KOPIN CORP - Quarter Report: 2019 September (Form 10-Q)
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 September 28, 2019
☐ | 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 Global Market | ||
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 x 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 x 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 | x | ||||
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 x
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 November 4, 2019 | ||
Common Stock, par value $0.01 | 84,016,821 | ||
Kopin Corporation
INDEX
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Item 6. | ||
Part 1. FINANCIAL INFORMATION
Item 1. | Condensed Consolidated Financial Statements (Unaudited) |
KOPIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 28, 2019 | December 29, 2018 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 8,757,699 | $ | 14,326,347 | |||
Marketable debt securities, at fair value | 17,258,504 | 22,918,016 | |||||
Accounts receivable, net of allowance of $241,000 in 2019 and $304,000 in 2018 | 4,910,375 | 3,088,360 | |||||
Contract assets and unbilled receivables | 1,045,939 | 3,089,663 | |||||
Inventory | 3,442,490 | 4,797,238 | |||||
Prepaid taxes | 601,608 | 399,611 | |||||
Prepaid expenses and other current assets | 766,688 | 784,790 | |||||
Total current assets | 36,783,303 | 49,404,025 | |||||
Plant and equipment, net | 1,621,927 | 2,598,842 | |||||
Operating lease right-of-use assets | 3,073,651 | — | |||||
Goodwill | — | 331,344 | |||||
Other assets | 844,049 | 1,361,375 | |||||
Equity investments | 9,029,417 | 5,853,525 | |||||
Total assets | $ | 51,352,347 | $ | 59,549,111 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 3,018,906 | $ | 3,921,880 | |||
Accrued payroll and expenses | 2,536,640 | 3,038,005 | |||||
Accrued warranty | 645,000 | 571,000 | |||||
Contract liabilities and billings in excess of revenue earned | 1,430,828 | 388,933 | |||||
Operating lease liabilities | 1,081,252 | — | |||||
Other accrued liabilities | 2,961,609 | 1,901,547 | |||||
Deferred tax liabilities | 507,000 | 546,000 | |||||
Total current liabilities | 12,181,235 | 10,367,365 | |||||
Asset retirement obligations | 245,916 | 254,098 | |||||
Operating lease liabilities, net of current portion | 2,077,245 | — | |||||
Other long-term obligations | 1,031,523 | 1,214,827 | |||||
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 88,584,577 shares in 2019 and 80,735,320 shares in 2018; outstanding 82,053,697 shares in 2019 and 74,008,815 shares in 2018 | 865,669 | 785,220 | |||||
Additional paid-in capital | 344,248,350 | 334,491,397 | |||||
Treasury stock (4,513,256 shares in 2019 and 2018, at cost) | (17,238,669 | ) | (17,238,669 | ) | |||
Accumulated other comprehensive income | 1,883,090 | 1,554,587 | |||||
Accumulated deficit | (293,947,437 | ) | (271,730,661 | ) | |||
Total Kopin Corporation stockholders’ equity | 35,811,003 | 47,861,874 | |||||
Noncontrolling interest | 5,425 | (149,053 | ) | ||||
Total stockholders’ equity | 35,816,428 | 47,712,821 | |||||
Total liabilities and stockholders’ equity | $ | 51,352,347 | $ | 59,549,111 | |||
See notes to unaudited condensed consolidated financial statements
3
KOPIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | ||||||||||||
Revenues: | |||||||||||||||
Net product revenues | $ | 4,955,062 | $ | 3,643,619 | $ | 14,004,319 | $ | 13,160,507 | |||||||
Research and development and other revenues | 1,184,270 | 1,482,711 | 6,788,071 | 3,563,341 | |||||||||||
6,139,332 | 5,126,330 | 20,792,390 | 16,723,848 | ||||||||||||
Expenses: | |||||||||||||||
Cost of product revenues | 4,689,944 | 3,659,800 | 15,809,535 | 11,219,741 | |||||||||||
Research and development | 2,389,573 | 4,599,266 | 10,686,491 | 13,577,075 | |||||||||||
Selling, general and administration | 5,130,019 | 7,166,137 | 16,788,493 | 21,011,050 | |||||||||||
Impairment of goodwill | 331,344 | — | 331,344 | — | |||||||||||
12,540,880 | 15,425,203 | 43,615,863 | 45,807,866 | ||||||||||||
Loss from operations | (6,401,548 | ) | (10,298,873 | ) | (22,823,473 | ) | (29,084,018 | ) | |||||||
Other (expense) income: | |||||||||||||||
Interest income | 120,645 | 160,875 | 438,316 | 486,239 | |||||||||||
Other (expense) income | (109,614 | ) | 241,466 | (330,821 | ) | 1,360,822 | |||||||||
Foreign currency transaction losses | (88,847 | ) | (227,447 | ) | (36,320 | ) | (254,615 | ) | |||||||
Gain on investments | — | — | 768,000 | 2,849,816 | |||||||||||
(77,816 | ) | 174,894 | 839,175 | 4,442,262 | |||||||||||
Loss before tax (provision) benefit and net (income) loss attributable to noncontrolling interest | (6,479,364 | ) | (10,123,979 | ) | (21,984,298 | ) | (24,641,756 | ) | |||||||
Tax (provision) benefit | (26,000 | ) | 316,000 | (78,000 | ) | 115,000 | |||||||||
Net loss | (6,505,364 | ) | (9,807,979 | ) | (22,062,298 | ) | (24,526,756 | ) | |||||||
Net (income) loss attributable to noncontrolling interest | (120,094 | ) | 16,596 | (154,478 | ) | (41,862 | ) | ||||||||
Net loss attributable to Kopin Corporation | $ | (6,625,458 | ) | $ | (9,791,383 | ) | $ | (22,216,776 | ) | $ | (24,568,618 | ) | |||
Net loss per share | |||||||||||||||
Basic and diluted | $ | (0.08 | ) | $ | (0.13 | ) | $ | (0.28 | ) | $ | (0.34 | ) | |||
Weighted average number of common shares outstanding | |||||||||||||||
Basic and diluted | 82,053,698 | 73,135,253 | 79,657,677 | 73,102,979 | |||||||||||
See notes to unaudited condensed consolidated financial statements
4
KOPIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||||
Net loss | $ | (6,505,364 | ) | $ | (9,807,979 | ) | $ | (22,062,298 | ) | $ | (24,526,756 | ) | ||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency translation adjustments | (21,163 | ) | 68,891 | (22,201 | ) | (266,807 | ) | |||||||||
Unrealized holding gains (losses) on marketable securities | 39,967 | (103,212 | ) | 366,224 | (313,348 | ) | ||||||||||
Reclassification of holding (losses) gains in net loss | (8,086 | ) | 27,620 | (15,520 | ) | 25,852 | ||||||||||
Other comprehensive income (loss), net of tax | 10,718 | (6,701 | ) | 328,503 | (554,303 | ) | ||||||||||
Comprehensive loss | (6,494,646 | ) | (9,814,680 | ) | (21,733,795 | ) | (25,081,059 | ) | ||||||||
Comprehensive (income) loss attributable to the noncontrolling interest | (120,094 | ) | 13,788 | (154,478 | ) | (15,658 | ) | |||||||||
Comprehensive loss attributable to Kopin Corporation | $ | (6,614,740 | ) | $ | (9,800,892 | ) | $ | (21,888,273 | ) | $ | (25,096,717 | ) | ||||
See notes to unaudited condensed consolidated financial statements
5
KOPIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Income | Accumulated Deficit | Total Kopin Corporation Stockholders’ Equity | Noncontrolling Interest | Total Stockholders’ Equity | ||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||
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 | — | — | 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 income | — | — | — | — | 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 | — | — | 538,474 | — | — | — | 538,474 | — | 538,474 | ||||||||||||||||||||||||||
Vesting of restricted stock | 60,000 | 600 | (600 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 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 | |||||||||||||||||||||||
Stock-based compensation | — | — | 451,683 | — | — | — | 451,683 | — | 451,683 | ||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 10,718 | — | 10,718 | — | 10,718 | ||||||||||||||||||||||||||
Net (loss) income | — | — | — | — | — | (6,625,458 | ) | (6,625,458 | ) | 120,094 | (6,505,364 | ) | |||||||||||||||||||||||
Balance, September 28, 2019 | 86,566,953 | $ | 865,669 | $ | 344,248,350 | $ | (17,238,669 | ) | $ | 1,883,090 | $ | (293,947,437 | ) | $ | 35,811,003 | $ | 5,425 | $ | 35,816,428 | ||||||||||||||||
6
Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Income | Accumulated Deficit | Total Kopin Corporation Stockholders’ Equity | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||||
Balance, December 30, 2017 | 77,572,038 | $ | 775,720 | $ | 329,917,858 | $ | (17,238,669 | ) | $ | 3,564,779 | $ | (240,256,502 | ) | $ | 76,763,186 | $ | 616,661 | $ | 77,379,847 | |||||||||||||||
Stock-based compensation | — | — | 1,399,415 | — | — | — | 1,399,415 | — | 1,399,415 | |||||||||||||||||||||||||
Vesting of restricted stock | 20,000 | 200 | (200 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | (269,863 | ) | — | (269,863 | ) | 3,759 | (266,104 | ) | ||||||||||||||||||||||
Adoption of accounting standards | — | — | — | — | — | 3,059,382 | 3,059,382 | — | 3,059,382 | |||||||||||||||||||||||||
Net (loss) income | — | — | — | — | — | (5,536,278 | ) | (5,536,278 | ) | 64,174 | (5,472,104 | ) | ||||||||||||||||||||||
Balance, March 31, 2018 | 77,592,038 | 775,920 | 331,317,073 | (17,238,669 | ) | 3,294,916 | (242,733,398 | ) | 75,415,842 | 684,594 | 76,100,436 | |||||||||||||||||||||||
Stock-based compensation | — | — | 1,288,374 | — | — | — | 1,288,374 | — | 1,288,374 | |||||||||||||||||||||||||
Vesting of restricted stock | 60,000 | 600 | (600 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||
Repurchases of restricted stock to satisfy tax withholding obligations | (3,530 | ) | (35 | ) | (11,368 | ) | — | — | — | (11,403 | ) | — | (11,403 | ) | ||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | (248,725 | ) | — | (248,725 | ) | (32,772 | ) | (281,497 | ) | |||||||||||||||||||||
Net (loss) income | — | — | — | — | — | (9,240,957 | ) | (9,240,957 | ) | (5,716 | ) | (9,246,673 | ) | |||||||||||||||||||||
Balance, June 30, 2018 | 77,648,508 | $ | 776,485 | $ | 332,593,479 | $ | (17,238,669 | ) | $ | 3,046,191 | $ | (251,974,355 | ) | $ | 67,203,131 | $ | 646,106 | $ | 67,849,237 | |||||||||||||||
Stock-based compensation | — | — | 1,190,830 | — | — | — | 1,190,830 | — | 1,190,830 | |||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | (9,510 | ) | — | (9,510 | ) | 2,809 | (6,701 | ) | ||||||||||||||||||||||
Net (loss) income | — | — | — | — | — | (9,791,383 | ) | (9,791,383 | ) | (16,596 | ) | (9,807,979 | ) | |||||||||||||||||||||
Balance, September 29, 2018 | 77,648,508 | 776,485 | 333,784,309 | (17,238,669 | ) | 3,036,681 | (261,765,738 | ) | 58,593,068 | 632,319 | 59,225,387 | |||||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements
7
KOPIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended | |||||||
September 28, 2019 | September 29, 2018 | ||||||
Cash flows used in operating activities: | |||||||
Net loss | $ | (22,062,298 | ) | $ | (24,526,756 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation and amortization | 597,091 | 1,688,715 | |||||
Stock-based compensation | 1,805,999 | 3,878,619 | |||||
Foreign currency losses | 32,483 | 269,239 | |||||
Change in allowance for bad debt | (56,997 | ) | (333,889 | ) | |||
Gain on investments | (768,000 | ) | (2,849,816 | ) | |||
Deferred income taxes | 78,777 | 70,803 | |||||
Loss on disposal of plant and equipment | 487,284 | — | |||||
Impairment of goodwill | 331,344 | — | |||||
Write-off of excess inventory | 2,682,397 | — | |||||
Other non-cash items | 94,444 | 519,027 | |||||
Changes in assets and liabilities, net of acquired assets and liabilities: | |||||||
Accounts receivable | (1,786,687 | ) | 1,504,218 | ||||
Contract assets | 2,043,724 | 1,619,875 | |||||
Inventory | (1,338,233 | ) | (1,551,859 | ) | |||
Prepaid expenses and other current assets | 436,575 | 144,421 | |||||
Accounts payable and accrued expenses | (427,603 | ) | (664,524 | ) | |||
Contract liabilities and billings in excess of revenue earned | 1,034,608 | 49,174 | |||||
Net cash used in operating activities | (16,815,092 | ) | (20,182,753 | ) | |||
Cash flows provided by investing activities: | |||||||
Other assets | (106,524 | ) | (7,616 | ) | |||
Capital expenditures | (113,009 | ) | (959,488 | ) | |||
Proceeds from sale of marketable debt securities | 5,954,139 | 21,858,785 | |||||
Purchase of marketable debt securities | — | (4,910,630 | ) | ||||
Cash paid for equity investment | (2,500,000 | ) | (1,000,000 | ) | |||
Net cash provided by investing activities | 3,234,606 | 14,981,051 | |||||
Cash flows provided by (used in) financing activities: | |||||||
Sale of registered stock | 8,038,531 | — | |||||
Settlements of restricted stock for tax withholding obligations | (7,128 | ) | (11,403 | ) | |||
Net cash provided by (used in) financing activities | 8,031,403 | (11,403 | ) | ||||
Effect of exchange rate changes on cash | (19,565 | ) | (268,074 | ) | |||
Net decrease in cash and cash equivalents | (5,568,648 | ) | (5,481,179 | ) | |||
Cash and cash equivalents: | |||||||
Beginning of period | 14,326,347 | 24,848,227 | |||||
End of period | $ | 8,757,699 | $ | 19,367,048 | |||
Supplemental disclosure of cash flow information: | |||||||
Income taxes paid | — | 1,300,000 | |||||
See notes to unaudited condensed consolidated financial statements
8
KOPIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | BASIS OF PRESENTATION |
The condensed consolidated financial statements of Kopin Corporation as of September 28, 2019 and for the three and nine month periods ended September 28, 2019 and September 29, 2018 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 29, 2018, as amended by Amendment No. 1 thereto on Form 10-K/A filed on November 7, 2019 (the “2018 Form 10-K/A”). 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 herein to conform with the presentation of the aforementioned Amendment on Form 10-K/A. Specifically, the Company reclassified certain amounts from additional paid-in capital to accumulated deficit and/or noncontrolling interest as of December 29, 2018 and December 30, 2017, which impacts both the accompanying consolidated balance sheet as of December 29, 2018 and consolidated statements of stockholders’ equity as of December 29, 2018 and December 30, 2017. The reclassifications further impact the respective figures shown for these equity categories in the prior interim periods presented herein. 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 condensed 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 $34.5 million and net cash outflows from operations of $28.1 million for the fiscal year ended 2018. The Company incurred a net loss of $22.1 million for the nine months ended September 28, 2019 and net cash outflows from operations of $16.8 million. 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 relates to the Company’s investments in the research and development of Wearable products. The Company had $26.0 million of cash and cash equivalents and marketable debt securities at September 28, 2019. 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 target the industrial wearable headset and military markets. Management believes the industrial wearable market is still developing and cannot predict how long the wearable market will take to develop or if the Company’s products will be accepted. Accordingly, the Company’s current strategy is to continue to invest in research and development, even during unprofitable periods, which has resulted in the Company continuing to incur net losses and negative cash flows from operations. As the Company continues to incur negative cash flows from operations, its financial condition will be materially adversely affected. As such, management is actively pursuing strategic alternatives including the reduction of operating expenses and raising additional capital, among other things. While there can be no assurance the Company will be able to successfully reduce operating expenses or raise additional capital, management believes it has sufficient cash for operations through the end of fiscal 2020, based on management’s historical success in managing cash flows and obtaining capital.
These condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
9
2. | ACCOUNTING STANDARDS |
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which requires lessees to recognize operating lease right-of-use assets and lease liability for most lease arrangements. Effective December 30, 2018, the Company adopted the requirements of the new lease standard using the modified retrospective approach, applying the new lease requirements at the beginning of fiscal year 2019. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows us to carry forward the historical lease classification. The Company did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of right-of-use assets. The standard resulted in the recognition of operating lease right-of-use assets of $3.7 million and operating lease liabilities of $3.8 million, of which $1.0 million was classified as current at the beginning of fiscal year 2019. The standard had no material impact on the Company's results of operations or cash flows and there was no cumulative impact on accumulated deficit as of December 30, 2018. In addition, new disclosures are provided to enable readers to assess the amount, timing and uncertainty of cash flows arising from leases.
Significant Accounting Policies Update
The Company's significant accounting policies are detailed in "Note 1: Summary of Significant Accounting Policies" of our 2018 Form 10-K/A. Effective December 30, 2018, the Company adopted the requirements of ASU 2016-02, Leases (Topic 842) using the modified retrospective approach as discussed below. The Company reclassified certain balance sheet accounts to conform to the Company's current period presentation. All amounts disclosed in this Form 10-Q reflect these changes.
Leases
The Company determines if an arrangement is a lease or contains an embedded lease at inception. For lease arrangements with both lease and non-lease components (e.g., common-area maintenance costs), the Company accounts for the non-lease components separately.
All of the Company's leases are operating leases. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of future lease payments over the lease term at the commencement date. The operating lease right-of-use assets also includes any initial direct costs and any lease payments made at or before the commencement date, and is reduced for any unrestricted incentives received at or before the commencement date.
For the majority of the Company's leases, the discount rate used to determine the present value of the lease payments is the Company's incremental borrowing rate at the lease commencement date, as the implicit rate is not readily determinable. The discount rate represents a risk-adjusted rate on a secured basis, and is the rate at which the Company would borrow funds to satisfy the scheduled lease liability payment streams commensurate with the lease term. On December 30, 2018, the discount rate used on existing leases at adoption was determined based on the remaining lease term using available data as of that date. For new or renewed leases starting in 2019, the discount rate is determined using available data at lease commencement and based on the lease term including any reasonably certain renewal periods.
Some of our leases include options to extend or terminate the lease. The Company includes these options in the recognition of the Company's ROU assets and lease liabilities when it is reasonably certain that the Company will exercise the option. In most cases, the Company has concluded that renewal and early termination options are not reasonably certain of being exercised by the Company (and thus not included in our ROU asset and lease liability) unless there is an economic, financial or business reason to do so. None of our leases include variable lease-related payments, such as escalation clauses based on the consumer price index ("CPI") rates or residual guarantees.
Accounting Standards Issued But Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which adds, amends and removes certain disclosure requirements related to fair value measurements. Among other changes, this standard requires certain additional disclosure surrounding Level 3 assets, including changes in unrealized gains or losses in other comprehensive income and certain inputs in those measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Certain amended or eliminated disclosures in this standard may be adopted early, while certain additional disclosure requirements in this standard can be adopted on its effective date. In addition, certain changes in the standard require retrospective adoption, while other changes must be adopted prospectively. The Company is currently evaluating ASU 2018-13 and its impact on our consolidated financial statements.
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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 nine months ended September 28, 2019 and the fiscal year ended December 29, 2018.
Investments in available-for-sale marketable debt securities were as follows at September 28, 2019 and December 29, 2018:
Amortized Cost | Unrealized Losses | Fair Value | |||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||
U.S. government and agency backed securities | $ | 9,305,150 | $ | 13,064,418 | $ | (5,730 | ) | $ | (253,495 | ) | $ | 9,299,420 | $ | 12,810,923 | |||||||||
Corporate debt | 7,960,963 | 10,175,084 | (1,879 | ) | (67,991 | ) | 7,959,084 | 10,107,093 | |||||||||||||||
Total | $ | 17,266,113 | $ | 23,239,502 | $ | (7,609 | ) | $ | (321,486 | ) | $ | 17,258,504 | $ | 22,918,016 | |||||||||
The contractual maturity of the Company’s marketable debt securities was as follows at September 28, 2019:
Less than One year | One to Five years | Total | |||||||||
U.S. government and agency backed securities | $ | 298,320 | $ | 9,001,100 | $ | 9,299,420 | |||||
Corporate debt | 2,501,675 | 5,457,409 | 7,959,084 | ||||||||
Total | $ | 2,799,995 | $ | 14,458,509 | $ | 17,258,504 | |||||
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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 September 28, 2019 Using: | |||||||||||||||
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Cash and Cash Equivalents | $ | 8,757,699 | $ | 8,757,699 | $ | — | $ | — | |||||||
U.S. Government Securities | 9,299,420 | — | 9,299,420 | — | |||||||||||
Corporate Debt | 7,959,084 | — | 7,959,084 | — | |||||||||||
Equity Investments | 9,029,417 | 325,317 | — | 8,704,100 | |||||||||||
$ | 35,045,620 | $ | 9,083,016 | $ | 17,258,504 | $ | 8,704,100 | ||||||||
Fair Value Measurement December 29, 2018 Using: | |||||||||||||||
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Cash and Cash Equivalents | $ | 14,326,347 | $ | 14,326,347 | $ | — | $ | — | |||||||
U.S. Government Securities | 12,810,923 | — | 12,810,923 | — | |||||||||||
Corporate Debt | 10,107,093 | — | 10,107,093 | — | |||||||||||
Equity Investments | 5,853,525 | 288,026 | — | 5,565,499 | |||||||||||
$ | 43,097,888 | $ | 14,614,373 | $ | 22,918,016 | $ | 5,565,499 | ||||||||
Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. During the nine months ended September 28, 2019, there were no transfers between levels of the fair value hierarchy. Changes in Level 3 investments were as follows:
December 29, 2018 | Net unrealized gains | Purchases, issuances and settlements | Transfers in and or out of Level 3 | September 28, 2019 | |||||||||||||||
Equity Investments | $ | 5,565,499 | $ | 638,601 | $ | 2,500,000 | $ | — | $ | 8,704,100 | |||||||||
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 if applicable and the bid and ask price spread of the same or similar investments which are traded on several markets.
Equity Investments
The Company adopted the measurement alternative for equity investments without readily determinable fair values (often referred to as cost method investments). As a result, equity investments will be revalued upon occurrence of an observable price change for similar investments and for impairments.
The Company acquired an equity interest in a company in the first quarter of 2018. The Company made a $1.0 million capital contribution during the three months ended March 31, 2018. The Company also contributed certain intellectual property. During the three and nine months ended September 28, 2019, the Company recorded $0.1 million of unrealized loss on this equity investment due to a fluctuation in the foreign exchange rate. As of September 28, 2019, the Company owned an 11.4% interest in this investment and the fair value of this equity investment was $3.5 million at September 28, 2019.
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The Company acquired an equity interest in a customer by exercising a warrant in the second quarter of 2018 for up to 15% of the customer's Series A equity offering as part of the licensing of technology to the customer. The Company used the customer's capital structure, pricing of the shares being offered and the warrant from the customer's Series A financing round in determining the value upon exercising the warrant. In addition, the Company acquired 368,732 shares of the customer's Series B equity valued at $2.5 million based on the fair value of the Series B at the closing in May 2019. During the nine months ended September 28, 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. As of September 28, 2019, the Company's total fair value in Series A and Series B equity investments was $5.2 million.
