UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  
 FORM 10-Q
  
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172018
¨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
  
 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes    x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨  Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company)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

1


Indicate the number of shares outstanding of each issuer’s classes of common stock, as of the latest practicable date.
ClassOutstanding as of NovemberAugust 6, 20172018 
Common Stock, par value $0.0175,336,56376,627,503 

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

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Part 1:1. FINANCIAL INFORMATION
 
Item 1:1.Condensed Consolidated Financial Statements (Unaudited)
KOPIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30, 2017 December 31, 2016June 30, 2018 December 30, 2017
ASSETS      
Current assets:      
Cash and equivalents$25,882,554
 $15,822,495
Cash and cash equivalents$22,742,575
 $24,848,227
Marketable debt securities, at fair value51,454,910
 61,375,401
30,681,129
 43,907,457
Accounts receivable, net of allowance of $149,000 in 2017 and $136,000 in 20162,023,618
 1,664,488
Unbilled receivables124,068
 34,707
Accounts receivable, net of allowance of $353,000 in 2018 and $149,000 in 20172,785,081
 3,955,123
Contract assets and unbilled receivables2,384,307
 704,863
Inventory5,949,010
 3,302,112
4,257,702
 5,080,797
Prepaid taxes166,461
 341,144
96,983
 264,352
Prepaid expenses and other current assets1,089,948
 853,757
1,177,022
 978,677
Total current assets86,690,569
 83,394,104
64,124,799
 79,739,496
Property, plant and equipment, net3,660,925
 2,976,006
5,125,629
 5,077,043
Goodwill2,376,577
 844,023
1,768,539
 1,780,247
Intangible assets, net1,356,546
 
441,818
 883,636
Other assets968,083
 618,139
2,173,428
 3,842,068
Equity investments5,708,816
 
Total assets$95,052,700
 $87,832,272
$79,343,029
 $91,322,490
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current liabilities:      
Accounts payable$3,965,760
 $4,355,462
$3,894,049
 $4,918,605
Accrued payroll and expenses2,755,150
 1,443,976
1,722,559
 1,636,512
Accrued warranty585,000
 518,000
615,000
 649,000
Billings in excess of revenue earned728,281
 981,761
Contract liabilities and billings in excess of revenue earned317,094
 896,479
Other accrued liabilities4,792,347
 2,560,144
1,716,612
 2,066,025
Income tax payable724,688
 935,364
161,620
 1,416,892
Deferred tax liabilities2,606,312
 2,571,000
863,000
 520,000
Total current liabilities16,157,538
 13,365,707
9,289,934
 12,103,513
Deferred revenue, net of current portion153,844
 374,171
Asset retirement obligations268,068
 246,922
264,238
 269,877
Commitments and contingencies
 
Other long-term obligations1,785,775
 1,195,082
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 79,669,818
shares in 2017 and 79,648,618 in 2016; outstanding 72,187,688 shares in 2017 and 64,538,686 shares in 2016
767,009
 766,409
Common stock, par value $.01 per share: authorized, 120,000,000 shares; issued 81,090,758 shares in 2018 and 80,201,313 shares in 2017; outstanding 73,135,253 shares in 2018 and 73,078,783 shares in 2017776,485
 775,720
Additional paid-in capital331,008,801
 328,524,644
333,794,962
 331,119,340
Treasury stock (4,513,256 shares in 2017 and 12,102,258 shares in 2016, at cost)(17,238,669) (42,741,551)
Treasury stock (4,513,256 shares in 2018 and 2017, at cost)(17,238,669) (17,238,669)
Accumulated other comprehensive income2,346,909
 1,570,971
3,046,191
 3,564,779
Accumulated deficit(238,319,253) (214,042,787)(251,839,754) (240,121,901)
Total Kopin Corporation stockholders’ equity78,564,797
 74,077,686
68,539,215
 78,099,269
Noncontrolling interest62,297
 141,957
(689,977) (719,422)
Total stockholders’ equity78,627,094
 74,219,643
67,849,238
 77,379,847
Total liabilities and stockholders’ equity$95,052,700
 $87,832,272
$79,343,029
 $91,322,490
                                          
See notes to unaudited condensed consolidated financial statements

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KOPIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
September 30, 2017 September 24, 2016 September 30, 2017 September 24, 2016June 30, 2018 July 1, 2017 June 30, 2018 July 1, 2017
Revenues:              
Net product revenues$5,589,402
 $5,522,584
 $14,501,945
 $15,597,247
$4,472,079
 $4,979,400
 $9,516,888
 $8,912,543
Research and development revenues549,765
 272,222
 1,942,819
 671,972
1,471,819
 948,069
 2,080,630
 1,393,054
6,139,167
 5,794,806
 16,444,764
 16,269,219
5,943,898
 5,927,469
 11,597,518
 10,305,597
Expenses:              
Cost of product revenues4,144,884
 4,573,581
 11,379,467
 13,856,469
3,497,750
 4,117,226
 7,559,941
 7,234,583
Research and development5,253,860
 4,123,268
 14,213,950
 12,282,620
4,526,156
 4,678,221
 8,977,809
 8,960,090
Selling, general and administration5,344,999
 3,980,605
 16,186,946
 12,023,717
6,913,503
 5,200,261
 13,844,913
 10,841,947
Gain on sale of property and plant
 
 
 (7,700,522)
14,743,743
 12,677,454
 41,780,363
 30,462,284
14,937,409
 13,995,708
 30,382,663
 27,036,620
Loss from operations(8,604,576) (6,882,648) (25,335,599) (14,193,065)(8,993,511) (8,068,239) (18,785,145) (16,731,023)
Other income (expense):              
Interest income191,613
 191,472
 611,532
 532,185
165,513
 186,142
 325,364
 419,919
Other (expense) income, net(109,546) (257,384) 215,883
 (415,758)
Foreign currency transaction gains (losses)224,370
 (1,124,526) (410,373) (1,581,962)
Other income18,101
 65,018
 1,119,356
 325,430
Foreign currency transaction (losses) gains(235,776) 556,539
 (27,168) (634,743)
Gain on investments
 
 274,000
 

 
 2,849,816
 274,000
306,437
 (1,190,438) 691,042
 (1,465,535)(52,162) 807,699
 4,267,368
 384,606
Loss before (provision) benefit for income taxes and net loss (income) attributable to noncontrolling interest(8,298,139) (8,073,086) (24,644,557) (15,658,600)(9,045,673) (7,260,540) (14,517,777) (16,346,417)
Tax (provision) benefit(4,500) (114,000) 1,141,500
 (2,218,000)(201,000) 
 (201,000) 1,146,000
Net loss(8,302,639) (8,187,086) (23,503,057) (17,876,600)(9,246,673) (7,260,540) (14,718,777) (15,200,417)
Net loss (income) attributable to the noncontrolling interest55,217
 69,782
 65,223
 (367,640)
Net loss attributable to the controlling interest$(8,247,422) $(8,117,304) $(23,437,834) $(18,244,240)
Net loss (income) attributable to noncontrolling interest5,716
 (71,431) (58,458) 10,007
Net loss attributable to Kopin Corporation$(9,240,957) $(7,331,971) $(14,777,235) $(15,190,410)
Net loss per share              
Basic and diluted$(0.11) $(0.13) $(0.34) $(0.29)$(0.13) $(0.10) $(0.20) $(0.22)
Weighted average number of common shares outstanding              
Basic and diluted72,187,688
 64,047,852
 69,117,640
 64,012,490
73,095,253
 70,626,542
 73,086,752
 67,582,615
See notes to unaudited condensed consolidated financial statements

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KOPIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 Three Months Ended Nine Months Ended
 September 30, 2017 September 24, 2016 September 30, 2017 September 24, 2016
Net loss$(8,302,639) $(8,187,086) $(23,503,057) $(17,876,600)
Other comprehensive (loss) income:       
     Foreign currency translation adjustments(272,618) 1,718,596
 658,443
 2,362,552
     Unrealized holding gains on marketable securities(29,584) (73,443) 108,196
 336,663
     Reclassification of holding losses in net loss(1,238) (14,092) (5,138) (48,284)
Other comprehensive (loss) income(303,440) 1,631,061
 761,501
 2,650,931
Comprehensive loss$(8,606,079) $(6,556,025) $(22,741,556) $(15,225,669)
Comprehensive income (loss) attributable to the noncontrolling interest63,306
 (19,656) 79,660
 (482,520)
Comprehensive loss attributable to controlling interest$(8,542,773) $(6,575,681) $(22,661,896) $(15,708,189)
  Three Months Ended Six Months Ended
  June 30, 2018 July 1, 2017 June 30, 2018 July 1, 2017
Net loss$(9,246,673) $(7,260,540) $(14,718,777) $(15,200,417)
Other comprehensive (loss) income, net of tax:       
 Foreign currency translation adjustments(211,217) (666,343) (335,697) 931,062
 Unrealized holding (losses) gains on marketable securities(73,262) 149,094
 (210,136) 137,780
 Reclassification of holding losses (gains) in net loss2,982
 (2,745) (1,768) (3,900)
Other comprehensive (loss) income, net of tax(281,497) (519,994) (547,601) 1,064,942
Comprehensive loss$(9,528,170) $(7,780,534) $(15,266,378) $(14,135,475)
Comprehensive loss (income) attributable to the noncontrolling interest38,488
 (41,680) (29,445) 16,354
Comprehensive loss attributable to controlling interest$(9,489,682) $(7,822,214) $(15,295,823) $(14,119,121)
See notes to unaudited condensed consolidated financial statements

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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 31, 201676,640,943
 $766,409
 $328,524,644
 $(42,741,551) $1,570,971
 $(214,042,787) $74,077,686
 $141,957
 $74,219,643
Stock-based compensation
 
 2,484,757
 
 
 
 2,484,757
 
 2,484,757
Vesting of restricted stock60,000
 600
 (600) 
 
 
 
 
 
Other comprehensive income
 
 
 
 775,938
 
 775,938
 (14,437) 761,501
Sale of unregistered stock
 
 
 25,502,882
 

(838,632)
24,664,250



24,664,250
Net loss
 
 
 
 
 (23,437,834) (23,437,834) (65,223) (23,503,057)
Balance, September 30, 201776,700,943
 $767,009
 $331,008,801
 $(17,238,669) $2,346,909
 $(238,319,253) $78,564,797
 $62,297
 $78,627,094
 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, 201777,572,038
 $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
 
 2,687,789
 
 
 
 2,687,789
 
 2,687,789
Vesting of restricted stock80,000
 800
 (800) 
 
 
 
 
 
Repurchases of restricted stock to satisfy tax withholding obligations(3,530) (35) (11,367)       (11,402) 
 (11,402)
Other comprehensive loss (income)
 
 
 
 (518,588) 
 (518,588) (29,013) (547,601)
Adoption of accounting standards (Note 2)
 
 
 
 
 3,059,382
 3,059,382
 
 3,059,382
Net loss
 
 
 
 
 (14,777,235) (14,777,235) 58,458
 (14,718,777)
Balance, June 30, 201877,648,508
 $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

