Kopin Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 26, 2020; comparisons are with the quarter and nine months ended September 28, 2019. Financial statements are unaudited.
Business context
Kopin develops and sells miniature displays and optical components, modules and subassemblies, and licenses related intellectual property. Its applications include defense, industrial/enterprise wearables, consumer products, training and simulation, and 3D metrology. The company reports one operating segment.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $9.51 million | $6.14 million | $26.21 million | $20.79 million |
| Operating loss | $1.11 million | $6.40 million | $5.74 million | $22.82 million |
| Net loss attributable to Kopin | $0.96 million | $6.63 million | $5.67 million | $22.22 million |
| Basic and diluted loss per share | $0.01 | $0.08 | $0.07 | $0.28 |
| Cash used in operating activities | Not stated for quarter | Not stated for quarter | $6.28 million | $16.82 million |
Q3 revenue rose about 55% year over year; nine-month revenue increased about 26%. Product revenue was $6.49 million in Q3 and $19.08 million for the nine months. Product cost was 74.4% of product revenue in Q3 and 80.0% for the nine months, versus 94.6% and 112.9%, respectively, in 2019. Management attributed the improvement primarily to lower material costs, higher production volumes and improved manufacturing efficiencies. These ratios are product cost relative to product revenue, not total-company gross margins.
At September 26, 2020, cash and equivalents were $10.62 million and marketable debt securities were $4.99 million, totaling $15.61 million, compared with $21.78 million at December 28, 2019. Working capital was $17.9 million, down from $22.5 million. Total assets were $37.66 million and stockholders’ equity was $23.31 million. The filing presents operating lease liabilities of $2.06 million; it does not show a separate conventional borrowing balance. The $2.24 million PPP loan received in 2020 was voluntarily repaid in full.
Changes and operating drivers
- Defense revenue rose to $4.77 million for Q3 from $1.97 million, and to $12.77 million for the nine months from $5.21 million, primarily due to higher thermal weapon sight shipments and avionic component contracts.
- Industrial revenue declined to $1.65 million for Q3 from $2.63 million and to $5.23 million for the nine months from $7.26 million, reflecting weaker 3D metrology and commercial wearable headset sales.
- Research and development and other revenue was $3.03 million in Q3, up from $1.18 million; nine-month revenue was $7.13 million versus $6.79 million. Increased U.S. defense program and microdisplay development funding contributed to the increase.
- License and royalty revenue was $0.46 million in Q3 versus none in the prior-year quarter. Nine-month license and royalty revenue fell to $0.84 million from $4.34 million, largely because 2019 included a one-time $3.5 million IP license.
- Operating expenses fell substantially year over year. Management cited the 2019 reorganization, reduced internal R&D activity, and lower compensation, stock-based compensation, bad-debt, professional-fee, IT, travel and other costs.
Liquidity, outlook and risks
- Going concern: The company states that recurring operating losses, operating cash outflows and limited liquidity raise substantial doubt about its ability to continue as a going concern. Management estimates available liquidity will fund operations at least through the end of Q3 2021, but that estimate depends on actual results and other assumptions. Kopin expects negative operating cash flow in 2020.
- Potential funding actions: If results are below projections or more liquidity is needed, the company may seek equity financing, reduce expenses or pursue a strategic transaction. Its ATM program permits sales of up to $20 million of common stock; there is no assurance that financing or other actions will be available on acceptable terms.
- Spending and commitments: Expected 2020 capital expenditures are $0.5–$1.0 million. A planned approximately $5 million contribution for a roughly 3.5% interest in Kunming BOE was postponed to July 2022.
- Orders: Remaining performance obligations were $25.8 million, expected to be recognized over the next 15 months. These government-contract amounts are subject to cancellation.
- COVID-19 and supply chain: Management said the pandemic’s impact to date was limited overall, but identified uncertainty around future disruption. Scotland’s facility experienced a March supply interruption and an April closure; shipments were back on schedule by June. Certain Asian-sourced materials are received weekly with limited inventory, leaving production exposed to supply or staffing disruptions.
- Market and currency risks: Management said the industrial wearable market is still developing and product acceptance and timing are uncertain. The company does not hedge foreign exchange exposure; a stronger U.S. dollar could make products less competitive in foreign markets.
- Controls: Internal control over financial reporting was not effective at September 26, 2020 because of an unremediated material weakness concerning monitoring and oversight of accounting for non-routine transactions. Remediation procedures had been added but not sufficiently tested.
- Litigation: BlueRadios alleges contract, fiduciary-duty and trade-secret violations, among other claims, and seeks monetary and other relief. The court denied BlueRadios’ partial-summary-judgment motion on September 25, 2020; Kopin’s motion remained undecided and no trial date had been set. Kopin said a loss was not considered probable and recorded no accrual.
Important facts for investors to verify
- Whether cash burn, liquidity and the stated runway through Q3 2021 remain consistent with management’s projections, and whether additional capital will be needed.
- Whether defense growth and funded R&D translate into sustained revenue and cash generation, and whether industrial and consumer demand recovers.
- Whether supply-chain and staffing risks recur, particularly for materials sourced from Asia and production at the Scotland facility.
- Whether the material weakness is remediated and controls are tested effectively; also review the filing’s discussion of control effectiveness.
- Developments in the BlueRadios litigation and the cancellation exposure associated with remaining government-contract performance obligations.