On September 30, 2019 the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Solos Technology Limited (the “Buyer”). Pursuant to the Purchase Agreement, the Company sold and licensed to the Buyer certain assets of our SolosTM (“Solos”) product line and WhisperTM Audio (“Whisper”) technology. As consideration for the transaction the Company received 1,172,000 common shares representing a 20.0% equity stake in the Buyer’s parent company, Solos Incorporation (“Solos Inc.”). The Company's 20.0% equity stake will be maintained until Solos Inc. has raised a total of $7.5 million in equity financing. The Company will also receive a royalty in the single digits on the net sales amount of Solos products for a four-year period, after commencement of commercial production. The Company's Hong Kong employees have been offered employment with the Buyer and most are expected to transition to the Buyer. If the employees do not join the Buyer or are terminated within 90 days of joining the Buyer, the Company will be liable for their statutory severance payment. Under the terms of the Purchase Agreement, the Company also has a non-exclusive, limited, fully paid-up, royalty-free worldwide license, including modification of or improvement or enhancement to the Whisper technology, for enterprise and military customers.
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 September 28, 2019 and December 29, 2018:
September 28, 2019 | December 29, 2018 | ||||||
Raw materials | $ | 2,539,460 | $ | 2,548,139 | |||
Work-in-process | 724,820 | 1,526,552 | |||||
Finished goods | 178,210 | 722,547 | |||||
$ | 3,442,490 | $ | 4,797,238 | ||||
In the nine months ended September 28, 2019 the Company charged $2.7 million for inventory obsolescence. The charges for inventory obsolescence primarily resulted from the discontinuance of certain products and the write-off of materials as we have found substitute materials that will provide for better long-term manufacturing yields.
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 | Nine Months Ended | ||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | ||||||||
Non-vested restricted common stock | 2,017,624 | 3,476,249 | 2,017,624 | 3,476,249 | |||||||
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7. | STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION |
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:
Shares | Weighted Average Grant Fair Value | |||||
Balance, December 29, 2018 | 2,213,249 | $ | 2.51 | |||
Granted | 150,000 | 1.19 | ||||
Forfeited | (275,625 | ) | 2.95 | |||
Vested | (70,000 | ) | 3.32 | |||
Balance, September 28, 2019 | 2,017,624 | $ | 2.33 | |||
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 September 28, 2019 | |||||||||||
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 | — | % | — | % | — | % | |||||
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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 nine months ended September 28, 2019 and September 29, 2018 (no tax benefits were recognized):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | ||||||||||||
Cost of product revenues | $ | 18,309 | $ | 52,368 | $ | 82,524 | $ | 318,519 | |||||||
Research and development | 73,939 | 159,436 | 262,454 | 627,519 | |||||||||||
Selling, general and administrative | 359,435 | 979,026 | 1,461,021 | 2,932,581 | |||||||||||
Total | $ | 451,683 | $ | 1,190,830 | $ | 1,805,999 | $ | 3,878,619 | |||||||
Unrecognized compensation expense for non-vested restricted common stock as of September 28, 2019 totaled $1.3 million and is expected to be recognized over a weighted average period of less than 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 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 nine months ended September 28, 2019 were as follows:
Balance, December 29, 2018 | $ | 571,000 | |
Additions | 628,000 | ||
Claims | (554,000 | ) | |
Balance, September 28, 2019 | $ | 645,000 | |
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 Contract liabilities and billings in excess of revenue earned and classifies the long-term portion of deferred revenue under Other long-term obligations in its condensed consolidated balance sheets. At September 28, 2019, the Company had less than $0.1 million of deferred revenue related to extended warranties.
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9. | INCOME TAXES |
The Company recorded a provision for income taxes of less than $0.1 million and a tax benefit of $0.3 million in the three months ended September 28, 2019 and September 29, 2018, respectively. The Company recorded a provision for income taxes of less than $0.1 million and a tax benefit of $0.1 million in the nine months ended September 28, 2019 and September 29, 2018, respectively. As of September 28, 2019, the Company has available for tax purposes U.S. federal NOLs of approximately $215.0 million expiring 2022 through 2037. 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:
September 28, 2019 | December 29, 2018 | $ Change | % Change | |||||||||||
Contract assets—current | $ | 1,045,939 | $ | 3,089,663 | $ | (2,043,724 | ) | (66 | )% | |||||
Contract liabilities—current | (1,430,828 | ) | (388,933 | ) | (1,041,895 | ) | 268 | % | ||||||
Contract liabilities—noncurrent | (10,007 | ) | (17,294 | ) | 7,287 | (42 | )% | |||||||
Net contract (liabilities) assets | $ | (394,896 | ) | $ | 2,683,436 | $ | (3,078,332 | ) | (115 | )% | ||||
The $3.1 million decrease in the Company's net contract assets (liabilities) from December 29, 2018 to September 28, 2019 was primarily due the shipment of inventory that was in process at December 29, 2018 and advanced payments in excess of amounts earned on development contracts.
In the three and nine months ended September 28, 2019, the Company recognized revenue of $0.1 million and $0.3 million, respectively, related to our contract liabilities at December 30, 2018. In the three and nine months ended September 29, 2018, the Company recognized revenue of less than $0.1 million and $0.2 million, respectively, related to our contract liabilities at December 31, 2017.
The Company did not recognize impairment losses on our contract assets in the three and nine months ended September 28, 2019 or September 29, 2018.
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 | Nine Months Ended | ||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | ||||||||
Point in time | 55 | % | 63 | % | 72 | % | 63 | % | |||
Over time | 45 | % | 37 | % | 28 | % | 37 | % | |||
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 September 28, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $9.3 million. The Company expects to recognize revenue on the remaining performance obligations of $9.3 million over the next 12 months. The remaining performance obligations represent amounts to be earned under government contracts, which are subject to cancellation.
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11. | LEASES AND COMMITMENTS |
Leases
The Company enters into operating leases primarily for manufacturing, engineering, research, administration and sales facilities, and information technology ("IT") equipment. At September 28, 2019 and December 29, 2018, the Company did not have any finance leases. Approximately 100% of our future lease commitments, and related lease liability, relate to the Company's facility 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 | Nine Months Ended | ||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | ||||||||||||
Operating lease cost | $ | 293,251 | $ | 359,574 | $ | 884,499 | $ | 1,078,714 | |||||||
At September 28, 2019, the Company's future lease payments under non-cancellable leases were as follows:
2019 (excluding the nine months ended September 28, 2019) | $ | 304,877 | ||
2020 | 1,262,048 | |||
2021 | 1,055,419 | |||
2022 | 653,234 | |||
2023 | 201,333 | |||
Thereafter | — | |||
Total future lease payments | 3,476,911 | |||
Less imputed interest | (318,414 | ) | ||
Total | $ | 3,158,497 | ||
The Company's lease liabilities recognized in the Company's condensed consolidated balance sheets at September 28, 2019 were as follows:
September 28, 2019 | |||||
Operating lease liabilities—current | $ | 1,081,252 | |||
Operating lease liabilities—noncurrent | 2,077,245 | ||||
Total lease liabilities | $ | 3,158,497 | |||
Supplemental cash flow information related to leases was as follows:
Nine months ended | ||||
September 28, 2019 | ||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 887,374 | ||
Other information related to leases was as follows:
September 28, 2019 | ||||
Weighted Average Discount Rate—Operating Leases | 6.03 | % | ||
Weighted Average Remaining Lease Term—Operating Leases (in years) | 3.0 | |||
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Prior to December 30, 2018, the Company accounted for its leases in accordance with Topic 840, Leases. At December 29, 2018, the Company was committed under operating leases for buildings, office space and equipment, which expired at various dates. As previously disclosed in our 2018 Form 10-K/A and under previous lease guidance, future minimum lease payments under non-cancelable operating leases as of December 29, 2018 were as follows:
Fiscal year ending, | Amount | |||
2019 | $ | 1,210,000 | ||
2020 | 1,112,000 | |||
2021 | 921,000 | |||
2022 | 616,000 | |||
2023 | 201,000 | |||
Thereafter | — | |||
Total | $ | 4,060,000 | ||
Commitments
The Company 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 $4.9 million). The purpose of the BOE equity offering is to raise funds to build an Organic Light Emitting Diode ("OLED") manufacturing facility. The Company is currently developing OLED products and its strategy is to use a fabless business model. Accordingly, the Company intends to use the BOE facility to manufacture its products. The Company's sole obligation under this agreement is to make this capital contribution. The Company previously has been unable to make the scheduled capital contribution due to Chinese laws, which had restrictions on direct foreign investment. Per the agreement, if Kopin is unable to make the scheduled capital contribution, it may be required to pay damages of 0.05% per day based on the unpaid portion of the capital contribution until the obligation is satisfied. The Company is currently assessing legal alternatives in connection with its investment obligation. The Company has accrued $0.6 million in penalties related to this agreement as of September 28, 2019. The Company and BOE are in discussions to determine alternatives, including a reduction in penalties, or to enable the Company to make the capital contribution.
