KOPN 10-Q
Kopin Corp (KOPN)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| 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
(Exact name of registrant as specified in its charter)
State or other jurisdiction of incorporation or organization |
(I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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.
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).
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
☐
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 Nov 4, 2020 | |
| Common Stock, par value $0.01 |
Kopin Corporation
INDEX
| 2 |
Part 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
KOPIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 26, 2020 | December 28, 2019 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and equivalents | $ | $ | ||||||
| Marketable debt securities, at fair value | ||||||||
| Accounts receivable, net of allowance of $ | ||||||||
| Contract assets and unbilled receivables | ||||||||
| Inventory | ||||||||
| Prepaid taxes | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other assets | ||||||||
| Equity investments | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll and expenses | ||||||||
| Accrued warranty | ||||||||
| Contract liabilities and billings in excess of revenues earned | ||||||||
| Operating lease liabilities | ||||||||
| Other accrued liabilities | ||||||||
| Customer deposits | ||||||||
| Taxes payable | ||||||||
| Total current liabilities | ||||||||
| Noncurrent contract liabilities and asset retirement obligations | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Other long-term obligations | ||||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, par value $ per share: authorized, shares; issued | - | - | ||||||
| Common stock, par value $per share: authorized, shares; issued shares in 2020 and shares in 2019; outstanding in 2020 and in 2019, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock ( shares in 2020 and 2019, at cost) | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Kopin Corporation stockholders’ equity | ||||||||
| Noncontrolling interest | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See notes to unaudited condensed consolidated financial statements
| 3 |
KOPIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||||||
| Revenues: | ||||||||||||||||
| Net product revenues | $ | $ | $ | $ | ||||||||||||
| Research and development and other revenues | ||||||||||||||||
| Expenses: | ||||||||||||||||
| Cost of product revenues | ||||||||||||||||
| Research and development | ||||||||||||||||
| Selling, general and administration | ||||||||||||||||
| Impairment of goodwill | - | - | ||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign currency transaction gains (losses) | ( | ) | ( | ) | ||||||||||||
| Gain on investments | - | - | - | |||||||||||||
| ( | ) | |||||||||||||||
| Loss before provision for income taxes and net loss (income) attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Tax provision | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss (income) attributable to the noncontrolling interest | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to Kopin Corporation | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
See notes to unaudited condensed consolidated financial statements
| 4 |
KOPIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ||||||||||
| Unrealized holding (loss) gain on marketable securities | ( | ) | ( | ) | ||||||||||||
| Reclassification of holding losses in net loss | ( | ) | ( | ) | ( | ) | ||||||||||
| Other comprehensive (loss) income, net of tax | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss (income) attributable to the noncontrolling interest | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss attributable to Kopin Corporation | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
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 28, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | ( | ) | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, March 28, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Vesting of restricted stock | ( | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||
| Other comprehensive Income | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, June 27, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | ( | ) | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, September 26, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| 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 29, 2018 | $ | | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | $ | | ||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Vesting of restricted stock | ( | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||
| Repurchases of restricted stock to satisfy tax withholding obligations | ( | ) | ( | ) | ( | ) | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Sale of registered stock | - | - | - | - | ||||||||||||||||||||||||||||||||
| Net (loss) income | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance, March 30, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Vesting of restricted stock | ( | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Sale of registered stock | - | - | - | - | ||||||||||||||||||||||||||||||||
| Net (loss) income | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance, June 29, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Net (loss) income | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance, September 28, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements
| 6 |
KOPIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended | ||||||||
| September 26, 2020 | September 28, 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Accretion of premium or discount on marketable debt securities | ||||||||
Recovery of impairment on marketable debt securities | ( | |||||||
| Stock-based compensation | ||||||||
| Foreign currency (gains) losses | ( | ) | ||||||
| Change in allowance for bad debt | ( | ) | ( | ) | ||||
| Unrealized gain on investments | ( | ) | ||||||
| Deferred income taxes | ||||||||
| Loss on disposal of plant and equipment | ||||||||
| Impairment of goodwill | ||||||||
| Write-off of inventory | ||||||||
| Other non-cash items | ( | ) | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Contract assets | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Billings in excess of revenue earned | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Other assets | ( | ) | ||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Proceeds from sale of marketable debt securities | ||||||||
| Cash paid for equity investment | ( | ) | ||||||
| Net cash provided by investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Paycheck protection program loan receipt | ||||||||
| Paycheck protection program loan repayment | ( | ) | ||||||
| Sale of registered stock | ||||||||
| Settlements of restricted stock for tax withholding obligations | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents: | ||||||||
| Beginning of period | ||||||||
| End of period | $ | $ | ||||||
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 September 26, 2020 and for the three and nine month periods ended September 26, 2020 and September 28, 2019 are unaudited and include all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the periods then ended. These condensed consolidated financial statements should be read in conjunction with the Company’s financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year. The December 28, 2019 consolidated balance sheet data was derived from audited financial statements, but certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) have been condensed or omitted. The Company reclassified certain prior period amounts to conform to the current period presentation. As used in this report, the terms “we”, “us”, “our”, “Kopin” and the “Company” mean Kopin Corporation and its subsidiaries, unless the context indicates another meaning.
