Kopin Corporation — Q2 2019 Form 10-Q
Business context and period: Kopin develops and sells display technologies, components and systems for wearable, military, thermal-imaging, industrial and training markets. This unaudited report covers the quarter and six months ended June 29, 2019, compared with the periods ended June 30, 2018.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $9.11M | $5.94M | $14.65M | $11.60M |
| Operating loss | $4.84M | $8.99M | $16.42M | $18.79M |
| Net loss attributable to Kopin | $4.26M | $9.24M | $15.59M | $14.78M |
| Net loss per share, diluted | $0.05 | $0.13 | $0.20 | $0.20 |
| Cash used in operating activities | Not separately stated | Not separately stated | $11.38M | $13.21M |
Q2 revenue increased 53% year over year, while first-half revenue increased 26%. Growth reflected a $3.5 million one-time functional-IP license and royalties, as well as stronger industrial-application sales. Net product revenue was nearly flat in Q2 and declined 5% for the first half. Product costs exceeded product revenue: the reported cost ratio was 118.2% in Q2 and 122.9% for the first half, compared with 78.2% and 79.4% in the respective 2018 periods. Inventory-obsolescence charges were $1.2 million in Q2 and $2.4 million for the first half. The filing does not report a consolidated gross-margin percentage.
Cash and marketable debt securities totaled $31.6 million at June 29, down from $37.2 million at year-end; working capital was $29.4 million, down from $39.0 million. Cash and cash equivalents alone were $12.1 million. The company reported no conventional borrowings in the presented balance sheet; it did report $3.33 million of operating lease liabilities, plus other obligations. Total assets were $58.4 million and stockholders’ equity was $41.9 million.
Material changes and notable items
- Research and development and other revenue rose to $4.67 million in Q2 from $1.47 million, principally reflecting the IP license and royalty activity. License and royalty revenue was $4.22 million in Q2.
- RealWear, Inc. accounted for $4.67 million of Q2 sales and $5.19 million for the first half; related-party receivables were $2.06 million at quarter-end. This represents significant customer exposure.
- Operating expenses declined: first-half R&D fell to $8.30 million from $8.98 million, and selling, general and administrative expense fell to $11.66 million from $13.84 million. Management attributed reductions partly to curtailed development programs; first-half internal R&D included a $0.5 million materials write-off.
- The company raised $8.1 million net through registered stock sales in March and April, issuing approximately 8.0 million shares. Outstanding shares increased to 82.1 million at June 29 from 74.0 million at December 29, 2018.
- A $0.8 million investment gain benefited both 2019 periods. By comparison, first-half 2018 other income included a $2.9 million gain related to intellectual property contributed for an equity interest and $1.0 million of insurance proceeds.
Outlook, liquidity and risks
Management expects negative operating cash flow in 2019 and anticipates $0.5 million to $1.0 million of capital expenditures. It states that available cash is sufficient to fund operations through the end of fiscal 2020, based on its cash-management and capital-raising experience. However, the company disclosed that its losses, operating cash outflows and limited liquidity raise substantial doubt about its ability to continue as a going concern. Management is pursuing strategic alternatives, including expense reductions and additional capital; there is no assurance these efforts will succeed.
Kopin has an agreement for an approximately $5.1 million contribution in exchange for a 3.5% equity interest, subject to Chinese investment restrictions. Delays have resulted in $0.4 million of accrued penalties. A proposed Solos and Whisper technology spinout was expected to close by the end of Q3 2019; the company anticipated no significant liquidity impact. Up to $0.7 million of additional NVIS milestone-related compensation could be payable by March 2020 if conditions are met.
Other risks include uncertain adoption and timing of wearable markets, reliance on continued R&D investment, competition, foreign-exchange exposure (the company does not hedge), and possible supplier constraints. The remaining performance obligations were $6.3 million, expected to be recognized over the following 12 months, but related government contracts are subject to cancellation. In BlueRadios litigation, the court granted Kopin partial summary judgment on claims involving alleged unpaid engineering retainer fees; other claims remained pending, with no loss accrual recorded because management had not concluded a loss was probable.
Key facts for investors to verify
- Whether operating cash burn and the stated liquidity runway support management’s end-of-fiscal-2020 funding estimate, and whether new capital or expense reductions will be needed.
- How much future revenue depends on RealWear and whether the Q2 license and royalty revenue is repeatable.
- Whether product margins improve after the inventory-obsolescence charges and discontinued-product write-offs.
- Whether the $5.1 million investment contribution can be completed, and the ultimate cost of accrued penalties.
- Progress and terms of the proposed Solos/Whisper spinout, potential NVIS payments, and developments in the remaining BlueRadios claims.