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KOPIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months EndedSix Months Ended
September 30, 2017 September 24, 2016June 30, 2018 July 1, 2017
Cash flows from operating activities:      
Net loss$(23,503,057) $(17,876,600)$(14,718,777) $(15,200,417)
Adjustments to reconcile net loss to net cash used in operating activities:      
Depreciation and amortization1,878,363
 949,854
1,130,169
 1,142,506
Accretion of premium or discount on marketable debt securities40,204
 104,282
Stock-based compensation2,990,157
 1,479,481
2,687,789
 1,968,128
Foreign currency losses400,542
 1,715,901
19,534
 656,613
Unrealized gain on warrant(274,000) 
Change in allowance for bad debt219,937
 
Unrealized gain on investments(2,849,816) (274,000)
Deferred income taxes(1,170,017) 1,192,128
196,252
 (1,169,940)
Gain on sale of property and plant
 (7,700,522)
Other non-cash items673,720
 503,115
301,499
 608,672
Change in warranty reserves68,003
 
Changes in assets and liabilities, net of acquired assets and liabilities:      
Accounts receivable71,400
 (524,084)687,986
 241,213
Contract assets1,315,022
 
Inventory(2,519,197) (1,231,705)(605,154) (778,240)
Prepaid expenses and other current assets13,345
 213,028
113,537
 (275,988)
Accounts payable and accrued expenses1,743,215
 1,271,171
(2,018,182) 358,388
Billings in excess of revenue earned(253,480) (132,740)312,352
 45,466
Net cash used in operating activities(19,840,802) (20,036,691)(13,207,852) (12,677,599)
Cash flows from investing activities:      
Other assets(79,916) (7,801)(41,966) (37,296)
Capital expenditures(1,341,744) (329,414)(740,172) (1,071,742)
Proceeds from sale of marketable debt securities33,395,422
 43,836,978
13,109,285
 24,322,300
Purchase of marketable debt securities(22,974,668) (45,905,075)
 (16,812,114)
Proceeds from sale of property and plant
 8,106,819
Cash paid for equity investment(1,000,000) 
Cash paid for acquisition, net of cash acquired(3,690,047) 

 (3,690,047)
Proceeds from sale of III-V product line
 15,000,000
Net cash provided by investing activities5,309,047
 20,701,507
11,327,147
 2,711,101
Cash flows from financing activities:      
Sale of unregistered stock24,664,250
 

 24,664,250
Settlements of restricted stock for tax withholding obligations
 (9,153)(11,402) 
Net cash provided by (used in) financing activities24,664,250
 (9,153)
Net cash (used in) provided by financing activities(11,402) 24,664,250
Effect of exchange rate changes on cash(72,436) 574,850
(213,545) 21,046
Net increase in cash and equivalents10,060,059
 1,230,513
Cash and equivalents:   
Net (decrease) increase in cash and cash equivalents(2,105,652) 14,718,798
Cash and cash equivalents:   
Beginning of period15,822,495
 19,767,889
24,848,227
 15,822,495
End of period$25,882,554
 $20,998,402
$22,742,575
 $30,541,293
Supplemental disclosure of cash flow information:      
Income taxes paid$
 $366,000
$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 (the Company)"Company") as of SeptemberJune 30, 20172018 and for the three and ninesix month periods ended SeptemberJune 30, 20172018 and September 24, 2016July 1, 2017 are unaudited and include all adjustments which, 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’sCompany's Annual Report on Form 10-K for the year ended December 31, 2016.30, 2017. 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. The Company reclassified certain prior period amounts to conform to the current period presentation.
2.ACCOUNTING STANDARDS
Recently Issued Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is an amendment on assessing whether an entity is a principal or an agent in a revenue transaction. This amendment addresses issues to clarify the principal versus agent assessment and lead to more consistent application. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which contains amendments to the new revenue recognition standard on identifying performance obligations and accounting for licenses of intellectual property. The amendments related to identifying performance obligations clarify when a promised good or service is separately identifiable and allows entities to disregard items that are immaterial in the context of a contract. The licensing implementation amendments clarify how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether revenue is recognized over time or at a point in time. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides clarity and implementation guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The new standards have the same effective date and transition requirements as ASU 2014-09. The new standard also requires entities to enhance disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The Company continues to evaluate the potential impact of ASC 606 on its consolidated financial statements and related disclosures. As part of the Company's assessment work to date, the Company with assistance from an external consulting firm is continuing to review and finalize its conclusions relative to is contracts with customers. For the remainder of 2017, the Company plans to finalize its evaluation and implement any required policy, process, and internal control changes required as a result of that evaluation. While the Company continues to assess all potential impacts of the new standard on its consolidated financial statements, the adoption of ASC 606 may accelerate the timing of revenue recognition for certain research and development contracts and the sale of products to military programs whereby revenue will be recognized as the product is produced (as opposed to at a point in time when the product is shipped to the customer) as the Company has an enforceable right to payment for performance completed to date and the inventory has no alternative use. Upon the adoption of ASC 606 using the modified retrospective method on December 31, 2017, the Company expects to record an adjustment to accumulated deficit for the amount that would have been recognized in 2017 under the new guidance and would not have been recognized until shipment of the product in 2018 under the current guidance. The new standard will also require an enhanced level of disclosures in the Company’s quarterly and annual consolidated financial statements.
Leases    
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02 (Topic 842) Leases. Topic 842 supersedes the lease recognition requirements in Accounting Standards Codification Topic 840, "Leases". Under Topic 842,, which requires lessees are required to recognize assetsa right-of-use asset and liabilities on the balance sheetlease liability for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating. Topic 842lease arrangements. The new standard is effective for annual reporting periods, and interim periods within thosefiscal years beginning after December 15, 2018. Entities are required to use a2018, with early adoption permitted, and must be adopted using the modified retrospective approach for leasesapproach. The Company intends to adopt the standard on the effective date of December 30, 2018. Interpretations are on-going and could have a material impact on the Company's implementation. Currently, the Company expects that exist or are entered into after the beginningadoption of the earliest comparative period inASU 2016-02 (Topic 842) Leases will have a material impact on its consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases, but we do not expect it to have a material impact on our results of operations or liquidity.
Recently Adopted Accounting Pronouncements
Recognition and Measurement of Financial Assets and Liabilities
The Company adopted ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities and the related amendments on December 31, 2017 (the first day of the Company's fiscal year 2018). This standard amends various aspects of the recognition, measurement, presentation, and disclosure of financial statements,instruments. 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 there are certain optional practical expedients that an entity may elect to apply. Full retrospective application is prohibited and early adoption by public entities is permitted.for impairments. The Company expects to completethat the adoption of this guidance may have a material effect on its assessment in 2018financial statements on an ongoing basis.
Revenue from Contracts with Customers
The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) effective December 31, 2017 and is required to adopt ASU


2016-02 as of January 1, 2019 usingapplied the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the potential impact of adopting ASU 2016-02the adoption of the new standard to be material to the Company's results of operations on an ongoing basis.
Significant Accounting Policies Update
The Company's significant accounting policies are detailed in "Note 1: Summary of Significant Accounting Policies" of our lease liabilitiesAnnual Report on Form 10-K for the year ended December 30, 2017. Significant changes to the Company's accounting policies as a result of adopting Topic 606 are discussed below.
Revenue Recognition
Substantially all of our revenues are from orders received from our customers for the purchase of wearable technology components that can be integrated to create headset systems. We also have development contracts for the design, manufacture and assetsmodification of products for the U.S. government or a prime contractor for the U.S. government (“U.S. government”) or for a customer that sells into the industrial or consumer markets. The Company's contracts with the U.S. government are typically subject to the Federal Acquisition Regulations (“FAR”) and are priced based on its consolidated balance sheets.estimated or actual costs of producing

Business Combinations
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goods. The FAR provides guidance on the types of costs that are allowable in establishing prices for goods provided under U.S. government contracts. The pricing for non-U.S. government contracts is based on the specific negotiations with each customer.
Our fixed-price contracts with the U.S. government may result in revenue recognized in excess of amounts actually billed. We disclose the in excess of revenues over amounts actually billed as Contract assets on the balance sheet. Amounts billed and due from our customers are classified as accounts receivable on the balance sheet. In January 2017,some instances, the FASB issued ASU 2017-01, Business Combinations (Topic 805).U.S. government retains a small portion of the contract price until completion of the contract. The new guidance clarifiesportion of the definitionpayments retained until final contract settlement is not considered a significant financing component because the intent is to protect the customer. For contracts with the U.S. government, we typically receive interim payments either as work progresses, we achieve certain milestones or based on a schedule in the contract. We recognize a liability for these advance payments in excess of revenue recognized and present it as billings in excess of revenue earned on the balance sheet. The advanced payment typically is not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a business thatcontract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract. For industrial and consumer purchase orders, we typically receive payments within 30 to 60 days of shipments of the product, although for some purchase orders, we may require an entity usesadvanced payment prior to shipment of the product.
To determine the proper revenue recognition method for complex contracts with the same customer, we evaluate whether a transactiontwo or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our development contracts and contracts with the U.S government, the customer contracts with us to provide a significant service of integrating a set of components into a single unit. Hence, the entire contract is accounted for as one performance obligation. Less common, however, we may promise to provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an asset acquisition (or disposal)amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. In cases where we sell standard products, the observable standalone sales are used to determine the standalone selling price.
The Company recognizes revenue from a business combination.contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For certain contracts that meet the foregoing requirements, primarily international direct commercial and military sale contracts, we recognize revenue once we have obtained all regulatory approvals.
Commencing in 2018 for certain contracts with the U.S. government, the Company recognizes revenue over time as we perform because of continuous transfer of control to the customer and the lack of an alternative use for the product. The guidancecontinuous transfer of control to the customer is expectedsupported by liability clauses in the contract that allow the U.S. government to cause fewer acquired setsunilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. For contracts with commercial customers while the contract may have a similar liability clause, our products historically have an alternative use and thus, revenue is recognized at a point in time.
In situations where control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. We generally use the cost-to-cost approach to measure the extent of progress towards completion of the performance obligation for our contracts because we believe it best depicts the transfer of assets (and liabilities)to the customer, which occurs as we incur costs on our contracts. Under the cost-to-cost measure approach, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.
Accounting for design, development and production contracts requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of the work required to be identifiedperformed on many of our contracts, the estimation of total revenue and cost at completion is complicated and subject to many variables. Contract costs include material, labor and subcontracting costs, as businesses. The guidancewell as an allocation of indirect costs. We have to make assumptions regarding the number of labor hours required to complete a task, the complexity of the work to be performed, the availability and cost of materials, and performance by our subcontractors. For contract change orders, claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is effective for fiscal years,considered probable. If our estimate of total contract costs or our determination of whether the customer agrees that a milestone is achieved is incorrect, our revenue could be overstated or understated and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted for transactions that meet certain requirements. The Company is evaluating the impact this standard will have on its financial statements.profits or loss reported could be wrong.

