Kopin Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2014; comparable periods ended June 29, 2013. Amounts below are U.S. dollars. The company develops and sells miniature displays and related components, funds display and wearable-technology development, and offers wearable headset reference designs. Its two reportable segments are Kopin and FDD.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $6.94m | $6.08m | $11.64m | $12.40m |
| Operating loss | $7.27m | $8.64m | $16.88m | $18.28m |
| Net income (loss) attributable to controlling interest | ($8.81m) | ($7.91m) | ($17.94m) | $13.72m |
| Basic and diluted EPS | ($0.14) | ($0.13) | ($0.29) | $0.22 |
| Operating cash flow | Not separately presented quarterly | ($13.04m) | ($7.19m) |
- Q2 revenue rose about 14% year over year, while first-half revenue fell about 6%. Component revenue was $4.91m for Q2 and $9.13m for the first half; R&D revenue was $2.04m and $2.50m, respectively.
- First-half 2013 net income included a $20.2m after-tax gain from discontinued operations following the 2013 sale of the III-V product line. Continuing operations had a $6.89m loss in that period, versus an $18.12m loss in first-half 2014.
- Component gross margin improved: component costs were 84.7% of component revenue in Q2 and 91.7% for the first half, versus 110.6% and 108.9% in the respective 2013 periods. Management attributed improvement to a richer product mix and use of previously written-off materials.
- Cash and equivalents were $13.31m and marketable debt securities were $85.59m at June 28, 2014. Combined cash and securities were $98.90m, down from $112.73m at December 28, 2013. Working capital was $96.0m; total assets were $131.09m and stockholders’ equity was $119.20m.
- First-half investing activities provided $9.74m, mainly reflecting net marketable-security sales; financing activities used $0.17m. The company reported no debt line in the presented balance sheet; debt obligations, if any, are not otherwise clearly quantified in the filing text.
Changes, outlook, and risks
- Military product sales declined amid reduced U.S. government demand, but management said it had recently received increased military orders and expected second-half military revenue to exceed first-half revenue. Wearable application revenue increased year over year; consumer applications faced a declining digital-camera market.
- R&D expense increased to $10.22m for the first half from $7.91m, primarily due to costs supporting customer-funded programs. Management expects significant 2014 development and marketing spending to commercialize wearable technology.
- Management forecast fiscal 2014 revenue of $24m–$28m, a consolidated net loss of $32m–$40m, and operating cash usage of $28m–$32m excluding working-capital and other investing and financing effects. It cautioned that wearable revenue is difficult to forecast and losses could exceed the estimate. Management said available cash resources should support operations and capital needs for at least 12 months; planned capital expenditures were $2m–$3m over the next 12 months.
- Q2 included a $1.32m impairment write-off of the KoBrite investment and $0.67m of foreign-currency transaction losses. The company also recorded an equity-method loss related to KoBrite before writing off the investment.
- A $14.9m note receivable from the III-V sale is due January 2016 and is collateralized by buyer assets; repayment depends on the buyer remaining compliant with its debt covenants. Kowon operations had ceased, its facility remained for sale, and the company expected to repatriate about $13m held there eventually.
- Key exposures include uncertain wearable-market adoption and commercialization costs, possible reductions in U.S. government funding, foreign-exchange movements (the company does not hedge), and realization of deferred tax assets. The filing describes possible ordinary-course legal proceedings but provides no specific matter or quantified contingency. Management stated disclosure controls were effective and reported no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether increased military orders materialize and support the anticipated second-half revenue improvement.
- Progress in wearable product commercialization, customer adoption, revenue generation, and related spending against the 2014 guidance.
- Cash burn relative to the $98.9m cash-and-securities balance and management’s stated minimum 12-month liquidity outlook.
- The buyer’s ability to satisfy covenant conditions and pay the $14.9m note when due, and the timing and proceeds of the Kowon facility sale.
- Drivers and recurrence potential of investment impairments, currency losses, and the company’s continuing operating losses.