Fluctuations in operating results make financial forecasting difficult and could adversely affect the price of our common stock. Our quarterly and annual revenues and operating results may fluctuate significantly for numerous reasons, including:
| ● | The timing of the initial selection of our display products as components in our customers’ new products; | |
| ● | Availability of interface electronics for our display products; |
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| ● | Competitive pressures on selling prices of our products; | |
| ● | The timing and cancellation of customer orders; | |
| ● | Our ability to introduce new products and technologies on a timely basis; | |
| ● | Our ability to successfully reduce costs; | |
| ● | The cancellation of U.S. government contracts; and | |
| ● | Our ability to secure agreements from our major customers for the purchase of our products. |
As a result of these and other factors, investors should not rely on our revenues and our operating results for any one quarter or year as an indication of our future revenues or operating results. If our quarterly revenues or results of operations fall below expectations of investors or public market analysts, the price of our common stock could fall substantially.
Our revenues and cash flows could be negatively affected if sales of our Display products for defense applications significantly decline or the current defense development programs are either cancelled or ultimately do not result in future product sales. The sale of our display products to the military for use in thermal weapon sights and avionic helmets have been a primary source of our defense revenues and cash flows over the last several years. We currently are designed in the Family Weapon Sight (“FWS”) Individual program and the Joint Strike Fighter (F-35) jet fighter. We are in development and qualification in additional defense programs related to avionic helmets, armored vehicles and soldier rifle scopes. Our ability to generate revenues and cash flow from sales to the U.S. military depends on our Display products remaining qualified in the F-35 Strike Fighter, FWS and other U.S. defense programs and on the U.S. government/military funding these programs. Our ability to generate revenues and cash flows also depends on the products we are developing and qualifying for other U.S. military programs being successfully qualified and the U.S. government/military funding these programs. We may not be awarded contracts for the systems we are in qualification for, and for the systems we are qualified for we may only be awarded a portion of the program as the U.S. military looks to have multiple sources when possible. In addition, the government could postpone or cancel these programs. We believe the U.S. defense is evaluating alternative display technologies for the F-35 Strike Fighter program. Our ability to generate revenues and cash flow from sales to the U.S. military also depends on winning contracts over our competitors. If we are unable to be qualified into new U.S. defense programs, remain qualified in existing programs, or win orders against our competition, or if defense programs are not funded, then our ability to generate revenues and achieve profitability and positive cash flow will be negatively impacted.
Our customers who purchase display products for defense applications typically incorporate our products into their products, which are sold to the U.S. government under contracts. U.S. government contracts generally are not fully funded at inception and may be terminated or modified prior to completion, which could adversely affect our business. Congress funds the vast majority of the federal budget on an annual basis, and Congress often does not provide agencies with all the money requested in their budget. Many of our customers’ contracts cover multiple years and, as such, are not fully funded at contract award. If Congress or a U.S. government agency chooses to spend money on other programs, our customers’ contracts may be terminated for convenience. Federal laws, collectively called the Anti-Deficiency Act, prohibit involving the government in any obligation to pay money before funds have been appropriated for that purpose, unless otherwise allowed by law. Therefore, the Anti-Deficiency Act indirectly regulates how agencies awards our contracts and pays our invoices. Federal government contracts generally contain provisions that provide the federal government rights and remedies not typically found in commercial contracts, including provisions permitting the federal government to, among other things: terminate our existing contracts; modify some of the terms and conditions in our existing contracts; subject the award to protest or challenge by competitors; suspend work under existing multiple year contracts and related delivery orders; and claim rights in technologies and systems invented, developed or produced by us.
The federal government may terminate a contract with us or our customers either “for convenience” (for instance, due to a change in its perceived needs) or if we default due to our failure or the failure of a general or subcontractor to perform under the contract. If the federal government terminates a contract with one of our customers, our contract with our customers generally would entitle us to recover only our incurred or committed costs, settlement expenses and possibly profit on the work completed prior to termination. However, under certain circumstances, our recovery costs upon termination for convenience of such a contract may be limited. As is common with government contractors, we have experienced occasional performance issues under some of our contracts. We have received Stop Work Orders wherein work is suspended pending a review of the program. We may in the future receive show-cause or cure notices under contracts that, if not addressed to the federal government’s satisfaction, could give the government the right to terminate those contracts for default or to cease procuring our services under those contracts.
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In addition, U.S. government contracts and subcontracts typically involve long purchase and payment cycles, competitive bidding, qualification requirements, delays or changes in funding, extensive specification and performance requirements, price negotiations and milestone requirements. Each U.S. government agency often also maintains its own rules and regulations with which we must comply, and which can vary significantly among agencies.
Most of our defense sales are on a fixed-price basis, which could subject us to losses if there are cost overruns. Under a fixed-price contract, we receive only the amount indicated in the contract, regardless of the actual cost to produce the goods. While firm fixed-price contracts allow us to benefit from potential cost savings, they also expose us to the risk of cost overruns. If the initial estimates that we use to calculate the sales price and the cost to perform the work prove to be incorrect, we could incur losses. We have had situations where we have underestimated the cost of a program and incurred losses on fulfilling the contract. In addition, some of our contracts have specific provisions relating to cost, scheduling, and performance. If we fail to meet the terms specified in those contracts, then our cost to perform the work could increase, which would adversely affect our financial position and results of operations. Some of the contracts we bid on have Indefinite Delivery, Indefinite Quantity (“IDIQ”) provisions. This means we are bidding a fixed price but are not assured of the quantity the government will buy or when it will buy during the term of the contract. This means we are exposed to the risk of price increases for labor, overhead and raw materials during the term of the contract. We may incur losses on fixed-price and IDIQ contracts that we had expected to be profitable, or such contracts may be less profitable than expected, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
We recognize revenue for our defense contracts and some commercial contracts based on percentage of completion which require significant management judgement and errors in our judgement could result in our revenue being overstated or understated and the profits or loss reported could be subject to adjustment. For certain contracts with the U.S. government, the Company recognizes revenue over time as we perform because of continuous transfer of control to the customer and the lack of an alternative use for the product. The continuous transfer of control to the customer is supported by liability clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. Contracts with commercial customers may have a similar liability clause. In situations where control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. We generally use the cost-to-cost approach to measure the extent of progress towards completion of the performance obligation for our contracts. Under the cost-to-cost measure approach, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred. Accounting for design, development and production contracts requires judgment relative to assessing risks, estimating contract revenues and costs and making assumptions for schedule and technical issues. Due to the size and nature of the work required to be performed on many of our contracts, the estimation of total revenue and cost at completion is complicated and subject to many variables. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect costs. We have to make assumptions regarding the number of labor hours required to complete a task, the complexity of the work to be performed, the availability and cost of materials and performance by our subcontractors. For contract change orders, claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated, and realization is considered probable. If our estimate of total contract costs or our determination of whether the customer agrees that a milestone is achieved is incorrect, our revenue could be overstated or understated, and the profits or loss reported could be subject to adjustment. If our revenues and costs require adjustment our stock price could decline.
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A decline in the U.S. government defense budget, changes in spending or budgetary priorities, a prolonged U.S. government shutdown or delays in contract awards may significantly and adversely affect our future revenues, cash flow and financial results. In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation. In 2011, Congress enacted the of Budget Control Act 2011 (“BCA”), which established specific limits on annual appropriations for fiscal years 2012-2021 and has since been amended a number of times, most recently by the Bipartisan Budget Act of 2019 (“BBA19”). As a result, Department of Defense (“DoD”) funding levels have fluctuated over this period and have been difficult to predict. Future spending levels are subject to a wide range of outcomes, depending on Congressional action. In addition, in recent years the U.S. government has been unable to complete its budget process before the end of its fiscal year, resulting in both a government shutdown and continuing resolutions to extend sufficient funds only for U.S. government agencies to continue operating. Most recently, the federal government was shut down due to lack of funding for over one month between late 2018 and early 2019. Additionally, the national debt has recently threatened to reach the statutory debt ceiling, and such an event in future years could result in the U.S. government defaulting on its debts.
As a result, defense spending levels are difficult to predict beyond the near-term due to numerous factors, including the external threat environment, future government priorities and the state of government finances. Significant changes in defense spending or changes in U.S. government priorities, policies and requirements could have a material adverse effect on our results of operations, financial condition or liquidity.
Our ability to manufacture and distribute our Display products would be severely limited if the foundries that we rely on to manufacture integrated circuits for our Display products fail to provide those services. We depend principally on a Taiwanese foundry for the fabrication of integrated circuits for our display products. In addition, our strategy is to use Chinese foundryfoundries services for OLED deposition and processing of OLED displays. We have no long-term contracts with foundries and from time to time we have been put on allocation, which means the foundry will limit the number of wafers they will process for us. If foundries were to terminate their arrangement with us or become unable to provide the required capacity and quality on a timely basis, we may not be able to manufacture and ship our Display products or we may be forced to manufacture them in
Our reliance on these foundries involves certain risks, including but not limited to:
| ● | Lack of control over production capacity and delivery schedules; | |
| ● | Limited control over quality assurance, manufacturing yields and production costs; | |
| ● | The risks associated with international commerce, including unexpected changes in legal and regulatory requirements, changes in tariffs and trade policies and political and economic instability; and | |
| ● | Natural disasters such as earthquakes, tsunami, mudslides, drought, hurricanes and tornadoes. |
Due to natural disasters such as earthquakes and typhoons that have occasionally occurred in Asia, many Taiwanese companies, including the Taiwanese foundry we use, have experienced related business interruptions. Our business could suffer significantly if any of the foundries we use hadhave their operations disrupted for an extended period of time due to natural disaster, political unrest or financial instability.
We may be unable to adequately control purchase pricing of certain critical materials, which may materially adversely affect our sales or profitability. We have no long termlong-term pricing contracts on foundry wafers and certain other materials that represent a significant portion of product BoMbill of material costs. We cannot provide assurance against supplier price increases that negatively impact the cost of producing products, which may adversely affect sales or profitability. Finding and/or qualifying a more cost-effective replacement supplier may take significant time.
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Our investments in the development and sale of OLED microdisplays may not be successful which may materially adversely affect our sales, profitability and cash flow.
We historically have sold products that incorporate our proprietary AMLCDs. We believe that for certain applications OLED microdisplays have performance advantages and we believe some customers will want to switch from AMCLDs to OLED microdisplays in the next two to three years. We are in the process of designing and developing OLED microdisplays. Our plan is to outsource the production of the OLED microdisplays. We have little experience in production outsourcing. We expect to make significant monetary investments in the development of OLED microdisplays. If we are unsuccessful in designing and developing OLED microdisplays or if we are unable to find cost-effective third party production partners our sales and profitability may be negatively affected.
We depend on third parties to provide integrated circuit chip sets and critical raw materials and we periodically receive “end of life” notices from suppliers that they will no longer be providing a raw material. We do not manufacture the integrated circuit chip sets that are used to electronically interface between our display products and our customers’ products. Instead, we rely on third party independent contractors for these integrated circuit chip sets. We purchase critical raw materials such as special glasses, special silicon on insulator ("SOI"(“SOI”) wafers, light emitting diodes, adhesives, chemicals, lenses, backlights, printed circuit boards and other components from third party suppliers. Some of these third party contractors and suppliers are small companies with limited financial resources. In addition, relative to the commercial market, the military buys a small number of units, which prevents us from qualifying and buying components economically from multiple vendors. We periodically receive notices from suppliers of our critical raw materials regarding their plans to stop selling those raw materials. This requires us to identify another raw material and/or raw material supplier to replace the discontinued item/supplier, which would then require us to internally re-qualify the product with the new material as well as possibly re-qualify the product with our customer. If any of these third party contractors or suppliers were unable or unwilling to supply these integrated circuit chip sets or critical raw materials to us, whether for business or regulatory reasons, we would be unable to manufacture and sell our display products until a replacement material could be found. We may not be able to find a replacement material or if we are able to find a replacement material we may be unable to sell our products until they have been qualified both internally and with the customer. Lower volume purchases may make it uneconomical for some of our suppliers to provide the raw materials we need. We cannot assure investors that a replacement third party contractor or supplier could be found on reasonable terms or in a timely manner. Any interruption in our ability to manufacture and distribute our display products could cause our display business to be unsuccessful and the price of our common stock may decline.
Widespread health problems, such as
Our investments in the outbreakdevelopment and spreadsale of the coronavirus, couldOLED microdisplays may not be successful which may materially adversely affect our business. The initial manufacturing stepssales, profitability and cash flow. We historically have sold products that incorporate our proprietary AMLCDs. We believe that for our AMLCD display products, our primary source of revenues, are performed in Taiwancertain applications OLED microdisplays have performance advantages and the product is then sentwe believe some customers have switched or will want to the U.S. for completion. To complete the displayswitch from AMCLDs to OLED microdisplays in the USA we neednext two to source raw materials and components from Asia. The initial manufacturing steps for our new OLED displays are performed in Asia and then sent to China for substantial completion. In addition, certain of our logistics and shipping operationsthree years. We are in Hong Kong.the process of designing and developing OLED microdisplays. We also have other operationsexpect to make significant monetary investments in Asia.the development of OLED microdisplays. Our plan is to outsource the production of the OLED microdisplays. We have many customerslittle experience in Asia. Pandemicsproduction outsourcing. If we are unsuccessful in designing and epidemics such as the current coronavirus outbreakdeveloping OLED microdisplays or other widespread public health problems could negatively affect our business. If, for example, the
The markets in which we operate are highly competitive and rapidly changing and we may be unable to compete successfully. There are a number of companies that develop or may develop products that compete in our targeted markets. The individual components that we offer for sale (displays, optical lenses, backlights and ASICs) are also offered by companies whose sole business focuses on that individual component. For example, there are companies whose sole business is to sell optical lenses. Accordingly, our strategy requires us to develop technologies and to compete in multiple markets. Some of our competitors are much larger than we are and have significantly greater financial, development and marketing resources than we do. The competition in these markets could adversely affect our operating results by reducing the volume of the products we sell or the prices we can charge. These competitors may be able to respond more rapidly than us to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than we do.
Our success will depend substantially upon our ability to enhance our products and technologies and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and incorporate technological enhancements. If we are unable to develop new products and enhance functionalities or technologies to adapt to these changes, our business will suffer.
Disruptions of our production could adversely affect our operating results. If we were to experience any significant disruption in the operation of our facilities, we would be unable to supply our products to our customers. Many of our sales contracts include financial penalties for late delivery. In the past, we have experienced power outages at our facilities, which ranged in duration from one to four days. We have certain critical pieces of equipment necessary to operate our facilities that are no longer offered for sale and we may not have service contracts or spare parts for the equipment. Additionally, as we introduce new equipment into our manufacturing processes, our display products could be subject to especially wide variations in manufacturing yields and efficiency. We may experience manufacturing problems that would result in delays in product introduction and delivery or yield fluctuations.
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A disruption to our information technology systems could significantly impact our operations, revenue and profitability. Our data processing systems and our Enterprise Resource Planning (“ERP”) software are cloud-based and hosted by third parties. We also use software packages that are no longer supported by their developer. We have experienced short-term (i.e., a few days) interruptions in our Internet connectivity. An interruption of the third party systems or the infrastructure that allows us to connect to the third party systems for an extended period may affect our ability to operate our business and process transactions, which could result in a decline in sales and affect our ability to achieve or maintain profitability.
If our information technology security systems were penetratedinfiltrated and confidential and or proprietary information were taken, we could be subject to fines, lawsuits and loss of customers. Significantly larger organizations with much greater resources than us have been the victim of cybercrimes. We routinely receive emails probing our Internet security, and our Internet security systems have detected outside organizations attempting to install Trojan virus software packages in our systems. We rely on our electronic information systems to perform the routine transactions to run our business. We transact business over the Internet with customers, vendors and our subsidiaries and have implemented security measures to protect unauthorized access to this information. We have also implemented security policies that limit access via the Internet from the Company to the outside world based on the individual’s position in the Company. We routinely receive security patches from software providers for the software we use. Our primary concerns are inappropriate access to personnel information, information covered under the International Traffic in Arms Regulation, product designs and manufacturing information, financial information and our intellectual property, trade secrets and know-how.
We may not achieve some or all of the anticipated benefits of saleour equity investments. At December 26, 2020 we had equity investments in companies totaling $4.5 million, where we have limited, if any, control over their governance, financial reporting and operations. As a result, we face certain operating, financial and other risks relating to these investments, including risks related to the financial strength of the investments. We are required to periodically review the value of these investments for impairment. For example, in the fourth quarter of 2019, we reviewed the financial condition and other factors of RealWear and as a result, in the fourth quarter of 2019, we recorded an impairment charge of $5.2 million to reduce our Solos product line and Whisper technology,investment in RealWear to zero. These investments may not contribute to our earnings or cash flows. In addition, these investments may be required to raise additional capital, which may adversely affect our business. On September 30, 2019 we entered into the Solos Purchase Agreement with Solos Technology, pursuant to which we sold and licensed certain assets of our Solos product line and Whisper technology. We will also receive a royaltyresult in the single digits on the net sales amount of Solos products for a three-year period, after commencement of commercial production. As consideration for the transaction, we received 1,172,000 common shares representing a 20.0% equity stake in Solos Technology’s parent company, Solos Inc. Our 20.0% equity stake will be maintained until Solos Inc. has
If we are unable to obtain or maintain existing software license relationships or other relationships relating to the intellectual property we use, our ability to grow revenue and achieve profitability and positive cash flow may be negatively affected. Our headset systems include software that we license from other companies. Should we violate the terms of a license, our license could be canceled. Companies may decide to stop supporting the software we license or new versions of the software may not be compatible with our software, which would require us to rewrite our software, which we may not be able to do. Moreover, the license fees we pay may be increased, which would negatively affect our ability to achieve profitability and positive cash flow.
The process of seeking patent protection can be time consuming and expensive and we cannot be certain that patents will be issued from currently pending or future patent applications or that our existing patents or any new patents that may be issued will be sufficient in scope and strength to provide meaningful protection or any commercial advantage to us. We may be subject to or may initiate contested patent or patent application proceedings in the United States Patent and Trademark Office, foreign patent offices or the courts, which can demand significant financial and management resources. Patent applications in the U.S. typically are maintained in secrecy until they are published about 18 months after their earliest claim to priority. As publication of discoveries in the scientific and patent literature lags behind actual discoveries, we cannot be certain that we were the first to conceive of inventions covered by our pending patent applications or the first to file patent applications on such inventions. We also cannot be certain that our pending patent applications or those of our licensors will result in issued patents or that any issued patents will afford protection against a competitor. In addition, we cannot be certain that others will not obtain patents that we would need to license, circumvent or cease manufacturing and sales of products covered by these patents, nor can we be sure that licenses, if needed, would be available to us on favorable terms, if at all.
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We may incur substantial costs in defending our intellectual property and may not be successful in protecting our intellectual property and proprietary rights. Our success depends in part on our ability to protect our intellectual property and proprietary rights. We have obtained certain domestic and foreign patents and we intend to continue to seek patents on our inventions when appropriate. We also attempt to protect our proprietary information with contractual arrangements and under trade secret laws. Our employees and consultants generally enter into agreements containing provisions with respect to confidentiality and the assignment of rights to us for inventions made by them while in our employ or consulting for us. These measures may not adequately protect our intellectual property or proprietary rights. Existing trade secret, trademark and copyright laws afford only limited protection and our patents could be invalidated, held to be unenforceable or circumvented. Moreover, the laws of certain foreign countries in which our products are or may be manufactured or sold may not provide full protection of our intellectual property rights. Misappropriation of our technology and the costs of defending our intellectual property rights from misappropriation could substantially impair our business. If we are unable to protect our intellectual property or proprietary rights, our business may not be successful, and the price of our common stock may decline.
We cannot be certain that foreign intellectual property laws will allow protection of our intellectual property rights or that others will not independently develop similar products, duplicate our products or design around any patents issued or licensed to us.Our products might infringe upon the patent rights of others, whether existing now or in the future. For the same reasons, the products of others could infringe upon our patent rights. We may be notified, from time to time, that we could be or we are infringing certain patents or other intellectual property rights of others. Litigation, which could be very costly and lead to substantial diversion of our resources, even if the outcome is favorable, may be necessary to enforce our patents or other intellectual property rights or to defend us against claimed infringement of the rights of others. These problems can be particularly severe in foreign countries. In the event of an adverse ruling in litigation against us for patent infringement, we might be required to discontinue the use of certain processes, and cease the manufacture, use, importation and/or sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to patents of third parties covering the infringing technology. We cannot be certain that licenses will be obtainable on acceptable terms, if at all, or that damages for infringement will not be assessed or that litigation will not occur. The failure to obtain necessary licenses or other rights or litigation arising out of any such claims could adversely affect our ability to conduct our business as we presently conduct it and as we plan to conduct it in the future.
We also attempt to protect our proprietary information with contractual arrangements and under trade secret laws. We believe that our future success will depend primarily upon the technical expertise, creative skills and management abilities of our officers and key employees in addition to patent ownership. Our employees enter into agreements containing provisions with respect to confidentiality and assignment of rights to us for inventions made by them while in our employ. Agreements with consultants generally provide that rights to inventions made by them while consulting for us will be assigned to us unless the assignment of rights is prohibited by the terms of any of their prior agreements. Agreements with employees, consultants and collaborators contain provisions intended to further protect the confidentiality of our proprietary information. To date, we have had no experience in enforcing these agreements. We cannot be certain that these agreements will not be breached or that we would have adequate remedies for any breaches. Our trade secrets may not be secure from discovery or independent development by competitors, in which case we may not be able to rely on these trade secrets to prevent our competitors from using them.
Our products could infringe on the intellectual property rights of others. Companies in the display industry steadfastly pursue and protect their intellectual property rights. This has resulted in considerable and costly litigation to determine the validity and enforceability of patents and claims by third parties of infringement of patents or other intellectual property. Our products could be found to infringe on the intellectual property rights of others. Other companies may hold or obtain patents on inventions or other proprietary rights in technology necessary for our business. Periodically, companies inquire about our products and technology in their attempts to assess whether we violate their intellectual property rights. If we are forced to defend against patent infringement claims, we may face costly litigation, diversion of technical and management personnel, and product shipment delays, even if the allegations of infringement are unwarranted. If there are one or more successful claims of infringement against us and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, or if we are required to cease using one or more of our business or product names due to a successful trademark infringement claim against us, our business could be adversely affected. We are currently involved in an intellectual property dispute with Blue Radios, Inc., as described under Item 3. Legal Proceedings. If the outcome of such dispute is adverse to us, our business could be adversely affected.
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Our business could suffer if we lose the services of, or fail to attract, key personnel. To continue to provide quality products in our rapidly changing business, we believe it is important to retain personnel with experience and expertise relevant to our business. Our success depends in large part upon a number of key management and technical employees. The loss of the services of one or more key employees, including Dr. John C.C. Fan, our President and Chief Executive Officer, could seriously impede our success. We do not maintain any “key-man” insurance policies on Dr. Fan or any other employees. In addition, due to the level of technical and marketing expertise necessary to support our existing and new customers, our success will depend upon our ability to attract and retain highly skilled management, technical, and sales and marketing personnel. Competition for highly skilled personnel is intense and there may be only a limited number of persons with the requisite skills to serve in these positions. Due to the competitive nature of the labor markets in which we operate, we may be unsuccessful in attracting and retaining these personnel. Our inability to attract and retain key personnel could adversely affect our ability to develop and manufacture our products.
Our customers who purchase display products for military applications typically incorporate our products into their products, which are sold to the U.S. government under contracts. U.S. government contracts generally are not fully funded at inception and may be terminated or modified prior to completion, which could adversely affect our business.
Congress funds the vast majority of the federal budget on an annual basis, and Congress often does not provide agencies with all the money requested in their budget. Many of our customers' contracts cover multiple years and, as such, are not fully funded at contract award. If Congress or a U.S. government agency chooses to spend money on other programs, our customers' contracts may be terminated for convenience. Federal laws, collectively called the Anti-Deficiency Act, prohibit involving the government in any obligation to pay money before funds have been appropriated for that purpose, unless otherwise allowed by law. Therefore, the Anti-Deficiency Act indirectly regulates how the agency awards our contracts and pays our invoices. Federal government contracts generally contain provisions, and are subject to laws and regulations, that provide the federal government rights and remedies not typically found in commercial contracts, including provisions permitting the federal government to, among other provisions: terminate our existing contracts; modify some of the terms and conditions in our existing contracts; subject the award to protest or challenge by competitors; suspend work under existing multiple year contracts and related delivery orders; and claim rights in technologies and systems invented, developed or produced by us.
