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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Kopin Corporation    KOPN

KOPIN CORPORATION

(KOPN)
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KOPIN : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/06/2020 | 05:11pm EDT

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 ended December 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 ended December 28, 2019 or the period
ended June 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 our Scotland 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 the U.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 December 28, 2019 and our unaudited condensed consolidated financial statements included in this Form 10-Q.



COVID-19


In March 2020, the World 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 ended
June 27, 2020 and June 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 ended June 27, 2020
as compared to the three and six months ended June 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 customers who 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 in Asia and sell to Asian contract manufacturers who use the
3D metrology machines for quality control purposes. The decrease in Industrial
applications revenue 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 a
decline in sales of products for industrial wearable headset applications
partially offset by an increase in sales of systems for public safety. Our
Scotland production plant, which provides the displays for the 3D metrology
equipment application, experienced a supply issue in March 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, our Scotland plant was closed for the majority of April 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 our Scotland plant because of the
closure in April 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 ended June 27, 2020 as
compared to the three and six months ended June 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 June 27, 2020 as compared to the three and six month ended June 29, 2019 primarily due to increase in funding for U.S. military programs.




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 to
the
first six months of 2020.


During the first six months of 2020 our U.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 from Asia, we do not have significant amounts of inventory
and we are receiving weekly shipments which are necessary to keep our production
lines going. Our Forth Dimension Display, Ltd. (FDD) production facility in
Scotland did experience a disruption in their supply chain in the month of March
2020 which negatively impacted their revenues, operating results and cash flow.
Our United 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 during April
2020 but has recently reopened. Our FDD facility produces displays for 3D
metrology equipment makers and certain U.S. military programs. FDD sells its
U.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 of March 28, 2020 but were
back on schedule by June 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 the U.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 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)                    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 June 27, 2020 increased as compared to the three and six months ended June 29, 2019 primarily due to increased spending on U.S. military programs. Internal R&D expenses for the three and six months ended June 27, 2020 decreased primarily due to the curtailment of certain development programs.




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




At June 27, 2020 and December 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 at June 27, 2020 and December
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 ending June 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 ending June 27, 2020 we repaid $2.1 million of the loans and we
repaid $0.1 million in July 2020. The Company's decision to terminate the loans
was based on additional guidance from the Small Business Administration. There
were no prepayment penalties in connection with the voluntary termination.



On March 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. On April 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 the March 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 in U.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 to U.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 FDD, Ltd. and, as such, we have not recorded any deferred tax liability with respect to such cash.

In March 2017, we purchased 100% of the outstanding stock of NVIS for $3.7
million and subsequently paid $1.9 million in contingent consideration through
March 28, 2020. There are no remaining contingent payment obligations related to
the NVIS purchase as of June 27, 2020.



We expect to expend between $0.5 million and $1.0 million on capital expenditures in 2020.

We entered into an agreement in August 2017 to acquire an approximate 3.5%
equity interest in Kunming BOE Display Technology Co., Ltd. ("BOE"), which is
located in China, 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 until July 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 ended June 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.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2020 33,9 M - -
Net income 2020 -7,98 M - -
Net Debt 2020 - - -
P/E ratio 2020 -18,0x
Yield 2020 -
Capitalization 149 M 149 M -
Capi. / Sales 2020 4,39x
Capi. / Sales 2021 3,85x
Nbr of Employees 153
Free-Float 77,6%
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Mean consensus BUY
Number of Analysts 1
Average target price 2,50 $
Last Close Price 1,80 $
Spread / Highest target 38,9%
Spread / Average Target 38,9%
Spread / Lowest Target 38,9%
EPS Revisions
Managers
NameTitle
John C. C. Fan Chairman, President & Chief Executive Officer
Eric Whitman Vice President-Operations
Richard A. Sneider CFO, Treasurer & Head-Investor Relations
Hong K. Choi Chief Technology Officer & Vice President
David E. Brook Secretary & Director
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