Intangibles- Goodwill
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For our commercial customers, the Company's revenue is recognized when obligations under the terms of a contract with our customer is satisfied; generally this occurs with the transfer of control of the Company's products or services. Revenue is recorded as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Provisions for product returns and Otherallowances are recorded in the same period as the related revenues. We analyze historical returns, current economic trends and changes in customer demand and acceptance of product when evaluating the adequacy of sales returns and other allowances. Certain product sales are made to distributors under agreements allowing for a limited right of return on unsold products. Sales to distributors are primarily made for sales to the distributors' customers and not for stocking of inventory. We delay revenue recognition for our estimate of distributor claims of right of return on unsold products based upon our historical experience with our products and specific analysis of amounts subject to return based upon discussions with our distributors or their customers. Sales, value add and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
The rights and benefits to the Company's intellectual property are conveyed to certain customers through technology license agreements. These agreements may include other performance obligations including the sale of product to the customer. When the license is distinct from other obligations in the agreement, the Company treats the license and other performance obligations as separate performance obligations. Accordingly, the license is recognized at a point in time or over time based on the standalone selling price. The sale of materials are recognized at a point in time, which occurs with the transfer of control of the Company's products or services. In certain instances, the Company is entitled to sales-based royalties under license agreements. These sales-based royalties are recognized when they are earned.
The cumulative effect of the changes made to the Company's consolidated December 31, 2017 balance sheet for the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) was as follows:
Balance SheetBalance at December 30, 2017 Adjustments due to Topic 606 Balance at December 31, 2017
Assets     
Contract assets and unbilled receivables$704,863
 $2,850,274
 $3,555,137
Inventory5,080,797
 (1,082,629) 3,998,168
Other assets3,842,068
 400,000
 4,242,068
      
Liabilities     
Contract liabilities and billings in excess of revenue earned1,555,883
 (891,737) 664,146
      
Stockholders’ equity     
Accumulated Deficit$(240,121,901) $3,059,382
 $(237,062,519)

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In January 2017,accordance with the FASB issued new revenue standard requirements, the impact of adoption on the Company's condensed consolidated statement of operations was as follows:ASU 2017-04, Intangibles- Goodwill
 Three Months Ended June 30, 2018
Statement of OperationsAs Reported 
Balances Without Adoption of
Topic 606
 Effect of Change Higher/(Lower)
Net product revenues$4,472,079
 $4,483,933
 $(11,854)
Research and development revenues1,471,819
 1,558,363
 (86,544)
Cost of product revenues3,497,750
 3,495,042
 2,708
Net loss attributable to Kopin Corporation$(9,240,957) $(9,139,851) $(101,106)
      
 Six Months Ended June 30, 2018
Statement of OperationsAs Reported 
Balances Without Adoption of
Topic 606
 Effect of Change Higher/(Lower)
Net product revenues$9,516,888
 $10,989,276
 $(1,472,388)
Research and development revenues2,080,630
 2,253,718
 (173,088)
Cost of product revenues7,559,941
 8,500,121
 (940,180)
Net loss attributable to Kopin Corporation$(14,777,235) $(14,071,939) $(705,296)
See Note 11. Segments and Other (Topic 350). The new guidance simplifiesDisaggregation of Revenue for additional information regarding the disaggregation of the Company's revenue by major source and the Company's updated accounting policy for goodwill impairments by eliminating Step 2revenue recognition.
Contract Assets
Contract assets include unbilled amounts typically resulting from the goodwill impairment test. The guidance requires, among other things, recognition of an impairment losssales under contracts when the carryingcost-to-cost method of revenue recognition is utilized and revenue recognized from customer arrangements, including licensing, exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. Amounts may not exceed their net realizable value. Contract assets are generally classified as current. The Company classifies the noncurrent portion of contract assets under other assets in its condensed consolidated balance sheets.
Contract Liabilities
Contract liabilities consist of advance payments and billings in excess of cost incurred and deferred revenue.
Performance Obligations
The Company's performance obligations that were satisfied at a point in time accounted for 59% and 84% for the three months ended June 30, 2018 and July 1, 2017, respectively, and 63% and 86% for the six months ended June 30, 2018 and July 1, 2017, respectively. The Company's performance obligations that were satisfied at over time accounted for 41% and 16% for the three months ended June 30, 2018 and July 1, 2017, respectively, and 37% and 14% for the six months ended June 30, 2018 and July 1, 2017, respectively.
Remaining performance obligations represent the transaction price of orders for which work has not been performed and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity ("IDIQ")). As of June 30, 2018, the aggregate amount of a reporting unit exceeds its fair value. The loss recognized is limited to the total amount of goodwilltransaction price allocated to that reporting unit. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.remaining performance obligations was $6.0 million. The Company is evaluatingexpects to recognize revenue on the impact this standard will have on its financial statements.remaining performance obligations of $6.0 million over the next 2 years. The remaining performance obligations represent amounts to be earned under government contracts, which are subject to cancellation.
2.3.CASH AND CASH EQUIVALENTS AND MARKETABLE 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's investment in GCS Holdings is included in "Other Assets" as available-for-sale and 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 ninesix months ended SeptemberJune 30, 20172018 and the year ended December 31, 2016.30, 2017.
Investments in available-for-sale marketable debt securities are as follows at SeptemberJune 30, 20172018 and December 31, 201630, 2017:
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair ValueAmortized Cost
Unrealized Losses
Fair Value
2017
2016
2017
2016
2017
2016
2017
20162018
2017
2018
2017
2018
2017
U.S. government and agency backed securities$36,365,672

$36,343,817

$

$

$(180,768)
$(252,556)
$36,184,904

$36,091,261
$23,827,644

$35,014,593

$(409,130)
$(288,782)
$23,418,514

$34,725,811
Corporate debt and certificates of deposit15,311,458

25,323,428





(41,452)
(39,288)
15,270,006

25,284,140
Corporate debt7,268,186
 8,988,608
 (5,571) (7,702) 7,262,615
 8,980,906
Certificates of deposit

201,000



(260)


200,740
Total$51,677,130
 $61,667,245
 $
 $
 $(222,220) $(291,844) $51,454,910
 $61,375,401
$31,095,830
 $44,204,201
 $(414,701) $(296,744) $30,681,129
 $43,907,457
The contractual maturity of the Company’s marketable debt securities is as follows at SeptemberJune 30, 2017:2018:
Less than
One year
 
One to
Five years
 
Greater than
Five years
 Total
Less than
One year
 
One to
Five years
 
Greater than
Five years
 Total
U.S. government and agency backed securities$21,245,723
 $12,993,121
 $1,946,060
 $36,184,904
$11,991,930
 $11,426,584
 $
 $23,418,514
Corporate debt and certificates of deposit9,585,467
 5,684,539
 
 15,270,006
Corporate debt1,042,161
 6,220,454
 
 7,262,615
Total$30,831,190
 $18,677,660
 $1,946,060
 $51,454,910
$13,034,091
 $17,647,038
 $
 $30,681,129
The Company conducts a review of its marketable debt securities on a quarterly basis for the presence of other-than-temporary impairment (OTTI)("OTTI"). The Company assesses whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the balance sheet date. Under these circumstances OTTI is considered to have occurred if (1) if the Company intends to sell the security before recovery of its amortized cost basis; (2) if it is “more likely than not” the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis.
The Company further estimates the amount of OTTI resulting from a decline in the creditworthiness of the issuer (credit-related OTTI) and the amount of non credit-related OTTI. Non credit-related OTTI can be caused by such factors as market illiquidity. Credit-related OTTI is recognized in earnings while non credit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (loss). The Company did not record an OTTI for the three and ninesix months ended SeptemberJune 30, 20172018 and September 24, 2016.July 1, 2017.

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3.4.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 September 30, 2017 Using:  Fair Value Measurement June 30, 2018 Using:
Total Level 1 Level 2 Level 3Total Level 1 Level 2 Level 3
Cash and Equivalents$25,882,554
 $25,882,554
 $
 $
Cash and Cash Equivalents$22,742,575
 $22,742,575
 $
 $
U.S. Government Securities23,418,514
 2,997,600
 20,420,914
 
Corporate Debt7,262,615
 
 7,262,615
 
GCS Holdings384,477
 384,477
 
 
Equity Investments5,708,816
 
 
 5,708,816
$59,516,997
 $26,124,652
 $27,683,529
 $5,708,816
       
  Fair Value Measurement December 30, 2017 Using:
Total Level 1 Level 2 Level 3
Cash and Cash Equivalents$24,848,227
 $24,848,227
 $
 $
U.S. Government Securities36,184,904
 6,923,591
 29,261,313
 
34,725,811
 6,927,323
 27,798,488
 
Corporate Debt7,652,455
 
 7,652,455
 
8,980,906
 
 8,980,906
 
Certificates of Deposit7,617,551
 
 7,617,551
 
200,740
 
 200,740
 
GCS Holdings365,017
 365,017
 
 
478,546
 478,546
 
 
Warrant274,000
 
 
 274,000
2,000,000
 
 
 2,000,000
$77,976,481
 $33,171,162
 $44,531,319
 $274,000
$71,234,230
 $32,254,096
 $36,980,134
 $2,000,000
       
  Fair Value Measurement December 31, 2016 Using:
Total Level 1 Level 2 Level 3
Cash and Equivalents$15,822,495
 $15,822,495
 $
 $
U.S. Government Securities36,091,261
 7,144,767
 28,946,494
 
Corporate Debt7,557,029
 
 7,557,029
 
Certificates of Deposit17,727,111
 
 17,727,111
 
GCS Holdings331,454
 331,454
 
 
$77,529,350
 $23,298,716
 $54,230,634
 $
The corporate debt consistsTransfers between levels of floating rate notes with a maturity that is over multiple years but has interest rates which 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 valuesvalue hierarchy are reported at the beginning of the financial instruments above by using discounted cash flow models, obtaining independent pricing of the securities or through the use of a modelreporting period in which incorporates the three month Libor, the credit default swap rate of the issuer and the bid and ask price spread of the same or similarthey occur. Changes in Level 3 investments which are traded on several markets. The Company has 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 fair market value of the warrant was determined based upon expectations from the customer’s management and then applying probabilities of occurrence and discounting back the values using expected returns required for similar instruments.follows:
 December 30, 2017 Net unrealized gains/(losses) Purchases, issuances and settlements Transfers in and or out of Level 3 June 30, 2018
Equity Investments$
 $(141,000) $3,900,000
 $1,949,816
 $5,708,816
Warrant2,000,000
 (50,184) 
 (1,949,816) 
 $2,000,000
 $(191,184) $3,900,000
 $
 $5,708,816
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 and the bid and ask price spread of the same or similar investments which are traded on several markets.
Warrant
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 exercised the warrant in April 2018.

