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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 25, 2022

 

☐ 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 3, 2022
Common Stock, par value $0.01   93,637,360

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 
 

 

Kopin Corporation

 

INDEX

 

   

Page

No.

Part I – Financial Information  
   
Item 1. Condensed Consolidated Financial Statements (Unaudited) 3
     
  Condensed Consolidated Balance Sheets at June 25, 2022 (Unaudited) and December 25, 2021 3
     
  Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 25, 2022 and June 26, 2021 4
     
  Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the three and six months ended June 25, 2022 and June 26, 2021 5
     
  Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and six months ended June 25, 2022 and June 26, 2021 6
     
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 25, 2022 and June 26, 2021 7
     
  Notes to Unaudited Condensed Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
     
Item 4. Controls and Procedures 24
     
Part II – Other Information 25
   
Item 1. Legal Proceedings 25
     
Item 1A. Risk Factors 25
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
     
Item 6. Exhibits 26
     
Signatures 27

 

2
 

 

Part 1. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

KOPIN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   June 25, 2022   December 25, 2021 
        
ASSETS          
Current assets:          
Cash and cash equivalents  $13,630,219   $26,787,931 
Marketable debt securities, at fair value   4,927,793    2,507,535 
Accounts receivable, net of allowance of $136,000 in 2022 and $150,000 in 2021   7,048,635    12,113,070 
Contract assets and unbilled receivables   5,268,754    2,299,392 
Inventory   6,926,489    6,581,139 
Prepaid taxes   170,124    160,599 
Prepaid expenses and other current assets   2,091,509    1,758,079 
Total current assets   40,063,523    52,207,745 
Property, plant and equipment, net   1,738,962    1,888,963 
Operating lease right-of-use assets   3,766,602    3,828,066 
Other assets   170,932    170,932 
Equity investments   9,831,592    4,912,022 
Total assets  $55,571,611   $63,007,728 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $4,860,573   $5,483,970 
Accrued payroll and expenses   2,319,713    2,413,744 
Accrued warranty   969,000    517,000 
Contract liabilities and billings in excess of revenues earned   3,047,208    4,063,031 
Operating lease liabilities   767,440    701,204 
Other accrued liabilities   1,698,129    1,202,635 
Customer deposits   806,040    2,638,103 
Deferred tax liabilities   472,569    513,417 
Total current liabilities   14,940,672    17,533,104 
           
Noncurrent contract liabilities and asset retirement obligations   250,844    288,634 
Operating lease liabilities, net of current portion   2,973,259    3,108,236 
Other long-term liabilities   2,015,890    2,450,897 
Total liabilities   20,180,665    23,380,871 
Commitments and contingencies (Note 13)   -      
Stockholders’ equity:          
Preferred stock, par value $.01 per share: authorized, 3,000 shares; none issued   -    - 
Common stock, par value $.01 per share: authorized, 150,000,000 shares; issued 93,627,360 shares in 2022 and 92,146,761 shares in 2021; outstanding 91,802,637 in 2022 and 89,988,528 in 2021   918,025    900,691 
Additional paid-in capital   359,552,311    356,931,157 
Treasury stock (80,641 shares in 2021, at cost)   -    (366,110)
Accumulated other comprehensive income   1,193,695    1,414,351 
Accumulated deficit   (326,100,471)   (319,080,898)
Total Kopin Corporation stockholders’ equity   35,563,560    39,799,191 
Noncontrolling interest   (172,614)   (172,334)
Total Kopin Corporation stockholders’ equity   35,390,946    39,626,857 
Total liabilities and stockholders’ equity  $55,571,611   $63,007,728 

 

See notes to unaudited condensed consolidated financial statements

 

3
 

 

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
   Three months
ended		   Three months
ended		   Six months
ended		   Six months
ended		 
   June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
Revenues:                    
Net product revenues  $9,003,658   $6,928,819   $15,511,186   $14,497,663 
Research and development and other revenues   2,905,374    2,976,437    7,976,268    7,083,961 
Total revenues   11,909,032    9,905,256    23,487,454    21,581,624 
Expenses:                    
Cost of product revenues   7,906,250    6,044,543    15,689,129    12,441,213 
Research and development   5,145,375    3,740,253    10,553,988    7,303,553 
Selling, general and administration   4,327,468    4,040,979    8,792,016    9,946,685 
Total expenses   17,379,093    13,825,775    35,035,133    29,691,451 
Loss from operations   (5,470,061)   (3,920,519)   (11,547,679)   (8,109,827)
Other (expense) income                    
Interest income   12,552    3,541    19,532    12,285 
Other expense, net   (3,586)   (896)   (4,727)   (2,045)
Gain on investments   —    —    4,700,000    — 
Foreign currency transaction (losses) gains   (150,094)   100,991    (114,979)   129,981 
Total other (expense) income   (141,128)   103,636    4,599,826    140,221 
Loss before provision for income taxes and net loss attributable to noncontrolling interest   (5,611,189)   (3,816,883)   (6,947,853)   (7,969,606)
Tax provision   (36,000)   (32,000)   (72,000)   (65,000)
Net loss   (5,647,189)   (3,848,883)   (7,019,853)   (8,034,606)
Net loss attributable to the noncontrolling interest   257    16    280    39,501 
Net loss attributable to Kopin Corporation  $(5,646,932)  $(3,848,867)  $(7,019,573)  $(7,995,105)
Net loss per share                    
Basic and diluted  $(0.06)  $(0.04)  $(0.08)  $(0.09)
Weighted average number of common shares outstanding                    
Basic and diluted   90,300,999    88,815,356    90,211,742    88,096,822 

