Kopin Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 27, 2015; comparisons are to the periods ended June 28, 2014. Financial statements are unaudited. Kopin develops and sells miniature display components, wearable-technology products and reference designs, and earns research and development (R&D) revenue. Its reportable segments are Kopin and FDD.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $10.9 million | $6.9 million | $19.4 million | $11.6 million |
| Operating loss | $5.5 million | $7.3 million | $11.4 million | $16.9 million |
| Net income (loss) attributable to controlling interest | $0.8 million | ($8.8 million) | ($3.1 million) | ($17.9 million) |
| Operating margin, approximately | (50.6%) | (104.7%) | (58.8%) | (145.1%) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | ($8.9 million) | ($13.0 million) |
- Q2 component revenue was $9.5 million, up from $4.9 million; R&D revenue was $1.4 million, down from $2.0 million. First-half component revenue was $16.6 million versus $9.1 million, while R&D revenue was $2.8 million versus $2.5 million.
- Component gross margin was approximately 33.0% in Q2 and 29.9% for the first half, compared with 15.3% and 8.3%, respectively, in 2014. Management attributed the improvement partly to higher sales of higher-margin military products.
- At June 27, cash and equivalents were $16.5 million and marketable debt securities were $71.8 million. Working capital was $100.4 million. Total liabilities were $15.6 million; the filing does not report interest-bearing debt.
- Cash used in operations was $8.9 million in the first half. Investing activities provided $10.9 million, including proceeds from sales of investments and marketable securities; cash increased $1.8 million to $16.5 million.
Changes, outlook and risks
- Revenue growth reflected increased wearable-component sales, including shipments to a customer expected to launch a product in 2015, and increased military demand for thermal weapon sights. Management said the customer launch date was not definitive.
- The Q2 result included a $5.46 million gain from divesting Kopin’s Recon Instruments interest following Intel’s acquisition of Recon. First-half other income also included a $1.3 million non-cash gain from recording Vuzix warrants, of which $817,000 was attributed to prior periods. These gains materially benefited reported net results despite continuing operating losses.
- Management expected thermal weapon-sight orders and digital still camera orders to decline during the remainder of 2015; it expected 3D metrology sales to increase year over year. It anticipated significant 2015 development and marketing costs to commercialize wearable technology and cited customer demand and product launches as uncertain.
- Management believed available cash resources would support operations and capital needs for at least 12 months and expected $2 million to $3 million of capital expenditures over the next 12 months. It did not provide revenue or earnings guidance.
- A $14.9 million note receivable from the buyer of the III-V product line and KTC investment is due January 2016, collateralized by certain buyer assets, and repayment depends on the buyer meeting debt-compliance obligations. The filing does not establish the ultimate collectability of the note.
- Kopin reported that disclosure controls and internal control over financial reporting were ineffective because of a previously disclosed material weakness. Remediation was ongoing and would require testing over time before management could deem it effective.
- Other stated exposures include foreign-exchange movements, unhedged currency risk, dependence on developing wearable markets, uncertainty in government funding and customer demand, and ordinary-course legal proceedings with uncertain outcomes.
Important facts for investors to verify
- Whether wearable customers launch products as expected and sustain component orders, and whether wearable revenue can offset anticipated declines in military and DSC demand.
- Collection of the $14.9 million note receivable by its due date and compliance with the buyer’s debt covenants.
- How much operating cash burn and commercialization spending continue, relative to management’s liquidity assessment.
- Progress and independent testing of the control-remediation plan, and the effect of the material weakness on reporting reliability.
- The sustainability of reported profitability: Q2 net income included a large investment-sale gain, while the company remained loss-making from operations.