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Equity Investments
The Company acquired an interest in an equity investment by transferring $1.0 million cash and certain intellectual property ("IP") in exchange for shares of common stock in the equity investment. The Company used the pricing of the shares being offered to other investors receiving shares of common stock in the same investment as well as a valuation of the IP to determine the value of its equity interest. As the initial value of the equity investment was determined to be $3.9 million and the carrying value of the IP on the Company’s books was zero, the Company recorded a gain of $2.9 million. The Company recorded a $0.1 million unrealized loss in the six months ended June 30, 2018 in this equity investment due to a fluctuation in the foreign exchange rate.
The Company acquired an interest in an equity investment by exercising 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 customer's capital structure, pricing of the shares being offered and 15% from the customer's qualified financing round in determining the value of its equity investment. The Company recorded an unrealized loss of less than $0.1 million in the six months ended June 30, 2018 in this equity investment due to a change in the Company's estimate of the value of the equity investment based on the observable transaction price at the exercise date of the warrant.
The Company adopted ASU No. 2016-01 and the related amendments on December 31, 2017 (the first day of the Company's fiscal year 2018). This standard amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. 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.
4.5. INVENTORY
Inventory isInventories are stated at standard cost adjusted to approximate the lower of cost (determined on the first-in, first-out)(first-in, first-out method) or marketnet realizable value and consistsconsist of the following at SeptemberJune 30, 20172018 and December 31, 2016:30, 2017:
September 30, 2017 December 31, 2016June 30, 2018 December 30, 2017
Raw materials$2,517,803
 $1,986,491
$1,978,510
 $2,070,153
Work-in-process2,552,517
 1,186,162
1,467,487
 1,829,805
Finished goods878,690
 129,459
811,705
 1,180,839
$5,949,010
 $3,302,112
$4,257,702
 $5,080,797


5.6. NET LOSS PER SHARE
Basic net loss per share is computed using the weighted averageweighted-average number of shares of common stock outstanding during the period less any non-vestedunvested restricted shares. Diluted earningsnet loss per common share if applicable, is calculated using weighted averageweighted-average shares outstanding and contingently issuable shares, less weighted averageweighted-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 outstanding stock options and non-vestedunvested restricted stock units.stock.
The following were not included in weighted averageweighted-average common shares outstanding-diluted because they are anti-dilutive or performance or market conditions hadhave not been met at the end of the period:
 Three Months Ended Nine Months Ended
 September 30, 2017 September 24, 2016 September 30, 2017 September 24, 2016
Non-vested restricted common stock2,968,874
 2,692,516
 2,968,874
 2,692,516
 Three Months Ended Six Months Ended
 June 30, 2018 July 1, 2017 June 30, 2018 July 1, 2017
Non-vested restricted common stock3,442,249
 3,048,874
 3,442,249
 3,048,874

13



6.7.STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION
On April 20, 2017, the Company sold 7,589,000 shares of unregistered common stock to Goertek Inc. for $24,664,250 ($3.25 per share). This represents approximately 10.1% of Kopin’s total outstanding shares of common stock as of the date of purchase. In addition, Kopin and Goertek have entered into agreements to jointly develop and commercialize a range of technologies and wearable products. Goertek is a leading innovative global technology company headquartered in Weifang, China that designs and manufactures a range of consumer electronics products for brand customers including wearables, virtual and augmented reality headsets, and audio products. The transaction was accounted for under FASB ASC 505-30 "Treasury Stock", and the loss on the sale of the treasury stock of approximately $0.8 million was charged to retained earnings. See "Note 13. Amounts Due To/Due From Affiliates" for additional discussion around agreements with Goertek.
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 which 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 which 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. Some
Restricted stock activity was as follows:
 Shares Weighted
Average
Grant
Fair
Value
Balance, December 30, 20172,629,274
 $3.31
Granted1,465,000
 2.22
Forfeited(572,025) 4.12
Vested(80,000) 3.64
Balance, June 30, 20183,442,249
 $2.71
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 awardsgrants issued to Dr. Fan, 640,000 shares will vest upon ourthe first 20 consecutive trading day period following the grant date during which the Company's common stock trades at a price achievingequal to or greater than $5.25, 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 $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 levels. Theseacceleration events and expire on December 31, 2020. The total fair value of these awards are referred to as Liability Awards and are mark-to-market. Accordingly in some periods thereon December 31, 2017 was $1.7 million. The value of restricted stock grants that vest based on market conditions is expense and in other periodscomputed on the expense may reverse. The Company recognizes compensation costs on a straight-line basis overdate of grant using the requisite service period for time-vested awards.Monte Carlo model with the following assumptions:
 Shares Weighted
Average
Grant
Fair
Value
Balance, December 31, 20163,007,674
 $3.21
Granted120,000
 3.44
Forfeited(98,800) 3.17
Vested(60,000) 1.70
Balance, September 30, 20172,968,874
 $3.26
 For the period ended June 30, 2018
Performance price target$5.25
 $6.00
 $7.00
Expected volatility48.3% 48.3% 48.3%
Interest rate1.97% 1.97% 1.97%
Expected life (years)3
 3
 3
Dividend yield% % %

14



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 three and ninesix months ended SeptemberJune 30, 20172018 and September 24, 2016July 1, 2017 (no tax benefits were recognized):
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
September 30, 2017 September 24, 2016 September 30, 2017 September 24, 2016June 30, 2018 July 1, 2017 June 30, 2018 July 1, 2017
Cost of product revenues$142,604
 $136,420
 $405,778
 $426,357
$155,925
 $159,081
 $266,151
 $263,174
Research and development203,288
 129,308
 616,500
 378,156
193,767
 194,655
 468,083
 413,213
Selling, general and administrative676,137
 262,700
 1,967,879
 674,968
938,682
 322,287
 1,953,555
 1,291,741
Total$1,022,029
 $528,428
 $2,990,157
 $1,479,481
$1,288,374
 $676,023
 $2,687,789
 $1,968,128
Unrecognized compensation expense for non-vested restricted common stock as of SeptemberJune 30, 20172018 totaled $3.86.1 million and is expected to be recognized over a weighted average period of approximately two years.
8. EQUITY INVESTMENTS
The selling, general and administrative expense includes Liability AwardsCompany 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 June 30, 2018. The Company also contributed certain intellectual property. As of June 30, 2018, the Company owned 12.5% interest in this investment and the increasecarrying value of the Company's investment is $3.9 million. The Company recorded a $0.1 million unrealized loss in expense for the ninesix months ended SeptemberJune 30, 2017 as compared2018 in this equity investment due to September 24, 2016a fluctuation in the foreign exchange rate. The fair value of this equity investment is partially the result of$3.8 million.
The Company acquired an interest in an equity investment by exercising a higher stock pricewarrant 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 at Septemberused the customer's capital structure, pricing of the shares being offered and 15% from the customer's qualified financing round in determining the value of its equity investment. The fair value of this equity investment is $1.9 million.
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 did not have an observable price change for similar investments of its equity investments and recorded no impairments on its equity investments as of June 30, 2017 as compared to September 24, 2016. Included in Other accrued liabilities is $1.6 million in deferred compensation from equity awards which are classified as Liability Awards.2018.
7. NOTE RECEIVABLE
In January 2016, the Company received the final $15.0 million payment resulting from the sale of its III-V product line and its investment in KTC.
8.9. ACCRUED WARRANTY
The Company typically warrants its products against defect for 12 to 15 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 ninesix months ended SeptemberJune 30, 20172018 are as follows:
Balance, December 31, 2016$518,000
Balance, December 30, 2017$649,000
Additions83,000
82,000
Claims(16,000)(116,000)
Balance, September 30, 2017$585,000
Balance, June 30, 2018$615,000
Extended Warranties
Deferred revenue represents the purchase of extended warranties by the Company's customers. The Company recognizes revenue from an extended warranty on the straight-line method over the life of the extended warranty, which is typically 12 to 15 months beyond the standard 12 month12-month warranty. The Company classifies the current portion of deferred revenue under other accrued liabilities in its condensed consolidated balance sheets. The Company currently has $0.5$0.6 million of deferred revenue related to extended warranties.


15

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9.10.INCOME TAXES
The Company recorded a tax provision of approximately $0.2 million for the three months and six months ended June 30, 2018, which represents an increase in deferred tax liabilities for estimated withholding taxes on future repatriation of unremitted foreign earnings of the Company's Korean subsidiary. The Company’s tax benefit of approximately $1.1 million for the ninesix months ended September 30,July 1, 2017, represents the net benefit of $0.1 million for foreign income taxes relatedincluding loss carryback to 2016, uncertain tax positions and a benefit for the net reduction in estimated foreign withholding. In addition, as a result of the acquisition of NVIS, Inc. in the first quarter of 2017, we recognized $1.0 million of deferred tax liabilities which provided evidence of recoverability of our net deferred tax assets that previously carried a full valuation allowance. We reduced the valuation allowance on our net deferred tax assets in the amount of $1.0 million and such reduction was recognized as a benefit for income taxes for the ninesix months ended September 30,July 1, 2017. The Company’s tax provision of approximately $0.1 million for the three months ended September 24, 2016, represents less than $14,000 of state income tax and $0.1 million of foreign income taxes including interest income on intercompany loan and net movement in estimated foreign withholding. The Company’s tax provision of approximately $2.2 million for the nine months ended September 24, 2016, represents $1.0 million of income taxes on the gain on the sale of Kowon’s plant and land, $1.2 million of net movement in estimated foreign withholding on anticipated future remitted earnings of a foreign subsidiary, and $22,000 in state income taxes. As of SeptemberJune 30, 2017,2018, the Company has available for tax purposes U.S. federal NOLs of approximately $153.0$174.0 million expiring 2022 through 2036.2037. The Company has recognized a full valuation allowance on its domestic and certain foreign net deferred tax assets due to the uncertainty of realization of such assets.
Ownership changes, as defined by the Internal Revenue Code, may substantially limit the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income. The ownership change in 2017 did not result in an annual net operating loss limitation as the acquired entity was an S Corporation and did not have loss carryforwards. Subsequent ownership changes could affect the limitation in future years. Such annual limitations could result in the expiration of net operating loss and tax credit carryforwards before utilization.
The tax years 2001 through 2016 remain open to examination by major taxing jurisdictions to which the Company is subject to United States federal tax. These periods have carryforward attributes generated in years past that may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they have or will be used in a future period. State statutes are generally shorter with shorter carryforward periods. The Company is currently not under examination by the Internal Revenue Service and is currently under examination by Massachusetts for the 2013 tax year. The Company recognizes both accrued interest and penalties related to its uncertain tax positions related to intercompany loan interest and potential transfer pricing exposure related to its Korean subsidiary.
The Company has concluded that it does not maintainis in the process of dissolving its permanent reinvestment assertion with regard toKorean subsidiary and repatriating the unremitted earnings of its Korean subsidiaries.subsidiary. As such, it accrues U.S. tax for the possible future repatriation of these unremitted foreign earnings. If the Company were to repatriate these earnings, it expects to have foreign withholding at a rate of 16.5% and does not expect any taxes to be paid in the U.S when repatriated as it currently is expected to be a return of capital.
10.11.BUSINESS COMBINATIONGOODWILL AND GOODWILLINTANGIBLES
In March 2017, the Company purchased 100% of a company for $3.7 million. The acquired company produces virtual reality systems for 3D applications. Additional payments of up to $2.0 million may be required if certain future operating performance milestones are met and the selling shareholders remain employed through March 2020. As there is a requirement to remain employed to earn the contingent payments, these contingent payments will be treated as compensation expense. Commencing on the date of acquisition, the Company consolidated the financial results of the acquired company. The identifiable assets acquired and liabilities assumed at the acquisition date have been recognized at fair value.

