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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 26, 2021

 

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, 2021
Common Stock, par value $0.01   91,490,206

 

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 26, 2021 (Unaudited) and December 26, 2020 3
     
  Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 26, 2021 and June 27, 2020 4
     
  Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the three and six months ended June 26, 2021 and June 27, 2020 5
     
  Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and six months ended June 26, 2021 and June 27, 2020 6
     
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 26, 2021 and June 27, 2020 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 26, 2021     December 26, 2020  
           
ASSETS                
Current assets:                
Cash and equivalents   $ 27,359,688     $ 17,112,869  
Marketable debt securities, at fair value     3,424,592       3,635,681  
Accounts receivable, net of allowance of $250,000 in 2021 and $175,000 in 2020     7,443,210       9,260,865  
Contract assets and unbilled receivables     3,196,477       3,521,753  
Inventory     6,249,403       4,455,756  
Prepaid taxes     163,305       205,568  
Prepaid expenses and other current assets     2,166,578       1,263,688  
Total current assets     50,003,253       39,456,180  
Property, plant and equipment, net     1,860,899       1,626,930  
Operating lease right-of-use assets     1,258,001       1,780,039  
Other assets     162,473       162,473  
Equity investments     4,540,210       4,523,525  
Total assets   $ 57,824,836     $ 47,549,147  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 5,099,714     $ 5,606,910  
Accrued payroll and expenses     1,979,311       1,977,851  
Accrued warranty     977,000       508,000  
Contract liabilities and billings in excess of revenues earned     2,076,467       1,493,847  
Operating lease liabilities     762,139       982,375  
Other accrued liabilities     2,008,173       1,809,495  
Customer deposits     2,640,321       3,950,031  
Deferred tax liabilities     540,617       554,000  
Total current liabilities     16,083,742       16,882,509  
Noncurrent contract liabilities and asset retirement obligations     277,846       276,409  
Operating lease liabilities, net of current portion     488,392       821,306  
Other long-term obligations     1,334,466       1,270,328  
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 91,557,666 shares in 2021 and 91,059,407 shares in 2020; outstanding 88,946,489 in 2021 and 85,443,378 in 2020, respectively     890,138       880,075  
Additional paid-in capital     351,418,984       341,512,893  
Treasury stock (67,460 in 2021 and 2,564,155 shares in 2020, at cost)     (257,652 )     (9,793,946 )
Accumulated other comprehensive income     1,408,387       1,484,434  
Accumulated deficit     (313,643,130 )     (305,648,025 )
Total Kopin Corporation stockholders’ equity     39,816,727       28,435,431  
Noncontrolling interest     (176,337 )     (136,836 )
Total Kopin Corporation stockholders’ equity     39,640,390       28,298,595  
Total liabilities and stockholders’ equity   $ 57,824,836     $ 47,549,147  

 

See notes to unaudited condensed consolidated financial statements

 

3
 

 

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    Three months ended     Three months ended     Six months ended     Six months ended  
    June 26, 2021     June 27, 2020     June 26, 2021     June 27, 2020  
Revenues:                                
Net product revenues   $ 6,928,819     $ 6,670,303     $ 14,497,663     $ 12,589,509  
Research and development and other revenues     2,976,437       2,144,343       7,083,961       4,103,742  
Total revenues     9,905,256       8,814,646       21,581,624       16,693,251  
Expenses:                                
Cost of product revenues     6,044,543       4,779,577       12,441,213       10,427,424  
Research and development     3,740,253       2,221,154       7,303,553       4,560,902  
Selling, general and administration     4,040,979       2,909,366       9,946,685       6,341,457  
Total expenses     13,825,775       9,910,097       29,691,451       21,329,783  
Loss from operations     (3,920,519 )     (1,095,451 )     (8,109,827 )     (4,636,532 )
Other income (expense):                                
Interest income     3,541       34,030       12,285       107,436  
Other expense, net    

(896

)     (49,757 )    

