Kopin Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 24, 2016; comparisons are with the quarter and nine months ended September 26, 2015. Kopin develops and sells wearable technology components and headset systems, as well as products for military, industrial, and consumer applications. The financial statements are unaudited.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $5.8 million | $8.0 million | $16.3 million | $27.4 million |
| Operating loss | $6.9 million | $5.9 million | $14.2 million | $17.4 million |
| Net loss attributable to controlling interest | $8.1 million | $4.7 million | $18.2 million | $7.7 million |
| Net loss per share, diluted | $0.13 | $0.07 | $0.29 | $0.12 |
| Operating cash flow | Not stated for quarter | $(20.0) million | $(10.1) million |
Product gross margin was approximately 17.2% in Q3 and 11.2% for the first nine months, versus 24.7% and 28.4%, respectively, a year earlier. The filing attributes the decline to lower sales volume and the absence of a prior-year customer pricing benefit. Nine-month operating results included a $7.7 million gain on sale of a Korean facility.
At September 24, 2016, cash and equivalents were $21.0 million and marketable debt securities were $63.0 million, or $84.0 million combined. Working capital was $76.9 million, down from $89.9 million at December 26, 2015. The filing reports no debt balance. Cash increased by $1.2 million over the nine-month period; $20.7 million of investing cash inflows, including $15.0 million from the final III-V product-line sale payment and $8.1 million from the facility sale, offset operating cash use.
Changes and operating trends
- Nine-month revenue declined 41%, with lower wearable, military, and research-and-development revenue partly offset by growth in industrial applications. Q3 revenue declined 28% year over year.
- Wearable product revenue for the first nine months fell to $5.9 million from $10.6 million; military revenue fell to $3.6 million from $8.9 million. Industrial revenue rose to $4.6 million from $2.9 million.
- Research-and-development revenue fell to $0.7 million from $3.7 million for nine months as customer programs ended or moved toward commercialization. Internal R&D spending increased to $11.9 million from $11.0 million.
- Foreign-currency transaction losses were $1.6 million for nine months, compared with gains of $1.0 million in the prior-year period. The prior-year comparison also included $8.0 million of investment-sale gains.
Outlook, risks, and unusual matters
- Management expected to ship Solos headsets in the second half of 2016 and anticipated significant 2016 development and marketing costs to commercialize wearable technologies. It expected capital expenditures of $2 million to $3 million over the following 12 months and believed available resources would fund operations and capital needs for at least 12 months.
- Military sales faced lower demand as the U.S. government transitioned from the TWS program; Kopin was qualifying for FWS-I and FWS-C programs and receiving low-volume FWS-I orders. Wearable growth depends on customer product launches and demand, which management said it could not predict.
- The company discovered embezzlement at its Korean subsidiary, with total theft of $1.589 million identified across fiscal years 2011–2016. It recorded approximately $420,000 for theft in the first nine months of 2016. Recovery of assets and insurance proceeds remained uncertain. The company said prior-period quarterly information would be immaterially restated.
- Management concluded disclosure controls were ineffective because of material weaknesses in segregation of duties and accounting oversight. Remediation was planned, with testing during fiscal 2017; management did not consider the weaknesses remediated.
- After quarter-end, Kopin disclosed a proposed Chinese strategic investment involving 7,589,000 unregistered shares for approximately $24.7 million, and a separate China joint venture involving intellectual property and $1 million equivalent in Renminbi for a minority interest. Both were subject to closing conditions and government approval.
- Other risks include foreign-exchange exposure without hedging, possible delays in repatriating foreign cash, customer and government-program concentration, and ordinary-course legal matters. The company held approximately $19.2 million of cash and marketable securities at Kowon that it expected eventually to remit to the U.S.
Important facts for investors to verify
- Whether the proposed Chinese share investment and joint venture closed, and their effects on cash, ownership dilution, and commercialization plans.
- Progress in wearable customer launches, Solos shipments, and military program qualification and orders.
- Whether embezzlement-related assets or insurance proceeds were recovered, and the final scope of restatements and control remediation.
- Operating cash use, liquidity runway, and the timing and practical availability of foreign-held funds.
- The impact of lower product margins, foreign-exchange losses, and reduced funded R&D revenue on the path to profitability.