The allocation of the purchase price is as follows:
Cash and marketable securities$2,600
Accounts receivable490,700
Inventory768,400
Other identifiable assets46,800
Order backlog840,000
Customer relationships1,000,000
Developed technology460,000
Trademark portfolio160,000
Current liabilities(480,500)
Net deferred tax liabilities(1,084,000)
Goodwill1,489,000
Total$3,693,000


Goodwill represents the recording of the excess of the purchase price over the fair values of the net tangible assets acquired. The values assigned to the acquired assets and liabilities are based on preliminary estimates of fair value available as of the date of this filing and will be adjusted upon completion of final valuations of certain assets and liabilities. Any changes in these fair values could potentially result in an adjustment to the goodwill recorded for this transaction.
The identified intangible assets will be amortized on a straight-line basis over the following lives, in years:
Order backlog1
Customer relationships2
Developed technology2
Trademark portfolio2
The Company recognized $1.1 million in amortization for the nine month period ended September 30, 2017 related to its intangible assets. In conjunction with the acquisition the Company recorded deferred tax liabilities of approximately $1.0 million associated with the future non-deductible amortization of the intangible assets. These deferred tax liabilities can be used to offset the Company’s net deferred tax assets in future years. The Company reduced the valuation allowance on its net deferred tax assets in the amount of $1.0 million and such reduction was recognized as a benefit for income taxes for the nine month period ended September 30, 2017. Acquisition expenses were approximately $0.2 million and are recorded in selling, general and administration expenses.
The following unaudited supplemental pro forma disclosures are provided for the three and nine month periods ended September 24, 2016 and the nine month period ended September 30, 2017, assuming the acquisition of the company had occurred as of December 26, 2015. All intercompany transactions have been eliminated.
 Three months ended Nine months ended
 September 24, 2016 September 30, 2017 September 24, 2016
Revenues$6,698,701
 $17,081,144
 $17,894,777
Net loss(7,710,770) (23,271,116) (18,226,203)
Since the date of acquisition, the Company recorded revenue and net loss of $1.9 million and $0.1 million, respectively, in the three month period ended September 30, 2017, and for the nine month period ended September 30, 2017 the revenues and net loss from the acquired company were $3.7 million and $0.5 million, respectively.
A rollforward of the Company's goodwill by segment is as follows:
 Kopin Industrial Total
Balance, December 31, 2016$844,023
 $
 $844,023
March 2017 acquisition
 1,488,650
 1,488,650
Change due to exchange rate fluctuations43,904
 
 43,904
Balance, September 30, 2017$887,927
 $1,488,650
 $2,376,577
 Kopin Industrial Total
Balance, December 30, 2017$891,683
 $888,564
 $1,780,247
Change due to exchange rate fluctuations(11,708) 
 (11,708)
Balance, March 31, 2018$879,975
 $888,564
 $1,768,539
The Company has entered into two joint venture agreementsrecognized $0.2 million of amortization expense for the three months ended June 30, 2018 and other agreementsJuly 1, 2017 and $0.4 million and $0.6 million of amortization expense for the six months ended June 30, 2018 and July 1, 2017, respectively, related to intangible assets. At June 30, 2018 and December 30, 2017, the Company's intangible assets include customer relationships, developed technology and a trade name, which are subjecthad a total carrying value of $2.5 million, total accumulated amortization of $2.1 million and $1.6 million, respectively, and a total net book value of $0.4 million and $0.9 million, respectively. The intangibles have a remaining life of less than 1 year as of June 30, 2018.

16

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12.     CONTRACT ASSETS AND LIABILITIES
Net contract assets (liabilities) consisted of the following:
 June 30, 2018 December 30, 2017 $ Change % Change
Contract assets—current$2,384,307
 $704,863
 $1,679,444
 238 %
Contract assets—noncurrent400,000
 
 400,000
  %
Contract liabilities—current(783,926) (1,181,712) 397,786
 (34)%
Contract liabilities—noncurrent(153,844) (374,171) 220,327
 (59)%
Net contract assets (liabilities)$1,846,537
 $(851,020) $2,697,557
 (317)%
The $2.7 million increase in the Company's net contract assets (liabilities) from December 30, 2017 to certain closing conditions including government approvals. IfJune 30, 2018 was primarily due to the transactions closeadoption of Topic 606.
In the three and six months ended June 30, 2018, the Company will contribute certain intellectual propertyrecognized revenue of less than $0.1 million related to our contract liabilities at December 31, 2017. In the three and approximately $8.0 million.six months ended July 1, 2017, the Company recognized revenue of $0.1 million and $0.2 million, respectively, related to our contract liabilities at January 1, 2017.
The Company did not recognize impairment losses on our contract assets in the three and six months ended June 30, 2018 and July 1, 2017.
11.13.     SEGMENTS AND GEOGRAPHICAL INFORMATIONDISAGGREGATION OF REVENUE
The Company’s chief operating decision maker is its Chief Executive Officer. The Company has determined it has two reportable segments, Industrial, which includes the operations that develop and manufacture its reflective display products and virtual reality systems for test and simulation products, and Kopin, which includes the operations that develop and manufacture its other products. Previously,
As noted in Note 2. Accounting Standards, effective December 31, 2017, the Company had two segments consistingadopted the requirements of KopinTopic 606 using the modified retrospective method. The comparative information has not been restated and FDD. The acquired company is includedcontinues to be reported under the accounting standards in the segment formerly known as FDD and the segment has been renamed to Industrial.effect for those periods.

17

Table of Contents


The following table presents the Company’s reportable segmentSegment financial results (in thousands):were as follows:
 Three Months Ended
 September 30, 2017 September 24, 2016
 Kopin Industrial Total Kopin Industrial Total
Revenues$3,744
 $2,395
 $6,139
 $4,708
 $1,087
 $5,795
Net loss attributable to the controlling interest(8,117) (130) (8,247) (7,901) (216) (8,117)
 Three Months Ended Six Months Ended
Total Revenue (in thousands)
June 30, 2018 July 1, 2017 June 30, 2018 July 1, 2017
Kopin$4,405
 $3,705
 $7,403
 $6,665
Industrial1,948
 2,222
 4,604
 3,641
Eliminations(409) 
 (409) 
Total$5,944
 $5,927
 $11,598
 $10,306
        
 Three Months Ended Six Months Ended
Total Intersegment Revenue (in thousands)
June 30, 2018 July 1, 2017 June 30, 2018 July 1, 2017
Kopin$
 $
 $
 $
Industrial409
 
 409
 
Total$409
 $
 $409
 $
        
 Three Months Ended Six Months Ended
Net Loss Attributable to Kopin (in thousands)
June 30, 2018 July 1, 2017 June 30, 2018 July 1, 2017
Kopin$(8,844) $(7,141) $(14,834) $(15,052)
Industrial(397) (191) 57
 (138)
Total$(9,241) $(7,332) $(14,777) $(15,190)
        
Total Assets (in thousands)
    June 30, 2018 December 30, 2017
Kopin    $74,693
 $82,707
Industrial    4,650
 8,615
Total    $79,343
 $91,322
Total long-live assets by country at June 30, 2018 and December 30, 2017 were as follows:
 Nine Months Ended
 September 30, 2017 September 24, 2016
 Kopin Industrial Total Kopin Industrial Total
Revenues$10,409
 $6,036
 $16,445
 $13,176
 $3,093
 $16,269
Net loss attributable to the controlling interest(23,170) (268) (23,438) (17,628) (616) (18,244)
Total assets87,043
 8,010
 95,053
 92,799
 1,699
 94,498
Long-lived assets3,544
 117
 3,661
 2,937
 
 2,937
Total Long-lived Assets (in thousands)
June 30, 2018 December 30, 2017
U.S.$2,249
 $2,456
United Kingdom169
 192
China2,509
 338
Japan167
 206
Korea32
 1,885
Total$5,126
 $5,077
The total assetsWe disaggregate our revenue from contracts with customers by geographic location and by display application, as we believe it best depicts how the nature, amount, timing and uncertainty of Kopinour revenue and cash flows are netaffected by economic factors.

18

Table of $6.0 million and $6.2 million in intercompany loans to Industrial as of September 30, 2017 and September 24, 2016, respectively.Contents


During the three and nine month periodssix months ended SeptemberJune 30, 20172018 and September 24, 2016,July 1, 2017, the Company derived its sales from the following geographies (as a percentage of net revenues):geographies:
Three Months Ended Nine Months EndedThree Months Ended June 30, 2018
September 30, 2017 September 24, 2016 September 30, 2017 September 24, 2016Kopin Industrial Total
(In thousands, except percentages)Revenue % of Total Revenue % of Total Revenue % of Total
United States47% 49% 48% 36%$2,950
 50% $608
 10% $3,558
 60%
Other26
 
 18
 
 44
 1
Americas2,976
 50
 626
 11
 3,602
 61
Asia-Pacific22% 37% 25% 48%987
 17
 468
 8
 1,455
 24
Europe31% 14% 27% 16%442
 7
 425
 7
 867
 15
Australia
 
 20
 
 20
 
Total Revenues100% 100% 100% 100%$4,405
 74% $1,539
 26% $5,944
 100%
           
Three Months Ended July 1, 2017
Kopin Industrial Total
(In thousands, except percentages)Revenue % of Total Revenue % of Total Revenue % of Total
United States$2,212
 37% $671
 11% $2,883
 49%
Other5
 
 
 
 5
 
Americas2,217
 37
 671
 11
 2,888
 49
Asia-Pacific1,009
 17
 546
 9
 1,555
 26
Europe479
 8
 998
 17
 1,477
 25
Australia
 
 7
 
 7
 
Total Revenues$3,705
 63% $2,222
 37% $5,927
 100%
           
Six Months Ended June 30, 2018
Kopin Industrial Total
(In thousands, except percentages)Revenue % of Total Revenue % of Total Revenue % of Total
United States$5,160
 44% $1,994
 17% $7,154
 62%
Other28
 
 22
 
 50
 
Americas5,188
 45
 2,016
 17
 7,204
 62
Asia-Pacific1,467
 13
 1,161
 10
 2,628
 23
Europe748
 6
 995
 9
 1,743
 15
Australia
 
 20
 
 20
 
Middle East
 
 3
 
 3
 
Total Revenues$7,403
 64% $4,195
 36% $11,598
 100%
           
Six Months Ended July 1, 2017
Kopin Industrial Total
(In thousands, except percentages)Revenue % of Total Revenue % of Total Revenue % of Total
United States$4,166
 40% $856
 8% $5,022
 49%
Other9
 
 22
 
 31
 
Americas4,175
 41
 878
 9
 5,053
 49
Asia-Pacific1,601
 16
 1,181
 11
 2,782
 27
Europe889
 9
 1,575
 15
 2,464
 24
Australia
 
 7
 
 7
 
Total Revenues$6,665
 66% $3,641
 35% $10,306
 100%

19

Table of Contents


During the three and six months ended June 30, 2018 and July 1, 2017, the Company derived its sales from the following display applications:
 Three Months Ended June 30, 2018 Three Months Ended July 1, 2017
(In thousands)Kopin Industrial Total Kopin Industrial Total
Military$1,067
 $570
 $1,637
 $954
 $1,282
 $2,236
Industrial472
 748
 1,220
 522
 898
 1,420
Consumer1,505
 
 1,505
 884
 
 884
R&D1,322
 150
 1,472
 939
 9
 948
Other39
 71
 110
 406
 33
 439
Total Revenues$4,405
 $1,539
 $5,944
 $3,705
 $2,222
 $5,927
            
 Six Months Ended June 30, 2018 Six Months Ended July 1, 2017
(In thousands)Kopin Industrial Total Kopin Industrial Total
Military$1,865
 $2,056
 $3,921
 $1,808
 $1,765
 $3,573
Industrial1,220
 1,759
 2,979
 1,109
 1,802
 2,911
Consumer2,396
 
