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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 June 29, 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
 
 
 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: (508870-5959
 
 
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 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.    Yes  x   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    x    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
 
x
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  x

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 August 5, 2019
 
Common Stock, par value $0.01
84,086,324
 


Table of Contents


Kopin Corporation
INDEX
 
 
 
 
 
 
Page
No.
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 


Table of Contents


Part 1. FINANCIAL INFORMATION
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
KOPIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 29, 2019
 
December 29, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
12,134,526

 
$
14,326,347

Marketable debt securities, at fair value
19,420,229

 
22,918,016

Accounts receivable, net of allowance of $360,000 in 2019 and $304,000 in 2018
4,904,247

 
3,088,360

Contract assets and unbilled receivables
1,222,605

 
3,089,663

Inventory
3,700,174

 
4,797,238

Prepaid taxes
104,726

 
399,611

Prepaid expenses and other current assets
802,398

 
784,790

Total current assets
42,288,905

 
49,404,025

Plant and equipment, net
2,029,406

 
2,598,842

Operating lease right-of-use assets
3,242,146

 

Goodwill
331,344

 
331,344

Other assets
1,325,163

 
1,361,375

Equity investments
9,141,133

 
5,853,525

Total assets
$
58,358,097

 
$
59,549,111

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
4,116,685

 
$
3,921,880

Accrued payroll and expenses
2,198,416

 
3,038,005

Accrued warranty
535,000

 
571,000

Contract liabilities and billings in excess of revenue earned
1,227,198

 
388,933

Operating lease liabilities
1,017,234

 

Other accrued liabilities
3,259,119

 
1,901,547

Deferred tax liabilities
527,000

 
546,000

Total current liabilities
12,880,652

 
10,367,365

Asset retirement obligations
254,096

 
254,098

Operating lease liabilities, net of current portion
2,314,032

 

Other long-term obligations
1,049,926

 
1,214,827

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 88,614,327 shares in 2019 and 80,735,320 shares in 2018; outstanding 82,053,697 shares in 2019 and 74,008,815 shares in 2018
865,669

 
785,220

Additional paid-in capital
344,998,149

 
335,692,879

Treasury stock (4,513,256 shares in 2019 and 2018, at cost)
(17,238,669
)
 
(17,238,669
)
Accumulated other comprehensive income
1,872,372

 
1,554,587

Accumulated deficit
(288,523,461
)
 
(272,932,143
)
Total Kopin Corporation stockholders’ equity
41,974,060

 
47,861,874

Noncontrolling interest
(114,669
)
 
(149,053
)
Total stockholders’ equity
41,859,391

 
47,712,821

Total liabilities and stockholders’ equity
$
58,358,097

 
$
59,549,111


See notes to unaudited condensed consolidated financial statements

3

Table of Contents



KOPIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 29, 2019
 
June 30, 2018
 
June 29, 2019
 
June 30, 2018
Revenues:
 
 
 
 
 
 
 
Net product revenues
$
4,435,401

 
$
4,472,079

 
$
9,049,257

 
$
9,516,888

Research and development and other revenues
4,674,732

 
1,471,819

 
5,603,801

 
2,080,630

 
9,110,133

 
5,943,898

 
14,653,058

 
11,597,518

Expenses:
 
 
 
 
 
 
 
Cost of product revenues
5,242,514

 
3,497,750

 
11,119,591

 
7,559,941

Research and development
3,330,202

 
4,526,156

 
8,296,918

 
8,977,809

Selling, general and administration
5,375,671

 
6,913,503

 
11,658,474

 
13,844,913

 
13,948,387

 
14,937,409

 
31,074,983

 
30,382,663

Loss from operations
(4,838,254
)
 
(8,993,511
)
 
(16,421,925
)
 
(18,785,145
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
154,310

 
165,513

 
317,671

 
325,364

Other (expense) income
(111,472
)
 
18,101

 
(221,207
)
 
