KOPIN CORPORATION Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are subject to the safe harbor created by such sections. Words such as "expects," "anticipates," "intends," "plans," "believes," "could," "would," "seeks," "estimates," and variations of such words and similar expressions, and the negatives thereof, are intended to identify such forward-looking statements. We caution readers not to place undue reliance on any such "forward-looking statements," which speak only as of the date made, and advise readers that these forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, estimates, and assumptions by us that are difficult to predict. Various factors, some of which are beyond our control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. All such forward-looking statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by these cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report, except as may otherwise be required by the federal securities laws. We have identified the following important factors that could cause actual results to differ materially from those discussed in our forward-looking statements. Such factors may be in addition to the risks described in Part I, Item 1A, "Risk Factors;" Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; and other parts of our Annual Report on Form 10-K for the fiscal year endedDecember 28, 2019 . These factors include: the extent of the impact of the coronavirus ("COVID-19") pandemic on our business and operations, and the economic and societal disruptions resulting from the COVID-19 pandemic; our ability to continue as a going concern; the material weakness management has identified in our internal control over financial reporting, our conclusion that our disclosure controls and procedures were not effective as of the fiscal year endedDecember 28, 2019 or the period endedJune 27, 2020 and our ability to remediate that material weakness; our ability to obtain raw materials and other goods as well as services from our suppliers as needed; our expectation that ourScotland plant will achieve normal production rates in the third quarter of 2020; the potential for customers to choose our competitors as their supplier; our expectation that we will have negative cash flow from operating activities in 2020; our ability to prosecute and defend our proprietary technology aggressively or successfully; our ability to retain personnel with experience and expertise relevant to our business; our ability to invest in research and development to achieve profitability even during periods when we are not profitable; our ability to continue to introduce new products in our target markets; our ability to generate revenue growth and positive cash flow, and reach profitability; the strengthening of theU.S. dollar and its effects on the price of our products in foreign markets; the impact of new regulations and customer demands relating to conflict minerals; our ability to obtain a competitive advantage in the wearable technologies market through our extensive portfolio of patents, trade secrets and non-patented know-how; our ability to grow within our targeted markets; the importance of small form factor displays in the development of military, consumer, and industrial products such as thermal weapon sights, safety equipment, virtual and augmented reality gaming, training and simulation products and metrology tools; the suitability of our properties for our needs for the foreseeable future; our expectation not to pay cash dividends for the foreseeable future and to retain earnings for the development of our businesses; our expectation that we will expend between$0.5 million and$1.0 million on capital expenditures over the next twelve months; our need to achieve and maintain positive cash flow and profitability, our financial condition will ultimately be materially adversely affected, and we will be required to reduce expenses, including our investments in research and development or raise additional capital; our ability to support our operations and capital needs for at least the next twelve months through our available cash resources; our expectation that we will incur taxes based on our foreign operations in 2020; and our expectation that we will have a state tax provision in 2020. Overview We are a leading developer, manufacturer and seller of miniature displays and optical lenses (our "components") for sale as individual displays, components, modules or higher-level subassemblies. We also license our intellectual property through technology license agreements. Our component products are used in highly demanding high-resolution portable military, enterprise and consumer electronic applications, training and simulation equipment and 3D metrology equipment. Our products enable our customers to develop and market an improved generation of products for these target applications. 18
The following discussion should be read in conjunction with our Annual Report on
Form 10-K for the fiscal year ended
COVID-19
InMarch 2020 , theWorld Health Organization declared COVID-19 a pandemic. We continue to actively monitor the COVID-19 pandemic and take steps intended to mitigate the potential risks to our workforce and our business. This pandemic has disrupted global economic activity and the capital markets. These disruptions can continue for a prolonged period of time or become severe. The COVID-19 pandemic is a rapidly evolving situation. We cannot predict the duration of the pandemic or the ultimate effects of it on the global or national economy. The COVID-19 pandemic and its related effects have affected our supply chain and workforce, as discussed more fully below. Results of Operations As described in our "Forward-Looking Statements" on page 18 of this Form 10-Q, our interim period results of operations and period-to-period comparisons of such results may not be indicative of our future operating results. Additionally, we use a fiscal calendar, which may result in differences in the number of work days in the current and comparable prior interim periods and could affect period-to-period comparisons. The following discussions of comparative results among periods, including the discussion of segment results, should be viewed in this context. Revenues. We categorize revenues based upon our understanding of the end market application our products are included in. For the three and six months endedJune 27, 2020 andJune 29, 2019 , our revenues by display application, which include product sales and amounts earned from research and development contracts, were as follows: Three months ended Three months ended Six months ended Six months ended (In thousands) June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Military $ 4,490 $ 1,797 $ 8,003 $ 3,238 Industrial 1,396 2,135 3,579 4,638 Consumer 232 503 453 1,149 R&D 1,772 455 3,733 1,199 License, royalties and other 925 4,220 925 4,429 Total Revenues $ 8,815 $ 9,110 $ 16,693 $ 14,653