Going Concern
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. The Company incurred net losses of $
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
COVID-19 pandemic has negatively impacted the global and national economy, disrupted global supply chains, and created significant
volatility in and disruption of financial markets. The extent of the impact of the COVID-19 pandemic on the Company’s operational
and financial performance, including the ability to execute business strategies and initiatives in the expected time frame to
date has been limited. The future impact of the COVID-19 pandemic on the Company’s operational and financial performance
will depend on future developments, including the duration and spread of the pandemic and related restrictions on travel and transportation,
all of which are uncertain and cannot be predicted at this time. An extended period of global supply chain and economic disruption
could materially affect the Company’s business, results of operations, financial condition, and access to sources of liquidity.
In this regard, the CARES Act established a Paycheck Protection Program (PPP), whereby certain small businesses are eligible for
a loan to fund payroll expenses, rent, and related costs. During the second quarter ended June 27, 2020 the Company received loans
under the PPP but subsequently voluntarily terminated and repaid the PPP Loans of $
| 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 nine months ended September 26, 2020 and September 28, 2019.
Investments in available-for-sale marketable debt securities were as follows at September 26, 2020 and December 28, 2019:
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| U.S. government and agency backed securities | $ | $ | $ | $ | - | $ | - | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Corporate Debt | ( | ) | ||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||
The contractual maturity of the Company’s marketable debt securities was as follows at September 26, 2020
| Less than One year | One to Five Years | Total | ||||||||||
| U.S. government and agency backed securities | $ | $ | $ | |||||||||
| Corporate debt | ||||||||||||
| Total | $ | $ | $ | |||||||||
| 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 September 26, 2020 Using: | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Cash and Cash Equivalents | $ | $ | $ | $ | ||||||||||||
| U.S. Government Securities | ||||||||||||||||
| Corporate Debt | ||||||||||||||||
| Equity Investments | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Fair Value Measurement at December 28, 2019 Using: | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Cash and Cash Equivalents | $ | $ | $ | $ | ||||||||||||
| U.S. Government Securities | ||||||||||||||||
| Corporate Debt | ||||||||||||||||
| Equity Investments | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| 10 |
Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. Changes in Level 3 investments were as follows:
| December 28, 2019 | Net unrealized gains | Impairment Charge | September 26, 2020 | |||||||||||||
| Equity Investments | $ | $ | $ | ( | ) | $ | ||||||||||
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short-term nature. If accrued liabilities were carried at fair value, these would be classified as Level 2 in the fair value hierarchy.
Marketable Debt Securities
The corporate debt consists of floating rate notes with a maturity that is over multiple years but has interest rates that are reset every three months based on the then-current three-month London Interbank Offering Rate (“three-month Libor”). The Company validates the fair market values of the financial instruments above by using discounted cash flow models, obtaining independent pricing of the securities or through the use of a model that incorporates the three-month Libor, the credit default swap rate of the issuer and the bid and ask price spread of the same or similar investments which are traded on several markets.
Equity Investments
The
Company acquired an equity interest in a company in the first quarter of 2018 through a $
In
2017 the Company had a warrant to acquire up to
On
September 30, 2019 the Company entered into an Asset Purchase Agreement (the “Solos Purchase Agreement”) pursuant
to which the Company sold and licensed certain assets of our SolosTM (“Solos”) product line and WhisperTM
Audio (“Whisper”) technology. As consideration for the transaction the Company received a
5. INVENTORY
Inventories are stated at standard cost adjusted to approximate the lower of cost (first-in, first-out method) or net realizable value and consist of the following at September 26, 2020 and December 28, 2019:
| September 26, 2020 | December 28, 2019 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
| 11 |
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.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||||||
| Non-vested restricted common stock | ||||||||||||||||
Restricted Stock Awards
In May of 2020, the Company adopted a 2020 Equity Incentive Plan (“2020 Equity Plan”) which authorizes the issuance of shares of common stock to employees, non-employees, and the Board. The 2020 Equity Plan was a successor to the Company’s 2010 Equity Incentive Plan (“2010 Equity Plan”). The number of shares authorized to be issued under the 2020 Equity Plan is four million shares plus shares of the common stock underlying any outstanding award granted under the 2010 Equity Plan that expires, or is terminated, surrendered or forfeited for any reason without issuance of such shares.
Registered sale of equity securities
On
March 15, 2019 and April 10, 2019, the Company sold million shares and million shares, respectively, of registered
common stock for aggregate gross proceeds of $
Non-Vested Restricted Common Stock
The fair value of non-vested restricted common stock awards is generally the market value of the Company’s common stock on the date of grant. The non-vested restricted common stock awards require the employee to fulfill certain obligations, including remaining employed by the Company for one, two or four years (the vesting period) and in certain cases also require meeting either performance criteria or the Company’s stock achieving a certain price. For non-vested restricted common stock awards that solely require the recipient to remain employed with the Company, the stock compensation expense is amortized over the anticipated service period. For non-vested restricted common stock awards that require the achievement of performance criteria, the Company reviews the probability of achieving the performance goals on a periodic basis. If the Company determines that it is probable that the performance criteria will be achieved, the amount of compensation cost derived for the performance goal is amortized over the anticipated service period. If the performance criteria are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed.