1,119,356

Foreign currency transaction (losses) gains
(183,608
)
 
(235,776
)
 
52,527

 
(27,168
)
Gain on investments
768,000

 

 
768,000

 
2,849,816

 
627,230

 
(52,162
)
 
916,991

 
4,267,368

Loss before provision for income taxes and net (income) loss attributable to noncontrolling interest
(4,211,024
)
 
(9,045,673
)
 
(15,504,934
)
 
(14,517,777
)
Provision for income taxes
(26,000
)
 
(201,000
)
 
(52,000
)
 
(201,000
)
Net loss
(4,237,024
)
 
(9,246,673
)
 
(15,556,934
)
 
(14,718,777
)
Net (income) loss attributable to noncontrolling interest
(23,367
)
 
5,716

 
(34,384
)
 
(58,458
)
Net loss attributable to Kopin Corporation
$
(4,260,391
)
 
$
(9,240,957
)
 
$
(15,591,318
)
 
$
(14,777,235
)
Net loss per share
 
 
 
 
 
 
 
Basic and diluted
$
(0.05
)
 
$
(0.13
)
 
$
(0.20
)
 
$
(0.20
)
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
Basic and diluted
81,950,352

 
73,095,253

 
78,459,666

 
73,086,752

See notes to unaudited condensed consolidated financial statements

4

Table of Contents


KOPIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 29, 2019
 
June 30, 2018
 
June 29, 2019
 
June 30, 2018
Net loss
$
(4,237,024
)
 
$
(9,246,673
)
 
$
(15,556,934
)
 
$
(14,718,777
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
121,026

 
(211,217
)
 
(1,038
)
 
(335,697
)
 
Unrealized holding gains (losses) on marketable securities
104,257

 
(73,262
)
 
326,257

 
(210,136
)
 
Reclassification of holding (losses) gains in net loss
(4,815
)
 
2,982

 
(7,434
)
 
(1,768
)
Other comprehensive income (loss), net of tax
220,468

 
(281,497
)
 
317,785

 
(547,601
)
Comprehensive loss
(4,016,556
)
 
(9,528,170
)
 
(15,239,149
)
 
(15,266,378
)
Comprehensive (income) loss attributable to the noncontrolling interest
(23,367
)
 
38,488

 
(34,384
)
 
(29,445
)
Comprehensive loss attributable to Kopin Corporation
$
(4,039,923
)
 
$
(9,489,682
)
 
$
(15,273,533
)
 
$
(15,295,823
)
See notes to unaudited condensed consolidated financial statements

5

Table of Contents




KOPIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited) 
 
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, December 29, 2018
78,522,066

 
$
785,220

 
$
335,692,879

 
$
(17,238,669
)
 
$
1,554,587

 
$
(272,932,143
)
 
$
47,861,874

 
$
(149,053
)
 
$
47,712,821

Stock-based compensation

 

 
815,842

 

 

 

 
815,842

 

 
815,842

Vesting of restricted stock
10,000

 
100

 
(100
)
 

 

 

 

 

 

Repurchases of restricted stock to satisfy tax withholding obligations
(4,294
)
 
(43
)
 
(7,085
)
 

 

 

 
(7,128
)
 

 
(7,128
)
Other comprehensive income

 

 

 

 
97,317

 

 
97,317

 


97,317

Sale of registered stock
7,272,727

 
72,727

 
7,237,273

 

 

 

 
7,310,000

 

 
7,310,000

Net (loss) income

 

 

 

 

 
(11,330,927
)
 
(11,330,927
)
 
11,017

 
(11,319,910
)
Balance, March 30, 2019
85,800,499

 
858,004

 
343,738,809

 
(17,238,669
)
 
1,651,904

 
(284,263,070
)
 
44,746,978

 
(138,036
)
 
44,608,942

Stock-based compensation

 

 
538,474

 

 

 

 
538,474

 

 
538,474

Vesting of restricted stock
60,000

 
600

 
(600
)
 

