Kopin Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 26, 2022; comparisons are with the three months ended March 27, 2021. Kopin develops and sells miniature displays, optical lenses and related components for defense, industrial/enterprise and consumer applications, and earns research and development (R&D) and licensing revenue. The interim statements are unaudited.
Financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $11.58 million | $11.68 million |
| Net product revenue | $6.51 million | $7.57 million |
| R&D revenue | $4.91 million | $3.56 million |
| Operating loss | $6.08 million | $4.19 million |
| Net loss attributable to Kopin | $1.37 million | $4.15 million |
| Basic and diluted loss per share | $0.02 | $0.05 |
| Net cash used in operating activities | $2.28 million | $0.25 million |
- Margins and expenses: Product cost was 120% of net product revenue, compared with 85% a year earlier. Product revenue less product cost therefore represented a gross loss of approximately $1.28 million, versus gross profit of approximately $1.17 million in Q1 2021. Management attributed the margin deterioration to lower production efficiency, approximately $450,000 of warranty reserves and approximately $300,000 of additional excess-material reserves. Total expenses rose to $17.66 million from $15.87 million.
- Cash, liquidity and obligations: At March 26, 2022, cash and cash equivalents were $21.87 million and marketable debt securities were $4.45 million, totaling $26.32 million. Working capital was $27.9 million, down from $34.7 million at December 25, 2021. Current assets were $44.99 million and current liabilities were $17.07 million. The balance sheet reports no conventional borrowings; operating lease liabilities totaled $3.61 million, including current and noncurrent portions.
- Cash flow: Cash decreased $4.92 million during the quarter. Investing activities used $2.52 million, including $3.00 million of marketable-security purchases and $0.52 million of capital expenditures. Financing activities used $0.10 million, principally for restricted-stock tax withholding; the prior-year period included $15.52 million of registered stock-sale proceeds.
Material changes and operating trends
- Total revenue declined about 1%, but product revenue fell about 14%. Defense revenue decreased to $4.76 million from $4.99 million, industrial revenue to $1.53 million from $2.04 million, and consumer revenue to $0.22 million from $0.53 million. R&D revenue rose to $4.91 million from $3.56 million, primarily on increased U.S. defense-program funding; licensing and royalty revenue fell to $0.16 million from $0.55 million.
- Management said component shortages reduced production and shipments, including in defense and 3D metrology applications. The company was evaluating alternative suppliers and warned that production could be disrupted if replacement components could not be found.
- Operating loss worsened despite lower selling, general and administrative expense ($4.46 million versus $5.91 million), as product costs and R&D expenses increased. R&D expense was $5.41 million versus $3.56 million, including higher funded defense-program spending and internal OLED development.
- Net loss narrowed chiefly because Kopin recorded a $4.7 million gain from remeasuring an equity investment in a customer after that customer raised equity capital. The customer investment was valued at $9.55 million at quarter-end, including $9.31 million classified as Level 3 fair value. This non-operating gain does not reflect improvement in operating performance.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expected 2022 capital expenditures of $1.0 million to $2.0 million and planned continued R&D investment, including in display products, overlay weapon sights and OLED technology.
- Remaining performance obligations were $29.3 million, expected to be recognized over the next 12 months; these government-contract amounts are subject to cancellation.
- Management cautioned that newer consumer OLED products have not achieved stable recurring revenue and that the enterprise wearable market remains under development. Continued operating losses and negative operating cash flow could require expense reductions, including R&D cuts, or additional capital. Management stated it believed available resources could support operations and capital needs for at least the next 12 months.
- Key risks include semiconductor and other raw-material shortages, customer adoption and market growth, foreign-exchange exposure, and the ability to generate revenue growth, positive cash flow and profitability. Kopin does not hedge foreign-currency risk.
- BlueRadios litigation remains pending; no trial date had been set. Kopin said it had not concluded a loss was probable and had recorded no litigation accrual.
Investor verification points
- Track whether semiconductor availability improves and whether production, shipments and product margins recover.
- Separate recurring operating results and cash generation from the $4.7 million investment remeasurement gain.
- Assess the timing, cancellation exposure and conversion to revenue and cash of the $29.3 million remaining performance obligations.
- Monitor cash and marketable securities, working-capital decline, operating cash use and the company’s stated 12-month funding outlook.
- Review developments in the BlueRadios case and any changes to the company’s loss assessment or contingencies.