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KOPIN CORP - Quarter Report: 2023 July (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 July 1, 2023

 

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 Capital Market

 

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

 

Class   Outstanding as of August 4, 2023
Common Stock, par value $0.01   114,295,151

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 
 

 

Kopin Corporation

 

INDEX

 

    Page No.
Part I – Financial Information  
     
Item 1. Condensed Consolidated Financial Statements (Unaudited) 3
     
  Condensed Consolidated Balance Sheets at July 1, 2023 (Unaudited) and December 31, 2022 3
     
  Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended July 1, 2023 and June 25, 2022 4
     
  Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the three and six months ended July 1, 2023 and June 25, 2022 5
     
  Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and six months ended July 1, 2023 and June 25, 2022 6
     
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended July 1, 2023 and June 25, 2022 7
     
  Notes to Unaudited Condensed Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
     
Item 4. Controls and Procedures 23
     
Part II – Other Information 24
     
Item 1. Legal Proceedings 24
     
Item 1A. Risk Factors 24
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
     
Item 6. Exhibits 25
     
Signatures 26

 

2
 

 

Part 1. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

KOPIN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

         
   July 1, 2023   December 31, 2022 
   (unaudited)     
ASSETS        
Current assets:          
Cash and cash equivalents  $10,106,668   $8,258,878 
Marketable debt securities, at fair value   15,563,133    4,388,778 
Accounts receivable, net of allowance of $1,103,000 in 2023 and $303,000 in 2022   6,171,241    6,537,891 
Contract assets and unbilled receivables   4,108,406    4,068,364 
Inventory   7,878,018    6,426,400 
Prepaid taxes   176,085    105,495 
Prepaid expenses and other current assets   1,917,503    1,074,867 
Total current assets   45,921,054    30,860,673 
Property, plant and equipment, net   1,800,346    1,831,641 
Operating lease right-of-use assets   2,847,836    3,168,520 
Other assets   169,132    170,132 
Equity investments   4,626,081    7,721,206 
Total assets  $55,364,449   $43,752,172 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $6,506,987   $5,438,980 
Accrued payroll and expenses   1,912,188    2,879,139 
Accrued warranty   2,165,000    1,966,000 
Contract liabilities and billings in excess of revenues earned   554,967    930,500 
Operating lease liabilities   796,073    786,928 
Accrued post-retirement benefits   790,000    790,000 
Other accrued liabilities   1,642,432    1,182,346 
Customer deposits   78,883     
Deferred tax liabilities   462,985    482,739 
Total current liabilities   14,909,515    14,456,632 
Noncurrent contract liabilities and asset retirement obligations   260,242    248,284 
Operating lease liabilities, net of current portion   2,182,886    2,576,883 
Accrued post-retirement benefits, net of current portion   694,996    1,110,000 
Other long-term obligations, net of current portion   1,390,705    1,369,758 
Total liabilities   19,438,344    19,761,557 
Commitments and contingencies   -    - 
Stockholders’ equity:          
Preferred stock, par value $.01 per share: authorized, 3,000 shares; none issued        
Common stock, par value $.01 per share: authorized, 150,000,000 shares; issued 114,365,786 shares in 2023 and 94,920,060 shares in 2022; outstanding 110,305,990 in 2023 and 92,883,524 in 2022, respectively   1,103,765    929,540 
Additional paid-in capital   382,941,171    360,567,631 
Treasury stock (70,635 shares in 2023 and 2022, at cost)   (103,127)   (103,127)
Accumulated other comprehensive income   1,200,045    1,176,068 
Accumulated deficit   (349,215,749)   (338,406,815)
Total Kopin Corporation stockholders’ equity   35,926,105    24,163,297 
Noncontrolling interest       (172,682)
Total Kopin Corporation stockholders’ equity   35,926,105    23,990,615 
Total liabilities and stockholders’ equity  $55,364,449   $43,752,172 

 

See notes to unaudited condensed consolidated financial statements

 

3
 

 

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

                 
  

Three months ended

  

Three months ended

  

Six months ended

  

Six months ended

 
   July 1, 2023   June 25, 2022   July 1, 2023   June 25, 2022 
Revenues:                
Net product revenues  $6,011,393   $9,003,658   $13,666,109   $15,511,186 
Research and development revenues   3,884,225    2,806,109    6,780,676    7,714,142 
Other revenues   564,238    99,265    771,262    262,126 
Total revenues   10,459,856    11,909,032    21,218,047    23,487,454 
Expenses:                    
Cost of product revenues   5,697,063    7,906,250    12,321,164    15,689,129 
Research and development   3,132,259    5,145,375    5,444,476    10,553,988 
Selling, general and administration   6,466,120    4,327,468    11,114,250    8,792,016 
Total expenses   15,295,442    17,379,093    28,879,890    35,035,133 
Loss from operations   (4,835,586)   (5,470,061)   (7,661,843)   (11,547,679)
Other (expense) income                    
Interest income   222,700    12,552    324,465    19,532 
Other income (expense), net   35,765    (3,586)   72,795    (4,727)
(Loss) gain on investments   (3,327,347)       (3,327,347)   4,700,000 
Foreign currency transaction losses   (236,911)   (150,094)   (139,004)   (114,979)
Total other (expense) income   (3,305,793)   (141,128)   (3,069,091)   4,599,826 
Loss before provision for income taxes and net loss attributable to noncontrolling interest   (8,141,379)   (5,611,189)   (10,730,934)   (6,947,853)
Tax provision   (39,000)   (36,000)   (78,000)   (72,000)
Net loss   (8,180,379)   (5,647,189)   (10,808,934)   (7,019,853)
Net loss attributable to the noncontrolling interest       257        280 
Net loss attributable to Kopin Corporation  $(8,180,379)  $(5,646,932)  $(10,808,934)  $(7,019,573)
Net loss per share                    
Basic and diluted  $(0.07)  $(0.06)  $(0.10)  $(0.08)
Weighted average number of common shares outstanding                    
Basic and diluted   109,911,244    90,300,999    107,473,813    90,211,742 

 

See notes to unaudited condensed consolidated financial statements

 

4
 

 

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

                 
  

Three months ended

  

Three months ended

  

Six months ended

  

Six months ended

 
   July 1, 2023   June 25, 2022   July 1, 2023   June 25, 2022 
Net loss  $(8,180,379)  $(5,647,189)  $(10,808,934)  $(7,019,853)
Other comprehensive loss, net of tax:                    
Foreign currency translation adjustments   32,190    (35,421)   42,184    (41,353)
Unrealized holding loss on marketable securities   (14,440)   (71,329)   (18,207)   (178,779)
Reclassification of holding losses in net loss               (522)
Other comprehensive income (loss), net of tax   17,750    (106,750)   23,977    (220,654)
Comprehensive loss   (8,162,629)   (5,753,939)   (10,784,957)   (7,240,507)
Comprehensive loss attributable to the noncontrolling interest       257        280 
Comprehensive loss attributable to Kopin Corporation  $(8,162,629)  $(5,753,682)  $(10,784,957)  $(7,240,227)

