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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 27, 2020

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____

 

Commission file number 0-19882

 

KOPIN CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   04-2833935

State or other jurisdiction of

incorporation or organization

 

(I.R.S. Employer

Identification No.)

     
125 North Drive, Westborough, MA   01581-3335
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (508) 870-5959

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.01   KOPN   NASDAQ

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class   Outstanding as of August 4, 2020
Common Stock, par value $0.01   84,963,042

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
Non-accelerated filer   Smaller reporting company
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No

 

 

 

   

 

 

Kopin Corporation

 

INDEX

 

   

Page

No.

Part I – Financial Information  
   
Item 1. Condensed Consolidated Financial Statements (Unaudited) 3
     
  Condensed Consolidated Balance Sheets at June 27, 2020 (Unaudited) and December 28, 2019 3
     
  Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 27, 2020 and June 29, 2019 4
     
  Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the three and six months ended June 27, 2020 and June 29, 2019 5
     
  Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and six months ended June 27, 2020 and June 29, 2019 6
     
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 27, 2020 and June 29, 2019 7
     
  Notes to Unaudited Condensed Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
     
Item 4. Controls and Procedures 24
     
Part II – Other Information 25
   
Item 1. Legal Proceedings 25
     
Item 1A. Risk Factors 25
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
     
Item 6. Exhibits 26
     
Signatures 27

 

 2 

 

 

Part 1. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

KOPIN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   June 27, 2020   December 28, 2019 
ASSETS          
Current assets:          
Cash and equivalents  $8,776,820   $6,029,247 
Marketable debt securities, at fair value   6,485,696    15,752,997 
Accounts receivable, net of allowance of $427,000 in 2020 and $938,000 in 2019   6,682,329    6,023,250 
Contract assets and unbilled receivables   2,509,258    921,082 
Inventory   3,712,047    3,768,696 
Prepaid taxes   98,137    104,442 
Prepaid expenses and other current assets   1,298,914    1,164,927 
Total current assets   29,563,201    33,764,641 
Property, plant and equipment, net   1,328,207    1,473,341 
Operating lease right-of-use assets   2,260,319    2,753,963 
Other assets   253,750    517,411 
Equity investments   4,222,896    4,537,159 
Total assets  $37,628,373   $43,046,515 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $3,068,657   $3,998,234 
Accrued payroll and expenses   1,630,783    2,203,773 
Accrued warranty   508,000    509,000 
Contract liabilities and billings in excess of revenues earned   1,687,403    796,794 
Operating lease liabilities   1,077,756    1,041,695 
Other accrued liabilities   1,891,756    2,202,217 
Customer deposits   608,386    33,000 
Taxes payable   506,000    525,000 
Total current liabilities   10,978,741    11,309,713 
Noncurrent contract liabilities and asset retirement obligations   248,384    268,440 
Operating lease liabilities, net of current portion   1,236,818    1,791,590 
Other long-term obligations   1,104,514    1,085,160 
Commitments and contingencies (Note 13)          
Stockholders’ equity:          
Preferred stock, par value $.01 per share: authorized, 3,000 shares; none issued   -    - 
Common stock, par value $.01 per share: authorized, 120,000,000 shares; issued 89,483,546 shares in 2020 and 88,912,796 shares in 2019; outstanding 82,596,416 in 2020 and 82,536,416 in 2019, respectively   871,096    870,496 
Additional paid-in capital   344,776,079    344,456,537 
Treasury stock (4,513,256 shares in 2020 and 2019, at cost)   (17,238,669)   (17,238,669)
Accumulated other comprehensive income   1,705,520    1,757,184 
Accumulated deficit   (305,953,973)   (301,236,913)
Total Kopin Corporation stockholders’ equity   24,160,053    28,608,635 
Noncontrolling interest   (100,137)   (17,023)
Total Kopin Corporation stockholders’ equity   24,059,916    28,591,612 
Total liabilities and stockholders’ equity  $37,628,373   $43,046,515 

 

See notes to unaudited condensed consolidated financial statements

 

 3 

 

 

