Kopin Corporation — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the three months ended March 30, 2019, compared with the three months ended March 31, 2018. Kopin develops and sells display technologies, components and systems for wearable, military, industrial, consumer and training markets. The company reports Kopin and Industrial segments.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $5.54 million | $5.65 million |
| Operating loss | $11.58 million | $9.79 million |
| Net loss attributable to Kopin | $11.33 million | $5.54 million |
| Basic and diluted loss per share | $0.15 | $0.08 |
| Cash used in operating activities | $7.85 million | $6.06 million |
- Net product revenue was $4.61 million, down from $5.04 million. Research and development and other revenue rose to $0.93 million from $0.61 million.
- Cost of product revenue was $5.88 million, or 127.4% of net product revenue, versus $4.06 million, or 80.5%, a negative product gross margin in both periods and a larger shortfall in 2019.
- Research and development expense increased to $4.97 million from $4.45 million; selling, general and administrative expense declined to $6.28 million from $6.93 million.
- Cash and cash equivalents plus marketable debt securities totaled $36.9 million at March 30, 2019, versus $37.2 million at December 29, 2018. Working capital was $35.1 million, down from $39.0 million.
- Total assets were $61.4 million and stockholders’ equity was $44.6 million. No borrowings are shown in the balance sheet; operating lease liabilities totaled $3.59 million.
Material changes and unusual items
- Revenue declined about 2% year over year, while the loss attributable to Kopin more than doubled. The larger loss reflected lower other income and higher product costs.
- Military revenue fell to $1.44 million from $2.28 million, primarily following completion of NVIS military programs in the prior-year quarter. Industrial application revenue increased to $2.50 million from $1.76 million; consumer revenue declined to $0.65 million from $0.89 million.
- Product costs included a $1.2 million inventory-obsolescence charge. Internal R&D included a $0.5 million write-off of materials for curtailed development programs and a one-time tooling charge.
- Q1 2018 other income included a $2.9 million gain related to intellectual property contributed in exchange for an equity interest, as well as $1.0 million of insurance proceeds. These items did not recur in Q1 2019.
- Kopin sold 7.3 million shares in March for $8.0 million gross proceeds at $1.10 per share; reported cash proceeds were $7.45 million. A further 0.7 million shares were sold in April for $0.8 million gross proceeds under the underwriters’ overallotment option.
- The company adopted lease accounting in Q1 2019, recognizing right-of-use assets and lease liabilities; management said adoption did not materially affect results or cash flows.
Outlook, risks and contingencies
- Management expects negative operating cash flow in 2019 and states that historical and current cash use, together with limited liquidity resources, raises substantial doubt about Kopin’s ability to continue as a going concern. The company reported $36.9 million of cash and marketable debt securities at quarter-end; management said it believes it can support operations and capital needs for at least the next 12 months, but there is no assurance.
- The company intends to continue investing in R&D, including wearable products, display products, overlay weapon sights and OLED technologies. Management warns that if positive cash flow and profitability are not achieved, it may need to reduce expenses, including R&D, and/or raise additional capital.
- Management expects $1.5 million to $2.0 million of capital expenditures in fiscal 2019. Kopin also disclosed an agreement for a one-time contribution of approximately $5.2 million for a 3.5% equity interest, subject to Chinese foreign-investment requirements.
- Up to $0.7 million of additional NVIS earnout compensation could be payable if milestones and employment conditions are met by March 2020.
- A BlueRadios lawsuit alleging contract, fiduciary-duty and trade-secret violations remained in discovery; trial had not been set. Kopin said it had not determined a loss was probable and recorded no accrual.
- Risks include uncertain adoption and development of wearable markets, competition, supplier availability, foreign-exchange exposure and continued operating losses. Kopin does not hedge its foreign-currency exposure. The filing reports disclosure controls as effective and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether cash burn moderates and the company can maintain liquidity without additional financing, given the going-concern warning.
- Whether product margins recover and inventory obsolescence or development-program write-offs recur.
- Revenue trends by military, industrial, consumer and R&D applications, and the timing and collectability of the $6.8 million remaining performance obligations, which are government-contract amounts subject to cancellation.
- Funding, timing and foreign-investment requirements for the approximately $5.2 million contribution, as well as potential earnout payments and dilution from equity issuance.
- Developments in the BlueRadios litigation and any change in the probability or estimability of a loss.