KOPIN CORP [KOPN] Filings

10-Q 1 form10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2023

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

For the transition period from _____ to _____

Commission file number 0-19882

KOPIN CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		04-2833935
State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)

125 North Drive, Westborough, MA		01581-3335
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (508) 870-5959

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.01		KOPN		Nasdaq Capital Market

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding as of November 3, 2023
Common Stock, par value $0.01		114,449,134

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

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

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

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

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

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

Kopin Corporation

INDEX

		Page No.
Part I – Financial Information

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets at September 30, 2023 (Unaudited) and December 31, 2022	3

	Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2023 and September 24, 2022	4

	Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the three and nine months ended September 30, 2023 and September 24, 2022	5

	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, 2023 and September 24, 2022	6

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2023 and September 24, 2022	7

	Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4.	Controls and Procedures	23

Part II – Other Information		24

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	25

Item 6.	Exhibits	25

Signatures		26

Part 1. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

KOPIN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2023			December 31, 2022
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	9,599,675		$	8,258,878
Restricted cash		500,000			—
Marketable debt securities, at fair value		11,610,485			4,388,778
Accounts receivable, net of allowance of $1,025,000 in 2023 and $303,000 in 2022		7,118,214			6,537,891
Contract assets and unbilled receivables		5,882,340			4,068,364
Inventory		9,074,492			6,426,400
Prepaid taxes		104,671			105,495
Prepaid expenses and other current assets		1,478,375			1,074,867
Total current assets		45,368,252			30,860,673
Property, plant and equipment, net		1,794,832			1,831,641
Operating lease right-of-use assets		2,670,116			3,168,520
Other assets		169,132			170,132
Equity investments		4,603,014			7,721,206
Total assets	$	54,605,346		$	43,752,172

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,187,025		$	5,438,980
Accrued payroll and expenses		1,717,584			2,879,139
Accrued warranty		2,161,000			1,966,000
Contract liabilities and billings in excess of revenues earned		668,046			930,500
Operating lease liabilities		762,521			786,928
Accrued post-retirement benefits		790,000			790,000
Other accrued liabilities		1,765,544			1,182,346
Customer deposits		559,503			—
Deferred tax liabilities		450,480			482,739
Total current liabilities		16,061,703			14,456,632
Noncurrent contract liabilities and asset retirement obligations		267,226			248,284
Operating lease liabilities, net of current portion		2,008,077			2,576,883
Accrued post-retirement benefits, net of current portion		507,496			1,110,000
Other long-term obligations, net of current portion		1,391,121			1,369,758
Total liabilities		20,235,623			19,761,557
Commitments and contingencies		-			-
Stockholders’ equity:
Preferred stock, par value $.01 per share: authorized, 3,000 shares; none issued		—			—
Common stock, par value $.01 per share: authorized, 150,000,000 shares; issued 114,415,269 shares in 2023 and 94,920,060 shares in 2022; outstanding 110,396,217 in 2023 and 92,883,524 in 2022, respectively		1,104,668			929,540
Additional paid-in capital		383,898,603			360,567,631
Treasury stock (70,635 shares in 2023 and 2022, at cost)		(103,127	)		(103,127	)
Accumulated other comprehensive income		1,135,641			1,176,068
Accumulated deficit		(351,666,062	)		(338,406,815	)
Total Kopin Corporation stockholders’ equity		34,369,723			24,163,297
Noncontrolling interest		—			(172,682	)
Total Kopin Corporation stockholders’ equity		34,369,723			23,990,615
Total liabilities and stockholders’ equity	$	54,605,346		$	43,752,172