 

See notes to unaudited condensed consolidated financial statements

 

5
 

 

KOPIN CORPORATION

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

   Shares   Amount   Capital   Stock   Income   Deficit   Equity   Interest   Equity 
   Common Stock   Additional Paid-in   Treasury   Accumulated Other Comprehensive   Accumulated   Total Kopin Corporation Stockholders’   Noncontrolling   Total Stockholders’ 
   Shares   Amount   Capital   Stock   Income   Deficit   Equity   Interest   Equity 
Balance, December 31, 2022   92,954,159   $929,540   $360,567,631   $(103,127)  $1,176,068   $(338,406,815)  $24,163,297   $(172,682)  $23,990,615 
Vesting of restricted stock   17,500    175    (175)   -    -    -    -    -    - 
Stock-based compensation expense   -    -    194,190    -    -    -    194,190    -    194,190 
Other comprehensive income   -    -    -    -    6,227    -    6,227    -    6,227 
Issuance of common stock and pre-funded warrants, net of costs   17,000,000    170,000    21,165,000    -    -    -    21,335,000    -    21,335,000 
Acquisition of noncontrolling interest   -    -    (172,682)   -    -    -    (172,682)   172,682    - 
Net loss   -    -    -    -    -    (2,628,555)   (2,628,555)   -    (2,628,555)
Balance, April 1, 2023   109,971,659   $1,099,715   $381,753,964   $(103,127)  $1,182,295   $(341,035,370)  $42,897,477   $-   $42,897,477 
Vesting of restricted stock   404,966    4,050    (4,050)   -    -    -    -    -    - 
Stock-based compensation expense   -    -    1,191,257    -    -    -    1,191,257    -    1,191,257 
Other comprehensive income   -    -    -    -    17,750    -    17,750    -    17,750 
Net loss   -    -    -    -    -    (8,180,379)   (8,180,379)   -    (8,180,379)
Balance, July 1, 2023   110,376,625   $1,103,765   $382,941,171   $(103,127)  $1,200,045   $(349,215,749)  $35,926,105   $-   $35,926,105 

 

   Common Stock   Additional Paid-in   Treasury   Accumulated Other Comprehensive   Accumulated   Total Kopin Corporation Stockholders’   Noncontrolling   Total Stockholders’ 
   Shares   Amount   Capital   Stock   Income   Deficit   Equity   Interest   Equity 
Balance, December 25, 2021   90,069,169   $900,691   $356,931,157   $(366,110)  $1,414,351   $(319,080,898)  $39,799,191   $(172,334)  $39,626,857 
Vesting of restricted stock   154,421    1,544    (1,544)   -    -    -    -    -    - 
Stock-based compensation expense   -    -    656,073    -    -    -    656,073    -    656,073 
Other comprehensive loss   -    -    -    -    (113,906)   -    (113,906)   -    (113,906)
Restricted stock for tax withholding obligations   -    -    -    (95,613)   -    -    (95,613)   -    (95,613)
Net loss   -    -    -    -    -    (1,372,641)  $(1,372,641)   (23)   (1,372,664)
Balance, March 26, 2022   90,223,590   $902,235   $357,585,686   $(461,723)  $1,300,445   $(320,453,539)  $38,873,104   $(172,357)  $38,700,747 
Vesting of restricted stock   50,000    500    (500)   -    -    -    -    -    - 
Stock-based compensation expense   -    -    417,033    -    -    -    417,033    -    417,033 
Other comprehensive loss   -    -    -    -    (106,750)   -    (106,750)   -    (106,750)
Sale of registered stock   1,529,047    15,290    1,550,092    461,723    -    -    2,027,105    -    2,027,105 
Net loss   -    -    -    -    -    (5,646,932)   (5,646,932)   (257)   (5,647,189)
Balance, June 25, 2022   91,802,637   $918,025   $359,552,311   $-   $1,193,695   $(326,100,471)  $35,563,560   $(172,614)  $35,390,946 

 

See notes to unaudited condensed consolidated financial statements

 

6
 

 

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

         
   Six months ended   Six months ended 
   July 1, 2023   June 25, 2022 
Cash flows from operating activities:          
Net loss  $(10,808,934)  $(7,019,853)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   387,779    535,253 
Accretion of premium or discount on marketable debt securities       128 
Stock-based compensation   1,385,449    1,073,106 
Foreign currency losses   51,950    124,741 
Change in allowance for credit losses   790,950    (5,576)
Write-off of excess inventory   292,405    1,454,688 
Investment impairment (unrealized gains on investments)   2,887,893    (4,700,000)
Loss on sale of property and plant       202,670 
Income taxes   78,210    71,672 
Changes in other non-cash items   198,194    453,072 
Changes in assets and liabilities:          
Accounts receivable   (1,565,340)   6,106,734 
Contract assets and unbilled receivables   (96,923)   (3,126,437)
Inventory   (1,685,961)   (1,892,935)
Prepaid expenses, other current assets and other assets   (929,086)   (393,939)
Accounts payable and accrued expenses   1,396,840    (3,296,577)
Contract liabilities and billings in excess of revenue earned   (375,499)   (1,023,859)
Net cash used in operating activities   (7,992,073)   (11,437,112)
Cash flows from investing activities:          
Other assets   (483)   4,337 
Capital expenditures   (350,631)   (604,944)
Equity investment purchase       (499,998)
Proceeds from sale of marketable debt securities   6,466,917    1,000,000 
Purchases of marketable debt securities   (17,624,779)   (3,500,030)
Net cash used in investing activities   (11,508,976)   (3,600,635)
Cash flows from financing activities:          
Sale of treasury stock, net of costs       461,723 
Issuance of common stock and pre-funded warrants, net of costs   21,335,000    1,565,382 
Settlements of restricted stock for tax withholding obligations       (95,613)
Net cash provided by financing activities   21,335,000    1,931,492 
Effect of exchange rate changes on cash   13,839    (51,457)
Net increase (decrease) in cash and cash equivalents   1,847,790    (13,157,712)
Cash and cash equivalents:          
Beginning of period   8,258,878    26,787,931 
End of period  $10,106,668   $13,630,219 

 

See notes to unaudited condensed consolidated financial statements

 

7
 

 

KOPIN CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. BASIS OF PRESENTATION

 

The condensed consolidated financial statements of Kopin Corporation as of July 1, 2023 and for the six month periods ended July 1, 2023 and June 25, 2022 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 31, 2022. 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. 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.

