Kopin Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 29, 2014; comparison is the three months ended March 30, 2013. Kopin develops miniature displays and wearable-technology components and reference designs. Its reportable segments are Kopin and FDD.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $4.7 million | $6.3 million |
| Operating loss | $9.6 million | $9.6 million |
| Net loss/income | $9.1 million loss | $21.4 million income |
| Net loss/income attributable to controlling interest | $9.1 million loss | $21.6 million income |
| Basic and diluted EPS | $(0.15) | $0.34 |
| Operating cash flow | $6.1 million used | $3.3 million used |
| Cash and marketable debt securities | $106.1 million | $112.7 million at Dec. 28, 2013 |
Revenue fell about 26%, primarily reflecting weaker military, consumer-display and research-and-development sales. Wearable-application revenue rose to $1.6 million from $0.6 million; military revenue fell to $1.0 million from $3.0 million. R&D revenue was $0.5 million, versus $0.8 million. The company reported no positive overall gross margin, citing insufficient production volume to absorb fixed costs; component cost was approximately 100% of component revenue, versus 107.1% a year earlier.
R&D expense increased to $5.1 million from $4.2 million, mainly due to internal development, including software. Selling, general and administrative expense declined to $5.0 million from $5.7 million, partly due to lower stock compensation. Q1 2013 results included $20.2 million of income from discontinued operations, including a $20.4 million after-tax gain on the III-V product-line sale, and a $2.5 million investment impairment; those items make the net-income comparison unusually favorable to 2013.
Balance sheet and liquidity
- At March 29, 2014, cash and equivalents were $14.8 million and marketable debt securities were $91.3 million. Working capital was $100.9 million, down from $108.4 million at Dec. 28, 2013.
- Total assets were $137.1 million, down from $146.1 million; total stockholders’ equity was $125.9 million. Current liabilities were $10.9 million.
- The filing does not identify borrowings or financial debt on the balance sheet. It reports $7.1 million of operating-lease obligations, including $1.2 million due in less than one year.
- Operating cash use increased year over year. Investing activities provided $4.4 million, largely reflecting net marketable-security sales; financing activities used $0.2 million, including $0.3 million of share repurchases. Cash and equivalents declined $1.9 million during the quarter.
- A $14.9 million note receivable from the III-V sale is due January 2016, is collateralized by certain buyer assets, and repayment is subject to the buyer remaining in compliance with its debt obligations.
Outlook, commentary and risks
- Management expected FY2014 revenue of $18–$22 million, a consolidated net loss of $32–$40 million, and operating cash usage of $28–$32 million, excluding working-capital and other investing and financing effects. Management cautioned that losses could exceed its estimate and that wearable-related revenue is difficult to forecast.
- Management expected $2–$3 million of capital expenditures over the next 12 months and said available cash resources should support operations and capital needs for at least 12 months.
- The 2014 priority was developing and commercializing wearable technologies and establishing customer relationships, with significant development and marketing costs anticipated. Wearables’ ability to generate growth and profitability remained uncertain amid established competitors and developing markets.
- Reduced U.S. government demand affected military and funded R&D revenue; management said future government funding was difficult to predict. Military products have historically carried higher margins.
- Kowon’s Korean operations had ceased. Management anticipated eventual remittance of its approximately $12.9 million in cash and marketable securities to the U.S.; timing and realization were not specified.
- Foreign-currency movements may affect results and competitiveness; the company did not hedge currency exposure. Marketable securities carry interest-rate and issuer-credit risks, though management did not expect reasonably possible near-term rate changes to have a material effect.
- The company disclosed ordinary-course legal proceedings but provided no specific matter or outcome. It reported disclosure controls and procedures were effective as of March 29, 2014.
Most important facts to verify
- Whether wearable products can convert development spending and rising wearable sales into sustainable revenue and positive margins.
- Whether FY2014 revenue, loss and cash-use guidance remains achievable, given Q1 operating cash use and management’s warning that losses could exceed its range.
- The timing and collectability of the $14.9 million III-V sale note, including the buyer’s debt-compliance condition.
- Whether U.S. government demand and military-program funding recover, and the implications of the company’s low production volumes for gross margins.
- Whether the reported liquidity, including funds held by foreign subsidiaries, is available as anticipated and sufficient to fund operations and planned capital expenditures.