See notes to unaudited condensed consolidated financial statements

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended			Three months ended			Nine months ended			Nine months ended
	September 30, 2023			September 24, 2022			September 30, 2023			September 24, 2022
Revenues:
Net product revenues	$	5,506,193		$	8,254,686		$	19,172,302		$	23,765,872
Research and development revenues		4,956,386			3,374,873			11,737,062			11,089,015
Other revenues		135,918			99,820			907,180			361,946
Total revenues		10,598,497			11,729,379			31,816,544			35,216,833
Expenses:
Cost of product revenues		5,437,953			7,987,154			17,759,117			23,676,283
Research and development		3,089,935			3,441,405			8,534,411			13,995,393
Selling, general and administration		4,798,598			4,320,117			15,912,848			13,112,133
Total expenses		13,326,486			15,748,676			42,206,376			50,783,809
Loss from operations		(2,727,989	)		(4,019,297	)		(10,389,832	)		(15,566,976	)
Other income (expense)
Interest income		299,506			21,663			623,971			41,195
Other income (expense), net		31,608			(3,225	)		104,403			(7,952	)
(Loss) gain on investments		—			(2,000,000	)		(3,327,347	)		2,700,000
Foreign currency transaction losses		(14,438	)		(112,315	)		(153,442	)		(227,294	)
Total other income (expense)		316,676			(2,093,877	)		(2,752,415	)		2,505,949
Loss before provision for income taxes and net loss attributable to noncontrolling interest		(2,411,313	)		(6,113,174	)		(13,142,247	)		(13,061,027	)
Tax provision		(39,000	)		(36,000	)		(117,000	)		(108,000	)
Net loss		(2,450,313	)		(6,149,174	)		(13,259,247	)		(13,169,027	)
Net loss attributable to the noncontrolling interest		—			—			—			280
Net loss attributable to Kopin Corporation	$	(2,450,313	)	$	(6,149,174	)	$	(13,259,247	)	$	(13,168,747	)
Net loss per share
Basic and diluted	$	(0.02	)	$	(0.07	)	$	(0.12	)	$	(0.14	)
Weighted average number of common shares outstanding
Basic and diluted		110,360,814			93,516,231			108,436,146			91,317,288

See notes to unaudited condensed consolidated financial statements

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

	Three months ended			Three months ended			Nine months ended			Nine months ended
	September 30, 2023			September 24, 2022			September 30, 2023			September 24, 2022
Net loss	$	(2,450,313	)	$	(6,149,174	)	$	(13,259,247	)	$	(13,169,027	)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments		(10,229	)		(128,994	)		31,955			(170,349	)
Unrealized holding loss on marketable securities		(54,175	)		(34,110	)		(72,382	)		(212,889	)
Reclassification of holding losses in net loss		—			—			—			(522	)
Other comprehensive loss, net of tax		(64,404	)		(163,104	)		(40,427	)		(383,760	)
Comprehensive loss		(2,514,717	)		(6,312,278	)		(13,299,674	)		(13,552,787	)
Comprehensive loss attributable to the noncontrolling interest		—			—			—			280
Comprehensive loss attributable to Kopin Corporation	$	(2,514,717	)	$	(6,312,278	)	$	(13,299,674	)	$	(13,552,507	)

See notes to unaudited condensed consolidated financial statements

KOPIN CORPORATION

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

	Shares		Amount		Capital			Stock			Income			Deficit			Equity			Interest			Equity
	Common Stock				Additional Paid-in			Treasury			Accumulated Other Comprehensive			Accumulated			Total Kopin Corporation Stockholders’			Noncontrolling			Total Stockholders’
	Shares		Amount		Capital			Stock			Income			Deficit			Equity			Interest			Equity
Balance, December 31, 2022		92,954,159	$	929,540	$	360,567,631		$	(103,127	)	$	1,176,068		$	(338,406,815	)	$	24,163,297		$	(172,682	)	$	23,990,615
Vesting of restricted stock		17,500		175		(175	)		-			-			-			-			-			-
Stock-based compensation expense		-		-		194,190			-			-			-			194,190			-			194,190
Other comprehensive income		-		-		-			-			6,227			-			6,227			-			6,227
Issuance of common stock and pre-funded warrants, net of costs		17,000,000		170,000		21,165,000			-			-			-			21,335,000			-			21,335,000
Acquisition of noncontrolling interest		-		-		(172,682	)		-			-			-			(172,682	)		172,682			-
Net loss		-		-		-			-			-			(2,628,555	)		(2,628,555	)		-			(2,628,555	)
Balance, April 1, 2023		109,971,659	$	1,099,715	$	381,753,964		$	(103,127	)	$	1,182,295		$	(341,035,370	)	$	42,897,477		$	-		$	42,897,477
Vesting of restricted stock		404,966		4,050		(4,050	)		-			-			-			-			-			-
Stock-based compensation expense		-		-		1,191,257			-			-			-			1,191,257			-			1,191,257
Other comprehensive income		-		-		-			-			17,750			-			17,750			-			17,750
Net loss		-		-		-			-			-			(8,180,379	)		(8,180,379	)		-			(8,180,379	)
Balance, July 1, 2023		110,376,625	$	1,103,765	$	382,941,171		$	(103,127	)	$	1,200,045		$	(349,215,749	)	$	35,926,105		$	-		$	35,926,105
Vesting of restricted stock		90,227		903		(903	)		-			-			-			-			-			-
Stock-based compensation expense		-		-		958,335			-			-			-			958,335			-			958,335
Other comprehensive loss		-		-		-			-			(64,404	)		-			(64,404	)		-			(64,404	)
Net loss		-		-		-			-			-			(2,450,313	)		(2,450,313	)		-			(2,450,313	)
Balance, September 30, 2023		110,466,852	$	1,104,668	$	383,898,603		$	(103,127	)	$	1,135,641		$	(351,666,062	)	$	34,369,723		$	-		$	34,369,723