 

 

 

 

 

Other comprehensive income

 

 

 

 
220,468

 

 
220,468

 

 
220,468

Sale of registered stock
706,454

 
7,065

 
721,466

 

 

 

 
728,531

 

 
728,531

Net (loss) income

 

 

 

 

 
(4,260,391
)
 
(4,260,391
)
 
23,367

 
(4,237,024
)
Balance, June 29, 2019
86,566,953

 
$
865,669

 
$
344,998,149

 
$
(17,238,669
)
 
$
1,872,372

 
$
(288,523,461
)
 
$
41,974,060

 
$
(114,669
)
 
$
41,859,391


6

Table of Contents


 
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, December 30, 2017
77,572,038

 
$
775,720

 
$
331,119,340

 
$
(17,238,669
)
 
$
3,564,779

 
$
(240,121,901
)
 
$
78,099,269

 
$
(719,422
)
 
$
77,379,847

Stock-based compensation

 

 
1,399,415

 

 

 

 
1,399,415

 

 
1,399,415

Vesting of restricted stock
20,000

 
200

 
(200
)
 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 
(269,863
)
 

 
(269,863
)
 
3,759

 
(266,104
)
Adoption of accounting standards

 

 

 

 

 
3,059,382

 
3,059,382

 

 
3,059,382

Net (loss) income

 

 

 

 

 
(5,536,278
)
 
(5,536,278
)
 
64,174

 
(5,472,104
)
Balance, March 31, 2018
77,592,038

 
775,920

 
332,518,555

 
(17,238,669
)
 
3,294,916

 
(242,598,797
)
 
76,751,925

 
(651,489
)
 
76,100,436

Stock-based compensation

 

 
1,288,374

 

 

 

 
1,288,374

 

 
1,288,374

Vesting of restricted stock
60,000

 
600

 
(600
)
 

 

 

 

 

 

Repurchases of restricted stock to satisfy tax withholding obligations
(3,530
)
 
(35
)
 
(11,367
)
 

 

 

 
(11,402
)
 

 
(11,402
)
Other comprehensive income (loss)

 

 

 

 
(248,725
)
 

 
(248,725
)
 
(32,772
)
 
(281,497
)
Net (loss) income

 

 

 

 

 
(9,240,957
)
 
(9,240,957
)
 
(5,716
)
 
(9,246,673
)
Balance, June 30, 2018
77,648,508

 
$
776,485

 
$
333,794,962

 
$
(17,238,669
)
 
$
3,046,191

 
$
(251,839,754
)
 
$
68,539,215

 
$
(689,977
)
 
$
67,849,238


See notes to unaudited condensed consolidated financial statements

7

Table of Contents


KOPIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
June 29, 2019
 
June 30, 2018
Cash flows used in operating activities:
 
 
 
Net loss
$
(15,556,934
)
 
$
(14,718,777
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
438,294

 
1,130,169

Stock-based compensation
1,354,316

 
2,687,789

Foreign currency (gains) losses
(73,231
)
 
19,534

Change in allowance for bad debt
330,172

 
219,937

Unrealized gain on investments
(768,000
)
 
(2,849,816
)
Deferred income taxes
52,518

 
196,252

Loss on disposal of plant and equipment
251,291

 

Write-off of excess inventory
2,406,492

 

Other non-cash items
(19,631
)
 
301,499

Changes in assets and liabilities, net of acquired assets and liabilities:
 
 
 
Accounts receivable
(2,144,699
)
 
687,986

Contract assets
1,867,058

 
1,315,022

Inventory
(1,309,827
)
 
(605,154
)
Prepaid expenses and other current assets
418,317

 
113,537

Accounts payable and accrued expenses
304,955

 
(2,018,182
)
Contract liabilities and billings in excess of revenue earned
1,070,129

 
312,352

Net cash used in operating activities
(11,378,780
)
 
