus sustainable growth in commercial wearable and industrial markets.
- Whether operating losses and negative operating cash flow persist, and whether the stated 12-month liquidity outlook remains supported by cash, securities, and spending plans.
- The valuation, future performance, and liquidity of the $3.9 million Level 3 equity investment, including the noncash gain recognized on the transaction.
- The continuing effect of ASC 606 on reported revenue, margins, contract assets, and cash conversion; reported contract assets were $2.48 million current plus $0.40 million noncurrent.
- Developments in the BlueRadios litigation and any resulting financial exposure; no loss estimate was recorded.
- Reconcile the share-count disclosures: the filing reports 73.08 million shares outstanding on the balance sheet date and 76.53 million shares outstanding as of May 7, 2018.