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three months ended   Three months ended   Six months ended   Six months ended 
   June 27, 2020   June 29, 2019   June 27, 2020   June 29, 2019 
Revenues:                    
Net product revenues  $6,670,303   $4,435,401   $12,589,509   $9,049,257 
Research and development and other revenues   2,144,343    4,674,732    4,103,742    5,603,801 
Total revenues   8,814,646    9,110,133    16,693,251    14,653,058 
Expenses:                    
Cost of product revenues   4,779,577    5,242,514    10,427,424    11,119,591 
Research and development   2,221,154    3,330,202    4,560,902    8,296,918 
Selling, general and administration   2,909,366    5,375,671    6,341,457    11,658,474 
Total expenses   9,910,097    13,948,387    21,329,783    31,074,983 
Loss from operations   (1,095,451)    (4,838,254)    (4,636,532)    (16,421,925) 
Other income:                    
Interest income   34,030    154,310    107,436    317,671 
Other expense, net   (49,757)    (111,472)    (37,080)    (221,207) 
Foreign currency transaction gains (losses)   9,995    (183,608)    (162,998)    52,527 
Gain on investments   -    768,000    -    768,000 
Total other income and expense   (5,732)    627,230    (92,642)    916,991 
Loss before provision for income taxes and net loss (income) attributable to noncontrolling interest   (1,101,183)    (4,211,024)    (4,729,174)    (15,504,934) 
Tax provision   (42,000)    (26,000)    (71,000)    (52,000) 
Net loss   (1,143,183)    (4,237,024)    (4,800,174)    (15,556,934) 
Net loss (income) attributable to the noncontrolling interest   21,642    (23,367)    83,114    (34,384) 
Net loss attributable to Kopin Corporation  $(1,121,541)   $(4,260,391)   $(4,717,060)   $(15,591,318) 
Net loss per share                    
Basic and diluted  $(0.01)   $(0.05)   $(0.06)   $(0.20) 
Weighted average number of common shares outstanding                    
Basic and diluted   82,569,379    81,950,352    82,552,896    78,459,666 

 

See notes to unaudited condensed consolidated financial statements

 

 4 

 

 

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

   Three months ended   Three months ended   Six months ended   Six months ended 
   June 27, 2020   June 29, 2019   June 27, 2020   June 29, 2019 
Net loss  $(1,143,183)   $(4,237,024)   $(4,800,174)   $(15,556,934) 
Other comprehensive income (loss), net of tax:                    
Foreign currency translation adjustments   (37,035)    121,026    152,043    (1,038) 
Unrealized holding gain (loss) on marketable securities   95,683    104,257    (182,679)    326,257 
Reclassification of holding losses in net loss   (11,680)    (4,815)    (21,028)    (7,434) 
Other comprehensive income (loss), net of tax   46,968    220,468    (51,664)    317,785 
Comprehensive loss   (1,096,215)    (4,016,556)    (4,851,838)    (15,239,149) 
Comprehensive loss (income) attributable to the noncontrolling interest   21,642    (23,367)    83,114    (34,384) 
Comprehensive loss attributable to Kopin Corporation  $(1,074,573)   $(4,039,923)   $(4,768,724)   $(15,273,533) 

 

See notes to unaudited condensed consolidated financial statements

 

 5 

 

 

 

KOPIN CORPORATION

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

  

Common Stock

Shares

   Common Stock Amount   Additional Paid-in Capital   Treasury Stock   Accumulated Other Comprehensive Income   Accumulated Deficit   Total Kopin Corporation Stockholders’ Equity   Noncontrolling Interest   Total Stockholders’ Equity 
Balance, December 28, 2019   87,049,672   $870,496   $344,456,537   $(17,238,669)  $1,757,184   $(301,236,913)  $28,608,635   $(17,023)  $28,591,612 
Stock-based compensation expense   -    -    158,465    -    -    -    158,465    -    158,465 
Other comprehensive Income   -    -    -    -    (98,632)   -    (98,632)   -    (98,632)
Net loss   -    -    -    -    -    (3,595,519)   (3,595,519)   (61,472)   (3,656,991)
Balance, March 28, 2020   87,049,672    870,496    344,615,002    (17,238,669)   1,658,552    (304,832,432)   25,072,949    (78,495)   24,994,454 
Stock-based compensation expense   -    -    161,677    -    -    -    161,677    -    161,677 
Vesting of restricted stock   60,000    600    (600)                  -           
Other comprehensive Income   -    -    -    -    46,968    -    46,968    -    46,968 
Net loss   -    -    -    -    -    (1,121,541)   (1,121,541)   (21,642)   (1,143,183)
Balance, June 27, 2020   87,109,672   $871,096   $344,776,079   $(17,238,669)  $1,705,520   $(305,953,973)  $24,160,053   $(100,137)  $24,059,916

 

 

 

                                             
    