Sales of our products for Military applications include systems used by the military both in the field and for training and simulation. The increase in Military applications revenues in the three and six months endedJune 27, 2020 as compared to the three and six months endedJune 29, 2019 is primarily from an increase in volume shipments for our thermal weapon sight systems for soldiers and avionic component contracts. 19 Industrial applications revenue represents customerswho purchase our display products for use in 3D metrology equipment and headsets used for applications in manufacturing, distribution and public safety. Our 3D metrology customers are primarily located inAsia and sell to Asian contract manufacturerswho use the 3D metrology machines for quality control purposes. The decrease in Industrial applications revenue for the three and six months endedJune 27, 2020 as compared to the three and six months endedJune 29, 2019 was primarily due to a decline in sales of products for industrial wearable headset applications partially offset by an increase in sales of systems for public safety. OurScotland production plant, which provides the displays for the 3D metrology equipment application, experienced a supply issue inMarch 2020 related to one raw material, which resulted in lower revenues from the sale of our displays for 3D applications. We do not believe this interruption was related to the COVID-19 pandemic. However, ourScotland plant was closed for the majority ofApril 2020 as a result of the COVID-19 pandemic. It has resumed operations at lower than normal rates but we expect it to achieve normal production rates in the third quarter of 2020. The loss of revenue of ourScotland plant because of the closure inApril 2020 was not significant. Our displays for Consumer applications are used primarily in thermal imaging products, recreational rifle and hand-held scopes, drone racing headsets and augmented reality and virtual reality headsets. The decrease in Consumer applications revenues for the three and six months endedJune 27, 2020 as compared to the three and six months endedJune 29, 2019 was primarily due to decreased demand for displays and components used in recreational rifle and hand-held scopes and drone racing headsets.
R&D revenues increased in the three and six months ended
Other revenues includes license fees from an arrangement with a customer where
our performance obligation is to license functional intellectual property ("IP")
and which provides the customer the right to use our IP as it exists at a point
in time and royalties on the sale of the customers' products which include our
IP. Other revenues also include sales of products which either do not meet the
description of one of the other product categories or we do not know what end
market application our product is used for. The decrease in Other revenue in the
three and six months ended June 27, 2020 compared to the three and six months
ended June 29, 2019 was due to the one-time license of functional IP to a
customer for $3.5 million in the second quarter ended June 29, 2019 .
International sales represented 21% and 70% of total revenues for the three
months ended June 27, 2020 and June 29, 2019 , and 18% and 65% of total revenues
for the six months ended June 27, 2020 and June 29, 2019 , respectively. We
categorize our sales as either domestic or international based upon the delivery
destination of our product. For example, if the customer is located in Asia or
if a U.S. customer has its Asian contract manufacturer order product from us and
we deliver the product to Asia we categorize both these sale as international.
The decline in international sales was a result of a decline in sales of
products for industrial wearable headset applications. Our international sales
are primarily denominated in U.S. currency. Consequently, a strengthening of the
U.S. dollar could increase the price in local currencies of our products in
foreign markets and make our products relatively more expensive than
competitors' products that are denominated in local currencies, which could lead
to a reduction in sales or profitability in those foreign markets. We have not
taken any protective measures against exchange rate fluctuations, such as
purchasing hedging instruments with respect to such fluctuations, because of the
historically stable exchange rate between the British Pound Sterling (the
functional currency of our U.K. subsidiary) and the U.S. dollar. Foreign
currency translation impact on our results, if material, is described in further
detail under "Item 3. Quantitative and Qualitative Disclosures About Market
Risk" section below.
Cost of Product Revenue. Cost of product revenues, which is comprised of
materials, labor and manufacturing overhead related to the production of our
products for the three and six months ended June 27, 2020 and June 29, 2019 ,
were as follows:
Three Months
Three Months Ended Ended Six Months Ended Six Months Ended
(In thousands, except for
percentages) June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019
Cost of product revenues $ 4,780 $ 5,243 $ 10,427 $ 11,120
Cost of product revenues as
a % of net product revenues 71.7% 118.2% 82.8% 122.9%
The decrease in cost of product revenues as a percentage of net product revenues
for the three and six months ended June 27, 2020 as compared to the three and
six months ended June 29, 2019 was primarily due to lower material cost and
improved manufacturing efficiencies due to higher sales volumes which reduced
fixed costs per unit at our United States plant. In 2019 we were commencing
production of certain products and we experienced higher than normal scrap of
approximately $1.2 million for the first six months of 2019 as compared tothe first six months of 2020.
