Kopin Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 27, 2014; comparisons are to the periods ended September 28, 2013. Unaudited consolidated results include Kopin and majority-owned subsidiaries. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $9.5 million | $5.0 million | $21.2 million | $17.3 million |
| Operating loss | $5.5 million | $10.3 million | $22.4 million | $28.6 million |
| Net income (loss) attributable to controlling interest | $(5.0) million | $(8.8) million | $(22.9) million | $5.0 million |
| Net income (loss) per share | $(0.08) | $(0.14) | $(0.37) | $0.08 |
- Q3 revenue rose approximately 93% year over year; nine-month revenue increased approximately 22%. Component revenue was $9.1 million in Q3 and $18.2 million for nine months; R&D revenue was $0.5 million and $3.0 million, respectively.
- Component gross margin was approximately 42.6% in Q3, versus 5.5% in Q3 2013; for the nine-month period it was approximately 25.4%, versus a negative 4.5%. Management attributed improvement to a higher mix of higher-margin sales and use of materials previously reserved as excess.
- Q3 operating loss improved year over year, while nine-month net results shifted from income to loss. The prior-year nine-month result included $20.2 million of income from discontinued operations, primarily the gain on sale of the III-V product line.
- Operating cash use was $17.4 million for the first nine months, compared with $12.8 million in the prior-year period. Investing activities provided $17.9 million, substantially reflecting net sales of marketable securities. Cash and equivalents were $17.0 million at quarter-end.
- Cash, equivalents and marketable debt securities totaled $94.0 million, down from $112.7 million at December 28, 2013. Working capital was $91.8 million, versus $108.4 million. Current liabilities were $11.4 million against current assets of $103.2 million. The balance sheet reports no debt balance; total liabilities were $11.7 million, including asset retirement obligations.
- Total assets were $126.7 million and stockholders’ equity was $115.0 million at quarter-end. Capital expenditures were $1.5 million for the nine-month period.
Business changes and management commentary
- Military application revenue reached $5.7 million in Q3, up from $1.5 million, driven by U.S. government demand for products used in thermal weapon sights. Management expected orders for this program to continue through the first half of 2015.
- Wearable application revenue increased to $1.7 million in Q3 and $4.8 million for nine months, compared with $1.2 million and $2.8 million, respectively. Management cited additional sales to existing customers and new customers. Licensing revenue remained minimal.
- Consumer application revenue declined to $0.6 million in Q3 and $2.3 million for nine months; management said the digital still-camera market was declining amid smartphone camera adoption.
- Management emphasized developing and commercializing wearable technologies and expected significant 2014 development and marketing costs. It cautioned that forecasting wearable revenue was difficult and that 2014 losses could exceed its estimate.
- The company’s Korean subsidiary, Kowon, had ceased operations; its facility was for sale but did not qualify as held for sale at quarter-end. The company had acquired an additional 29% interest in eMDT during Q2.
- The company wrote off its $1.3 million KoBrite investment during the nine-month period. A $14.9 million note receivable from the III-V product-line sale is due in January 2016; collection depends on the buyer remaining compliant with its debt obligations.
Outlook, liquidity and risks
- Fiscal 2014 guidance was revenue of $24 million to $28 million, consolidated net loss of $29 million to $33 million, and operating cash use of $23 million to $26 million, excluding working-capital and other investing and financing effects.
- Management expected to spend $2 million to $3 million on capital expenditures over the next 12 months and stated that available cash resources should support operations and capital needs for at least 12 months.
- Foreign exchange exposure is not hedged; a stronger U.S. dollar could make products more expensive in foreign markets. Management also cited possible changes in U.S. government funding, uncertain development of wearable markets, larger competitors, and execution and commercialization costs.
- Marketable securities were primarily U.S. government and agency-backed securities, corporate debt and certificates of deposit. Management did not expect reasonably possible near-term interest-rate changes to have a material effect, but noted securities remain exposed to interest-rate and issuer-credit risks.
- The company disclosed ordinary-course legal proceedings but no specific outcome or quantified contingency. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether military thermal-weapon-sight orders continue as expected through the first half of 2015, and their impact on margins and revenue.
- Progress in wearable product commercialization, customer adoption, licensing and the associated development and marketing costs.
- Performance against the fiscal 2014 revenue, net-loss and cash-use outlook, including the possibility that losses exceed guidance.
- Collectability of the $14.9 million buyer note due January 2016 and the timing and proceeds of the Kowon facility sale and cash remittance.
- Cash burn, liquidity and capital spending, as well as the impact of foreign exchange movements and any changes in government funding.