Restricted stock activity was as follows:
| Weighted Average | ||||||||
| Shares | Grant Fair Value | |||||||
| Balance, December 28, 2019 | $ | |||||||
| Granted | ||||||||
| Forfeited | ( |
|||||||
| Vested | ( |
|||||||
| Balance, September 26, 2020 | $ | |||||||
| 12 |
On
December 31, 2017, the Company amended the employment agreement with our CEO, Dr. John Fan, to expire on December 31, 2020 and
as part of the amendment issued restricted stock grants. Of the restricted stock grants issued to Dr. Fan, shares will vest upon the first 20 consecutive
trading day period following the grant date during which the Company’s common stock trades at a price equal to or greater
than $5.25, shares will vest at the end of the first
20 consecutive trading day period following the grant date during which the Company’s common stock trades at a price per
share equal to or greater than $6.00, and shares will vest at the end of the first
20 consecutive trading day period following the grant date during which the Company’s common stock trades at a price per
share equal to or greater than $7.00. All of the grants are subject to certain acceleration events and expire on
| For the three months ended September 26, 2020 | ||||||||||||
| Performance price target | $ | $ | $ | |||||||||
| Expected volatility | ||||||||||||
| Interest rate | ||||||||||||
| Expected Life (years) | ||||||||||||
| Dividend yield | ||||||||||||
Stock-Based Compensation
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 26, 2020 | September
28, 2019 | September 26, 2020 | September
28, 2019 | |||||||||||||
| Cost of product revenues | $ | $ | $ | $ | ||||||||||||
| Research and development | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Unrecognized compensation expense for non-vested restricted common stock as of September 26, 2020 totaled $million and is expected to be recognized over a weighted average period of approximately
| 13 |
8. ACCRUED WARRANTY
| Balance, December 28, 2019 | $ | ||||
| Additions | |||||
| Claims | ( |
||||
| Balance, September 26, 2020 | $ |
Extended Warranties
Deferred
revenue represents the purchase of extended warranties by the Company’s customers.
| 14 |
9. INCOME TAXES
The
Company recorded a provision for income taxes of less than $
10. CONTRACT ASSETS AND LIABILITIES
Contract assets include unbilled amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized from customer arrangements, including licensing, exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current. The Company classifies the noncurrent portion of contract assets under other assets in its condensed consolidated balance sheets.
Contract liabilities consist of advance payments and billings in excess of cost incurred and deferred revenue.
Net contract assets (liabilities) consisted of the following:
| September 26, 2020 | December 28, 2019 | $ Change | % Change | |||||||||||||
| Contract assets —current | $ | $ | $ | |||||||||||||
| Contract liabilities—current | ( | ) | ( | ( | ||||||||||||
| Contract liabilities—noncurrent | ( | ) | ( | ( | ||||||||||||
| Net contract assets | $ | $ | $ | |||||||||||||
The
$
In
the three and nine months ended September 26, 2020, the Company recognized revenue of less than $
The Company did not recognize impairment losses on our contract assets in the three and nine months ended September 26, 2020 or September 28, 2019.
Performance Obligations
The Company’s revenue recognition related to performance obligations that were satisfied at a point in time and over time were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||||||
| Point in time | % | % | % | % | ||||||||||||
| Over time | % | % | % | % | ||||||||||||
Remaining
performance obligations represent the transaction price of orders for which work has not been performed and excludes unexercised
contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity (“IDIQ”)).
As of September 26, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $
| 15 |
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 September 26, 2020 and December 28, 2019, the Company did not have any finance leases. Approximately all of our future lease commitments, and related lease liability, relate to the Company’s real estate leases. Some of the Company’s leases include options to extend or terminate the lease.
The components of lease expense were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September
26, 2020 | September
28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
At September 26, 2020, the Company’s future lease payments under non-cancellable leases were as follows:
| 2020 (excluding the nine months ended September 26, 2020) | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| Thereafter | ||||
| Total future lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total | $ |
The Company’s lease liabilities recognized in the Company’s condensed consolidated balance sheets at September 26, 2020 was as follows:
| September 26, 2020 | ||||
| Operating lease liabilities - current | $ | |||
| Operating lease liabilities -noncurrent | ||||
| Total lease liabilities | $ | |||
Supplemental cash flow information related to leases was as follows:
| Nine months ended | ||||
| September 26, 2020 | ||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | |||
Other information related to leases was as follows:
| September 26, 2020 | ||||
| Weighted Average Discount Rate - Operating Leases | % | |||
| Weighted Average Remaining Lease Term - Operating Leases (in years) | ||||
| 16 |
12. SEGMENTS AND DISAGGREGATION OF REVENUE
We continually monitor and review our segment reporting structure in accordance with authoritative guidance to determine if any changes have occurred that would affect our reportable segments. In the fourth quarter of 2019, as a result of the changes in our operations and management structure we commenced reporting under one segment. We have retrospectively adjusted our segment disclosures to present one reportable segment, as our Chief Executive Officer, who is our chief operating decision maker (“CODM”), reviews results on a total company basis.
