Kopin Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 29, 2018; comparisons are with the quarter and nine months ended September 30, 2017. The company develops and sells display components, wearable technologies, and systems for military, industrial, consumer, and training markets. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $5.13 million | $6.14 million | $16.72 million | $16.44 million |
| Operating loss | $10.30 million | $8.60 million | $29.08 million | $25.34 million |
| Net loss attributable to Kopin | $9.79 million | $8.25 million | $24.57 million | $23.44 million |
| Loss per share, diluted | $0.13 | $0.11 | $0.34 | $0.34 |
- Q3 revenue fell about 16% year over year; nine-month revenue increased about 2%. Product revenue was $3.64 million in Q3 and $13.16 million year to date. Research and development revenue rose to $1.48 million in Q3 and $3.56 million year to date.
- Product cost was 100.4% of net product revenue in Q3 and 85.3% year to date, versus 74.2% and 78.5%, respectively, in 2017. Management attributed the deterioration to lower volumes and yields.
- Q3 selling, general and administrative expense rose to $7.17 million from $5.34 million; year-to-date expense increased to $21.01 million from $16.19 million. Management cited compensation and stock-based compensation, legal expense, advertising, and patent-maintenance costs.
- Cash used in operating activities was $20.18 million for the nine months, compared with $19.84 million a year earlier. Cash and cash equivalents were $19.37 million; marketable debt securities were $26.84 million. Combined, these totaled $46.20 million, down from $68.76 million at year-end 2017. Working capital was $46.8 million, versus $67.6 million.
- Total assets were $71.63 million and stockholders’ equity was $59.23 million at September 29, 2018. The balance sheet reports no borrowings; total liabilities were approximately $12.4 million.
Material changes and notable items
- Military application revenue declined to $1.50 million in Q3 from $2.79 million, primarily following completion of NVIS military programs; increased U.S. military simulation and training revenue partly offset the decline. Consumer application revenue also fell, mainly due to lower demand for thermal-imaging and drone-racing products. Industrial and R&D revenue increased.
- Kopin adopted ASC 606 using the modified retrospective method; prior-year figures were not restated. The company says the standard’s impact on ongoing revenue is material. For the first nine months of 2018, reported net loss attributable to Kopin was $1.19 million greater than it would have been without adoption. ASC 606 also shifted the timing of certain revenue recognition, making comparisons less directly comparable.
- Nine-month other income included a $2.85 million gain related to transferring intellectual property in exchange for an equity interest and $1.0 million of insurance proceeds related to a previously discovered embezzlement at the Korean subsidiary. These items supported reported results and are not recurring operating revenue.
- The company invested in equity interests carried at $5.57 million, including an investment for which it contributed intellectual property and cash. Management also disclosed an agreement, subject to closing conditions and government approvals, requiring a capital contribution of approximately $5.3 million (35 million RMB).
Outlook, risks, and contingencies
- Management expected fiscal 2018 revenue of $24.5 million to $26.5 million, negative operating cash flow in 2018, and capital expenditures of $1.0 million to $1.5 million. It stated that available cash resources should support operations and capital needs for at least 12 months.
- Remaining performance obligations were $8.8 million, expected to be recognized over the next 12 months; these government contracts are subject to cancellation. The company recognized 37% of Q3 revenue over time, compared with 9% in the prior-year quarter.
- Management highlighted uncertainty in estimates of costs and progress on development contracts, customer demand, foreign exchange exposure, and the potential effect of U.S.–China trade measures and tariffs on imported components. The company does not hedge foreign currency risk.
- A BlueRadios lawsuit alleging contract, fiduciary-duty, and trade-secret violations remained in discovery; discovery was scheduled to close March 14, 2019. Kopin said it did not consider a loss probable and had recorded no accrual. The ultimate outcome and potential exposure are not clear from the filing.
- Up to $2.0 million in additional NVIS acquisition-related payments may be due if specified performance milestones are met and former owners remain employed through March 2020; the company expects to account for such payments as compensation expense.
- The company expected to adopt the lease accounting standard in fiscal 2019, anticipating a material balance-sheet impact from recognizing lease assets and liabilities, but no material impact on operations or liquidity.
Important facts for investors to verify
- Whether the $24.5 million–$26.5 million fiscal-year revenue outlook remains achievable, given nine-month revenue of $16.72 million and the timing and cancellation terms of government contracts.
- How ASC 606 affects reported revenue, contract estimates, and period-to-period comparability, including the $1.19 million year-to-date effect on reported loss.
- Whether operating cash burn can be reduced and whether the stated 12-month liquidity expectation accounts for the proposed $5.3 million capital contribution and other commitments.
- The trajectory of military and consumer demand, product yields and costs, and potential tariff effects on the company’s supply chain and margins.
- Developments in the BlueRadios litigation, the value and recoverability of equity investments, and the timing and tax consequences of remitting Korean subsidiary cash.