12. | SEGMENTS AND DISAGGREGATION OF REVENUE |
The Company’s chief operating decision maker is its Chief Executive Officer. The Company has determined it has two reportable segments: Industrial, which includes the operations that develop and manufacture its reflective display products and virtual reality systems for test and simulation products, and Kopin, which includes the operations that develop and manufacture its other products.
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Segment financial results were as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||
Total Revenue (in thousands) | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||
Kopin | $ | 4,699 | $ | 3,629 | $ | 15,829 | $ | 11,033 | |||||||
Industrial | 1,885 | 1,895 | 6,109 | 6,549 | |||||||||||
Eliminations | (445 | ) | (398 | ) | (1,146 | ) | (858 | ) | |||||||
Total | $ | 6,139 | $ | 5,126 | $ | 20,792 | $ | 16,724 | |||||||
Three Months Ended | Nine Months Ended | ||||||||||||||
Total Intersegment Revenue (in thousands) | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||
Kopin | $ | — | $ | — | $ | — | $ | — | |||||||
Industrial | 445 | 398 | 1,146 | 858 | |||||||||||
Total | $ | 445 | $ | 398 | $ | 1,146 | $ | 858 | |||||||
Three Months Ended | Nine Months Ended | ||||||||||||||
Net Loss Attributable to Kopin (in thousands) | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||
Kopin | $ | (6,737 | ) | $ | (9,814 | ) | $ | (22,789 | ) | $ | (24,650 | ) | |||
Industrial | 112 | 23 | 572 | 81 | |||||||||||
Total | $ | (6,625 | ) | $ | (9,791 | ) | $ | (22,217 | ) | $ | (24,569 | ) | |||
Total Assets (in thousands) | September 28, 2019 | December 29, 2018 | |||||||||||||
Kopin | $ | 44,099 | $ | 50,995 | |||||||||||
Industrial | 7,253 | 8,554 | |||||||||||||
Total | $ | 51,352 | $ | 59,549 | |||||||||||
Total long-live assets by country at September 28, 2019 and December 29, 2018 were:
Total Long-lived Assets (in thousands) | September 28, 2019 | December 29, 2018 | |||||
U.S. | $ | 1,380 | $ | 2,101 | |||
United Kingdom | 168 | 197 | |||||
China | 30 | 251 | |||||
Japan | 44 | 50 | |||||
Total | $ | 1,622 | $ | 2,599 | |||
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.
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During the three and nine months ended September 28, 2019 and September 29, 2018, the Company derived its sales from the following geographies:
Three Months Ended September 28, 2019 | ||||||||||||||||||||
Kopin | Industrial | Total | ||||||||||||||||||
(In thousands, except percentages) | Revenue | % of Total | Revenue | % of Total | Revenue | % of Total | ||||||||||||||
United States | $ | 3,138 | 51 | % | $ | 315 | 5 | % | $ | 3,453 | 56 | % | ||||||||
Other Americas | 10 | — | — | — | 10 | — | ||||||||||||||
Total Americas | 3,148 | 51 | 315 | 5 | 3,463 | 56 | ||||||||||||||
Asia-Pacific | 1,431 | 23 | 876 | 14 | 2,307 | 38 | ||||||||||||||
Europe | 120 | 3 | 230 | 4 | 350 | 6 | ||||||||||||||
Other | — | — | 19 | — | 19 | — | ||||||||||||||
Total Revenues | $ | 4,699 | 77 | % | $ | 1,440 | 23 | % | $ | 6,139 | 100 | % | ||||||||
Three Months Ended September 29, 2018 | ||||||||||||||||||||
Kopin | Industrial | Total | ||||||||||||||||||
(In thousands, except percentages) | Revenue | % of Total | Revenue | % of Total | Revenue | % of Total | ||||||||||||||
United States | $ | 2,427 | 47 | % | $ | 820 | 16 | % | $ | 3,247 | 63 | % | ||||||||
Other Americas | 14 | — | 6 | — | 20 | — | ||||||||||||||
Total Americas | 2,441 | 47 | 826 | 17 | 3,267 | 63 | ||||||||||||||
Asia-Pacific | 863 | 17 | 324 | 6 | 1,187 | 23 | ||||||||||||||
Europe | 325 | 6 | 341 | 7 | 666 | 13 | ||||||||||||||
Other | — | — | 6 | — | 6 | — | ||||||||||||||
Total Revenues | $ | 3,629 | 71 | % | $ | 1,497 | 29 | % | $ | 5,126 | 100 | % | ||||||||
Nine Months Ended September 28, 2019 | ||||||||||||||||||||
Kopin | Industrial | Total | ||||||||||||||||||
(In thousands, except percentages) | Revenue | % of Total | Revenue | % of Total | Revenue | % of Total | ||||||||||||||
United States | $ | 7,329 | 35 | % | $ | 1,135 | 6 | % | $ | 8,464 | 41 | % | ||||||||
Other Americas | 28 | — | 7 | — | 35 | — | ||||||||||||||
Total Americas | 7,357 | 35 | 1,142 | 6 | 8,499 | 41 | ||||||||||||||
Asia-Pacific | 7,634 | 37 | 2,363 | 11 | 9,997 | 48 | ||||||||||||||
Europe | 838 | 4 | 1,430 | 7 | 2,268 | 11 | ||||||||||||||
Other | — | — | 28 | — | 28 | — | ||||||||||||||
Total Revenues | $ | 15,829 | 76 | % | $ | 4,963 | 24 | % | $ | 20,792 | 100 | % | ||||||||
Nine Months Ended September 29, 2018 | ||||||||||||||||||||
Kopin | Industrial | Total | ||||||||||||||||||
(In thousands, except percentages) | Revenue | % of Total | Revenue | % of Total | Revenue | % of Total | ||||||||||||||
United States | $ | 7,586 | 45 | % | $ | 2,814 | 17 | % | $ | 10,400 | 62 | % | ||||||||
Other Americas | 43 | — | 29 | — | 72 | — | ||||||||||||||
Total Americas | 7,629 | 45 | 2,843 | 17 | 10,472 | 62 | ||||||||||||||
Asia-Pacific | 2,331 | 15 | 1,484 | 9 | 3,815 | 24 | ||||||||||||||
Europe | 1,073 | 6 | 1,336 | 8 | 2,409 | 14 | ||||||||||||||
Other | — | — | 28 | — | 28 | — | ||||||||||||||
Total Revenues | $ | 11,033 | 66 | % | $ | 5,691 | 34 | % | $ | 16,724 | 100 | % | ||||||||
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During the three and nine months ended September 28, 2019 and September 29, 2018, the Company derived its sales from the following display applications:
Three Months Ended September 28, 2019 | Three Months Ended September 29, 2018 | ||||||||||||||||||||||
(In thousands) | Kopin | Industrial | Total | Kopin | Industrial | Total | |||||||||||||||||
Military | $ | 1,661 | $ | 307 | $ | 1,968 | $ | 582 | $ | 917 | $ | 1,499 | |||||||||||
Industrial | 1,590 | 1,035 | 2,625 | 721 | 562 | 1,283 | |||||||||||||||||
Consumer | 360 | — | 360 | 816 | — | 816 | |||||||||||||||||
Other | 2 | — | 2 | 28 | 17 | 45 | |||||||||||||||||
R&D | 1,086 | 98 | 1,184 | 1,482 | 1 | 1,483 | |||||||||||||||||
License and royalties | — | — | — | — | — | — | |||||||||||||||||
Total Revenues | $ | 4,699 | $ | 1,440 | $ | 6,139 | $ | 3,629 | $ | 1,497 | $ | 5,126 | |||||||||||
Nine Months Ended September 28, 2019 | Nine Months Ended September 29, 2018 | ||||||||||||||||||||||
(In thousands) | Kopin | Industrial | Total | Kopin | Industrial | Total | |||||||||||||||||
Military | $ | 4,017 | $ | 1,190 | $ | 5,207 | $ | 2,448 | $ | 2,972 | $ | 5,420 | |||||||||||
Industrial | 3,744 | 3,518 | 7,262 | 1,941 | 2,320 | 4,261 | |||||||||||||||||
Consumer | 1,510 | — | 1,510 | 3,213 | — | 3,213 | |||||||||||||||||
Other | 8 | 17 | 25 | 68 | 199 | 267 | |||||||||||||||||
R&D | 2,214 | 238 | 2,452 | 3,363 | 200 | 3,563 | |||||||||||||||||
License and royalties | 4,336 | — | 4,336 | — | — | — | |||||||||||||||||
Total Revenues | $ | 15,829 | $ | 4,963 | $ | 20,792 | $ | 11,033 | $ | 5,691 | $ | 16,724 | |||||||||||
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 are scheduled to complete expert depositions on November 15, 2019. The court has set a deadline of December 2, 2019 for dispositive motions. A trial date has not yet been set by the Court as to BlueRadios’ remaining claims. 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 September 28, 2019. 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.