	Common Stock				Additional Paid-in			Treasury			Accumulated Other Comprehensive			Accumulated			Total Kopin Corporation Stockholders’			Noncontrolling			Total Stockholders’
	Shares		Amount		Capital			Stock			Income			Deficit			Equity			Interest			Equity
Balance, December 25, 2021		90,069,169	$	900,691	$	356,931,157		$	(366,110	)	$	1,414,351		$	(319,080,898	)	$	39,799,191		$	(172,334	)	$	39,626,857
Vesting of restricted stock		154,421		1,544		(1,544	)		-			-			-			-			-			-
Stock-based compensation expense		-		-		656,073			-			-			-			656,073			-			656,073
Other comprehensive loss		-		-		-			-			(113,906	)		-			(113,906	)		-			(113,906	)
Restricted stock for tax withholding obligations		-		-		-			(95,613	)		-			-			(95,613	)		-			(95,613	)
Net loss		-		-		-			-			-			(1,372,641	)	$	(1,372,641	)		(23	)		(1,372,664	)
Balance, March 26, 2022		90,223,590	$	902,235	$	357,585,686		$	(461,723	)	$	1,300,445		$	(320,453,539	)	$	38,873,104		$	(172,357	)	$	38,700,747
Vesting of restricted stock		50,000		500		(500	)		-			-			-			-			-			-
Stock-based compensation expense		-		-		417,033			-			-			-			417,033			-			417,033
Other comprehensive loss		-		-		-			-			(106,750	)		-			(106,750	)		-			(106,750	)
Sale of registered stock		1,529,047		15,290		1,550,092			461,723			-			-			2,027,105			-			2,027,105
Net loss		-		-		-			-			-			(5,646,932	)		(5,646,932	)		(257	)		(5,647,189	)
Balance, June 25, 2022		91,802,637	$	918,025	$	359,552,311		$	-		$	1,193,695		$	(326,100,471	)	$	35,563,560		$	(172,614	)	$	35,390,946
Vesting of restricted stock		149,422		1,495		(1,495	)		-			-			-			-			-			-
Stock-based compensation expense		-		-		297,549			-			-			-			297,549			-			297,549
Other comprehensive loss		-		-		-			-			(163,104	)		-			(163,104	)		-			(163,104	)
Sale of registered stock		675,000		6,750		825,486			-			-			-			832,236			-			832,236
Net loss		-		-		-			-			-			(6,149,174	)		(6,149,174	)		-			(6,149,174	)
Balance, September 24, 2022		92,627,059	$	926,270	$	360,673,851		$	-		$	1,030,591		$	(332,249,645	)	$	30,381,067		$	(172,614	)	$	30,208,453

