Kopin Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter ended September 28, 2013; year-to-date results cover the nine months then ended. Kopin is shifting its focus to wearable voice- and gesture-controlled computing systems and display products. It sold its III-V product line in January 2013 and planned to close its Korean Kowon operations.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $4.95 million | $8.19 million | $17.35 million | $26.07 million |
| Operating loss | $10.31 million | $6.10 million | $28.59 million | $16.30 million |
| Loss from continuing operations | $9.02 million | $6.85 million | $15.91 million | $16.02 million |
| Net income (loss) | $(9.02) million | $(7.07) million | $4.24 million | $(14.66) million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(12.84) million | $1.50 million |
Product revenue was $4.89 million for Q3 and $16.07 million year to date. Product gross margin, calculated from disclosed product revenue and product cost, was approximately 5.4% for Q3 and negative 4.5% year to date, versus 33.5% and 28.7% in the respective 2012 periods. Management attributed the deterioration to lower military demand, price declines, lower unit volumes, and under-absorbed fixed costs.
Nine-month net income included $20.2 million of after-tax discontinued-operations income, including a $20.4 million after-tax gain on the III-V sale. Continuing operations remained loss-making. The nine-month tax benefit was $12.9 million, largely reflecting tax allocation related to that sale.
Liquidity, cash flow and balance sheet
- At September 28, 2013, cash and equivalents were $25.3 million and marketable debt securities were $97.5 million, totaling $122.7 million; working capital was $116.4 million. Management expected available resources to support operations and capital needs for at least 12 months.
- Nine-month operating cash use was $12.8 million. Investing activities provided $20.7 million, including $55.2 million cash proceeds from the III-V sale; financing used $9.7 million, including $6.0 million for share repurchases and $3.7 million to buy an additional Kowon interest.
- Total assets were $159.3 million and total stockholders’ equity was $145.7 million. The balance sheet presents no debt line item; the filing does not report a clear debt balance.
Changes, outlook and risks
- Revenue declined approximately 40% in Q3 and 33% year to date. Q3 military-application revenue fell to $1.5 million from $4.3 million; consumer-electronics revenue increased modestly to $3.4 million from $3.0 million. Lower U.S. government funding also reduced R&D revenue.
- Management forecast 2013 revenue of $18–$22 million and a consolidated net loss of $28–$33 million, excluding the III-V sale gain. It cautioned that the loss could exceed that range as it prioritizes Golden-i development and commercialization, for which revenue had been minimal.
- Management estimated $30–$35 million of 2013 operating cash use, excluding working-capital effects, the stock buyback and other investing and financing activities; it expected $2–$3 million of capital expenditures over the following 12 months.
- The III-V sale price was finalized at $70.2 million: $55.2 million had been received by September, and a $15.0 million payment is due on the sale’s third anniversary (recorded at a discounted value of $14.8 million). The company expected to repay approximately $1.0 million of Massachusetts job-retention grant funds.
- Key risks include further U.S. defense-budget reductions, delayed or cancelled government contracts and effects of the 2013 shutdown; uncertain demand and competitive conditions for consumer displays; execution and commercialization risks for Golden-i; foreign-exchange exposure without hedging; and potential conflict-minerals compliance and sourcing costs.
Investor verification priorities
- Track whether revenue, losses and cash use meet management’s 2013 outlook, and distinguish continuing operations from discontinued-sale effects.
- Verify receipt and tax treatment of the deferred $15.0 million III-V sale payment, and the expected repayment of the state grant.
- Assess Golden-i commercialization progress, development spending and customer adoption against management’s stated strategy.
- Monitor military and R&D demand, product margins, Kowon closure and repatriation of its cash, and the company’s remaining liquidity.