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.
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During the three and nine month periods ended September 28, 2019 and September 29, 2018, the Company had the following transactions with related parties:
Three Months Ended | |||||||||||||||
September 28, 2019 | September 29, 2018 | ||||||||||||||
Sales | Purchases | Sales | Purchases | ||||||||||||
Goertek | $ | — | $ | — | $ | — | $ | 90,594 | |||||||
RealWear, Inc. | 538,930 | — | 634,834 | — | |||||||||||
$ | 538,930 | $ | — | $ | 634,834 | $ | 90,594 | ||||||||
Nine Months Ended | |||||||||||||||
September 28, 2019 | September 29, 2018 | ||||||||||||||
Sales | Purchases | Sales | Purchases | ||||||||||||
Goertek | $ | — | $ | 747,154 | $ | — | $ | 389,503 | |||||||
RealWear, Inc. | 5,731,574 | — | 1,147,789 | — | |||||||||||
$ | 5,731,574 | $ | 747,154 | $ | 1,147,789 | $ | 389,503 | ||||||||
The Company had the following receivables, contract assets and payables with related parties:
September 28, 2019 | December 29, 2018 | ||||||||||||||||||||||
Receivables | Contract assets | Payables | Receivables | Contract assets | Payables | ||||||||||||||||||
Goertek | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 207,530 | |||||||||||
RealWear, Inc. | 799,250 | 400,000 | — | 1,041,334 | 400,000 | — | |||||||||||||||||
$ | 799,250 | $ | 400,000 | $ | — | $ | 1,041,334 | $ | 400,000 | $ | 207,530 | ||||||||||||
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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 that 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 29, 2018, as amended by Amendment No. 1 thereto on Form 10-K/A filed on November 7, 2019 (the “2018 Form 10-K/A”). These factors include: our ability to continue as a going concern; the material weakness management has identified in our internal control over financial reporting, its conclusion that our disclosure controls and procedures were not effective as of the fiscal year ended December 29, 2018, and our ability to remediate that material weakness; the expected benefits to be derived from our sale of our Solos product line and Whisper Audio technology, and the lack of an impact the sale is expected to have on our liquidity or capital resources; our ability to obtain raw materials and other goods as well as services from our suppliers as needed; our intent to continue focusing our development efforts on proprietary wearable computing systems; the potential for customers to choose our competitors as their supplier; our expectation that we will have negative cash flow from operating activities in 2019; our ability to invest in research and development to achieve profitability even during periods when we are not profitable; our ability to focus our research and development expenditures in our display products, overlay weapon sights and organic light emitting diode display technologies; our ability to continue to introduce new products in our target markets; the degree to which our wearable technology is embraced by consumers and commercial users; our ability to develop and expand our wearable technologies and to market and license our concept systems and components; 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; 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 material adverse effects on our financial condition if we do not soon achieve and maintain positive cash flow and profitability, which may include us being required to reduce expenses, including our investments in research and development and/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; and our expectation that we will incur taxes based on our foreign operations in 2019.
Overview
We were incorporated in Delaware in 1984 and are a leading inventor, developer, manufacturer and seller of technologies, components and systems for the smart headset wearable, military, thermal imager, 3D optical inspection system and training and simulation markets.
Effective December 30, 2018, the Company adopted the requirements of Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) using the modified retrospective approach as discussed below. All amounts disclosed in this Form 10-Q reflect these changes.
The following discussion should be read in conjunction with our 2018 Form 10-K/A and our unaudited condensed consolidated financial statements included in this Form 10-Q.
Results of Operations
As described in our "Forward-Looking Statements" on page 23 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,
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we use a fiscal calendar, which may result in differences in the number of workdays 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. For the three and nine months ended September 28, 2019 and September 29, 2018, our revenues by display application, which include product sales and amounts earned from research and development contracts, were as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||
(In thousands) | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||
Military | $ | 1,968 | $ | 1,499 | $ | 5,207 | $ | 5,420 | |||||||
Industrial | 2,625 | 1,283 | 7,262 | 4,261 | |||||||||||
Consumer | 360 | 816 | 1,510 | 3,213 | |||||||||||
Other | 2 | 45 | 25 | 267 | |||||||||||
R&D | 1,184 | 1,483 | 2,452 | 3,563 | |||||||||||
License and royalties | — | — | 4,336 | — | |||||||||||
Total Revenues | $ | 6,139 | $ | 5,126 | $ | 20,792 | $ | 16,724 | |||||||
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 months ended September 28, 2019 as compared to the three months ended September 29, 2018 was primarily due to deliveries on the Family Weapons Sight-Individual ("FWS-i") program. The decrease in Military applications revenue in the nine months ended September 28, 2019 as compared to the nine months ended September 29, 2018 was primarily due to the completion of military programs at our subsidiary NVIS, Inc. ("NVIS") during the nine months ended September 29, 2018, partially offset by deliveries on the FWS-i program in the nine months ended September 28, 2019.
Industrial applications revenues 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 increase in Industrial applications revenue for the three and nine months ended September 28, 2019 as compared to the three and nine months ended September 29, 2018 was primarily due to an increase in sales volume to customers who use our display components in industrial headsets.
Our displays for Consumer applications are used primarily in thermal imaging products, recreational rifle and hand-held scopes and drone racing headsets. The decrease in Consumer applications for the three and nine months ended September 28, 2019 as compared to the three and nine months ended September 29, 2018 was primarily due to decreased demand for displays and components used in drone racing headsets.
Research and development ("R&D") revenues consist primarily of development contracts with agencies or prime contractors of the U.S. government and commercial enterprises. R&D revenue decreased in the three and nine months ended September 28, 2019 as compared to the three and nine months ended September 29, 2018 primarily due to the completion of performance obligations on funded U.S. military programs.