See notes to unaudited condensed consolidated financial statements

KOPIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended			Nine months ended
	September 30, 2023			September 24, 2022
Cash flows from operating activities:
Net loss	$	(13,259,247	)	$	(13,169,027	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		498,188			665,217
Accretion of premium or discount on marketable debt securities		—			128
Stock-based compensation		2,343,782			1,370,654
Foreign currency losses		27,478			339,186
Change in allowance for credit losses		726,413			4,772
Write-off of excess inventory		292,405			1,670,993
Investment impairment (unrealized gains on investments)		2,887,893			(2,700,000	)
Loss on sale of property and plant		18,878			202,670
Income taxes		117,316			107,509
Changes in other non-cash items		194,890			1,451,478
Changes in assets and liabilities:
Accounts receivable		(2,137,460	)		3,756,182
Contract assets and unbilled receivables		(1,651,437	)		(2,302,972	)
Inventory		(2,944,672	)		(1,944,577	)
Prepaid expenses, other current assets and other assets		(461,365	)		(272,446	)
Accounts payable and accrued expenses		1,799,444			(1,651,538	)
Contract liabilities and billings in excess of revenue earned		(244,188	)		(3,130,965	)
Net cash used in operating activities		(11,791,682	)		(15,602,736	)
Cash flows from investing activities:
Other assets		14,656			23,802
Capital expenditures		(478,282	)		(642,146	)
Equity investment purchase		—			(499,998	)
Proceeds from sale of marketable debt securities		10,374,593			1,000,000
Purchases of marketable debt securities		(17,624,779	)		(4,000,042	)
Net cash used in investing activities		(7,713,812	)		(4,118,384	)
Cash flows from financing activities:
Sale of treasury stock, net of costs		—			461,723
Issuance of common stock and pre-funded warrants, net of costs		21,335,000			2,397,618
Settlements of restricted stock for tax withholding obligations		—			(95,613	)
Net cash provided by financing activities		21,335,000			2,763,728
Effect of exchange rate changes on cash		11,291			(205,125	)
Net increase (decrease) in cash, cash equivalents, and restricted cash		1,840,797			(17,162,517	)
Cash, cash equivalents and restricted cash:
Beginning of period		8,258,878			26,787,931
End of period	$	10,099,675		$	9,625,414

See notes to unaudited condensed consolidated financial statements

KOPIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The condensed consolidated financial statements of Kopin Corporation as of September 30, 2023 and for the nine month periods ended September 30, 2023 and September 24, 2022 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 31, 2022. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year. As used in this report, the terms “we”, “us”, “our”, “Kopin” and the “Company” mean Kopin Corporation and its subsidiaries, unless the context indicates another meaning.

The condensed consolidated financial statements for the nine months ended September 30, 2023 include the accounts of Kopin Corporation and its wholly owned subsidiaries. The condensed consolidated financial statements for the nine months ended September 24, 2022 include the accounts of Kopin Corporation and its wholly owned subsidiaries. Net loss attributable to noncontrolling interest in the Company’s condensed consolidated statements of operations for the nine months ended September 24, 2022 represents the 20% of the results of operations of a former partially owned subsidiary which is allocated to the shareholders of the equity interests not owned by the Company. All intercompany transactions and balances have been eliminated.

The Company’s current strategy is to continue to invest in research and development, even during unprofitable periods, which may result in the Company continuing to incur net losses and negative cash flows from operations. If the Company is unable to achieve and maintain positive cash flows and profitability in the foreseeable future, its financial condition may ultimately be materially adversely affected such that management may be required to reduce operating expenses, including investments in research and development, or raise additional capital. While there can be no assurance the Company will be able to successfully reduce operating expenses or raise additional capital, management believes its historical success in managing cash flows and obtaining capital will continue in the foreseeable future.

On January 27, 2023, the Company sold 17,000,000 shares of common stock and pre-funded warrants to purchase up to 6,000,000 shares of common stock at a public offering price of $0.99 per share for net proceeds of approximately $21.4 million. The Company believes that its existing cash and cash equivalents will be adequate to satisfy its current operating plans for at least the next twelve months from the issuance of these financial statements. The Company has in the past sold equity securities through at-the-market equity offerings and in the traditional fashion of significant equity offerings. Nonetheless, management monitors the capital markets on an ongoing basis and may consider raising capital if favorable market conditions develop. If the Company’s actual results are less than projected or the Company needs to raise capital for additional liquidity, the Company may be required to do additional equity financings, reduce expenses, or enter into a strategic transaction. However, management can make no assurance that the Company will be able to raise additional capital, reduce expenses sufficiently, or enter into a strategic transaction on terms acceptable to the Company, or at all.