(2,045

)     (37,080 )
Foreign currency transaction gains (losses)     100,991       9,995       129,981       (162,998 )
Total other income and expense     103,636       (5,732 )     140,221       (92,642 )
Loss before provision for income taxes and net loss attributable to noncontrolling interest     (3,816,883 )     (1,101,183 )     (7,969,606 )     (4,729,174 )
Tax provision     (32,000 )     (42,000 )     (65,000 )     (71,000 )
Net loss     (3,848,883 )     (1,143,183 )     (8,034,606 )     (4,800,174 )
Net loss attributable to the noncontrolling interest     16       21,642       39,501       83,114  
Net loss attributable to Kopin Corporation   $ (3,848,867 )   $ (1,121,541 )   $ (7,995,105 )   $ (4,717,060 )
Net loss per share                                
Basic and diluted   $ (0.04 )   $ (0.01 )   $ (0.09 )   $ (0.06 )
Weighted average number of common shares outstanding                                
Basic and diluted     88,815,356       82,569,379       88,096,822       82,552,896  

 

See notes to unaudited condensed consolidated financial statements

 

4
 

 

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

    Three months ended     Three months ended     Six months ended     Six months ended  
    June 26, 2021     June 27, 2020     June 26, 2021     June 27, 2020  
Net loss   $ (3,848,883 )   $ (1,143,183 )   $ (8,034,606 )   $ (4,800,174 )
Other comprehensive (loss) income, net of tax:                                
Foreign currency translation adjustments     (26,326 )     (37,035 )     (54,167 )     152,043  
Unrealized holding gain (loss) on marketable securities     (30,165 )     95,683       (21,880 )     (182,679 )
Reclassification of holding losses in net loss           (11,680 )           (21,028 )
Other comprehensive (loss) income, net of tax     (56,491 )     46,968       (76,047 )     (51,664 )
Comprehensive loss     (3,905,374 )     (1,096,215 )     (8,110,653 )     (4,851,838 )
Comprehensive loss attributable to the noncontrolling interest     16       21,642       39,501       83,114  
Comprehensive loss attributable to Kopin Corporation   $ (3,905,358 )   $ (1,074,573 )   $ (8,071,152 )   $ (4,768,724 )

 

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 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  

 

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

 

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 26, 2021     June 27, 2020  
Cash flows from operating activities:                
Net loss   $ (8,034,606 )   $ (4,800,174 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     412,031       341,743  
Accretion of premium or discount on marketable debt securities     (3,644 )     4,400  
Recovery of impairment on marketable debt securities     -       (150,644 )
Stock-based compensation     3,124,675       320,142  
Foreign currency losses (gains)     (165,086 )     186,516  
Change in allowance for bad debt     69,120       (504,432 )
Write-off of excess inventory     424,328       924,679  
Unrealized gain on investments     9,246       -  
Loss on disposal of plant and equipment     14,950       -  
Deferred income taxes     64,140       58,268  
Other non-cash items     468,215       (870 )
Changes in assets and liabilities:                
Accounts receivable     2,624,899       (113,412 )
Contract assets     325,276       (1,588,176 )
Inventory     (2,203,925 )     (896,783 )
Prepaid expenses and other current assets     (1,079,691 )     15,507  
Accounts payable and accrued expenses     (2,259,398 )     (1,441,710 )
Billings in excess of revenue earned     608,866       885,641  
Net cash used in operating activities     (5,600,604 )     (6,759,305 )
Cash flows from investing activities:                
Other assets     18,958       266,972  
Capital expenditures     (673,575 )     (206,127 )
Proceeds from sale of marketable debt securities     200,000       9,296,550  
Net cash (used in) provided by investing activities     (454,617 )     9,357,395  
Cash flows from financing activities:                
Paycheck protection program loan receipt     -       2,238,000  
Paycheck protection program loan repayment     -       (2,070,000 )
Sale of treasury stock, net of costs     16,360,478       -  
Settlements of restricted stock for tax withholding obligations     (32,705 )     -  
Net cash provided by financing activities     16,327,773       168,000  
Effect of exchange rate changes on cash     (25,733 )     (18,517 )
Net increase in cash and cash equivalents     10,246,819       2,747,573  
Cash and cash equivalents:                
Beginning of period     17,112,869       6,029,247  
End of period   $ 27,359,688     $ 8,776,820  

 

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 26, 2021 and for the three and six month periods ended June 26, 2021 and June 27, 2020 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 26, 2020. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year. The Company reclassified certain prior period amounts to conform to the current period presentation. As used in this report, the terms “we”, “us”, “our”, “Kopin” and the “Company” mean Kopin Corporation and its subsidiaries, unless the context indicates another meaning.