(13,207,852
)
Cash flows provided by investing activities:
 
 
 
Other assets
(100,810
)
 
(41,966
)
Capital expenditures
(119,815
)
 
(740,172
)
Proceeds from sale of marketable debt securities
3,789,139

 
13,109,285

Cash paid for equity investment
(2,500,000
)
 
(1,000,000
)
Net cash provided by investing activities
1,068,514

 
11,327,147

Cash flows (used in) provided by financing activities:
 
 
 
Sale of registered stock
8,128,531

 

Settlements of restricted stock for tax withholding obligations
(7,128
)
 
(11,402
)
Net cash provided by financing activities
8,121,403

 
(11,402
)
Effect of exchange rate changes on cash
(2,958
)
 
(213,545
)
Net decrease in cash and cash equivalents
(2,191,821
)
 
(2,105,652
)
Cash and cash equivalents:
 
 
 
Beginning of period
14,326,347

 
24,848,227

End of period
$
12,134,526

 
$
22,742,575

Supplemental disclosure of cash flow information:
 
 
 
Issuance costs included in accounts payable and accrued expenses
$
90,000

 
$

Income taxes paid

 
1,300,000

See notes to unaudited condensed consolidated financial statements


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KOPIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
BASIS OF PRESENTATION
The condensed consolidated financial statements of Kopin Corporation as of June 29, 2019 and for the three and six month periods ended June 29, 2019 and June 30, 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. 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.
Going Concern
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 has incurred net losses of $35.8 million and net cash outflows from operations of $28.2 million for the fiscal year ended 2018. The Company incurred a net loss of $15.6 million for the six months ended June 29, 2019 and net cash outflows from operations of $11.4 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 $31.6 million of cash and cash equivalents and marketable debt securities at June 29, 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.

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2.
ACCOUNTING STANDARDS
Recently Adopted Accounting Standards
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 Annual Report on Form 10-K for the fiscal year ended December 29, 2018. Effective December 30, 2019, 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.
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'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.

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3.
CASH AND CASH EQUIVALENTS AND MARKETABLE DEBT SECURITIES
The Company considers all highly liquid, short-term debt instruments with original maturities of three months or less to be cash equivalents.
Marketable debt securities consist primarily of commercial paper, medium-term corporate notes, and U.S. government and agency backed securities. The Company classifies these marketable debt securities as available-for-sale at fair value in “Marketable debt securities, at fair value.” The Company records the amortization of premium and accretion of discounts on marketable debt securities in the results of operations.
The Company uses the specific identification method as a basis for determining cost and calculating realized gains and losses with respect to marketable debt securities. The gross gains and losses realized related to sales and maturities of marketable debt securities were not material during the three and six months ended June 29, 2019 and the fiscal year ended December 29, 2018.
Investments in available-for-sale marketable debt securities were as follows at June 29, 2019 and December 29, 2018:
 
Amortized Cost

Unrealized Losses

Fair Value
 
2019

2018

2019

2018

2019

2018
U.S. government and agency backed securities
$
10,306,091


$
13,064,418


$
(10,895
)

$
(253,495
)

$
10,295,196


$
12,810,923

Corporate debt
9,128,446

 
10,175,084

 
(3,413
)
 
(67,991
)
 
9,125,033

 
10,107,093

Total
$
19,434,537

 
$
23,239,502

 
$
(14,308
)
 
$
(321,486
)
 
$
19,420,229

 
$
22,918,016


The contractual maturity of the Company’s marketable debt securities was as follows at June 29, 2019:
 