 2,396
 1,528
 
 1,528
R&D1,883
 198
 2,081
 1,384
 9
 1,393
Other39
 182
 221
 836
 65
 901
Total Revenues$7,403
 $4,195
 $11,598
 $6,665
 $3,641
 $10,306
12.14. LITIGATION
The Company may be namedengage in legal proceedings arising in the ordinary course of business. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of such matters and our business, financial condition, results of operations or cash flows could be affected in any particular period.
BlueRadios, Inc. v. Kopin Corporation, Civil Action No. 16-02052-JLK (D. Col.):
On August 12, 2016, BlueRadios, Inc. ("BlueRadios") filed a complaint in the U.S. District Court for the District of Colorado, alleging that the Company breached a contract between it and BlueRadios concerning a joint venture between the Company and BlueRadios to design, develop and commercialize micro-display products with embedded wireless technology referred to as “Golden-i”, breached the covenant of good faith and fair dealing associated with that contract, breached its fiduciary duty to BlueRadios, and misappropriated trade secrets owned by BlueRadios in violation of Colorado law (C.R.S. § 7-74-104(4)) and the Defend Trade Secrets Act (18 U.S.C. § 1836(b)(1)). BlueRadios further alleges that the Company was unjustly enriched by its alleged misconduct, BlueRadios is entitled to an accounting to determine the amount of profits obtained by the Company as a result of its alleged misconduct, and the inventorship on at least ten patents or patent applications owned by the Company need to be corrected to list BlueRadios’ employees as inventors and thereby list BlueRadios as co-assignees of the patents. BlueRadios seeks monetary, declaratory, and injunctive relief.
On October 11, 2016, the Company filed its Answer and Affirmative Defenses. The parties are in the midst of discovery, with the close of all discovery currently set for January 14, 2019. A trial date has not yet been set by the Court. The Company has not concluded a loss from this matter is probable; therefore, we have not recorded an accrual for litigation or claims related to this matter for the period ended June 30, 2018. The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.


13.15.     RELATED PARTY TRANSACTIONS
The Company may from time to time enter into agreements with shareholders, affiliates and other companies engaged in certain aspects of the display, electronics, optical and software industries as part of our business strategy. In addition, the wearable computing product market is relatively new and there may be other technologies the Company needs to purchase from affiliates in order to enhance its product offering. The Company and Goertek Inc. ("Goertek") have entered into agreements to jointly develop and commercialize a range of technologies and wearable products. These include: a mutualmutually exclusive supply and manufacturing arrangement for a certain display product for twenty four24 months after mass production begins; an agreement that provides the Company with the right of first refusal to invest in certain manufacturing capacity for certain products with Goertek; an agreement whereby Goertek will provide system level original equipment manufacturing services for the Company's wearable products; an arrangement whereby the Company will supply display modules for Goertek's virtual reality

20



and augmented reality products; and other agreements related to promotion around certain products as well as providing designs relating to head mounted displays.
During the three and ninesix month periods ended SeptemberJune 30, 2018 and July 1, 2017, the Company had the following transactions with related parties:
Three Months Ended Nine Months EndedThree Months Ended
September 30, 2017 September 30, 2017June 30, 2018��July 1, 2017
Sales Purchases Sales PurchasesSales Purchases Sales Purchases
Goertek$
 $207,694
 $
 $390,619
$
 $78,905
 $
 $173,925
Affiliate 148,320
 
 109,952
 
RealWear, Inc.261,605
 
 
 
$48,320
 $207,694
 $109,952
 $390,619
$261,605
 $78,905
 $
 $173,925
       
Six Months Ended
June 30, 2018 July 1, 2017
Sales Purchases Sales Purchases
Goertek$
 $298,909
 $
 $182,925
RealWear, Inc.512,956
 
 
 
$512,956
 $298,909
 $
 $182,925
At September 30, 2017, theThe Company had the following receivables, contract assets and payables with related parties:
 Receivables Payables
Goertek$
 $103,100
 June 30, 2018 December 30, 2017
 Receivables Contract assets Payables Receivables Payables
Goertek$
 $
 $122,974
 $
 $326,877
RealWear, Inc.246,005
 900,000
 
 414,635
 
 $246,005
 $900,000
 $122,974
 $414,635
 $326,877

21
14. EMBEZZLEMENT
During the third quarter of 2016, the Company discovered embezzlement activities at its Korean subsidiary. Based upon the results of forensic investigation procedures, the Company identified that the embezzlement activities occurred from fiscal year 2011 through fiscal year 2016. The embezzlement resulted in a total theft loss of $1,589,000 over that period and as a result of the embezzlement the Company has made the following correcting adjustments to the amounts presented in its previously issued quarterly financial information.
In the three and nine month periods ended September 24, 2016, the Company has recorded in Other income (expense), net, embezzlement expense of approximately $200,000 and $420,000, respectively, representing the total amount of theft loss that occurred.



Item 2:2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q (including the information incorporated by reference) contains ‘‘forward-looking statements’’statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the United States Private Securities Litigation Reform Act of 1995, and that involve risks and uncertainties. These statements and other risks described below as well as those discussed elsewhere in this Quarterly Report Form 10-Q, documents incorporated by reference and other documents and reports that we file periodically with the Securities and Exchange Commission (“SEC”) include,including, without limitation, statements made relating to our belief that we will incur significant development and marketing costs in 2017 to commercialize our Wearable technologies; our expectation that the cash and marketable debt securities held by Kowon will eventually be remitted back to the U.S.; our expectation that we will offerhave negative cash flow from operating activities in 2018; our proprietary noise cancellation chip whichintention to continue to pursue U.S. government development contracts for applications that relate to our commercial product applications; our belief that it is important to retain personnel with experience and expertise relevant to our business; our belief that it is important to invest in research and development to achieve profitability even during periods when we referare not profitable; our belief that the technical nature of our products and markets demands a commitment to as “Whisper Chip™” in 2017; our expectation that any market risk associatedclose relationships with our international operations is unlikelycustomers; our belief that our wearable technology will be embraced by consumers and commercial users; our belief that our ability to have a material adverse effect ondevelop and expand our business, financial condition or results of operation;wearable technologies and to market and license our concept systems and components will be critical for our revenue growth, positive cash flow, and profitability; our belief that a strengthening of the U.S. dollar could increase the price of our products in foreign markets; our expectation that the impact of the adoption of the new standard, ASU No. 2014-09, Revenue from Contracts with Customers(Topic 606), will be material to the Company's revenues on an ongoing basis; our expectation is that our revenues for the fiscal year 2018 will be in the range of $30 million to $35 million; our belief that our future success will depend primarily upon the technical expertise, creative skills and management abilities of our officers and key employees rather than on patent ownership;our belief that our extensive portfolio of patents, trade secrets and non-patented know-how provides us with a competitive advantage in the wearable technologies market; our expectation not to pay cash dividends for the foreseeable future and to retain earnings for the development of our businesses; our expectation that we will expend betweenbetween $2.0 million and $3.0 $2.5 million on capital expenditures over the next twelve months; our belief that our available cash resources will support our operations and capital needs for at least the next twelve months; our expectation that we will incur taxes based on our foreign operations in 2018; our expectation that we will have a state tax provision in 2017;2018; our statement that we do not have any immediate plans to repatriate the cash and marketable debt securities held in our foreign subsidiaries, other than Korea;our expectation that we would have foreign withholding at a rate of 16.5% if we were to repatriate foreign earnings from our Korean subsidiary and that no taxes would be paid in the U.S. upon repatriation as we currently expect such foreign earnings to be a return of capital; and our belief 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. This Quarterly Report on Form 10-Q should be read in conjunction with our Form 10-K and other documents filed with the Securities and Exchange Commission. Our Form 10-K and other documents we have filed with the Securities and Exchange Commission also contain these additional forward-looking statements. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate, management's beliefs, and assumptions made by management. In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of us. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “could”, “seeks”, “estimates”,“expects,” “anticipates,” “intends,” “plans,” “believes,” “could,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause or contribute to such differences in outcomes and results include, but are not limited to any of, those discussed below in Item 1A and those set forth in our other periodic filings filed with the Securities and Exchange Commission. Except as required by law,the federal securities laws, we do not intend to update any forward-looking statements even if new information becomes available or other events occur in the future.
Critical Accounting PoliciesOverview
Management's discussionWe were incorporated in Delaware in 1984 and analysisare a leading inventor, developer, manufacturer and seller of technologies, components and systems for the smart headset wearable, military, thermal imager, 3D optical inspection system and training and simulation markets.
We adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) effective December 31, 2017 (the first day of our fiscal year 2018) and applied the modified retrospective method. This update is discussed in the notes to the unaudited condensed consolidation financial conditionstatements within Item 1 of this Form 10-Q. All amounts and results of operations are based upondisclosures set forth in this Form 10-Q reflect these changes.
The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 30, 2017 and our unaudited condensed consolidated financial statements. The preparation of thesestatements included in this Form 10-Q.
Critical Accounting Policies Update
Our consolidated financial statements requiresare based on the application of U.S. Generally Accepted Accounting Principles ("GAAP"), which require us to make estimates and judgmentsassumptions about future events that affect the amounts reported amount of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We regularly evaluatein our estimates used in the preparation of ourunaudited consolidated financial statements including those related to revenue recognition under the percentage of completion method, bad debts, inventories, warranty reserves, investment valuations, valuation of stock compensation awards and recoverability of deferred tax assets. When we make acquisitions we use estimates in determining the allocation of the purchase price. These estimates included the forecasted operating results and cash flow projections of the acquired company, the appropriate time period to analyze the forecasted operating results and cash flow projections, additional investments, if any, in order to complete development of products and the cost to bring them to market, the weighted average cost of capital for the Company and discount rates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not apparent from other sources. Actual results will most likely differ from these estimates.accompanying notes. Further detail regarding our critical accounting policies can be found in “Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2016.30, 2017. Significant changes to our critical accounting policies as a result of adoption of Topic 606 are discussed below:
Business Matters
We were incorporated in Delaware in 1984 and
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Revenue Recognition
Substantially all of our revenues are a leading inventor, developer, manufacturer and sellerfrom orders received from our customers for the purchase of Wearable technologies which includewearable technology components and systems.
Kopin Wearable technology includes component technologies whichthat can be integrated to create headset systems. We also have development contracts for the design, manufacture and modification of products and proprietary headset systems which use voice asfor the primary user interface and, through the use of wireless technologies, can contact other user devices in close proximity or information from the cloud.
Components
The components we offer for sale primarily consist of our displays, backlights, ASICs and optical lenses. In 2017, we also anticipate offering our proprietary noise cancellation chip which we refer to as “Whisper Chip™”.
Our principal display products are miniature high density color or monochrome Active Matrix Liquid Crystal Displays (AMLCDs) with resolutions that range from approximately 320 x 240 resolution to 2048 x 2048 resolution, sold in either a transmissive or reflective format. We sell our displays individually or in combination with our other components assembled in a unit. For example, we sell a module unit which includes a single display, backlight and optics in a plastic housing, a binocular display module unit which includes two displays, backlights and optics in a plastic housingU.S. government or a Higher-Level Assembly (HLA) which containsprime contractor for the U.S. government (“U.S. government”) or for a display, light emitting diodecustomer that sells into the industrial or consumer markets. The Company's contracts with the U.S. government are typically subject to the Federal Acquisition Regulations (“FAR”) and are priced based illumination, optics,on estimated or actual costs of producing goods. The FAR provides guidance on the types of costs that are allowable in establishing prices for goods provided under U.S. government contracts. The pricing for non-U.S. government contracts is based on the specific negotiations with each customer.
Our fixed-price contracts with the U.S. government may result in revenue recognized in excess of amounts actually billed. We disclose the in excess of revenues over amounts actually billed as Contract assets on the balance sheet. Amounts billed and electronics indue from our customers are classified as accounts receivable on the balance sheet. In some instances, the U.S. government retains a sealed housing, primarily for military applications.
Our transmissive display products, which we refer to as CyberDisplay™ products, utilize high quality, single crystal silicon-the same high quality silicon used in conventional integrated circuits. This single crystal siliconsmall portion of the contract price until completion of the contract. The portion of the payments retained until final contract settlement is not grown on glass; rather, itconsidered a significant financing component because the intent is first formed on a silicon wafer and patterned into an integrated circuit (includingto protect the active matrix, driver circuitry and other logic circuits) in an integrated circuit foundry. The silicon wafer is then sent to our facilities andcustomer. For contracts with the integrated circuit is lifted offU.S. government, we typically receive interim payments either as a thin film and transferred to glass using our proprietary Wafer™ Engineering technology, so that the transferred layer is a fully functional active matrix integrated circuit which now resides on a transparent substrate.
Our reflective LCOS display products are miniature high density dual mode color sequential/monochrome reflective micro displays with resolutions which range from approximately 1280 x 720 pixels (720P) resolution to 2048 x 1536 pixels (QXGA) resolution. These displays are manufactured at our facility in Scotland, U.K. Our reflective displays arework progresses, we achieve certain milestones or based on a schedule in the contract. We recognize a liability for these advance payments in excess of revenue recognized and present it as billings in excess of revenue earned on the balance sheet. The advanced payment typically is not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract. For industrial and consumer purchase orders, we typically receive payments within 30 to 60 days of shipments of the product, although for some purchase orders, we may require an advanced payment prior to shipment of the product.
To determine the proper revenue recognition method for complex contracts with the same customer, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our development contracts and contracts with the U.S government, the customer contracts with us to provide a significant service of integrating a set of components into a single unit. Hence, the entire contract is accounted for as one performance obligation. Less common, however, we may promise to provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. In cases where we sell standard products, the observable standalone sales are used to determine the standalone selling price.
The Company recognizes revenue from a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For certain contracts that meet the foregoing requirements, primarily international direct commercial and military sale contracts, we recognize revenue once we have obtained all regulatory approvals.
Commencing in 2018 for certain contracts with the U.S. government, the Company recognizes revenue over time as we perform because of continuous transfer of control to the customer and the lack of an alternative use for the product. The continuous transfer of control to the customer is supported by liability clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. For contracts with commercial customers while the contract may have a similar liability clause, our products historically have an alternative use and thus, revenue is recognized at a point in time.
In situations where control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. We generally use the cost-to-cost approach to measure the extent of progress towards completion of the performance obligation for our contracts because we believe it best depicts the transfer of assets to the customer, which occurs as we incur costs on our contracts. Under the cost-to-cost measure approach, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.
Accounting for design, development and production contracts requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of the work required to be performed on many of our contracts, the estimation of total revenue and cost at completion is complicated and subject to many variables. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect costs. We have to make assumptions regarding the number of labor hours required to complete a task, the complexity of the