Total long-lived assets by country at September 26, 2020 and December 28, 2019 were:
| Total Long-lived Assets (in thousands) | September 26, 2020 | December 28, 2019 | ||||||
| U.S. | $ | $ | ||||||
| United Kingdom | ||||||||
| China | ||||||||
| Japan | ||||||||
| Total | $ | $ | ||||||
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 nine months ended September 26, 2020 and September 28, 2019, the Company derived its sales from the following display applications:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||||||
| (In thousands) | ||||||||||||||||
Defense | $ | $ | $ | $ | ||||||||||||
| Industrial | ||||||||||||||||
| Consumer | ||||||||||||||||
| Other | ||||||||||||||||
| R&D | ||||||||||||||||
| License & Royalties | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
During the three and nine months ended September 26, 2020 and September 28, 2019, the Company derived its sales from the following geographies:
| Three Months Ending | Nine Months Ending | |||||||||||||||
| September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||||||
| (In thousands) | ||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Other Americas | ||||||||||||||||
| Total Americas | ||||||||||||||||
| Asia - Pacific | ||||||||||||||||
| Europe | ||||||||||||||||
| Other | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
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. The Court has not yet ruled on the Company’s 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 for the period ended September 26, 2020. The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.
| 17 |
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 nine months ended September 26, 2020 and September 28, 2019, the Company had the following transactions with related parties:
| Three Months Ended | ||||||||||||||||
| September 26, 2020 | September 28, 2019 | |||||||||||||||
| Revenues | Purchases | Sales | Purchases | |||||||||||||
| Solos Inc. | $ | $ | $ | $ | ||||||||||||
| RealWear, Inc. | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Nine Months Ended | ||||||||||||||||
| September 26, 2020 | September 28, 2019 | |||||||||||||||
| Revenues | Purchases | Sales | Purchases | |||||||||||||
| Goertek | $ | $ | $ | $ | ||||||||||||
| Solos Inc. | ||||||||||||||||
| RealWear, Inc. | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
At September 26, 2020 and December 28, 2019, the Company had the following receivables, contract liabilities and payables with related parties:
| September 26, 2020 | December 28, 2019 | |||||||||||||||||||||||
| Receivables | Contract Liabilities | Payables | Receivables | Contract Assets | Payables | |||||||||||||||||||
| Solos Inc. | $ | $ | $ | $ | $ | $ | |
|||||||||||||||||
| RealWear, Inc. | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| 18 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the safe harbor created by such sections. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “could,” “would,” “seeks,” “estimates,” and variations of such words and similar expressions, and the negatives thereof, are intended to identify such forward-looking statements. We caution readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and advise readers that these forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, estimates, and assumptions by us that are difficult to predict. Various factors, some of which are beyond our control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. All such forward-looking statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by these cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report, except as may otherwise be required by the federal securities laws.
We have identified the following important factors that could cause actual results to differ materially from those discussed in our forward-looking statements. Such factors may be in addition to the risks described in Part I, Item 1A, “Risk Factors;” Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; and other parts of our Annual Report on Form 10-K for the fiscal year ended December 28, 2019. These factors include: the extent of the impact of the coronavirus (“COVID-19”) pandemic on our business and operations, and the economic and societal disruptions resulting from the COVID-19 pandemic; our ability to continue as a going concern; the material weakness management has identified in our internal control over financial reporting, our conclusion that our disclosure controls and procedures were not effective as of the fiscal year ended December 28, 2019 or the period ended September 26, 2020 and our ability to remediate that material weakness; our ability to obtain raw materials and other goods as well as services from our suppliers as needed; the potential for customers to choose our competitors as their supplier; our expectation that we will have negative cash flow from operating activities in 2020; our ability to prosecute and defend our proprietary technology aggressively or successfully; our ability to retain personnel with experience and expertise relevant to our business; our ability to invest in research and development to achieve profitability even during periods when we are not profitable; our ability to continue to introduce new products in our target markets; our ability to generate revenue growth and positive cash flow, and reach profitability; the strengthening of the U.S. dollar and its effects on the price of our products in foreign markets; the impact of new regulations and customer demands relating to conflict minerals; our ability to obtain a competitive advantage in the wearable technologies market through our extensive portfolio of patents, trade secrets and non-patented know-how; our ability to grow within our targeted markets; the importance of small form factor displays in the development of 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 expectation that we will expend between $0.5 million and $1.0 million on capital expenditures during 2020; our need to achieve and maintain positive cash flow and profitability, our financial condition will ultimately be materially adversely affected, and we will be required to reduce expenses, including our investments in research and development or raise additional capital; our ability to support our operations and capital needs for at least the next twelve months through our available cash resources; our expectation that we will incur taxes based on our foreign operations in 2020; and our expectation that we will have a state tax provision in 2020.
Overview
We are a leading developer, manufacturer and seller of miniature displays and optical lenses (our “components”) for sale as individual displays, components, modules or higher-level subassemblies. We also license our intellectual property through technology license agreements. Our component products are used in highly demanding high-resolution portable defense, 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.
| 19 |
The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 28, 2019 and our unaudited condensed consolidated financial statements included in this Form 10-Q.
COVID-19
We continue to actively monitor the COVID-19 pandemic and take steps intended to mitigate the potential risks to our workforce and our business. This pandemic continues to disrupt global economic activity and the capital markets. These disruptions may continue for a prolonged period of time or become more severe. The COVID-19 pandemic is a continuously evolving situation. We cannot predict the duration of the pandemic or the ultimate effects of it on the global or national economy. The COVID-19 pandemic and its related effects have affected our supply chain and workforce, as discussed more fully below.
Results of Operations
As described in our “Forward-Looking Statements” on page 19 of this Form 10-Q, our interim period results of operations and period-to-period comparisons of such results may not be indicative of our future operating results. Additionally, we use a fiscal calendar, which may result in differences in the number of work days in the current and comparable prior interim periods and could affect period-to-period comparisons. The following discussions of comparative results among periods, including the discussion of segment results, should be viewed in this context.