Common Stock

 Shares

    Common Stock Amount    Additional Paid-in Capital    Treasury Stock    Accumulated Other Comprehensive Income    Accumulated Deficit    Total Kopin Corporation Stockholders’ Equity    Noncontrolling Interest    Total Stockholders’ Equity 
Balance, December 29, 2018   78,522,066   $785,220   $334,491,397   $(17,238,669)  $1,554,587   $(271,730,661)  $47,861,874   $(149,053)  $47,712,821 
Stock-based compensation expense   -    -    815,842    -    -    -    815,842    -    815,842 
Vesting of restricted stock   10,000    100    (100)   -    -    -    -    -    - 
Repurchases of restricted stock to satisfy tax withholding obligations   (4,294)   (43)   (7,085)   -    -    -    (7,128)   -    (7,128)
Other comprehensive loss   -    -    -    -    97,317    -    97,317    -    97,317 
Sale of registered stock   7,272,727    72,727    7,237,273    -    -    -    7,310,000    -    7,310,000 
Net (loss) income   -    -    -    -    -    (11,330,927)   (11,330,927)   11,017    (11,319,910)
Balance, March 30, 2019   85,800,499    858,004    342,537,327    (17,238,669)   1,651,904    (283,061,588)   44,746,978    (138,036)   44,608,942 
Stock-based compensation expense   -    -    538,474    -    -    -    538,474    -    538,474 
Vesting of restricted stock   60,000    600    (600)   -    -    -    -    -    - 
Other comprehensive loss   -    -    -    -    220,468    -    220,468    -    220,468 
Sale of registered stock   706,454    7,065    721,466    -    -    -    728,531    -    728,531 
Net (loss) income   -    -    -    -    -    (4,260,391)   (4,260,391)   23,367    (4,237,024)
Balance, June 29, 2019  86,566,953   $865,669   $343,796,667   $(17,238,669)  $1,872,372   $(287,321,979)  $41,974,060   $(114,669)  $41,859,391 

  

See notes to unaudited condensed consolidated financial statements

 

 6 

 

 

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Six months ended   Six months ended 
   June 27, 2020   June 29, 2019 
Cash flows from operating activities:          
Net loss  $(4,800,174)   $(15,556,934) 
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   341,743    438,294 
Accretion of premium or discount on marketable debt securities   4,400    - 
Recovery of impairment on marketable debt securities   (150,644)    - 
Stock-based compensation   320,142    1,354,316 
Foreign currency losses (gains)   186,516    (73,231) 
Change in allowance for bad debt   (504,432)    330,172 
Write-off of excess inventory   924,679    2,406,492 
Unrealized gain on investments   -    (768,000) 
Loss on disposal of plant and equipment   -    251,291 
Deferred income taxes   58,268    52,518 
Other non-cash items   (870)    (19,631) 
Changes in assets and liabilities:          
Accounts receivable   (113,412)    (2,144,699) 
Contract assets   (1,588,176)    1,867,058 
Inventory   (896,783)    (1,309,827) 
Prepaid expenses and other current assets   15,507    418,317 
Accounts payable and accrued expenses   (1,441,710)    304,955 
Billings in excess of revenue earned   885,641    1,070,129 
Net cash used in operating activities   (6,759,305)    (11,378,780) 
Cash flows from investing activities:          
Other assets   266,972    (100,810) 
Capital expenditures   (206,127)    (119,815) 
Proceeds from sale of marketable debt securities   9,296,550    3,789,139 
Cash paid for equity investment   -    (2,500,000) 
Net cash provided by investing activities   9,357,395    1,068,514 
Cash flows from financing activities:          
Paycheck protection program loan receipt   

2,238,000

    - 
Paycheck protection program loan repayment   (2,070,000)   - 
Sale of registered stock   -    8,128,531 
Settlements of restricted stock for tax withholding obligations   -    (7,128) 
Net cash provided by (used in) financing activities   168,000    8,121,403 
Effect of exchange rate changes on cash   (18,517)    (2,958) 
Net increase (decrease) in cash and cash equivalents   2,747,573    (2,191,821) 
Cash and cash equivalents:          
Beginning of period   6,029,247    14,326,347 
End of period  $8,776,820   $12,134,526 
Supplemental disclosure of cash flow information:          
Issuance costs included in accounts payable and accrued expenses  $-   $90,000 
Cash paid for interest   1,495    - 

 

See notes to unaudited condensed consolidated financial statements

 

 7 

 

 

KOPIN CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. BASIS OF PRESENTATION

 

The condensed consolidated financial statements of Kopin Corporation as of June 27, 2020 and for the three and six month periods ended June 27, 2020 and June 29, 2019 are unaudited and include all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the periods then ended. These condensed consolidated financial statements should be read in conjunction with the Company’s financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year. The Company reclassified certain prior period amounts to conform to the current period presentation. As used in this report, the terms “we”, “us”, “our”, “Kopin” and the “Company” mean Kopin Corporation and its subsidiaries, unless the context indicates another meaning.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred net losses of $29.4 million and net cash outflows from operations of $21.0 million for the fiscal year ended 2019. The Company incurred a net loss of $4.8 million and net cash outflows from operations of $6.8 million for the six months ended June 27, 2020. In addition, the Company has experienced a significant decline in its cash and cash equivalents and marketable debt securities over the last several years, which was primarily a result of funding operating losses, of which a significant component related to the Company’s ongoing investments in the research and development of Wearable products. The Company had $15.3 million of cash and cash equivalents and marketable debt securities at June 27, 2020. The Company’s historical and current use of cash in operations combined with limited liquidity resources raise substantial doubt regarding the Company’s ability to continue as a going concern.