 

See notes to unaudited condensed consolidated financial statements

 

4
 

 

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

   June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
   Three months
ended		   Three months
ended		   Six months
ended		   Six months
ended		 
   June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
Net loss  $(5,647,189)  $(3,848,883)  $(7,019,853)  $(8,034,606)
Other comprehensive loss, net of tax:                    
Foreign currency translation adjustments   (35,421)   (26,326)   (41,353)   (54,167)
Unrealized holding loss on marketable securities   (71,329)   (30,165)   (178,779)   (21,880)
Reclassification of holding losses in net loss   —    —    (522)   — 
Other comprehensive loss, net of tax   (106,750)   (56,491)   (220,654)   (76,047)
Comprehensive loss   (5,753,939)   (3,905,374)   (7,240,507)   (8,110,653)
Comprehensive loss attributable to the noncontrolling interest   257    16    280    39,501 
Comprehensive loss attributable to Kopin Corporation  $(5,753,682)  $(3,905,358)  $(7,240,227)  $(8,071,152)

 

See notes to unaudited condensed consolidated financial statements

 

5
 

 

KOPIN CORPORATION

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

                                              
   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 
Stock-based compensation expense   -    -    656,073    -    -    -    656,073    -    656,073 
Vesting of restricted stock   154,421    1,544    (1,544)   -    -    -    -    -    - 
Restricted stock for tax withholding obligations   -    -    -    (95,613)   -    -    (95,613)   -    (95,613)
Other comprehensive loss   -    -    -    -    (113,906)   -    (113,906)   -    (113,906)
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 
Stock-based compensation expense   -    -    417,033    -    -    -    417,033    -    417,033 
Vesting of restricted stock   50,000    500    (500)   -    -    -    -    -    - 
Sale of registered stock   1,529,047    15,290    1,550,092    461,723    -    -    2,027,105    -    2,027,105 
Other comprehensive loss   -    -    -    -    (106,750)   -    (106,750)   -    (106,750)
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 

 

   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 26, 2020   88,007,535   $880,075   $341,512,893   $(9,793,946)  $1,484,434   $(305,648,025)   $28,435,431   $(136,836)  $28,298,595 
Stock-based compensation expense   -    -    2,610,166    -    -    -     2,610,166    -    2,610,166 
Vesting of restricted stock   950,000    9,500    (9,500)   -    -    -     -    -    - 
Sale of registered stock   -    -    6,336,470    9,183,614    -    -     15,520,084    -    15,520,084 
Restricted stock for tax withholding obligations   (3,586)   (37)   (32,668)   -    -    -     (32,705)   -    (32,705)
Other comprehensive loss   -    -    -    -    (19,556)   -     (19,556)   -    (19,556)
Net loss   -    -    -    -    -    (4,146,238)    (4,146,238)   (39,485)   (4,185,723)
Balance, March 27, 2021   88,953,949    889,538    350,417,361    (610,332)   1,464,878    (309,794,263)    42,367,182    (176,321)   42,190,861 
Stock-based compensation expense   -    -    514,509    -    -    -     514,509    -    514,509 
Vesting of restricted stock   60,000    600    (600)   -    -    -     -    -    - 
Sale of registered stock   -    -    487,714    352,680    -    -     840,394    -    840,394 
Other comprehensive loss   -    -    -    -    (56,491)   -     (56,491)   -    (56,491)
Net loss   -    -    -    -    -    (3,848,867)    (3,848,867)   (16)   (3,848,883)
Balance, June 26, 2021   89,013,949   $890,138   $351,418,984    $   (257,652 )   $1,408,387    $   (313,643,130)   $39,816,727   $(176,337)  $39,640,390 

 

See notes to unaudited condensed consolidated financial statements

 

6
 

 