 

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.

 

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 26, 2021 and June 27, 2020.

 

Investments in available-for-sale marketable debt securities were as follows at June 26, 2021 and December 26, 2020:

    Amortized Cost     Unrealized Gains     Fair Value  
    2021     2020     2021     2020     2021     2020  
U.S. government and agency backed securities   $ 1,002,044     $ 1,003,941     $ 10,256     $ 19,179     $ 1,012,300     $ 1,023,120  
Corporate debt     2,400,000       2,603,704       12,292       8,857       2,412,292       2,612,561  
Total   $ 3,402,044     $ 3,607,645     $ 22,548     $ 28,036     $ 3,424,592     $ 3,635,681  

 

The contractual maturity of the Company’s marketable debt securities was as follows at June 26, 2021:

 

    Less than One year    

One to Five

years

    Total  
U.S. government and agency backed securities   $ 1,012,300     $     $ 1,012,300  
Corporate debt     901,017       1,511,275       2,412,292  
Total   $ 1,913,317     $ 1,511,275     $ 3,424,592  

 

9
 

 

4. FAIR VALUE MEASUREMENTS

 

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

 

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

 

          Fair Value Measurement June 26, 2021 Using:  
    Total     Level 1     Level 2     Level 3  
Cash and cash equivalents   $ 27,359,688     $ 27,359,688     $ -     $ -  
U.S. government securities     1,012,300       -       1,012,300       -  
Corporate Debt     2,412,292       -       2,412,292       -  
Equity investments     4,540,210       277,499       -       4,262,711  
    $ 35,324,490     $ 27,637,187     $ 3,424,592     $ 4,262,711  

 

          Fair Value Measurement at December 26, 2020 Using:  
    Total     Level 1     Level 2     Level 3  
Cash and cash equivalents   $ 17,112,869     $ 17,112,869     $ -     $ -  
U.S. government securities     1,023,120       -       1,023,120       -  
Corporate debt     2,612,561       -       2,612,561       -  
Equity investments     4,523,525       293,891       -       4,229,634  
    $ 25,272,075     $ 17,406,760     $ 3,635,681     $ 4,229,634  

 

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 26, 2020     Net unrealized gains    

Purchases,

issuances and settlements

   

Transfers in

and or out of

Level 3

    June 26, 2021  
Equity investments   $ 4,229,634     $ 33,077     $ -     $ -     $ 4,262,711  

 

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

 

Marketable Debt Securities

 

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

 

Equity Investments

 

During the three and six months ended June 26, 2021, the Company recorded a less than $0.1 million unrealized gain 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 26, 2021 and December 26, 2020:

 

    June 26, 2021     December 26, 2020  
Raw materials   $ 5,470,123     $ 3,609,710  
Work-in-process     601,180       565,986  
Finished goods     178,100       280,060  
Total   $ 6,249,403     $ 4,455,756  

 

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 26, 2021     June 27, 2020     June 26, 2021     June 27, 2020  
Non-vested restricted common stock     2,543,717       2,373,874       2,543,717       2,373,874  

 

7. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

 

Registered sale of equity securities

 

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, Nicolaus & Company, Incorporated, (“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 March 5, 2021, the Company entered into a new At-The-Market Offering Sales Agreement (the “Current ATM Agreement”) with Stifel under which the Company may sell up to $50 million of its common stock.

 

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 our Current 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 was as follows:

 

          Weighted Average  
    Shares     Grant Fair Value  
Balance, December 26, 2020     3,051,874     $ 1.67  
Granted     1,486,843       3.03  
Forfeited     (985,000 )     1.81  
Vested     (1,010,000 )     2.44  
Balance, June 26, 2021     2,543,717     $ 2.11  

 

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 26, 2021 and June 27, 2020 (no tax benefits were recognized):

 

    Three Months Ended     Three Months Ended    

Six Months

Ended

   

Six Months

Ended

 
    June 26, 2021     June 27, 2020     June 26, 2021     June 27, 2020  
Cost of product revenues   $ 34,789     $ 16,226     $ 168,573     $ 30,246  
Research and development     121,012       57,523       215,065       112,655  
Selling, general and administrative     358,708       87,885       2,741,037       177,241  
Total   $ 514,509     $ 161,677     $ 3,124,675     $ 320,142  