 

The Company’s products are targeted towards the military and industrial wearable markets. Management believes the industrial wearable market is still developing and cannot predict how long it will take to develop or if the Company’s products will be accepted. In addition, the Company’s current strategy is to continue to invest in research and development, even during unprofitable periods, which may result in the Company continuing to incur net losses and negative cash flows from operations. If the Company is unable to achieve and maintain positive cash flows and profitability in the foreseeable future, its financial condition may ultimately be materially adversely affected such that management may be required to reduce operating expenses, including investments in research and development, or raise additional capital. While there can be no assurance the Company will be able to successfully reduce operating expenses or raise additional capital, management believes its historical success in managing cash flows and obtaining capital will continue in the foreseeable future.

 

In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global and national economy, disrupted global supply chains, and created significant volatility in and disruption of financial markets. The extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance, including the ability to execute business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and spread of the pandemic and related restrictions on travel and transportation, all of which are uncertain and cannot be predicted at this time. An extended period of global supply chain and economic disruption could materially affect Kopin’s business, results of operations, financial condition, and access to sources of liquidity. In this regard, the CARES Act established a Paycheck Protection Program, whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. During the second quarter ended June 27, 2020 the Company and a subsidiary each received a loan under the PPP. In May, 2020, the Company voluntarily terminated its PPP Loan and repaid the PPP Loan of $2.1 million and the Company’s subsidiary repaid its PPP loan of $0.1 million in July, 2020. The Company’s decision to terminate the loans was based on additional guidance issued by the Small Business Administration. There were no prepayment penalties in connection with the voluntary terminations.

 

 8 

 

 

2. ACCOUNTING STANDARDS

 

Accounting Standards Issued But Not Yet Adopted

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held. In November 2019, the FASB issued ASU 2019-10 that has extended the effective date of ASU 2016-13 for Smaller Reporting Entities to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently evaluating ASU 2016-13 and its impact on our consolidated financial statements.

 

3. CASH AND CASH EQUIVALENTS AND MARKETABLE DEBT SECURITIES

 

The Company considers all highly liquid, short-term debt instruments with original maturities of three months or less to be cash equivalents.

 

Marketable debt securities consist primarily of commercial paper, medium-term corporate notes, and U.S. government and agency backed securities. The Company classifies these marketable debt securities as available-for-sale at fair value in “Marketable debt securities, at fair value.” The Company records the amortization of premium and accretion of discounts on marketable debt securities in the results of operations.

 

The Company uses the specific identification method as a basis for determining cost and calculating realized gains and losses with respect to marketable debt securities. The gross gains and losses realized related to sales and maturities of marketable debt securities were not material during the three and six months ended June 27, 2020 and June 29, 2019.

 

Investments in available-for-sale marketable debt securities were as follows at June 27, 2020 and December 28, 2019:

 

   Amortized Cost   Unrealized Gains   Unrealized Losses   Fair Value 
   2020   2019   2020   2019   2020   2019   2020   2019 
U.S. government and agency backed securities  $1,005,819   $8,304,229   $27,521   $-   $-   $(7,359)  $1,033,340   $8,296,870 
Corporate Debt   5,456,757    7,459,298    -    -    (4,401)   (3,171)   5,452,356    7,456,127 
Total  $6,462,576   $15,763,527   $27,521   $-   $(4,401)  $(10,530)  $6,485,696   $15,752,997 

 

The contractual maturity of the Company’s marketable debt securities was as follows at June 27, 2020:

 

   Less than One year   One to Five years   Total 
U.S. government and agency backed securities  $-    1,033,340    1,033,340 
Corporate debt   1,552,336    3,900,020    5,452,356 
Total  $1,552,336    4,933,360    6,485,696 

 

 

 9 

 

 

4. FAIR VALUE MEASUREMENTS

 

Financial instruments are categorized as Level 1, Level 2 or Level 3 based upon the method by which their fair value is computed. An investment is categorized as Level 1 when its fair value is based on unadjusted quoted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An investment is categorized as Level 2 if its fair market value is based on quoted market prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, based on observable inputs such as interest rates, yield curves, or derived from or corroborated by observable market data by correlation or other means. An investment is categorized as Level 3 if its fair value is based on assumptions developed by the Company about what a market participant would use in pricing the assets.

 

The following table details the fair value measurements of the Company’s financial assets:

 

       Fair Value Measurement June 27, 2020 Using: 
   Total   Level 1   Level 2   Level 3 
Cash and Cash Equivalents  $8,776,820   $8,776,820   $-   $- 
U.S. Government Securities   1,033,340    -    1,033,340    - 
Corporate Debt   5,452,356    -    5,452,356    - 
Equity Investments   4,222,896    299,998    -    3,922,898 
   $19,485,412   $9,076,818   $6,485,696   $3,922,898 

 

       Fair Value Measurement at Dec 28, 2019 Using: 
   Total   Level 1   Level 2   Level 3 
Cash and Cash Equivalents  $6,029,247   $6,029,247   $-   $- 
U.S. Government Securities   8,296,870    -    8,296,870    - 
Corporate Debt   7,456,127    -    7,456,127    - 
Equity Investments   4,537,159    386,711    -    4,150,448 
   $26,319,403   $6,415,958   $15,752,997   $4,150,448 

 

 10 

 

 

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. Changes in Level 3 investments were as follows:

 

   December 28, 2019   Net unrealized losses   Purchases, issuances and settlements   Transfers in and or out of Level 3   June 27, 2020 
Equity Investments  $4,150,448   $(227,550)  $  -   $ -   $3,922,898 

 

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short-term nature. If accrued liabilities were carried at fair value, these would be classified as Level 2 in the fair value hierarchy.