 

The condensed consolidated financial statements for the six months ended July 1, 2023 include the accounts of Kopin Corporation and its wholly owned subsidiaries. The condensed consolidated financial statements for the six months ended June 25, 2022 include the accounts of Kopin Corporation and its wholly owned subsidiaries. Net loss attributable to noncontrolling interest in the Company’s condensed consolidated statements of operations for the six months ended June 25, 2022 represents the 20% of the results of operations of a former partially owned subsidiary which is allocated to the shareholders of the equity interests not owned by the Company. All intercompany transactions and balances have been eliminated.

 

The Company’s current strategy is to continue to invest in research and development, even during unprofitable periods, which may result in the Company continuing to incur net losses and negative cash flows from operations. If the Company is unable to achieve and maintain positive cash flows and profitability in the foreseeable future, its financial condition may ultimately be materially adversely affected such that management may be required to reduce operating expenses, including investments in research and development, or raise additional capital. While there can be no assurance the Company will be able to successfully reduce operating expenses or raise additional capital, management believes its historical success in managing cash flows and obtaining capital will continue in the foreseeable future.

 

On January 5, 2023, the Company entered into a Technology License Agreement and an Asset Purchase Agreement (the “LST Agreements”) with Lightning Silicon Technology, Inc. (“LST”). Pursuant to the LST Agreements, the Company issued a license to LST for certain technology associated with our Organic Light Emitting Technology, transferred in-process development contracts with two customers and accounts receivables that the Company had previously determined were not collectible. The technology license agreement provides for Kopin to transfer certain patents to LST if LST achieves certain milestones; however upon transfer, Kopin will receive a license to the technology. To the extent LST makes improvements to the technology licensed from Kopin, Kopin will receive a license for these improvements for certain markets. Kopin is not obligated to provide any additional funding support to LST. As consideration for the transaction, the Company received 18,000,000 preferred shares in LST, which the Company determined had no fair value as of the transaction date or as of July 1, 2023. While these shares represent a 20.0% equity stake in LST, they do not provide the Company with voting rights to elect LST’s Governance Board. The Company will also receive a royalty based on unit sales of products that utilize the technology licensed. Drs. John Fan, the Company’s former President, CEO and Chairman of the Board, Boryeu Tsaur, a former Executive Vice President of the Company and Hong Choi, the Company’s former Chief Technology Officer terminated their employment with the Company and became investors in and members of the management team of LST. Dr. Fan is the Founder of LST. As a result of this transaction, in 2022 the Company wrote off the two operating lease assets associated with facilities used for the development of our organic light emitting diode (OLED) products.

 

On January 27, 2023, the Company sold 17,000,000 shares of common stock and pre-funded warrants to purchase up to 6,000,000 shares of common stock at a public offering price of $0.99 per share for net proceeds of approximately $21.4 million. The Company believes that its existing cash, cash equivalents, will be adequate to satisfy its current operating plans for at least the next twelve months from the issuance of these financial statements. The Company has in the past sold equity securities through at-the-market equity offerings and in the traditional fashion of significant equity offerings. Nonetheless, management monitors the capital markets on an ongoing basis and may consider raising capital if favorable market conditions develop. If the Company’s actual results are less than projected or the Company needs to raise capital for additional liquidity, the Company may be required to do additional equity financings, reduce expenses, or enter into a strategic transaction. However, management can make no assurance that the Company will be able to raise additional capital, reduce expenses sufficiently, or enter into a strategic transaction on terms acceptable to the Company, or at all.

 

8
 

 

2. ACCOUNTING STANDARDS

 

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments became effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The amendments in ASU 2016-13 are intended to provide more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The Company adopted this standard on January 1, 2023 and there was not a material impact.

 

3. CASH AND CASH EQUIVALENTS AND MARKETABLE DEBT SECURITIES

 

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

 

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

 

The Company uses the specific identification method as a basis for determining cost and calculating realized gains and losses with respect to marketable debt securities. The gross gains and losses realized related to sales and maturities of marketable debt securities were not material during the three and six months ended July 1, 2023 and June 25, 2022.

 

Investments in available-for-sale marketable debt securities were as follows at July 1, 2023 and December 31, 2022:

  

   Amortized Cost   Unrealized
(Losses) Gains
   Fair Value 
   2023   2022   2023   2022   2023   2022 
U.S. government and agency backed securities  $8,407,706   $2,500,006   $(14,421)  $(102,276)  $8,393,285   $2,397,730 
Corporate debt and certificates of deposit   7,250,174    2,000,012    (80,326)   (8,964)   7,169,848    1,991,048 
Total  $  15,657,880   $  4,500,018   $  (94,747)  $  (111,240)  $  15,563,133   $  4,388,778 

 

The contractual maturity of the Company’s marketable debt securities was as follows at July 1, 2023:

  

   Less than One year   One to Five years   Total 
U.S. government and agency backed securities  $6,423,450   $1,969,835   $8,393,285 
Corporate debt and certificates of deposit   2,236,813    4,933,035    7,169,848 
Total  $8,660,263   $6,902,870   $15,563,133 

 

9
 

 

4. FAIR VALUE MEASUREMENTS

 

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

 

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

  

   Total   Level 1   Level 2   Level 3 
       Fair Value Measurement at July 1, 2023 Using: 
   Total   Level 1   Level 2   Level 3 
Cash and cash equivalents  $10,106,668   $10,106,668   $   $ 
U.S. government securities   8,393,285    3,978,360    4,414,925     
Certificates of deposit   7,169,848    7,169,848         
Equity investments   4,626,081    178,316        4,447,765 
Financial instruments, owned, at fair value  $30,295,882   $21,433,192   $4,414,925   $4,447,765 

 

   Total   Level 1   Level 2   Level 3 
       Fair Value Measurement at December 31, 2022 Using: 
   Total   Level 1   Level 2   Level 3 
Cash and cash equivalents  $8,258,878   $8,258,878   $   $ 
U.S. government securities   2,397,730        2,397,730     
Corporate debt   1,500,445        1,500,445     
Certificates of deposit   490,603    490,603         
Equity investments   7,721,206    213,016        7,508,190 
Financial instruments, owned, at fair value  $20,368,862   $8,962,497   $3,898,175   $7,508,190 

 

10
 

 

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

  

   December 31, 2022   Net unrealized losses   Foreign
currency
losses
    Purchases, issuances
and settlements
   July 1, 2023 
Equity investments  $7,508,190   $(3,327,347)  $ (172,532 )   $439,454   $4,447,765 

 

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

 

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

 

Equity Investments

 

From 2017 through 2019, the Company made several equity investments in a customer. In the fourth quarter of 2019, the Company reviewed the financial condition and other factors of the customer and, as a result, recorded an impairment charge of $5.2 million to reduce its investment in the customer to zero as of December 28, 2019. In the first quarter of 2022 the customer raised additional equity capital and based on an observable price change of the customer’s share prices and terms of the equity sale the Company remeasured the fair market value of its investment and recorded a gain of $4.7 million. In the second quarter of 2022, the Company made an additional equity investment of $0.5 million. During the quarter ended July 1, 2023, the Company received common stock of the equity investment valued at approximately $0.4 million for the payment of royalties. The Company also performed an impairment evaluation and as a result recorded an impairment charge of approximately $3.1 million. As of July 1, 2023, the Company owned an approximate 3.4% interest in this investment.

