Kopin: Jury Still Out On Its Restructuring Program (NASDAQ:KOPN)

After plunging from its two-year high of approximately $12.00 per share on April 5, 2021, Kopin Corporation (NASDAQ:KOPN), “a leading developer and provider of critical components for integration into wearable computing systems for military, industrial and consumer products,” has spiraled down until it landed at a bottom of $0.96 per share on November 9, 2022, and has traded volatile since then.

Since its last earnings report the stock has jumped up and down in price, apparently from being overbought and oversold from about November 9, 2022, to January 18, 2023, where it has since pulled back and started trade in a tighter range.

The two things that brought it back to earth were when it priced an offering and downwardly revised its prior guidance. From management commentary, it appears the company isn’t going to generate the type of revenue it was hoping to in 2023, and instead will continue to focus more on improving the bottom line.

In this article we’ll look at some of its numbers, the downward revising of its guidance, its recent share offering, and the impact they’ll likely have on the performance of KOPN for the remainder of the year.

Some of the numbers

Since the company downwardly revised its outlook for 2023, I’m not going to get into too many of the numbers from the last earnings report, other than to use them as a baseline to consider how the company is probably going to perform in the next 10 months or so.

With that in mind, revenue in the third quarter of 2022 was $9.9 million, compared to revenue of $6.6 million in the third quarter of 2021, up 50 percent year-over-year.

Leading the increase in revenue in the segments was Defense sales, which were up 115 percent, and Consumer revenue, which climbed 76 percent in the reporting period. That was partially offset by a drop in Industrial revenue of 37 percent.

Net loss in the reporting period was -$(6.15) million, or -$(0.07) per share, compared to a net loss of -$(2.13) million, or -$(0.02) per share in the third quarter of 2021. Net loss for the first nine months of 2022 was -$(13.2) million, or -$(0.14) per share, compared to a net loss of -$(10.12) million, or -$(0.11) per share in the first nine months of 2021.

At the end of the reporting period, the company held cash and cash equivalents of $9.62 million, compared to cash and cash equivalents of $26.8 million as of December 25, 2021.

In the last earnings call management said it saw “significant revenue opportunities in 2023,” specifically calling out health care, AR and VR as having adoption rates increasing to the point of generating higher growth for 2023, but KOPN recently downwardly revised that assessment, now looking for revenue to be lower in the fourth quarter of 2022, and for most, if not all of 2023.

Restructuring company

In early January 2023, KOPN announced it was restructuring the company, including a reduction in its workforce and partial spinoff of its OLED development unit. Not long afterwards it updated the initiative, saying it was now going to reorganize the company as well. One of the major changes it is making is to separate its program management from program capture. The purpose there is to make sure the focus is on building the pipeline of KOPN in a way that reflects the overall strategy of the company.

What that means practically is going through reviews with its customers, which under some circumstances is resulting deliveries being slowed down for the purpose of making sure the products are of the highest quality.

In other situations there have been ongoing negotiations concerning getting out of some of its deals if they aren’t able to agree to terms that would make them profitable. To me, that suggests there was business the company took on that it shouldn’t have in the first place.

The end result of all this is the company has downwardly revised its outlook for revenue growth over the next year, with fourth-quarter revenue for 2022 now expected to be in a range of $11.00 million to $11.5 million. And as mentioned above, that will mean less revenue in the first quarter of 2023 and the rest of the year.

While there is no doubt these changes are going to result in some pain for the company over the next year, if it’s able to execute on its strategy, it should bring about revenue growth that is also positive for the bottom line of the company.

Share price movement

The share price of KOPN over the last couple of years has collapsed, falling from approximately $12.00 per share on April 5, 2021, to its 52-week low of $0.96 on November 9, 2022.

Since its 52-week low it has been trading volatile, moving up to a six-month high of about $1.80 per share on November 21, 2022, back down to around $1.03 per share on December 27, 2022, and then back up to approximately $174.00, before once again dropping to about $1.12 per share on January 25, 2023.

After announcing its stock offering and downwardly revising guidance for 2023, the share price has been trading in a tighter range since January 19, 2023, and I think for the remainder of the year, barring a surprise positive catalyst, it’s likely to trade level.

Taking into consideration its restructuring activities, it’s hard to be optimistic about the company in the near term because of the unknown response from the market when it reports guided lower earnings; the stock could test its 52-week low if results are lower than even expected.

On the other side of the play, if there are some upside surprises, I think they’re likely to be modest and won’t have a sustainable impact on the price of the company until it proves its changes will result in long-term improvement in its bottom line.

Stock offering

On January 25, 2023, KOPN announced it had priced an underwritten public offering of 14 million shares of common stock at a price of $1.00 per share. Also, in lieu of common stock to certain investors, the company stated it was pricing a public offering of pre-funded warrants to acquire of up to 6 million shares of common stock for an offering price of $0.99 per pre-funded warrant.

The underwriter was also offered a 30-day option to acquire another 3 million shares of common stock at the public offering price, minus underwriting commissions and discounts.

Before expenses, the offering will raise about $19.9 million, which the company will use for general corporate purposes and working capital.

Unsurprisingly, when it was announced the stock took a hit, but not long afterwards it began another big upward run before pulling back. I think the reason for that was the company was coming off a plunge in its share price, so it looks like it received the benefit of the timing of that.

Conclusion

At the time of its last earnings call, Michael Murray had recently been installed as the new CEO, and when pointing out his main goals for the company over the next year, he stated that he was going to focus primarily on improving yields, reducing costs, and getting the full deliveries of the company to be on time.

While that strategy remains in place, it appears what he didn’t know at the time was the level of unprofitable business the company had in its pipeline, which resulted in the reorganization of the company, which is expected to cut into revenue through the end of 2023, and I think, possibly longer, depending on how the company executes on its plan.

Unless there are some surprises to the upside during 2023, I don’t expect the stock to go anywhere, and should continue to bounce around, albeit probably in a tighter trading range because of the visibility now seen in the near term.

As for the strategy itself, it looks good on paper, but the company will have to show improvement on margin and earnings going forward to justify its decision to get rid of business that was weighing on the bottom line.

If it lowers revenue but doesn’t improve margins and profit, we’re going to see the share price come under heavy pressure in 2023, in my opinion, and possibly into 2024.

On the other hand, if it does show its restructuring and reorganization is working, it would be a nice catalyst for long-term shareholders.

But at this time, while we see the challenges of the company clearly defined with an actionable plan in place, until it proves it can deliver, it’s going to be a stock that I would pass on. If it once again tests its 52-week low, and appears to be making progress, it could be a good long-term holding that could be worth taking a small position in.