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Six months ended   Six months ended 
   June 25, 2022   June 26, 2021 
Cash flows from operating activities:          
Net loss  $(7,019,853)  $(8,034,606)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   535,253    412,031 
Accretion of premium or discount on marketable debt securities   128    (3,644)
Stock-based compensation   1,073,106    3,124,675 
Foreign currency losses (gains)   124,741    (165,086)
Change in allowance for bad debt   (5,576)   69,120 
Write-off of excess inventory   1,454,688    424,328 
Unrealized (gains) losses on investments   (4,700,000)   9,246 
Loss on disposal of property and plant   202,670    14,950 
Deferred income taxes   71,672    64,140 
Other non-cash items   453,072    468,215 
Changes in assets and liabilities:          
Accounts receivable   6,106,734    2,624,899 
Contract assets   (3,126,437)   325,276 
Inventory   (1,892,935)   (2,203,925)
Prepaid expenses and other current assets   (393,939)   (1,079,691 
Accounts payable and accrued expenses   (3,296,577)   (2,259,398)
Billings in excess of revenue earned   (1,023,859)   608,866 
Net cash used in operating activities   (11,437,112)   (5,600,604)
Cash flows from investing activities:          
Other assets   4,337    18,958 
Capital expenditures   (604,944)   (673,575)
Equity investment purchase   (499,998)   — 
Proceeds from sale of marketable debt securities   1,000,000    200,000 
Purchases of marketable debt securities   (3,500,030)   — 
Net cash used in investing activities   (3,600,635)   (454,617)
Cash flows from financing activities:          
Sale of treasury stock, net of costs   461,723    16,360,478 
Settlements of restricted stock for tax withholding obligations   (95,613)   (32,705)
Issuance of common stock, net of costs   1,565,382    — 
Net cash provided by financing activities   1,931,492    16,327,773 
Effect of exchange rate changes on cash   (51,457)   (25,733)
Net (decrease) increase in cash and cash equivalents   (13,157,712)   10,246,819 
Cash and cash equivalents:          
Beginning of period   26,787,931    17,112,869 
End of period  $13,630,219   $27,359,688 

 

See notes to unaudited condensed consolidated financial statements

 

7
 

 

KOPIN CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. BASIS OF PRESENTATION

 

The condensed consolidated financial statements of Kopin Corporation as of June 25, 2022 and for the three and six month periods ended June 25, 2022 and June 26, 2021 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 25, 2021. 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 Company’s products are targeted towards the defense and industrial/enterprise wearable markets. Management believes the industrial wearable market is still developing and cannot predict how long it will take to develop or if the Company’s products will be accepted. In addition, the Company’s current strategy is to continue to invest in research and development, even during unprofitable periods, which may result in the Company continuing to incur net losses and negative cash flows from operations. If the Company is unable to achieve and maintain positive cash flows and profitability in the foreseeable future, its financial condition may ultimately be materially adversely affected such that management may be required to reduce operating expenses, including investments in research and development, or raise additional capital. While there can be no assurance the Company will be able to successfully reduce operating expenses or raise additional capital, management believes its historical success in managing cash flows and obtaining capital will continue in the foreseeable future.

 

The Company has incurred net losses of $7.0 million and $13.4 million for the six month period ended June 25, 2022 and for the fiscal year ended December 25, 2021, respectively, and net cash outflows from operations of $11.4 million and $10.7 million for the six month period ended June 25, 2022 and for the fiscal year ended December 25, 2021, respectively. The Company’s net cash outflows from operations were partially a result of funding its ongoing investments in research and development which management believes will continue. The Company has in the past sold equity securities through an At The Money program and in the traditional fashion of significant equity offerings. Management estimates the Company will have sufficient liquidity to fund operations at least through Q3 2023. 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

 

Accounting Standards Issued But Not Yet Adopted

 

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

 

3. CASH AND CASH EQUIVALENTS AND MARKETABLE DEBT SECURITIES

 

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

 

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

 

The Company uses the specific identification method as a basis for determining cost and calculating realized gains and losses with respect to marketable debt securities. The gross gains and losses realized related to sales and maturities of marketable debt securities were not material during the three and six months ended June 25, 2022 and June 26, 2021.

 

Investments in available-for-sale marketable debt securities were as follows at June 25, 2022 and December 25, 2021:

 

   Amortized Cost   Unrealized (Losses) Gains   Fair Value 
   2022   2021   2022   2021   2022   2021 
U.S. government and agency backed securities  $2,500,006   $1,000,128   $(69,001)  $522   $2,431,005   $1,000,650 
Corporate debt and certificates of deposit   2,500,024    1,500,000    (3,236)   6,885    2,496,788    1,506,885 
Total  $5,000,030   $2,500,128   $(72,237)  $7,407   $4,927,793   $2,507,535 

 

The contractual maturity of the Company’s marketable debt securities was as follows at June 25, 2022:

 

