Financial Instruments

12 Months Ended

Dec. 28, 2019

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 at December 28, 2019 Using:
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	6,029,247	$	6,029,247	$	—	$	—
U.S. government and agency backed securities	8,296,870		—		8,296,870		—
Corporate debt	7,456,127		—		7,456,127		—
Equity Investments	4,537,159		386,711		—		4,150,448
	$	26,319,403	$	6,415,958	$	15,752,997	$	4,150,448



			Fair Value Measurement at December 29, 2018 Using:
	Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	14,326,347	$	14,326,347	$	—	$	—
U.S. government and agency backed securities	12,810,923		—		12,810,923		—
Corporate debt	10,107,093		—		10,107,093		—
Equity Investments	5,853,525		288,026		—		5,565,499
	$	43,097,888	$	14,614,373	$	22,918,016	$	5,565,499

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short-term nature. If accrued liabilities were carried at fair value, these would be classified as Level 2 in the fair value hierarchy.

Changes in Level 3 investments are as follows:



	December 29, 2018		Net unrealized gains/(losses)			Purchases, issuances and settlements		Transfers in and or out of Level 3		December 28, 2019
Equity Investments	$	5,565,499	$	(3,915,051	)	$	2,500,000	$	—	$	4,150,448

Equity Investments

Equity investments rarely traded or not quoted will generally have less (or no) pricing observability and a higher degree of judgment utilized in measuring fair value. Initial measurement of equity investments occurs when an observable price for the equity investment is available. The Company adopted the measurement alternative for equity investments without readily determinable fair values (often referred to as cost method investments) on a prospective basis. As a result, these investments will be revalued upon occurrence of an observable price change for similar investments and for impairments.

The Company acquired an equity interest in a company in the first quarter of 2018. The Company made a $1.0 million capital contribution during the three months ended March 31, 2018. The Company also contributed certain intellectual property. For the years ended December 28, 2019 and December 29, 2018, the Company recorded less than $0.1 million and $0.3 million of unrealized loss on this equity investment respectively due to a fluctuation in the foreign exchange rate. As of December 28, 2019, the Company owned an 11% interest in this investment and the fair value of this equity investment was $3.6 million at December 28, 2019.

In 2017 the Company had a warrant to acquire up to 15% of the next round of equity offered by a customer as part of the licensing of technology to the customer. The Company used the pricing and terms of the qualified financing round by the customer in determining the value of its Series A warrant and recorded a gain of $2.0 million. The Company acquired an equity interest in the customer by exercising the Series A warrant into Series A shares in the second quarter of 2018 and recorded a loss of less than $0.1 million. In addition, the Company acquired shares of the customer's Series B shares valued at $2.5 million based on the fair value of the Series B at the closing in May 2019. During the second quarter of 2019, the Company recognized a $0.8 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. In the fourth quarter of 2019 Kopin reviewed the financial condition and other factors of the customer and as a result, in the fourth quarter of 2019, we recorded an impairment charge of $5.2 million to reduce our investment in the customer to zero as of December 28, 2019.

On September 30, 2019 the Company entered into an Asset Purchase Agreement (the “Solos Purchase Agreement”) pursuant to which the Company sold and licensed certain assets of our Solos^TM (“Solos”) product line and Whisper^TM Audio (“Whisper”) 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. The Company will also receive a royalty in the single digits on the net sales amount of Solos products for a three-year period, after commencement of commercial production. The Company has performed the analysis and identified Solos Technology as a variable interest entity that should not be consolidated by Kopin as Kopin is not the primary beneficiary of the entity. Kopin is not obligated to provide any additional funding support to Solos Inc., and our potential loss exposure is the value of the investment recorded on our books. Based on the price paid for equity by the other 80.0% owners of Solos Inc., volatility based on a peer group and assumptions about the risk free interest rate, the Company estimated the fair value of its’ equity holdings at $0.6 million and recorded $0.6 million gain on investment for this equity transaction as the basis of assets transferred was zero.

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 and the bid and ask price spread of the same or similar investments which are traded on several markets. Investments in available-for-sale marketable debt securities are as follows at December 28, 2019 and December 29, 2018:



	Amortized Cost				Unrealized Losses						Fair Value
	2019		2018		2019			2018			2019		2018
U.S. government and agency backed securities	$	8,304,229	$	13,064,418	$	(7,359	)	$	(253,495	)	$	8,296,870	$	12,810,923
Corporate debt	7,459,298		10,175,084		(3,171		)	(67,991		)	7,456,127		10,107,093
Total	$	15,763,527	$	23,239,502	$	(10,530	)	$	(321,486	)	$	15,752,997	$	22,918,016

The contractual maturity of the Company’s marketable debt securities is as follows at December 28, 2019:



	Less than One year		One to Five years		Total
U.S. government and agency backed securities	$	299,250	$	7,997,620	$	8,296,870
Corporate debt	3,346,615		4,109,512		7,456,127
Total	$	3,645,865	$	12,107,132	$	15,752,997