License revenue represents an arrangement with a customer where our performance obligation is to license functional intellectual property ("IP"), which provides the customer the right to use our IP as it exists at a point in time. The satisfaction of the Company's performance obligation, and related recognition of revenue, occurs when the IP is delivered to the customer, the license period has begun and there are no additional performance obligations in the agreement. Under certain license agreements, we may receive royalties based on the sales of the licensed product. We recognize royalty revenue upon the later of when the related sales occur, or when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Under our current license agreements for which a royalty exists, we have recorded revenue when the related sales by our customer occurs because the performance obligation related to the delivery of the license to the customer has been satisfied. The increase in license and royalties in the nine months ended September 28, 2019 compared to the three and nine months ended September 29, 2018 was due to the one-time license of functional IP to a customer for $3.5 million and royalties earned under other functional IP license agreements, all in the second quarter of 2019.
International sales represented 44% and 37% of total revenues for the three months ended September 28, 2019 and September 29, 2018, respectively, and 59% and 38% for the nine months ended September 28, 2019 and September 29, 2018, respectively. Our international sales are primarily denominated in U.S. dollars. 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
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than competitors' products that are denominated in local currencies, which could lead to a reduction in sales or profitability for us 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 (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" below.
Cost of Product Revenues. Cost of product revenues, which is comprised of materials, labor and manufacturing overhead related to the production of our products, for the three and nine months ended September 28, 2019 and September 29, 2018 was as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||
(In thousands, except for percentages) | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||
Cost of product revenues | $ | 4,690 | $ | 3,660 | $ | 15,810 | $ | 11,220 | |||||||
Cost of product revenues as a % of net product revenues | 94.6 | % | 100.4 | % | 112.9 | % | 85.3 | % | |||||||
The increase in cost of product revenues for the three months ended September 28, 2019 as compared to the three months ended September 29, 2018 was primarily due to an increase in volume sales of our industrial products in the three months ended September 28, 2019 compared to the three months ended September 29, 2018. The increase in cost of product revenues for the nine months ended September 28, 2019 as compared to the nine months ended September 29, 2018 was primarily due to an increase in volume sales of our industrial products and a $2.7 million charge for inventory obsolescence in the nine months ended September 28, 2019. The charges for inventory obsolescence primarily resulted from the discontinuance of certain products and the write-off of materials as we have found substitute materials that will provide for better long-term manufacturing yields.
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. For the remainder of fiscal year 2019, 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 statements of operations. R&D expenses for the three and nine months ended September 28, 2019 and September 29, 2018 were as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||
(In thousands) | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||
Funded | $ | 1,161 | $ | 2,006 | $ | 2,471 | $ | 3,640 | |||||||
Internal | 1,229 | 2,593 | 8,216 | 9,937 | |||||||||||
Total research and development expense | $ | 2,390 | $ | 4,599 | $ | 10,687 | $ | 13,577 | |||||||
Funded R&D expense for the three and nine months ended September 28, 2019 decreased as compared to the three and nine months ended September 29, 2018 primarily due to the completion of certain development programs that have moved into the production phase. For the three and nine months ended September 28, 2019, internal R&D decreased as compared to the three and nine months ended September 29, 2018 primarily due to the licensing of certain products and other development programs being curtailed.
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 nine months ended September 28, 2019 and September 29, 2018 were as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||
(In thousands, except for percentages) | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||
Selling, general and administration expense | $ | 5,130 | $ | 7,166 | $ | 16,788 | $ | 21,011 | |||||||
Selling, general and administration expense as a % of revenues | 83.6 | % | 139.8 | % | 80.7 | % | 125.6 | % | |||||||
S,G&A decreased for the three and nine months ended September 28, 2019 as compared to the three and nine months ended September 29, 2018 primarily due to a decrease in compensation expenses, including stock-based compensation,
25
amortization of intangible assets, use of information technology consultants, marketing expenses including product promotion and accretion of the NVIS earnout.
Other (Expense) Income, net. Other income, net, is primarily composed of gain on investments, interest income, foreign currency transaction and remeasurement gains and losses incurred by our U.K.-based subsidiary and other non-operating income items. Other (expense) income, net, for the three and nine months ended September 28, 2019 and September 29, 2018 was as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||
(In thousands) | September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||
Other (expense) income, net | $ | (78 | ) | $ | 175 | $ | 839 | $ | 4,442 | ||||||
During the three months ended September 28, 2019 and September 29, 2018, we recorded less than $0.1 million and $0.2 million of foreign currency losses, respectively. During the nine months ended September 28, 2019 and September 29, 2018, we recorded less than $0.1 million and $0.3 million of foreign currency losses, respectively. During the nine months ended September 28, 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. During the nine months ended September 29, 2018, the Company recognized a gain of $2.9 million from the transfer of intellectual property in exchange for equity interest in an investment. During the nine months ended September 29, 2018, the Company received $1.0 million of insurance proceeds related to the embezzlement at our Korean subsidiary, which was discovered in 2016.
Tax Provision. The Company recorded a provision for income taxes of less than $0.1 million and a tax benefit of approximately $0.3 million in the three months ended September 28, 2019 and September 29, 2018, respectively. The Company recorded a provision for income taxes of less than $0.1 million and a tax benefit of approximately $0.1 million in the nine months ended September 28, 2019 and September 29, 2018, respectively.
Net Loss (Income) Attributable to Noncontrolling Interest. As of September 28, 2019, we owned 80% of the equity of eMDT America ("eMDT"). Net loss (income) attributable to noncontrolling interest on our consolidated statements of operations represents the portion of the results of operations of our majority-owned subsidiary that 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 nine months ended September 28, 2019 and September 29, 2018.
Net Loss Attributable to Kopin Corporation. The Company incurred a net loss attributable to Kopin Corporation of $6.6 million during the three months ended September 28, 2019 compared to a net loss attributable to Kopin Corporation of $9.8 million during the three months ended September 29, 2018. The decrease in the net loss attributable to Kopin Corporation during the three months ended September 28, 2019 compared to the three months ended September 29, 2018 was primarily due to a decrease in operating expenses and an increase in total revenues, which is described above in Research and Development and Selling, General and Administrative and Revenues. The Company incurred a net loss attributable to Kopin Corporation of $22.2 million during the nine months ended September 28, 2019 compared to a net loss attributable to Kopin Corporation of $24.6 million during the nine months ended September 29, 2018. The decrease in the net loss attributable to Kopin Corporation during the nine months ended September 28, 2019 compared to the nine months ended September 29, 2018 was primarily due to a decrease in operating expenses and an increase in total revenues, which is described above in Research and Development and Selling, General and Administrative and Revenues, partially offset by a decrease in other income (expense), net, which is described above in Other (Expense) Income, net.
Liquidity and Capital Resources
At September 28, 2019 and December 29, 2018, we had cash and cash equivalents and marketable securities of $26.0 million and $37.2 million, respectively, and working capital of $24.6 million and $39.0 million at September 28, 2019 and December 29, 2018, respectively. The change in cash and cash equivalents and marketable debt securities was primarily due to net outflow of cash used in operating activities of $16.8 million and the purchase of an equity investment of $2.5 million, partially offset by the net proceeds from the sale of registered securities of $8.0 million and the proceeds from the sale of marketable debt securities of $6.0 million.
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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.
Cash and cash equivalents and marketable debt securities held in U.S. Dollars at:
September 28, 2019 | December 29, 2018 | ||||||
Domestic locations | $ | 24,780,062 | $ | 36,182,663 | |||
International locations | 800,901 | 418,339 | |||||
Subtotal cash and cash equivalents marketable debt securities held in U.S. dollars | 25,580,963 | 36,601,002 | |||||
Cash and cash equivalents held in other currencies and converted to U.S. dollars | 435,240 | 643,361 | |||||
Total cash and cash equivalents and marketable debt securities | $ | 26,016,203 | $ | 37,244,363 | |||
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.
As part of the NVIS acquisition, additional payments by the Company to the former owners of up to $2.0 million could be required if certain future operating performance milestones are met and the former owners remain employed with NVIS through March 2020. In March 2019, the Company paid approximately $1.3 million of additional payments to the former owners. Accordingly, if certain milestones are met by March 2020, the Company may be required to pay an additional $0.7 million. Such contingent payments have been and will be treated as compensation expense because the milestone payments require recipients to remain employed to earn the contingent payments.