   Less than One
year		   One to Five
years		   Total 
U.S. government and agency backed securities  $—   $2,431,005   $2,431,005 
Corporate debt and certificates of deposit   2,496,788    —    2,496,788 
Total  $2,496,788   $2,431,005   $4,927,793 

 

9
 

 

4. FAIR VALUE MEASUREMENTS

 

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

 

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

 

                     
       Fair Value Measurement at June 25, 2022 Using: 
   Total   Level 1   Level 2   Level 3 
Cash and cash equivalents  $13,630,219   $13,630,219   $-   $— 
U.S. government securities   2,431,005    —    2,431,005    — 
Corporate debt   1,499,360    —    1,499,360    — 
Certificates of deposit   997,428    997,428    —    — 
Equity investments   9,831,592    196,516    —    9,635,076 
Financial instruments, owned, at fair value  $28,389,604   $14,824,163   $3,930,365   $9,635,076 

 

                     
       Fair Value Measurement at December 25, 2021 Using: 
   Total   Level 1   Level 2   Level 3 
Cash and cash equivalents  $26,787,931   $26,787,931   $—   $— 
U.S. government securities   1,000,650    —    1,000,650    — 
Corporate debt   1,506,885    —    1,506,885    — 
Equity investments   4,912,022    296,173    —    4,615,849 
Financial instruments, owned, at fair value  $34,207,488   $27,084,104   $2,507,535   $4,615,849 

 

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 25, 2021   Net unrealized gains  

Purchases,

issuances and settlements

  

Transfers in

and or out of

Level 3

   June 25, 2022 
Equity investments  $4,615,849   $4,519,229   $499,998   $—   $9,635,076 

 

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. As of June 25, 2022, the Company owned an approximate 2.3% interest in this investment.

 

During the three and six months ended June 25, 2022, the Company recorded less than $0.1 million and $0.2 million, respectively, of unrealized losses on an equity interest in a company due to a fluctuation in the foreign exchange rate.

 

5. INVENTORY

 

Inventories are stated at standard cost adjusted to approximate the lower of cost (first-in, first-out method) or net realizable value and consist of the following at June 25, 2022 and December 25, 2021:

 

           
   June 25, 2022   December 25, 2021 
Raw materials  $4,698,312   $5,044,334 
Work-in-process   1,539,388    1,032,519 
Finished goods   688,789    504,286 
Total  $6,926,489   $6,581,139 

 

11
 

 

6. NET LOSS PER SHARE

 

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

 

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

 

                     
   Three Months Ended   Three Months Ended  

Six Months

Ended

   Six Months
Ended		 
   June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
Non-vested restricted common stock   1,824,723    2,543,717    1,824,723    2,543,717 

 

7. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

 

Registered sale of equity securities

 

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, (“Stifel”) 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.

 

During the three and six months ended June 26, 2021, the Company sold 0.1 million and 2.5 million shares of common stock for gross proceeds of $0.8 million and $16.8 million (average of $6.74 per share), respectively, before deducting broker expenses paid by us of less than $0.1 million and $0.5 million, respectively, pursuant to the Company’s At-The-Market Equity Offering Sales Agreement dated as of February 8, 2019 (the “Previous ATM Agreement”) with Stifel as agent. The Previous ATM Agreement has since terminated pursuant to its terms as a result of the sale of all the shares subject to such agreement.

 

On June 28, 2021 (the first business day of our fiscal third quarter), we sold 0.6 million shares of common stock for gross proceeds of $4.8 million (average of $8.06 per share), before deducting broker expenses paid by us of less than $0.2 million, pursuant to 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.

 

Restricted stock activity for the six months ended June 25, 2022 was as follows:

 

       Weighted Average 
   Shares   Grant Fair Value 
Balance, December 25, 2021   2,077,592   $2.90 
Granted   186,500    1.53 
Forfeited   (234,948)   2.61 
Vested   (204,421)   3.80 
Balance, June 25, 2022   1,824,723   $2.70 

 

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 June 25, 2022 and June 26, 2021 (no tax benefits were recognized):

 

                     
   Three Months Ended   Three Months Ended  

Six Months

Ended

   Six Months
Ended		 
   June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
Cost of product revenues  $11,713   $34,789   $78,381   $168,573 
Research and development   108,347    121,012    255,726    215,065 
Selling, general and administrative   296,973    358,708    738,999    2,741,037 
Total  $417,033   $514,509   $1,073,106   $3,124,675 

 

Unrecognized compensation expense for non-vested restricted common stock as of June 25, 2022 totaled $3.0 million and is expected to be recognized over a weighted average period of approximately 3.0 years.

