Kopin Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 27, 2021; comparisons are with the three months ended March 28, 2020. Kopin develops, manufactures and sells miniature displays, optical lenses, modules and related technology for defense, industrial/enterprise and consumer applications, and conducts technology licensing and funded research and development.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $11.68 million | $7.88 million |
| Operating loss | $4.19 million | $3.54 million |
| Net loss attributable to Kopin | $4.15 million; $0.05 per diluted share | $3.60 million; $0.04 per diluted share |
| Net cash used in operating activities | $0.25 million | $3.87 million |
| Cash and cash equivalents | $32.20 million | $8.33 million |
Revenue rose approximately 48%. Product revenue was $7.57 million, up from $5.92 million. Product cost was $6.40 million, or 85% of product revenue, implying a product gross margin of approximately 15%; management attributed the improvement from 5% in Q1 2020 to higher volumes and manufacturing efficiencies. Total expenses increased to $15.87 million from $11.42 million, including higher R&D and selling, general and administrative expenses. SG&A rose to $5.91 million from $3.43 million, principally reflecting higher stock-based compensation and bad-debt expense, partly offset by lower professional fees.
Operating cash outflow improved year over year. Cash and marketable debt securities totaled $35.63 million at quarter-end, versus $20.75 million at December 26, 2020; working capital was $36.5 million, versus $22.6 million. The increase in liquidity was primarily supported by $15.5 million of net proceeds from an at-the-market stock sale. The filing reports no conventional borrowings; operating lease liabilities totaled $1.53 million. Capital expenditures were $0.35 million in the quarter.
Business changes and period comparison
- Defense application revenue increased to $4.99 million from $3.51 million, primarily on higher shipments of thermal weapon sight systems.
- R&D revenue rose to $3.56 million from $1.96 million, mainly from increased U.S. defense program funding. Industrial revenue declined to $2.04 million from $2.18 million; consumer revenue increased to $0.53 million from $0.22 million.
- International revenue increased to 30% of total revenue from 14%, reflecting sales growth in 3D metrology and industrial wearable headset applications.
- Net loss attributable to Kopin widened to $4.15 million from $3.60 million. Management cited increased stock-based compensation, partly offset by improved product gross margin. Stock-based compensation expense was $2.61 million, compared with $0.16 million in the prior-year quarter.
- The company sold 2.4 million shares under its prior ATM agreement for $16 million gross proceeds, approximately $6.66 per share, and $15.5 million net proceeds. A new ATM agreement permits sales of up to $50 million of common stock.
Outlook, risks and contingencies
- Management said existing cash is expected to fund operations for at least the next 12 months and expects 2021 capital expenditures of $1.0 million to $2.0 million. No revenue or earnings guidance was provided.
- Remaining performance obligations were $21.0 million, expected to be recognized over the next 12 months; these amounts are under government contracts and are subject to cancellation.
- Kopin intends to continue investing in R&D despite ongoing losses. Management cautioned that failure to achieve positive cash flow and profitability could require expense reductions, including R&D cuts, or additional capital.
- Management reported no semiconductor component shortages affecting production in Q1, but a vendor warned it might not meet commitments for a component used in 3D metrology products. Kopin was evaluating alternative sources. The filing added supply shortages as a risk.
- Other identified risks include COVID-19 effects, customer adoption and growth in developing wearable markets, competition and protection of intellectual property, foreign-exchange movements, and the ability to retain specialized personnel. Kopin does not currently hedge foreign-exchange risk.
- In the BlueRadios litigation, the company reported that the court denied BlueRadios’ motion for partial summary judgment in September 2020; no trial date had been set. Kopin did not consider a loss probable and recorded no accrual. The ultimate outcome and potential exposure are not quantified in the filing.
- Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether defense shipments and funded R&D revenue continue at the Q1 pace, and whether the $21.0 million of cancellable government-contract obligations convert to revenue.
- Whether the 3D metrology component supplier can meet commitments or alternative sources can prevent disruption.
- How stock-based compensation, bad-debt expense and ongoing R&D investment affect operating losses and cash use.
- Cash runway assumptions and potential dilution from the new ATM facility, which allows up to $50 million in additional stock sales.
- Developments in the BlueRadios case and any change in the likelihood or estimability of a loss.