If we fail to comply with complex procurement laws and regulations, we could lose business and be liable for various penalties or sanctions. We must comply with laws and regulations relating to the formation, administration and performance of federal government contracts. These laws and regulations affect how we conduct business with our federal government customers. In complying with these laws and regulations, we may incur additional costs, and non-compliance may result in fines and penalties, including contractual damages. Among the more significant laws and regulations affecting our business are:
| ● | The Federal Acquisition Regulation, which comprehensively regulates the formation, administration and performance of federal government contracts; | |
| ● | The Truth in Negotiations Act, which requires certification and disclosure of all cost and pricing data in connection with contract negotiations; | |
| ● | The Cost Accounting Standards and Cost Principles, which impose accounting requirements that govern our right to reimbursement under certain cost-based federal government contracts; and | |
| ● | Laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the export of certain products, services and technical data. We engage in international work falling under the jurisdiction of U.S. export control laws. Failure to comply with these control regimes can lead to severe penalties, both civil and criminal, and can include debarment from contracting with the U.S. government. |
Our contracting agency customers may review our performance under and compliance with the terms of our federal government contracts. If a government review or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties or administrative sanctions, including:
| ● | Termination of contracts; | |
| ● | Forfeiture of profits; |
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| ● | Cost associated with triggering of price reduction clauses; | |
| ● | Suspension of payments; | |
| ● | Fines; and | |
| ● | Suspension or debarment from doing business with federal government agencies. |
Additionally, the False Claims Act provides for substantial civil penalties where, for example, a contractor presents a false or fraudulent claim to the government for payment or approval. Civil actions under the False Claims Act may be brought by the government or by other persons on behalf of the government (who may then share a portion of any recovery).
If we fail to comply with these laws and regulations, we may also suffer harm to our reputation, which could impair our ability to win awards of contracts in the future or receive renewals of existing contracts. If we are subject to civil or criminal penalties and administrative sanctions or suffer harm to our reputation, our current business, future prospects, financial condition or operating results could be materially harmed.
The U.S. government may also revise its procurement practices or adopt new contracting rules and regulations, including cost accounting standards, at any time. Any new contracting methods could be costly to satisfy, be administratively difficult for us to implement and could impair our ability to obtain new contracts.
A decline in the U.S. government defense budget, changes in spending or budgetary priorities, prolonged U.S. government shutdown or delays in contract awards may significantly and adversely affect our future revenues, cash flow and financial results
. In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation. In 2011, Congress enacted the Budget Control Act of 2011 ("BCA"), which established specific limits on annual appropriations for fiscal years ("FY") 2012-2021 and has since been amended a number of times, most recently by the Bipartisan Budget Act of 2018 (“BBA18”). As a result, Department of Defense ("DoD") funding levels have fluctuated over this period and have been difficult to predict. Future spending levels are subject to a wide range of outcomes, depending on Congressional action. In addition, in recent years the U.S. government has been unable to complete its budget process before the end of its fiscal year, resulting in both a government shutdown and continuing resolutions to extend sufficient funds only for U.S. government agencies to continue operating. Most recently, the federal government was shut down due to lack of funding for over one month between late 2018 and early 2019. Additionally, the national debt has recently threatened to reach the statutory debt ceiling, and such an event in future years could result in the U.S. government defaulting on its debts.
Changes in tax laws, unfavorable resolution of tax examinations, or exposure to additional tax liabilities could have a material adverse effect on our results of operations, financial condition and liquidity. We are subject to taxes in the U.S., Korea, China and the United Kingdom. Governments in the jurisdictions in which we operate implement changes to tax laws and regulations periodically. Any implementation of tax laws that fundamentally change the taxation of corporations in the U.S. or in the foreign jurisdictions in which we operate could materially affect our effective tax rate and could have a significant adverse impact on our financial results.
We may incur significant liabilities if we fail to comply with stringent environmental laws and regulations and the ITAR, or if we did not comply with these regulations in the past. We are subject to a variety of federal, state and local government regulations related to the use, storage, discharge and disposal of toxic or other hazardous chemicals used in our manufacturing process. We are also subject to federal ITAR laws that regulate the export of technical data and export of products to other nations that may use these products for militarydefense purposes. The failure to comply with present or future regulations could result in fines, suspension of production, or a cessation of operations. Any failure on our part to control the use of, or adequately restrict the discharge of, hazardous substances, or otherwise comply with environmental regulations, could subject us to significant future liabilities. Any failure on our part to obtain any required licenses for the export of technical data and/or export of our products or to otherwise comply with ITAR, could subject us to significant future liabilities. In addition, we cannot be certain that we have not violated applicable laws or regulations in the past, which violations could result in required remediation or other liabilities. We also cannot be certain that past use or disposal of environmentally sensitive materials in conformity with then existing environmental laws and regulations will protect us from required remediation or other liabilities under current or future environmental laws or regulations.
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We may be unable to modify our products to meet regulatory or customer requirements. From time to time our display products are subject to new domestic and international requirements, such as the European Union'sUnion’s Restriction on Hazardous Substances ("RoHS") Directive. Our customers’ terms and conditions require us to be in compliance with “all laws.” If we are unable to comply with these regulations, we may not be permitted to ship our products, which would adversely affect our revenue and ability to maintain profitability. In addition, if we are found to be in violation of laws we may be subject to fines and penalties.
We may be unable to successfully integrate new strategic acquisitions and investments, which could materially adversely affect our business, results of operations and financial condition. In the past we have made, and in the future we may make, acquisitions of, and investments in, businesses, products and technologies that could complement or expand our business. If we identify an acquisition candidate, we may not be able to successfully integrate the acquired businesses, products or technologies into our existing business and products. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, amortization expenses and write-downs of acquired assets. In 2017, 2012 and 2011, we acquired 100% of the outstanding shares of NVIS, acquired 80% of the outstanding shares of eMDT Inc. and acquired 100% of the outstanding shares of FDD, respectively. If we are unable to operate NVIS, eMDT, FDD and NVISFDD profitably, our results of operations will be negatively affected. We perform periodic reviews to determine if these investments are impaired, but such reviews are difficult and rely on significant judgment about the company’s technology, ability to obtain customers, and ability to become cash flow positive and profitable. We may take future impairment charges which will have an adverse impact of on our results of operations.
Additionally, we are a party tohave several joint ventures and investments where we may have some influence, but not complete control. Accordingly, we have limited, if any, control over their governance, financial reporting and operations. As a result, we face certain operating, financial and other risks relating to these investments, including risks related to the financial strength of our joint venture partners, having differing objectives from our partners, compliance risks relating to actions of the joint venture or our partners and the risk that we will be unable to resolve disputes with the joint venture partner.investments. As a result, these investments may not contribute to our earnings or cash flows. In addition, these joint venturesinvestments may be required to raise additional capital, which may result in our ownership percentage being decreased.
Changes in China’s laws, legal protections or government policies on foreign investment in China may harm our business. Our business and corporate transactions including operations through our joint ventures, are subject to laws and regulations applicable to foreign investment in China as well as laws and regulations applicable to foreign-invested enterprises. These laws and regulations frequently change, and their interpretation and enforcement involvesinvolve uncertainties that could limit the legal protections available to us. Regulations and rules on foreign investments in China impose restrictions on the means that a foreign investor like us may apply to facilitate corporate transactions we may undertake. In addition, the Chinese legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. If any of our past operations are deemed to be non-compliant with Chinese law, we may be subject to penalties and our business and operations may be adversely affected. For instance, under the catalogue for the Guidance of Foreign Investment Industries, some industries are categorized as sectors that are encouraged, restricted or prohibited for foreign investment. As the catalogue for the Guidance of Foreign Investment Industries is updated every few years, there can be no assurance that China’s government will not change its policies in a manner that would render part or all of our business to fall within the restricted or prohibited categories. If we cannot obtain approval from relevant authorities to engage in businesses that has become prohibited or restricted for foreign investors, we may be forced to sell or restructure such business. Furthermore, China’s government has broad discretion in dealing with violations of laws and regulations, including levying
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Raising additional funds by issuing securities may cause dilution to our existing stockholders or restrict our operations. To the extent that we raise additional capital by issuing equity securities, the share ownership of existing stockholders will be diluted. The terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, or the possibility of such issuance, may cause the market price of our shares to decline. We may sell shares or other securities in other offerings at a price per share that is less than the prices per share paid by other investors, and investors purchasing shares of our common stock or other securities in the future could have rights superior to existing stockholders. The sale of additional equity or convertible securities would dilute all of our stockholders and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders.
We have no present intention to pay dividends on our common stock in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of our common stock appreciates. We have no present intention to pay dividends on our common stock in the foreseeable future. Historically, our earnings, if any, have been retained for the development of our businesses. Any recommendation by our Board of Directors to pay dividends will depend on many factors, including our financial condition, results of operations, and other factors. Accordingly, if the price of our common stock declines in the foreseeable future, you will incur a loss on your investment, without the likelihood that this loss will be offset in part or at all by potential future cash dividends.
Our stock price may be volatile in the future. The trading price of our common stock has been subject to wide fluctuations in response to quarter-to-quarter variations in results of operations, announcements of technological innovations or new products by us or our competitors, general conditions in the wireless communications, semiconductor and display markets, changes in earnings estimates by analysts or other events or factors. In addition, the public stock markets recently have experienced extreme price and trading volatility. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.
Our operations are subject to political, legal and economic risks and natural disasters, which could adversely affect our business, results of operations, financial condition and prospects. Credit rating downgrades in certain European countries and/or speculation regarding changes to the composition or viability of the EU create uncertain global economic conditions. The UK’s decision to voluntarily exit from the EU, generally referred to as the “Brexit,” may trigger short-term financial volatility, including a decline in the value of the Great Britain Pound in comparison to both the U.S. dollar and the Euro. Despite the UK having formally left the EU in January 2020, the future effects of Brexit remain uncertain and will depend on, among other things, the terms of any agreements the UK enters into governing UK access to EU and other markets either during the transitional period that is currently scheduled to end on December 31, 2020. The ongoing uncertainty could have a negative economic impact and result in further volatility in the markets for several years. The impact of the Brexit referendum and such ongoing uncertainty may result in various economic and financial consequences for businesses operating in the UK, the EU and beyond. We hold significant assets in the UK and operate a UK subsidiary, and the future impacts of the Brexit and the continued uncertainty surrounding the EU could have a material impact on our business, financial condition, results of operations and cash flows.
Changes in government trade policies may increase the cost of our products, which may materially adversely affect our sales or profitability.We depend on a Taiwanese foundry for the manufacture of integrated circuits for our AMLCD display products and on Chinese and Korean foundries for our OLED display products. The U.S. and China have recently engaged in trade negotiations,In recent years the outcome of which remains uncertain. The U.S. has imposed, among other actions, new or higher tariffs on specified imported products originating from China in response to what it characterizes as unfair trade practices, and China has responded by proposing or implementing new or higher tariffs on specified products imported from the U.S. Tariffs on components that we import from China or other nations that have imposed, or may in the future impose, tariffs have in some case and may in the future cause our expenses to increase, which would adversely affect our profitability unless we were able to exclude our products from the tariffs or we raise prices for our products, which may result in our products becoming less attractive relative to products offered by our competitors. In addition, future actions or escalations by either the U.S. or China that affect trade relations may also affect our business or that of our suppliers or customers, and we cannot provide any assurances as to whether such actions will occur or the form that they may take. Moreover, it is uncertain to what extent, if any, the U.S. tariffs on components that we import from China will affect the Taiwanese foundries on which we depend, in part because many Taiwanese foundries conduct parts of their manufacturing in China.
A protectionist trade environment in either the U.S. or those foreign countries in which we do business, such as a change in the current tariff structures, export compliance or other trade policies, may materially adversely affect our ability to sell our products in foreign markets. To the extent that our sales or profitability are affected negatively by any such tariffs or other trade actions, our business and results of operations may be materially adversely affected.
As a publicly traded company, we are subject to a significant body of regulation, including the Sarbanes-Oxley Act of 2002. While we have developed and instituted a corporate compliance program based on what we believe are the current best practices in corporate governance and continue to update this program in response to newly implemented or changing regulatory requirements, we cannot provide assurance that we are or will be in compliance with all potentially applicable corporate regulations. If we fail to comply with any of these regulations, we could be subject to a range of regulatory actions, fines or other sanctions or litigation. If we must disclose any material weakness in our internal control over financial reporting, our stock price could decline.
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| Item 1B. | Unresolved Staff Comments |
None.
| Item 2. | Properties |
We lease our 74,000 square foot production facility in Westborough, Massachusetts, 10,000 square feet of which is contiguous environmentally controlled production clean rooms operated between Class 10 and Class 1,000 levels. In addition to our Massachusetts facility, we lease a 10,000 square foot facility in San Jose, California which houses our OLED design team and ASIC development. We also have a lease in Tokyo, Japan.
NVIS, our subsidiary in Reston, Virginia, leases 6,100 square feet in Reston. FDD, our subsidiary in Scotland, leases 20,000 square feet in Dalgety Bay, 5,000 square feet of which is contiguous environmentally controlled production clean rooms operated between Class 10 and Class 10,000 levels.
At this time, we believe these properties are suitable for our needs for the foreseeable future.
| Item 3. | 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"(“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.
.
| Item 4. | Mine Safety Disclosures |
Not applicable.
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Part II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on the Nasdaq GlobalCapital Market under the symbol “KOPN”.
As of March 9, 2020,1, 2021, there were approximately 84,914,040320 stockholders of record of our common stock, which does not reflect those shares held beneficially or those shares held in “street” name.
We have not paid cash dividends in the past, nor do we expect to pay cash dividends for the foreseeable future. We anticipate that earnings, if any, will be retained for the development of our businesses.
Equity Compensation Plan Information
The following table sets forth information as of December 28, 201926, 2020 about shares of the Company’s common stock issuable upon exercise of outstanding options, warrants and rights and available for issuance under our existing equity compensation plans.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (b) | ||||||||||
| Equity compensation plans approved by security holders | — | $ | — | (1) | |||||||||
| Equity compensation plans not approved by security holders | — | — | — | ||||||||||
(1) Amount includes shares available under the 20102020 Equity Incentive Plan.
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Company Stock Performance
The following graph shows a five-year comparison of cumulative total shareholder return for the Company, the Nasdaq US Benchmark TR Index and the S&P 500 Information Technology index. The graph assumes $100 was invested in each of the Company’s common stock, the Nasdaq US Benchmark TR Index and the S&P 500 Information Technology index on December 31, 2014.2015. Data points on the graph are annual. Note that historical price performance is not necessarily indicative of future performance.
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| Fiscal Year Ended | |||||||||||||||||||
| (in thousands, except per share data) | 2019 | 2018(1) | 2017 | 2016 | 2015 | ||||||||||||||
| Statement of Operations Data: | |||||||||||||||||||
| Total revenues | $ | 29,519 | $ | 24,465 | $ | 27,841 | $ | 22,643 | $ | 32,054 | |||||||||
| Loss from operations | (26,380 | ) | (39,967 | ) | (30,298 | ) | (20,473 | ) | (25,237 | ) | |||||||||
| Total non-operating (expense) income, net | (2,887 | ) | 5,514 | 1,955 | 571 | 10,416 | |||||||||||||
| Tax (provision) benefit | (108 | ) | (30 | ) | 2,963 | (3,130 | ) | 25 | |||||||||||
| Net loss | (29,374 | ) | (34,482 | ) | (25,380 | ) | (23,031 | ) | (14,843 | ) | |||||||||
| Net loss attributable to the controlling interest | (29,506 | ) | (34,534 | ) | (25,240 | ) | (23,568 | ) | (14,693 | ) | |||||||||
| Basic and diluted loss per share attributable to Kopin Corporation common stockholders | $ | (0.37 | ) | $ | (0.47 | ) | $ | (0.36 | ) | $ | (0.37 | ) | $ | (0.23 | ) | ||||
| Weighted average basic and diluted common shares outstanding | 80,282 | 73,157 | 69,915 | 64,045 | 63,466 | ||||||||||||||
| Fiscal Year Ended | |||||||||||||||||||
| (in thousands) | 2019 | 2018 (1) | 2017 | 2016 | 2015 | ||||||||||||||
| Balance Sheet Data: | |||||||||||||||||||
| Cash and cash equivalents and marketable debt securities | $ | 21,782 | $ | 37,244 | $ | 68,756 | $ | 77,198 | $ | 80,711 | |||||||||
| Working capital | 22,455 | 39,037 | 67,636 | 70,028 | 89,879 | ||||||||||||||
| Total assets | 43,047 | 59,549 | 91,322 | 87,832 | 106,060 | ||||||||||||||
| Long-term obligations | 3,145 | 1,469 | 1,839 | 247 | 298 | ||||||||||||||
| Total Kopin Corporation stockholders’ equity | $ | 28,609 | $ | 47,862 | $ | 76,763 | $ | 72,742 | $ | 93,539 | |||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview
The following discussion should be read in conjunction with our consolidated financial statements and notes to those statements and other financial information appearing elsewhere in this Form 10-K. The following discussion contains forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including the risks discussed in Item 1A “Risk Factors,” and elsewhere in this Form 10-K. Please refer to our cautionary note on Forward Looking Statements on page 3 of this Form 10-K.
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,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.
Critical Accounting Estimates
Management’s discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition under the percentage-of-completion method, bad debts, inventories, warranty reserves, investment valuations, valuation of stock compensation awards, recoverability of deferred tax assets, liabilities for uncertain tax positions and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for judgments about carrying values of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions.
We adopted the Financial Accounting Standards Board’s ("FASB"(“FASB”) Accounting Standards Update ("ASU"(“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) effective December 31, 2017 (the first day of our fiscal year 2018) and applied the modified retrospective method. Our results for reporting periods beginning after December 31, 2017 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policies ASC 605. We believe the following critical accounting policies are most affected by our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Revenue Recognition
Substantially all of our product revenues are primarily derived from the sales of microdisplays, which are sold as individual displays, modules which include electronics and optics, or higher-level subassemblies for use in military,defense, industrial and consumer near-eye applications such as avionic helmets, thermal weapon sights or virtual reality headsets. We also have development contracts for the design, manufacture and modification of products for the U.S. government or a prime contractor for the U.S. government or for a customer that sells into the industrial or consumer markets. The Company's contracts with the U.S. government are typically subject to the Federal Acquisition Regulations ("FAR") and are priced based on estimated or actual costs of producing goods. The FAR provides guidance on the types of costs that are allowable in establishing prices for goods provided under U.S. government contracts. The pricing for non-U.S. government contracts is based on the specific negotiations with each customer.