 

Marketable Debt Securities

 

The corporate debt consists of floating rate notes with a maturity that is over multiple years but has interest rates that are reset every three months based on the then-current three-month London Interbank Offering Rate (“three-month Libor”). The Company validates the fair market values of the financial instruments above by using discounted cash flow models, obtaining independent pricing of the securities or through the use of a model that incorporates the three-month Libor, the credit default swap rate of the issuer and the bid and ask price spread of the same or similar investments which are traded on several markets.

 

Equity Investments

 

The Company acquired an equity interest in a company in the first quarter of 2018 through a $1.0 million capital contribution and the contribution of certain intellectual property. During the three and six months ended June 27, 2020, the Company recorded less than $0.1 million of unrealized gains on this equity investment due to a fluctuation in the foreign exchange rate. As of June 27, 2020, the Company owned an 11% interest in this investment and the estimated fair value of this equity investment was $3.5 million at June 27, 2020.

 

In 2017 the Company had a warrant to acquire up to 15% of the next round of equity offered by a customer as part of the licensing of technology to the customer. The Company used the pricing and terms of the qualified financing round by the customer in determining the value of its Series A warrant and recorded a gain of $2.0 million. The Company acquired an equity interest in the customer by exercising the Series A warrant into Series A shares in the second quarter of 2018 and recorded a loss of less than $0.1 million. In addition, the Company acquired shares of the customer’s Series B shares valued at $2.5 million based on the fair value of the Series B at the closing in May 2019. During the second quarter of 2019, the Company recognized a $0.8 million gain based on an observable price change for the Series A shares by using the customer’s Series B capital structure, pricing of the shares being offered and the liquidation preference of Series B. In the fourth quarter of 2019 the Company reviewed the financial condition and other factors of the customer and as a result, recorded an impairment charge of $5.2 million to reduce its investment in the customer to zero.

 

On September 30, 2019 the Company entered into an Asset Purchase Agreement (the “Solos Purchase Agreement”) pursuant to which the Company sold and licensed certain assets of our SolosTM (“Solos”) product line and WhisperTM Audio (“Whisper”) technology. As consideration for the transaction the Company received a 20% equity stake in Solos Incorporation (“Solos Inc.”). The Company has recorded a less than $0.2 million impairment charge on its Solos Inc. investment during the three and six months ended June 27, 2020.

 

5. INVENTORY

 

Inventories are stated at standard cost adjusted to approximate the lower of cost (first-in, first-out method) or net realizable value and consist of the following at June 27, 2020 and December 28, 2019:

 

   June 27, 2020   December 28, 2019 
Raw materials  $2,598,727   $2,630,156 
Work-in-process   544,528    711,475 
Finished goods   568,792    427,065 
Total  $3,712,047   $3,768,696 

 

 

 11 

 

 

6. NET LOSS PER SHARE

 

Basic net loss per share is computed using the weighted-average number of shares of common stock outstanding during the period less any unvested restricted shares. Diluted net loss per share is calculated using weighted-average shares outstanding and contingently issuable shares, less weighted-average shares reacquired during the period. The net outstanding shares are adjusted for the dilutive effect of shares issuable upon the assumed conversion of the Company’s common stock equivalents, which consist of unvested restricted stock.

 

The following were not included in weighted-average common shares outstanding-diluted because they are anti-dilutive or performance conditions have not been met at the end of the period:

 

   Three Months Ended   Three Months Ended   Six Months Ended   Six Months Ended 
   June 27, 2020   June 29, 2019   June 27, 2020   June 29, 2019 
Non-vested restricted common stock   2,373,874    2,047,374    2,373,874    2,047,374 

 

 

7. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

 

Restricted Stock Awards

 

In May of 2020, the Company adopted a 2020 Equity Incentive Plan (“2020 Equity Plan”) which authorized the issuance of shares of common stock to employees, non-employees, and the Board. The 2020 Equity Plan was a successor to the Company’s 2010 Equity Incentive Plan (“2010 Equity Plan”). The number of shares authorized to be issued under the 2020 Equity Plan is four million shares plus shares of the Company Stock underlying any outstanding award granted under the 2010 Equity Plan that expires, or is terminated, surrendered or forfeited for any reason without issuance of such shares.

 

Registered sale of equity securities

 

On March 15, 2019, the Company 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 Kopin’s 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, the Company 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 the Company of less than $0.1 million, pursuant to the partial exercise of the underwriters’ overallotment option in connection with its March 15, 2019 public offering. This represented approximately 0.8% of Kopin’s total outstanding shares of common stock as of the date of purchase.