Revenues. We categorize revenues based upon our understanding of the end market application our products are included in. For the three and nine months ended September 26, 2020 and September 28, 2019, our revenues by display application, which include product sales and amounts earned from research and development contracts, were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (In thousands) | September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||
Defense | $ | 4,769 | $ | 1,968 | $ | 12,772 | $ | 5,207 | ||||||||
| Industrial | 1,650 | 2,625 | 5,229 | 7,262 | ||||||||||||
| Consumer | 68 | 360 | 521 | 1,510 | ||||||||||||
| Other | - | 2 | 553 | 25 | ||||||||||||
| R&D | 2,563 | 1,184 | 6,295 | 2,452 | ||||||||||||
| License & royalties | 463 | - | 836 | 4,336 | ||||||||||||
| Total Revenues | $ | 9,513 | $ | 6,139 | $ | 26,206 | $ | 20,792 | ||||||||
Sales of our products for Defense applications include systems used by the defense both in the field and for training and simulation. The increase in Defense applications revenues in the three and nine months ended September 26, 2020 as compared to the three and nine months ended September 28, 2019 is primarily from an increase in volume shipments for our thermal weapon sight systems for soldiers and avionic component contracts.
| 20 |
Industrial applications revenue represents customers who purchase our display products for use in 3D metrology equipment and wearable headsets used for commercial applications in manufacturing, distribution and public safety. Our 3D metrology customers are primarily located in Asia and sell to Asian contract manufacturers who use the 3D metrology machines for quality control purposes. The decrease in Industrial applications revenue for the three months ended September 26, 2020 as compared to the three months ended September 28, 2019 was primarily due to a decline in sales of products for 3D metrology equipment and wearable headsets used for commercial applications and public safety. The decrease in Industrial applications revenue for the nine months ended September 26, 2020 as compared to the nine months ended September 28, 2019 was primarily due to a decline in sales of products for 3D metrology equipment and wearable headsets used for commercial applications partially offset by an increase in sales of headsets for public safety Our Scotland production plant, which provides the displays for the 3D metrology equipment application, experienced a supply issue in March 2020 related to one raw material, which resulted in lower revenues from the sale of our displays for 3D applications during the three and nine months ended September 26, 2020. We do not believe this interruption was related to the COVID-19 pandemic. However, our Scotland plant was closed for the majority of April 2020 as a result of the COVID-19 pandemic. The loss of revenue of our Scotland plant because of the closure in April 2020 was not significant.
Our displays for Consumer applications are used primarily in thermal imaging products, recreational rifle and hand-held scopes, drone racing headsets and augmented reality and virtual reality headsets. The decrease in Consumer applications revenues for the three and nine months ended September 26, 2020 as compared to the three and nine months ended September 28, 2019 was primarily due to decreased demand for displays and components used in recreational rifle and hand-held scopes and drone racing headsets.
R&D revenues increased in the three and nine months ended September 26, 2020 as compared to the three and nine months ended September 28, 2019 due to increase in funding for U.S. defense programs and microdisplay development.
Other revenue includes sales of products which either do not meet the description of one of the other product categories or we do not know what end market application our product is used for. License and royalty revenues include license fees from an arrangement with a customer where our performance obligation is to license functional intellectual property (“IP”) and which provides the customer the right to use our IP as it exists at a point in time and royalties on the sale of the customers’ products that include our IP. The increase in license & royalties revenue in the three months ended September 26, 2020 compared to the three months ended September 28, 2019 was due to no royalties received for the three months ended September 28, 2019. The decrease in license and royalties revenue in the nine months ended September 26, 2020 compared to the nine months ended September 28, 2019 was due to the one-time license of functional IP to a customer for $3.5 million in the second quarter ended June 29, 2019.
International sales represented 18% and 44% of total revenues for the three months ended September 26, 2020 and September 28, 2019, and 18% and 59% of total revenues for the nine months ended September 26, 2020 and September 28, 2019, respectively. We categorize our sales as either domestic or international based upon the delivery destination of our product. For example, if the customer is located in Asia or if a U.S. customer has its Asian contract manufacturer order product from us and we deliver the product to Asia we categorize both these sale as international. 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 decline in international sales was primarily a result of a decline in sales of products for industrial wearable headset applications. Our international sales are primarily denominated in U.S. currency. Consequently, a strengthening of the U.S. dollar could increase the price in local currencies of our products in foreign markets and make our products relatively more expensive than competitors’ products that are denominated in local currencies, which could lead to a reduction in sales or profitability in those foreign markets. We have not taken any protective measures against exchange rate fluctuations, such as purchasing hedging instruments with respect to such fluctuations, because of the historically stable exchange rate between the British Pound Sterling (the functional currency of our U.K. subsidiary) and the U.S. dollar. Foreign currency translation impact on our results, if material, is described in further detail under “Item 3. Quantitative and Qualitative Disclosures About Market Risk” section below.