| (In thousands) | 2019 | 2018 | 2017 | ||||||||
| Military | $ | 8,729 | $ | 8,724 | $ | 13,438 | |||||
| Industrial | 9,717 | 6,066 | 5,478 | ||||||||
| Consumer | 1,777 | 4,146 | 4,406 | ||||||||
| Research and Development | 4,983 | 5,254 | 2,947 | ||||||||
| Other | 61 | 275 | 1,573 | ||||||||
| License and royalties | 4,252 | — | — | ||||||||
| Total Revenues | $ | 29,519 | $ | 24,465 | $ | 27,841 | |||||
| (In thousands, except percentages) | 2019 | 2018 | 2017 | ||||||||
| Cost of product revenues | $ | 20,902 | $ | 15,831 | $ | 18,118 | |||||
| Cost of product revenues as a % of net product revenues | 103.0 | % | 82.4 | % | 72.8 | % | |||||
| (In thousands) | 2019 | 2018 | 2017 | ||||||||
| Funded | $ | 4,216 | $ | 4,892 | $ | 3,365 | |||||
| Internal | 9,133 | 12,553 | 15,515 | ||||||||
| Total | $ | 13,349 | $ | 17,445 | $ | 18,880 | |||||
| (In thousands, except percentages) | 2019 | 2018 | 2017 | ||||||||
| Selling, general and administrative expense | $ | 21,316 | $ | 27,211 | $ | 20,541 | |||||
| Selling, general and administrative expense as a % of total revenue | 72.2 | % | 111.2 | % | 73.8 | % | |||||
| (In thousands) | 2019 | 2018 | 2017 | ||||||||
| Impairment of goodwill | $ | 331 | $ | 1,417 | $ | 600 | |||||
| (In thousands) | 2019 | 2018 | 2017 | ||||||||
| Impairment of assets | $ | — | $ | 2,527 | $ | — | |||||
| (In thousands) | 2019 | 2018 | 2017 | ||||||||
| Total other income (expense), net | $ | (2,887 | ) | $ | 5,514 | $ | 1,955 | ||||
| (In thousands) | 2019 | 2018 | 2017 | ||||||||
| Tax (provision) benefit | $ | (108 | ) | $ | (30 | ) | $ | 2,963 | |||
| December 28, 2019 | December 29, 2018 | ||||||
| Domestic locations | $ | 21,148,381 | $ | 36,182,663 | |||
| Foreign locations | 145,240 | 418,339 | |||||
| Subtotal cash and cash equivalents and marketable debt securities held in U.S. dollars | 21,293,621 | 36,601,002 | |||||
| Cash and cash equivalents held in other currencies and converted to U.S. dollars | 488,623 | 643,361 | |||||
| Total cash and cash equivalents and marketable debt securities | $ | 21,782,244 | $ | 37,244,363 | |||
| Payment due by period | |||||||||||||
| Total | Less than 1 year | 1-3 Years | 4-5 years | More than 5 years | |||||||||
| Operating Lease Obligations | $ | 3,105,935 | 1,193,762 | 1,912,173 | 0 | $ | — | ||||||
| December 28, 2019 | December 29, 2018 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 6,029,247 | $ | 14,326,347 | |||
| Marketable debt securities, at fair value | 15,752,997 | 22,918,016 | |||||
| Accounts receivable, net of allowance of $938,000 and $304,000 in 2019 and 2018, respectively | 6,023,250 | 3,088,360 | |||||
| Contract assets and unbilled receivables | 921,082 | 3,089,663 | |||||
| Inventory | 3,768,696 | 4,797,238 | |||||
| Prepaid taxes | 104,442 | 399,611 | |||||
| Prepaid expenses and other current assets | 1,164,927 | 784,790 | |||||
| Total current assets | 33,764,641 | 49,404,025 | |||||
| Property, plant and equipment, net | 1,473,341 | 2,598,842 | |||||
| Operating lease right-of-use assets | 2,753,963 | — | |||||
| Goodwill | — | 331,344 | |||||
| Other assets | 517,411 | 1,361,375 | |||||
| Equity investments | 4,537,159 | 5,853,525 | |||||
| Total assets | $ | 43,046,515 | $ | 59,549,111 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 3,998,234 | $ | 3,921,880 | |||
| Accrued payroll and expenses | 2,203,773 | 3,038,005 | |||||
| Accrued warranty | 509,000 | 571,000 | |||||
| Contract liabilities and billings in excess of revenue earned | 796,794 | 388,933 | |||||
| Operating lease liabilities | 1,041,695 | — | |||||
| Other accrued liabilities | 2,235,217 | 1,901,547 | |||||
| Deferred tax liabilities | 525,000 | 546,000 | |||||
| Total current liabilities | 11,309,713 | 10,367,365 | |||||
| Noncurrent contract liabilities and asset retirement obligations | 268,440 | 271,392 | |||||
| Operating lease liabilities, net of current portion | 1,791,590 | — | |||||
| Other long-term liabilities | 1,085,160 | 1,197,533 | |||||
| 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, 120,000,000 shares; issued 84,399,540 shares in 2019 and 80,735,320 shares in 2018; outstanding 82,536,416 in 2019 and 74,008,815 in 2018, respectively | 870,496 | 785,220 | |||||
| Additional paid-in capital | 344,456,537 | 334,491,397 | |||||
Treasury stock (4,513,256 shares in 2019 and 2018, at cost) | (17,238,669 | ) | (17,238,669 | ) | |||
| Accumulated other comprehensive income | 1,757,184 | 1,554,587 | |||||
| Accumulated deficit | (301,236,913 | ) | (271,730,661 | ) | |||
| Total Kopin Corporation stockholders’ equity | 28,608,635 | 47,861,874 | |||||
| Noncontrolling interest | (17,023 | ) | (149,053 | ) | |||
| Total stockholders’ equity | 28,591,612 | 47,712,821 | |||||
| Total liabilities and stockholders’ equity | $ | 43,046,515 | $ | 59,549,111 | |||
| 2019 | 2018 | 2017 | |||||||||
| Fiscal year ended | |||||||||||
| Revenues: | |||||||||||
| Net product revenues | $ | 20,283,888 | $ | 19,211,115 | $ | 24,894,805 | |||||
| Research and development and other revenues | 9,234,921 | 5,253,890 | 2,946,685 | ||||||||
| Total revenue | 29,518,809 | 24,465,005 | 27,841,490 | ||||||||
| Expenses: | |||||||||||
| Cost of product revenues | 20,901,538 | 15,831,441 | 18,118,418 | ||||||||
| Research and development-funded programs | 4,216,161 | 4,892,066 | 3,364,658 | ||||||||
| Research and development-internal | 9,132,969 | 12,553,237 | 15,515,057 | ||||||||
| Selling, general and administrative | 21,316,459 | 27,210,849 | 20,541,244 | ||||||||
| Impairment of goodwill | 331,344 | 1,417,470 | 600,086 | ||||||||
| Impairment of assets | — | 2,526,669 | — | ||||||||
| Total operating expenses | 55,898,471 | 64,431,732 | 58,139,463 | ||||||||
| Loss from operations | (26,379,662 | ) | (39,966,727 | ) | (30,297,973 | ) | |||||
| Non-operating (expense) income, net: | |||||||||||
| Interest income | 543,759 | 640,059 | 775,626 | ||||||||
| Other income, net | 225,617 | 855,106 | 247,291 | ||||||||
| Foreign currency transaction gains (losses) | 202,517 | 1,169,254 | (1,068,059 | ) | |||||||
| (Loss) gain on investments | (3,858,453 | ) | 2,849,816 | 2,000,000 | |||||||
| Total non-operating income | (2,886,560 | ) | 5,514,235 | 1,954,858 | |||||||
| Loss before (provision) benefit for income taxes and net (income) loss of noncontrolling interest | (29,266,222 | ) | (34,452,492 | ) | (28,343,115 | ) | |||||
| Tax (provision) benefit | (108,000 | ) | (30,000 | ) | 2,963,000 | ||||||
| Net loss | (29,374,222 | ) | (34,482,492 | ) | (25,380,115 | ) | |||||
| Net (income) loss attributable to the noncontrolling interest | (132,030 | ) | (51,050 | ) | 139,633 | ||||||
| Net loss attributable to Kopin Corporation | $ | (29,506,252 | ) | $ | (34,533,542 | ) | $ | (25,240,482 | ) | ||
| Net loss per share: | |||||||||||
| Basic and diluted | $ | (0.37 | ) | $ | (0.47 | ) | $ | (0.36 | ) | ||
| Weighted average number of common shares outstanding: | |||||||||||
| Basic and diluted | 80,282,126 | 73,156,545 | 69,914,956 | ||||||||
| Fiscal year ended | 2019 | 2018 | 2017 | ||||||||
| Net loss | $ | (29,374,222 | ) | $ | (34,482,492 | ) | $ | (25,380,115 | ) | ||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustments | (206,580 | ) | (1,912,427 | ) | 1,921,655 | ||||||
| Unrealized holding gain (loss) on marketable securities | 446,533 | (264,949 | ) | 148,520 | |||||||
| Reclassifications of (loss) gain in net loss on marketable securities | (37,356 | ) | 49,525 | (6,376 | ) | ||||||
| Other comprehensive income (loss), net of tax | 202,597 | (2,127,851 | ) | 2,063,799 | |||||||
| Comprehensive loss | (29,171,625 | ) | (36,610,343 | ) | (23,316,316 | ) | |||||
| Comprehensive (income) loss attributable to the noncontrolling interest | (132,030 | ) | 66,609 | 69,642 | |||||||
| Comprehensive loss attributable to Kopin Corporation | $ | (29,303,655 | ) | $ | (36,543,734 | ) | $ | (23,246,674 | ) | ||
| Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Income | Accumulated Deficit | Total Kopin Corporation Stockholders’ Equity | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2016 | 76,640,943 | $ | 766,409 | $ | 327,323,162 | $ | (42,741,551 | ) | $ | 1,570,971 | $ | (214,177,388 | ) | $ | 72,741,603 | $ | 1,478,040 | $ | 74,219,643 | |||||||||||||||
| Vesting of restricted stock | 1,170,847 | 11,708 | (11,708 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 3,375,330 | — | — | — | 3,375,330 | — | 3,375,330 | |||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | 1,993,808 | — | 1,993,808 | 69,991 | 2,063,799 | |||||||||||||||||||||||||
| Restricted stock for tax withholding obligations | (239,752 | ) | (2,397 | ) | (768,926 | ) | — | — | — | (771,323 | ) | — | (771,323 | ) | ||||||||||||||||||||
| Distribution to noncontrolling interest holder | — | — | — | — | — | — | — | (791,737 | ) | (791,737 | ) | |||||||||||||||||||||||
| Sale of unregistered stock | — | — | — | 25,502,882 | — | (838,632 | ) | 24,664,250 | — | 24,664,250 | ||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (25,240,482 | ) | (25,240,482 | ) | (139,633 | ) | (25,380,115 | ) | |||||||||||||||||||||
| Balance at December 30, 2017 | 77,572,038 | 775,720 | 329,917,858 | (17,238,669 | ) | 3,564,779 | (240,256,502 | ) | 76,763,186 | 616,661 | 77,379,847 | |||||||||||||||||||||||
| Vesting of restricted stock | 1,093,000 | 10,930 | (10,930 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 4,791,054 | — | — | — | 4,791,054 | — | 4,791,054 | |||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | (2,010,192 | ) | — | (2,010,192 | ) | (117,659 | ) | (2,127,851 | ) | |||||||||||||||||||||
| Restricted stock for tax withholding obligations | (142,972 | ) | (1,430 | ) | (206,585 | ) | — | — | — | (208,015 | ) | — | (208,015 | ) | ||||||||||||||||||||
| Distribution to noncontrolling interest holder | — | — | — | — | — | — | — | (699,105 | ) | (699,105 | ) | |||||||||||||||||||||||
| Adoption of accounting standard | — | — | — | — | — | 3,059,383 | 3,059,383 | — | 3,059,383 | |||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | (34,533,542 | ) | (34,533,542 | ) | 51,050 | (34,482,492 | ) | ||||||||||||||||||||||
| Balance at December 29, 2018 | 78,522,066 | 785,220 | 334,491,397 | (17,238,669 | ) | 1,554,587 | (271,730,661 | ) | 47,861,874 | (149,053 | ) | 47,712,821 | ||||||||||||||||||||||
| Vesting of restricted stock | 634,511 | 6,345 | (6,345 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 2,057,400 | — | — | — | 2,057,400 | — | 2,057,400 | |||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | 202,597 | — | 202,597 | — | 202,597 | |||||||||||||||||||||||||
| Restricted stock for tax withholding obligations | (86,086 | ) | (861 | ) | (44,652 | ) | — | — | — | (45,513 | ) | — | (45,513 | ) | ||||||||||||||||||||
| Sale of registered stock, net of costs | 7,979,181 | 79,792 | 7,958,737 | — | — | — | 8,038,529 | — | 8,038,529 | |||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | (29,506,252 | ) | (29,506,252 | ) | 132,030 | (29,374,222 | ) | ||||||||||||||||||||||
| Balance at 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 | ||||||||||||||
| Fiscal year ended | 2019 | 2018 | 2017 | ||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (29,374,222 | ) | $ | (34,482,492 | ) | $ | (25,380,115 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | 792,221 | 1,958,680 | 2,501,891 | ||||||||
| Accretion of premium or discount on marketable debt securities | 21,838 | 15,948 | 41,364 | ||||||||
| Stock-based compensation | 2,057,400 | 4,791,054 | 2,296,131 | ||||||||
| Net (gain)/loss on investment transactions | 3,858,453 | (2,849,816 | ) | (2,000,000 | ) | ||||||
| Income taxes | 105,036 | 4,185 | (2,421,040 | ) | |||||||
| Foreign currency (gains) losses | (220,015 | ) | (1,096,487 | ) | 893,260 | ||||||
| Loss on sale of property and plant | 508,833 | 51,159 | — | ||||||||
| Impairment of assets | — | 2,526,669 | — | ||||||||
| Impairment of goodwill | 331,344 | 1,417,470 | 600,086 | ||||||||
| Change in allowance for bad debt | 633,131 | (155,000 | ) | 13,000 | |||||||
| Write-off of excess inventory | 1,834,300 | 832,615 | 654,694 | ||||||||
| Change in warranty reserves | (62,107 | ) | (79,633 | ) | 142,328 | ||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | (3,944,859 | ) | 853,163 | (2,376,593 | ) | ||||||
| Contract assets and unbilled receivables | 2,168,581 | 865,474 | — | ||||||||
| Inventory | (792,165 | ) | (1,656,196 | ) | (1,633,027 | ) | |||||
| Prepaid expenses, other current assets and other assets | 821,340 | 113,015 | (1,084,146 | ) | |||||||
| Accounts payable and accrued expenses | (163,084 | ) | (1,208,848 | ) | 1,924,751 | ||||||
| Billings in excess of revenue earned | 397,121 | (4,742 | ) | (85,282 | ) | ||||||
| Net cash used in operating activities | (21,026,854 | ) | (28,103,782 | ) | (25,912,698 | ) | |||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from sale of marketable debt securities | 7,454,139 | 26,646,078 | 37,536,004 | ||||||||
| Purchase of marketable debt securities | — | (5,697,329 | ) | (19,633,903 | ) | ||||||
| Cash paid for acquisition, net of cash acquired | — | — | (3,690,047 | ) | |||||||
| Equity investments purchase | (2,500,000 | ) | (1,000,000 | ) | — | ||||||
| Other assets | (41,031 | ) | (8,373 | ) | (140,860 | ) | |||||
| Capital expenditures | (170,186 | ) | (1,183,131 | ) | (2,794,467 | ) | |||||
| Net cash provided by investing activities | 4,742,922 | 18,757,245 | 11,276,727 | ||||||||
| Cash flows from financing activities: | |||||||||||
| Sale of unregistered stock | — | — | 24,664,250 | ||||||||
| Sale of registered stock, net of costs | 8,038,529 | — | — | ||||||||
| Settlements of restricted stock for tax withholding obligations | (45,513 | ) | (208,015 | ) | (771,323 | ) | |||||
| Distribution to noncontrolling interest holder | — | (699,105 | ) | (791,737 | ) | ||||||
| Net cash provided by (used in) financing activities | 7,993,016 | (907,120 | ) | 23,101,190 | |||||||
| Effect of exchange rate changes on cash | (6,184 | ) | (268,223 | ) | 560,513 | ||||||
| Net (decrease) increase in cash and cash equivalents | (8,297,100 | ) | (10,521,880 | ) | 9,025,732 | ||||||
| Cash and cash equivalents at beginning of year | 14,326,347 | 24,848,227 | 15,822,495 | ||||||||
| Cash and cash equivalents at end of year | $ | 6,029,247 | $ | 14,326,347 | $ | 24,848,227 | |||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Income taxes paid | $ | — | $ | 1,374,000 | $ | 281,000 | |||||
| Construction in progress included in accrued expenses | — | — | 212,000 | ||||||||
Our fixed-price contracts with the U.S. government or other customers may result in revenue recognized in excess of amounts currently billed. We disclose the excess of revenues over amounts actually billed as Contract assets and unbilled receivables on the balance sheet. Amounts billed and due from our customers are classified as Accounts receivable on the balance sheets. In some instances, the U.S. government retains a small portion of the contract price until completion of the contract. The portion of the payments retained until final contract settlement is not considered a significant financing component because the intent is to protect the customer. For contracts with the U.S. government, we typically receive interim payments either as work progresses or by achieving certain milestones or based on a schedule in the contract. We recognize a liability for these advance payments in excess of revenue recognized and present it as Contract liabilities and billings in excess of revenue earned on the balance sheets. The advanced payment typically is not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract. For industrial and consumer purchase orders, we typically receive payments within 30 to 60 days of shipments of the product, although for some purchase orders, we may require an advanced payment prior to shipment of the product.
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To determine the proper revenue recognition method for contracts with the same customer, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. For most of our development contracts and contracts with the U.SU.S. government, the customer contracts with us to provide a significant service of integrating a set of components into a single unit. Hence, the entire contract is accounted for as one performance obligation. Less frequently, however, we may promise to provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. In cases where we sell standard products, the observable standalone sales are used to determine the standalone selling price.
The Company recognizes revenue from a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
For certain contracts with the U.S. government, the Company recognizes revenue over time as we perform because of continuous transfer of control to the customer and the lack of an alternative use for the product. The continuous transfer of control to the customer is supported by liability clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. For contracts with commercial customers, while the contract may have a similar liability clause, our products historically have an alternative use and thus, revenue is recognized at a point in time.
In situations where control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. We generally use the cost-to-cost approach to measure the extent of progress towards completion of the performance obligation for our contracts because we believe it best depicts the transfer of assets to the customer. Under the cost-to-cost measure approach, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.
Accounting for design, development and production contracts requires judgment relative to assessing risks, estimating contract revenues and costs and making assumptions for schedule and technical issues. Due to the size and nature of the work required to be performed on many of our contracts, the estimation of total revenue and cost at completion is complicated and subject to many variables. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect costs. We have to make assumptions regarding the number of labor hours required to complete a task, the complexity of the work to be performed, the availability and cost of materials and performance by our subcontractors. For contract change orders, claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is considered probable. If our estimate of total contract costs or our determination of whether the customer agrees that a milestone is achieved is incorrect, our revenue could be overstated or understated and the profits or loss reported could be subject to adjustment.
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For our commercial customers, the Company'sCompany’s revenue is recognized when obligations under the terms of a contract with our customer is satisfied and the Company transfers control of the products or services, which is generally upon delivery to the customer. Revenue is recorded as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Provisions for product returns and allowances are reductions in the transaction price and are recorded in the same period as the related revenues. We analyze historical returns, current economic trends and changes in customer demand when evaluating the adequacy of sales returns and other allowances. Certain product sales are made to distributors under agreements allowing for a limited right of return on unsold products. Sales to distributors are primarily made for sales to the distributors'distributors’ customers and not for stocking of inventory. Sales, value add and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
The rights and benefits to the Company'sCompany also licenses its intellectual property are conveyed to certain customers(“IP”) through technology license agreements.agreements which provides the customer the right to use our IP as it exists at a point in time. These agreements may include other performance obligations including the sale of product to the customer. The satisfaction of the Company’s performance obligation, and related recognition of revenue, occurs when the IP is delivered to the customer, the license period has begun and there are no additional performance obligations in the agreement. When the license is distinct from other obligations in the agreement, the Company treats the license and other performance obligations as separate performance obligations. Accordingly, the license is recognized at a point in time or over time based on the standalone selling price. Under certain license agreements, we may receive royalties based on the sales of the licensed product. We recognize royalty revenue upon the later of when the related sales occur, or when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Under our current license agreements for which a royalty exists, we have recorded revenue when the related sales by our customer occurs because the performance obligation related to the delivery of the license to the customer has been satisfied.
Inventory
We provide a reserve for estimated obsolete or unmarketable inventory based on assumptions about future demand and market conditions and our production plans. Inventories that are obsolete or slow moving are generally fully reserved (representing the estimated net realizable value) as such information becomes available. Our display products are manufactured based upon production plans whose critical assumptions include non-binding demand forecasts provided by our customers, lead times for raw materials, lead times for wafer foundries to perform circuit processing and yields. If a customer were to cancel an order or actual demand was lower than forecasted demand, we may not be able to sell the excess display inventory and additional reserves would be required. If we were unable to sell the excess inventory, we would establish reserves to reduce the inventory to its estimated realizable value (generally zero).
Investment Valuation
We periodically make equity investments in private companies, accounted for as an equity investment, whose values are difficult to determine. The Company adopted ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities and the related amendments on December 31, 2017. The Company adopted the measurement alternative for equity investments without readily determinable fair values (often referred to as cost method investments) on a prospective basis. When assessing investments in private companies for impairment, we consider such factors as, among others, the share price from the investee’s latest financing round, the performance of the investee in relation to its own operating targets and its business plan, the investee’s revenue and cost trends, the liquidity and cash position, including its cash burn rate and market acceptance of the investee’s products and services. Because these are private companies which we do not control we may not be able to obtain all of the information we would want in order to make a complete assessment of the investment on a timely basis. Accordingly, our estimates may be revised if other information becomes available at a later date.
In addition to the above, we make investments in government and agency-backed securities and corporate debt securities. For all of our investments we provide for an impairment valuation if we believe a decline in the value of an investment is other-than-temporary, which may have an adverse impact on our results of operations. The determination of whether a decline in value is other-than-temporary requires that we estimate the cash flows we expect to receive from the security. We use publicly available information such as credit ratings and financial information of the entity that issued the security in the development of our expectation of the cash flows to be received. Historically, we have periodically recorded other than temporary impairment losses, however we have not done so recently.
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Income Taxes
We have historically incurred domestic operating losses from both a financial reporting and tax return standpoint. We establish valuation allowances if it appears more likely than not that our deferred tax assets will not be realized. These judgments are based on our projections of taxable income and the amount and timing of our tax operating loss carryforwards and other deferred tax assets. Given our federal operating tax loss carryforwards, we do not expect to pay domestic federal taxes in the near term. It is possible that we could pay foreign and state income taxes. We are also subject to foreign taxes from our Korean and U.K. subsidiary operations.
Our income tax provision is based on calculations and assumptions that will be subject to examination by tax authorities. Despite our history of operating losses there can be exposures for state taxes or foreign tax that may be due. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. Should the actual results differ from our estimates, we would have to adjust the income tax provision in the period in which the facts that give rise to the revision become known. Such adjustment could have a material impact on our results of operations. We have historically established valuation allowances against all of our net deferred tax assets because of our history of generating operating losses and restrictions on the use of certain items. Our evaluation of the recoverability of deferred tax assets has also included analysis of the expiration dates of net operating loss carryforwards. In forming our conclusions as to whether the deferred tax assets are more likely than not to be realized we consider the sources of our income and the projected stability of those sources and product life cycles.
Goodwill
We account for goodwill in accordance with ASC Topic 350. Under ASC Topic 350, goodwill is considered to have an indefinite life, and is carried at cost. Goodwill is not amortized, but is subject to an annual impairment test, as well as between annual tests when events or circumstances indicate that the carrying value may not be recoverable.
The Company performs impairment tests of goodwill at its reporting unit level. The goodwill valuations that are utilized to test these assets for impairment are depending on a number of significant estimates and assumptions, including macroeconomic conditions, overall growth rates, competitive activities, cost containment, Company business plans and the discount rate applied to cash flows. We believe these estimates and assumptions are reasonable and are comparable to those that would be used by other market participants. However, actual events and results could differ substantially from those used in our valuations. At December 26, 2020 and December 28, 2019, the ending balance of goodwill was zero.
Results of Operations
We have two principal sources of revenues: product revenues and research and development (“R&D”) revenues. R&D revenues consist primarily of development contracts with agencies or prime contractors of the U.S. government and commercial enterprises.
We manufacture transmissive microdisplays and reflective microdisplays. Our commercial and defense transmissive display production is being performed entirely in our Westborough, Massachusetts facility. FDD, our wholly-owned subsidiary, manufactures our reflective microdisplays in its facility located in Scotland. In 2017, we commenced development of OLED displays which are designed by us and manufactured by third parties for us.
We are a display supplier for the U.S. Army’s Family of Weapon Sights Individual program and are undergoing qualification for the FWS - Crew Served variant. We are also in development for a new series of displays for armored vehicles under the M1A2 program. The FWS, M1A2 and our existing production avionic programs are expected to increase production for the next several years. There are other firms offering products which compete against us in the defense programs and all of the programs we supply product to are subject to the U.S. government defense budget and procurement process. Accordingly, there can be no assurances we will continue to ship under our defense contracts.
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We offer microdisplays and optical lenses for use in consumer, enterprise and public safety products and systems which are targeted at AR and VR markets, among other areas. We refer to the sale of microdisplays and optical lenses as our component sales. We also offer head mounted, voice and gesture controlled, hands-free headset system designs that include our components and software for consumer and enterprise applications.
Predicting our R&D revenue and related trends is challenging because we have limited ability to forecast if we will be awarded additional R&D contracts in the future as such awards depend on the U.S. military budget and priorities. We cannot assure that the R&D contracts will result in workable products or if successful our products developed under these contracts will be procured but our customers. If we do not continue to win R&D contracts or if there is no demand for the products developed under these contracts, our ability to achieve profitability and positive cash flow could be negatively affected because the R&D revenues (or the products derived from the R&D contracts) would not be available to cover the allocated overhead and selling, general and administrative costs which may remain. Some of our contracts are fixed priced and we may incur cost overruns which would result on losses on the contracts. If we incur such losses on our contracts our ability to achieve profitability and positive cash flow could be negatively affected.
Because our fiscal year ends on the last Saturday of December every seven years we have a fiscal year with 53 weeks. Our fiscal years 2020, 2019, and 2018 were each 52 week years.
Revenues. Our revenues by display application, which include product sales and amounts earned from research and development contracts, for fiscal years 2020, 2019 and 2018 by category, were as follows:
| (In thousands) | 2020 | 2019 | 2018 | |||||||||
| Defense | $ | 20,231 | $ | 8,729 | $ | 8,724 | ||||||
| Industrial/Enterprise | 6,882 | 9,717 | 6,066 | |||||||||
| Consumer | 852 | 1,777 | 4,146 | |||||||||
| Research and Development | 10,123 | 4,983 | 5,254 | |||||||||
| Other | 553 | 61 | 275 | |||||||||
| License and royalties | 1,487 | 4,252 | — | |||||||||
| Total Revenues | $ | 40,128 | $ | 29,519 | $ | 24,465 | ||||||
Fiscal Year 2020 Compared to Fiscal Year 2019
Sales of our products for Defense applications include systems used by the military both in the field and for training and simulation. Sales of our products for Defense applications may be for a one-time purchase order or for programs that run for several years. Product sales to defense customers increased in 2020 compared to 2019 due to an increase in shipments of our products into the Family of Weapon Sights Individual (FWS-I) program and the Joint Strike Fighter program. FWS-I and Joint Strike Fighter revenues increased in 2020 over 2019 by 167% and 139%, respectively.
Industrial/Enterprise applications revenues represent customers who purchase our display products for use in headsets used for manufacturing, distribution, public safety, 3D metrology equipment and other industrial applications. Our 3D metrology customers are primarily located in Asia and they sell to Asian contract manufacturers who use the 3D metrology machines for quality control purposes. The decrease in Industrial/Enterprise applications revenues in 2020 compared to 2019 was primarily due to a decrease in sales to customers who use our display components in industrial headsets, 3D metrology and safety applications.
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Sales of our displays for Consumer applications is primarily for the use in thermal imaging products, recreational rifle and hand-held scopes and drone racing headsets. The decrease in Consumer applications in 2020 compared to 2019 was primarily due to decreased demand for displays and components used in drone racing headsets.
R&D revenues increased in 2020 as compared to 2019 primarily due to the completion of performance obligations on funded U.S. defense programs partially offset by lower revenues from OLED development contracts. R&D revenues primarily increased in 2020 over 2019 because we were awarded and commenced work on new contracts to develop technologies we believe will be used in U.S. defense programs. These contracts typically reimburse us for direct costs and allocated overhead and selling, general and administrative costs and in some cases profit. In 2020 and 2019 our R&D revenues exceeded funded R&D expenses by approximately $2.4 million and $0.8 million, respectively, and this increase aided our improved operating results in 2020 as compared to 2019.
