Kopin Corp: Form 10-Q for the period ended Mar 29, 2025

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the safe harbor created by such sections. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “could,” “would,” “seeks,” “estimates,” and variations of such words and similar expressions, and the negatives thereof, are intended to identify such forward-looking statements. We caution readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and advise readers that these forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, estimates, and assumptions by us that are difficult to predict. Various factors, some of which are beyond our control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. All such forward-looking statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by these cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report, except as may otherwise be required by the federal securities laws.

We have identified the following important factors that could cause actual results to differ materially from those discussed in our forward-looking statements. Such factors may be in addition to the risks described in Part I, Item 1A. “Risk Factors;” Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” and other parts of our Annual Report on Form 10-K for the fiscal year ended December 28, 2024, as amended. These factors include: our ability to source semiconductor components and other raw materials used in the manufacturing of our products amidst continued intermittent shortages, including from new and alternative suppliers; our ability to prosecute and defend our proprietary technology aggressively or successfully; our ability to recruit and retain personnel with experience and expertise relevant to our business; our ability to invest in research and development to achieve profitability even during periods when we are not profitable; any disruptions or delays in our supply chains, particularly with respect to semiconductor components, whether resulting from regional or global geopolitical developments, changes imposed by the new U.S. presidential administration, or otherwise; costs and outcomes relating to any disputes, governmental inquiries or investigations, regulatory proceedings, legal proceedings or litigation; our ability to continue to introduce new products in our target markets; our ability to generate revenue growth and positive cash flow, and reach profitability; the strengthening of the U.S. dollar and its effects on the price of our products in foreign markets; the impact of new regulations and customer demands relating to conflict minerals; our ability to obtain a competitive advantage in the wearable technologies market through our extensive portfolio of patents, trade secrets and non-patented know-how; our ability to grow within our targeted markets; the importance of small form factor displays in the development of defense, consumer, and industrial products such as thermal weapon sights, safety equipment, virtual and augmented reality gaming, training and simulation products and metrology tools; the suitability of our properties for our needs for the foreseeable future; and our need to achieve and maintain positive cash flow and profitability.

Overview

We are a leading developer, manufacturer and seller of miniature displays and optical lenses (our “components”) for sale as individual displays, components, modules or higher-level subassemblies. We also license our intellectual property through technology license agreements. Our component products are used in highly demanding high-resolution portable defense, enterprise and consumer electronic applications, training and simulation equipment and 3D metrology equipment. Our products enable our customers to develop and market an improved generation of products for these target applications.

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 28, 2024, as amended and our unaudited condensed consolidated financial statements included in this Form 10-Q.

Results of Operations

Our interim period results of operations and period-to-period comparisons of such results may not be indicative of our future operating results. Additionally, we use a fiscal calendar that may result in differences in the number of workdays in the current and comparable prior interim periods and could affect period-to-period comparisons. The following discussion of comparative results of operations among periods should be viewed in this context.

Revenues. For the three months ended March 29, 2025 and March 30, 2024, our revenues by display application, which include product sales and amounts earned from research and development contracts (“R&D”), were as follows:

(In thousands)

Sales of our products for Defense applications include systems used by the military both in the field and for training and simulation. The increase in Defense applications revenues in the three months ended March 29, 2025 as compared to the three months ended March 30, 2024 was primarily due to an increase in revenues from products used in thermal weapon sights and in pilot helmets partially offset by a decline in sales of training and simulation products.

Industrial applications revenue represents customers who purchase our display products for use in 3D metrology equipment and headsets used for applications in manufacturing, distribution, and public safety. Our 3D metrology customers are primarily located in Asia and sell to Asian contract manufacturers who use the 3D metrology machines for quality control purposes. The decrease in Industrial applications revenues for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024 was primarily due to a decline in sales of products for 3D metrology.

Medical revenues represent the initial shipments of head-mounted medical product.

Sales of our displays for Consumer applications are typically “one-off” purchases from companies or organizations using our products for research and development.

R&D revenues increased in the three months ended March 29, 2025 as compared to the three months ended March 30, 2024 primarily due to increases in funding for U.S. defense programs.

The decrease in license and royalty revenue in the first quarter ending March 29, 2025 compared to the first quarter ended March 20, 2024 is due to a decrease in royalties earned under IP license agreements for industrial wearable headsets.