Cost of Product Revenue. Cost of product revenues, which is comprised of materials, labor and manufacturing overhead related to the production of our products, were as follows for the three and nine months ended September 26, 2020 and September 28, 2019:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (In thousands, except for percentages) | September
26, 2020 | September
28, 2019 | September
26, 2020 | September
28, 2019 | ||||||||||||
| Cost of product revenues | $ | 4,825 | $ | 4,690 | $ | 15,252 | $ | 15,810 | ||||||||
| Cost of product revenues as a % of net product revenues | 74.4 | % | 94.6 | % | 80.0 | % | 112.9 | % | ||||||||
The decrease in cost of product revenues as a percentage of net product revenues for the three and nine months ended September 26, 2020 as compared to the three and nine months ended September 28, 2019 was primarily due to lower material cost and improved manufacturing efficiencies due to higher sales volumes which reduced fixed costs per unit at our United States plant. In 2019 we were commencing production of certain products and we experienced higher than normal scrap and excess inventory charges of approximately $1.5 million for the first nine months of 2019 as compared to the first nine months of 2020.
During the first nine months of 2020 our U.S. production facilities did not experience significant issues with obtaining raw materials as a result of the coronavirus pandemic. However, for certain raw materials, including raw materials we source from Asia, we do not have significant amounts of inventory and we are receiving weekly shipments that are necessary to keep our production lines going. Our Forth Dimension Displays, Ltd. (FDD) production facility in Scotland did experience a disruption in their supply chain in March 2020 which negatively impacted their revenues, operating results and cash flow. Our United States production facilities were open during the first nine months of 2020 but our production staffing levels were below normal for the first six months of 2020, as some employees stayed home. We have returned to normal staffing levels in the third quarter of 2020. Our FDD facility was closed during April 2020 but reopened in May 2020. Our FDD facility produces displays for 3D metrology equipment makers and certain U.S. defense programs. FDD sells its U.S. defense displays to our subsidiary, NVIS, Inc. for incorporation into defense systems. As a result of the disruption at FDD, display shipments to its customers, including NVIS, were behind schedule as of March 28, 2020 but were back on schedule by June 27, 2020. A disruption in supply of raw materials or a decrease in production employee attendance could result in lower revenues, an increase in our operating losses and a negative impact on our cash flow.
| 21 |
Research and Development. R&D expenses are incurred in support of internal display development programs and programs funded by agencies or prime contractors of the U.S. government and commercial partners. R&D costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication and packaging of display products, and overhead. In fiscal year 2020, we expect our R&D expenditures to be related to our display products, overlay weapon sights and organic light emitting diode (“OLED”) display and related optical technologies. Funded and internal R&D expense are combined in research and development expenses in the statement of operations. R&D expenses for the three and nine months ended September 26, 2020 and September 28, 2019 were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (In thousands) | September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||
| Funded | $ | 1,618 | $ | 1,161 | $ | 4,484 | $ | 2,471 | ||||||||
| Internal | 1,098 | 1,229 | 2,793 | 8,215 | ||||||||||||
| Total research and development expense | $ | 2,716 | $ | 2,390 | $ | 7,277 | $ | 10,686 | ||||||||
Funded R&D expense for the three and nine months ended September 26, 2020 increased as compared to the three and nine months ended September 28, 2019 primarily due to increased spending on U.S. defense programs and microdisplay development. Internal R&D expenses for the three and nine months ended September 26, 2020 decreased as compared to the three and nine months ended September 28, 2019 primarily due to the curtailment of certain development programs.
Selling, General and Administrative. Selling, general and administrative (“S,G&A”) expenses consist of the expenses incurred by our sales and marketing personnel and related expenses, and administrative and general corporate expenses. S,G&A expenses for the three and nine months ended September 26, 2020 and September 28, 2019 were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (In thousands, except for percentages) | September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||
| Selling, general and administration expense | $ | 3,080 | $ | 5,130 | $ | 9,421 | $ | 16,788 | ||||||||
| Selling, general and administration expense as a % of revenues | 32.4 | % | 83.6 | % | 35.9 | % | 80.7 | % | ||||||||
S,G&A decreased for the three and nine months ended September 26, 2020 as compared to the three and nine months ended September 28, 2019 primarily due to a decrease in compensation expenses including stock-based compensation, bad debt expense, professional fees, information technology expenses, travel and accretion of the NVIS contingent consideration.
Other Income (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 nine months ended September 26, 2020 and September 28, 2019 was as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (In thousands) | September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||
| Other income (expense), net | $ | 168 | $ | (78 | ) | $ | 75 | $ | 839 | |||||||
During the three and nine months ended September 26, 2020 we recorded foreign currency gains of less than $0.2 million and less than $0.1 million, respectively, as compared to losses of $0.1 million for the three and nine months ended September 28, 2019. During the three and nine months ended September 28, 2019, the Company recognized a gain of approximately $0.8 million on the fair value adjustment due to an observable price change on an equity investment.
Tax Provision. We recorded a provision for income taxes of less than $0.1 million in the three months ended September 26, 2020 and $0.1 million in the nine months ended September 26, 2020. We recorded a provision for income taxes of less than $0.1 million for the three and nine months ended September 28, 2019. The provision for income taxes in the three and nine months ended September 26, 2020 and September 28, 2019 primarily relate to interest and penalties on uncertain tax positions.