 

8. ACCRUED WARRANTY

 

The Company typically warrants its products against defect for 12 to 18 months, however, for certain products a customer may purchase an extended warranty. A provision for estimated future costs and estimated returns for credit relating to such warranty is recorded in the period when product is shipped and revenue is recognized and is updated as additional information becomes available. The Company’s estimate of future costs to satisfy warranty obligations is based primarily on historical warranty expense experienced and a provision for potential future product failures. Changes in the accrued warranty for the six months ended June 25, 2022 were as follows:

 

      
Balance, December 25, 2021  $517,000 
Additions   1,037,000 
Claims   (585,000)
Balance, June 25, 2022  $969,000 

 

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 revenues earned in its condensed consolidated balance sheets. At June 25, 2022, the Company had less than $0.1 million of deferred revenue related to extended warranties.

 

13
 

 

9. INCOME TAXES

 

The Company recorded a provision for income taxes of less than $0.1 million in each of the three and six months ended June 25, 2022 and June 26, 2021, respectively. As of June 25, 2022, the Company has available for tax purposes U.S. federal net operating loss carryforwards (“NOLs”) of approximately $160.3 million expiring 2022 through 2037 and $82.4 million that have an unlimited carryover period. 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.

 

10. CONTRACT ASSETS AND LIABILITIES

 

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

 

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

 

Net contract assets (liabilities) consisted of the following:

 

   June 25, 2022   December 25, 2021   $ Change   % Change 
Contract assets —current  $5,268,754   $2,299,392   $2,969,362    129%
Contract liabilities—current   (3,047,208)   (4,063,031)   1,015,823    (25)%
Contract liabilities—noncurrent   (5,371)   (20,664)   15,293    (74)%
Net contract assets (liabilities)  $2,216,175   $(1,784,303)  $4,000,478    (224)%

 

The $4.0 million increase in the Company’s net contract assets (liabilities) at June 25, 2022 as compared to December 25, 2021 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 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. In the three and six months ended June 26, 2021, the Company recognized revenue of $0.1 million and $1.3 million, respectively, related to our contract liabilities at December 26, 2020.

 

The Company did not recognize impairment losses on our contract assets in the three or six months ended June 25, 2022 or June 26, 2021.

 

Performance Obligations

 

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

                     
   Three months ended   Three months ended   Six months
ended		   Six months
ended		 
   June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
Point in time   17%   36%   18%   33%
Over time   83%   64%   82%   67%

 

Remaining performance obligations represent the transaction price of orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity (“IDIQ”)). As of June 25, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $33.4 million which the Company expects to recognize over the next 12 months. The remaining performance obligations represent amounts to be earned under government contracts, which are subject to cancellation.

 

14
 

 

11. LEASES

 

The Company enters into operating leases primarily for: real estate, including for manufacturing, engineering, research, administration and sales facilities, and information technology (“IT”) equipment. At June 25, 2022 and December 25, 2021, the Company did not have any finance leases. Approximately all of our future lease commitments, and related lease liability, relate to the Company’s real estate leases. Some of the Company’s leases include options to extend or terminate the lease.

 

The components of lease expense were as follows:

 

                     
   Three Months Ended   Three Months Ended   Six Months
Ended		   Six Months
Ended		 
   June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
Operating lease cost  $250,361   $289,685   $499,864   $576,578 

 

At June 25, 2022, the Company’s future lease payments under non-cancellable leases were as follows:

 

      
2022 (excluding the six months ended June 25, 2022)  $480,260 
2023   981,434 
2024   892,573 
2025   638,070 
2026   604,000 
Thereafter   805,333 
Total future lease payments   4,401,670 
Less imputed interest   (660,971)
Total  $3,740,699 

 

The Company’s lease liabilities recognized in the Company’s condensed consolidated balance sheets at June 25, 2022 were as follows:

 

      
   June 25, 2022 
Operating lease liabilities - current  $767,440 
Operating lease liabilities - noncurrent   2,973,259 
Total lease liabilities  $3,740,699 

 

Supplemental cash flow information related to leases was as follows:

 

      
   Six months ended 
   June 25, 2022 
Cash paid for amounts included in the measurement of operating lease liabilities  $504,916 
      

 

Other information related to leases was as follows:

 

   June 25, 2022 
Weighted Average Discount Rate - Operating Leases   5.89%
Weighted Average Remaining Lease Term - Operating Leases (in years)   5.11 

 

15
 

 

12. SEGMENTS AND DISAGGREGATION OF REVENUE

 

We continually monitor and review our segment reporting structure in accordance with authoritative guidance to determine if any changes have occurred that would affect our reportable segments. 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 June 25, 2022 and December 25, 2021 were:

 

           
Total Long-lived Assets (in thousands)  June 25, 2022   December 25, 2021 
U.S.  $5,011   $5,381 
United Kingdom   495    264 
Japan   —    72 
Total  $5,506   $5,717 

 

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

 

During the three and six months ended June 25, 2022 and June 26, 2021, the Company derived its sales from the following geographies:

 

  