The decrease in license and royalty revenue in 2020 compared to 2019 is due to the one-time license of IP to RealWear for $3.5 million in 2019 partially offset by royalties earned under IP license agreements.
International sales represented approximately 20% and 44% of product revenues for 2020 and 2019, respectively. Our international sales are primarily denominated in U.S. dollars. Consequently, a strengthening of the U.S. dollar could increase the price in local currencies of our products in foreign markets and make our products relatively more expensive than competitors’ products that are denominated in local currencies, which could result in a reduction in sales or profitability in those foreign markets. As a result, our financial position and results of operations are subject to exchange rate fluctuation in transactional and functional currency. 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 Japanese yen, Great Britain pound and the U.S. dollar. Foreign currency translation impact on our results, if material, is described in further detail under “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” section below.
Fiscal Year 2019 Compared to Fiscal Year 2018
Sales of our products for Defense applications include systems used by the military both in the field and for training and simulation. Sales of our products for Defense applications may be for a one-time purchase order or for programs that run for several years. Product sales to defense customers were essentially flat for 2019 and 2018.
Industrial applications revenues represent customers who purchase our display products for use in headsets used for manufacturing, distribution, public safety, 3D metrology equipment and other industrial applications. Our 3D metrology customers are primarily located in Asia and they sell to Asian contract manufacturers who use the 3D metrology machines for quality control purposes. The increase in Industrial applications in 2019 compared to 2018 was primarily due to an increase in sales to customers who use our display components in industrial headsets and safety applications.
Sales of our displays for Consumer applications is primarily for the use in thermal imaging products, recreational rifle and hand-held scopes and drone racing headsets. The decrease in Consumer applications in 2019 compared to 2018 was primarily due to decreased demand for displays and components used in drone racing headsets.
Research & Development (“R&D”) revenues decreased in 2019 as compared to 2018 primarily due to due to the completion of performance obligations on funded U.S. defense programs partially offset by revenues from OLED development contracts.
The increase in license and royalty revenue in 2019 is due to the one-time license of IP to RealWear for $3.5 million and royalties earned under IP license agreements.
International sales represented approximately 44% and 41% of product revenues for 2019 and 2018, respectively. Our international sales are primarily denominated in U.S. currency.
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Cost of Product Revenues. Cost of product revenues, which is comprised of materials, labor and manufacturing overhead related to the production of our products for fiscal years 2020, 2019 and 2018 were as follows:
| (In thousands, except percentages) | 2020 | 2019 | 2018 | |||||||||
| Cost of product revenue | $ | 21,398 | $ | 20,902 | $ | 15,831 | ||||||
| Cost of product revenues as a % of net product revenues | 75.0 | % | 103.0 | % | 82.4 | % | ||||||
Fiscal Year 2020 Compared to Fiscal Year 2019
Cost of product revenues decreased as a percentage of revenues in 2020 as compared to 2019 primarily due to improved yields from our manufacturing process. Improved yields result in lower material cost per unit because we are scrapping less material to produce a unit. In addition, the labor cost per unit declined as employees are not reworking or performing the same manufacturing process multiple times to create a finished product. Also, fixed overhead costs per unit decline because we are producing more units in the manufacturing facility but the cost to run the manufacturing facility does not significantly increase. We were able to improve yields because we have more experience manufacturing our two primary defense products and we are learning ways to improve our processes. In addition, we are working with our subcontractors to improve the quality and lower the cost of the raw materials we acquire. In 2021 we expect some products that are currently in R&D to go into production. We expect these new products to start at lower yields and for us to improve these yields over time. Accordingly, we expect our 2021 cost of product revenues as a percentage of product revenues to be negatively affected by these new products. We are unable to forecast whether our continued yield improvement efforts on our existing products will offset the initial negative impact of the new products coming into production in 2021.
Fiscal Year 2019 Compared to Fiscal Year 2018
Cost of product revenues increased as a percentage of revenues in 2019 as compared to 2018 primarily due to lower than historical yields from our manufacturing process as a result of initial production of our FWS programs and a charge for inventory obsolescence that resulted from the discontinuance of certain products and the write-off of materials as we have found substitute materials that will provide for better long-term manufacturing yields. The FWS program went into volume production in 2019 and our yields were lower than we historically have as our supply chain took time to consistently meet quality standards.
Research and Development. R&D expenses are incurred in support of internal display development programs or 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 allocated overhead. In fiscal year 2020, our R&D expenditures were primarily related to our display products and defense systems. R&D expenses for fiscal years 2020, 2019 and 2018 were as follows:
| (In thousands) | 2020 | 2019 | 2018 | |||||||||
| Funded | $ | 7,746 | $ | 4,216 | $ | 4,892 | ||||||
| Internal | 3,924 | 9,133 | 12,553 | |||||||||
| Total | $ | 11,670 | $ | 13,349 | $ | 17,445 | ||||||
Fiscal Year 2020 Compared to Fiscal Year 2019
Funded R&D expense for 2020 increased as compared to 2019 primarily due to an increase in the number of defense related contracts we have been awarded. Internal R&D expense for 2020 decreased as compared to the prior year primarily due to the licensing of certain products and other development programs being curtailed. We expect to incur significant development costs in fiscal year 2021 to develop OLED display products and defense products.
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Fiscal Year 2019 Compared to Fiscal Year 2018
Funded R&D expense for 2019 decreased as compared to 2018 primarily due to due to the completion of performance obligations on funded U.S. defense programs. Internal R&D expense for 2019 decreased as compared to the prior year primarily due to the licensing of certain products and other development programs being curtailed.
Selling, General and Administrative. Selling, general and administrative (“S,G&A”) expenses consist of the expenses incurred by our sales and marketing personnel and related expenses, and administrative and general corporate expenses. SG&A expenses for the fiscal years 2020, 2019 and 2018 were as follows:
| (In thousands, except percentages) | 2020 | 2019 | 2018 | |||||||||
| Selling, general and administrative expense | $ | 11,823 | $ | 21,316 | $ | 27,211 | ||||||
| Selling, general and administrative expense as a % of total revenue | 29.5 | % | 72.2 | % | 111.2 | % | ||||||
Fiscal Year 2020 Compared to Fiscal Year 2019
S,G&A for 2020 decreased as compared to 2019 primarily due to decreases of approximately $1.2 million in non-cash stock-based compensation, $2.9 million in professional fees, $1.4 million in bad debt expense, $1.5 million in product promotion and marketing expenses, and $0.7 million in travel and related expenses.
Fiscal Year 2019 Compared to Fiscal Year 2018
S,G&A for 2019 decreased as compared to 2018 primarily due to decrease of approximately $2.0 million in non-cash stock-based compensation, $1.0 million in product promotion and marketing expenses, $0.8 million in IT spending, $0.9 million amortization of intangibles and $0.8 million of accrued contingent consideration which were partially offset by an approximate increase of $1.0 million in professional fees.
Impairment of Goodwill and Intangibles. Goodwill and intangibles are evaluated for impairment annually or more often if indicators of a potential impairment are present. Our annual impairment testing of goodwill is performed separately from our impairment testing of intangibles. The Company performs impairment tests of goodwill at its reporting unit level. The goodwill valuations that are utilized to test these assets for impairment are depending on a number of significant estimates and assumptions, including macroeconomic conditions, overall growth rates, competitive activities, cost containment, Company business plans and the discount rate applied to cash flows. We believe these estimates and assumptions are reasonable and are comparable to those that would be used by other market participants. Impairment of goodwill for the fiscal years 2020, 2019 and 2018 were as follows:
| (In thousands) | 2020 | 2019 | 2018 | |||||||||
| Impairment of goodwill | $ | –– | $ | 331 | $ | 1,417 | ||||||
During fiscal 2019, we recognized a $0.3 million goodwill impairment charge related to our e-MDT subsidiary. During fiscal 2018, we recognized a $1.4 million goodwill impairment charge related to our NVIS and our Kopin Software Ltd. subsidiaries. See Note 5 of the “Notes to Consolidated Financial Statements” for more information.
Impairment of Assets. The Company periodically reviews the carrying value of its long-lived assets to determine if facts and circumstances suggest that they may be impaired or that the amortization or depreciation period may need to be changed. The carrying value of a long-lived asset is considered impaired when the anticipated identifiable undiscounted cash flows from such asset are less than its carrying value. For assets that are to be held and used, impairment is measured based upon the amount by which the carrying amount of the asset exceeds its fair value. Impairment of assets for the fiscal years 2020, 2019 and 2018 were as follows:
| (In thousands) | 2020 | 2019 | 2018 | |||||||||
| Impairment of assets | $ | — | $ | — | $ | 2,527 | ||||||
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During fiscal 2018, we recognized a $2.5 million asset impairment charge related to equipment as discussed further in Note 2. of the “Notes to Consolidated Financial Statements.”
Total Other Income (Expense), Net. Other income (expense), net, is primarily composed of interest income, foreign currency transaction, remeasurement gains and losses incurred by our UK-based subsidiaries and other non-operating income items. Other income (expense), net, for the fiscal years 2020, 2019 and 2018 were as follows:
| (In thousands) | 2020 | 2019 | 2018 | |||||||||
| Total other income (expense), net | $ | 361 | $ | (2,887 | ) | $ | 5,514 | |||||
Fiscal Year 2020 Compared to Fiscal Year 2019
In 2020 we recorded $0.3 million of foreign currency gains compared to $0.2 million of foreign currency gains recorded in 2019. In 2019, we recorded a non-cash $1.4 million gain on equity investments and an impairment charge of $5.2 million on equity investment.
Fiscal Year 2019 Compared to Fiscal Year 2018
In 2019 we recorded $0.2 million of foreign currency gains compared to $1.2 million of foreign currency gains recorded in 2018. In 2019, we recorded a non-cash $1.4 million gain on equity investments and an impairment charge of $5.2 million on equity investment. In 2018, we recorded a non-cash $2.8 million gain on equity investments. In 2018, the Company received $1.0 million of insurance proceeds related to the embezzlement at our former Korean subsidiary.
Tax provision
| (In thousands) | 2020 | 2019 | 2018 | |||||||||
| Tax provision | $ | (129 | ) | $ | (108 | ) | $ | (30 | ) | |||
Fiscal Year 2020 Compared to Fiscal Year 2019
The provision for income taxes for the fiscal years ended 2020 and 2019 of approximately $(0.1) million was due to a change in estimates related to uncertain tax positions and deferred tax liabilities for the Company’s former Korean subsidiary.
Fiscal Year 2019 Compared to Fiscal Year 2018
The provision for income taxes for the fiscal years ended 2019 and 2018 of approximately $(0.1) and $(0.03) million respectively, was due to a change in estimates related to uncertain tax positions and deferred tax liabilities for the Company’s former Korean subsidiary.
Net (income) loss attributable to noncontrolling interest. As of December 26, 2020, we owned 80% of the equity of eMDT. Net loss attributable to noncontrolling interest on our consolidated statement of operations represents the portion of the results of operations of our majority owned subsidiaries which is allocated to the shareholders of the equity interests not owned by us. The change in net loss attributable to noncontrolling interest in 2020 compared to 2019 is $0.3 million and is a result of net loss attributable to minority shareholders of eMDT.
The change in net (income) loss attributable to noncontrolling interest in 2019 compared to 2018 is $0.1 million and is a result of net income attributable to minority shareholders of eMDT.
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Liquidity and Capital Resources
At December 26, 2020 and December 28, 2019, we had cash and cash equivalents and marketable securities of $20.7 million and working capital of $22.6 million compared to $21.8 million and $22.5 million, respectively. The change in cash and cash equivalents and marketable securities was primarily due to net outflow of cash used in operating activities of $4.4 million, which was offset by financing activities of $3.7 million.
In the fourth quarter of 2020, we issued 1.9 million shares of our common stock pursuant to our At-The-Market Equity Offering Sales Agreement dated as of February 8, 2019 with Stifel, Nicolaus & Company, Incorporated, as agent (the “ATM Agreement”) for $4.0 million (average of $2.05 per share) in gross proceeds before deducting broker expenses paid by us of $0.1 million. The net proceeds from the sale of common shares were used for general corporate purposes, including working capital. In Q1 2021, we sold 2.4 million shares of common stock for gross proceeds of $16 million (average of $6.66 per share), before deducting broker expenses paid by us of $0.5 million under the ATM Agreement. The ATM Agreement has since terminated pursuant to its terms as a result of the sale of all the shares subject to such agreement.
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 us of $0.7 million. This represented approximately 8.9% of Kopin’s total outstanding shares of common stock as of the date of purchase. The net proceeds from the offering were used for general corporate purposes, including working capital. On April 10, 2019, 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 Kopin’s total outstanding shares of common stock as of the date of purchase.
Cash and cash equivalents and marketable debt securities held in U.S. dollars at:
| December 26, 2020 | December 28, 2019 | |||||||
| Domestic locations | $ | 19,724,103 | $ | 21,148,381 | ||||
| Foreign locations | 340,217 | 145,240 | ||||||
| Subtotal cash and cash equivalents and marketable debt securities held in U.S. dollars | 20,064,320 | 21,293,621 | ||||||
| Cash and cash equivalents held in other currencies and converted to U.S. dollars | 684,230 | 488,623 | ||||||
| Total cash and cash equivalents and marketable debt securities | $ | 20,748,550 | $ | 21,782,244 | ||||
We have no plans to repatriate the cash and cash equivalents held in our foreign subsidiary FDD.
The manufacturing operations at our Korean facility, Kowon, have ceased and Kowon was liquidated at fiscal year ended 2018. The Company has approximately $0.4 million of cash and cash equivalents in Korea at December 26, 2020. The Company has recorded deferred tax liabilities for any additional withholding tax that may be due to the Korean government upon Kowon’s final tax return acceptance.
In March 2017, we purchased 100% of the outstanding stock of NVIS, a producer of virtual reality systems for 3D applications, for $3.7 million. As part of the purchase, we agreed to pay up to an additional $2.0 million if certain future operating performance milestones are met and the selling shareholders remain employed with NVIS through March 2020. We have paid $1.8 million in contingent consideration through December 26, 2020 and there are no remaining contingent payment obligations related to the NVIS purchase as of December 26, 2020. As there was a requirement to remain employed to earn the contingent payments, these contingent payments were treated as compensation expense.
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We expect to expend between $1.0 million and $2.0 million on capital expenditures over fiscal 2021.
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). We initially attempted to make our investment but were unable to due to Chinese investment rules and we received an extension to make our investment. However, BOE needed to complete the fund raising and we agreed to transfer our rights to the equity to another shareholder of BOE.
In the second quarter of 2019, we made an additional equity investment in RealWear, Inc. of $2.5 million by participating in an equity raise by RealWear. In the fourth quarter of 2019 Kopin reviewed the financial condition and other factors of RealWear and as a result, in the fourth quarter of 2019, we recorded an impairment charge of $5.2 million to reduce our investment in RealWear to zero as of December 28, 2019.
On September 30, 2019 we entered into the Solos Purchase Agreement with Solos Technology, pursuant to which we sold and licensed certain assets of our Solos product line and Whisper technology. As consideration for the transaction, we received a 20.0% equity stake in Solos Technology’s parent company, Solos Inc. Our 20.0% equity stake will be maintained until Solos Inc. has raised a total of $7.5 million in equity financing. We will also receive a royalty in the single digits on the net sales amount of Solos products for a three-year period, after commencement of commercial production. Based on the price paid for equity by the other 80% owners of Solos Inc., volatility based on a peer group and assumptions about the risk free interest rate, we estimated the fair value of our equity holdings at $0.6 million and recorded $0.6 million gain on investment for this equity transaction as the basis of assets transferred was zero.
We have incurred net losses of $4.4 million, $29.5 million and $34.5 million for the fiscal years 2020, 2019 and 2018, respectively, and net cash outflows from operations of $4.4 million, $21.0 million and $28.1 million for the fiscal years ended 2020, 2019 and 2018, respectively. Our decline in cash and cash equivalents and marketable debt securities was partially a result of funding our ongoing investments in research and development which we believe will continue. We have in the past sold equity securities through an At The Money program and in the traditional fashion of significant equity offerings. We estimate we will have sufficient liquidity to fund operations at least through Q1 2022. Nonetheless, we monitor the capital markets on an ongoing basis and may consider raising capital if favorable market conditions develop. If our actual results are less than projected or we need to raise capital for additional liquidity, we may be required to do additional equity financings, reduce expenses or enter into a strategic transaction. However, we can make no assurance that we will be able to raise additional capital, reduce expenses sufficiently, or enter into a strategic transaction on terms acceptable to us, or at all.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Seasonality
Our revenues have not followed a seasonal pattern for the past three years and we do not anticipate any seasonal trend to our revenues in 2021.
Contractual Obligations
The following is a summary of our contractual lease payment obligations as of December 26, 2020:
| Payment due by period | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 Years | 4-5 years | More than 5 years | ||||||||||||||||
| Operating Lease Obligations | $ | 1,924,296 | 1,065,879 | 858,417 | — | $ | — | |||||||||||||
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| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
We invest our excess cash in high-quality U.S. government, government-backed (i.e.: 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 Asia and Europe, and remeasurement of U.S. dollars to 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 in our production processes but do not enter into forward or futures hedging contracts.
| Item 8. | Financial Statements and Supplementary Data |
The financial statements required by this Item are included in this Report on pages 41 through 70. Reference is made to Item 15 of this Report.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
In connection with filing the Form 10-K, management, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by our Annual Report on Form 10-K for the fiscal year ended December 26, 2020. Based upon that evaluation, our CEO and CFO concluded that, as of the end of the period covered by this report, 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 CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and include those policies and procedures that:
| ● | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; | |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made in accordance with authorizations of management and directors of the company; and | |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our internal control over financial reporting as of December 26, 2020, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework). Based on that evaluation, our management concluded that, as of December 26, 2020, internal control over financial reporting was effective based on criteria established in Internal Control-Integrated Framework issued by the COSO.
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Remediation
To remediate the material weakness, 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. During 2019 and 2020 we did not identify any deficiencies in the monitoring and of accounting for non-routine transactions and therefore management concluded that the material weakness has been remedied as of December 26, 2020.
Changes in Internal Control Over Financial Reporting
Except for the change in our internal controls, as discussed in this Item 9A, there were no changes in our internal control over financial reporting that occurred during the fiscal year ended December 26, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
| Item 9B. | Other Information |
None.
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required under this item is incorporated herein by reference from our Proxy Statement relating to our 2021 Annual Meeting of Stockholders (the “Proxy Statement”). We expect to file the Proxy Statement with the SEC in April, 2021 (and, in any event, no later than 120 days after the close of our last fiscal year).
Code of Ethics. We have adopted a Code of Business Conduct and Ethics (the Code) that applies to all of our employees (including our CEO and CFO) and directors. The Code is available on our website at www.kopin.com. We intend to satisfy the disclosure requirement regarding any amendment to or waiver of a provision of the Code applicable to any executive officer or director, by posting such information on our website.
Our corporate governance guidelines, whistleblower policy and the charters of the audit committee, compensation committee and nominating and corporate governance committee of the Board of Directors as well as other corporate governance document materials are available on our website at www.kopin.com under the heading “Investors,” then “Corporate Governance” then “Governance Documents.”
| Item 11. | Executive Compensation |
The information required by this item is incorporated herein by reference from the Proxy Statement.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this item is incorporated herein by reference from the Proxy Statement. Refer also to the equity compensation plan information set forth in Part II Item 5 of this Annual Report on Form 10-K.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item is incorporated herein by reference from the Proxy Statement.
| Item 14. | Principal Accounting Fees and Services |
The information required by this item is incorporated herein by reference from the Proxy Statement.
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Part IV
| Item 15. | Exhibits and Financial Statement Schedules |
(1) Consolidated Financial Statements:
(2) Financial Statement Schedules:
Financial Statement Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the accompanying Consolidated Financial Statements or notes thereto.
(3) Exhibits:
The exhibits filed as part of this Form 10-K are listed on the exhibit index immediately preceding such exhibits and is incorporated herein by reference.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Kopin Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Kopin Corporation and its subsidiaries (the Company) as of December 26, 2020 and December 28, 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 26, 2020 and December 28, 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Research and Development Revenues
As described in Note 1 of the consolidated financial statements, the Company’s research and development revenues were $11,609,795 for the year ending December 26, 2020. The Company recognizes revenue for certain of its research and development contracts over time, generally using the input method. Progress and revenues from research and development contracts are generally recognized on an input method of accounting as costs are incurred. Under the input method, revenue is recognized based on contract costs expended to date relative to total contract costs intended to be expended. Management exercises significant judgment in determining revenue recognition for these customer contracts as the estimate of the total contract costs is critical to the recognition of revenue based under the input method.
We identified the Company’s accounting for revenue recognition of research and development contracts to be a critical audit matter because of the significant assumptions and judgments used by management in determining the estimated costs to be incurred throughout the customer contract. Auditing management’s estimation of cost recognition required significant audit effort and a high degree of auditor judgment and subjectivity to evaluate the audit evidence obtained.
Our audit procedures related to the Company’s revenue recognition of research and development contracts included the following, among others:
| ● | Evaluated the reasonableness of management estimates of cost recognition for a selection of contracts by comparing costs incurred under completed contracts to the costs estimated by management. | |||
| ● | We selected a sample of customer contracts and performed the following procedures: | |||
| ○ | Read the underlying contracts and agreed the Company’s total budgeted costs to approved management budgets. | |||
| ○ | Evaluated management’s ability to achieve the estimates of total profit by performing corroborating inquiries with Company personnel, including project managers, and comparing the estimates to actual subsequent results and documentation such as management’s internal budgets and specified contract terms. | |||
/s/ RSM US LLP
We have served as the Company’s auditor since 2019.
Stamford, Connecticut
March 5, 2021
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Kopin Corporation
Opinion on the 2018 Financial Statements
We have audited the consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows of Kopin Corporation and subsidiaries (the “Company”) for the year ended December 29, 2018, and the related notes (collectively referred to as the “2018 financial statements”). In our opinion, the 2018 financial statements, present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 29, 2018, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The 2018 financial statements were prepared assuming that the Company would continue as a going concern. The Company had suffered recurring losses from operations and recurring negative operating cash flows that raised substantial doubt about its ability to continue as a going concern. The 2018 financial statements did not include any adjustments that might result from the outcome of this uncertainty.
Change in Accounting Principle
As discussed in Note 1 to the 2018 financial statements, the Company adopted Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers,” using the modified retrospective adoption method on December 31, 2017.
Basis for Opinion
These 2018 financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s 2018 financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 2018 financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the 2018 financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the 2018 financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the 2018 financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Deloitte and Touche LLP
Boston, Massachusetts
March 13, 2019 (November 7, 2019, as to the effects of the correction of previously issued financial statements)
We served as the Company’s auditor since at least 1987; however, an earlier year could not be reliably determined. In 2019 we became the predecessor auditor.