Our international revenues, which are primarily our sales of our products into the 3D AOI market and which comprise the majority of our Industrial sales category, represented 4% and 9% of total revenues for the three months ended March 29, 2025 and March 30, 2024, respectively. These sales are primarily made by Kopin Europe, Ltd. our wholly-owned Scottish subsidiary into Asian markets. We have not taken any protective measures against exchange rate fluctuations, such as purchasing hedging instruments with respect to such fluctuations, because of the historically stable exchange rate between the British Pound Sterling (the functional currency of our U.K. subsidiary) and the U.S. dollar. Foreign currency translation impact on our results, if material, is described in further detail under “Item 3. Quantitative and Qualitative Disclosures About Market Risk” section below.

Cost of Product Revenues. Cost of product revenues, which is comprised of materials, labor and manufacturing overhead related to the production of our products for the three months ended March 29, 2025 and March 30, 2024 were as follows:

(In thousands, except for percentages)

The decrease in cost of product revenue as a percent of net product revenues for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024 was due to a decrease in excess and obsolete reserves.

The United States government is or is in the process of increasing or implementing tariffs on the importation of certain goods. In some cases, our contracts allow us to pass along new or increased tariffs subject to ability to prove the impact of the tariff on the cost of our product. If we are unable to increase our prices due to the implementation or increase in tariff, duties and other taxes our gross margin and overall profitability would be negatively impacted.

The issues associated with the global shortage of semiconductor circuit chips and other raw materials decreased in 2024 as compared to 2023 and 2022. However, we have identified several semiconductor components which continue to have long lead delivery times. We continue to search for and procure all necessary components from our current vendors and new alternative vendors. In certain situations, we can obtain the components but at a significantly increased cost. The inability to procure a single component will prevent the completion of our product and the ability to sell the product. Our products go through extensive qualification processes and therefore our customers may not accept a replacement component. We are unable to determine if we will be able to obtain all necessary components for fiscal 2025. If we are unable to obtain all necessary components, we may be required to stop production, which would negatively affect our cash flow and results of operations. In addition, we depend on a Taiwanese foundry for the manufacture of integrated circuits for our AMLCD display products and on Chinese, Korean, and European foundries for our OLED display products. If there was a disruption of supply from these foundries it would take a significant period of time to identify, and qualify, if possible, a new source.

Research and Development. R&D expenses are incurred in support of internal display development programs and programs funded by agencies or prime contractors of the U.S. Government and commercial partners. R&D costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication and packaging of display products, and overhead. In fiscal year 2025, we expect our R&D expenditures to be related to our display products, overlay weapon sights and OLED display technologies. Funded and internal R&D expenses are combined in research and development expenses in the condensed consolidated statement of operations. R&D expenses for the three months ended March 29, 2025 and March 30, 2024 were as follows:

(In thousands)

Funded R&D expense for the three months ended March 29, 2025 decreased as compared to the three months ended March 30, 2024 primarily due to decreased spending on U.S. defense programs and programs previously in development are transitioning into production. Internal R&D expense decreased due to an increase in process improvements.

Selling, General and Administrative. Selling, general and administrative (“S,G&A”) expenses consist of the expenses incurred by our sales and marketing personnel and related expenses, and administrative and general corporate expenses. S,G&A expenses for the three months ended March 29, 2025 and March 30, 2024 were as follows:

(In thousands, except for percentages)

S,G&A decreased for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024 primarily due to a decrease in legal fees of $2.9 million.

Litigation Damages Litigation damages were accrued as of March 30, 2024 as a result of the April 22, 2024 jury verdict that was entered against the Company awarding approximately $5.1 million in damages as well as recommending $19.7 million in disgorgement and exemplary damages.

Other Income, net. Other income, net, is primarily composed of interest income, foreign currency transactions, gains on fair value recording of investments and remeasurement gains and losses incurred by our U.K.-based subsidiary and other non-operating income items. Other income, net, for the three months ended March 29, 2025 and March 30, 2024 were as follows:

(In thousands)

During the three months ended March 29, 2025, we sold an investment for a gain of approximately $0.3 million. In addition, interest income increased approximately $0.3 million for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024. During the three months ended March 29, 2025 and March 30, 2024, we recorded foreign currency gains of approximately $0.1 million.

Tax Provision. We recorded a provision for income taxes of less than $0.1 million and $0 in the three months ended March 29, 2025 and March 30, 2024, respectively.

Net Loss. We incurred a net loss of $3.1 million during the three months ended March 29, 2025 compared to a net loss of $32.5 million during the three months ended March 30, 2024. The decrease in the net loss during the three months ended March 29, 2025 compared to the three months ended March 30, 2024 was primarily due to the accrual of litigation damages and legal fees for the three months ended March 30, 2024 in addition to more effective expense management during the three months ended March 29, 2025.