 

Non-Vested Restricted Common Stock

 

The fair value of non-vested restricted common stock awards is generally the market value of the Company’s common stock on the date of grant. The non-vested restricted common stock awards require the employee to fulfill certain obligations, including remaining employed by the Company for one, two or four years (the vesting period) and in certain cases also require meeting either performance criteria or the Company’s stock achieving a certain price. For non-vested restricted common stock awards that solely require the recipient to remain employed with the Company, the stock compensation expense is amortized over the anticipated service period. For non-vested restricted common stock awards that require the achievement of performance criteria, the Company reviews the probability of achieving the performance goals on a periodic basis. If the Company determines that it is probable that the performance criteria will be achieved, the amount of compensation cost derived for the performance goal is amortized over the anticipated service period. If the performance criteria are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed.

 

Restricted stock activity was as follows:

 

       Weighted Average 
   Shares   Grant Fair Value 
Balance, December 28, 2019   1,863,124   $1.60 
Granted   593,000    0.47 
Forfeited   (22,250)   2.07 
Vested   (60,000)   1.12 
Balance, June 27, 2020    2,373,874   $1.32 

 

 12 

 

 

On December 31, 2017, the Company amended the employment agreement with our CEO, Dr. John Fan, to expire on December 31, 2020 and as part of the amendment issued restricted stock grants. Of the restricted stock grants issued to Dr. Fan, 640,000 shares will vest upon the first 20 consecutive trading day period following the grant date during which the Company’s common stock trades at a price equal to or greater than $5.25, 150,000 shares will vest at the end of the first 20 consecutive trading day period following the grant date during which the Company’s common stock trades at a price per share equal to or greater than $6.00, and 150,000 shares will vest at the end of the first 20 consecutive trading day period following the grant date during which the Company’s common stock trades at a price per share equal to or greater than $7.00. All of the grants are subject to certain acceleration events and expire on December 31, 2020. The total fair value of these awards on December 31, 2017 was $1.7 million. The value of restricted stock grants that vest based on market conditions is computed on the date of grant using the Monte Carlo model with the following assumptions:

 

 

   For the three months ended    For the three months ended    For the three months ended  
   June 27, 2020   June 27, 2020   June 27, 2020 
Performance price target   $5.25   $6.00   $7.00 
Expected volatility   48.3%    48.3%    48.3% 
Interest rate   1.97%    1.97%    1.97% 
Expected Life (years)   3    3    3 
Dividend yield   %    %    % 

 

Stock-Based Compensation

 

The following table summarizes stock-based compensation expense within each of the categories below as it relates to non-vested restricted common stock awards for the three and six months ended June 27, 2020 and June 29, 2019 (no tax benefits were recognized):

 

   Three Months Ended   Three Months Ended   Six Months Ended   Six Months Ended 
   June 27, 2020   June 29, 2019   June 27, 2020   June 29, 2019 
Cost of product revenues  $16,269   $32,107   $30,246   $64,215 
Research and development   57,523    83,785    112,655    188,515 
Selling, general and administrative   87,885    422,582    177,241    1,101,586 
Total  $161,677   $538,474   $320,142   $1,354,316 

 

Unrecognized compensation expense for non-vested restricted common stock as of June 27, 2020 totaled $0.7 million and is expected to be recognized over a weighted average period of approximately two years.

 

8. ACCRUED WARRANTY

 

The Company typically warrants its products against defect for 12 to 18 months, however, for certain products a customer may purchase an extended warranty. A provision for estimated future costs and estimated returns for credit relating to such warranty is recorded in the period when product is shipped and revenue is recognized and is updated as additional information becomes available. The Company’s estimate of future costs to satisfy warranty obligations is based primarily on historical warranty expense experienced and a provision for potential future product failures. Changes in the accrued warranty for the six months ended June 27, 2020 were as follows:

 

Balance, December 28, 2019   $509,000 
Additions    348,000 
Claims    (349,000) 
Balance, June 27, 2020   $508,000 

 

Extended Warranties

 

Deferred revenue represents the purchase of extended warranties by the Company’s customers. The Company recognizes revenue from an extended warranty on the straight-line method over the life of the extended warranty, which is typically 12 to 15 months beyond the standard 12 to 18 month warranty. The Company classifies the current portion of deferred revenue under Other accrued liabilities in its condensed consolidated balance sheets. At June 27, 2020, the Company had less than $0.1 million of deferred revenue related to extended warranties.

 

 13 

 

 

9. INCOME TAXES

 

The Company 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, respectively. As of June 27, 2020, the Company has available for tax purposes U.S. federal NOLs of approximately $160.5 million expiring 2022 through 2037 and $59.1 million that have an unlimited carryover period. The Company had recognized a full valuation allowance on its domestic and certain foreign net deferred tax assets due to the uncertainty of realization of such assets. The Company recognizes both accrued interest and penalties related to its uncertain tax positions related to intercompany loan interest and potential transfer pricing exposure related to its foreign subsidiaries.