Less than
One year
 
One to
Five years
 
Total
U.S. government and agency backed securities
$
999,210

 
$
9,295,986

 
$
10,295,196

Corporate debt
3,669,413

 
5,455,620

 
9,125,033

Total
$
4,668,623

 
$
14,751,606

 
$
19,420,229



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4.
FAIR VALUE MEASUREMENTS
Financial instruments are categorized as Level 1, Level 2 or Level 3 based upon the method by which their fair value is computed. An investment is categorized as Level 1 when its fair value is based on unadjusted quoted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An investment is categorized as Level 2 if its fair market value is based on quoted market prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, based on observable inputs such as interest rates, yield curves, or derived from or corroborated by observable market data by correlation or other means. An investment is categorized as Level 3 if its fair value is based on assumptions developed by the Company about what a market participant would use in pricing the assets.
The following table details the fair value measurements of the Company’s financial assets:
 
 
 
Fair Value Measurement June 29, 2019 Using:
 
Total
 
Level 1
 
Level 2
 
Level 3
Cash and Cash Equivalents
$
12,134,526

 
$
12,134,526

 
$

 
$

U.S. Government Securities
10,295,196

 

 
10,295,196

 

Corporate Debt
9,125,033

 

 
9,125,033

 

Equity Investments
9,141,133

 
300,134

 

 
8,840,999

 
$
40,695,888

 
$
12,434,660

 
$
19,420,229

 
$
8,840,999

 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurement December 29, 2018 Using:
 
Total
 
Level 1
 
Level 2
 
Level 3
Cash and Cash Equivalents
$
14,326,347

 
$
14,326,347

 
$

 
$

U.S. Government 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

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. During the six months ended June 29, 2019, there were no transfers between levels of the fair value hierarchy. Changes in Level 3 investments were as follows:
 
December 29, 2018
 
Net unrealized gains
 
Purchases, issuances and settlements
 
Transfers in and or out of Level 3
 
June 29, 2019
Equity Investments
$
5,565,499

 
$
775,500

 
$
2,500,000

 
$

 
$
8,840,999


The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short-term nature. If accrued liabilities were carried at fair value, these would be classified as Level 2 in the fair value hierarchy.
Marketable Debt Securities
The corporate debt consists of floating rate notes with a maturity that is over multiple years but has interest rates that are reset every three months based on the then-current three-month London Interbank Offering Rate ("three-month Libor"). The Company validates the fair market values of the financial instruments above by using discounted cash flow models, obtaining independent pricing of the securities or through the use of a model that incorporates the three-month Libor, the credit default swap rate of the issuer if applicable and the bid and ask price spread of the same or similar investments which are traded on several markets.
Equity Investments
The Company adopted the measurement alternative for equity investments without readily determinable fair values (often referred to as cost method investments). As a result, equity 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 million capital contribution during the three months ended March 31, 2018. The Company also contributed certain intellectual property. During the three and six months ended June 29, 2019, the Company recorded less than $0.1 million of unrealized gain on this equity investment due to a fluctuation in the foreign exchange rate. As of June 29, 2019, the Company owned an 11.4% interest in this investment and the fair value of this equity investment was approximately $3.6 million at June 29, 2019.

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The Company acquired an equity interest in a customer by exercising a warrant in the second quarter of 2018 for up to 15% of the customer's Series A equity offering as part of the licensing of technology to the customer. The Company used the customer's capital structure, pricing of the shares being offered and the warrant from the customer's Series A financing round in determining the value upon exercising the warrant. In addition, the Company acquired 368,732 shares of the customer's Series B equity valued at $2.5 million based on the fair value of the Series B at the closing in May 2019. During the three and six months ended June 29, 2019, the Company recognized a $0.8 million gain based on an observable price change for the Series A shares by using the customer's Series B capital structure, pricing of the shares being offered and the liquidation preference of Series B. As of June 29, 2019, the Company's total fair value in Series A and Series B equity investments is $5.2 million.
5.
INVENTORY
Inventories are stated at standard cost adjusted to approximate the lower of cost (first-in, first-out method) or net realizable value and consist of the following at June 29, 2019 and December 29, 2018:
 
