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Financial Instruments
 12 Months Ended
Dec. 25, 2021
Investments, All Other Investments [Abstract]  
Financial Instruments

7. Financial Instruments

 

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 25, 2021 Using: 
   Total   Level 1   Level 2   Level 3 
Cash and cash equivalents  $26,787,931   $26,787,931   $—   $— 
U.S. government and agency backed securities   1,000,650    —    1,000,650    — 
Corporate debt   1,506,885    —    1,506,885    — 
Equity Investments   4,912,022    296,173    —    4,615,849 
   $34,207,488   $27,084,104   $2,507,535   $4,615,849 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

       Fair Value Measurement at December 26, 2020 Using: 
   Total   Level 1   Level 2   Level 3 
Cash and cash equivalents  $17,112,869   $17,112,869   $—   $— 
U.S. government and agency backed securities   1,023,120    —    1,023,120    — 
Corporate debt   2,612,561    —    2,612,561    — 
Equity Investments   4,523,525    293,891    —    4,229,634 
   $25,272,075   $17,406,760   $3,635,681   $4,229,634 

 

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 26, 2020   Net unrealized gains   Impairment Charge   Transfers in and or out of Level 3   December 25, 2021 
Equity Investments  $4,229,634   $386,215   $—   $—   $4,615,849 

 

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 has limited, if any, control over their governance, financial reporting and operations. The Company relies on the financial reporting provided by these investments in order to evaluate them for possible impairment. As a result, we face certain operating, financial and other risks relating to these investments, including risks related to the financial strength of the investments.

 

The Company acquired an equity interest in a company in the first quarter of 2018. The Company made $1.9 million in payments to acquire this interest as of December 26, 2020. The Company also contributed certain intellectual property. For the years ended December 25, 2021 and December 26, 2020, the Company recorded approximately $0.1 million and, $0.3 million of unrealized gains, respectively, and for the years ended December 28, 2019, the Company recorded approximately $0.1 million of unrealized loss on this equity investment respectively due to a fluctuation in the foreign exchange rate. As of December 25, 2021, the Company owned an approximate 9% interest in this investment and the fair value of this equity investment was $3.9 million at December 25, 2021 and $3.8 million at December 26, 2020.

 

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, the Company reviewed the financial condition and other factors of the customer and, as a result, the Company recorded an impairment charge of $5.2 million to reduce its investment in the customer to zero as of December 25, 2021. As of December 25, 2021, the Company owned an approximate 2.8% interest in this investment.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

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 SolosTM (“Solos”) product line and WhisperTM 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 its potential loss exposure is the value of the investment recorded on its 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. In 2020 the Company performed impairment analysis and wrote the investment down to $0.4 million as of December 26, 2020.

 

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 25, 2021 and December 26, 2020:

 

   Amortized Cost   Unrealized Gains/(Losses)   Fair Value 
   2021   2020   2021   2020   2021   2020 
U.S. government and agency backed securities  $1,000,128   $1,003,941   $522   $19,179   $1,000,650   $1,023,120 
Corporate debt   1,500,000    2,603,704    6,885    8,857    1,506,885    2,612,561 
Total     $2,500,128   $3,607,645   $7,407   $28,036   $2,507,535   $3,635,681 

 

The contractual maturity of the Company’s marketable debt securities is as follows at December 25, 2021:

 

   Less than
One year		   One to
Five years		   Total 
U.S. government and agency backed securities  $1,000,650   $—   $1,000,650 
Corporate debt   —    1,506,885    1,506,885 
Total  $1,000,650   $1,506,885   $2,507,535