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KOPIN CORPORATION
CONSOLIDATED BALANCE SHEETS
| December 26, 2020 | December 28, 2019 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 17,112,869 | $ | 6,029,247 | ||||
| Marketable debt securities, at fair value | 3,635,681 | 15,752,997 | ||||||
| Accounts receivable, net of allowance of $175,000 and $938,000 in 2020 and 2019, respectively | 9,260,865 | 6,023,250 | ||||||
| Contract assets and unbilled receivables | 3,521,753 | 921,082 | ||||||
| Inventory | 4,455,756 | 3,768,696 | ||||||
| Prepaid taxes | 205,568 | 104,442 | ||||||
| Prepaid expenses and other current assets | 1,263,688 | 1,164,927 | ||||||
| Total current assets | 39,456,180 | 33,764,641 | ||||||
| Property, plant and equipment, net | 1,626,930 | 1,473,341 | ||||||
| Operating lease right-of-use assets | 1,780,039 | 2,753,963 | ||||||
| Other assets | 162,473 | 517,411 | ||||||
| Equity investments | 4,523,525 | 4,537,159 | ||||||
| Total assets | $ | 47,549,147 | $ | 43,046,515 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 5,606,910 | $ | 3,998,234 | ||||
| Accrued payroll and expenses | 1,977,851 | 2,203,773 | ||||||
| Accrued warranty | 508,000 | 509,000 | ||||||
| Contract liabilities and billings in excess of revenue earned | 1,493,847 | 796,794 | ||||||
| Operating lease liabilities | 982,375 | 1,041,695 | ||||||
| Other accrued liabilities | 1,809,495 | 2,202,217 | ||||||
| Customer deposits | 3,950,031 | 33,000 | ||||||
| Deferred tax liabilities | 554,000 | 525,000 | ||||||
| Total current liabilities | 16,882,509 | 11,309,713 | ||||||
| Noncurrent contract liabilities and asset retirement obligations | 276,409 | 268,440 | ||||||
| Operating lease liabilities, net of current portion | 821,306 | 1,791,590 | ||||||
| Other long-term liabilities | 1,270,328 | 1,085,160 | ||||||
| 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 | 880,075 | 870,496 | ||||||
| Additional paid-in capital | 341,512,893 | 344,456,537 | ||||||
| Treasury stock ( and shares in 2020 and 2019, at cost) | (9,793,946 | ) | (17,238,669 | ) | ||||
| Accumulated other comprehensive income | 1,484,434 | 1,757,184 | ||||||
| Accumulated deficit | (305,648,025 | ) | (301,236,913 | ) | ||||
| Total Kopin Corporation stockholders’ equity | 28,435,431 | 28,608,635 | ||||||
| Noncontrolling interest | (136,836 | ) | (17,023 | ) | ||||
| Total stockholders’ equity | 28,298,595 | 28,591,612 | ||||||
| Total liabilities and stockholders’ equity | $ | 47,549,147 | $ | 43,046,515 | ||||
See Accompanying Notes to Consolidated Financial Statements.
| 44 |
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| 2020 | 2019 | 2018 | ||||||||||
| Fiscal year ended | 2020 | 2019 | 2018 | |||||||||
| Revenues: | ||||||||||||
| Net product revenues | $ | 28,517,874 | $ | 20,283,888 | $ | 19,211,115 | ||||||
| Research and development and other revenues | 11,609,795 | 9,234,921 | 5,253,890 | |||||||||
| Total revenue | 40,127,669 | 29,518,809 | 24,465,005 | |||||||||
| Expenses: | ||||||||||||
| Cost of product revenues | 21,398,381 | 20,901,538 | 15,831,441 | |||||||||
| Research and development-funded programs | 7,745,762 | 4,216,161 | 4,892,066 | |||||||||
| Research and development-internal | 3,924,241 | 9,132,969 | 12,553,237 | |||||||||
| Selling, general and administrative | 11,822,703 | 21,316,459 | 27,210,849 | |||||||||
| Impairment of goodwill | — | 331,344 | 1,417,470 | |||||||||
| Impairment of assets | — | — | 2,526,669 | |||||||||
| Total operating expenses | 44,891,087 | 55,898,471 | 64,431,732 | |||||||||
| Loss from operations | (4,763,418 | ) | (26,379,662 | ) | (39,966,727 | ) | ||||||
| Non-operating income (expense), net: | ||||||||||||
| Interest income | 132,642 | 543,759 | 640,059 | |||||||||
| Other (expense) income, net | (35,463 | ) | 225,617 | 855,106 | ||||||||
| Foreign currency transaction gains | 293,670 | 202,517 | 1,169,254 | |||||||||
| (Loss) gain on investments | (29,356 | ) | (3,858,453 | ) | 2,849,816 | |||||||
| Total non-operating income (expense) | 361,493 | (2,886,560 | ) | 5,514,235 | ||||||||
| Loss before provision for income taxes and net loss (income) of noncontrolling interest | (4,401,925 | ) | (29,266,222 | ) | (34,452,492 | ) | ||||||
| Tax provision | (129,000 | ) | (108,000 | ) | (30,000 | ) | ||||||
| Net loss | (4,530,925 | ) | (29,374,222 | ) | (34,482,492 | ) | ||||||
| Net loss (income) attributable to the noncontrolling interest | 119,813 | (132,030 | ) | (51,050 | ) | |||||||
| Net loss attributable to Kopin Corporation | $ | (4,411,112 | ) | $ | (29,506,252 | ) | $ | (34,533,542 | ) | |||
| Net loss per share: | ||||||||||||
| Basic and diluted | $ | (0.05 | ) | $ | (0.37 | ) | $ | (0.47 | ) | |||
| Weighted average number of common shares outstanding: | ||||||||||||
| Basic and diluted | 82,347,741 | 80,282,126 | 73,156,545 | |||||||||
See Accompanying Notes to Consolidated Financial Statements.
| 45 |
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| 2020 | 2019 | 2018 | ||||||||||
| Fiscal year ended | 2020 | 2019 | 2018 | |||||||||
| Net loss | $ | (4,530,925 | ) | $ | (29,374,222 | ) | $ | (34,482,492 | ) | |||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Foreign currency translation adjustments | (67,852 | ) | (206,580 | ) | (1,912,427 | ) | ||||||
| Unrealized holding gain (loss) on marketable securities | (183,870 | ) | 446,533 | (264,949 | ) | |||||||
| Reclassifications of (loss) gain in net loss on marketable securities | (21,028 | ) | (37,356 | ) | 49,525 | |||||||
| Other comprehensive income (loss), net of tax | (272,750 | ) | 202,597 | (2,127,851 | ) | |||||||
| Comprehensive loss | (4,803,675 | ) | (29,171,625 | ) | (36,610,343 | ) | ||||||
| Comprehensive (income) loss attributable to the noncontrolling interest | 119,813 | (132,030 | ) | 66,609 | ||||||||
| Comprehensive loss attributable to Kopin Corporation | $ | (4,683,862 | ) | $ | (29,303,655 | ) | $ | (36,543,734 | ) | |||
See Accompanying Notes to Consolidated Financial Statements.
| 46 |
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| 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 at December 30, 2017 | 77,572,038 | $ | 775,720 | $ | 329,917,858 | $ | (17,238,669 | ) | $ | 3,564,779 | $ | (240,256,502 | ) | $ | 76,763,186 | $ | 616,661 | $ | 77,379,847 | |||||||||||||||||
| Vesting of restricted stock | 1,093,000 | 10,930 | (10,930 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 4,791,054 | — | — | — | 4,791,054 | — | 4,791,054 | |||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | (2,010,192 | ) | — | (2,010,192 | ) | (117,659 | ) | (2,127,851 | ) | |||||||||||||||||||||||
| Restricted stock for tax withholding obligations | (142,972 | ) | (1,430 | ) | (206,585 | ) | — | — | — | (208,015 | ) | — | (208,015 | ) | ||||||||||||||||||||||
| Distribution to noncontrolling interest holder | — | — | — | — | — | — | — | (699,105 | ) | (699,105 | ) | |||||||||||||||||||||||||
| Adoption of accounting standard | — | — | — | — | — | 3,059,383 | 3,059,383 | — | 3,059,383 | |||||||||||||||||||||||||||
| Sale of registered stock | ||||||||||||||||||||||||||||||||||||
| Sale of registered stock, shares | ||||||||||||||||||||||||||||||||||||
| Sale of treasury stock, net of costs | ||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | (34,533,542 | ) | (34,533,542 | ) | 51,050 | (34,482,492 | ) | ||||||||||||||||||||||||
| Balance at December 29, 2018 | 78,522,066 | 785,220 | 334,491,397 | (17,238,669 | ) | 1,554,587 | (271,730,661 | ) | 47,861,874 | (149,053 | ) | 47,712,821 | ||||||||||||||||||||||||
| Balance at December 29, 2018 | 78,522,066 | 785,220 | 334,491,397 | (17,238,669 | ) | 1,554,587 | (271,730,661 | ) | 47,861,874 | (149,053 | ) | 47,712,821 | ||||||||||||||||||||||||
| Vesting of restricted stock | 634,511 | 6,345 | (6,345 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 2,057,400 | — | — | — | 2,057,400 | — | 2,057,400 | |||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | 202,597 | — | 202,597 | — | 202,597 | |||||||||||||||||||||||||||
| Restricted stock for tax withholding obligations | (86,086 | ) | (861 | ) | (44,652 | ) | — | — | — | (45,513 | ) | — | (45,513 | ) | ||||||||||||||||||||||
| Sale of registered stock, net of costs | 7,979,181 | 79,792 | 7,958,737 | — | — | — | 8,038,529 | — | 8,038,529 | |||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | (29,506,252 | ) | (29,506,252 | ) | 132,030 | (29,374,222 | ) | ||||||||||||||||||||||||
| Balance at 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 | ||||||||||||||||||||||||
| Balance at 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 | ||||||||||||||||||||||||
| Vesting of restricted stock | 1,038,655 | 10,387 | (10,387 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 821,122 | — | — | — | 821,122 | — | 821,122 | |||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (272,750 | ) | — | (272,750 | ) | — | (272,750 | ) | ||||||||||||||||||||||||
| Restricted stock for tax withholding obligations | (80,792 | ) | (808 | ) | (139,118 | ) | — | — | — | (139,926 | ) | — | (139,926 | ) | ||||||||||||||||||||||
| Sale of treasury stock, net of costs | — | — | (3,615,261 | ) | 7,444,723 | — | — | 3,829,462 | — | 3,829,462 | ||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (4,411,112 | ) | (4,411,112 | ) | (119,813 | ) | (4,530,925 | ) | |||||||||||||||||||||||
| Balance at 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 | ||||||||||||||||
See Accompanying Notes to Consolidated Financial Statements.
| 47 |
KOPIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| 2020 | 2019 | 2018 | ||||||||||
| Fiscal year ended | 2020 | 2019 | 2018 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net loss | $ | (4,530,925 | ) | $ | (29,374,222 | ) | $ | (34,482,492 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | 651,083 | 792,221 | 1,958,680 | |||||||||
| Accretion of premium or discount on marketable debt securities | 7,762 | 21,838 | 15,948 | |||||||||
| Stock-based compensation | 821,122 | 2,057,400 | 4,791,054 | |||||||||
| Net loss (gain) on investment transactions | 29,356 | 3,858,453 | (2,849,816 | ) | ||||||||
| Income taxes | 116,536 | 105,036 | 4,185 | |||||||||
| Foreign currency (gains) losses | (289,471 | ) | (220,015 | ) | (1,096,487 | ) | ||||||
| Loss on sale of property and plant | — | 508,833 | 51,159 | |||||||||
| Impairment of assets | — | — | 2,526,669 | |||||||||
| Impairment of goodwill | — | 331,344 | 1,417,470 | |||||||||
| Change in allowance for bad debt | (763,159 | ) | 633,131 | (155,000 | ) | |||||||
| Write-off of excess inventory | 667,019 | 1,834,300 | 832,615 | |||||||||
| Change in warranty reserves | (1,172 | ) | (62,107 | ) | (79,633 | ) | ||||||
| Changes in assets and liabilities: | ||||||||||||
| Accounts receivable | (2,954,703 | ) | (3,944,859 | ) | 853,163 | |||||||
| Contract assets and unbilled receivables | (2,600,671 | ) | 2,168,581 | 865,474 | ||||||||
| Inventory | (1,332,139 | ) | (792,165 | ) | (1,656,196 | ) | ||||||
| Prepaid expenses, other current assets and other assets | (160,371 | ) | 821,340 | 113,015 | ||||||||
| Accounts payable and accrued expenses | 5,227,011 | (163,084 | ) | (1,208,848 | ) | |||||||
| Billings in excess of revenue earned | 695,565 | 397,121 | (4,742 | ) | ||||||||
| Net cash used in operating activities | (4,417,157 | ) | (21,026,854 | ) | (28,103,782 | ) | ||||||
| Cash flows from investing activities: | ||||||||||||
| Proceeds from sale of marketable debt securities | 12,148,117 | 7,454,139 | 26,646,078 | |||||||||
| Purchase of marketable debt securities | — | — | (5,697,329 | ) | ||||||||
| Equity investments purchase | — | (2,500,000 | ) | (1,000,000 | ) | |||||||
| Other assets | 193,186 | (41,031 | ) | (8,373 | ) | |||||||
| Capital expenditures | (542,862 | ) | (170,186 | ) | (1,183,131 | ) | ||||||
| Net cash provided by investing activities | 11,798,441 | 4,742,922 | 18,757,245 | |||||||||
| Cash flows from financing activities: | ||||||||||||
| Sale of treasury stock, net of costs | 3,829,462 | — | — | |||||||||
| Sale of registered stock, net of costs | — | 8,038,529 | — | |||||||||
| Settlements of restricted stock for tax withholding obligations | (139,926 | ) | (45,513 | ) | (208,015 | ) | ||||||
| Distribution to noncontrolling interest holder | — | — | (699,105 | ) | ||||||||
| Net cash provided by (used in) financing activities | 3,689,536 | 7,993,016 | (907,120 | ) | ||||||||
| Effect of exchange rate changes on cash | 12,802 | (6,184 | ) | (268,223 | ) | |||||||
| Net increase (decrease) in cash and cash equivalents | 11,083,622 | (8,297,100 | ) | (10,521,880 | ) | |||||||
| Cash and cash equivalents at beginning of year | 6,029,247 | 14,326,347 | 24,848,227 | |||||||||
| Cash and cash equivalents at end of year | $ | 17,112,869 | $ | 6,029,247 | $ | 14,326,347 | ||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Income taxes paid | $ | — | $ | — | $ | 1,374,000 | ||||||
| Construction in progress included in accrued expenses | $ | 257,000 | $ | — | $ | — | ||||||
See Accompanying Notes to Consolidated Financial Statements.
| 48 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As used in these notes, the terms “we,” “us,” “our,” “Kopin” and the “Company” mean Kopin Corporation and its subsidiaries, unless the context indicates another meaning.
Fiscal Year
The Company’s fiscal year ends on the last Saturday in December. The fiscal years ended December 26, 2020, December 28, 2019, and December 29, 2018 includes 52 weeks and are referred to as fiscal years 2020, 2019 and 2018, respectively, herein. Because our fiscal year ends on the last Saturday of December every seven years we have a fiscal year with 53 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Kopin Corporation, its wholly owned subsidiaries and a majority owned 80% subsidiary, eMDT America Inc. (“eMDT”), located in California (collectively the Company). Net loss attributable to noncontrolling interest in the Company’s Consolidated Statement of Operations represents the portion of the results of operations of which is allocated to the shareholders of the equity interests not owned by the Company. All intercompany transactions and balances have been eliminated.
Revenue Recognition
The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) effective December 31, 2017 and applied the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit.
Substantially all of our product revenues are either derived from the sales of components or subassemblies for use in defense applications or industrial headset systems. We also have development contracts for the design, manufacture and or modification of products for the U.S. government or prime contractors for the U.S. government and for customers that expects to sell into the industrial or consumer markets. The Company’s contracts with the U.S. government are typically subject to the Federal Acquisition Regulations (“FAR”) and are priced based on estimated or actual costs of producing goods. The FAR provides guidance on the types of costs that are allowable in establishing prices for goods provided under U.S. government contracts. The pricing for non-U.S. government contracts is based on the specific negotiations with each customer.
Our fixed-price contracts with the U.S. government or other customers may result in revenue recognized in excess of amounts currently billed. We disclose the excess of revenues over amounts actually billed as Contract assets and unbilled receivables on the balance sheet. Amounts billed and due from our customers are classified as Accounts receivable on the balance sheets. In some instances, the U.S. government retains a small portion of the contract price until completion of the contract. The portion of the payments retained until final contract settlement is not considered a significant financing component because the intent is to protect the customer. For contracts with the U.S. government and some commercial customers, we typically receive interim payments either as work progresses or by achieving certain milestones or based on a schedule in the contract. We recognize a liability for these advance payments in excess of revenue recognized and present it as Contract liabilities and billings in excess of revenue earned on the balance sheets. The advanced payment typically is not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract. For industrial and consumer purchase orders, we typically receive payments within 30 to 60 days of shipments of the product, although for some purchase orders, we may require an advanced payment prior to shipment of the product.
| 49 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
To determine the proper revenue recognition method for contracts with the same customer, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. For most of our development contracts and contracts with the U.S government, the customer contracts with us to provide a significant service of integrating a set of components into a single unit. Hence, the entire contract is accounted for as one performance obligation. Less frequently, however, we may promise to provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. In cases where we sell standard products, the observable standalone sales are used to determine the standalone selling price.
The Company recognizes revenue from a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
For certain contracts with the U.S. government, the Company recognizes revenue over time as we perform because of continuous transfer of control to the customer and the lack of an alternative use for the product. The continuous transfer of control to the customer is supported by liability clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. For contracts with commercial customers, while the contract may have a similar liability clause, our products historically have an alternative use and thus, revenue is recognized at a point in time.
In situations where control transfers over time, which occurs withrevenue is recognized based on the extent of progress towards completion of the performance obligation. We generally use the cost-to-cost approach to measure the extent of progress towards completion of the performance obligation for our contracts because we believe it best depicts the transfer of control ofassets to the Company's products or services. In certain instances, the Company is entitled to sales-based royalties under license agreements. These sales-based royalties are recognized when they are earned. Revenues from sales-based royalties under license agreements are shown under Research and development and other revenues on the Company's Consolidated Statements of Operations.
| Statement of Operations | As Reported | Balances Without Adoption of Topic 606 | Effect of Change Higher/(Lower) | ||||||||
| Net product revenues | $ | 19,211,115 | $ | 19,726,901 | $ | (515,786 | ) | ||||
| Research and development and other revenues | 5,253,890 | 5,600,066 | (346,176 | ) | |||||||
| Cost of product revenues | 15,831,441 | 16,809,343 | (977,902 | ) | |||||||
| Net loss attributable to Kopin Corporation | $ | (34,533,542 | ) | $ | (34,649,482 | ) | $ | 115,940 | |||
| Fiscal year ended | 2019 | 2018 | 2017 | |||||
| Point in time | 64 | % | 60 | % | 91 | % | ||
| Over time | 36 | % | 40 | % | 9 | % | ||
Accounting for design, development and production contracts requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of the work required to be performed on many of our contracts, the estimation of total revenue and cost at completion is complicated and subject to many variables. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect costs. We have to make assumptions regarding the number of labor hours required to complete a task, the complexity of the work to be performed, the availability and cost of materials, and performance by our subcontractors. For contract change orders, claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is considered probable. We have accounting policies in place to address these as well as other contractual and business arrangements to properly account for long-term contracts. If our estimate of total contract costs or our determination of whether the customer agrees that a milestone is achieved is incorrect, our revenue could be overstated or understated and the profits wouldor loss reported could be negatively impacted.subject to adjustment.
For our commercial customers, the Company’s revenue is recognized when obligations under the terms of a contract with our customer is satisfied and the Company transfers control of the products or services, which is generally upon delivery to the customer. Revenue is recorded as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Provisions for product returns and allowances are reductions in the transaction price and are recorded in the same period as the related revenues. We analyze historical returns, current economic trends and changes in customer demand when evaluating the adequacy of sales returns and other allowances. Certain product sales are made to distributors under agreements allowing for a limited right of return on unsold products. Sales to distributors are primarily made for sales to the distributors’ customers and not for stocking of inventory. Sales, value add and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
| 50 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The rights and benefits to the Company’s intellectual property are conveyed to certain customers through technology license agreements. These agreements may include other performance obligations including the sale of product to the customer. When the license is distinct from other obligations in the agreement, the Company treats the license and other performance obligations as separate performance obligations. Accordingly, the license is recognized at a point in time or over time based on the standalone selling price. The sale of materials is recognized at a point in time, which occurs with the transfer of control of the Company’s products or services. In certain instances, the Company is entitled to sales-based royalties under license agreements. These sales-based royalties are recognized when they are earned. Revenues from sales-based royalties under license agreements are shown under Research and development and other revenues on the Company’s Consolidated Statements of Operations.
In accordance with the new revenue standard requirements, the impact of adoption on the Company’s consolidated statement of operations for the fiscal year 2018 was as follows:
Schedule of Restated Consolidated Statement of Operations
| Statement of Operations | As Reported | Balances Without Adoption of Topic 606 | Effect of Change Higher/(Lower) | |||||||||
| Net product revenues | $ | 19,211,115 | $ | 19,726,901 | $ | (515,786 | ) | |||||
| Research and development and other revenues | 5,253,890 | 5,600,066 | (346,176 | ) | ||||||||
| Cost of product revenues | 15,831,441 | 16,809,343 | (977,902 | ) | ||||||||
| Net loss attributable to Kopin Corporation | $ | (34,533,542 | ) | $ | (34,649,482 | ) | $ | 115,940 | ||||
See Note 15. Segments and Disaggregation of Revenue for additional information regarding the disaggregation of the Company’s revenue by major source.
Contract Assets
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
Contract liabilities consist of advance payments and billings in excess of revenue recognized for the contract.
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:
Schedule of Satisfaction of Performance Obligations
| Fiscal year ended | 2020 | 2019 | 2018 | |||||||||
| Point in time | 34 | % | 64 | % | 60 | % | ||||||
| Over time | 66 | % | 36 | % | 40 | % | ||||||
The value of remaining performance obligations represents 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 December 26, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $25.5 million, which the Company expects to recognize revenue over the next 12 months. The remaining performance obligations represent amounts to be earned under government contracts, which are subject to cancellation.
| 51 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Research and Development Costs
Research and development expenses are incurred in support of internal display product development programs or programs funded by agencies or prime contractors of the U.S. government and commercial partners. Research and development costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication and packaging of experimental display products, and overhead, and are expensed immediately.
Cash and Cash Equivalents
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
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 fiscal years ended 2020, 2019 2018 and 2017.
Fair Value of Financial Instruments
Financial instruments consist of marketable debt securities, accounts receivable and certain current liabilities. These assets (excluding marketable securities which are recorded at fair value) and liabilities are carried at cost, which approximates fair value.
Inventory
Inventories are stated at standard cost adjusted to approximate the lower of cost (first-in, first-out method) or net realizable value. The Company adjusts inventory carrying value for the estimated obsolescence equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. The Company fully reserves for inventories and non-cancellable purchase orders for inventory deemed obsolete. The Company performs periodic reviews of inventory items to identify excess inventories on hand by comparing on-hand balances to anticipated usage using recent historical activity as well as anticipated or forecasted demand. If estimates of customer demand diminish further or market conditions become less favorable than those projected by the Company, additional inventory adjustments may be required.
Inventory consists of the following at December 28, 201926, 2020 and December 29, 2018:28, 2019:
Schedule of Inventory
| 2020 | 2019 | |||||||
| Raw materials | $ | 3,609,710 | $ | 2,630,156 | ||||
| Work-in-process | 565,986 | 711,475 | ||||||
| Finished goods | 280,060 | 427,065 | ||||||
| Total | $ | 4,455,756 | $ | 3,768,696 | ||||
| 52 |
| 2019 | 2018 | ||||||
| Raw materials | $ | 2,630,156 | $ | 2,548,139 | |||
| Work-in-process | 711,475 | 1,526,552 | |||||
| Finished goods | 427,065 | 722,547 | |||||
| $ | 3,768,696 | $ | 4,797,238 | ||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets, generally 3 to 10 years. Leasehold improvements and leased equipment are amortized over the shorter of the term of the lease or the useful life of the improvement or equipment. As discussed below,
Recognition and Measurement of Financial Assets and Liabilities
We periodically make equity investments in private companies, accounted for as an equity investment, whose values are difficult to determine. The Company uses the measurement alternative for equity investments without readily determinable fair values which is often referred to as cost method investments. When assessing investments in private companies for impairment, we consider such factors as, among other things, the share price from the investee'sinvestee’s latest financing round, the performance of the investee in relation to its own operating targets and its business plan, the investee'sinvestee’s revenue and cost trends, the liquidity and cash position, including its cash burn rate and market acceptance of the investee'sinvestee’s products and services. Because these are private companies which we do not control we may not be able to obtain all of the information we would want in order to make a complete assessment of the investment on a timely basis. Accordingly, our estimates may be revised if other information becomes available at a later date.