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proprietary, very high-speed, ferroelectric liquid crystal on silicon (FLCOS) platform. Our digital softwarework to be performed, the availability and logic-based drive electronics combinedcost of materials, and performance by our subcontractors. For contract change orders, claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is considered probable. If our estimate of total contract costs or our determination of whether the customer agrees that a milestone is achieved is incorrect, our revenue could be overstated or understated and the profits or loss reported could be wrong.
For our commercial customers, the Company's revenue is recognized when obligations under the terms of a contract with our customer is satisfied; generally this occurs with the very fast switching binary liquid crystal enables our micro displaytransfer of control of the Company's products or services. Revenue is recorded as the amount of consideration we expect to process images purely digitallyreceive in exchange for transferring goods or providing services. Provisions for product returns and create red, green and blue gray scaleallowances are recorded in the same period as the related revenues. We analyze historical returns, current economic trends and changes in customer demand and acceptance of product when evaluating the adequacy of sales returns and other allowances. Certain product sales are made to distributors under agreements allowing for a limited right of return on unsold products. Sales to distributors are primarily made for sales to the distributors' customers and not for stocking of inventory. We delay revenue recognition for our estimate of distributor claims of right of return on unsold products based upon our historical experience with our products and specific analysis of amounts subject to return based upon discussions with our distributors or their customers. Sales, value add and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
The rights and benefits to the Company's intellectual property are conveyed to certain customers through technology license agreements. These agreements may include other performance obligations including the sale of product to the customer. When the license is distinct from other obligations in the agreement, the Company treats the license and other performance obligations as separate performance obligations. Accordingly, the license is recognized at a point in time domain. This architecture has major advantagesor over time based on the standalone selling price. The sale of materials are recognized at a point in visual performance over other liquid crystal, organic light-emitting diode and MEMS based technologies: precisely controlled full color or monochrome gray scale is achieved on a matrixtime, which occurs with the transfer of undivided high fill factor pixels, motion artifacts are reduced to an insignificant level and there are no sub-pixels, no moving mirrors and no analog conversions to detract from the qualitycontrol of the image.
WeCompany's products or services. In certain instances, the Company is entitled to sales-based royalties under license agreements. These sales-based royalties are developing organic light emitting diode (OLED) displays. We design the display and are using foundries services to manufacture the display. We are targeting virtual reality systems with the OLED displays andrecognized when they are expected to be available in 2018.
We offer a variety of optical lenses, some of which we have developed internally and others we license the rights to sell. We also offer a variety of backlights, some of which we have developed and are “off-the-shelf” components. Our lenses come in a variety of sizes with the smallest being our Pupil lens, followed by our Pearl lens and then our largest being our Prism lens. The different sizes of lenses give us and our customers design flexibility when creating headset systems. There is a trade-off between the lens size and the size of the perceived image to the viewer. For example, a Pearl lens will provide the viewer with an image approximately equivalent to what the viewer would see looking at a smart phone, whereas a Prism lens provides the viewer with an image approximately equivalent to what the viewer would see looking at a tablet. A Pearl lens is smaller than a Prism lens, however, it may enable a more fashionable design. Therefore a customer designing a consumer-oriented product may choose a Pearl lens but a customer designing an enterprise-oriented product might choose a Prism lens. We use third parties to manufacture these lenses.
The Whisper Chip is designed to enhance the performance of existing audio systems and speech recognition engines by allowing the speaker’s voice to be clearly “heard” by the listener, whether the “listener” is a person or a machine. The Whisper chip incorporates our Voice Extraction™ Filter (VEF). VEF is a patented approach to singulating the voice signal without distorting it. The Whisper Chip is an all-digital solution that runs at 16MHz, consumes less than 12mW of power and replaces the CODEC so no ADC or DAC is needed. The Whisper Chip is 4 x 4 mm in size and accepts up to four (4) digital microphone inputs. We use third parties to manufacture the Whisper Chip.
Headset Systems
Our headset systems include:
Consumer-oriented headsets which resemble typical eyeglasses but include voice and audio capabilities allowing the user to communicate with other users and a Pupil display module;
Augmented reality health and fitness sunglasses, called Solos™, that have voice and audio capabilities, a Pupil display module which overlays situational information on the glasses, our Whisper Chip;
Industrial headset reference design, which is essentially a complete head-worn computer that includes an optical pod with one of our display products, a microprocessor, battery, camera, memory and various commercially available software packages that we license; and
Professional virtual reality systems that allow customers to visualize and interact with simulated 3D environments.
Our headsets receive or transmit data from or to the internet by interfacing with a smartphone or similar device via WiFi or Bluetooth. They can also receive information from devices in close proximity using ANT+. The display module or optical pod allows users to view the information such as WEB data, emails, text messages, maps or biometric data (heart rate), situational data (speed, distance traveled, Watts produced) at a “normal” viewing size because of our specialized optics. Our industrial headset provides the capability of viewing technical diagrams, by enabling the user to zoom in to see finer details or zoom out to see a larger perspective. Our industrial headset is equipped with a camera to enable a picture to be taken, video to be streamed or face-to-face communication to occur. The camera enables users to send pictures or stream live video to a remote subject matter expert so that both the user and expert can analyze an issue at the same time and collaboratively identify and implement a solution. Our headset reference designs utilize operating system software we developed. Our professional virtual reality systems allow our customers to develop high-fidelity training and simulation applications.earned.
We have three sources of revenues: product revenues, which are our primary source of revenues, research and development (R&D)("R&D") revenues primarily from development contracts with agencies or prime contractors of the U.S. government and commercial enterprises and license revenues from our reference designs. To date our license revenues have been de minimis. For the three and nine months ended September 30, 2017, R&D revenues were $0.5 million and $1.9 million, or 9.0% and 11.8% of total revenues, respectively. This contrasted with $0.3 million and $0.7 million, or 4.7% and 4.1% of total revenues for the corresponding period in 2016.


 Results of Operations
As described in our "Forward-Looking Statements" on page 23 of this Form 10-Q, 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, which may result in differences in the number of work days in the current and comparable prior interim period and could affect period-to-period comparisons. The following discussions of comparative results among periods, including the discussion of segment results, should be viewed in this context.
Revenues.   For the three and nine month periodssix months ended SeptemberJune 30, 20172018 and September 24, 2016 are referred to asJuly 1, 2017, and 2016, respectively. The year ended period December 31, 2016 is referred to as fiscal year 2016.
Revenues. For 2017 and 2016, our revenues by display application, which include product sales and amounts earned from research and development contracts, were as follows (in millions):follows:
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
Display Revenues by ApplicationSeptember 30, 2017 September 24, 2016 September 30, 2017 September 24, 2016
Consumer$1.3
 $1.5
 $2.8
 $5.9
(In thousands)June 30, 2018 July 1, 2017 June 30, 2018 July 1, 2017
Military2.9
 1.2
 6.1
 3.6
$1,637
 $2,236
 $3,921
 $3,573
Industrial1.1
 2.4
 4.3
 4.6
1,220
 1,420
 2,979
 2,911
Consumer1,505
 884
 2,396
 1,528
R&D1,472
 948
 2,081
 1,393
Other0.3
 0.4
 1.3
 1.5
110
 439
 221
 901
Research & Development0.5
 0.3
 1.9
 0.7
Total$6.1
 $5.8
 $16.4
 $16.3
Total Revenues$5,944
 $5,927
 $11,598
 $10,306
Sales of our products to customers that use our products for Wearable Applications is a critical part of our strategy to increase revenues and return to profitability and positive cash flow. Our success in selling our products for Wearable Applications will depend on the demand for our customers’ new products, which we are unable to predict. Consumer Applications primarily represents sales of our components for products that are worn on the head and  body for gaming and other applications. The decrease in Consumer Applications revenues in 2017 as compared to 2016 is primarily because of a decrease in sales to customers who use our products for drone headset applications and a health and fitness application. Sales of our products for Military Applications increasedapplications include systems used by the military both in 2017the field and for training and simulation. The decrease in Military applications revenues in the three months ended June 30, 2018 as compared to 2016the three months ended July 1, 2017 is primarily becausedue to the completion of a company wemilitary programs at our subsidiary NVIS, Inc. ("NVIS"), which was acquired in March 2017. The increase in Military applications revenues in the first quarter ofsix months ended June 30, 2018 as compared to the six months ended July 1, 2017 that producesis primarily due to incremental revenue from virtual reality optical systems for professional 3D applications. Revenue from the 2017 acquired company were approximately $1.9 millionsimulation and $3.7 million in the three and nine months ended September 30, 2017, respectively. Included in Military Applications is incremental revenue of the acquired company of $1.9 million and $3.2 million for the three and nine months ended September 30, 2017, respectively. We are in qualificationtraining for the U.S. military’s Familymilitary of Weapon Sights (FWS) program. The FWS program has several sub-programs and we are currently proposing to be a supplier for the FWS-I and FWS-C programs. As part of the qualification process we are receiving low volume orders for the FWS-I program. The revenues for the FWS programs are recorded in Research & Development (R&D) and are the reason for the increase in R&D revenues in 2017 as compared to 2016.$0.7 million.
Industrial Applicationsapplications revenue represents customers who purchase our display products for use in headsets used for applications in public safety, and equipment such as 3D metrology equipment and trainingother enterprise applications. Our 3D metrology customers are