 

10. CONTRACT ASSETS AND LIABILITIES

 

Contract assets include unbilled amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized from customer arrangements, including licensing, exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current. The Company classifies the noncurrent portion of contract assets under other assets in its condensed consolidated balance sheets.

 

Contract liabilities consist of advance payments and billings in excess of cost incurred and deferred revenue.

 

Net contract assets (liabilities) consisted of the following:

 

   June 27, 2020   December 28, 2019   $ Change   % Change 
Contract assets ---current   2,509,258   $921,082   $1,588,176    172% 
Contract liabilities---current   (1,687,403)  $(796,794)   $(890,609)    112% 
Contract liabilities---noncurrent   (1,589)  $(6,557)   $4,968    (76)% 
Net contract assets (liabilities)  $820,266   $117,731   $702,535    597% 

 

The $0.7 million increase in the Company’s net contract assets at June 27, 2020 as compared to December 28, 2019 was primarily due to an increase in inventory and other costs associated with government contracts which recognize revenue over time, which was partially offset by an increase in billing in excess of revenue earned.

 

In the three and six months ended June 27, 2020, the Company recognized revenue of $0.6 million, related to our contract liabilities at December 28, 2019. In the three and six months ended June 29, 2019, the Company recognized revenue of $0.1 million and $0.3 million, respectively, related to our contract liabilities at December 29, 2018.

 

The Company did not recognize impairment losses on our contract assets in the three and six months ended June 27, 2020 or June 29, 2019.

 

Performance Obligations

 

The Company’s revenue recognition related to performance obligations that were satisfied at a point in time and over time were as follows:

 

 

   Three months ended   Three months ended   Six months ended   Six months ended 
   June 27, 2020   June 29, 2019   June 27, 2020   June 29, 2019 
Point in time   39%    78%    37%    75% 
Over time   61%    22%    63%    25% 

 

Remaining performance obligations represent the transaction price of orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity (“IDIQ”)). As of June 27, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $5.7 million which the Company expects to recognize over the next 12 months. The remaining performance obligations represent amounts to be earned under government contracts, which are subject to cancellation.

 

 14 

 

 

11. LEASES

 

The Company enters into operating leases primarily for: real estate, including for manufacturing, engineering, research, administration and sales facilities, and information technology (“IT”) equipment. At June 27, 2020 and December 28, 2019, the Company did not have any finance leases. Approximately all of our future lease commitments, and related lease liability, relate to the Company’s real estate leases. Some of the Company’s leases include options to extend or terminate the lease.

 

The components of lease expense were as follows:

 

 

   Three Months Ended   Three Months Ended   Six Months Ended   Six Months Ended 
   June 27,2020   June 29, 2019   June 27, 2020   June 29, 2019 
Operating lease cost  $283,443   $308,080   $566,443   $603,565 

 

At June 27, 2020, the Company’s future lease payments under non-cancellable leases were as follows:

 

 

2020 (excluding the six months ended June 27, 2020)  $596,627 
2021   1,048,973 
2022   653,367 
2023   201,333 
Thereafter   - 
Total future lease payments  $2,500,300 
Less imputed interest   (187,955) 
Total  $2,312,345 

 

The Company’s lease liabilities recognized in the Company’s condensed consolidated balance sheets at June 27, 2020 was as follows:

 

 

   June 27, 2020 
Operating lease liabilities - current  $1,077,756 
Operating lease liabilities -noncurrent   1,236,818 
Total lease liabilities  $2,314,574 

 

Supplemental cash flow information related to leases was as follows:

 

 

   Six months ended 
   June 27, 2020 
Cash paid for amounts included in the measurement of operating lease liabilities  $591,500 

 

Other information related to leases was as follows:

 

   June 27, 2020 
Weighted Average Discount Rate - Operating Leases   6.16% 
Weighted Average Remaining Lease Term - Operating Leases (in years)   2.39 

 

   

 15 

 

 

12. SEGMENTS AND DISAGGREGATION OF REVENUE

 

We continually monitor and review our segment reporting structure in accordance with authoritative guidance to determine if any changes have occurred that would affect our reportable segments. In the fourth quarter of 2019, as a result of the changes in our operations and management structure we commenced reporting under one segment. We have retrospectively adjusted our segment disclosures to present one reportable segment, as our Chief Executive Officer, who is our chief operating decision maker (“CODM”), reviews results on a total company basis.