Net Loss (Income) Attributable to Noncontrolling Interest. As of September 26, 2020, we owned 80% of the equity of eMDT America (“eMDT”). Net loss (income) attributable to noncontrolling interest on our consolidated statement of operations represents the portion of the results of operations of our majority owned subsidiary which is allocated to the stockholders of the equity interests not owned by us. The change in net loss (income) attributable to noncontrolling interest is the result of the change in the results of operations of eMDT for the three and nine months ended September 26, 2020 and September 28, 2019.
| 22 |
Net Loss Attributable to Kopin Corporation. We incurred net losses attributable to Kopin Corporation of $1.0 million and $5.7 million during the three and nine months ended September 26, 2020 compared to net losses attributable to Kopin Corporation of $6.6 million and $22.2 million during the three and nine months ended September 28, 2019.The decrease in the net losses attributable to Kopin Corporation during the three and nine months ended September 26, 2020 compared to the three and nine months ended September 28, 2019 is due to a reorganization of the Company in 2019. The reorganization included a reduction in the number of employees, a decrease in R&D expense through the sale or license of intellectual property associated with activities we had either completed or abandoned, and a decrease in S,G&A due to lower labor costs, stock based compensation costs, bad debt expense, professional fees, information technology costs and the accretion of the NVIS contingent consideration. Some of the reduction in S,G&A costs was made possible by the actions taken to reduce R&D expense as we would no longer be pursing the launch of products based on the technologies being developed.
Liquidity and Capital Resources
At September 26, 2020 and December 28, 2019, we had cash and cash equivalents and marketable securities of $15.6 million and $21.8 million, respectively, and working capital of $17.9 million and $22.5 million at September 26, 2020 and December 28, 2019, respectively. The change in cash and cash equivalents and marketable securities was primarily due to net outflow of cash used in operating activities of $6.3 million and capital expenditures of $0.3 million, partially offset by the proceeds from the sale of marketable debt securities of $10.8 million. Included in the $6.3 million of cash used in operating activities was a contingent consideration payment to the former owners on NVIS of $0.5 million.
During the second quarter of the fiscal year ending December 26, 2020, we received the proceeds from loans in the amount of approximately $2.2 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). During the second quarter of the fiscal year ending December 26, 2020 we repaid $2.1 million of the loans and we repaid $0.1 million in July 2020. Our decision to terminate the loans was based on additional guidance issued by the Small Business Administration. There were no prepayment penalties in connection with the voluntary repayment.
On March 15, 2019, we sold 7.3 million shares of registered common stock for gross proceeds of $8.0 million ($1.10 per share), before deducting underwriting discounts and offering expenses paid by the Company of $0.7 million. This represented approximately 8.9% of our total outstanding shares of common stock as of the date of purchase. The net proceeds from the offering were used for general corporate purposes, including working capital. On April 10, 2019, we sold 0.7 million shares of registered common stock for gross proceeds of $0.8 million ($1.10 per share), before deducting underwriting discounts and offering expenses paid by us of less than $0.1 million, pursuant to the partial exercise of the underwriters’ overallotment option in connection with the March 15, 2019 public offering. This represented approximately 0.8% of our total outstanding shares of common stock as of the date of purchase.
Cash and cash equivalents and marketable debt securities held in U.S. Dollars at:
| September 26, 2020 | December 28, 2019 | |||||||
| Domestic locations | $ | 14,830,423 | $ | 21,148,381 | ||||
| International locations | 369,240 | 145,240 | ||||||
| Subtotal cash and cash equivalents marketable debt securities held in U.S. dollars | 15,199,663 | 21,293,621 | ||||||
| Cash and cash equivalents held in other currencies and converted to U.S. dollars | 413,696 | 488,623 | ||||||
| Total cash and cash equivalents and marketable debt securities | $ | 15,613,359 | $ | 21,782,244 | ||||
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We have no plans to repatriate the cash and cash equivalents held in our foreign subsidiary FDD and, as such, we have not recorded any deferred tax liability with respect to such cash.
In March 2017, we purchased 100% of the outstanding stock of NVIS for $3.7 million and subsequently paid $1.9 million in contingent consideration through March 28, 2020. There are no remaining contingent payment obligations related to the NVIS purchase as of September 26, 2020.
We expect to expend between $0.5 million and $1.0 million on capital expenditures in 2020.
We entered into an agreement in August 2017 to acquire an approximate 3.5% equity interest in Kunming BOE Display Technology Co., Ltd. (“BOE”), which is located in China, for 35.0 million Chinese Yuan Renminbi (approximately $5.0 million). Our sole obligation under this agreement is to make this capital contribution. The funds raised by the BOE equity offering are being used to build an Organic Light Emitting Diode (“OLED”) manufacturing facility which we intend to use to manufacture our products. We were unable to make our scheduled capital contribution and have received an extension from BOE postponing our capital contribution until July 2022.