During the first six months of 2020 ourU.S. production facilities did not experience significant issues with obtaining raw materials as a result of the coronavirus pandemic. However, for certain raw materials, including raw materials we source fromAsia , we do not have significant amounts of inventory and we are receiving weekly shipments which are necessary to keep our production lines going. OurForth Dimension Display, Ltd. (FDD) production facility inScotland did experience a disruption in their supply chain in the month ofMarch 2020 which negatively impacted their revenues, operating results and cash flow. OurUnited States production facilities were open during the first six months of 2020 but our production staffing levels were below normal as some employees decided to stay home and we expect this to continue and are unable to determine when we will return to normal levels. Our FDD facility was closed duringApril 2020 but has recently reopened. Our FDD facility produces displays for 3D metrology equipment makers and certainU.S. military programs. FDD sells itsU.S. military displays to our subsidiary,NVIS, Inc. for incorporation into military systems. As a result of the disruption at FDD, display shipments to its customers, including NVIS, were behind schedule as ofMarch 28, 2020 but were back on schedule byJune 27, 2020 . A disruption in supply of raw materials or a decrease in production employee attendance could result in lower revenues, an increase in our operating losses and a negative impact on our cash flow. 20
Research and Development. R&D expenses are incurred in support of internal display development programs and programs funded by agencies or prime contractors of theU.S. government and commercial partners. R&D costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication and packaging of display products, and overhead. In fiscal year 2020, we expect our R&D expenditures to be related to our display products, overlay weapon sights and organic light emitting diode ("OLED") display technologies. Funded and internal R&D expense are combined in research and development expenses in the statement of operations. R&D expenses for the three and six months endedJune 27, 2020 andJune 29, 2019 were as follows: Three Months Ended Three Months Ended Six Months Ended Six Months Ended (In thousands) June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Funded $ 1,361 $ 445 $ 2,866 $ 1,311 Internal 860 2,885 1,695 6,986 Total research and development expense $ 2,221 $ 3,330 $ 4,561 $ 8,297
Funded R&D expense for the three and six months ended
Selling, General and Administrative. Selling, general and administrative
("S,G&A") expenses consist of the expenses incurred by our sales and marketing
personnel and related expenses, and administrative and general corporate
expenses. S,G&A expenses for the three and six months ended June 27, 2020 and
June 29, 2019 were as follows:
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
(In thousands, except for
percentages) June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019
Selling, general and
administration expense $ 2,909 $ 5,376 $ 6,341 $ 11,658
Selling, general and
administration expense as a
% of revenues 33.0% 59.0%
38.0% 79.6%
S,G&A decreased for the three and six months ended June 27, 2020 as compared to
the three and six months ended June 29, 2019 primarily due to a decrease in
compensation expenses including stock-based compensation, bad debt expense,
professional fees, information technology expenses, travel and accretion of the
NVIS contingent consideration.
Other Income, net. Other income, net, is primarily composed of interest income,
foreign currency transaction and remeasurement gains and losses incurred by our
U.K. -based subsidiary and other non-operating income items. Other income, net,
for the three and six months ended June 27, 2020 and June 29, 2019 was as
follows:
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
(In thousands) June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019
Other (expense) income, net $ (6) $ 627 $ (93) $ 917
During the three and six months ended June 27, 2020 we recorded foreign currency
gains of less than $0.1 million and losses of $0.2 million as compared to losses
of $0.2 million and gains of $0.1 million for the three and six months ended
June 29, 2019 , respectively. During the three and six months ended June 29,
2019 , the Company recognized a gain of $0.8 million on the fair value adjustment
due to an observable price change on an equity investment.
Tax Provision. We recorded a provision for income taxes of less than $0.1
million in the three and six months ended June 27, 2020 and June 29, 2019 . The
provision for income taxes in the three and six months ended June 27, 2020 and
June 29, 2019 primarily relate to interest and penalties on uncertain tax
positions.
Net Loss (Income) Attributable to Noncontrolling Interest. As of June 27, 2020 ,
we owned 80% of the equity of eMDT America ("eMDT"). Net loss (income)
attributable to noncontrolling interest on our consolidated statement of
operations represents the portion of the results of operations of our majority
owned subsidiary which is allocated to the stockholders of the equity interests
not owned by us. The change in net loss (income) attributable to noncontrolling
interest is the result of the change in the results of operations of eMDT for
the three and six months ended June 27, 2020 and June 29, 2019 .