Liquidity and Capital Resources

At March 29, 2025 and December 28, 2024, we had cash and cash equivalents, including restricted cash, and marketable securities of $32.6 million and working capital of $16.2 million compared to $36.6 million and $18.9 million, respectively.

The increase in cash, cash equivalents, and restricted cash for the three months ended March 29, 2025 was primarily due to proceeds from the sale of marketable securities of $4.6 million partially offset by cash used in operations of $3.4 million. The increase in cash, cash equivalents, and restricted cash for the three months ended March 30, 2024 was primarily due to net proceeds from the sale of common stock of $7.2 million and marketable securities of $4.5 million partially offset by cash used in operations of $3.1 million. For the three months ended March 29, 2025, cash used in operating activities consisted of a net loss from operations of $3.1 million and net cash used to fund changes in operating assets and liabilities of $1.9 million, which were partially offset by non-cash charges totaling $1.6 million, which was primarily related to stock-based compensation, depreciation, and inventory reserves. For the three months ended March 30, 2024, cash used in operating activities consisted of a net loss from operations of $32.5 million partially offset by net cash provided by changes in operating assets and liabilities of $2.9 million and non-cash charges totaling $26.5 million, which was primarily related to accrued litigation damages, stock-based compensation, depreciation, and inventory reserves. We expect that net cash used for or provided by operating activities to fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, the timing of when we recognize revenue, and changes in components of working capital. Our cash and cash equivalents and liquidity could be adversely affected by any amounts that become payable in connection with any adverse results from any litigation we are, or may become, involved in.

Equity offerings

On September 30, 2024, we sold 2,405,000 shares of common stock and received gross proceeds of $1.6 million.

On September 23, 2024, we sold 37,550,000 shares of common stock and pre-funded warrants to purchase up to 4,000,000 shares of common stock at a public offering price of $0.64 per pre-funded warrants, for gross proceeds of $27.0 million before deducting underwriting discounts and offering expenses paid by the us of $1.8 million. The offering price of the pre-funded warrant equals the public offering price per share of the common stock less the $0.01 per share exercise price of each pre-funded warrant.

At-the-market offerings

During the three months ended March 30, 2024, we sold 3,080,000 shares of common stock for gross proceeds of $7,466,755 (average of $2.42 per share) before deducting broker expenses paid by us of approximately $0.2 million, pursuant to our then effective At-The-Market Equity Offering Sales Agreement, dated as of March 5, 2021 (the “ATM Agreement”) with Stifel, Nicolaus & Company, Incorporated (“Stifel”), as agent. The ATM Agreement terminated in the three months ended March 30, 2024. On January 24, 2025 we entered into a new At-The-Market Equity Offering Sales Agreement with Stifel, Nicolaus & Company, Incorporated (“Stifel”), as agent, for the sale of up to $50 million of securities. Subsequent to March 29, 2025, the Company cannot use the ATM Agreement entered into on January 24, 2025 until such time the Company can utilize Form S-3.

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. We have incurred net losses of $43.9 million and net cash outflows from operations of $14.2 million for the fiscal year ended 2024. We incurred a net loss of $3.1 million for the three months ended March 29, 2025 and net cash outflows from operations of $3.4 million. In addition, we have experienced a significant decline in our cash and cash equivalents and marketable securities over the last several years, which was primarily a result of funding operating losses. As described in Note 14 Litigation, on April 22, 2024, the jury verdict was entered against us awarding approximately $5.1 million in damages as well as recommending $19.7 million in disgorgement and exemplary damages. While no final judgment has been issued by the Court, the Court will take that recommendation under advisement and will rule in its final judgment on the final amount after briefing on the issues. We have argued that the damages, disgorgement and exemplary damages should be reduced or eliminated. Final briefing on the issued occurred on October 29, 2024. We are also considering the appeal of any award in a final judgment. The $5.1 million in damages and $19.7 million in disgorgement and exemplary damages were accrued for as of March 29, 2025 and December 28, 2024. We had $32.6 million of cash and cash equivalents, restricted cash, and marketable securities at March 29, 2025.

We have had historical and current negative cash flow from operations and limited liquidity resources. Our current strategy is to continue to invest in our business and raise additional capital through financing activities that may include public offerings and private placements of our common stock, preferred stock offerings, collaborations and licensing arrangements and issuances of debt and convertible debt instruments. Until such time that additional capital can be raised, we plan to strategically manage our uncommitted spending, execute our priorities and implement cost saving measures to reduce research and development and general and administrative expenditures which could include minimizing staff costs. We may also sell assets and look at other strategic alternatives. There are inherent uncertainties associated with fundraising activities and activities to manage our uncommitted spending and the successful execution of these activities may not be within our control. There are no assurances that such additional funding will be obtained and that we will succeed in our future operations. If we are unable to achieve positive cash flows and profitability in the foreseeable future or cannot successfully raise additional capital and implement our strategic plan, our liquidity, financial condition and business prospects will be materially and adversely affected. As the Company is unable to conclude that a favorable outcome in this litigation is probable and due to the net losses and negative cash flows from operations, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern for twelve months from the issuance of these financial statements.

