Kopin Corporation — Q1 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 26, 2016, compared with the three months ended March 28, 2015. Kopin develops and sells miniature display components and wearable headset systems, alongside research and development services. Its reportable segments are Kopin and FDD.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $6.12 million | $8.58 million |
| Operating loss | $6.33 million | $5.95 million |
| Net loss attributable to controlling interest | $6.92 million ($0.11 per share) | $3.84 million ($0.06 per share) |
| Operating cash flow | $(5.55) million | $(5.48) million |
| Cash and equivalents | $27.64 million | $19.77 million at December 26, 2015 |
| Marketable debt securities | $63.25 million | $60.94 million at December 26, 2015 |
| Working capital | $84.4 million | $89.9 million at December 26, 2015 |
Component revenue was $5.98 million, with component cost of $4.65 million; the resulting gross margin was approximately 22.3%, versus approximately 25.9% a year earlier. Total assets were $101.32 million and stockholders’ equity was $89.31 million at quarter-end. The balance sheet reports no borrowings or other debt; current liabilities were $11.73 million.
Material changes versus the prior comparable period
- Revenue declined about 29%. Wearable application sales rose to $2.6 million from $1.1 million, while military sales fell to $1.5 million from $4.6 million.
- Research and development revenue declined to $0.14 million from $1.46 million, as customer programs were discontinued or moved to commercialization. Internal R&D expense increased to about $3.9 million from $3.4 million.
- Lower military sales and reduced manufacturing volume weakened component margins. Operating loss widened, and net loss increased; the prior-year comparison included a $2.14 million gain on investment sales, including a noncash warrant-related gain.
- Cash and marketable securities totaled $90.88 million, up from $80.71 million at year-end, mainly reflecting receipt of the final $15 million installment from the 2013 III-V product-line and investment sale. Operating activities used $5.55 million of cash.
Outlook, risks, contingencies and unusual items
- Management said available cash resources should support operations and capital needs for at least 12 months, and expected capital expenditures of $2 million to $3 million over the next 12 months. It expected significant 2016 development costs to commercialize wearable technologies; the Solos headset was expected to be offered for sale in the second half of 2016.
- Management expected military thermal-weapon-sight orders and DSC application orders to decline for the remainder of 2016, while anticipating increased 3D metrology sales versus 2015. Wearable revenue growth depends on customer product demand, which the company said it could not predict.
- In February 2016, Kopin agreed to sell its discontinued Kowon facility for 9.5 billion KRW (about $8.1 million at quarter-end). The buyer may cancel under certain conditions; the company expected a sale within 12 months. Related assets were classified as held for sale.
- Foreign-currency transaction losses were $0.55 million, and the company does not hedge currency exposure. It also identified risks from foreign exchange movements, investment credit and interest rates, product demand, competition, and execution of wearable commercialization. Ordinary-course legal proceedings were disclosed, with outcomes described as uncertain.
- The company reported about $89 million of U.S. federal net operating loss carryforwards, subject to expiration through 2035, and a full valuation allowance on domestic and certain foreign deferred tax assets. Management reported disclosure controls effective at quarter-end and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether wearable customer launches translate into sustained component revenue and improved margins.
- Timing and completion terms of the Kowon facility sale, including the buyer’s cancellation rights and eventual minority-shareholder settlement.
- Cash burn relative to the stated 12-month liquidity outlook, planned R&D spending, and capital expenditure range.
- The scale and timing of expected declines in military and DSC orders, and whether anticipated 3D metrology growth offsets them.
- Exposure to currency movements and the status of tax carryforwards, valuation allowances, and any legal proceedings that could materially affect results.