 

Unrecognized compensation expense for non-vested restricted common stock as of June 26, 2021 totaled $3.0 million and is expected to be recognized over a weighted average period of approximately 2.6 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 26, 2021 were as follows:

 

 

Balance, December 26, 2020   $ 508,000  
Additions     546,000  
Claims     (77,000 )
Balance, June 26, 2021   $ 977,000  

 

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 26, 2021, the Company had less than $0.1 million of deferred revenue related to extended warranties.

 

13
 

 

9. INCOME TAXES

 

The Company recorded a provision for income taxes of less than $0.1 million in the three and six months ended June 26, 2021 and June 27, 2020, respectively. As of June 26, 2021, 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 $66.4 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 26, 2021

   

December 26, 2020

    $ Change     % Change  
Contract assets —current   $ 3,196,477     $ 3,521,753     $ (325,276 )     (9 )%
Contract liabilities—current     (2,076,467 )     (1,493,847 )     (582,620 )     39 %
Contract liabilities—noncurrent     (32,460 )   $ (5,069 )   $ (27,391 )     540 %
Net contract assets (liabilities)   $ 1,087,550     $ 2,022,837     $ (935,287 )     (46 )%

 

The $0.9 million decrease in the Company’s net contract assets at June 26, 2021 as compared to December 26, 2020 was primarily due to an increase in inventory and other costs associated with government contracts which recognize revenue over time, which was partially offset by an increase in billing in excess of revenue earned.

 

In the three and six months ended June 26, 2021, the Company recognized revenue of $0.1 million and $1.3 million, respectively, related to our contract liabilities at December 26, 2020. In the three and six months ended June 27, 2020, the Company recognized revenue of $0.6 million, related to our contract liabilities at December 28, 2019.

 

The Company did not recognize impairment losses on our contract assets in the three and six months ended June 26, 2021 or June 27, 2020.

 

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 26, 2021     June 27, 2020     June 26, 2021     June 27, 2020  
Point in time     36 %     39 %     33 %     37 %
Over time     64 %     61 %     67 %     63 %

 

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 26, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $22.7 million which the Company expects to recognize over the next 12 months. The remaining performance obligations represent amounts to be earned under government contracts, which are subject to cancellation.

 

14
 

 

11. LEASES

 

The Company enters into operating leases primarily for: real estate, including for manufacturing, engineering, research, administration and sales facilities, and information technology (“IT”) equipment. At June 26, 2021 and December 26, 2020, 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 26,2021     June 27, 2020     June 26, 2021     June 27, 2020  
Operating lease cost   $ 289,685     $ 283,443     $ 576,578     $ 566,443  

 

At June 26, 2021, the Company’s future lease payments under non-cancellable leases were as follows:

 

2021 (excluding the six months ended June 26, 2021)   $ 462,092  
2022     658,068  
2023     201,335  
Total future lease payments   $ 1,321,495  
Less imputed interest     (70,964 )
Total   $ 1,250,531  

 

The Company’s lease liabilities recognized in the Company’s condensed consolidated balance sheets at June 26, 2021 was as follows:

 

    June 26, 2021  
Operating lease liabilities - current   $ 762,139  
Operating lease liabilities -noncurrent     488,392  
Total lease liabilities   $ 1,250,531  

 

Supplemental cash flow information related to leases was as follows:

 

    Six months ended  
    June 26, 2021  
Cash paid for amounts included in the measurement of operating lease liabilities   $ 604,672  

 

Other information related to leases was as follows:

 

    June 26, 2021  
Weighted Average Discount Rate - Operating Leases     6.19 %
Weighted Average Remaining Lease Term - Operating Leases (in years)     2.40  

 

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 26, 2021 and December 26, 2020 were:

 

Total Long-lived Assets (in thousands)  

June 26, 2021

   

December 26, 2020

 
U.S.   $ 2,784     $ 3,028  
United Kingdom     327       329  
China     -       11  
Japan     8       39  
Total   $ 3,119     $ 3,407  

 

