Kopin Corporation — Q2 2022 Form 10-Q
Business context and reporting period. Kopin develops and sells miniature displays, optical lenses, modules and related technology, serving defense, industrial/enterprise and consumer markets and performing contract research and development. This unaudited report covers the three and six months ended June 25, 2022; comparisons are to periods ended June 26, 2021.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $11.9 million | $9.9 million | $23.5 million | $21.6 million |
| Operating loss | $5.5 million | $3.9 million | $11.5 million | $8.1 million |
| Net loss attributable to Kopin | $5.6 million | $3.8 million | $7.0 million | $8.0 million |
| Loss per share, basic and diluted | $0.06 | $0.04 | $0.08 | $0.09 |
| Net cash used in operations | Not separately provided by quarter | $11.4 million | $5.6 million |
Q2 revenue increased approximately 20%; first-half revenue increased approximately 9%. Q2 product revenue was $9.0 million, up from $6.9 million, while R&D and other revenue was $2.9 million, approximately flat. Product cost was $7.9 million in Q2 and $15.7 million for the first half. Product gross margin was approximately 12% in Q2 versus 13% a year earlier; for the first half it was negative approximately 1% versus positive approximately 14%.
Q2 operating loss widened as product costs and R&D spending rose. First-half net loss improved year over year partly because of a $4.7 million first-quarter gain on an equity investment; excluding that gain, the reported net-loss comparison is not indicative of equivalent underlying operating improvement. The company also recorded a $1.5 million inventory write-off in the first half.
At June 25, 2022, cash and cash equivalents were $13.6 million and marketable debt securities were $4.9 million, totaling $18.6 million, down from $29.3 million at December 25, 2021. Working capital was $25.1 million, compared with $34.7 million. Total assets were $55.6 million and total liabilities were $20.2 million. The filing reports no financial borrowings; operating lease liabilities totaled $3.7 million, including $0.8 million current. First-half capital expenditures were $0.6 million.
Changes, outlook and material matters
- Revenue mix: Defense revenue rose to $7.1 million in Q2 from $3.8 million, primarily on higher thermal weapon sight shipments. Industrial revenue fell to $1.6 million from $2.6 million, and consumer revenue fell to $0.3 million from $0.4 million. First-half defense revenue was $11.8 million, up from $8.8 million; industrial and consumer revenue declined.
- Costs and investment: Management attributed weaker product margins to manufacturing inefficiencies, intermittent component shortages and higher raw-material prices. First-half R&D expense increased to $10.6 million from $7.3 million, including spending on defense programs, OLED development and product redesigns to use alternative semiconductors. Management expects continued R&D investment.
- Liquidity outlook: Management estimated available liquidity would fund operations at least through Q3 2023. It expects 2022 capital expenditures of $1.0 million to $2.0 million. Management may consider additional capital raising and notes that further equity financing, expense reductions or a strategic transaction could be required if results are below plan or liquidity needs increase; none is assured.
- Funding and dilution: During Q2, Kopin sold approximately 1.7 million common and treasury shares for gross proceeds of $2.1 million under its ATM program, at an average $1.26 per share. Approximately $41.4 million remained available under the program. Shares outstanding were 91.8 million at quarter-end and 93.6 million as of August 3, 2022.
- Supply and market risks: Semiconductor shortages affected Q2 shipments and could disrupt production in the second half of 2022. The company is seeking alternative sources and redesigning products. Other cited risks include demand and market acceptance, ability to achieve profitability and positive cash flow, foreign-exchange effects, and access to capital. Kopin does not hedge foreign-exchange risk.
- Litigation: In the BlueRadios case, the court’s August 3, 2022 ruling dismissed certain claims and denied summary judgment on others; limited discovery was reopened and no trial date was set. Kopin said it had not determined a loss was probable and recorded no accrual.
Important facts for investors to verify
- Whether semiconductor availability, pricing and product redesigns improve shipment volumes and product margins.
- Whether defense growth and funded R&D revenue can offset declines in industrial and consumer markets.
- The company’s cash burn, liquidity runway and potential need for additional ATM or other financing; assess the associated dilution.
- The sustainability of results excluding the $4.7 million investment gain and the impact of inventory write-offs.
- Developments in the BlueRadios litigation and any resulting change in the likelihood or estimability of a loss.