Kopin Corporation — Q1 2020 Form 10-Q
Business context and reporting period. Kopin develops and sells miniature displays, optical lenses, modules and related subassemblies, and licenses intellectual property for military, industrial and consumer applications. This unaudited quarterly report covers the three months ended March 28, 2020; comparisons are with the three months ended March 30, 2019.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $7.88 million | $5.54 million |
| Operating loss | $3.54 million | $11.58 million |
| Net loss attributable to Kopin | $3.60 million; $0.04 per share | $11.33 million; $0.15 per share |
| Operating cash flow | $(3.87) million | $(7.85) million |
| Cash and marketable debt securities | $17.64 million | $21.78 million at December 28, 2019 |
| Working capital | $19.3 million | $22.5 million at December 28, 2019 |
Product gross margin was approximately 4.6% of product revenue, compared with negative 27.4% a year earlier. The filing reports no interest-bearing debt on the March 28 balance sheet; operating lease liabilities totaled $2.57 million. A $2.1 million Paycheck Protection Program (PPP) loan was received on April 21, after quarter-end.
Changes versus the prior-year quarter
- Revenue increased 42%, led by military applications, up to $3.51 million from $1.44 million, and R&D revenue, up to $1.96 million from $0.93 million.
- Industrial revenue decreased to $2.18 million from $2.50 million; consumer revenue declined to $0.22 million from $0.65 million.
- Operating loss narrowed substantially. Management attributed lower R&D and selling, general and administrative costs primarily to the 2019 reorganization, reduced staffing, and curtailment or sale/license of certain development programs. Improved U.S. manufacturing yields and higher volumes also helped product costs.
- Cash and marketable securities declined from $21.8 million at year-end to $17.6 million, primarily reflecting operating cash use and capital expenditures, partly offset by marketable-security sales.
Outlook, risks and contingencies
- Going concern: Kopin reported substantial doubt about its ability to continue as a going concern, citing recurring losses and operating cash outflows. Management estimated available liquidity could fund operations through at least the end of Q1 2021, but said it may need to raise capital, reduce expenses or pursue a strategic transaction. It expects negative operating cash flow in 2020.
- COVID-19 and operations: The Scotland facility experienced a March supply disruption and was closed for most of April before reopening below normal rates. Management expected production to rise through Q2 and return to normal in Q3 2020. U.S. production staffing was below normal; shortages or reduced attendance could depress revenue and cash flow. The duration and financial impact of the pandemic were uncertain.
- PPP loan: The $2.1 million loan bears 1% interest and matures April 20, 2022. Forgiveness is conditional on documented eligible spending and SBA requirements; the company gave no assurance that forgiveness would be obtained. Management also noted potential scrutiny and reputational risks related to participation.
- Guidance and commitments: Expected 2020 capital expenditures were $0.5 million to $1.0 million. Remaining performance obligations were $8.6 million, expected to be recognized over 13 months, but relate to government contracts subject to cancellation. A previously scheduled $5.0 million contribution to a BOE investment was postponed to July 2022.
- Controls and litigation: Management said internal control over financial reporting was not effective as of March 28, 2020 because of an unresolved material weakness involving review of non-routine transactions. The BlueRadios lawsuit remained pending; the company had not deemed a loss probable and had recorded no accrual.
Important facts for investors to verify
- Whether liquidity and the expected runway remain adequate given ongoing losses, operating cash use and the filing’s substantial-doubt conclusion.
- Actual production recovery, raw-material availability and customer demand following COVID-19 disruptions, particularly at the Scotland facility.
- Whether the PPP loan qualifies for full or partial forgiveness, and the resulting repayment obligations.
- Progress in remediating the material weakness and whether disclosure controls improve.
- Developments in the BlueRadios case and the cancellability and timing of the $8.6 million remaining performance obligations.
- The cover page states shares outstanding “as of May 6, 2019,” although the report is for 2020; verify the intended date and share count.