Three months

ended

   Three months
ended		  

Six months

ended

   Six months
ended		 
   June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
(In thousands, except percentages)  Revenue   % of Total   Revenue   % of Total   Revenue   % of Total   Revenue   % of Total 
United States  $10,037    84%  $6,448    65%  $19,335    82%  $14,629    68%
Asia - Pacific   1,564    13    3,111    31    3,707    16    6,386    29 
Europe   308    3    346    4    445    2    567    3 
Total Revenues  $11,909    100%  $9,905    100%  $23,487    100%  $21,582    100%

 

During the three and six months ended June 25, 2022 and June 26, 2021, the Company derived its sales from the following display applications:

 

                     
  

Three months

ended

   Three months
ended		  

Six months

ended

   Six months
ended		 
(In thousands)  June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
Defense  $7,087   $3,779   $11,844   $8,772 
Industrial   1,633    2,629    3,162    4,671 
Consumer   284    400    505    934 
R&D   2,806    2,704    7,714    6,265 
Other   99    393    262    940 
Total Revenues  $11,909   $9,905   $23,487   $21,582 

 

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 the Company’s 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 has not yet been set by the Court. The Company has not concluded a loss from this matter is probable; therefore, we have not recorded an accrual for litigation or claims related to this matter for the period ended June 25, 2022. The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.

 

16
 

 

14. RELATED PARTY TRANSACTIONS

 

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

 

During the three and six months ended June 25, 2022 and June 26, 2021, the Company had the following transactions with related parties:

 

           
   Three Months Ended 
   June 25, 2022   June 26, 2021 
   Sales   Sales 
HMDmd, Inc.   62,925    244,890 
RealWear, Inc.   94,805    1,238,072 
Sales  $157,730   $1,482,962 

 

           
   Six Months Ended 
   June 25, 2022   June 26, 2021 
   Sales   Sales 
HMDmd, Inc.   62,925    244,890 
RealWear, Inc.   719,022    2,560,957 
Sales  $781,947   $2,805,847 

 

At June 25, 2022 and December 25, 2021, the Company had the following receivables with related parties:

 

   June 25, 2022  December 25, 2021
   Receivables    Receivables 
RealWear, Inc.  $94,805    $306,307 

 

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 25, 2021. These factors include: the extent of the impact of the coronavirus (“COVID-19”) pandemic on our business and operations, and the economic and societal disruptions resulting from the COVID-19 pandemic; our ability to 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 source semiconductor components and other raw materials used in the manufacturing of our products amidst continued intermittent shortages, including from new and alternative suppliers; 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.

 

18
 

 

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 25, 2021 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 June 25, 2022 and June 26, 2021, 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)  June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
Defense  $7,087   $3,779   $11,844   $8,772 
Industrial   1,633    2,629    3,162    4,671 
Consumer   284    400    505    934 
R&D   2,806    2,704    7,714    6,265 
Other   99    393    262    940 
Total Revenues  $11,909   $9,905   $23,487   $21,582 

 

Sales of our products for Defense applications include systems used by the military both in the field and for training and simulation. The increase in Defense applications revenues for the three and six months ended June 25, 2022 as compared to the three and six months ended June 26, 2021 is primarily from an increase in volume shipments for our thermal weapon sight systems for soldiers. We continue to experience intermittent shortages of raw materials which affected our ability to ship units in the second quarter of 2022 and may affect our ability to manufacture and ship products in the second half of 2022.

 

19
 

 

Industrial applications revenue represents customers who purchase our display products for use in 3D metrology equipment and headsets used for applications in manufacturing, distribution and public safety. Our 3D metrology customers are primarily located in Asia and sell to Asian contract manufacturers who use the 3D metrology machines for quality control purposes. The decrease in Industrial applications revenues for the three and six months ended June 25, 2022 as compared to the three and six months ended June 26, 2021 was primarily due to a decrease in sales of displays used within wearable headsets used for applications in manufacturing, distribution and to a lesser extent a decrease in sales of products for 3D automated optical inspection (“AOI”) metrology equipment. Shortages of certain components affected our ability to manufacture and ship products during the first quarter of 2022. We were able to source more components during the second quarter which enable sales of products for 3D AOI metrology equipment.

 

Our displays for Consumer applications are used primarily in thermal imaging products, recreational rifle and hand-held scopes and augmented reality (AR) and virtual reality (VR) headsets. The decreases in Consumer applications revenues for the three and six months ended June 25, 2022 as compared to the three and six months ended June 26, 2021 were primarily due to decreased demand for displays and components used in recreational rifle and hand-held scopes, drone racing headsets and sales of our organic light emitting diode (“OLED”) products.

 

R&D revenues increased in the three and six months ended June 25, 2022 as compared to the three and six months ended June 26, 2021 primarily due to an increase in funding for U.S. defense programs, development of OLED displays and redesign of certain products with newer semiconductor components, which we believe can be more readily sourced amidst continued intermittent shortages of semiconductor components.