 

On September 30, 2019, the Company entered into an Asset Purchase Agreement pursuant to which the Company sold and licensed certain assets of our SolosTM product line and WhisperTM Audio technology. As consideration for the transaction, the Company received a 20.0% equity stake in 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. Based on the price paid for equity by the other 80.0% owners of Solos Inc. and other factors, the Company estimated the fair value of its equity holdings at $0.6 million and in 2019 recorded a $0.6 million gain on its investment for this equity transaction as the basis of assets transferred was zero. The investment was written down to $0.4 million as a result of an impairment analysis and write down performed in 2020. In the second quarter ending July 1, 2023 the Company reviewed its investment and wrote-down the investment to $0.2 million.

 

During the three and six months ended July 1, 2023, the Company recorded less than $0.2 million of unrealized losses on an equity interest in a company due to a fluctuation in the foreign exchange rate.

 

5. ACCOUNTS RECEIVABLE, NET

 

Accounts receivable consisted of the following:

 

   July 1, 2023   December 31, 2022 
Accounts receivable  $7,274,241   $6,840,891 
Less — allowance for credit losses   (1,103,000)   (303,000)
Total  $6,171,241   $6,537,891 

 

Changes to the allowance for credit losses for the six months ended July 1, 2023 were as follows:

 

      
Balance, December 31, 2022  $303,000 
Additions   829,000 
Write-offs   (29,000)
Balance, July 1, 2023  $1,103,000 

 

6. 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 July 1, 2023 and December 31, 2022:

  

   July 1, 2023   December 31, 2022 
Raw materials  $4,907,401   $4,285,757 
Work-in-process   2,053,581    1,735,454 
Finished goods   917,036    405,189 
Total  $7,878,018   $6,426,400 

 

11
 

 

7. NET LOSS PER SHARE

 

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

 

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

  

   Three Months Ended   Three Months Ended   Six Months Ended   Six Months Ended 
   July 1, 2023   June 25, 2022   July 1, 2023   June 25, 2022 
Non-vested restricted common stock   3,989,161    1,824,723    3,989,161    1,824,723 

 

8. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

 

Registered sale of equity securities

 

On January 27, 2023, the Company sold 17,000,000 shares of common stock and pre-funded warrants to purchase up to 6,000,000 shares of common stock at a public offering price of $0.99 per pre-funded warrant, for gross proceeds of $22.9 million before deducting underwriting discounts and offering expenses paid by the Company of $1.5 million. The offering price of the pre-funded warrant equals the public offering price per share of the common stock less the $0.01 per share exercise price of each pre-funded warrant.

 

During the three months ended June 25, 2022, the Company sold 1.5 million shares of common stock and 0.2 million shares of treasury stock for gross proceeds of $2.1 million (average of $1.26 per share) before deducting broker expenses paid by us of less than $0.1 million, pursuant to the Company’s At-The-Market Equity Offering Sales Agreement dated as of March 5, 2021 (the” ATM Agreement”) with Stifel, Nicolaus & Company, Incorporated, as agent, under which we may sell up to $50 million of our common stock. The Company has approximately $41.4 million worth of common stock remaining available for sale under the ATM Agreement.

 

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.

 

The Company granted 3,136,844 and 186,500 restricted stock units to its employees, executives and the Board of Directors in the six months ended July 1, 2023 and June 25, 2022, respectively. 1,416,294 shares of the 3,136,844 shares are time-based and will vest on average over three equal annual installments. 1,720,550 shares of the 3,136,844 shares will vest upon the successful achievement of certain fiscal year 2023 milestones. The fair value of the restricted stock units was based on the fair market value of the Company’s stock on the date of grant. The time-based shares are expensed over the service period and the milestone based shares are expensed based upon the probability of achievement.

 

Restricted stock activity for the six months ended July 1, 2023 was as follows:

 

       Weighted Average 
   Shares   Grant Fair Value 
Balance, December 31, 2022    1,965,901   $2.22 
Granted    3,136,844    1.58 
Forfeited    (691,118)   3.03 
Vested    (422,466)   1.58 
Balance, July 1, 2023    3,989,161   $1.65 

 

12
 

 

Stock-Based Compensation

 

The following table summarizes stock-based compensation expense within each of the categories below as it relates to non-vested restricted common stock awards for the three and six months ended July 1, 2023 and June 25, 2022 (no tax benefits were recognized):

  

   Three Months Ended   Three Months Ended   Six Months Ended   Six Months Ended 
   July 1, 2023   June 25, 2022   July 1, 2023   June 25, 2022 
Cost of product revenues  $427,323   $11,713   $453,541   $78,381 
Research and development   322,294    108,347    339,168    255,726 
Selling, general and administrative   441,641    296,973    592,740    738,999 
Total  $1,191,258   $417,033   $1,385,449   $1,073,106 

 

Unrecognized compensation expense for non-vested restricted common stock as of July 1, 2023 totaled $4.0 million and is expected to be recognized over a weighted average period of approximately three years.

 

9. ACCRUED WARRANTY

 

The Company typically warrants its products against defect for 12 to 18 months, however, for certain products a customer may purchase an extended warranty. A provision for estimated future costs and estimated returns for credit relating to such warranty is recorded in the period when product is shipped and revenue is recognized and is updated as additional information becomes available. The Company’s estimate of future costs to satisfy warranty obligations is based primarily on historical warranty expense experienced and a provision for potential future product failures. Changes in the accrued warranty for the six months ended July 1, 2023 were as follows:

  

      
Balance, December 31, 2022   $1,966,000 
Additions    448,000 
Claims    (249,000)
Balance, July 1, 2023   $2,165,000 

 

Extended Warranties

 

Deferred revenue represents the purchase of extended warranties by the Company’s customers. The Company recognizes revenue from an extended warranty on the straight-line method over the life of the extended warranty, which is typically 12 to 15 months beyond the standard 12 to 18 month warranty. The Company classifies the current portion of deferred revenue under Other accrued liabilities in its condensed consolidated balance sheets. At July 1, 2023, the Company had less than $0.1 million of deferred revenue related to extended warranties.