The following table presents the components of our cash, cash equivalents, restricted cash and marketable securities held in U.S. dollars as of the dates presented:

We have no plans to repatriate the cash and cash equivalents held in our foreign subsidiary KEL.

The manufacturing operations at our Korean facility, Kowon, have ceased and Kowon was liquidated at fiscal year ended 2018. We have recorded deferred tax liabilities for any additional withholding tax that may be due to the Korean government upon Kowon’s final tax return acceptance.

We expect to expend between $1.0 million and $2.0 million on capital expenditures in 2025.

Critical Accounting Estimates

Our critical accounting estimates are described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition” of our Annual Report on Form 10-K for the fiscal year ended December 28, 2024, as amended.

We invest our excess cash in high-quality U.S. Government, government-backed (e.g., Fannie Mae, FDIC guaranteed bonds and certificates of deposit) and corporate debt instruments, which bear lower levels of relative risk. We believe that the effect, if any, of reasonably possible near-term changes in interest rates on our financial position, results of operations and cash flows should not be material to our cash flows or income. It is possible that interest rate movements would increase our unrealized gain or loss on debt securities. We are exposed to changes in foreign currency exchange rates primarily through our translation of our foreign subsidiaries’ financial position, results of operations, and transaction gains and losses as a result of non-U.S. dollar denominated cash flows related to business activities in Europe, and remeasurement of U.S. dollars to the British pound, the functional currency of our U.K. subsidiaries. We are also exposed to the effects of exchange rates in the purchase of certain raw materials, which are in U.S. dollars, but the price on future purchases is subject to change based on the relationship of the Japanese yen to the U.S. dollar. We do not currently hedge our foreign currency exchange rate risk. We estimate that any market risk associated with our international operations or investments is unlikely to have a material adverse effect on our business, financial condition or results of operation. Our portfolio of marketable securities is subject to interest rate risk and the credit rating of our investments may be affected by the underlying financial health of the guarantors of our investments. We use silicon wafers but do not enter into forward or futures hedging contracts to mitigate against risks related to the price of silicon.

Evaluation of Disclosure Controls and Procedures

As of March 29, 2025, the Company conducted an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 29, 2025, as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures” means controls and other procedures that are designed to ensure that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the requisite time periods and that such disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act are accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our management concluded that, as of March 29, 2025, our disclosure controls and procedures were not effective as of March 29, 2025 due to the following material weaknesses which were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 28, 2024, as amended and continue to exist as of March 29, 2025:

We identified control deficiencies, that when aggregated, constitute material weaknesses as follows:

• Design and operating effectiveness of information technology general computer controls in the areas of user access and program change-management for certain information technology systems that are critical to capturing, processing, and reporting financial transactions. These ineffective information technology controls contributed to (i) improper segregation of duties among certain business process controls and (ii) ineffective data validation of spreadsheets and system-generated reports.
• Management did not design, implement and retain appropriate documentation of control procedures to achieve timely, complete and accurate recording and disclosures across multiple financial statement areas including accounting and disclosure of stockholder’s equity, share-based compensation, certain other receivables, accruals, and certain investments, including insufficient review controls around completeness and accuracy of information produced by the entity and documentation of evidence of reviews.
• Management did not design, implement and retain appropriate documentation of certain business process controls related to the revenue cycle, including insufficient review controls around completeness and accuracy of information produced by the entity including, certain costs incurred, estimates to complete, and documentation of evidence of contract accounting reviews.

Remediation Activities

Management is actively engaged in the implementation of a remediation plan to implement measures designed to improve our internal control over financial reporting to remediate these material weaknesses with oversight from the Audit Committee of the Board of Directors.

Changes in Internal Control over Financial Reporting

Other than the changes discussed above in connection with the changes designed and implemented as a result of our remediation plan of the previously identified material weaknesses, there have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 29, 2025 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Our business and financial results are subject to numerous risks and uncertainties. As a result, the risks and uncertainties discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 28, 2024, as amended should be carefully considered. There have been no material changes in the assessment of our risk factors from those set forth in our Annual Report on Form 10-K for the fiscal year ended December 28, 2024, as amended.