Kopin Corporation — Q2 2016 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 25, 2016, compared with the corresponding 2015 periods. Kopin develops and sells wearable technology components and headset systems, with additional research and development revenue. Its reportable segments are Kopin and FDD.
Key financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $4.36 million | $10.86 million | $10.47 million | $19.44 million |
| Operating income (loss) | $(1.03) million | $(5.50) million | $(7.36) million | $(11.44) million |
| Net income (loss) attributable to controlling interest | $(3.13) million | $0.78 million | $(10.05) million | $(3.06) million |
| Net income (loss) per share, diluted | $(0.05) | $0.01 | $(0.16) | $(0.05) |
| Cash used in operating activities | Not separately presented | Not separately presented | $(12.20) million | $(8.86) million |
- Component revenue was $4.10 million in Q2 and $10.07 million in the first half. Component cost was $4.68 million and $9.33 million, respectively—114.3% and 92.6% of component revenue, indicating component gross losses in both periods.
- At June 25, cash and equivalents were $25.81 million and marketable debt securities were $65.71 million, totaling $91.52 million. Working capital was $83.0 million. The balance sheet reports no borrowings; total liabilities were $14.12 million.
- Total assets were $101.22 million and stockholders’ equity was $87.10 million at June 25, 2016.
Material changes and unusual items
- Revenue fell 60% in Q2 and 46% in the first half versus 2015. Management attributed the decline principally to weaker wearable-customer demand, lower military thermal-weapon-sight demand, and reduced funded development activity. Q2 wearable revenue was $1.8 million versus $6.0 million a year earlier; military revenue was $0.9 million versus $2.4 million.
- Q2 operating results included a $7.7 million gain from the June sale of Kowon’s inactive plant and land for approximately $8.1 million. Excluding that gain, the reported Q2 operating loss would have been approximately $8.7 million; this is a simple calculation, not a company-reported adjusted measure.
- First-half investing cash flow of $18.0 million included $15.0 million received as the final payment for the earlier III-V product-line and investment sale, and $8.1 million from the plant-and-land sale. Despite those proceeds, operating cash use increased from the prior-year first half.
- The first-half tax provision was $2.1 million, mainly reflecting taxes on the property-sale gain and estimated foreign withholding taxes on anticipated remittance of subsidiary earnings. The company reported approximately $98 million of U.S. federal net operating loss carryforwards and a full valuation allowance on domestic and certain foreign deferred tax assets.
Outlook, risks, and contingencies
- Management expected Solos headset shipments in the second half of 2016 and anticipated significant 2016 development and marketing costs to commercialize wearable technologies. The filing does not provide a revenue or earnings forecast.
- Management expected military thermal-weapon-sight orders and digital-still-camera orders to decline during the remainder of 2016, while expecting higher 2016 sales for 3D metrology applications. It also noted that wearable sales depend on customers’ product launches and demand, which it cannot predict.
- Management expected capital expenditures of $2.0–$3.0 million over the next twelve months and believed available cash resources would support operations and capital needs for at least twelve months.
- Risks include weak or delayed customer demand, under-absorption of fixed manufacturing costs, foreign-exchange exposure (the company did not hedge), investment credit and interest-rate risk, and uncertainty over future taxes and remittance of foreign earnings. Ordinary-course legal proceedings may affect results, but the filing gives no specific matter or quantified exposure.
Important facts for investors to verify
- Whether expected Solos shipments occurred and translated into meaningful sales, and whether wearable customers launched products as anticipated.
- Whether military and consumer-market declines, along with low component utilization and negative component margins, persisted in subsequent periods.
- How much of reported earnings and cash availability depended on the non-recurring property and product-line sale proceeds, and whether operating cash burn improved.
- Whether Kowon’s approximately $19.7 million in cash and marketable securities was remitted as expected and what tax costs resulted; management also said it was evaluating a possible purchase of the remaining 7% of Kowon.
- The effects of foreign-exchange movements, customer concentration and product demand, and the company’s ability to fund commercialization while preserving liquidity.