June 29, 2019
 
December 29, 2018
Raw materials
$
2,412,961

 
$
2,548,139

Work-in-process
887,595

 
1,526,552

Finished goods
399,618

 
722,547

 
$
3,700,174

 
$
4,797,238


6. 
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
 
Six Months Ended
 
June 29, 2019
 
June 30, 2018
 
June 29, 2019
 
June 30, 2018
Non-vested restricted common stock
2,047,374

 
3,442,249

 
2,047,374

 
3,442,249


7.
STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION
Registered Sale of Equity Securities
On March 15, 2019, the Company sold 7.3 million shares of registered common stock for gross proceeds of $8.0 million ($1.10 per share), before deducting underwriting discounts and offering expenses paid by the Company. 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, the Company 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 the Company, pursuant to the partial exercise of the 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.
Non-Vested Restricted Common Stock
The fair value of non-vested restricted common stock awards is generally the market value of the Company’s common stock on the date of grant. The non-vested restricted common stock awards require the employee to fulfill certain obligations, including remaining employed by the Company for one, two or four years (the vesting period) and in certain cases also require meeting either performance criteria or the Company’s stock achieving a certain price. For non-vested restricted common stock awards that solely require the recipient to remain employed with the Company, the stock compensation expense is amortized over the anticipated service period. For non-vested restricted common stock awards that require the achievement of performance criteria, the Company reviews the probability of achieving the performance goals on a periodic basis. If the Company determines that it is probable that the performance criteria will be achieved, the amount of compensation cost derived for the performance goal is amortized over the anticipated service period. If the performance criteria are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed.

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Restricted stock activity was as follows:
 
Shares
 
Weighted
Average
Grant
Fair
Value
Balance, December 29, 2018
2,213,249

 
$
2.51

Granted
130,000

 
1.20

Forfeited
(225,875
)
 
2.97

Vested
(70,000
)
 
3.32

Balance, June 29, 2019
2,047,374

 
$
2.35


On December 31, 2017, the Company amended the employment agreement with our CEO, Dr. John Fan, to expire on December 31, 2020 and as part of the amendment issued restricted stock grants. Of the restricted stock grants issued to Dr. Fan, 640,000 shares will vest upon the first 20 consecutive trading day period following the grant date during which the Company's common stock trades at a price equal to or greater than $5.25150,000 shares will vest at the end of the first 20 consecutive trading day period following the grant date during which the Company’s common stock trades at a price per share equal to or greater than $6.00, and 150,000 shares will vest at the end of the first 20 consecutive trading day period following the grant date during which the Company’s common stock trades at a price per share equal to or greater than $7.00. All of the grants are subject to certain acceleration events and expire on December 31, 2020. The total fair value of these awards on December 31, 2017 was $1.7 million. The value of restricted stock grants that vest based on market conditions is computed on the date of grant using the Monte Carlo model with the following assumptions:
 
For the three months ended June 29, 2019
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)
3

 
3

 
3

Dividend yield
%
 
%
 
%

Stock-Based Compensation
The following table summarizes stock-based compensation expense within each of the categories below as it relates to non-vested restricted common stock awards for the six months ended June 29, 2019 and June 30, 2018 (no tax benefits were recognized):
 
Three Months Ended
 
Six Months Ended
 
June 29, 2019
 
June 30, 2018
 
June 29, 2019
 
June 30, 2018
Cost of product revenues
$
32,107

 
$
155,925

 
$
64,215

 
$
266,151

Research and development
83,785

 
193,767

 
188,515

 
468,083

Selling, general and administrative
422,582

 
938,682

 
1,101,586

 
1,953,555

Total
$
538,474

 
$
1,288,374

 
$
1,354,316

 
$
2,687,789

Unrecognized compensation expense for non-vested restricted common stock as of June 29, 2019 totaled $1.9 million and is expected to be recognized over a weighted average period of approximately two years.

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8. 
ACCRUED WARRANTY
The Company typically warrants its products against defect for 12 to 18 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 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 the six months ended June 29, 2019 were as follows:
Balance, December 29, 2018
$
571,000