 

International revenues represented 16% and 18% of total revenues for the three and six months ended June 25, 2022, respectively, and 35% and 32% of total revenues for the three and six months ended June 26, 2021, 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 June 25, 2022 and June 26, 2021, were as follows:

 

   Three Months Ended   Three Months Ended   Six Months
Ended		   Six Months
Ended		 
(In thousands, except for percentages)  June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
Cost of product revenues  $7,906   $6,045   $15,689   $12,441 
Cost of product revenues as a % of net product revenues   88%   87%   101%   86%

 

The increase in cost of product revenues as a percentage of net product revenues for the three and six months ended June 25, 2022, as compared to the three and six months ended June 26, 2021, was primarily due to lower manufacturing efficiencies driven by disruptions to the manufacturing process caused by intermittent raw material shortages and higher prices for raw materials.

 

During 2021, we became aware of global shortages of semiconductor components and production capacity affecting many industries. In the first six months of 2022, we were impacted by a shortage of several semiconductor components from our normal vendors that are necessary to manufacture our products. We are also seeing prices increase for semiconductor components and other raw materials. We are evaluating other possible sources for the components we use and are in the process of redesigning certain of our products to incorporate alternative semiconductor components. If we are unable to find replacement components, we expect that our production will be disrupted. The shortage of semiconductor components is a very dynamic situation, and we rely on our vendors to provide information about the vendors that they use.

 

20
 

 

Research and Development. R&D expenses are incurred in support of internal display development programs and programs funded by agencies or prime contractors of the U.S. government and commercial partners. R&D costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication and packaging of display products, and overhead. In fiscal year 2022, 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 statements of operations. R&D expenses for the three and six months ended June 25, 2022 and June 26, 2021 were as follows:

 

   Three Months Ended   Three Months Ended   Six Months
Ended		   Six Months
Ended		 
(In thousands)  June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
Funded  $3,181   $2,511   $6,548   $4,626 
Internal   1,964    1,229    4,006    2,678 
Total research and development expense  $5,145   $3,740   $10,554   $7,304 

 

Funded R&D expense for the three and six months ended June 25, 2022 increased as compared to the three and six months ended June 26, 2021 primarily due to increased spending on U.S. defense programs. Internal R&D expenses for the three and six months ended June 25, 2022 increased compared to the three and six months ended June 26, 2021 primarily due to an increase in OLED development costs and the redesign of certain products to incorporate different semiconductor components as a result of shortages of the legacy semiconductor components.

 

Selling, General and Administrative. Selling, general and administrative (“S,G&A”) expenses consist of the expenses incurred by our sales and marketing personnel and related expenses, and administrative and general corporate expenses. S,G&A expenses for the three and six months ended June 25, 2022 and June 26, 2021 were as follows:

 

   Three Months Ended   Three Months Ended   Six Months
Ended		   Six Months
Ended		 
(In thousands, except for percentages)  June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
Selling, general and administration expense  $4,327   $4,041   $8,792   $9,947 
Selling, general and administration expense as a % of revenues   36%   41%   37%   46%

 

S,G&A expense increased for the three months ended June 25, 2022 as compared to the three months ended June 26, 2021 primarily due to an increase in compensation, information technology and travel expenses which were partially offset by lower bad debt expense and stock-based compensation. S,G&A expense decreased for the six months ended June 25, 2022 as compared to the six months ended June 26, 2021 primarily due to a decrease in stock-based compensation and legal expenses partially offset by increases in compensation costs, information technology expenses and travel expenses.

 

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 June 25, 2022 and June 26, 2021 was as follows:

 

   Three Months Ended   Three Months Ended   Six Months
Ended		   Six Months
Ended		 
(In thousands)  June 25, 2022   June 26, 2021   June 25, 2022   June 26, 2021 
Other income (expense), net  $(141)  $104   $4,600   $140 

 

During the three and six months ended June 25, 2022, we recorded foreign currency losses of $0.2 million and $0.1 million, respectively, as compared to gains of $0.1 million for the three and six months ended June 26, 2021. Other income for the first quarter of 2022 includes a gain of $4.7 million resulting from the mark to market of an equity investment.

 

Tax Provision. We recorded a provision for income taxes of less than $0.1 million in the three and six months ended June 25, 2022 and June 26, 2021.

 

Net Loss Attributable to Noncontrolling Interest. As of June 25, 2022, we owned 80% of the equity of eMDT America (“eMDT”). Net loss attributable to noncontrolling interest on our condensed consolidated statements of operations represents the portion of the results of operations of eMDT which is allocated to the stockholders of the equity interests not owned by us. 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 and June 26, 2021.

