Kopin Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter ended September 30, 2017; comparisons are to the three and nine months ended September 24, 2016. Figures are unaudited.
Business context and results
Kopin develops and sells wearable technology components and headset systems, and earns research and development (R&D) revenue. Its reportable segments are Kopin and Industrial. The company acquired a virtual-reality systems business in March 2017.
- Revenue: Q3 revenue was $6.14 million, up 5.9% year over year; nine-month revenue was $16.44 million, up 1.1%. Q3 R&D revenue increased to $0.55 million from $0.27 million; nine-month R&D revenue rose to $1.94 million from $0.67 million.
- Product gross margin: Approximately 25.8% in Q3 versus 17.2% in the prior-year quarter, and 21.5% for nine months versus 11.2%. Management attributed the improvement to a higher mix of military products.
- Operating results: Q3 operating loss was $8.60 million versus $6.88 million; nine-month operating loss was $25.34 million versus $14.19 million. The prior-year nine-month period included a $7.70 million gain on property and plant sale.
- Net loss attributable to Kopin: $8.25 million in Q3 versus $8.12 million; $23.44 million for nine months versus $18.24 million. Loss per share was $0.11 in Q3 versus $0.13, and $0.34 for nine months versus $0.29.
- Operating costs: Nine-month R&D expense was $14.21 million versus $12.28 million. SG&A was $16.19 million versus $12.02 million; increases included acquisition costs, stock compensation and professional fees.
Cash, liquidity and capital
- Cash and equivalents were $25.88 million and marketable debt securities were $51.45 million at September 30, 2017. Together they totaled $77.34 million, compared with $77.20 million at December 31, 2016. Working capital was $70.5 million, versus $70.0 million.
- Nine-month operating cash use was $19.84 million, compared with $20.04 million in the prior-year period. Investing activities provided $5.31 million, while financing provided $24.66 million, primarily from the Goertek share sale.
- The balance sheet does not show interest-bearing debt. Kopin said available cash resources should support operations and capital needs for at least 12 months.
- On April 20, 2017, Kopin sold 7.589 million treasury shares to Goertek for $24.66 million ($3.25 per share). Shares outstanding increased to 72.19 million at quarter-end from 64.54 million at year-end 2016.
Material changes, outlook and risks
- Military display revenue increased, partly reflecting the acquired business and low-volume orders during qualification for the U.S. military Family of Weapon Sights program. Consumer revenue declined, primarily due to lower sales for drone-headset and health-and-fitness applications.
- The acquired business contributed $3.7 million in revenue and a $0.5 million net loss from acquisition through September 30. Up to $2.0 million of additional payments may be earned if milestones are met and specified employees remain through March 2020; these payments would be compensation expense.
- Management expected significant 2017 development costs to commercialize wearable technologies and develop military products, and forecast $2.0–$3.0 million in capital expenditures over the next 12 months. The filing provides no quantified revenue or earnings guidance.
- Two proposed joint ventures and related agreements remained subject to closing conditions, including government approvals. If completed, Kopin expects to contribute intellectual property and approximately $8.0 million.
- Kopin was assessing ASC 606 and expected adoption using the modified retrospective method. Adoption may accelerate revenue recognition for certain R&D contracts and military product sales; the filing does not provide a clear quantified impact.
- Disclosure controls and internal control over financial reporting were reported ineffective because of previously identified material weaknesses associated with embezzlement at the Korean subsidiary. Remediation was ongoing and had not yet been deemed effective. The filing also describes foreign-exchange exposure without hedging, uncertainty in wearable-product demand, and potential limits on use of tax-loss carryforwards.
Important facts for investors to verify
- Whether military-program qualification, orders and product mix can sustain the improved product margins and offset continuing operating losses and cash use.
- Progress in wearable commercialization and the effects of ASC 606 adoption on revenue timing and accumulated deficit.
- Final acquisition valuations, contingent compensation payments, and the status and funding requirements of the proposed joint ventures.
- Whether internal-control remediation is completed and independently tested, and whether any additional findings emerge.
- Goertek-related commercial arrangements, future transactions and the company’s ability to fund operations while meeting planned investment needs.