We incurred net losses of $29.4 million and net cash outflows from operations of $21.0 million for the fiscal year ended December 28, 2019. We incurred a net loss of $5.8 million for the nine months ended September 26, 2020 and net cash outflows from operations of $6.3 million. In addition, for the nine months ended September 26, 2020 we have continued to experience a significant decline in cash and cash equivalents and marketable debt securities, which was primarily a result of funding operating losses, of which a significant component relates to our ongoing investments in the research and development of display products. These negative financial conditions raise substantial doubt regarding our ability to continue as a going concern. We have an At-The-Market (ATM) program in place that provides us a method of selling up to an aggregate of $20 million of shares of our common stock into the market on a periodic basis to raise funds. In addition, we have in the past sold equity securities to fund our operations. We estimate we will have sufficient liquidity to fund operations at least through the end of the third quarter of 2021. If our actual results are less than projected or we need to raise capital for additional liquidity, we may be required to do an equity financing, reduce expenses or enter into a strategic transaction. However, we can make no assurance that we will be able to raise additional capital, reduce expenses sufficiently, or enter into a strategic transaction on terms acceptable to us, or at all.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We invest our excess cash in high-quality U.S. government, government-backed (e.g., Fannie Mae, FDIC guaranteed bonds and certificates of deposit) and corporate debt instruments, which bear lower levels of relative risk. We believe that the effect, if any, of reasonably possible near-term changes in interest rates on our financial position, results of operations and cash flows should not be material to our cash flows or income. It is possible that interest rate movements would increase our unrealized gain or loss on debt securities. We are exposed to changes in foreign currency exchange rates primarily through our translation of our foreign subsidiaries’ financial position, results of operations, and transaction gains and losses as a result of non-U.S. dollar denominated cash flows related to business activities in Europe, and remeasurement of U.S. dollars to the British pound, the functional currency of our U.K. subsidiary. We are also exposed to the effects of exchange rates in the purchase of certain raw materials, which are in U.S. dollars, but the price 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 September 26, 2020, 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 September 26, 2020, 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 September 26, 2020, internal control over financial reporting was not effective based on criteria established in Internal Control-Integrated Framework issued by the COSO because of a material weakness previously identified, as discussed below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
In the course of performing our assessment of internal control over financial reporting in 2019, management identified a material weakness in internal controls as of December 28, 2019 and December 29, 2018 related to management’s monitoring and oversight of accounting for non-routine transactions. Specifically, our internal controls were not designed effectively to ensure appropriate and timely evaluation of the accounting impact for non-routine transactions, including the accounting for non-controlling interest and other investments. This material weakness continues to exist as of September 26, 2020.
Remediation
We are in the process of remediating this deficiency. To date, we implemented additional review procedures, including increasing the scope of activities from the accounting firm we use to assist us in internal control reviews, to ensure the financial statements we issue are prepared in accordance with GAAP and are fairly presented in all material respects. As of September 26, 2020, we have not had sufficient opportunity to test whether our corrective actions have remedied the material weakness and therefore management concluded that the material weakness has not been remedied as of September 26, 2020.
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 September 26, 2020 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. The Court has not yet ruled on the Company’s 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 for the period ended September 26, 2020. The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 28, 2019. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, including the COVID-19 pandemic, could adversely affect our business, results of operations and financial condition. The COVID-19 pandemic has negatively impacted the global and national economy, disrupted global supply chains, and created significant volatility in and disruption of financial markets. The extent of the impact of the COVID-19 pandemic on our operational and financial performance, including the ability to execute business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and spread of the pandemic and related restrictions on travel and transportation, all of which are uncertain and cannot be predicted at this time. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, financial condition, and access to sources of liquidity. In this regard, the CARES Act established a Paycheck Protection Program, whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. The loan may be forgiven if the funds are used for payroll and other qualified expenses. As previously disclosed, we received $2.2 million in proceeds from a loan under the PPP, which we subsequently repaid. Governmental programs such as the PPP are complex and our participation may lead to additional litigation and governmental, regulatory and third-party scrutiny, negative publicity and damage to our reputation.
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We depend on raw materials and certain production employee staffing levels in order to maintain production. During the first nine months of 2020 our US production facilities did not experience significant issues with obtaining raw materials as a result of the coronavirus pandemic. However, for certain raw materials, including raw materials we source from Asia, we do not have significant amounts of inventory and we are receiving weekly shipments that are necessary to keep our production lines going. Our FDD production facility in Scotland did experience a disruption in their supply chain in the month of March 2020 which negatively impacted their revenues, operating results and cash flow. Our United States production facilities were open during the first fiscal quarter of 2020 but our production staffing levels were below normal as some employees stayed home and we expect this to continue and are unable to determine when we will return to normal staffing levels. Our FDD facility was closed during April 2020 but has recently reopened. Our FDD facility produces displays for 3D metrology equipment makers and certain US defense programs. FDD sells its US defense displays to our subsidiary, NVIS Inc. for incorporation into defense systems. As a result of the disruption at FDD display shipments to its customers, including NVIS Inc., were behind as of March 28, 2020 but we were able to return to schedule in the quarter ended June 27, 2020. A disruption in supply of raw materials or a decrease in production employee attendance could result in lower revenues, an increase in our operating losses and a negative impact on our cash flow.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any securities during the nine months ended September 26, 2020 that were not registered under the Securities Act.
Item 6. Exhibits
| * | Submitted electronically herewith |
| ** | Furnished and not filed herewith |
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 26, 2020 (Unaudited) and December 28, 2019, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 26, 2020 and September 28, 2019, (iii) Condensed Consolidated Statement of Comprehensive (Loss) Income (Unaudited) for the three and nine months ended September 26, 2020 and September 28, 2019, (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and nine months ended September 26, 2020 and September 28, 2019, (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 26, 2020 and September 28, 2019, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| KOPIN
CORPORATION (Registrant) | |||
| Date: | November 5, 2020 | By: | /S/ John C.C. Fan |
| John C.C. Fan | |||
President, Chief Executive Officer and Chairman of the Board of Directors | |||
| (Principal Executive Officer) | |||
| Date: | November 5, 2020 | By: | /S/ RICHARD A. SNEIDER |
| Richard A. Sneider | |||
| Treasurer and Chief Financial Officer | |||
| (Principal Financial and Accounting Officer) | |||
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