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 26, 2021 and June 27, 2020, the Company derived its sales from the following geographies:

 

   

Three months

ended

   

Three months

ended

   

Six months

ended

   

Six months

ended

 
    June 26, 2021     June 27, 2020     June 26, 2021     June 27, 2020  
(In thousands)   Revenue     % of Total     Revenue     % of Total     Revenue     % of Total     Revenue     % of Total  
United States   $ 6,448       65 %   $ 6,938       79 %   $ 14,629       68 %   $ 13,704       82 %
Other Americas     -       -       -       -       -       -       101       1  
Total Americas     6,448       65       6,938       79       14,629       68       13,805       83  
Asia - Pacific     3,111       31       1,642       18       6,386       29       2,306       14  
Europe     346       4       235       3       567       3       582       3  
Total Revenues   $ 9,905       100 %   $ 8,815       100 %   $ 21,582       100 %   $ 16,693       100 %

 

During the three and six months ended June 26, 2021 and June 27, 2020, 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 26, 2021     June 27, 2020     June 26, 2021     June 27, 2020  
Defense   $ 3,779     $ 4,490     $ 8,772     $ 8,003  
Industrial     2,629       1,396       4,671       3,579  
Consumer     400       232       934       453  
R&D     2,704       1,772       6,265       3,733  
Other     393       925       940       925  
Total Revenues   $ 9,905     $ 8,815     $ 21,582     $ 16,693  

 

13. LITIGATION

 

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

 

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

 

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

 

On October 11, 2016, the Company filed its Answer and Affirmative Defenses. The parties completed expert depositions on November 15, 2019. On December 2, 2019, the Company filed a Motion for Partial Summary Judgment requesting the Court dismiss counts 2-7 in their entirety and counts 1 and 8 in part. BlueRadios also filed a Motion for Partial Summary Judgment alleging it is the co-owner of U.S. Patent No. 8,909,296. Responses to the Motions for Partial Summary Judgment were filed on January 15, 2020, and replies were filed on February 19, 2020. On September 25, 2020, the Court denied BlueRadios’ Motion for Partial Summary Judgment. 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 as of June 26, 2021. 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 26, 2021 and June 27, 2020, the Company had the following transactions with related parties:

 

    Three Months Ended  
    June 26, 2021     June 27, 2020  
    Sales     Purchases     Sales     Purchases  
Solos Technology   $     $     $ 106,390     $  
HMDmd, Inc.     244,890                    
RealWear, Inc.     1,238,072             371,902        
    $ 1,482,962     $     $ 478,292     $  

 

    Six Months Ended  
    June 26, 2021     June 27, 2020  
    Sales     Purchases     Sales     Purchases  
Solos Technology   $     $     $ 246,458     $  
HMDmd, Inc.     244,890                    
RealWear, Inc.     2,560,957             371,902        
    $ 2,805,847     $     $ 618,360     $  

 

At June 26, 2021 and December 26, 2020, the Company had the following receivables, contract liabilities and payables with related parties:

 

    June 26, 2021     December 26, 2020  
    Receivables     Contract Liabilities     Payables     Receivables     Contract Assets     Payables  
RealWear, Inc.   $ 577,151     $     $     $ 817,388     $     $  

 

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 26, 2020. 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 expectation of lower shipment rate of our thermal weapon sight system to continue during the third fiscal quarter and then for shipments to increase in the fourth fiscal quarter of 2021; 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, 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 26, 2020 and our unaudited condensed consolidated financial statements included in this Form 10-Q.

 

Results of Operations

 

As described in our “Forward-Looking Statements” on page 18 of this Form 10-Q, our interim period results of operations and period-to-period comparisons of such results may not be indicative of our future operating results. Additionally, we use a fiscal calendar, which may result in differences in the number of work days in the current and comparable prior interim periods and could affect period-to-period comparisons. The following discussions of comparative results among periods, including the discussion of segment results, should be viewed in this context.