On January 5, 2023, the Company entered into a Technology License Agreement and an Asset Purchase Agreement (the “LST Agreements”) with Lightning Silicon Technology, Inc. (“LST”). Pursuant to the LST Agreements, the Company issued a license to LST for certain technology associated with our Organic Light Emitting Technology, transferred in-process development contracts with two customers and accounts receivables that the Company had previously determined were not collectible. The technology license agreement provides for Kopin to transfer certain patents to LST if LST achieves certain milestones; however upon transfer, Kopin will receive a license to the technology. To the extent LST makes improvements to the technology licensed from Kopin, Kopin will receive a license for these improvements for certain markets. Kopin is not obligated to provide any additional funding support to LST. As consideration for the transaction, the Company received 18,000,000 preferred shares in LST, which the Company determined had no fair value as of the transaction date or as of September 30, 2023. While these shares represent a 20.0% equity stake in LST, they do not provide the Company with voting rights to elect LST’s Governance Board. The Company will also receive a royalty based on unit sales of products that utilize the technology licensed. Drs. John Fan, the Company’s former President, CEO and Chairman of the Board, Boryeu Tsaur, a former Executive Vice President of the Company and Hong Choi, the Company’s former Chief Technology Officer terminated their employment with the Company and became investors in and members of the management team of LST. Dr. Fan is the Founder of LST. As a result of this transaction, in 2022 the Company wrote off the two operating lease assets associated with facilities used for the development of our organic light emitting diode (OLED) products.

2. ACCOUNTING STANDARDS

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments became effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The amendments in ASU 2016-13 are intended to provide more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The Company adopted this standard on January 1, 2023 and there was not a material impact.

3. CASH AND CASH EQUIVALENTS, RESTRICTED CASH, 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.

Restricted cash of approximately $0.5 million is included on the consolidated balance sheet as of September 30, 2023, and represents cash deposited by the Company into a separate account and designated as collateral for a standby letter of credit in the same amount in accordance with contractual agreements.

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 30, 2023 and September 24, 2022.

Investments in available-for-sale marketable debt securities were as follows at September 30, 2023 and December 31, 2022:

	Amortized Cost				Unrealized (Losses) Gains						Fair Value
	2023		2022		2023			2022			2023		2022
U.S. government and agency backed securities	$	4,500,030	$	2,500,006	$	(61,715	)	$	(102,276	)	$	4,438,315	$	2,397,730
Corporate debt and certificates of deposit		7,250,174		2,000,012		(78,004	)		(8,964	)		7,172,170		1,991,048
Total	$	11,750,204	$	4,500,018	$	(139,719	)	$	(111,240	)	$	11,610,485	$	4,388,778

The contractual maturity of the Company’s marketable debt securities was as follows at September 30, 2023:

SCHEDULE OF MARKETABLE DEBT SECURITIES

	Less than One year		One to Five years		Total
U.S. government and agency backed securities	$	2,468,075	$	1,970,240	$	4,438,315
Corporate debt and certificates of deposit		3,724,927		3,447,243		7,172,170
Total	$	6,193,002	$	5,417,483	$	11,610,485

4. FAIR VALUE MEASUREMENTS

Financial instruments are categorized as Level 1, Level 2 or Level 3 based upon the method by which their fair value is computed. An investment is categorized as Level 1 when its fair value is based on unadjusted quoted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An investment is categorized as Level 2 if its fair market value is based on quoted market prices for similar assets in active markets, based on quoted prices for identical or similar assets in markets that are not active, based on observable inputs such as interest rates or 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:

	Total		Level 1		Level 2		Level 3
			Fair Value Measurement at September 30, 2023 Using:
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents and restricted cash	$	10,099,675	$	10,099,675	$	—	$	—
U.S. government securities		4,438,315		—		4,438,315		—
Certificates of deposit		7,172,170		7,172,170		—		—
Equity investments		4,603,014		169,112		—		4,433,902
	$	26,313,174	$	17,440,957	$	4,438,315	$	4,433,902