21
Net Loss Attributable to Kopin Corporation . We incurred net losses attributable
to Kopin Corporation of $1.1 million and $4.7 million during the three and six
months ended June 27, 2020 compared to net losses attributable to Kopin
Corporation of $4.3 million and $15.6 million during the three and six months
ended June 29 , 2019.The decrease in the net losses attributable to Kopin
Corporation during the three and six months ended June 27, 2020 compared to the
three and six months ended June 29, 2019 is due to a reorganization of the
Company in 2019. The reorganization included a reduction in the number of
employees, a decrease in R&D expense through the sale or license of intellectual
property associated with activities we had either completed or abandoned, and a
decrease in S,G&A due to lower labor costs, stock based compensation costs, bad
debt expense, professional fees, information technology costs and the accretion
of the NVIS contingent consideration. Some of the reduction in S,G&A costs was
made possible by the actions taken to reduce R&D expense as we would no longer
be pursing the launch of products based on the technologies being developed.
Liquidity and Capital Resources
AtJune 27, 2020 andDecember 28, 2019 , we had cash and cash equivalents and marketable securities of$15.3 million and$21.8 million , respectively, and working capital of$18.6 million and$22.5 million atJune 27, 2020 andDecember 28, 2019 , respectively. The change in cash and cash equivalents and marketable securities was primarily due to net outflow of cash used in operating activities of$6.8 million , capital expenditures of$0.2 million , partially offset by the proceeds from the sale of marketable debt securities of$9.3 million . Included in the$6.8 million of cash used in operation activities was a contingent consideration payment to the former owners on NVIS of$0.5 million . During the second quarter of the year endingJune 27, 2020 , we received the proceeds from loans in the amount of approximately$2.2 million (the "PPP Loan") pursuant to the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). During the second quarter of the year endingJune 27, 2020 we repaid$2.1 million of the loans and we repaid$0.1 million inJuly 2020 . The Company's decision to terminate the loans was based on additional guidance from theSmall Business Administration . There were no prepayment penalties in connection with the voluntary termination. OnMarch 15, 2019 , we sold 7.3 million shares of registered common stock for gross proceeds of$8.0 million ($1.10 per share), before deducting underwriting discounts and offering expenses paid by the Company of$0.7 million . This represented approximately 8.9% of our total outstanding shares of common stock as of the date of purchase. The net proceeds from the offering were used for general corporate purposes, including working capital. OnApril 10, 2019 , we sold 0.7 million shares of registered common stock for gross proceeds of$0.8 million ($1.10 per share), before deducting underwriting discounts and offering expenses paid by us of less than$0.1 million , pursuant to the partial exercise of the underwriters' overallotment option in connection with theMarch 15, 2019 public offering. This represented approximately 0.8% of our total outstanding shares of common stock as of the date of purchase. Cash and cash equivalents and marketable debt securities held inU.S. Dollars at: June 27, 2020 December 28, 2019 Domestic locations$ 14,553,345 $ 21,148,381 International locations 244,920 145,240 Subtotal cash and cash equivalents marketable debt securities held in U.S. dollars 14,798,265
21,293,621
Cash and cash equivalents held in other currencies and converted toU.S. dollars 464,251
488,623
Total cash and cash equivalents and marketable debt securities$ 15,262,516 $ 21,782,244 22
We have no plans to repatriate the cash and cash equivalents held in our foreign
subsidiary
InMarch 2017 , we purchased 100% of the outstanding stock of NVIS for$3.7 million and subsequently paid$1.9 million in contingent consideration throughMarch 28, 2020 . There are no remaining contingent payment obligations related to the NVIS purchase as ofJune 27, 2020 .
We expect to expend between
We entered into an agreement inAugust 2017 to acquire an approximate 3.5% equity interest inKunming BOE Display Technology Co., Ltd. ("BOE"), which is located inChina , for 35.0 million Chinese Yuan Renminbi (approximately$5.0 million ). Our sole obligation under this agreement is to make this capital contribution. The funds raised by the BOE equity offering are being used to build an Organic Light Emitting Diode ("OLED") manufacturing facility which we intend to use to manufacture our products. We were unable to make our scheduled capital contribution and have received an extension from BOE postponing our capital contribution untilJuly 2022 . We incurred net losses of$29.4 million and net cash outflows from operations of$21.0 million for the fiscal year ended 2019. We incurred a net loss of$4.8 million for the six months endedJune 27, 2020 and net cash outflows from operations of$6.8 million . In addition, we have continued to experience a significant decline in cash and cash equivalents and marketable debt securities, which was primarily a result of funding operating losses, of which a significant component relates to our ongoing investments in the research and development of display products. These negative financial conditions raise substantial doubt regarding our ability to continue as a going concern. We have an At-The-Market (ATM) registration statement in place which provides us a method of selling equity securities into the market on a periodic basis to raise funds. In addition, we have in the past sold equity securities to fund our operations. We estimate we will have sufficient liquidity to fund operations at least through the end of the second quarter of 2021. If our actual results are less than projected or we need to raise capital for additional liquidity, we may be required to do an equity financing, reduce expenses or enter into a strategic transaction. However, we can make no assurance that we will be able to raise additional capital, reduce expenses sufficiently, or enter into a strategic transaction on terms acceptable to us, or at all.
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