 

Total long-lived assets by country at June 27, 2020 and December 28, 2019 were:

 

SCHEDULE OF LONG-LIVED ASSETS BY GEOGRAPHIC AREAS 

Total Long-lived Assets (in thousands)  June 27, 2020   December 28, 2019 
U.S.  $3,144   $3,647 
United Kingdom   352    442 
China   23    37 
Japan   70    101 
Total  $3,589   $4,227 

  

We disaggregate our revenue from contracts with customers by geographic location and by display application, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

 

During the three and six months ended June 27, 2020 and June 29, 2019, the Company derived its sales from the following geographies:

 

  

   Three months ended   Three months ended   Six months
ended
   Six months
ended
 
   June 27, 2020   June 29, 2019   June 27, 2020   June 29, 2019 
(In thousands)  Revenue   % of Total   Revenue   % of Total   Revenue   % of Total   Revenue   % of Total 
United States  $6,938    79%   $2,605    29%   $13,704    82%   $5,011    35% 
Other Americas   -    -    7    -    101    1    25    - 
Total Americas   6,938    79    2,612    29    13,805    83    5,036    35 
Asia - Pacific   1,642    18    5,817    64    2,306    14    7,690    52 
Europe   235    3    671    7    582    3    1,917    13 
Other   -    -    10    -    -    -    10    - 
Total Revenues  $8,815    100%   $9,110    100%   $16,693    100%   $14,653    100% 

 

During the three and six months ended June 27, 2020 and June 29, 2019, the Company derived its sales from the following display applications:

 

 

    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  

 

 

13. LITIGATION

 

The Company may engage in legal proceedings arising in the ordinary course of business. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of such matters and our business, financial condition, results of operations or cash flows could be affected in any particular period.

 

BlueRadios, Inc. v. Kopin Corporation, Civil Action No. 16-02052-JLK (D. Col.):

 

On August 12, 2016, BlueRadios, Inc. (“BlueRadios”) filed a complaint in the U.S. District Court for the District of Colorado, alleging that the Company breached a contract between it and BlueRadios concerning an alleged joint venture between the Company and BlueRadios to design, develop and commercialize micro-display products with embedded wireless technology referred to as “Golden-i” breached the covenant of good faith and fair dealing associated with that contract, breached its fiduciary duty to BlueRadios, and misappropriated trade secrets owned by BlueRadios in violation of Colorado law (C.R.S. § 7-74-104(4)) and the Defend Trade Secrets Act (18 U.S.C. § 1836(b)(1)). BlueRadios further alleges that the Company was unjustly enriched by its alleged misconduct, BlueRadios is entitled to an accounting to determine the amount of profits obtained by the Company as a result of its alleged misconduct, and the inventorship on at least ten patents or patent applications owned by the Company need to be corrected to list BlueRadios’ employees as inventors and thereby list BlueRadios as co-assignees of the patents. BlueRadios seeks monetary, declaratory, and injunctive relief, including for alleged non-payment of engineering retainer fees.

 

On October 11, 2016, the Company filed its Answer and Affirmative Defenses. The parties completed expert depositions on November 15, 2019. On December 2, 2019, the Company filed a Motion for Partial Summary Judgment requesting the Court dismiss counts 2-7 in their entirety and counts 1 and 8 in part. BlueRadios also filed a Motion for Partial Summary Judgment alleging it is the co-owner of U.S. Patent No. 8,909,296. Responses to the Motions for Partial Summary Judgment were filed on January 15, 2020, and replies were filed on February 19, 2020. A trial date has not yet been set by the Court. The Company has not concluded a loss from this matter is probable; therefore, we have not recorded an accrual for litigation or claims related to this matter for the period ended June 27, 2020. The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.

 

 16 

 

 

14. RELATED PARTY TRANSACTIONS

 

The Company may from time to time enter into agreements with stockholders, affiliates and other companies engaged in certain aspects of the display, electronics, optical and software industries as part of our business strategy. In addition, the wearable computing product market is relatively new and there may be other technologies the Company needs to purchase from affiliates to enhance its product offering.

 

During the three and six months ended June 27, 2020 and June 29, 2019, the Company had the following transactions with related parties:

 

   Three Months Ended 
   June 27, 2020   June 29, 2019 
   Sales   Purchases   Sales   Purchases 
Solos Technology  $106,390   $   $   $ 
RealWear, Inc.   371,902       4,667,258     
   $478,292   $   $4,667,258   $ 

 

   Six Months Ended 
   June 27, 2020   June 29, 2019 
   Sales   Purchases   Sales   Purchases 
Goertek  $   $   $   $1,246,077 
Solos Technology   246,458             
RealWear, Inc.   371,902        5,192,644     
   $618,360   $   $5,192,644   $1,246,077 

 

At June 27, 2020 and December 28, 2019, the Company had the following receivables, contract liabilities and payables with related parties:

 

   June 27, 2020   December 28, 2019 
   Receivables   Contract Liabilities   Payables   Receivables   Contract Assets   Payables 
Solos Technology  $79,146   $   $15,015  $283,203         
RealWear, Inc.   363,607    395,386        646,848         
   $442,753   $395,386   $15,015  $930,051   $   $ 

 

 

 17 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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 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 
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.

 

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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 

 

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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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk<