QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-19882
(Exact name of registrant as specified in its charter)
State or other jurisdiction of
incorporation or organization
125 North Drive,
(Address of principal executive offices)
Registrant’s telephone number, including area code: (508) 870-5959
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $0.01
Nasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yesx No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Accounts receivable, net of allowance of $241,000 in 2019 and $304,000 in 2018
Contract assets and unbilled receivables
Prepaid expenses and other current assets
Total current assets
Plant and equipment, net
Operating lease right-of-use assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accrued payroll and expenses
Contract liabilities and billings in excess of revenue earned
Operating lease liabilities
Other accrued liabilities
Deferred tax liabilities
Total current liabilities
Asset retirement obligations
Operating lease liabilities, net of current portion
Other long-term obligations
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 88,584,577 shares in 2019 and 80,735,320 shares in 2018; outstanding 82,053,697 shares in 2019 and 74,008,815 shares in 2018
Additional paid-in capital
Treasury stock (4,513,256 shares in 2019 and 2018, at cost)
Accumulated other comprehensive income
Total Kopin Corporation stockholders’ equity
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to unaudited condensed consolidated financial statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The condensed consolidated financial statements of Kopin Corporation as of September 28, 2019 and for the three and nine month periods ended September 28, 2019 and September 29, 2018 are unaudited and include all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the periods then ended. These condensed consolidated financial statements should be read in conjunction with the Company’s financial statements and notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2018, as amended by Amendment No. 1 thereto on Form 10-K/A filed on November 7, 2019 (the “2018 Form 10-K/A”). The results of the Company's operations for any interim period are not necessarily indicative of the results of the Company's operations for any other interim period or for a full fiscal year. The Company reclassified certain prior period amounts herein to conform with the presentation of the aforementioned Amendment on Form 10-K/A. Specifically, the Company reclassified certain amounts from additional paid-in capital to accumulated deficit and/or noncontrolling interest as of December 29, 2018 and December 30, 2017, which impacts both the accompanying consolidated balance sheet as of December 29, 2018 and consolidated statements of stockholders’ equity as of December 29, 2018 and December 30, 2017. The reclassifications further impact the respective figures shown for these equity categories in the prior interim periods presented herein. As used in this report, the terms "we," "us," "our," "Kopin" and the "Company" mean Kopin Corporation and its subsidiaries, unless the context indicates another meaning.
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred net losses of$34.5 millionand net cash outflows from operations of$28.1 millionfor the fiscal year ended 2018. The Company incurred a net loss of$22.1 millionfor thenine months endedSeptember 28, 2019and net cash outflows from operations of$16.8 million. In addition, the Company has experienced a significant decline in its cash and cash equivalents and marketable debt securities over the last several years, which was primarily a result of funding operating losses, of which a significant component relates to the Company’s investments in the research and development of Wearable products. The Company had $26.0 million of cash and cash equivalents and marketable debt securities at September 28, 2019. The Company's historical and current use of cash in operations combined with limited liquidity resources raise substantial doubt regarding the Company’s ability to continue as a going concern.
The Company’s products target the industrial wearable headset and military markets. Management believes the industrial wearable market is still developing and cannot predict how long the wearable market will take to develop or if the Company’s products will be accepted. Accordingly, the Company’s current strategy is to continue to invest in research and development, even during unprofitable periods, which has resulted in the Company continuing to incur net losses and negative cash flows from operations. As the Company continues to incur negative cash flows from operations, its financial condition will be materially adversely affected. As such, management is actively pursuing strategic alternatives including the reduction of operating expenses and raising additional capital, among other things. While there can be no assurance the Company will be able to successfully reduce operating expenses or raise additional capital, management believes it has sufficient cash for operations through the end of fiscal 2020, based on management’s historical success in managing cash flows and obtaining capital.
These condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which requires lessees to recognize operating lease right-of-use assets and lease liability for most lease arrangements. Effective December 30, 2018, the Company adopted the requirements of the new lease standard using the modified retrospective approach, applying the new lease requirements at the beginning of fiscal year 2019. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows us 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 standard resulted in the recognition of operating lease right-of-use assets of $3.7 million and operating lease liabilities of $3.8 million, of which $1.0 million was classified as current at the beginning of fiscal year 2019. The standard had no material impact on the Company'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.
Significant Accounting Policies Update
The Company's significant accounting policies are detailed in "Note 1: Summary of Significant Accounting Policies" of our 2018 Form 10-K/A. Effective December 30, 2018, the Company adopted the requirements of ASU 2016-02, Leases (Topic 842) using the modified retrospective approach as discussed below. The Company reclassified certain balance sheet accounts to conform to the Company's current period presentation. All amounts disclosed in this Form 10-Q reflect these changes.
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'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's leases, the discount rate used to determine the present value of the lease payments is the Company'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 our leases include options to extend or terminate the lease. The Company includes these options in the recognition of the Company'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") rates or residual guarantees.
Accounting Standards Issued But Not Yet Adopted
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 is currently evaluating ASU 2018-13 and its impact on our consolidated financial statements.
CASH AND CASH EQUIVALENTS AND MARKETABLE DEBT SECURITIES
The Company considers all highly liquid, short-term debt instruments with original maturities of three months or less to be cash equivalents.
Marketable debt securities consist primarily of commercial paper, medium-term corporate notes, and U.S. government and agency backed securities. The Company classifies these marketable debt securities as available-for-sale at fair value in “Marketable debt securities, at fair value.” The Company records the amortization of premium and accretion of discounts on marketable debt securities in the results of operations.
The Company uses the specific identification method as a basis for determining cost and calculating realized gains and losses with respect to marketable debt securities. The gross gains and losses realized related to sales and maturities of marketable debt securities were not material during the three and nine months ended September 28, 2019 and the fiscal year ended December 29, 2018.
Investments in available-for-sale marketable debt securities were as follows at September 28, 2019 and December 29, 2018:
U.S. government and agency backed securities
The contractual maturity of the Company’s marketable debt securities was as follows at September 28, 2019:
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: