Kopin Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 26, 2015; comparable periods ended September 27, 2014. Unaudited consolidated results. Kopin develops miniature display components and wearable technology, and reports Kopin and FDD segments.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $8.00 million | $9.53 million | $27.44 million | $21.17 million |
| Operating loss | $5.92 million | $5.52 million | $17.36 million | $22.40 million |
| Net loss attributable to controlling interest | $4.68 million | $4.97 million | $7.73 million | $22.91 million |
| Basic and diluted loss per share | $0.07 | $0.08 | $0.12 | $0.37 |
| Operating cash flow | Not provided for quarter | $(10.14) million | $(17.39) million |
- Q3 revenue declined about 16% year over year; nine-month revenue increased about 30%. Nine-month component revenue rose to $23.73 million from $18.20 million, while R&D revenue increased to $3.71 million from $2.97 million.
- Q3 component gross margin was about 24.7% of component revenue, down from 42.6%; nine-month component gross margin was about 28.4%, up from 25.4%. Management attributed the Q3 decline to lower sales of higher-margin military products and under-absorption of fixed costs.
- Nine-month net loss improved substantially, but results included an $8.0 million gain on investment sales and a $1.3 million noncash gain from recording Vuzix warrants, including $817,000 attributed to prior periods. Operating loss remained significant.
- Cash and marketable debt securities totaled $87.3 million at quarter-end, versus $90.9 million at December 27, 2014; working capital was $96.3 million, versus $86.7 million. Cash and equivalents were $15.0 million and marketable debt securities were $72.4 million. Investing activities provided $11.0 million, offsetting much of operating cash use.
- Total assets were $114.9 million and total liabilities were $12.3 million. The balance sheet lists no borrowings; the filing text does not provide a separate debt balance.
Changes, outlook, and risks
- Q3 military application revenue fell to $1.9 million from $5.7 million, while wearable revenue increased to $3.5 million from $1.7 million. Management said the wearable increase largely reflected shipments to a customer expected to launch a product in 2015, but no definitive launch date was available.
- Management expected military thermal-weapon-sight orders and consumer digital-still-camera orders to decline for the rest of 2015, and expected 2015 sales for 3D metrology applications to increase versus 2014. It anticipated significant 2015 development and marketing costs to commercialize wearable technology. Licensing revenue remained minimal.
- The $15.0 million note receivable from the sale of the III-V product line and KTC investment was due January 16, 2016, collateralized by buyer assets, and repayment depended on the buyer meeting debt compliance obligations.
- Management expected $2.0–$3.0 million of capital expenditures over the next 12 months and believed available cash resources would support operations and capital needs for at least that period. The company reported no seasonal sales pattern.
- The company did not hedge foreign-currency exposure and noted that a stronger U.S. dollar could make products more expensive in foreign markets. Marketable securities carried interest-rate and issuer-credit risks. The filing also describes ordinary-course legal proceedings but gives no specific case or outcome.
- Disclosure controls and internal control over financial reporting were reported ineffective because of a previously disclosed material weakness. Remediation was underway, but management said the weakness would not be considered remediated until controls were tested and found effective over time.
- After quarter-end, Kopin acquired Intoware’s remaining equity for £1 as part of a transaction involving contribution of two software products for 17.5% ownership in a new commercialization company.
Important facts for investors to verify
- Whether the wearable customer launched its product and whether related demand converted into sustained revenue.
- Collection and timing of the $15.0 million note receivable, including the buyer’s compliance with debt obligations.
- Underlying operating performance excluding the $8.0 million investment-sale gain and the Vuzix warrant accounting gain.
- Progress and independent validation of remediation for the disclosed material weakness in financial reporting controls.
- Actual military, consumer, and 3D metrology demand versus management’s 2015 expectations, and the effect of currency movements on sales and margins.