 

13
 

 

10. INCOME TAXES

 

The Company recorded a provision for income taxes of less than $0.1 million in each of the three and six months ended July 1, 2023 and June 25, 2022, respectively. As of July 1, 2023, the Company has available for tax purposes U.S. federal net operating loss carryforwards (“NOLs”) of approximately $135.5 million expiring 2023 through 2038 and $93.1 million that have an unlimited carryover period. Under the provisions of Section 382, certain substantial changes in Kopin’s ownership may limit in the future the amount of net operating loss carryforwards that could be used annually to offset future taxable income and income tax liability. The Company has 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.

 

11. 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:

   

   July 1, 2023   December 31, 2022   $ Change   % Change 
Contract assets —current  $4,108,406   $4,068,364   $40,042    1%
Contract liabilities—current   (554,967)   (930,500)   375,533    (40)%
Contract liabilities—noncurrent   (6,224)   (6,190)   (34)   1%
Net contract assets  $3,547,215   $3,131,674   $415,541    13%

 

The $0.4 million increase in the Company’s net contract assets at July 1, 2023 as compared to December 31, 2022 was primarily due to a change in its fixed price contracts with the U.S. government that resulted in revenue recognized in excess of amounts billed and product revenue recognized over time for defense programs.

 

In the three and six months ended July 1, 2023, the Company recognized revenue of $0.1 million and $0.6 million, respectively, related to our contract liabilities at December 31, 2022. In the three and six months ended June 25, 2022, the Company recognized revenue of $2.9 million and $0.2 million, respectively, related to our contract liabilities at December 25, 2021.

 

The Company did not recognize impairment losses on our contract assets in the three or six months ended July 1, 2023 or June 25, 2022.

 

Performance Obligations

 

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

  

   Three months ended   Three months ended   Six months ended   Six months ended 
   July 1, 2023   June 25, 2022   July 1, 2023   June 25, 2022 
Point in time   31%   17%   28%   18%
Over time   69%   83%   72%   82%

 

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 July 1, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $14.6 million which the Company expects to recognize over the next 12 months. The remaining performance obligations represent amounts to be earned under government contracts, which are subject to cancellation.

 

14
 

 

12. LEASES

 

The Company enters into operating leases primarily for: real estate, including for manufacturing, engineering, research, administration and sales facilities, and information technology (“IT”) equipment. At July 1, 2023 and December 31, 2022, the Company did not have any finance leases. Approximately all of our future lease commitments, and related lease liability, relate to the Company’s real estate leases. Some of the Company’s leases include options to extend or terminate the lease.

 

The components of lease expense were as follows:

  

   Three Months Ended   Three Months Ended   Six Months Ended   Six Months Ended 
   July 1, 2023   June 25, 2022   July 1, 2023   June 25, 2022 
Operating lease cost  $217,863   $250,361   $432,426   $499,864 

 

At July 1, 2023, the Company’s future lease payments under non-cancellable leases were as follows:

   

      
2023 (excluding the six months ended July 1, 2023)  $483,463 
2024   898,459 
2025   639,281 
2026   604,000 
2027   604,000 
Thereafter   201,333 
Total future lease payments   3,430,536 
Less imputed interest   (451,577)
Total  $2,978,959 

 

The Company’s lease liabilities recognized in the Company’s condensed consolidated balance sheets at July 1, 2023 were as follows:

   

   July 1, 2023 
Operating lease liabilities - current  $796,073 
Operating lease liabilities - noncurrent   2,182,886 
Total lease liabilities  $2,978,959 

 

Supplemental cash flow information related to leases was as follows:

   

   Six months ended 
   July 1, 2023 
Cash paid for amounts included in the measurement of operating lease liabilities  $496,691 

 

Other information related to leases was as follows:

 

   July 1, 2023 
Weighted Average Discount Rate - Operating Leases   6.00%
Weighted Average Remaining Lease Term - Operating Leases (in years)   4.28 

 

15
 

 

13. SEGMENTS AND DISAGGREGATION OF REVENUE

 

We continually monitor and review our segment reporting structure in accordance with authoritative guidance to determine if any changes have occurred that would affect our reportable segments. We report under one segment, as our Chief Executive Officer, who is our chief operating decision maker (“CODM”), reviews results on a total company basis.

 

Total long-lived assets by country at July 1, 2023 and December 31, 2022 were:

   

Total Long-lived Assets (in thousands)  July 1, 2023   December 31, 2022 
United States  $4,320   $4,604 
United Kingdom   328    396 
Total  $4,648   $5,000 

 

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

 

During the three and six months ended July 1, 2023 and June 25, 2022, the Company derived its sales from the following geographies:

   

   Three months ended   Three months ended   Six months ended   Six months ended 
   July 1, 2023   June 25, 2022   July 1, 2023   June 25, 2022 
(In thousands, except percentages)  Revenue   % of Total   Revenue   % of Total   Revenue   % of Total   Revenue   % of Total 
United States  $8,931    86%  $10,037    84%  $17,909    85%  $19,335    82%
Other Americas   5                5             
Total Americas   8,936    86    10,037    84    17,914    85    19,335    82 
Asia - Pacific   1,184    11    1,564    13    2,593    12    3,707    16 
Europe   340    3    308    3    711    3    445    2 
Total Revenues  $  10,460    100%  $11,909    100%  $  21,218    100%  $23,487    100%

 

During the three and six months ended July 1, 2023 and June 25, 2022, the Company derived its sales from the following display applications:

   

   Three months ended   Three months ended   Six months ended   Six months ended 
(In thousands)  July 1, 2023   June 25, 2022   July 1, 2023   June 25, 2022 
Defense  $5,067   $7,087   $11,487   $11,844 
Industrial   884    1,633    1,808    3,162 
Consumer   59    284    370    505 
R&D   3,884    2,806    6,780    7,714 
License and royalties   566    99    773    262 
Total Revenues  $10,460   $11,909   $21,218   $23,487 

 

14. LITIGATION

 

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

 

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

 

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

 

On October 11, 2016, the Company filed its Answer and Affirmative Defenses. The parties completed expert depositions on November 15, 2019. On December 2, 2019, the Company filed a Motion for Partial Summary Judgment requesting the Court dismiss counts 2-7 in their entirety and counts 1 and 8 in part. BlueRadios also filed a Motion for Partial Summary Judgment alleging it is the co-owner of U.S. Patent No. 8,909,296. Responses to the Motions for Partial Summary Judgment were filed on January 15, 2020, and replies were filed on February 19, 2020. On September 25, 2020, the Court denied BlueRadios’ Motion for Partial Summary Judgment. On August 3, 2022, the Court granted the Company’s Motion for Partial Summary Judgment by dismissing counts 3, 6, 7, punitive damages under count 2, and count 8 as it relates to patent applications, and denying the motion as it relates to counts 1, 4, and 5, and the remainder of counts 2 and 8. The Court also ordered discovery reopened for certain limited purposes. A trial date was set by the Court for January 22 – February 5, 2024. 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 July 1, 2023. The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.