We expect to expend between $0.1 million and $0.5 million on capital expenditures in 2019.
The Company 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 $4.9 million). The purpose of the BOE equity offering is to raise funds to build an Organic Light Emitting Diode ("OLED") manufacturing facility. The Company is currently developing OLED products and its strategy is to use a fabless business model. Accordingly, the Company intends to use the BOE facility to manufacture its products. The Company's sole obligation under this agreement is to make this capital contribution. The Company previously has been unable to make the scheduled capital contribution due to Chinese laws, which had restrictions on direct foreign investment. Per the agreement, if Kopin is unable to make the scheduled capital contribution, it may be required to pay damages of 0.05% per day based on the unpaid portion of the capital contribution until the obligation is satisfied. The Company is currently assessing legal alternatives in connection with its investment obligation. The Company has accrued $0.6 million in penalties related to this agreement as of September 28, 2019. The Company and BOE are in discussions to determine alternatives, including a reduction in penalties, or to enable the Company to make the capital contribution.
On September 30, 2019 we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Solos Technology Limited (the “Buyer”). Pursuant to the Purchase Agreement, we sold and licensed to the Buyer certain assets of our SolosTM (“Solos”) product line and WhisperTM Audio (“Whisper”) technology. As consideration for the transaction we received 1,172,000 common shares representing a 20.0% equity stake in the Buyer’s parent company, Solos Incorporation (“Solos Inc.”). Our 20.0% equity stake will be maintained until Solos Inc. has raised a total of $7.5 million in equity financing. The Company will also receive a royalty in the single digits on the net sales amount of Solos products for a four-year period, after commencement of commercial production. We will also receive a royalty in the single digits on the net sales amount of Solos products for a four-year period, after commencement of commercial production. Our Hong Kong employees have been offered employment with the Buyer and most are expected to transition to the Buyer. If the employees do not join the Buyer or are terminated within 90 days of joining the Buyer, we will be liable for their statutory severance payment. Under the terms of the Purchase Agreement, we also have a non-exclusive, limited, fully paid-up, royalty-free worldwide license, including modification of or improvement or enhancement to the Whisper technology, for enterprise and military customers. This transaction is not expected to have an impact on our liquidity or capital resources.
The accompanying condensed 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 $34.5 million and net cash outflows from operations of $28.1 million for the fiscal year ended 2018. The Comp
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any incurred a net loss of $22.1 million for the nine months ended September 28, 2019 and net cash outflows from operations of $16.8 million. 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 relates to the Company’s investments in the research and development of Wearable products. 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.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
We invest our excess cash in high-quality U.S. government, government-backed (e.g., Fannie Mae, FDIC guaranteed bonds and certificates of deposit) and corporate debt instruments, which bear lower levels of relative risk. We believe that the effect, if any, of reasonably possible near-term changes in interest rates on our financial position, results of operations and cash flows should not be material to our cash flows or income. It is possible that interest rate movements would increase our unrealized gain or loss on debt securities. We are exposed to changes in foreign currency exchange rates primarily through our translation of our foreign subsidiaries' financial position, results of operations, and transaction gains and losses as a result of non-U.S. dollar denominated cash flows related to business activities in Europe, and remeasurement of U.S. dollars to the British pound, the functional currency of our U.K. subsidiary. We are also exposed to the effects of exchange rates in the purchase of certain raw materials, which are in U.S. dollars, but the price of future purchases is subject to change based on the relationship of the Japanese yen to the U.S. dollar. We do not currently hedge our foreign currency exchange rate risk. We estimate that any market risk associated with our international operations or investments is unlikely to have a material adverse effect on our business, financial condition or results of operation. Our portfolio of marketable debt securities is subject to interest rate risk although our intent is to hold securities until maturity. The credit rating of our investments may be affected by the underlying financial health of the guarantors of our investments. We use silicon wafers but do not enter into forward or futures hedging contracts to mitigate against risks related to the price of silicon.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 28, 2019, the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures” means controls and other procedures that are designed to ensure that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the requisite time periods and that such disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act are accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, in connection with the filing of the Form 10-Q on November 7, 2019, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, because a material weakness in the Company’s internal control over financial reporting existed at December 29, 2018 and had not been remediated by September 28, 2019, the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q. This material weakness in the Company’s internal control over financial reporting and the Company’s remediation efforts are described below.
Material Weakness in Internal Control Over Financial Reporting
In September 2019, we identified certain misstatements arising from immaterial errors we had identified in our previously-issued consolidated financial statements and related financial information for the fiscal years ended December 29, 2018, December 30, 2017 and December 31, 2016 and the interim periods ending March 30, 2019 and June 29, 2019. In connection with the misstatements in the company’s consolidated financial statements, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, identified a material weakness in the Company’s internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We did not design and maintain effective controls related to management’s monitoring and oversight of accounting for non-routine transactions. Specifically, our internal controls were not designed effectively to ensure appropriate and timely evaluation of the accounting impact for non-routine transactions, including the accounting for non-controlling interest and other investments.
Based on this assessment and the material weakness described above, management concluded that the Company’s internal control over financial reporting was not effective as of December 29, 2018 and had not been remediated by the end of
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the period covered by this Quarterly Report on Form 10-Q. However, the Company has concluded that the existence of this material weakness did not result in a material misstatement of the Company’s financial statements included in its Annual Report on Form 10-K for the year ended December 29, 2018, as initially filed on March 14, 2019, or in its Quarterly Reports on Form 10-Q for the fiscal periods ended March 30, June 29, or September 28, 2019.
Management’s Plan to Remediate the Material Weakness
We are committed to and are taking steps necessary to remediate the control deficiencies that constituted the above material weakness by implementing changes to our internal control over financial reporting. We are in the process of designing and implementing measures to remediate the underlying causes of the control deficiencies that gave rise to the material weakness. In addition, we are providing in-house accounting personnel training to ensure that they have the relevant expertise related to the monitoring and oversight of accounting for non-routine transactions. We will continue to monitor the effectiveness of these controls and will make any further changes management determines appropriate.
Changes in Internal Control over Financial Reporting
Except for the material weakness noted above, there have been no changes in the Company’s internal control over financial reporting that occurred during the fiscal period ended September 28, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Table of Contents
Part II. OTHER INFORMATION
Item 1. | Legal Proceedings |
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 are scheduled to complete expert depositions on November 15, 2019. The court has set a deadline of December 2, 2019 for dispositive motions. A trial date has not yet been set by the Court as to BlueRadios’ remaining claims. 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 September 28, 2019. 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.
Item 1A. | Risk Factors |
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2018 Form 10-K/A. The risks discussed in our 2018 Form 10-K/A could materially affect our business, financial condition and future results. The risks described in our 2018 Form 10-K/A are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
We did not sell any securities during the three months ended September 28, 2019 that were not registered under the Securities Act.
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Item 6. Exhibits
Exhibit No. | Description | |
101.INS | XBRL Instance Document* | |
101.SCH | XBRL Taxonomy Extension Schema Document* | |
101.CAL | XBRL Taxonomy Calculation Linkbase Document* | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* | |
101.LAB | XBRL Taxonomy Label Linkbase Document* | |
101.PRE | XBRL Taxonomy Presentation Linkbase Document* | |
* | Submitted electronically herewith |
** | Furnished and not filed herewith |
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 28, 2019 (Unaudited) and December 29, 2018, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 28, 2019 and September 29, 2018, (iii) Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the three and nine months ended September 28, 2019 and September 29, 2018, (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the nine months ended September 28, 2019, (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 28, 2019 and September 29, 2018, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KOPIN CORPORATION (Registrant) | ||||
Date: | November 7, 2019 | By: | /S/ John C.C. Fan | |
John C.C. Fan | ||||
President, Chief Executive Officer and Chairman of the Board of Directors | ||||
(Principal Executive Officer) | ||||
Date: | November 7, 2019 | By: | /S/ RICHARD A. SNEIDER | |
Richard A. Sneider | ||||
Treasurer and Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) | ||||
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