Product Warranty
The Company generally sells products with a limited warranty of product quality and a limited indemnification of customers against intellectual property infringement claims related to the Company’s products. The Company accrues for known warranty and indemnification issues if a loss is probable and can be reasonably estimated and accrues for estimated incurred but unidentified issues based on historical activity. Accrued warranty costs and warranty claims are not material in the periods presented.
Extended Warranties
Warranties
Asset Retirement Obligations
The Company recorded asset retirement obligations ("ARO"(“ARO”) liabilities of $0.3$0.3 million at December 26, 2020 and December 28, 2019 and December 29, 2018.2019. This represents the legal obligations associated with retirement of the Company’s assets when the timing and/or method of settling the obligation are conditional on a future event that may or may not be within the control of the Company. Changes in ARO liabilities for fiscal years 20192020 and 20182019 are as follows:
Schedule of Changes in Asset Retirement Obligations
| 2020 | 2019 | |||||||
| Beginning balance | $ | 261,883 | $ | 254,098 | ||||
| Exchange rate change | 9,457 | 7,785 | ||||||
| Ending balance | $ | 271,340 | $ | 261,883 | ||||
| 2019 | 2018 | ||||||
| Beginning balance | $ | 254,098 | $ | 269,877 | |||
| Exchange rate change | 7,785 | (15,779 | ) | ||||
| Ending balance | $ | 261,883 | $ | 254,098 | |||
| 53 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
The consolidated financial statements reflect provisions for federal, state, local and foreign income taxes. The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss and tax credit carryforwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company provides valuation allowances if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The 2017 Act imposes a U.S. tax on global intangible low taxed income (“GILTI”) that is earned by certain foreign affiliates owned by a U.S. shareholder. The Company has made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred.
Foreign Currency
Assets and liabilities of non-U.S. operations where the functional currency is other than the U.S. dollar are translated from the functional currency into U.S. dollars at year end exchange rates, and revenues and expenses are translated at average rates prevailing during the year. Resulting translation adjustments are accumulated as part of accumulated other comprehensive income. Transaction gains or losses are recognized in income or loss in the period in which they occur.
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 outstanding stock options and unvested restricted stock.
| 2019 | 2018 | 2017 | ||||||
| Nonvested restricted common stock | 1,863,124 | 2,213,249 | 2,629,274 | |||||
| 2020 | 2019 | 2018 | ||||||||||
| Nonvested restricted common stock | 3,051,874 | 1,863,124 | 2,213,249 | |||||||||
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk other than marketable securities consist principally of trade accounts receivable. Trade receivables are primarily derived from sales to manufacturers of consumer electronic devices and wireless components or militarydefense applications. The Company sells its products to customers worldwide and generally does not require collateral. The Company maintains a reserve for potential credit losses.
The Company primarily invests its excess cash in government backed and corporate debt securities that management believes to be of high credit worthiness, which bear lower levels of relative credit risk. The Company relies on rating agencies to ascertain the credit worthiness of its marketable securities and, where applicable, guarantees made by the Federal Deposit Insurance Company.
Other-than-Temporary Impairments
The Company conducts a review of its marketable debt securities on a quarterly basis for the presence of other-than-temporary impairment ("OTTI"(“OTTI”). The Company assesses whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the balance sheet date. Under these circumstances OTTI is considered to have occurred (1) if the Company intends to sell the security before recovery of its amortized cost basis; (2) if it is “more likely than not” the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis.
| 54 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company further estimates the amount of OTTI resulting from a decline in the creditworthiness of the issuer (credit-related OTTI) and the amount of non credit-related OTTI. Non credit-related OTTI can be caused by such factors as market illiquidity. Credit-related OTTI is recognized in earnings while non credit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (loss). The Company record a gain of approximately $0.2 million in fiscal year 2020 from the reversal of an OTTI previously recorded. The Company did not record any OTTI for the fiscal years 2020, 2019 2018 and 2017.
The fair value of nonvested restricted common stock awards is generally the quoted price of the Company’s equity shares on the date of grant. The nonvested restricted common stock awards require the employee to fulfill certain obligations, including remaining employed by the Company for periods ranging from to years (the vesting period) and in certain cases also require meeting either performance criteria or market condition. The performance criteria primarily consist of the achievement of established milestones. For nonvested restricted common stock awards which solely require the recipient to remain employed with the Company, the stock compensation expense is amortized over the anticipated service period. For nonvested restricted common stock awards which 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 service period. If the performance criteria are not met, no compensation cost is recognized, and any previously recognized compensation cost is reversed. The Company recognizes compensation costs on a straight-line basis over the requisite service period for time vested awards.
The value of restricted stock grants that vest based on market conditions is computed on the date of grant using the Monte Carlo model. The fair value of stock option awards is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. There were no stock options granted in fiscal years 2020, 2019 2018 or 2017.
Comprehensive Loss
Comprehensive loss is the total of net (loss) income and all other non-owner changes in equity including such items as unrealized holding (losses) gains on marketable equity and debt securities classified as available-for-sale and foreign currency translation adjustments.
The components of accumulated other comprehensive income are as follows:
Cumulative Translation Adjustment | Unrealized holding (loss) gain on marketable securities | Reclassifications of gain (loss) of marketable securities in net loss | Accumulated Other Comprehensive Income | ||||||||||||
| Balance as of December 31, 2016 | $ | 1,380,042 | $ | 239,213 | $ | (48,284 | ) | $ | 1,570,971 | ||||||
| Changes during year | 1,851,664 | 148,520 | (6,376 | ) | 1,993,808 | ||||||||||
| Balance as of December 30, 2017 | 3,231,706 | 387,733 | (54,660 | ) | 3,564,779 | ||||||||||
| Changes during year | (1,794,768 | ) | (264,949 | ) | 49,525 | (2,010,192 | ) | ||||||||
| Balance as of December 29, 2018 | 1,436,938 | 122,784 | (5,135 | ) | 1,554,587 | ||||||||||
| Changes during year | (206,580 | ) | 446,533 | (37,356 | ) | 202,597 | |||||||||
| Balance as of December 28, 2019 | $ | 1,230,358 | $ | 569,317 | $ | (42,491 | ) | $ | 1,757,184 | ||||||
| Cumulative Translation Adjustment | Unrealized holding (loss) gain on marketable securities | Reclassifications of gain (loss) of marketable securities in net loss | Accumulated Other Comprehensive Income | |||||||||||||
| Balance as of December 30, 2017 | $ | 3,231,706 | $ | 387,733 | $ | (54,660 | ) | $ | 3,564,779 | |||||||
| Changes during year | (1,794,768 | ) | (264,949 | ) | 49,525 | (2,010,192 | ) | |||||||||
| Balance as of December 29, 2018 | 1,436,938 | 122,784 | (5,135 | ) | 1,554,587 | |||||||||||
| Changes during year | (206,580 | ) | 446,533 | (37,356 | ) | 202,597 | ||||||||||
| Balance as of December 28, 2019 | 1,230,358 | 569,317 | (42,491 | ) | 1,757,184 | |||||||||||
| Changes during year | (67,852 | ) | (183,870 | ) | (21,028 | ) | (272,750 | ) | ||||||||
| Balance as of December 26, 2020 | $ | 1,162,506 | $ | 385,447 | $ | (63,519 | ) | $ | 1,484,434 | |||||||
Goodwill
We account for goodwill in accordance with ASC Topic 350. Under ASC Topic 350, goodwill is considered to have an indefinite life, and is carried at cost. Goodwill is not amortized, but is subject to an annual impairment test, as well as between annual tests when events or circumstances indicate that the carrying value may not be recoverable.
| 55 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company performsCompany’s policy is to perform impairment tests of goodwill at its reporting unit level.level when applicable. The goodwill valuations that are utilized to test these assets for impairment are dependingdepend on a number of significant estimates and assumptions, including macroeconomic conditions, overall growth rates, competitive activities, cost containment, Company business plans and the discount rate applied to cash flows. We believe these estimates and assumptions are reasonable and are comparable to those that would be used by other market participants. However, actual events and results could differ substantially from those used in our valuations. As of December 26, 2020 and December 28, 2019, the ending balance of goodwill was zero.
Impairment of Long-Lived Assets
The Company periodically reviews the carrying value of its long-lived assets to determine if facts and circumstances suggest that they may be impaired or that the amortization or depreciation period may need to be changed. The carrying value of a long-lived asset is considered impaired when the anticipated identifiable undiscounted cash flows from such asset are less than its carrying value. For assets that are to be held and used, impairment is measured based upon the amount by which the carrying amount of the asset exceeds its fair value.
Leases
Effective December 30, 2018 (the first day of fiscal year 2019), the Company adopted the requirements of the new lease standard Accounting Standards Update ("ASU"(“ASU”) 2016-02, Leases (Topic 842) using the modified retrospective approach, applying the new lease requirements at the beginning of fiscal year 2019. In addition, wethe Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows usit to carry forward the historical lease classification. The Company did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of right-of-use assets. The adoption of the standard resulted in the recognition of operating lease right-of-use assets of $3.7$3.7 million and operating lease liabilities of $3.8$3.8 million, of which $1.0$1.0 million was classified as current at the beginning of fiscal year 2019. The standard had no material impact on the Company'sCompany’s results of operations or cash flows and there was no cumulative impact on accumulated deficit as of December 30, 2018. In addition, new disclosures are provided to enable readers to assess the amount, timing and uncertainty of cash flows arising from leases.
The Company determines if an arrangement is a lease or contains an embedded lease at inception. For lease arrangements with both lease and non-lease components (e.g., common-area maintenance costs), the Company accounts for the non-lease components separately.
All of the Company'sCompany’s leases are operating leases. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of future lease payments over the lease term at the commencement date. The operating lease right-of-use assets also includes any initial direct costs and any lease payments made at or before the commencement date and is reduced for any unrestricted incentives received at or before the commencement date.
For the majority of the Company'sCompany’s leases, the discount rate used to determine the present value of the lease payments is the Company'sCompany’s incremental borrowing rate at the lease commencement date, as the implicit rate is not readily determinable. The discount rate represents a risk-adjusted rate on a secured basis and is the rate at which the Company would borrow funds to satisfy the scheduled lease liability payment streams commensurate with the lease term. On December 30, 2018, the discount rate used on existing leases at adoption was determined based on the remaining lease term using available data as of that date. For new or renewed leases starting in 2019, the discount rate is determined using available data at lease commencement and based on the lease term including any reasonably certain renewal periods.
Some of ourthe Company’s leases include options to extend or terminate the lease. The Company includes these options in the recognition of the Company'sCompany’s ROU assets and lease liabilities when it is reasonably certain that the Company will exercise the option. In most cases, the Company has concluded that renewal and early termination options are not reasonably certain of being exercised by the Company (and thus not included in our ROU asset and lease liability) unless there is an economic, financial or business reason to do so. None of our leases include variable lease-related payments, such as escalation clauses based on the consumer price index ("CPI"(“CPI”) rates or residual guarantees.
| 56 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):
Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which adds, amends and removes certain disclosure requirements related to fair value measurements. Among other changes, this standard requires certain additional disclosure surrounding Level 3 assets, including changes in unrealized gains or losses in other comprehensive income and certain inputs in those measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Certain amended or eliminated disclosures in this standard may be adopted early, while certain additional disclosure requirements in this standard can be adopted on its effective date. In addition, certain changes in the standard require retrospective adoption, while other changes must be adopted prospectively. The Company believes the standard will not have a material impact on our financial position, results of operations or liquidity.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 provide for simplified accounting to several income tax situations and removal of certain accounting exceptions. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim periods within those periods. The Company does not expect the impact of the adoption of ASU 2019-12 to be material to its consolidated financial statements.
2. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 26, 2020 and December 28, 20192019:
Schedule of Property Plant and Equipment
| Useful Life | 2020 | 2019 | ||||||||
| Equipment | 3-5 years | $ | 15,031,726 | $ | 16,344,040 | |||||
| Leasehold improvements | Life of the lease | 3,574,103 | 3,577,809 | |||||||
| Furniture and fixtures | 3 years | 101,777 | 101,777 | |||||||
| Equipment under construction | 374,010 | — | ||||||||
| 19,081,616 | 20,023,626 | |||||||||
| Accumulated depreciation and amortization | (17,454,686 | ) | (18,550,285 | ) | ||||||
| Property, plant and equipment, net | $ | 1,626,930 | $ | 1,473,341 | ||||||
December 29, 2018
:
| Useful Life | 2019 | 2018 | |||||||
| Equipment | 3-5 years | $ | 16,344,040 | $ | 16,824,384 | ||||
| Leasehold improvements | Life of the lease | 3,577,809 | 3,676,775 | ||||||
| Furniture and fixtures | 3 years | 101,777 | 523,736 | ||||||
| Equipment under construction | — | 436,806 | |||||||
| 20,023,626 | 21,461,701 | ||||||||
| Accumulated depreciation and amortization | (18,550,285 | ) | (18,862,859 | ) | |||||
| Property, plant and equipment, net | $ | 1,473,341 | $ | 2,598,842 | |||||
Depreciation expense for the fiscal years 2020, 2019, 2018 and 20172018 was approximately $0.7 million, $$0.8 million, $1.0 million and $1.0$0.9 million, respectively.
During the fiscal year 2018, the Company recorded asset impairment charges of $2.5$2.5 million associated with equipment that either is not currently being utilized or will not be utilized for its remaining useful life and is not recoverable.
3. Leases
The Company enters into operating leases primarily for manufacturing, engineering, research, administration and sales facilities, and information technology ("IT"(“IT”) equipment. At December 28, 201926, 2020 and December 29, 2018,28, 2019, the Company did not
Schedule of Lease Expense
| 2020 | ||||
| Operating lease cost | $ | 1,155,967 | ||
| 2019 | |||
| Operating lease cost | $ | 1,372,245 | |
| 57 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 28, 2019,26, 2020, the Company'sCompany’s future lease payments under non-cancellable leases were as follows:
| 2020 | 1,193,762 | ||
| 2021 | 1,055,188 | ||
| 2022 | 655,652 | ||
| 2023 | 201,333 | ||
| Thereafter | — | ||
| Total future lease payments | 3,105,935 | ||
| Less imputed interest | (272,650 | ) | |
| Total | 2,833,285 | ||
| 2020 | ||||
| 2021 | 1,065,879 | |||
| 2022 | 657,084 | |||
| 2023 | 201,333 | |||
| Total future lease payments | 1,924,296 | |||
| Less imputed interest | (115,546 | ) | ||
| Total | 1,808,750 |
Supplemental cash flow information related to leases was as follows:
| 2019 | ||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 1,146,090 | ||
Schedule of Supplemental Information Related To Leases
| 2020 | ||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 1,196,386 | ||
Other information related to leases was as follows:
| 2020 | ||||
| Weighted Average Discount Rate—Operating Leases | 6.15 | % | ||
| Weighted Average Remaining Lease Term—Operating Leases (in years) | ||||
Supplemental Information for Comparative Periods
Prior to December 30, 2018, the Company accounted for its leases in accordance with Topic 840, Leases. The Company leases various facilities.
Amounts incurred under operating leases are recorded as rent expense on a straight-line basis. Total rent expense in the fiscal yearsyear ended 2018 and 2017 werewas approximately $1.4 million and $1.5 million, respectively.
4. Contract Assets and Liabilities
Net contract assets (liabilities) consisted of the following:
| December 28, 2019 | December 29, 2018 | $ Change | % Change | |||||||||||
| Contract assets and unbilled receivables | $ | 921,082 | $ | 3,089,663 | $ | (2,168,581 | ) | (70 | )% | |||||
| Contract liabilities and billings in excess of revenue earned | (796,794 | ) | (388,933 | ) | (407,861 | ) | 105 | % | ||||||
| Contract liabilities, noncurrent | (6,557 | ) | (17,294 | ) | 10,737 | (62 | )% | |||||||
| Net contract assets | $ | 117,731 | $ | 2,683,436 | $ | (2,565,705 | ) | (96 | )% | |||||
| December 26, 2020 | December 28, 2019 | $ Change | % Change | |||||||||||||
| Contract assets and unbilled receivables | $ | 3,521,753 | $ | 921,082 | $ | 2,600,671 | 282 | % | ||||||||
| Contract liabilities and billings in excess of revenue earned | (1,493,847 | ) | (796,794 | ) | (696,053 | ) | 87 | % | ||||||||
| Contract liabilities, noncurrent | (5,069 | ) | (6,557 | ) | 1,488 | (23 | )% | |||||||||
| Net contract assets | $ | 2,022,837 | $ | 117,731 | $ | 1,905,106 | 1618 | % | ||||||||
The $2.6$1.9 million decreaseincrease in the Company'sCompany’s net contract assets from December 29, 201828, 2019 to December 28, 201926, 2020 was primarily due to change in ourits fixed-price contracts with the U.S. government that resulted in revenue recognized in excess of amounts billed and product revenue recognized over time for militarydefense programs.
The Company recognized revenue of approximately $0.8$0.6 million and $0.4$0.8 million related to our contract liabilities at December 26, 2020 and December 28, 2019, and December 29, 2018, respectively.
The Company did not recognize impairment losses on our contract assets during the years ended December 28, 201926, 2020 and December 29, 2018.
5. Business Combinations
In March 2017, we purchased 100% of the outstanding stock of NVIS, Inc. ("NVIS") , "), a producer of virtual reality systems for 3D applications, for $3.7 million. In addition to the $3.7 million the former selling shareholders of NVIS could earn an additional $2.0 million for meeting certain operating performance milestones through March of 2020.applications. As of December 28, 2019, we estimate that the former owners have earned approximately $1.8 million of the $2.0 million. In 2019, the Company made payments of $1.3 million to the former selling shareholders of NVIS for meeting certain operating performance milestones and the Company may be required to pay an additional $0.7 million if additional milestones are met and the selling shareholders remain employed with NVIS through March 2020. As there is a requirement to remain employed to earn the contingent payments, these contingent payments are being treated as compensation expense.
| Cash and marketable securities | $ | 2,600 | |
| Accounts receivable | 490,700 | ||
| Inventory | 768,400 | ||
| Other identifiable assets | 46,800 | ||
| Order backlog | 840,000 | ||
| Customer relationships | 1,000,000 | ||
| Developed technology | 460,000 | ||
| Trademark portfolio | 160,000 | ||
| Current liabilities | (480,500 | ) | |
| Net deferred tax liabilities | (1,084,000 | ) | |
| Goodwill | 1,489,000 | ||
| Total | $ | 3,693,000 | |
| Fiscal year ended | 2017 | |||
| Revenues | $ | 28,477,870 | ||
| Net loss | (26,302,840 | ) | ||
| Basic and diluted earnings per share | $ | (0.38 | ) | |
6. Goodwill and Intangibles
A rollforward of the Company'sCompany’s goodwill is as follows:
| Total | ||||
| Balance, December 30, 2017 | $ | 1,780,247 | ||
| Impairment of goodwill | (1,417,470 | ) | ||
| Change due to exchange rate fluctuations | (31,433 | ) | ||
| Balance, December 29, 2018 | 331,344 | |||
| Impairment of goodwill | (331,344 | ) | ||
| Balance, December 28, 2019 | $ | — | ||
| Total | ||||
| Balance, December 29, 2018 | $ | 331,344 | ||
| Impairment of goodwill | (331,344 | ) | ||
| Balance, December 28, 2019 | $ | 0 | ||
In 2019, the Company performed a qualitative impairment analysis of goodwill for e-MDT operating unit and determined that the discounted cash flows were not in excess of the carrying value. As a result of the analysis, the Company recorded impairment of goodwill of $0.3$0.3 million for the year ended December 28, 2019. At December 29, 2018, the Company performed an impairment analysis of goodwill based on a comparison of the discounted cash flows to the recorded carrying value of the reporting units, and determined that the discounted cash flows were not in excess of the carrying value of the NVIS reporting unit. At December 29, 2018, the Company decided to discontinue operations at its wholly-owned subsidiary, Kopin Software Ltd. and expects no future cash flows to support the carrying amount of goodwill. As a result, the Company recorded an impairment of goodwill for NVIS and Kopin Software Ltd. of $1.4$1.4 million for the year ended December 29, 2018. The input methods for goodwill are analyzed for impairment on a nonrecurring basis using fair value measurements with unobservable inputs, which is Level 3 in the fair value hierarchy.
The Company recognized $0.9 million and $1.6$0.9 million in amortization expense for the fiscal years ended 2018 and 2017, respectively, related to intangible assets. The Company did not recognize any amortization expense in 2020 or 2019. At December 28, 2019,26, 2020, the Company has a carrying value of $2.5$2.5 million and accumulated amortization of $2.5$2.5 million related to intangibles. The intangibles have no remaining useful life.
7. Financial Instruments
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:
Schedule of Fair Value Measurements of Financial Assets
| 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 and agency backed 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 | |||||||||
| 59 |
| Fair Value Measurement at December 28, 2019 Using: | |||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Cash and cash equivalents | $ | 6,029,247 | $ | 6,029,247 | $ | — | $ | — | |||||||
| U.S. government and agency backed securities | 8,296,870 | — | 8,296,870 | — | |||||||||||
| Corporate debt | 7,456,127 | — | 7,456,127 | — | |||||||||||
| Equity Investments | 4,537,159 | 386,711 | — | 4,150,448 | |||||||||||
| $ | 26,319,403 | $ | 6,415,958 | $ | 15,752,997 | $ | 4,150,448 | ||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| Fair Value Measurement at December 29, 2018 Using: | |||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Cash and cash equivalents | $ | 14,326,347 | $ | 14,326,347 | $ | — | $ | — | |||||||
| U.S. government and agency backed securities | 12,810,923 | — | 12,810,923 | — | |||||||||||
| Corporate debt | 10,107,093 | — | 10,107,093 | — | |||||||||||
| Equity Investments | 5,853,525 | 288,026 | — | 5,565,499 | |||||||||||
| $ | 43,097,888 | $ | 14,614,373 | $ | 22,918,016 | $ | 5,565,499 | ||||||||
| Fair Value Measurement at December 28, 2019 Using: | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Cash and cash equivalents | $ | 6,029,247 | $ | 6,029,247 | $ | — | $ | — | ||||||||
| U.S. government and agency backed securities | 8,296,870 | — | 8,296,870 | — | ||||||||||||
| Corporate debt | 7,456,127 | — | 7,456,127 | — | ||||||||||||
| Equity Investments | 4,537,159 | 386,711 | — | 4,150,448 | ||||||||||||
| $ | 26,319,403 | $ | 6,415,958 | $ | 15,752,997 | $ | 4,150,448 | |||||||||
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.
Changes in Level 3 investments are as follows:
| December 29, 2018 | Net unrealized gains/(losses) | Purchases, issuances and settlements | Transfers in and or out of Level 3 | December 28, 2019 | |||||||||||||||
| Equity Investments | $ | 5,565,499 | $ | (3,915,051 | ) | $ | 2,500,000 | $ | — | $ | 4,150,448 | ||||||||
| December 28, 2019 | Net unrealized gains | Impairment Charge | Transfers in and or out of Level 3 | December 26, 2020 | ||||||||||||||||
| Equity Investments | $ | 4,150,448 | $ | 259,186 | $ | (180,000 | ) | $ | — | $ | 4,229,634 | |||||||||
Equity Investments
Equity investments rarely traded or not quoted will generally have less (or no) pricing observability and a higher degree of judgment utilized in measuring fair value. Initial measurement of equity investments occurs when an observable price for the equity investment is available. The Company adopted the measurement alternative for equity investments without readily determinable fair values (often referred to as cost method investments) on a prospective basis. As a result, these investments will be revalued upon occurrence of an observable price change for similar investments and for impairments.
The Company acquired an equity interest in a company in the first quarter of 2018. The Company made a $1.0$1.9 million capital contribution during the three months ended March 31, 2018.in payments to acquire this interest as of December 26, 2020. The Company also contributed certain intellectual property. For the years ended December 28, 201926, 2020 and December 29, 2018,28, 2019, the Company recorded less than $0.1approximately $0.3 million and $0.3$0.1 million of unrealized gain and loss, respectively, on this equity investment respectively due to a fluctuation in the foreign exchange rate. As of December 28, 2019,26, 2020, the Company owned an approximate 11% interest in this investment and the fair value of this equity investment was $3.6$3.8 million at December 28, 2019.
In 2017 the Company had a warrant to acquire up to 15% of the next round of equity offered by a customer as part of the licensing of technology to the customer. The Company used the pricing and terms of the qualified financing round by the customer in determining the value of its Series A warrant and recorded a gain of $2.0 $2.0 million. The Company acquired an equity interest in the customer by exercising the Series A warrant into Series A shares in the second quarter of 2018 and recorded a loss of less than $0.1 $0.1 million. In addition, the Company acquired shares of the customer'scustomer’s Series B shares valued at $2.5 $2.5 million based on the fair value of the Series B at the closing in May 2019. During the second quarter of 2019, the Company recognized a $0.8 $0.8 million gain based on an observable price change for the Series A shares by using the customer'scustomer’s Series B capital structure, pricing of the shares being offered and the liquidation preference of Series B. In the fourth quarter of 2019, Kopinthe Company reviewed the financial condition and other factors of the customer and, as a result, in the fourth quarter of 2019, weCompany recorded an impairment charge of $5.2 $5.2 million to reduce ourits investment in the customer to zero as of December 28, 2019. As of December 26, 2020, the Company owned an approximate 3% interest in this investment.
| 60 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 WhisperTMAudio (“Whisper”) technology. As consideration for the transaction the Company received a 20.0% equity stake in Solos Incorporation (“Solos Inc.”). The Company's Company’s 20.0% equity stake will be maintained until Solos Inc. has raised a total of $7.5$7.5 million in equity financing. The Company will also receive a royalty in the single digits on the net sales amount of Solos products for a three-year period, after commencement of commercial production. The Company has performed the analysis and identified Solos Technology as a variable interest entity that should not be consolidated by Kopin, as Kopin is not the primary beneficiary of the entity. Kopin is not obligated to provide any additional funding support to Solos Inc., and ourits potential loss exposure is the value of the investment recorded on ourits books. Based on the price paid for equity by the other 80.0% owners of Solos Inc., volatility based on a peer group and assumptions about the risk free interest rate, the Company estimated the fair value of its’ equity holdings at $0.6$0.6 million and recorded $0.6$0.6 million gain on investment for this equity transaction as the basis of assets transferred was zero. In 2020 the Company performed impairment analysis and wrote the investment down to $0.4
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"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. Investments in available-for-sale marketable debt securities are as follows at December 28, 201926, 2020 and December 29, 2018:28, 2019:
Schedule of Available-for-sale Marketable Debt Securities
| Amortized Cost | Unrealized Gains/(Losses) | Fair Value | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| U.S. government and agency backed securities | $ | 1,003,941 | $ | 8,304,229 | $ | 19,179 | $ | (7,359 | ) | $ | 1,023,120 | $ | 8,296,870 | |||||||||||
| Corporate debt | 2,603,704 | 7,459,298 | 8,857 | (3,171 | ) | 2,612,561 | 7,456,127 | |||||||||||||||||
| Total | $ | 3,607,645 | $ | 15,763,527 | $ | 28,036 | $ | (10,530 | ) | $ | 3,635,681 | $ | 15,752,997 | |||||||||||
| Amortized Cost | Unrealized Losses | Fair Value | |||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||
| U.S. government and agency backed securities | $ | 8,304,229 | $ | 13,064,418 | $ | (7,359 | ) | $ | (253,495 | ) | $ | 8,296,870 | $ | 12,810,923 | |||||||||
| Corporate debt | 7,459,298 | 10,175,084 | (3,171 | ) | (67,991 | ) | 7,456,127 | 10,107,093 | |||||||||||||||
| Total | $ | 15,763,527 | $ | 23,239,502 | $ | (10,530 | ) | $ | (321,486 | ) | $ | 15,752,997 | $ | 22,918,016 | |||||||||
The contractual maturity of the Company’s marketable debt securities is as follows at December 28, 2019:26, 2020:
Less than One year | One to Five years | Total | |||||||||
| U.S. government and agency backed securities | $ | 299,250 | $ | 7,997,620 | $ | 8,296,870 | |||||
| Corporate debt | 3,346,615 | 4,109,512 | 7,456,127 | ||||||||
| Total | $ | 3,645,865 | $ | 12,107,132 | $ | 15,752,997 | |||||
| Less than One year | One to Five years | Total | ||||||||||
| U.S. government and agency backed securities | $ | — | $ | 1,023,120 | $ | 1,023,120 | ||||||
| Corporate debt | 1,102,171 | 1,510,390 | 2,612,561 | |||||||||
| Total | $ | 1,102,171 | $ | 2,533,510 | $ | 3,635,681 | ||||||
Sale of Treasury Stock:
During the three months and year ended December 26, 2020, the Company sold shares of its common stock for approximately $3.8 million, net of offering expenses, through the sale of shares under its At The Market Offering Agreement, dated December 14, 2018. Commissions paid were approximately $120,000. The Company intends to use the net proceeds from sales made under the ATM offering for working capital and other general corporate purposes.
Registered Sale of Equity Securities
On March 15, 2019, the Company sold million shares of registered common stock for gross proceeds of $8.0$8.0 million ($ per share), before deducting underwriting discounts and offering expenses paid by the Company of $0.7$0.7 million. This represented approximately 8.9%% of Kopin'sKopin’s total outstanding shares of common stock as of the date of purchase. The net proceeds from the offering were used for general corporate purposes, including working capital. On April 10, 2019, the Company sold million shares of registered common stock for gross proceeds of $0.8$0.8 million ($ per share), before deducting underwriting discounts and offering expenses paid by the Company of less than $0.1$0.1 million, pursuant to the partial exercise of the underwriters'underwriters’ overallotment option in connection with its March 15, 2019 public offering. This represented approximately 0.8% of Kopin's total outstanding shares of common stock as of the date of purchase.
| 61 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Restricted Stock Awards
In 2010,2020, the Company adopted a 20102020 Equity Incentive Plan ("2010(“2020 Equity Plan"Plan”) which authorized the issuance of shares of common stock to employees, non-employees, and the Board. The 20102020 Equity Plan was a successor to the Company’s 20012010 Equity Incentive Plan ("2001(“2010 Equity Plan"Plan”) and has been subsequently amended to increase the number of authorized shares to 14,100,000 as of December 28, 2019.. The number of shares authorized under the 2020 Equity Plan was shares of Company Stock. In addition, shares of the Company Stock underlying any outstanding award granted under the 2010 Equity Plan that expires, or is the numberterminated, surrendered or forfeited for any reason without issuance of such shares approved by the shareholders plus the number of shares of common stock which wereshall be available for grantthe award of new Grants under the 2001 Equity Plan, the number of shares of common stock which were the subject of awards outstanding under the 2001 Equity Plan and are forfeited, terminated, canceled or expire after the adoption of the 2010 Equity Plan and the number of shares of common stock delivered to the Company either in exercise of an 2001 Equity Plan award or in satisfaction of a tax withholding obligation. The term and vesting period for restricted stock awards granted under the 2010 Equity Plan are determined by the Board’s compensation committee.this Plan. As of December 28, 2019,26, 2020, the Company has approximately 1.4 million shares of common stock authorized and available for issuance under the Company’s 20102020 Equity Plan of which 0.5 million shares are committed to be issued for 2020 incentive program.Plan.
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 periods ranging from one two or fourto five 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.
| Shares | Weighted Average Grant Fair Value | |||||
| Outstanding at December 31, 2016 | 3,007,674 | $ | 3.21 | |||
| Granted | 1,152,000 | 3.40 | ||||
| Forfeited | (465,150 | ) | 3.82 | |||
| Vested | (1,065,250 | ) | 2.90 | |||
| Outstanding at December 30, 2017 | 2,629,274 | 3.31 | ||||
| Granted | 1,549,000 | 2.25 | ||||
| Forfeited | (872,025 | ) | 3.78 | |||
| Vested | (1,093,000 | ) | 3.05 | |||
| Balance at December 29, 2018 | 2,213,249 | 2.51 | ||||
| Granted | 645,000 | 0.57 | ||||
| Forfeited | (355,625 | ) | 2.95 | |||
| Vested | (639,500 | ) | 2.98 | |||
| Balance at December 28, 2019 | 1,863,124 | $ | 1.60 | |||
Schedule of Non-vested Restricted Stock Activity
| Shares | Weighted Average Grant Fair Value | |||||||
| Outstanding at December 30, 2017 | 2,629,274 | $ | 3.31 | |||||
| Granted | 1,549,000 | 2.25 | ||||||
| Forfeited | (872,025 | ) | 3.78 | |||||
| Vested | (1,093,000 | ) | 3.05 | |||||
| Outstanding at December 29, 2018 | 2,213,249 | 2.51 | ||||||
| Granted | 645,000 | 0.57 | ||||||
| Forfeited | (355,625 | ) | 2.95 | |||||
| Vested | (639,500 | ) | 2.98 | |||||
| Balance at December 28, 2019 | 1,863,124 | 1.60 | ||||||
| Granted | 2,381,000 | 1.42 | ||||||
| Forfeited | (153,595 | ) | 1.71 | |||||
| Vested | (1,038,655 | ) | 0.96 | |||||
| Balance at December 26, 2020 | 3,051,874 | $ | 1.67 | |||||
On December 31, 20172020 (fiscal year beginning 2018)2021), the Company amended the employment agreement with our CEO Dr. John Fan to expire on December 31, 202024, 2022 and as part of the amendment issued restricted stock grants. 640,000five tranches of shares of restricted stock whichgrants. The grants will vest upon the first achievement of the Company’s stock price reaching certain levels for consecutive trading day period following the grant date during whichdate. The Company used a Monte Carlo model to determine the Company's common stock trades at a price equal to or greater than $5.25, 150,000 shares of restricted stock will vest at the endestimated fair value of the first 20 consecutive trading day period followingawards. Total compensation expense resulting from the grant date during whichawards is approximately $ million. The Company’s stock price met the Company’s common stock trades at a price per share equal to or greater than $6.00, and 150,000 shares of restricted common stock will vest at the end ofrequired levels in the first 20 consecutive trading day period followingquarter of fiscal year 2021 and the grant date during whichtotal stock compensation expense was recognized in the Company’s common stock trades at a price per share equal to or greater than $7.00.first quarter of fiscal year 2021. All of the grants are subject to certain acceleration events and terminate on December 31, 2020.24, 2022. The following table describes inputs used to calculate fair value of the restricted stock grants:
| Expected volatility | 94.2 | % | ||
| Interest rate | 0.2 | % | ||
| Expected life (years) | 0.7 | |||
| Dividend yield | 0 | % |
| For the period ended December 29, 2018 | |||||||||||
| Performance price target | $ | 5.25 | $ | 6.00 | $ | 7.00 | |||||
| Expected volatility | 48.3 | % | 48.3 | % | 48.3 | % | |||||
| Interest rate | 1.97 | % | 1.97 | % | 1.97 | % | |||||
| Expected life (years) | 2 | 2 | 2 | ||||||||
| Dividend yield | — | % | — | % | — | % | |||||
| 62 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock-Based Compensation
| 2019 | 2018 | 2017 | |||||||||
| Cost of product revenues | $ | 102,629 | $ | 418,605 | $ | 490,481 | |||||
| Research and development | 295,872 | 725,112 | 799,485 | ||||||||
| Selling, general and administrative | 1,658,899 | 3,647,337 | 1,006,165 | ||||||||
| Total | $ | 2,057,400 | $ | 4,791,054 | $ | 2,296,131 | |||||
Schedule of Stock-based Compensation Expense
| 2020 | 2019 | 2018 | ||||||||||
| Cost of product revenues | $ | 113,517 | $ | 102,629 | $ | 418,605 | ||||||
| Research and development | 204,599 | 295,872 | 725,112 | |||||||||
| Selling, general and administrative | 503,006 | 1,658,899 | 3,647,337 | |||||||||
| Total | $ | 821,122 | $ | 2,057,400 | $ | 4,791,054 | ||||||
Unrecognized compensation expense for non-vested restricted common stock as of December 28, 201926, 2020 totaled $0.9$ million and is expected to be recognized over a weighted average period of approximately two years.
9. Concentrations of Risk
Ongoing credit evaluations of customers’ financial condition are performed and collateral, such as letters of credit, are generally not required. Customer’s accounts receivable balance as a percentage of total accounts receivable was as follows:
Percent of Gross Accounts Receivable | |||
| Customer | December 28, 2019 | December 29, 2018 | |
| Collins Aerospace | 23% | 11% | |
| DRS Network & Imaging Systems, LLC | 22% | 11% | |
| Scott Safety | 12% | * | |
| RealWear, Inc. | 10% | 31% | |
Schedules of Concentration of Risk, by Risk Factor
| Percent of Gross Accounts Receivable | ||||||||
| Customer | December 26, 2020 | December 28, 2019 | ||||||
| Collins Aerospace | 45 | % | 23 | % | ||||
| DRS Network & Imaging Systems, LLC | 15 | % | 22 | % | ||||
| Scott Safety | * | 12 | % | |||||
| RealWear, Inc. | * | 10 | % | |||||
Note: The symbol “*” indicates that accounts receivables from that customer were less than 10% of the Company’s total accounts receivable.
Sales to significant non-affiliated customers for fiscal years 2020, 2019, 2018 and 2017,2018, as a percentage of total revenues, is as follows:
Sales as a Percent of Total Revenue | |||||
| Fiscal Year | |||||
| Customer | 2019 | 2018 | 2017 | ||
| Military Customers in Total | 30% | 36% | 48% | ||
| Collins Aerospace | * | 20% | 10% | ||
| DRS Network & Imaging Systems, LLC | 17% | * | 10% | ||
| General Dynamics | * | 11% | * | ||
| RealWear, Inc. | 20% | * | * | ||
| U.S. Army | * | * | 12% | ||
| Funded Research and Development Contracts | 17% | 20% | 11% | ||
| Sales as a Percent of Total Revenue | ||||||||||||
| Fiscal Year | ||||||||||||
| Customer | 2020 | 2019 | 2018 | |||||||||
| Defense Customers in Total | 50 | % | 30 | % | 36 | % | ||||||
| General Dynamics | * | * | 11 | % | ||||||||
| DRS Network & Imaging Systems, LLC | 35 | % | 17 | % | * | |||||||
| Collins Aerospace | 27 | % | * | 20 | % | |||||||
| RealWear, Inc. | * | 20 | % | * | ||||||||
| Funded Research and Development Contracts | 25 | % | 17 | % | 20 | % | ||||||
Note: The symbol “*” indicates that sales to that customer were less than 10% of the Company’s total revenues. The caption "Military“Defense Customers in Total"Total” excludes research and development contracts.
| 63 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Income Taxes
The (benefit) provision for income taxes from continuing operations consists of the following for the fiscal years indicated:
| Fiscal Year | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Current | |||||||||||
| State | $ | 4,000 | $ | 5,000 | $ | 5,000 | |||||
| Foreign | 104,000 | 25,000 | (568,000 | ) | |||||||
| Total current provision (benefit) | 108,000 | 30,000 | (563,000 | ) | |||||||
| Deferred | |||||||||||
| Federal | (5,165,000 | ) | (7,307,000 | ) | 15,461,000 | ||||||
| State | (2,341,000 | ) | (360,000 | ) | (493,000 | ) | |||||
| Foreign | (56,000 | ) | 300,000 | (187,000 | ) | ||||||
| Change in valuation allowance | 7,562,000 | 7,367,000 | (17,181,000 | ) | |||||||
| Total (benefit) deferred provision | — | — | (2,400,000 | ) | |||||||
| Total provision (benefit) for income taxes | $ | 108,000 | $ | 30,000 | $ | (2,963,000 | ) | ||||
| Fiscal Year | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Current | ||||||||||||
| State | $ | — | $ | 4,000 | $ | 5,000 | ||||||
| Foreign | 129,000 | 104,000 | 25,000 | |||||||||
| Total current provision | 129,000 | 108,000 | 30,000 | |||||||||
| Deferred | ||||||||||||
| Federal | (1,075,000 | ) | (5,165,000 | ) | (7,307,000 | ) | ||||||
| State | (321,000 | ) | (2,341,000 | ) | (360,000 | ) | ||||||
| Foreign | (19,000 | ) | (56,000 | ) | 300,000 | |||||||
| Change in valuation allowance | 1,415,000 | 7,562,000 | 7,367,000 | |||||||||
| Total (benefit) deferred provision | — | — | — | |||||||||
| Total provision for income taxes | $ | 129,000 | $ | 108,000 | $ | 30,000 | ||||||
The following table sets forth the changes in the Company'sCompany’s balance of unrecognized tax benefits for the year ended:
| Total | |||
| Unrecognized tax benefits at December 30, 2017 | $ | 394,000 | |
| Gross increases—prior year tax positions | — | ||
| Unrecognized tax benefits at December 29, 2018 | 394,000 | ||
| Gross increases—current year tax positions | — | ||
| Unrecognized tax benefits at December 28, 2019 | $ | 394,000 | |
Schedule of Unrecognized Tax Benefit
| Total | ||||
| Unrecognized tax benefits at December 29, 2018 | $ | 394,000 | ||
| Gross increases—prior year tax positions | — | |||
| Gross increases—current year tax positions | - | |||
| Unrecognized tax benefits at December 28, 2019 | 394,000 | |||
| Unrecognized tax benefits at December 28, 2019 | 394,000 | |||
| Gross increases—current year tax positions | — | |||
| Unrecognized tax benefits at December 26, 2020 | $ | 394,000 | ||
U.S. GAAP requires applying a 'more‘more likely than not'not’ threshold to the recognition and derecognition of uncertain tax positions either taken or expected to be taken by the Company'sCompany’s income tax returns. The total amount of our gross tax liability for tax positions that may not be sustained under a 'more‘more likely than not'not’ threshold amounts to $0.4$0.4 million as of December 28, 201926, 2020 and December 29, 2018.28, 2019. The Company'sCompany’s policy regarding the classification of interest and penalties is to include these amounts as a component of income tax expense. The total amount of accrued interest and penalties related to the Company'sCompany’s unrecognized tax benefits was $0.8$0.9 million and $0.5$0.8 million as of December 26, 2020 and December 28, 2019 and December 29, 2018 respectively.
Net operating losses were not utilized in 2020, 2019, 2018 and 20172018 to offset federal and state taxes.
| 64 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The actual income tax (benefit) provision reported from operations are different than those which would have been computed by applying the federal statutory tax rate to loss before income tax (benefit) provision. A reconciliation of income tax (benefit) provision from continuing operations as computed at the U.S. federal statutory income tax rate to the provision for income tax benefit is as follows:
| Fiscal Year | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Tax provision at federal statutory rates | $ | (6,196,000 | ) | $ | (7,515,000 | ) | $ | (9,884,000 | ) | ||
| State tax liability | 4,000 | 5,000 | 5,000 | ||||||||
| Foreign deferred tax rate differential | (64,000 | ) | (39,000 | ) | 15,000 | ||||||
| Foreign withholding | — | 301,000 | (771,000 | ) | |||||||
| Outside basis in Kowon, net unremitted earnings | — | (468,000 | ) | (2,888,000 | ) | ||||||
| Permanent items | 1,964,000 | 186,000 | 774,000 | ||||||||
| Increase in net state operating loss carryforwards | (1,985,000 | ) | (406,000 | ) | (300,000 | ) | |||||
| Utilization of net operating losses for U.K. research and development refund | (148,000 | ) | — | — | |||||||
Provision to tax return adjustments and tax rate change (1) | 803,000 | (76,000 | ) | 24,833,000 | |||||||
| Tax credits | (1,931,000 | ) | 239,000 | 24,000 | |||||||
| Non-deductible 162M compensation limitations | — | 13,000 | 199,000 | ||||||||
| Non-deductible equity compensation | 16,000 | 290,000 | 1,901,000 | ||||||||
| Uncertain tax position for transfer pricing | 105,000 | 91,000 | 203,000 | ||||||||
| Other, net | (22,000 | ) | 45,000 | 107,000 | |||||||
| Change in valuation allowance | 7,562,000 | 7,364,000 | (17,181,000 | ) | |||||||
| Total provision (benefit) | $ | 108,000 | $ | 30,000 | $ | (2,963,000 | ) | ||||
Schedule of Effective Income Tax Rate Reconciliation
| Fiscal Year | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Tax provision at federal statutory rates | $ | (925,000 | ) | $ | (6,196,000 | ) | $ | (7,515,000 | ) | |||
| State tax liability | — | 4,000 | 5,000 | |||||||||
| Foreign deferred tax rate differential | (38,000 | ) | (64,000 | ) | (39,000 | ) | ||||||
| Foreign withholding | — | — | 301,000 | |||||||||
| Outside basis in Kowon, net unremitted earnings | — | — | (468,000 | ) | ||||||||
| Permanent items | 238,000 | 1,964,000 | 186,000 | |||||||||
| Increase in net state operating loss carryforwards | (233,000 | ) | (1,985,000 | ) | (406,000 | ) | ||||||
| Utilization of net operating losses for U.K. research and development refund | (151,000 | ) | (148,000 | ) | — | |||||||
| Provision to tax return adjustments and tax rate change | (180,000 | ) | 803,000 | (76,000 | ) | |||||||
| Tax credits | 9,000 | (1,931,000 | ) | 239,000 | ||||||||
| Non-deductible 162M compensation limitations | — | — | 13,000 | |||||||||
| Equity compensation | (121,000 | ) | 16,000 | 290,000 | ||||||||
| Uncertain tax position for transfer pricing | 129,000 | 105,000 | 91,000 | |||||||||
| Other, net | (14,000 | ) | (22,000 | ) | 45,000 | |||||||
| Change in valuation allowance | 1,415,000 | 7,562,000 | 7,364,000 | |||||||||
| Total provision | $ | 129,000 | $ | 108,000 | $ | 30,000 | ||||||
Pretax foreign income from continuing operations was approximately $1.3$1.0 million for the fiscal year ended 2020, $1.3 million for fiscal year ended 2019, and pretax foreign loss from continuing operations was approximately $0.7$0.7 million for fiscal year ended 2018 and pretax foreign income from continuing operations was approximately $0.4 million for fiscal year ended 2017.2018. Deferred income taxes are provided to recognize the effect of temporary differences between tax and financial reporting. Deferred income tax assets and liabilities consist of the following:
Schedule of Deferred Tax Assets and Liabilities
| Fiscal Year | ||||||||
| 2020 | 2019 | |||||||
| Deferred tax liability: | ||||||||
| Foreign withholding liability | $ | (554,000 | ) | $ | (525,000 | ) | ||
| Deferred tax assets: | ||||||||
| Federal net operating loss carryforwards | 46,311,000 | 44,820,000 | ||||||
| State net operating loss carryforwards | 5,454,000 | 5,097,000 | ||||||
| Foreign net operating loss carryforwards | 1,319,000 | 1,293,000 | ||||||
| Equity awards | 549,000 | 428,000 | ||||||
| Tax credits | 9,153,000 | 9,161,000 | ||||||
| Property, plant and equipment | 577,000 | 524,000 | ||||||
| Unrealized losses on investments | 2,860,000 | 2,641,000 | ||||||
| Other | 757,000 | 1,603,000 | ||||||
| Net deferred tax assets | 66,426,000 | 65,042,000 | ||||||
| Valuation allowance | (66,980,000 | ) | (65,566,000 | ) | ||||
| $ | (554,000 | ) | $ | (524,000 | ) | |||
| 65 |
| Fiscal Year | |||||||
| 2019 | 2018 | ||||||
| Deferred tax liability: | |||||||
| Foreign withholding liability | $ | (525,000 | ) | $ | (538,000 | ) | |
| Deferred tax assets: | |||||||
| Federal net operating loss carryforwards | 44,820,000 | 41,755,000 | |||||
| State net operating loss carryforwards | 5,097,000 | 3,114,000 | |||||
| Foreign net operating loss carryforwards | 1,293,000 | 1,259,000 | |||||
| Equity awards | 428,000 | 444,000 | |||||
| Tax credits | 9,161,000 | 7,231,000 | |||||
| Property, plant and equipment | 524,000 | 640,000 | |||||
| Unrealized losses on investments | 2,641,000 | 1,848,000 | |||||
| Other | 1,603,000 | 1,707,000 | |||||
| Net deferred tax assets | 65,042,000 | 57,460,000 | |||||
| Valuation allowance | (65,566,000 | ) | (58,006,000 | ) | |||
| $ | (524,000 | ) | $ | (546,000 | ) | ||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The valuation allowance was approximately $65.6$67.0 million and $58.0$65.6 million at December 28, 201926, 2020 and December 29, 2018,28, 2019, respectively, primarily driven by U.S. net operating loss carryforwards ("NOLs"(“NOLs”) and tax credits that the Company does not believe will ultimately be realized.