 

16
 

 

15. RELATED PARTY TRANSACTIONS

 

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

 

During the three and six months ended July 1, 2023 and June 25, 2022, the Company had the following transactions with related parties:

   

   Three Months Ended 
   July 1, 2023   June 25, 2022 
   Sales   Purchases   Sales   Purchases 
RealWear, Inc.  $562,622   $   $94,805   $ 
HMDmd, Inc.   236,279        62,925     
Lightning Silicon Technology, Inc.       168,800         
   $798,901   $168,800   $157,730   $ 

 

   Six Months Ended 
   July 1, 2023   June 25, 2022 
   Sales   Purchases   Sales   Purchases 
RealWear, Inc.  $769,646   $   $719,022   $ 
HMDmd, Inc.   502,755        62,925     
Lightning Silicon Technology, Inc.       208,055         
   $1,272,401   $208,055   $781,947   $ 

 

At July 1, 2023 and December 31, 2022, the Company had the following receivables from and payables to related parties:

 

   July 1, 2023   December 31, 2022 
   Receivables   Payables   Receivables   Payables 
RealWear, Inc.  $123,168   $   $171,518   $ 
HMDmd, Inc.   92,752        151,340     
Solos Technology   1,295        2,248     
Lightning Silicon Technology, Inc.   10,396    193,800         
   $227,611   $193,800   $325,106   $ 

 

 

17
 

 

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

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the safe harbor created by such sections. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “could,” “would,” “seeks,” “estimates,” and variations of such words and similar expressions, and the negatives thereof, are intended to identify such forward-looking statements. We caution readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and advise readers that these forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, estimates, and assumptions by us that are difficult to predict. Various factors, some of which are beyond our control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. All such forward-looking statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by these cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report, except as may otherwise be required by the federal securities laws.

 

We have identified the following important factors that could cause actual results to differ materially from those discussed in our forward-looking statements. Such factors may be in addition to the risks described in Part I, Item 1A, “Risk Factors;” Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; and other parts of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. These factors include: our ability to source semiconductor components and other raw materials used in the manufacturing of our products; our ability to prosecute and defend our proprietary technology aggressively or successfully; our ability to retain personnel with experience and expertise relevant to our business; our ability to invest in research and development to achieve profitability even during periods when we are not profitable; our ability to continue to introduce new products in our target markets; our ability to generate revenue growth and positive cash flow, and reach profitability; the strengthening of the U.S. dollar and its effects on the price of our products in foreign markets; the impact of new regulations and customer demands relating to conflict minerals; our ability to obtain a competitive advantage in the wearable technologies market through our extensive portfolio of patents, trade secrets and non-patented know-how; our ability to grow within our targeted markets; the importance of small form factor displays in the development of defense, consumer, and industrial products such as thermal weapon sights, safety equipment, virtual and augmented reality gaming, training and simulation products and metrology tools; the suitability of our properties for our needs for the foreseeable future; our expectation not to pay cash dividends for the foreseeable future and to retain earnings for the development of our businesses; our need to achieve and maintain positive cash flow and profitability; and our expectation that if we do not achieve and maintain positive cash flow and profitability; our financial condition will ultimately be materially adversely affected, and we will be required to reduce expenses, including our investments in research and development or raise additional capital and our ability to support our operations and capital needs for at least the next twelve months through our available cash resources.

 

Overview

 

We are a leading developer, manufacturer and seller of miniature displays and optical lenses (our “components”) for sale as individual displays, components, modules or higher-level subassemblies. We also license our intellectual property through technology license agreements. Our component products are used in highly demanding high-resolution portable military, enterprise and consumer electronic applications, training and simulation equipment and 3D metrology equipment. Our products enable our customers to develop and market an improved generation of products for these target applications.

 

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The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and our unaudited condensed consolidated financial statements included in this Form 10-Q.

 

Results of Operations

 

Our interim period results of operations and period-to-period comparisons of such results may not be indicative of our future operating results. Additionally, we use a fiscal calendar, which may result in differences in the number of work days in the current and comparable prior interim periods and could affect period-to-period comparisons. The following discussions of comparative results among periods, including the discussion of results by display application, should be viewed in this context.

 

Revenues. For the three and six months ended July 1, 2023 and June 25, 2022, our revenues by display application, which include product sales and amounts earned from research and development contracts (“R&D”), were as follows:

 

   Three months ended   Three months ended   Six months ended   Six months ended 
(In thousands)  July 1, 2023   June 25, 2022   July 1, 2023   June 25, 2022 
Defense  $5,067   $7,087   $11,487   $11,844 
Industrial   884    1,633    1,808    3,162 
Consumer   59    284    370    505 
R&D   3,884    2,806    6,780    7,714 
License and royalties   566    99    773    262 
Total Revenues  $10,460   $11,909   $21,218   $23,487 

 

Sales of our products for Defense applications include systems used by the military both in the field and for training and simulation. The decrease in Defense applications revenues for the three months ended July 1, 2023 as compared to the three months ended June 25, 2022 was primarily due to decreases in revenues from products used in pilot helmets and thermal weapon sight systems for soldiers. The decrease in Defense applications revenues for the six months ended July 1, 2023 as compared to the six months ended June 25, 2022 was primarily due to decreases in revenues from products used in thermal weapon sight systems for soldiers partially offset by an increase in sales of our products for pilot helmets.

 

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Industrial applications revenue represents customers who purchase our display products for use in 3D metrology equipment and headsets used for applications in manufacturing, distribution and public safety. Our 3D metrology customers are primarily located in Asia and sell to Asian contract manufacturers who use the 3D metrology machines for quality control purposes. The decreases in Industrial applications revenues for the three and six months ended July 1, 2023 as compared to the three and six months ended June 25, 2022 was due to a decline in sales of products for use in 3D metrology equipment and headsets.

 

Our displays for Consumer applications are used primarily in thermal imaging products and recreational rifles and hand-held scopes. The decreases in Consumer applications revenues for the three and six months ended July 1, 2023 as compared to the three and six months ended June 25, 2022 were primarily due to a decrease in sales for hand-held thermal imagers.

 

R&D revenues increased in the three months ended July 1, 2023 as compared to the three months ended June 25, 2022 primarily due to an increase in funding for display systems initially used in U.S. defense programs. R&D revenues decreased in the six months ended July 1, 2023 as compared to the six months ended June 25, 2022 primarily due to a decrease in funding for U.S. defense programs as certain programs transitioned to production programs.