 

Revenues. For the three and six months ended June 26, 2021 and June 27, 2020, 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 26, 2021     June 27, 2020     June 26, 2021     June 27, 2020  
Defense   $ 3,779     $ 4,490     $ 8,772     $ 8,003  
Industrial     2,629       1,396       4,671       3,579  
Consumer     400       232       934       453  
R&D     2,704       1,772       6,265       3,733  
Other     393       925       940       925  
Total Revenues   $ 9,905     $ 8,815     $ 21,582     $ 16,693  

 

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 in the three months ended June 26, 2021 as compared to the three months ended June 27, 2020 is primarily from a decrease in volume shipments for our thermal weapon sight systems for soldiers. During the three months ended June 26, 2021 we reduced shipments of our thermal weapon sight systems to a customer who was making system and production enhancements. We expect the lower shipment rate to continue during the third fiscal quarter and then for shipments to increase in the fourth fiscal quarter of 2021. The increase in Defense applications revenues in the six months ended June 26, 2021 as compared to the six months ended June 27, 2020 is primarily from an increase in volume shipments for our thermal weapon sight.

 

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 increase in Industrial applications revenues for the three and six months ended June 26, 2021 as compared to the three and six months ended June 27, 2020 was primarily due to an increase in sales of products for 3D metrology equipment and headsets used for applications in manufacturing, distribution partially offset by a decline in public safety wearable headsets.

 

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 increase in Consumer applications revenues for the three and six months ended June 26, 2021 as compared to the three and six months ended June 27, 2020 was primarily due to increased 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 26, 2021 as compared to the three and six months ended June 27, 2020 primarily due to an increase in funding for U.S. defense programs.

 

International revenues represented 35% and 32% of total revenues for the three and six months ended June 26, 2021, respectively, and 21% and 18% of total revenues for the three and six months ended June 27, 2020, 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 increase in international revenues was a result of an increase in sales of products for 3D 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 Revenue. Cost of product revenues, which is comprised of materials, labor and manufacturing overhead related to the production of our products for the three and six months ended June 26, 2021 and June 27, 2020, were as follows:

 

    Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
(In thousands, except for percentages)   June 26, 2021     June 27, 2020     June 26, 2021     June 27, 2020  
Cost of product revenues   $ 6,045     $ 4,780     $ 12,441     $ 10,427  
Cost of product revenues as a % of net product revenues     87 %     72 %     86 %     83 %

 

 

The increase in cost of product revenues as a percentage of net product revenues for the three and six months ended June 26, 2021 as compared to the three and six months ended June 27, 2020 was primarily due to lower manufacturing efficiencies driven by lower volumes.

 

During the first six months of 2021, we became aware of global shortages of semiconductor components and production capacity affecting many industries. We have not experienced any shortage issues during the first six months of 2021, however we were notified by several vendors that provide us with components for our 3D metrology products that they may not be able to honor their purchase commitments to us and in some cases we are experiencing price increases. To date the price increases have not had a material effect on our gross margins We are evaluating other possible sources for these components. The shortage of semiconductor components is a very dynamic situation, and we rely on our vendors to provide information about where they source semiconductor components and the availability of these semiconductor components. The shortage of semiconductor components is resulting in the need to place purchase orders further out into the future than we normally do and we are seeing price increases quoted for some semiconductor components which may negatively affect future gross margins.

 

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 2021, 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 statement of operations. R&D expenses for the three and six months ended June 26, 2021 and June 27, 2020 were as follows:

 

    Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
(In thousands)   June 26, 2021     June 27, 2020     June 26, 2021     June 27, 2020  
Funded   $ 2,511     $ 1,361     $ 4,626     $ 2,866  
Internal     1,229       860       2,678       1,695  
Total research and development expense   $ 3,740     $ 2,221     $ 7,304     $ 4,561  

 

Funded R&D expense for the three and six months ended June 26, 2021 increased as compared to the three and six months ended June 27, 2020 primarily due to increased spending on U.S. defense programs. Internal R&D expenses for the three and six months ended June 26, 2021 increased primarily due to an increase in OLED development.

 

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 26, 2021 and June 27, 2020 were as follows:

 

    Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
(In thousands, except for percentages)   June 26, 2021     June 27, 2020     June 26, 2021     June 27, 2020  
Selling, general and administration expense   $ 4,041     $ 2,909     $ 9,947     $ 6,341  
Selling, general and administration expense as a % of revenues     41 %     33 %     46 %     38 %

 

S,G&A increased for the three and six months ended June 26, 2021 as compared to the three and six months ended June 27, 2020 primarily due to increases in stock-based compensation and bad debt expense which were partially offset by lower professional fees.

