Kopin Corporation — Q2 2013 Form 10-Q
Business context and period. The unaudited quarter and six months ended June 29, 2013. Kopin is shifting its focus toward wearable, voice- and gesture-controlled cloud-computing systems and display products. It sold its III-V product line in January and reported that business as discontinued operations.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $6.08 million | $7.01 million | $12.40 million | $17.88 million |
| Operating loss | $8.64 million | $6.70 million | $18.28 million | $10.19 million |
| Loss from continuing operations | $8.06 million | $6.45 million | $6.89 million | $9.17 million |
| Net income (loss) attributable to Kopin | $(7.91) million | $(5.20) million | $13.72 million | $(7.78) million |
Revenue and margins. Q2 revenue declined about 13% year over year; first-half revenue declined about 31%. Q2 product revenue was $5.61 million against product costs of $6.20 million, a gross loss of approximately $0.60 million (negative 10.6% margin). First-half product gross loss was approximately $0.99 million (negative 8.9% margin). Management cited lower military-display sales, price declines, and lower unit volumes. Research and development expense rose to $3.66 million in Q2 and $7.91 million for the first half; selling, general and administrative expense was $4.85 million and $10.60 million, respectively.
Cash, liquidity, and debt. At June 29, cash and equivalents were $32.8 million and marketable debt securities were $97.6 million; together, cash and marketable securities totaled $130.4 million. Working capital was $125.9 million. The filing reports no debt balance. First-half operating cash use was $7.2 million, versus $1.2 million provided in the prior-year period. Investing activities provided $19.0 million, including $55.2 million of cash proceeds from the III-V sale, partly offset by purchases of securities and investments. Management said available cash should fund operations and capital needs for at least 12 months.
Material changes and unusual items
- The III-V product-line sale had a final net purchase price of $70.2 million and produced a $20.4 million after-tax gain. Kopin received most proceeds in 2013; a $15 million payment is due on the third anniversary and was recorded at a discounted value of $14.8 million.
- First-half net income primarily reflects the sale: continuing operations recorded a $6.9 million loss, while discontinued operations recorded $20.2 million of income, including the sale gain.
- A $12.8 million first-half income tax benefit reflected intraperiod tax allocation associated with the discontinued-operation gain and use of net operating losses. Final tax treatment remained subject to determination.
- Kopin recorded a $2.5 million impairment of a cost-based investment in the first half. It acquired 51% of eMDT for $0.4 million in April; purchase accounting was preliminary.
- The company paid $3.7 million to acquire an additional 15% of Kowon as part of its plan to close the Korean operation. It expects approximately $13.4 million of Kowon cash and securities eventually to be remitted to the U.S.
- After an August 6 preliminary-results announcement, adjustments changed first-half net income to $13.7 million and operating cash use to $7.2 million.
Outlook, commentary, and risks
Management forecast 2013 revenue of $18 million to $22 million and a consolidated net loss of $28 million to $33 million, excluding the III-V sale gain; it cautioned that losses could exceed that range. The company expects significant 2013 development and marketing spending to commercialize Golden-i technology and plans $2 million to $3 million of capital expenditures over the next 12 months. It also expects military-program funding and thermal weapon sight sales to decline, while noting that Golden-i revenue is difficult to forecast and commercialization remains uncertain.
Other risks and contingencies include possible repayment of some or all of approximately $1.6 million in Massachusetts job-retention incentives; potential foreign-exchange effects, which Kopin does not hedge; and ordinary-course legal matters whose outcomes are uncertain. Management reported effective disclosure controls as of June 29, 2013.
Investor verification points
- Track continuing-business revenue, product gross margins, and whether military-sales weakness persists.
- Assess Golden-i commercialization, licensing, customer adoption, and development spending against the 2013 outlook.
- Confirm the timing and collection of the deferred $15 million sale payment and the final tax treatment of the III-V disposition.
- Monitor operating cash use, liquidity, Kowon closure and repatriation, and any repayment of Massachusetts incentives.
- Review the 10-K risk factors and subsequent filings for changes to the stated guidance, contingencies, or investment valuations.