 

On January 5, 2023, the Company entered into a Technology License Agreement and an Asset Purchase Agreement (the “LST Agreements”) with Lightning Silicon Technology, Inc. (“LST”). Pursuant to the LST Agreements, the Company transferred in-process development contracts with two customers. Included in R&D revenues for the six months ended July 1, 2023 and June 25, 2022 is approximately $500,000 and $400,000, respectively, related to OLED development programs with the transferred development contracts.

 

International revenues represented 14% and 15% of total revenues for the three and six months ended July 1, 2023, respectively, and 16% and 18% of total revenues for the three and six months ended June 25, 2022, respectively. We categorize our revenues as either domestic or international based upon the delivery destination of our product. For example, if the customer is located in Asia or if a U.S. customer has its Asian contract manufacturer order product from us and we deliver the product to Asia, we categorize both these sales as international. In addition, if we earn royalties on sales from a customer, the royalties are categorized as domestic or international based on how the product revenues are categorized. The decrease in international revenues was a result of a decrease in sales of products for 3D AOI metrology equipment and industrial wearable headset applications. Our international sales are primarily denominated in U.S. currency. Consequently, a strengthening of the U.S. dollar could increase the price in local currencies of our products in foreign markets and make our products relatively more expensive than competitors’ products that are denominated in local currencies, which could lead to a reduction in sales or profitability in those foreign markets. We have not taken any protective measures against exchange rate fluctuations, such as purchasing hedging instruments with respect to such fluctuations, because of the historically stable exchange rate between the British Pound Sterling (the functional currency of our U.K. subsidiary) and the U.S. dollar. Foreign currency translation impact on our results, if material, is described in further detail under “Item 3. Quantitative and Qualitative Disclosures About Market Risk” section below.

 

Cost of Product 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 six months ended July 1, 2023 and June 25, 2022, were as follows:

 

   Three Months Ended   Three Months Ended   Six Months Ended   Six Months Ended 
(In thousands, except for percentages)  July 1, 2023   June 25, 2022   July 1, 2023   June 25, 2022 
Cost of product revenues  $5,697   $7,906   $12,321   $15,689 
Cost of product revenues as a % of net product revenues   95%   88%   90%   101%

 

The increase in cost of product revenues as a percentage of net product revenues for the three months ended July 1, 2023, as compared to the three months ended June 25, 2022, was primarily due to lower efficiencies from reduced product sale volumes. The decrease in cost of product revenues as a percentage of net product revenues for the six months ended July 1, 2023, as compared to the six months ended June 25, 2022, was primarily due to lower labor costs as a result of a reduction in force in the first quarter of 2023 and lower material costs for warranty issues of approximately $450,000.

 

During 2021, we became aware of global shortages of semiconductor components. During 2022, our manufacturing was impacted by a shortage of several semiconductor components from our normal vendors that are necessary to manufacture our products. For some components we were able to identify and use other sources for the components but for some components primarily used in defense related products, we were able to avail ourselves of alternate components because their use would have required a requalification of our product by our customer. The shortage of certain semiconductor components situation is very dynamic, and we rely on our vendors to provide information about the vendors that they use.

 

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Research and Development. R&D expenses are incurred in support of internal display development programs and programs funded by agencies or prime contractors of the U.S. government and commercial partners. R&D costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication, and packaging of display products, and overhead. In fiscal year 2023, we expect our R&D expenditures to be related to our display products, overlay weapon sights and OLED display technologies. Funded and internal R&D expenses are combined in research and development expenses in the condensed consolidated statement of operations. R&D expenses for the three and six months ended July 1, 2023 and June 25, 2022 were as follows:

 

    Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
(In thousands)   July 1, 2023     June 25, 2022     July 1, 2023     June 25, 2022  
Funded   $ 2,193     $ 3,181     $ 3,834     $ 6,548  
Internal     939       1,964       1,610       4,006  
Total research and development expense   $ 3,132     $ 5,145     $ 5,444     $ 10,554  

 

Funded R&D expense for the three and six months ended July 1, 2023 decreased as compared to the three and six months ended June 25, 2022 primarily due to decreased spending on U.S. defense programs as certain programs transitioned to production programs. Internal R&D expenses for the three and six months ended July 1, 2023 decreased compared to the three and six months ended June 25, 2022 primarily due to a decrease in OLED development costs.

 

On January 5, 2023, the Company entered into the LST Agreements with LST. Drs. John Fan, the Company’s former President, CEO, and Chairman of the Board, Boryeu Tsaur, a former Executive Vice President of the Company and Hong Choi, the Company’s former Chief Technology Officer, terminated their employment with the Company and became investors in and members of the management team of LST. In addition, approximately 20 employees terminated their employment with the Company and joined LST. These individuals were primarily involved with internal R&D projects and the termination of the programs they were working on and their employment is the primary reason for the decrease in internal R&D expense.

 

Selling, General and Administrative. Selling, general and administrative (“S,G&A”) expenses consist of the expenses incurred by our sales and marketing personnel and related expenses, and administrative and general corporate expenses. S,G&A expenses for the three and six months ended July 1, 2023 and June 25, 2022 were as follows:

 

   Three Months Ended   Three Months Ended   Six Months Ended   Six Months Ended 
(In thousands, except for percentages)  July 1, 2023   June 25, 2022   July 1, 2023   June 25, 2022 
Selling, general and administration expense  $6,466   $4,327   $11,114   $8,792 
Selling, general and administration expense as a % of revenues   62%   36%   52%   37%

 

The increase in S,G&A expense for the three months ended July 1, 2023, as compared to the three months ended June 25, 2022, was primarily due to an increase in legal expense, stock compensation, and credit loss expense partially offset by lower information technology and cash compensation and benefits expense. The increase in S,G&A expense for the six months ended July 1, 2023, as compared to the six months ended June 25, 2022, was primarily due to an increase in legal expense, stock compensation and credit loss expense partially offset by lower information technology, insurance, and cash compensation and benefits expense.

 

Other Income (Expense), net. Other income (expense), net, is primarily composed of interest income, foreign currency transaction and remeasurement gains and losses incurred by our U.K.-based subsidiary and other non-operating income items. Other income (expense), net, for the three and six months ended July 1, 2023 and June 25, 2022 was as follows:

 

    Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
(In thousands)   July 1, 2023     June 25, 2022     July 1, 2023     June 25, 2022  
Other (expense) income, net   $ (3,306 )   $ (141 )   $ (3,069 )   $ 4,600  

 

During the three and six months ended July 1, 2023 and June 25, 2022, we recorded foreign currency losses of $0.2 million and $0.1 million. Other expense for the second quarter of 2023 includes $3.3 million of impairment losses on equity investments. Other income for the first quarter of 2022 includes a gain of $4.7 million resulting from an observable price change in an equity investment.