	Total		Level 1		Level 2		Level 3
			Fair Value Measurement at December 31, 2022 Using:
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	8,258,878	$	8,258,878	$	—	$	—
U.S. government securities		2,397,730		—		2,397,730		—
Corporate debt		1,500,445		—		1,500,445		—
Certificates of deposit		490,603		490,603		—		—
Equity investments		7,721,206		213,016		—		7,508,190
	$	20,368,862	$	8,962,497	$	3,898,175	$	7,508,190

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. Changes in Level 3 investments were as follows:

		December 31, 2022				Net unrealized losses				Foreign currency losses				Purchases, issuances and settlements				September 30, 2023
Equity investments		$	7,508,190			$	(3,327,347	)		$	(186,395	)		$	439,454			$	4,433,902

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

Marketable Debt Securities

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

Equity Investments

From 2017 through 2019, the Company made several equity investments in a customer. In the fourth quarter of 2019, the Company reviewed the financial condition and other factors of the customer and, as a result, recorded an impairment charge of $5.2 million to reduce its investment in the customer to zero as of December 28, 2019. In the first quarter of 2022, the customer raised additional equity capital and, based on an observable price change of the customer’s share prices and terms of the equity sale, the Company remeasured the fair market value of its investment and recorded a gain of $4.7 million. In the second quarter of 2022, the Company made an additional equity investment of $0.5 million. During the quarter ended July 1, 2023, the Company received common stock of the equity investment valued at approximately $0.4 million for the payment of royalties. During the three and nine months ended September 30, 2023, the Company also performed an impairment evaluation using an Option Pricing Method and as a result recorded impairment charges of approximately $0 and $3.1 million, respectively. As of September 30, 2023, the Company owned an approximate 2.9% interest in this investment.

On September 30, 2019, the Company entered into an Asset Purchase Agreement pursuant to which the Company sold and licensed certain assets of our SolosTM product line and WhisperTM Audio technology. As consideration for the transaction, the Company received a 20.0% equity stake in Solos Incorporation (“Solos Inc.”). The Company’s 20.0% equity stake will be maintained until Solos Inc. has raised a total of $7.5 million in equity financing. Based on the price paid for equity by the other 80.0% owners of Solos Inc. and other factors, the Company estimated the fair value of its equity holdings at $0.6 million and in 2019 recorded a $0.6 million gain on its investment for this equity transaction as the basis of assets transferred was zero. The investment was written down to $0.4 million as a result of an impairment analysis and write down performed in 2020. During the three and nine months ended September 30, 2023, the Company recorded impairment charges of $0 and $0.2 million, respectively.

During the three and nine months ended September 30, 2023, the Company recorded approximately $0.1 million and $0.2 million, respectively, of unrealized losses on its equity interest in a company due to a fluctuation in the foreign exchange rate.

5. ACCOUNTS RECEIVABLE, NET

Accounts receivable consisted of the following:

SCHEDULE OF ACCOUNTS RECEIVABLE

	September 30, 2023			December 31, 2022
Accounts receivable	$	8,143,214		$	6,840,891
Less — allowance for credit losses		(1,025,000	)		(303,000	)
Total	$	7,118,214		$	6,537,891

Changes to the allowance for credit losses for the nine months ended September 30, 2023 were as follows:


Balance, December 31, 2022	$	303,000
Additions		798,000
Write-offs		(76,000	)
Balance, September 30, 2023	$	1,025,000

6. INVENTORY

Inventories are stated at standard cost adjusted to approximate the lower of cost (first-in, first-out method) or net realizable value and consist of the following at September 30, 2023 and December 31, 2022:

SCHEDULE OF INVENTORY

	September 30, 2023		December 31, 2022
Raw materials	$	5,522,913	$	4,285,757
Work-in-process		2,527,748		1,735,454
Finished goods		1,023,831		405,189
Total	$	9,074,492	$	6,426,400

7. NET LOSS PER SHARE

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

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

Three Months Ended