Kopin Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 28, 2015, compared with the three months ended March 29, 2014. Kopin develops and sells miniature display components, wearable-technology reference designs and related products, and earns revenue from research and development contracts. The filing is unaudited.
Financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $8.6 million | $4.7 million |
| Operating loss | $5.9 million | $9.6 million |
| Net loss attributable to controlling interest | $3.8 million; $0.06 per share | $9.1 million; $0.15 per share |
| Operating cash flow | $(5.5) million | $(6.1) million |
| Cash and marketable debt securities | $87.1 million | $90.9 million at December 27, 2014 |
| Working capital | $99.2 million | $86.7 million at December 27, 2014 |
| Total assets | $119.2 million | $122.9 million at December 27, 2014 |
Component revenue was $7.1 million, versus $4.2 million; research and development revenue was $1.5 million, versus $0.5 million. Component cost was 74.1% of component revenue, compared with 100.0% a year earlier, reflecting a higher share of military products, which management said carry higher margins. R&D expense was $4.9 million, compared with $5.1 million; selling, general and administrative expense was $4.4 million, compared with $5.0 million. The filing does not present a consolidated gross-margin figure.
Investing activities provided $3.3 million, including proceeds from securities and an investment sale; financing cash flow was zero. Cash and equivalents declined by $2.2 million during the quarter. Current liabilities were $12.0 million. The filing reports no borrowings or debt balance on the balance sheet.
Material changes and unusual items
- Revenue rose about 83% year over year, with military applications revenue increasing to $4.6 million from $1.0 million. Wearable revenue declined to $1.1 million from $1.6 million; industrial revenue rose to $1.1 million from $0.8 million; consumer revenue declined to $0.3 million from $0.8 million.
- The reported loss improved substantially, but results included a $2.1 million gain on sale of an investment and a $1.3 million noncash gain from recording Vuzix warrants. Of the warrant gain, approximately $817,000 related to prior periods. The company said the prior-period unrecorded gains were not material to those years’ financial statements.
- A $14.9 million note receivable from the sale of the III-V product line and the company’s KTC investment is due January 2016. Repayment depends on the buyer remaining compliant with its debt obligations; the note is collateralized by certain buyer assets.
- Management disclosed that disclosure controls and internal control over financial reporting were ineffective because of a previously reported material weakness. Remediation was underway, but management said the weakness would not be considered remediated until controls had operated and been tested effectively.
Outlook, risks and contingencies
- Management expects orders for thermal-weapon-sight products and digital-still-camera applications to decline for the remainder of 2015, while it expects 3D metrology sales to increase year over year.
- The company expects significant 2015 development and marketing costs to commercialize wearable technology. Management views wearable technology expansion and licensing as important to revenue growth, positive cash flow and profitability; licensing revenue to date was described as minimal.
- Management expects capital expenditures of $2 million to $3 million over the next 12 months and believes available cash resources will support operations and capital needs for at least 12 months. It does not expect to pay cash dividends for the foreseeable future.
- Risks include ongoing operating cash use, dependence on developing wearable markets, expected declines in some product applications, foreign-exchange exposure (the company does not hedge), and the collection of the conditional note receivable. The company also identifies ordinary-course legal proceedings but gives no specific matter or quantified exposure.
- The company’s Kowon facility had ceased production and was being marketed for sale; management said the sale timing did not meet held-for-sale accounting criteria. Approximately $12.0 million of Kowon cash and marketable securities was expected eventually to be remitted to the U.S.
Key facts for investors to verify
- Whether the $14.9 million note receivable is collectible when due, given the buyer’s debt-compliance condition and collateral.
- How much of the reported loss improvement reflects recurring operations versus the investment-sale and warrant gains, including the prior-period warrant accounting correction.
- Progress and testing results for remediation of the material weakness in financial reporting controls.
- Whether management’s product-level expectations, wearable commercialization spending and 12-month liquidity outlook remain achievable as operating cash continues to be used.
- Share-count disclosures: the cover reports 66,495,779 common shares outstanding as of May 8, 2015, while the balance sheet reports 63,088,667 outstanding at March 28 and the quarter’s weighted-average basic shares were 63,083,652.