 

21
 

 

Net Loss Attributable to Kopin Corporation. We incurred 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, compared to net losses attributable to Kopin Corporation of $3.9 million and $8.0 million during the three and six months ended June 26, 2021, respectively. The increase in the net loss attributable to Kopin Corporation during the three and six months ended June 25, 2022 compared to the three and six months ended June 26, 2021 is due to lower gross margins and increases in R&D spending on OLED development and stock-based compensation expenses.

 

Liquidity and Capital Resources

 

At June 25, 2022 and December 25, 2021, we had cash and cash equivalents and marketable debt securities of $18.6 million and $29.3 million, respectively, and working capital of $25.1 million and $34.7 million, 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 $11.4 million and capital expenditures of $0.6 million, partially offset by the sale of 1.7 million shares of common stock for net proceeds of $2.0 million.

 

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 (“Stifel”), 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.

 

During the three and six months ended June 26, 2021, we sold 0.1 million and 2.5 million shares of common stock for gross proceeds of $0.8 million and $16.8 million (average of $6.74 per share), respectively, before deducting broker expenses paid by us of less than $0.1 million and $0.5 million, respectively, pursuant to our At-The-Market Equity Offering Sales Agreement dated as of February 8, 2019 (the “Previous ATM Agreement”) with Stifel as agent. The Previous ATM Agreement has since terminated pursuant to its terms as a result of the sale of all the shares subject to such agreement.

 

On June 28, 2021 (the first business day of our fiscal third quarter), we sold 0.6 million shares of common stock for gross proceeds of $4.8 million (average of $8.06 per share), before deducting broker expenses paid by us of less than $0.2 million, pursuant to the ATM Agreement.

 

Cash and cash equivalents and marketable debt securities held in U.S. dollars at June 25, 2022 and December 25, 2021 were as follows:

 

   June 25, 2022   December 25, 2021 
Domestic locations  $18,050,414   $27,031,695 
International locations   117,042    865,416 
Subtotal cash and cash equivalents marketable debt securities held in U.S. dollars   18,167,456    27,897,111 
Cash and cash equivalents held in other currencies and converted to U.S. dollars   390,556    1,398,355 
Total cash and cash equivalents and marketable debt securities  $18,558,012   $29,295,466 

 

22
 

 

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 2022.

 

We have incurred net losses of $7.0 million and $13.4 million for the six month period ended June 25, 2022 and for the fiscal year ended December 25, 2021, respectively, and net cash outflows from operations of $11.4 million and $10.7 million for the six month period ended June 25, 2022 and for the fiscal year ended December 25, 2021, respectively. Our net cash outflows from operations were partially a result of funding our ongoing investments in research and development which we believe will continue. We have in the past sold equity securities through an At The Money program and in the traditional fashion of significant equity offerings. We estimate we will have sufficient liquidity to fund operations at least through Q3 2023. Nonetheless, we monitor 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 financings, reduce expenses or enter into a strategic transaction. However, we can make no assurance that we will be able to raise additional capital, reduce expenses sufficiently, or enter into a strategic transaction on terms acceptable to us, or at all.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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.

 

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Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of June 25, 2022, 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 June 25, 2022, 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 June 25, 2022, 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 June 25, 2022 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 has not yet been set by the Court. The Company has not concluded a loss from this matter is probable; therefore, we have not recorded an accrual for litigation or claims related to this matter for the period ended June 25, 2022. 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 25, 2021 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 25, 2021, except for the risk factor noted below.

 

Supply shortages have and could continue to impair the quality, reduce the availability or increase the cost of raw materials, which could harm our business. We rely on third-party independent contractors for certain integrated circuit chip sets, backlights and other critical raw materials such as special glasses, wafers and chemicals. Lead times for the parts and components that we order vary significantly and depend on factors such as manufacturing cycle times, manufacturing yields, and the availability of raw materials used to produce the parts or components. Currently, the semiconductor industry is experiencing a shortage of semiconductor components. If this shortage were to further affect our supply of raw materials, our ability to manufacture and distribute our products could continue to be adversely affected, which in turn would adversely affect our results of operations or financial condition.

 

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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 June 25, 2022 that were not registered under the Securities Act.

 

Item 6. Exhibits

 

Exhibit No.   Description
31.1   Certification of John C.C. Fan, 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 John C.C. Fan, 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 June 25, 2022 (Unaudited) and December 25, 2021, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 25, 2022 and June 26, 2021, (iii) Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the three and six months ended June 25, 2022 and June 26, 2021, (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and six months ended June 25, 2022 and June 26, 2021, (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 25, 2022 and June 26, 2021, 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 4, 2022 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: August 4, 2022 By: /S/ RICHARD A. SNEIDER
      Richard A. Sneider
      Treasurer and Chief Financial Officer
      (Principal Financial and Accounting Officer)

 

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