Deferred tax assets and liabilities—The Company has remeasured certain deferred tax assets and liabilities, excluding those items included on the Company's 2017 tax return, based on the rates the Company expects to realize the deferred tax assets and liabilities at in the future, which is generally 21%. The amount recorded related to the remeasurement of the Company's deferred tax balance was approximately $25.1 million of tax expense.
As of December 28, 2019,26, 2020, the Company has available for tax purposes NOLs of $160.3 $160.5 millionexpiring 2021 through 20372038 and $52.9$60.1 million that have an unlimited carryover period. The Company has recognized a full valuation allowance on its net deferred tax assets as the Company has concluded that such assets are not more likely than not to be realized.
The decrease in valuation allowance during fiscal year 2017 was a result of decreases in the federal tax rate as part of the Tax Act and a reduction in the valuation allowance as a result of deferred tax liabilities assumed as part of the acquisition of NVIS.
Under the provisions of Section 382, certain substantial changes in Kopin’s ownership may limit in the future the amount of net operating loss carryforwards that could be used annually to offset future taxable income and income tax liability.
The Company’s income tax returns have not been examined by the Internal Revenue Service and are subject to examination for all years since 2001.2001. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states.
International jurisdictions have statutes of limitations generally ranging from three to twenty years after filing of the respective return. Years still open to examination by tax authorities in major jurisdictions include Korea (2009 onward)(2009 onward), Japan (2009 onward)(2009 onward), Hong Kong (2011 onward)(2011 onward) and United Kingdom (2014 onward)(2014 onward). The Company is not currently under examination in these jurisdictions.
11. Accrued Warranty
The Company warrants its products against defect for 12 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 fiscal years ended 2020, 2019 2018 and 20172018 are as follows:
| Fiscal Year Ended | |||||||||||
| December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||
| Beginning balance | $ | 571,000 | $ | 649,000 | $ | 518,000 | |||||
| Additions | 471,000 | 159,000 | 328,000 | ||||||||
| Claim and reversals | (533,000 | ) | (237,000 | ) | (197,000 | ) | |||||
| Ending Balance | $ | 509,000 | $ | 571,000 | $ | 649,000 | |||||
Schedule of Accrued Warranty
| Fiscal Year Ended | ||||||||||||
| December 26, 2020 | December 28, 2019 | December 29, 2018 | ||||||||||
| Beginning balance | $ | 509,000 | $ | 571,000 | $ | 649,000 | ||||||
| Additions | 435,000 | 471,000 | 159,000 | |||||||||
| Claim and reversals | (436,000 | ) | (533,000 | ) | (237,000 | ) | ||||||
| Ending Balance | $ | 508,000 | $ | 509,000 | $ | 571,000 | ||||||
12. Employee Benefit Plan
The Company has an employee benefit plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. In 2019,2020, the plan allowed employees to defer an amount of their annual compensation up to a current maximum of $19,500$19,000 if they are under the age of 50 and $26,000$25,000 if they are over the age of 50.50. The Company matches 5050%% of all deferred compensation on the first 66%% of each employee’s deferred compensation. The amount charged to operations in connection with this plan was approximately $0.3$0.3 million in fiscal years 2020, 2019 and 2018.2019, 2018
and 2017.
| 66 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Commitments
The Company entered into an agreement in August 2017 to acquire an approximate 3.5%3.5% equity interest in Kunming BOE Display Technology Co., Ltd. ("BOE"(“BOE”), which is located in China, for 35.0 million Chinese Yuan Renminbi (approximately $5.0$5.0 million). The Company's 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 whichIn 2020 the Company intendsexecuted an agreement to usetransfer its equity purchase obligation to manufacture its products. Theanother company. Accordingly, the Company was unable to make its scheduled capital contributionis no longer obligated and has received an extension from BOE postponing its capital contribution until July 2022. will not be making the investment.
14. Litigation
The Company may engage in legal proceedings arising in the ordinary course of business. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of such matters and our business, financial condition, results of operations or cash flows could be affected in any particular period.
BlueRadios, Inc. v. Kopin Corporation, Civil Action No. 16-02052-JLK (D. Col.):
On August 12, 2016, BlueRadios, Inc. ("BlueRadios"(“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.
.
| 67 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Segments and Disaggregation of Revenue
Total long-livelong-lived assets by country at December 26, 2020 and December 28, 2019 and December 29, 2018 were:
Total Long-lived Assets (in thousands) | 2019 | 2018 | |||||
| U.S. | $ | 1,233 | $ | 2,101 | |||
| United Kingdom | 177 | 197 | |||||
| China | 37 | 251 | |||||
| Japan | 26 | 50 | |||||
| Total | $ | 1,473 | $ | 2,599 | |||
Schedule of Long-lived Assets by Geographic Areas
| Total Long-lived Assets (in thousands) | 2020 | 2019 | ||||||
| U.S. | $ | 3,028 | $ | 3,647 | ||||
| United Kingdom | 329 | 442 | ||||||
| China | 11 | 37 | ||||||
| Japan | 39 | 101 | ||||||
| Total | $ | 3,407 | $ | 4,227 | ||||
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.
Total revenue by geographical area for the fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018 and December 30, 2017:
| 2019 | 2018 | 2017 | |||||||||||||||||
| (In thousands, except percentages) | Revenue | % of Total | Revenue | % of Total | Revenue | % of Total | |||||||||||||
| U.S. | $ | 14,946 | 51 | % | $ | 14,436 | 59 | % | 16,540 | 59 | % | ||||||||
| Other Americas | 134 | — | 123 | 1 | % | 86 | — | % | |||||||||||
| Total Americas | 15,080 | 51 | % | 14,559 | 60 | % | 16,626 | 60 | % | ||||||||||
| Asia-Pacific | 11,768 | 40 | % | 6,916 | 28 | % | 5,406 | 19 | % | ||||||||||
| Europe | 2,628 | 9 | % | 2,948 | 12 | % | 5,809 | 21 | % | ||||||||||
| Other | 42 | — | % | 42 | — | % | — | — | % | ||||||||||
| Total Revenues | $ | 29,519 | 100 | % | $ | 24,465 | 100 | % | 27,841 | 100 | % | ||||||||
Schedule of Segment Information by Revenue Type
| 2020 | 2019 | 2018 | ||||||||||||||||||||||
| (In thousands, except percentages) | Revenue | % of Total | Revenue | % of Total | Revenue | % of Total | ||||||||||||||||||
| U.S. | $ | 33,031 | 82 | % | $ | 14,946 | 51 | % | 14,436 | 59 | % | |||||||||||||
| Other Americas | 101 | 0 | 134 | 0 | % | 123 | 1 | % | ||||||||||||||||
| Total Americas | 33,132 | 82 | % | 15,080 | 51 | % | 14,559 | 60 | % | |||||||||||||||
| Asia-Pacific | 5,798 | 15 | % | 11,768 | 40 | % | 6,916 | 28 | % | |||||||||||||||
| Europe | 1,198 | 3 | % | 2,628 | 9 | % | 2,948 | 12 | % | |||||||||||||||
| Other | — | 0 | % | 42 | 0 | % | 42 | 0 | % | |||||||||||||||
| Total Revenues | $ | 40,128 | 100 | % | $ | 29,519 | 100 | % | 24,465 | 100 | % | |||||||||||||
Total revenue by display application for the fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018 and December 30, 2017 was as follows:
Schedule of Segment Reporting Information, by Segment
| (In thousands) | 2020 | 2019 | 2018 | |||||||||
| Defense | $ | 20,231 | $ | 8,729 | $ | 8,724 | ||||||
| Industrial | 6,882 | 9,717 | 6,066 | |||||||||
| Consumer | 852 | 1,777 | 4,146 | |||||||||
| R&D | 10,123 | 4,983 | 5,254 | |||||||||
| Other | 553 | 61 | 275 | |||||||||
| License and royalties | 1,487 | 4,252 | — | |||||||||
| Total Revenues | $ | 40,128 | $ | 29,519 | $ | 24,465 | ||||||
| 68 |
| (In thousands) | 2019 | 2018 | 2017 | ||||||||
| Military | $ | 8,729 | $ | 8,724 | $ | 13,438 | |||||
| Industrial | 9,717 | 6,066 | 5,478 | ||||||||
| Consumer | 1,777 | 4,146 | 4,406 | ||||||||
| R&D | 4,983 | 5,254 | 2,947 | ||||||||
| Other | 61 | 275 | 1,573 | ||||||||
| License and royalties | 4,252 | — | — | ||||||||
| Total Revenues | $ | 29,519 | $ | 24,465 | $ | 27,841 | |||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Selected Quarterly Financial Information (Unaudited)
The following tables present Kopin’s quarterly operating results for the fiscal years ended December 26, 2020 and December 28, 2019 and December 29, 2018.2019. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited consolidated quarterly results when read in conjunction with Kopin’s audited consolidated financial statements and related notes. These operating results are not necessarily indicative of the results of any future period.
Quarterly Periods During Fiscal Year Ended December 28, 2019:26, 2020:
Schedule of Quarterly Financial Information
| (in thousands, except per share data) | Three months ended March 28, 2020 | Three months ended June 27, 2020 | Three months ended September 26, 2020 | Three months ended December 26, 2020 | ||||||||||||
| Total revenue | $ | 7,878 | $ | 8,815 | $ | 9,513 | $ | 13,922 | ||||||||
| Gross profit (2) | 271 | 1,891 | 1,662 | 3,295 | ||||||||||||
| (Loss) income from operations | (3,541 | ) | (1,095 | ) | (1,108 | ) | 981 | |||||||||
| Net (loss) income attributable to the controlling interest | (3,596 | ) | (1,122 | ) | (957 | ) | 1,263 | |||||||||
| Net (loss) income per share (1): | ||||||||||||||||
| Basic | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | 0.02 | |||||
| Diluted | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | 0.02 | |||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic | 82,536 | 82,569 | 82,596 | 81,689 | ||||||||||||
| Diluted | 82,536 | 82,569 | 82,596 | 82,196 | ||||||||||||
| (in thousands, except per share data) | Three months ended March 30, 2019 | Three months ended June 29, 2019(3) | Three months ended September 28, 2019 | Three months ended December 28, 2019 | |||||||||||
| Total revenue | $ | 5,543 | $ | 9,110 | $ | 6,139 | $ | 8,727 | |||||||
Gross profit (2) | (1,263 | ) | (808 | ) | 265 | 1,188 | |||||||||
| Loss from operations | (11,584 | ) | (4,838 | ) | (6,402 | ) | (3,556 | ) | |||||||
| Net loss attributable to the controlling interest | (11,331 | ) | (4,260 | ) | (6,625 | ) | (7,290 | ) | |||||||
Net loss per share (1): | |||||||||||||||
| Basic and diluted | $ | (0.15 | ) | $ | (0.05 | ) | $ | (0.08 | ) | $ | (0.09 | ) | |||
| Weighted average number of common shares outstanding: | |||||||||||||||
| Basic and diluted | 74,969 | 81,950 | 82,054 | 82,155 | |||||||||||
| (1) | |
| Net loss per share is computed independently for each of the quarters presented; accordingly, the sum of the quarterly net income per share may not equal the total computed for the year. |
| (2) | Gross profit is defined as net product revenues less cost of product revenues. |
Quarterly Periods During Fiscal Year Ended December 29, 2018:
| (in thousands, except per share data) | Three months ended March 31, 2018 (3) | Three months ended June 30, 2018 | Three months ended September 29, 2018 | Three months ended December 29, 2018 | |||||||||||
| Total revenue | $ | 5,654 | $ | 5,944 | $ | 5,126 | $ | 7,741 | |||||||
Gross profit (2) | 983 | 974 | (16 | ) | 1,439 | ||||||||||
| Loss from operations | (9,792 | ) | (8,992 | ) | (10,299 | ) | (10,884 | ) | |||||||
| Net loss attributable to the controlling interest | (5,536 | ) | (9,241 | ) | (9,791 | ) | (9,966 | ) | |||||||
Net loss per share (1): | |||||||||||||||
| Basic and diluted | $ | (0.08 | ) | $ | (0.13 | ) | $ | (0.13 | ) | $ | (0.14 | ) | |||
| Weighted average number of common shares outstanding: | |||||||||||||||
| Basic and diluted | 73,078 | 73,095 | 73,135 | 73,317 | |||||||||||
| (in thousands, except per share data) | Three months 2019 | Three months 2019(3) | Three months ended September 28, 2019 | Three months ended December 28, 2019 | ||||||||||||
| Total revenue | $ | 5,543 | $ | 9,110 | $ | 6,139 | $ | 8,727 | ||||||||
| Gross profit (2) | (1,263 | ) | (808 | ) | 265 | 1,188 | ||||||||||
| Loss from operations | (11,584 | ) | (4,838 | ) | (6,402 | ) | (3,556 | ) | ||||||||
| Net loss attributable to the controlling interest | (11,331 | ) | (4,260 | ) | (6,625 | ) | (7,290 | ) | ||||||||
| Net loss per share (1): | ||||||||||||||||
| Basic and diluted | $ | (0.15 | ) | $ | (0.05 | ) | $ | (0.08 | ) | $ | (0.09 | ) | ||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic and diluted | 74,969 | 81,950 | 82,054 | 82,155 | ||||||||||||
| (1) | |
| Net loss per share is computed independently for each of the quarters presented; accordingly, the sum of the quarterly net income per share may not equal the total computed for the year. |
| (2) | Gross profit is defined as net product revenues less cost of product revenues. |
| (3) | Includes |
| 69 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Related Party Transactions
The Company may from time to time enter into agreements with shareholders, 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 in order to enhance its product offering.
The Company and Goertek have entered into agreements to jointly develop and commercialize a range of technologies and wearable products. These include: a mutually exclusive supply and manufacturing arrangement for a certain display product for twenty four months after mass production begins; an agreement that provides the Company with the right of first refusal to invest in certain manufacturing capacity for certain products with Goertek; an agreement whereby Goertek will provide system level original equipment manufacturing services for the Company'sCompany’s wearable products; an arrangement whereby the Company will supply display modules for Goertek'sGoertek’s virtual reality and augmented reality products; and other agreements related to promotion around certain products as well as providing designs relating to head mounted displays.
The Company and RealWear, Inc. ("RealWear"(“RealWear”) have entered into agreements where the Company has agreed to supply display modules for RealWear's augmented reality products. The Company has also licensedto RealWear, and license certain intellectual property to RealWear andRealWear. In conjunction with these agreements the Company received a 15% warrantan equity interest in RealWear's next equity offering round, which was exercised in April 2018. The Company also received a $1.5RealWear, one-time $1.5 million license fee for the intellectual property licensed to RealWearfees and the Company is entitled towill receive sales-based royalties from RealWear.of future product sales. In May 2019, the Company has signed an additional agreement to license certain intellectual property to Realwear for $3.5$3.5 million license fee and additional sales-based royalties. Of the $3.5 million license fee, $2.5$2.5 million was paid upon signing of the license agreement and the other $1.0$1.0 million iswas paid in quarterly installments of $0.25 million. As of December 28, 2019 the remaining receivable balance related to license fee was $0.5$0.25 million. Additionally, in the second quarter of 2019, we made an additional equity investment in RealWear of $2.5$2.5 million as part of an equity raise by the company.RealWear. As of December 28, 2019, we ownowned approximately 2.8% of RealWear. In the fourth quarter of 2019 Kopin reviewed the financial condition and other factors of RealWear and as a result, in the fourth quarter of 2019, we recorded an impairment charge of $5.2$5.2 million to reduce our investment in RealWear to zero as of December 28, 2019.
On September 30, 2019, the Company entered into an Asset Purchase Agreement (the “Solos Purchase Agreement”) with Solos Technology Limited (“Solos Technology”). Pursuant to the Solos Purchase Agreement, the Company sold and licensed to Solos Technology certain assets of our SolosTM (“Solos”) product line and WhisperTM Audio (“Whisper”) technology. As consideration for the transaction the Company received common shares representing a 20.0% equity stake in Solos Technology’s parent company, Solos Incorporation (“Solos Inc.”). In addition, the Company has agreed to reimburse Solos Technology for sales support provided. Solos Technology has agreed to reimburse the Company for the employeesemployee’s time spent on Solos development. As of December 26, 2020, and December 28, 2019, the Company had $283,000less than $10,000 and $283,000 respectively of receivables outstanding from Solos Technology and had a payable of less than $10,000$10,000 to Solos Technology.
As of December 26, 2020, the Company’s CEO and Chairman, Dr. John C.C. Fan, acquiredhas an individual ownership interest of 15.5% (12.3%15.7% (13.6% fully diluted) of Solos Inc. Two of Dr. Fan’s family members have also invested in Solos Inc., and collectively hold a 37.1% (29.5%37.5% (32.5% fully diluted) ownership interest in Solos Inc.
During fiscal years 2020, 2019 2018 and 2017,2018, the Company had the following transactions with related parties:
| 2019 | 2018 | 2017 | |||||||||||||||||||
| Revenue | Purchases | Revenue | Purchases | Revenue | Purchases | ||||||||||||||||
| Goertek | $ | — | $ | 747,154 | $ | — | $ | 646,135 | — | 727,101 | |||||||||||
| RealWear, Inc. | 5,778,672 | — | 1,220,838 | — | 576,644 | — | |||||||||||||||
| $ | 5,778,672 | $ | 747,154 | $ | 1,220,838 | $ | 646,135 | 576,644 | 727,101 | ||||||||||||
Schedule of Transactions with Related Parties
| 2020 | 2019 | 2018 | ||||||||||||||||||||||
| Revenue | Purchases | Revenue | Purchases | Revenue | Purchases | |||||||||||||||||||
| Goertek | $ | — | $ | — | $ | — | $ | 747,154 | — | 646,135 | ||||||||||||||
| RealWear, Inc. | 2,678,335 | — | 5,778,672 | — | 1,220,838 | — | ||||||||||||||||||
| $ | 2,678,335 | $ | — | $ | 5,778,672 | $ | 747,154 | 1,220,838 | 646,135 | |||||||||||||||
At December 28, 201926, 2020 and December 29, 2018,28, 2019, the Company had the following receivables and payables with related parties:
| December 28, 2019 | December 29, 2018 | |||||||||||||||||
| Receivables | Payables | Receivables | Contract Assets | Payables | ||||||||||||||
| Goertek | $ | — | $ | — | $ | — | — | $ | 207,530 | |||||||||
| RealWear, Inc. | 646,848 | — | 1,041,334 | 400,000 | — | |||||||||||||
| $ | 646,848 | $ | — | $ | 1,041,334 | 400,000 | $ | 207,530 | ||||||||||
| December 26, 2020 | December 28, 2019 | |||||||||||||||
| Receivables | Payables | Receivables | Payables | |||||||||||||
| RealWear, Inc. | 817,388 | — | 646,848 | — | ||||||||||||
18. Subsequent Events
In Q1 2021, we sold million shares of common stock for gross proceeds of $16 million (average of $per share), before deducting broker expenses paid by us of $0.5 million, pursuant to our At-The-Market Equity Offering Sales Agreement dated as of February 8, 2019 with Stifel, Nicolaus & Company, Incorporated, as agent (the “ATM Agreement”). The ATM Agreement has since terminated pursuant to its terms as a result of the sale of all the shares subject to such agreement.
19. Valuation and Qualifying Accounts
The following table sets forth activity in Kopin'sKopin’s allowance for doubtful accounts:
Schedule of Valuation and Qualifying Accounts
| Fiscal year ended: | Balance at Beginning of Year | Additions Charged to Income | Deductions from Reserve | Balance at End of Year | ||||||||||||
| December 29, 2018 | $ | 149,000 | $ | 268,000 | $ | (113,000 | ) | $ | 304,000 | |||||||
| December 28 2019 | 304,000 | 951,000 | (317,000 | ) | 938,000 | |||||||||||
| December 26, 2020 | $ | 938,000 | $ | 42,000 | $ | (805,000 | ) | $ | 175,000 | |||||||
| 70 |
| Fiscal year ended: | Balance at Beginning of Year | Additions Charged to Income | Deductions from Reserve | Balance at End of Year | |||||||||||
| December 30, 2017 | $ | 136,000 | $ | 13,000 | $ | — | $ | 149,000 | |||||||
| December 29, 2018 | 149,000 | 268,000 | (113,000 | ) | 304,000 | ||||||||||
| December 28, 2019 | $ | 304,000 | $ | 951,000 | $ | (317,000 | ) | $ | 938,000 | ||||||
| Exhibits | |||
| 3.1 | |||
| Amended and Restated Certificate of Incorporation filed as an exhibit to Registration Statement on Form S-1, File No. 33-57450, and incorporated herein by reference. | |||
| 4.1 | Specimen Certificate of Common Stock filed as an exhibit to Registration Statement on Form S-1, File No. 33-45853, and incorporated herein by reference. | ||
| 10.1 | Form of Employee Agreement with Respect to Inventions and Proprietary Information filed as an exhibit to Registration Statement on Form S-1, File No. 33-45853, and incorporated herein by reference. | ||
| 10.8* | Form of Key Employee Stock Purchase Agreement filed as an exhibit to Registration Statement on Form S-1, File No. 33-45853, and incorporated herein by reference. * | ||
| 10.9 | License Agreement by and between the Company and Massachusetts Institute of Technology dated April 22, 1985, as amended, filed as an exhibit to Registration Statement on Form S-1, File No. 33-45853, and incorporated herein by reference. | ||
| 10.10 | Facility Lease, by and between the Company and Massachusetts Technology Park Corporation, dated October 15, 1993 filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference. | ||
| 10.16† | |||
| 71 |
| 10.17* | Kopin Corporation 2020 Equity Incentive Plan filed as an exhibit to Current Form on 8-K on May 20, 2020 and incorporated by reference herein. | ||
10.18* | Tenth Amended and Restated Employment Agreement between the Company and Dr. John C.C. Fan, dated as of December 31, 2020 | ||
| 21.1 | |||
| 101.0 | The following materials from the Company’s Annual Report on Form 10-K for the fiscal year ended December | ||
| 104 | The cover page from the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2020, formatted in Inline XBRL and contained in Exhibit 101. | ||
| * | Management contract or compensatory plan required to be filed as an Exhibit to this Form 10-K. | ||
| † | Portions of this exhibit and the schedules thereto, marked by brackets, have been omitted pursuant to Item 601(b)(10) of Regulation S-K. |
| Item 16. | Form 10-K Summary |
Not applicable.
| 72 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 11, 20205, 2021
| KOPIN CORPORATION | ||
| /s/ JOHN C.C. FAN | ||
John C.C. Fan Chairman of the Board, Chief Executive Officer, President and Director | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ JOHN C.C. FAN | Chairman of the Board, Chief Executive Officer, President and Director (Principal Executive Officer) | March | ||
| John C.C. Fan | ||||
| /s/ JAMES BREWINGTON | Director | March | ||
| James Brewington | ||||
| /s/ DAVID E. BROOK | Director | March | ||
| David E. Brook | ||||
| /s/ MORTON COLLINS | Director | March | ||
| Morton Collins | ||||
| /s/ RICHARD H. OSGOOD III | Director | March | ||
| Richard H. Osgood III | ||||
| /s/ CHI CHIA HSIEH | Director | March | ||
| Chi Chia Hsieh | ||||
| /s/ SCOTT L. ANCHIN | Director | March | ||
| Scott L. Anchin | ||||
| /s/ RICHARD A. SNEIDER | Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) | March | ||
| Richard A. Sneider |
| 73 |