 

Tax Provision. We recorded a provision for income taxes of less than $0.1 million in the three and six months ended July 1, 2023 and June 25, 2022.

 

Net Loss Attributable to Noncontrolling Interest. In the first quarter of 2023, we acquired the remaining interest in eMDT America (“eMDT”). Net loss attributable to noncontrolling interest on our condensed consolidated statements of operations represents the 20% portion of the results of operations of eMDT which is allocated to the stockholders of the equity interests not owned by us in 2022. The change in net loss attributable to noncontrolling interest is the result of the change in the results of operations of eMDT for the three and six months ended June 25, 2022.

 

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Net Loss Attributable to Kopin Corporation. We incurred net losses attributable to Kopin Corporation of $8.2 million and $10.8 million during the three and six months ended July 1, 2023, respectively, compared to net losses attributable to Kopin Corporation of $5.6 million and $7.0 million during the three and six months ended June 25, 2022, respectively. The increase in the net loss attributable to Kopin Corporation during the three and six months ended July 1, 2023 compared to the three and six months ended June 25, 2022 is primarily due to the impairment losses on equity investments.

 

Liquidity and Capital Resources

 

At July 1, 2023 and December 31, 2022, we had cash and cash equivalents and marketable debt securities of $25.7 million and $12.6 million, respectively, and working capital of $31.0 million and $16.4 million, respectively. The change in cash and cash equivalents and marketable securities was primarily due to gross proceeds of $22.9 million received from the sale of 17,000,000 shares of common stock and the pre-funded warrants to purchase up to 6,000,000 shares of common stock at a public offering price of $0.99 per share. The reader is referred to Note 8 Stockholders’ Equity and Stock-Based Compensation.

 

We believe that our existing cash and cash equivalents will be adequate to satisfy our current operating plans for at least the next twelve months from the issuance of these financial statements. We have in the past sold equity securities through at-the-market equity offerings and in the traditional fashion of significant equity offerings. Nonetheless, management monitors the capital markets on an ongoing basis and may consider raising capital if favorable market conditions develop. If our actual results are less than projected or we need to raise capital for additional liquidity, we may be required to do additional equity financing, reduce expenses, or enter into a strategic transaction. However, management can make no assurance that we will be able to raise additional capital, reduce expenses sufficiently, or enter into a strategic transaction on terms acceptable to us, or at all.

 

During the three months ended June 25, 2022, we sold 1.5 million shares of common stock and 0.2 million shares of treasury stock for gross proceeds of $2.1 million (average of $1.26 per share) before deducting broker expenses paid by us of less than $0.1 million, pursuant to the Company’s At-The-Market Equity Offering Sales Agreement dated as of March 5, 2021 (the “ATM Agreement”) with Stifel, Nicolaus & Company, Incorporated, as agent, under which we may sell up to $50 million of our common stock. We have approximately $41.4 million worth of common stock remaining available for sale under the ATM Agreement.

 

Cash and cash equivalents and marketable debt securities held in U.S. dollars at July 1, 2023 and December 31, 2022 were as follows:

 

   July 1, 2023   December 31, 2022 
Domestic locations  $25,328,421   $11,778,324 
International locations   43,790    629,793 
Subtotal cash and cash equivalents marketable debt securities held in U.S. dollars   25,372,211    12,408,117 
Cash and cash equivalents held in other currencies and converted to U.S. dollars   297,590    239,539 
Total cash and cash equivalents and marketable debt securities  $25,669,801   $12,647,656 

 

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We have no plans to repatriate the cash and cash equivalents held in our foreign subsidiary Forth Dimension Displays, Ltd. and, as such, we have not recorded any deferred tax liability with respect to such cash.

 

We expect to expend between $1.0 million and $2.0 million on capital expenditures in 2023.

 

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. subsidiaries. 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 on 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

 

As of July 1, 2023, the Company conducted an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of July 1, 2023, as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 that evaluation, our management concluded that, as of July 1, 2023, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended July 1, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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 completed expert depositions on November 15, 2019. On December 2, 2019, the Company filed a Motion for Partial Summary Judgment requesting the Court dismiss counts 2-7 in their entirety and counts 1 and 8 in part. BlueRadios also filed a Motion for Partial Summary Judgment alleging it is the co-owner of U.S. Patent No. 8,909,296. Responses to the Motions for Partial Summary Judgment were filed on January 15, 2020, and replies were filed on February 19, 2020. On September 25, 2020, the Court denied BlueRadios’ Motion for Partial Summary Judgment. On August 3, 2022, the Court granted the Company’s Motion for Partial Summary Judgment by dismissing counts 3, 6, 7, punitive damages under count 2, and count 8 as it relates to patent applications, and denying the motion as it relates to counts 1, 4, and 5, and the remainder of counts 2 and 8. The Court also ordered discovery reopened for certain limited purposes. A trial date was set by the Court for January 22 – February 5, 2024. 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 July 1, 2023. 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

 

Our business and financial results are subject to numerous risks and uncertainties. As a result, the risks and uncertainties discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 should be carefully considered. There have been no material changes in the assessment of our risk factors from those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

We did not sell any securities during the six months ended July 1, 2023 that were not registered under the Securities Act.

 

Item 5. Other Information

 

None of the Company’s directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the Company’s fiscal quarter ended July 1, 2023.

 

Item 6. Exhibits

 

Exhibit No.   Description
4.1   Form of Pre-Funded Warrant (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 26, 2023)
31.1   Certification of Michael Murray, Chief Executive Officer, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) *
31.2   Certification of Richard A. Sneider, Chief Financial Officer, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) *
32.1   Certification of Michael Murray, Chief Executive Officer, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) **
32.2   Certification of Richard A. Sneider, Chief Financial Officer, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) **
101.INS   Inline XBRL Instance Document*
101.SCH   Inline XBRL Taxonomy Extension Schema Document*
101.CAL   Inline XBRL Taxonomy Calculation Linkbase Document*
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB   Inline XBRL Taxonomy Label Linkbase Document*
101.PRE   Inline XBRL Taxonomy Presentation Linkbase Document*
104   Cover Page Interactive Data File (embedded within the Inline XBRL 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 July 1, 2023 (Unaudited) and December 31, 2022, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended July 1, 2023 and June 25, 2022, (iii) Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the three and six months ended July 1, 2023 and June 25, 2022, (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and six months ended July 1, 2023 and June 25, 2022, (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended July 1, 2023 and June 25, 2022, 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: August 11, 2023 By:  /S/ MICHAEL MURRAY
    Michael Murray
    President, Chief Executive Officer
    (Principal Executive Officer)
     
Date: August 11, 2023 By: /S/ RICHARD A. SNEIDER
    Richard A. Sneider
    Treasurer and Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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