Kopin Corporation — Q2 2020 Form 10-Q
Business context and reporting period. Kopin develops, manufactures and sells miniature displays and optical components, and licenses related intellectual property. This unaudited report covers the three and six months ended June 27, 2020, compared with the periods ended June 29, 2019. The company reports one operating segment.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $8.81 million | $9.11 million | $16.69 million | $14.65 million |
| Net loss attributable to Kopin | $1.12 million | $4.26 million | $4.72 million | $15.59 million |
| Loss from operations | $1.10 million | $4.84 million | $4.64 million | $16.42 million |
| Net loss per share, basic and diluted | $0.01 | $0.05 | $0.06 | $0.20 |
| Net cash used in operating activities | Not stated for quarter | Not stated for quarter | $6.76 million | $11.38 million |
Margins and costs. Product cost was 71.7% of net product revenue in Q2 and 82.8% for the first half, compared with 118.2% and 122.9%, respectively, in 2019. This implies product gross margins of approximately 28.3% and 17.2% in 2020, versus negative 18.2% and 22.9% in 2019. Management attributed the improvement to lower material costs, manufacturing efficiencies and higher U.S. production volumes; 2019 included higher scrap costs.
Balance sheet and liquidity at June 27, 2020. Cash and equivalents were $8.78 million and marketable debt securities were $6.49 million, totaling $15.26 million in cash and securities, down from $21.78 million at December 28, 2019. Working capital was $18.6 million, versus $22.5 million at year-end. Total assets were $37.63 million and stockholders’ equity was $24.06 million. The filing reports operating lease liabilities of $2.31 million; it does not provide a clear figure for other conventional debt outstanding. The PPP loans totaled approximately $2.2 million received; Kopin repaid $2.1 million in May and its subsidiary repaid approximately $0.1 million in July 2020.
First-half operating cash outflow of $6.8 million was partly offset by $9.3 million in proceeds from marketable securities. Management cited a $0.5 million contingent-consideration payment related to the NVIS acquisition as included in operating cash use. Cash and securities declined overall by $6.5 million from year-end.
Material changes versus the prior period
- Q2 revenue declined about 3% year over year, while first-half revenue increased about 14%.
- Military application revenue rose to $4.49 million in Q2 from $1.80 million, and to $8.00 million for the first half from $3.24 million, primarily on higher thermal weapon sight shipments and avionic contracts.
- Industrial revenue declined to $1.40 million in Q2 from $2.14 million; consumer revenue also declined. R&D revenue increased, supported by U.S. military programs.
- License, royalties and other revenue fell to $0.93 million in Q2 from $4.22 million, reflecting a $3.5 million one-time functional-IP license in Q2 2019. The prior-year comparison also included a $0.8 million investment gain.
- Net losses narrowed substantially year over year. Management attributed this mainly to the 2019 reorganization, lower internal R&D and SG&A, and reduced compensation and other costs.
Outlook, risks and unusual items
- Going concern: Management states that recurring losses, operating cash outflows and limited liquidity raise substantial doubt about Kopin’s ability to continue as a going concern. It estimates available liquidity can support operations through at least the end of Q2 2021, but says additional capital, expense reductions or a strategic transaction may be needed and none is assured. The company expects negative operating cash flow in 2020.
- COVID-19 and operations: The pandemic affected supply chains, staffing and the Scotland facility, which was closed for most of April and later resumed at below-normal rates. Shipments that were behind schedule in March were back on schedule by June 27. Management expected normal Scotland production rates in Q3 2020. Certain Asian-sourced materials were being received weekly, leaving production exposed to supply disruption and staffing constraints.
- Spending outlook: Kopin expected 2020 capital expenditures of $0.5 million to $1.0 million and continued investment in display, overlay weapon sight and OLED research and development.
- Accounting and operating items: First-half inventory write-offs were $0.92 million, compared with $2.41 million in the prior-year period. Kopin recorded a less than $0.2 million impairment on its Solos investment during the first half.
- Litigation: BlueRadios alleges, among other claims, contract breaches, trade-secret misappropriation and patent co-ownership rights. Motions for partial summary judgment were pending, no trial date had been set, and Kopin had not accrued a loss because it did not consider a loss probable.
- Controls: Management concluded internal control over financial reporting and disclosure controls were not effective as of June 27, 2020 because a previously identified material weakness concerning oversight and accounting for non-routine transactions remained unremediated.
- Other risks: The filing highlights customer acceptance and competition, foreign-exchange exposure (not hedged), access to raw materials, and the need to achieve profitability and positive cash flow.
Important facts for investors to verify
- Whether cash burn, working-capital needs and the $15.3 million cash-and-securities balance support operations beyond management’s stated Q2 2021 estimate.
- Subsequent liquidity actions, including any ATM or other equity financing, expense reductions, or strategic transactions.
- Whether military demand and funded R&D continue to offset softness in industrial, consumer and licensing revenue.
- Whether Scotland production returned to normal in Q3 2020 and whether supply and staffing disruptions affected later results.
- Updates on the BlueRadios litigation and the material weakness remediation, including whether controls were tested and deemed effective.