 

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 26, 2021 and June 27, 2020 was as follows:

 

    Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
(In thousands)   June 26, 2021     June 27, 2020     June 26, 2021     June 27, 2020  
Other income (expense), net   $ 104     $ (6 )   $

140

    $ (93 )

 

During the three and six months ended June 26, 2021, we recorded foreign currency gains of $0.1 million as compared to losses of less than $0.1 million and $0.2 million for the three and six months ended June 27, 2020, respectively.

 

Tax Provision. We recorded a provision for income taxes of less than $0.1 million in the three and six months ended June 26, 2021 and June 27, 2020.

 

Net Loss (Income) Attributable to Noncontrolling Interest. As of June 26, 2021, we owned 80% of the equity of eMDT America (“eMDT”). Net loss (income) attributable to noncontrolling interest on our consolidated statement of operations represents the portion of the results of operations of our majority owned subsidiary which is allocated to the stockholders of the equity interests not owned by us. The change in net loss (income) attributable to noncontrolling interest is the result of the change in the results of operations of eMDT for the three and six months ended June 26, 2021 and June 27, 2020.

 

21
 

 

Net Loss Attributable to Kopin Corporation. We incurred 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, compared to net losses attributable to Kopin Corporation of $1.1 million and $4.7 million during the three and six months ended June 27, 2020, respectively. The increase in the net loss attributable to Kopin Corporation during the three and six months ended June 26, 2021 compared to the three and six months ended June 27, 2020 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 26, 2021 and December 26, 2020, we had cash and cash equivalents and marketable securities of $30.8 million and $20.7 million, respectively, and working capital of $33.9 million and $22.6 million, respectively. The change in cash and cash equivalents and marketable securities was primarily due to the sale of 2.5 million shares of common stock for net proceeds of $16.3 million partially offset by capital expenditures of $0.7 million.

 

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 the Company’s At-The-Market Equity Offering Sales Agreement dated as of February 8, 2019 (the “Previous ATM Agreement”) with Stifel, Nicolaus & Company, Incorporated, (“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 March 5, 2021, the Company entered into a new At-The-Market Offering Sales Agreement (the “Current ATM Agreement”) with Stifel under which we may sell up to $50 million of our common stock.

 

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 our Current ATM Agreement.

 

Cash and cash equivalents and marketable debt securities held in U.S. Dollars at:

 

    June 26, 2021     December 26, 2020  
Domestic locations   $ 29,729,726     $ 19,724,103  
International locations     488,236       340,217  
Subtotal cash and cash equivalents marketable debt securities held in U.S. dollars     30,217,962       20,064,320  
Cash and cash equivalents held in other currencies and converted to U.S. dollars     566,318       684,230  
Total cash and cash equivalents and marketable debt securities   $ 30,784,280     $ 20,748,550  

 

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 2021.

 

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 26, 2021, 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 26, 2021, 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 26, 2021, 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 26, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

24
 

 

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. 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 as of June 26, 2021. 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 2020 Annual Report on Form 10-K 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 26, 2020, except for the risk factor noted below.

 

Supply shortages could 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 affect our supply of raw materials, our ability to manufacture and distribute our products could be adversely affect, 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 26, 2021 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   XBRL Instance Document*
101.SCH   XBRL Taxonomy Extension Schema Document*
101.CAL   XBRL Taxonomy Calculation Linkbase Document*
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB   XBRL Taxonomy Label Linkbase Document*
101.PRE   XBRL Taxonomy Presentation Linkbase Document*

 

* Submitted electronically herewith
** Furnished and not filed herewith

 

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at June 26, 2021 (Unaudited) and December 26, 2020, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 26, 2021 and June 27, 2020, (iii) Condensed Consolidated Statement of Comprehensive (Loss) Income (Unaudited) for the three and six months ended June 26, 2021 and June 27, 2020, (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and six months ended June 26, 2021 and June 27, 2020, (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 26, 2021 and June 27, 2020, 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 5, 2021 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 5, 2021 By: /S/ RICHARD A. SNEIDER
      Richard A. Sneider
      Treasurer and Chief Financial Officer
      (Principal Financial and Accounting Officer)

 

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