Kopin Corporation — Q1 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended April 1, 2017; the comparable period ended March 26, 2016. Kopin develops and sells wearable-technology components and headset systems, and reports Kopin and Industrial segments. Amounts below are U.S. dollars.
Financial results and liquidity
| Metric | Q1 2017 | Comparable 2016 period |
|---|---|---|
| Revenue | $4.38 million | $6.12 million |
| Product revenue | $3.93 million | $5.98 million |
| Research and development revenue | $0.44 million | $0.14 million |
| Operating loss | $8.66 million | $6.32 million |
| Net loss attributable to Kopin | $7.86 million; $0.12 per share | $6.93 million; $0.11 per share |
| Net cash used in operating activities | $6.62 million | $5.57 million |
- Cost of product revenue was $3.12 million, or 79.3% of product revenue, implying a product gross margin of about 20.7%. Management attributed the higher cost ratio versus 77.7% in 2016 to lower volume, under-absorbed fixed overhead, and lower productivity.
- Research and development expense was $4.28 million, compared with $4.04 million. Selling, general and administrative expense rose to $5.64 million from $3.76 million, including higher legal and accounting costs and stock-based compensation.
- At April 1, cash and equivalents were $18.39 million and marketable debt securities were $49.36 million, totaling $67.75 million, down from $77.20 million at December 31, 2016. Working capital was $60.5 million. The company reported no debt in the presented balance sheet.
- Cash increased by $2.57 million during the quarter, primarily because investing cash inflows exceeded operating outflows. Investing activities included $13.52 million of securities-sale proceeds and $3.25 million paid for an acquisition.
Material changes and notable items
- Revenue declined about 28% year over year. Wearable revenue fell to $0.7 million from $2.6 million, and military revenue fell to $0.9 million from $1.5 million; industrial revenue increased to $1.9 million from $1.1 million. The acquired company contributed $396,000 of quarterly revenue after acquisition.
- Foreign-currency transaction losses were $1.19 million, versus $0.50 million. Kopin recorded a $0.3 million noncash gain from revaluing a customer-related warrant and approximately $280,000 in restitution related to the prior embezzlement.
- In March, Kopin acquired all of a company for approximately $3.7 million, including $3.3 million paid and a working-capital adjustment. Up to a further $2.0 million may be payable if operating milestones are achieved and certain employees remain through March 2020; the contingent payments are treated as compensation expense. The acquisition added $1.48 million of goodwill and identifiable intangibles.
- On April 20, 2017, after quarter-end, Kopin completed a sale of 7.589 million treasury shares to Goertek for approximately $24.7 million. This is a subsequent event and was not included in quarter-end cash.
- A $1.15 million income-tax benefit included a $1.1 million valuation-allowance reduction associated with deferred tax liabilities recognized in the acquisition. Kopin also reported approximately $141 million of U.S. federal net operating loss carryforwards, subject to potential limitations and realization uncertainty.
Outlook, risks, and controls
- Management expected significant 2017 development and marketing spending to commercialize wearable technologies and develop military products, and anticipated $2–$3 million of capital expenditures over the next 12 months. It stated available cash resources were expected to support operations and capital needs for at least 12 months.
- Management cited uncertainty in customer launches and demand for wearable products, including applications that drove the year-over-year decline. Kopin was receiving low-volume orders while qualifying for U.S. military Family of Weapon Sights programs.
- The company does not hedge foreign-currency exposure and recorded material currency losses in the quarter. It also cited possible effects of dollar strength on foreign-market pricing, investment interest-rate and credit risk, and reliance on estimates for revenue, inventory, warranty, stock awards, taxes, and acquisition valuations.
- Disclosure controls and internal control over financial reporting were reported ineffective due to previously disclosed material weaknesses connected to embezzlement at the Korean subsidiary. Remediation measures included removing the company seal from local management’s control, outsourcing accounting, and enhanced corporate reviews; management said remediation was not yet complete.
- The embezzlement was identified in 2016 and involved approximately $1.589 million over 2011–2016. The filing includes an immaterial correction to the 2016 comparative quarter. Kopin also disclosed ordinary-course legal proceedings but provided no specific material case or quantified contingency.
Important facts for investors to verify
- Whether wearable customer products launched as anticipated and whether demand can recover from the steep decline in wearable revenue.
- Whether operating losses and cash burn can be reduced, and how much of reported liquidity is accessible across subsidiaries and currencies.
- The acquired company’s performance, any milestone-based compensation payments, and the realization of acquired intangible assets and goodwill.
- The completed Goertek share issuance’s effect on share count, ownership, and cash resources.
- Progress in remediating control weaknesses, the outcome of the Massachusetts tax examination, and any further consequences of the Korean embezzlement.