Kopin Corporation — Q1 2013 Form 10-Q
Business context and period. The unaudited quarter ended March 30, 2013. Kopin is refocusing on wearable, voice- and gesture-controlled computing systems and display products. During the quarter, it sold its III-V product line and closed its Kowon facility; management says operations are being reorganized around the new strategy.
Financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $6.32 million | $10.87 million |
| Operating loss | $9.64 million | $3.49 million |
| Net income (loss), continuing operations | $1.17 million | ($2.71 million) |
| Net income (loss), including discontinued operations | $21.36 million | ($2.47 million) |
| Operating cash flow | ($3.27 million) | ($0.63 million) |
- Revenue fell about 42%. Product revenue was $5.57 million, down from $10.40 million; R&D revenue increased to $0.75 million from $0.46 million.
- Product cost was $5.96 million, exceeding product revenue by $0.40 million; cost was 107.1% of product revenue. Management attributed the weaker result to lower military sales, price declines, and lower unit volumes.
- Q1 net income included $20.2 million of discontinued-operations income, primarily a $20.4 million after-tax gain on the III-V sale. Continuing operations recorded a $13.0 million tax benefit related to intraperiod tax allocation. The continuing-operations result therefore differs sharply from reported total net income.
- Other income and expense was a net expense of $2.13 million, including a $2.49 million impairment of a cost-method investment.
- Cash and equivalents were $38.85 million and marketable debt securities were $98.61 million, totaling $137.46 million. Working capital was $136.3 million. The balance sheet lists no borrowings or debt.
- Investing cash flow was $18.83 million, including $55.0 million cash proceeds from the III-V sale, offset in part by purchases of marketable securities and other investments. Cash increased $11.72 million during the quarter.
Material changes and transactions
- On January 16, 2013, Kopin completed the sale of its III-V product line and KTC-related interest. The agreement provided approximately $75 million of consideration, subject to adjustments: $55 million was paid at closing, $5 million was held in escrow, and $15 million is due in three years. The company estimated net purchase price of about $70.2 million and recorded the deferred $15 million payment at a discounted value of $14.8 million.
- Military-application revenue declined to $2.6 million from $7.6 million; consumer-electronics revenue was $2.9 million versus $2.8 million. The military decline reflects reduced U.S. government demand.
- R&D expense rose to $4.25 million from $3.00 million, primarily due to development of concept designs. SG&A increased to $5.75 million from $4.21 million, including higher compensation, sale-related professional fees, and patent amortization.
- Kopin paid approximately $3.7 million to acquire an additional 15% of Kowon. The facility closed during the quarter; management expected its operations to cease and approximately $13.7 million of cash and securities there to eventually be remitted to the U.S.
Outlook, risks, and contingencies
- Management forecast FY2013 revenue of $18–$22 million and a consolidated net loss of $15–$19 million, excluding the III-V sale gain; it cautioned that losses could exceed that range. Golden-i licensing revenue had been de minimis, and management expected significant 2013 development and marketing costs.
- Management expected U.S. government defense-product revenue to decline by approximately $8–$10 million in FY2013, including reduced sales into the thermal weapon sight program. Military products historically had higher margins than other displays.
- Management believed available cash resources would fund operations and capital needs for at least 12 months; it expected $2–$3 million in capital expenditures over the next 12 months. It also expected interest income to decline.
- Kopin expected to repay the remaining balance of a Massachusetts employment-incentive grant in 2013. About $0.8 million was included in billings in excess of revenue earned, and repayment may also be required if specified employment or location conditions are not met.
- Risks include uncertain adoption and commercialization of Golden-i, continued pressure on military demand and product margins, customer-dependent and competitive camera sales, foreign-exchange exposure (not hedged), and potential investment losses. The filing also describes future payments and options tied to development milestones at investees.
- The company authorized a stock-repurchase program of up to $30 million, expiring March 17, 2014; no shares were repurchased in the quarter. It reported no specific material litigation outcome, noting ordinary-course legal proceedings may arise.
Most important facts for investors to verify
- Whether the III-V sale’s escrow, working-capital adjustment, deferred $15 million payment, and final tax treatment result in the estimated proceeds and gain.
- Whether full-year revenue and loss guidance is achievable, particularly given military-sales declines and limited visibility into Golden-i commercialization.
- Whether the company can improve product margins and manage development spending while continuing operations generate negative cash flow.
- Whether Kowon’s expected closure, remittance of its cash and securities, and repayment of the Massachusetts grant proceed as management anticipated.
- Whether additional investment impairments, milestone funding obligations, or share repurchases materially affect liquidity.