Kopin Corporation (NASDAQ: KOPN) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 28, 2019; filed November 7, 2019. Kopin develops and sells display technologies, components and systems for wearable, military, industrial, thermal-imaging, and training and simulation markets. Financial statements are unaudited.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $6.14m | $5.13m | $20.79m | $16.72m |
| Operating loss | $6.40m | $10.30m | $22.82m | $29.08m |
| Net loss attributable to Kopin | $6.63m | $9.79m | $22.22m | $24.57m |
| Loss per share, basic and diluted | $0.08 | $0.13 | $0.28 | $0.34 |
| Operating cash flow | Not separately stated for the quarter | $(16.82)m | $(20.18)m |
- Q3 revenue rose 20% year over year; nine-month revenue rose 24%. The nine-month increase included $4.34m of license and royalty revenue, including a one-time $3.5m functional-IP license in Q2.
- Q3 net product revenue was $4.96m, with product cost of $4.69m, for an approximately 5.4% product gross margin versus negative 0.4% a year earlier. For the nine months, product gross margin was approximately negative 12.9%, versus positive 14.7% in 2018; the 2019 period included a $2.7m inventory-obsolescence charge.
- Operating expenses declined: nine-month R&D was $10.69m versus $13.58m, and SG&A was $16.79m versus $21.01m. Management attributed the reductions to completed or curtailed development programs and lower compensation, stock compensation, consulting, marketing, and other costs.
- At September 28, cash and equivalents were $8.76m and marketable debt securities were $17.26m, totaling $26.02m versus $37.24m at year-end 2018. Working capital was $24.6m, down from $39.0m. Total assets were $51.35m and stockholders’ equity was $35.82m.
- The filing reports operating lease liabilities of $3.16m. No separate interest-bearing borrowing balance is presented in the supplied filing text.
Changes, outlook, and notable items
- Q3 military revenue increased mainly on Family Weapons Sight-Individual deliveries; nine-month military revenue declined as prior NVIS programs completed. Industrial revenue increased, while consumer revenue fell, primarily with lower demand for drone-racing headset components. R&D revenue declined as funded programs reached completion.
- Management expects negative operating cash flow in 2019 and says it intends to continue investing in R&D, including displays, overlay weapon sights, and OLED technologies. It expects $0.1m–$0.5m in 2019 capital expenditures. No revenue or earnings guidance is provided.
- Going concern: Management states that losses, operating cash outflows, and limited liquidity raise substantial doubt about the company’s ability to continue as a going concern. It is pursuing expense reductions, additional capital, and other strategic alternatives. Management believes available resources can fund operations through fiscal 2020, but gives no assurance and says continued cash burn could materially harm the business.
- Solos/Whisper transaction: On September 30, after quarter-end, Kopin sold and licensed certain Solos product-line and Whisper Audio assets for a 20% equity stake in the buyer’s parent, plus single-digit royalties on Solos net sales for four years after commercial production begins. Kopin retained a limited, royalty-free license for enterprise and military customers. The company said the transaction was not expected to affect liquidity or capital resources.
- Contingencies: Kopin accrued $0.6m of penalties related to an overdue approximately $4.9m BOE investment commitment; potential damages accrue at 0.05% per day on the unpaid amount, and alternatives are under discussion. A further NVIS earnout payment of up to $0.7m may be due if milestones and employment conditions are met by March 2020. The BlueRadios lawsuit seeks monetary and other relief; Kopin has not deemed a loss probable and recorded no accrual.
- Controls: Management concluded disclosure controls were ineffective at quarter-end because an unremediated material weakness involved controls over accounting for non-routine transactions, including noncontrolling interests and investments. Management reported no material misstatement in the referenced financial statements and is implementing remediation and training.
- During 2019, Kopin raised $8.0m gross from a March registered share offering and $0.8m gross from the April overallotment. Shares outstanding increased; reported outstanding shares were 84.0m as of November 4, 2019.
Important facts for investors to verify
- Whether cash burn, fundraising, or expense reductions support the stated runway through fiscal 2020 and address the going-concern uncertainty.
- Whether product margins recover after the inventory write-off, and how recurring revenue develops apart from the one-time IP license.
- The timing and commercial success of the Solos/Whisper transaction, including the buyer’s financing, royalties, and possible employee severance costs.
- The outcome and potential cost of the BOE investment commitment and BlueRadios litigation, and whether any NVIS earnout becomes payable.
- Progress in remediating the material weakness and the effect of future share issuance on dilution.