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primarily located in Asia and simulation. Revenue fromAsian contract manufacturers represent a significant market for 3D metrology equipment. The decrease in Industrial applications revenue for the three months ended June 30, 2018 as compared to the three months ended July 1, 2017 acquired company were approximately $0.4 millionis primarily due to a decrease in sales to customers who use our display components in industrial headsets and customers that use our displays in 3D metrology equipment. Industrial applications revenue in the ninesix months ended SeptemberJune 30, 2018 was relatively consistent with the six months ended July 1, 2017.
Sales of our displays for Consumer applications is primarily for the use in thermal imaging products, recreational rifle and hand-held scopes and drone racing headsets. The increase in Consumer applications for the three and six months ended June 30, 2018 as compared to the three and six months ended July 1, 2017 was primarily due to increased demand for displays and are includedcomponents used in rifle scope products.
R&D revenues increased in the Industrial category.three and six months ended June 30, 2018 as compared to the three and six months ended July 1, 2017 primarily due to funding for U.S. military programs, including the Family of Weapon Sights ("FWS") program.
Historically, we have recognized revenue in the period when we have shipped units of products. For the fiscal year 2018, we adopted Topic 606 and certain revenues are being recorded on the percentage of completion method using a cost-to-cost approach. Prior to the adoption of Topic 606 we believe we would have recorded approximately $4.1 million as revenue, however, with our adoption of Topic 606 the approximately $4.1 million was recognized as part of the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the impact of the adoption of the new standard to be material to the Company's revenues on an ongoing basis. Our expectation is that our revenues for the fiscal year 2018 will be in the range of $30 million to $35 million.
International sales represented 52%40% and 64%51% of product revenues for the ninethree months ended SeptemberJune 30, 2018 and July 1, 2017, respectively, and September 24, 2016,38% and 51% of product revenues for the six months ended June 30, 2018 and July 1, 2017, respectively. Our international sales are primarily denominated in U.S. currency. Consequently, a strengthening of the U.S. dollar could increase the price in local currencies of our products in foreign markets and make our products relatively more expensive than competitors' products that are denominated in local currencies, leading to a reduction in sales or profitability in those foreign markets. In addition, our Korean subsidiary, Kowon, holds U.S. dollars. As a result, our financial position and results of operations are subject to exchange rate fluctuation in transactional and functional currency. 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 Japanese yen, Great Britain pound, Korean wonBritish Pound Sterling (the functional currency of our U.K. subsidiaries) 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.
 Three Months Ended Nine Months Ended
 September 30, 2017 September 24, 2016 September 30, 2017 September 24, 2016
Cost of product revenues (in millions):$4.1
 $4.6
 $11.4
 $13.9
Cost of product revenues as a % of net product revenues74.2% 82.8% 78.5% 88.8%
For the three and nine months ended September 30, 2017, costCost of product revenues, which is comprised of materials, labor and manufacturing overhead related to the production of our products decreasedfor the three and six months ended June 30, 2018 and July 1, 2017 were as follows:
 Three Months Ended Six Months Ended
(In thousands, except for percentages)June 30, 2018 July 1, 2017 June 30, 2018 July 1, 2017
Cost of product revenues$3,498
 $4,117
 $7,560
 $7,235
Cost of product revenues as a % of net product revenues78.2% 82.7% 79.4% 81.2%
Cost of product revenues as a percentage of net product revenues in 2017the three and six months ended June 30, 2018 decreased as


compared to 2016 becausethe three and six months ended July 1, 2017. The decrease in cost of product revenues for the three months ended June 30, 2018 as compared to the three months ended July 1, 2017 was primarily due to a decrease in our net product revenues. The increase in salescost of product revenues in the six months ended June 30, 2018 as compared to the six months ended July 1, 2017 was primarily due to due to lower utilization in one of our military productsfacilities partially offset by the increase in Military applications revenues, which have higher gross margins than theas compared to our other products sold during same period in 2016.products.
Research and Development. Research and development (R&D)R&D expenses are incurred in support of internal display development programs or programs funded by agencies or prime contractors of the U.S. government and commercial partners. R&D revenues associated with funded programs are presented separately in revenue in the statement of operations. Research and development costs include staffing, purchases of materials and laboratory supplies, circuit design costs, fabrication and packaging of display products, and overhead. ForIn fiscal year 2018, we expect our R&D expenditures to be related to our display products, overlay weapon sights and Kopin Wearable technologies. Funded and internal R&D expense are combined in research and development expenses in

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the statement of operations. R&D expenses for the three and ninesix months ended SeptemberJune 30, 2018 and July 1, 2017 and September 24, 2016, R&D expense waswere as follows (in millions):follows:
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
September 30, 2017 September 24, 2016 September 30, 2017 September 24, 2016
(In thousands)June 30, 2018 July 1, 2017 June 30, 2018 July 1, 2017
Funded$0.8
 $0.2
 $2.4
 $0.4
$781
 $765
 $1,634
 $1,617
Internal4.5
 3.9
 11.8
 11.9
3,745
 3,913
 7,344
 7,343
Total research and development expense$5.3
 $4.1
 $14.2
 $12.3
$4,526
 $4,678
 $8,978
 $8,960
Funded R&D expense for the three and ninesix months ended SeptemberJune 30, 2017 increased2018 was relatively consistent as compared to the prior year due to an increase in spending for military programs.three and six months ended July 1, 2017. For the three and six months ended SeptemberJune 30, 2017, internal R&D increased as compared to prior year due to an increase in spending for wearable technology. For the nine months ended September 30, 2017,2018, internal R&D was essentially flat withrelatively consistent as compared to the same period in 2016.six months ended July 1, 2017. We expect to incur significant development costs in fiscal year 20172018 to commercialize our Wearable technologieswearable technology and develop military products.
Selling, General and Administrative.  Selling, general and administrative (S,("S,G&A)&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 and six months ended June 30, 2018 and July 1, 2017 were as follows:
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
September 30, 2017 September 24, 2016 September 30, 2017 September 24, 2016
Selling, general and administration expense (in millions)$5.3
 $4.0
 $16.2
 $12.0
(In thousands, except for percentages)June 30, 2018 July 1, 2017 June 30, 2018 July 1, 2017
Selling, general and administration expense$6,914
 $5,200
 $13,845
 $10,842
Selling, general and administration expense as a % of revenues87.1% 68.7% 98.4% 73.9%116.3% 87.7% 119.4% 105.2%
S,G&A increased for the three and six months ended SeptemberJune 30, 20172018 as compared to the same period in 2016, reflecting incremental S,G&A of $0.5 million from our acquisition of NVISthree and six months ended months ended July 1, 2017 primarily due to an increase in compensation expenses including stock-based compensation, of $0.5 million. S,G&A increased for the nine months ended September 30, 2017 as compared to the same period in 2016, reflecting incremental S,G&A of $1.1 million from our acquisition of NVIS, an increase in stock-based compensation of $1.5 millionproduct promotion expenses and a $1.0 million increase in professionalinformation technology expenses partially offset by lower consultant usage and patent maintenance fees. The incremental S,G&A from NVIS for the three and nine months ended September 30, 2017 primarily relates to the amortization of intangibles resulting from the acquisition.
Other Income and Expense.
 Three Months Ended Nine Months Ended
 September 30, 2017 September 24, 2016 September 30, 2017 September 24, 2016
Other income (expense), net (in millions):$0.3
 $(1.2) $0.7
 $(1.5)
Other income (expense), net, is primarily composed of interest income, foreign currency transaction and remeasurement gains and losses incurred by our Korean and UK-basedU.K.-based subsidiaries and other non-operating income items. Other income (expense), net, for the three and six months ended June 30, 2018 and July 1, 2017 was as follows:
 Three Months Ended Six Months Ended
(In thousands)June 30, 2018 July 1, 2017 June 30, 2018 July 1, 2017
Other income (expense), net$(52) $808
 $4,267
 $385
During the three and nine months ended SeptemberJune 30, 2018 and July 1, 2017, we recorded $0.2 million of foreign currency losses and $0.6 million of foreign currency gains, respectively. During the six months ended June 30, 2018 and $0.4July 1, 2017, we recorded less than $0.1 million and $0.6 million of foreign currency losses, respectively. During the three and ninesix months ended September 24, 2016, we recorded $1.1 millionJune 30, 2018 and $1.6 million of foreign currency losses, respectively. During the nine months ended September 30,July 1, 2017, we recorded a non-cash loss of less than $0.1 million and $0.3 million gain, respectively, on the mark-to-market of equity investments. During the six months ended June 30, 2018, the Company recognized a warrant wegain of $2.9 million from the transfer of intellectual property in exchange for equity interest in an investment. During the six months ended June 30, 2018, the Company received as part$1.0 million of a license of our technology.
In 2016, we discoveredinsurance proceeds related to the embezzlement at our Korean subsidiary, of approximately $1.6 million which occurred during the period 2011 throughwas discovered in 2016. In the three and nine month periods ended September 24, 2016, we
Tax Provision.  The Company recorded in Other income (expense), net, embezzlement expensea tax provision of approximately $0.2 million for the three months and $0.4 million, respectively, representing the total amount of theft loss that occurred during those time periods. During the ninesix months ended SeptemberJune 30, 2017 we recognized a recovery2018, which represents an increase in deferred tax liabilities for estimated withholding taxes on future repatriation of approximately $0.3 million received from the familyunremitted foreign earnings of the embezzler as restitution.


Tax Provision. For the nine months ended September 30, 2017, we recorded aCompany's Korean subsidiary. The Company’s tax benefit of approximately $1.1 million whichfor the six months ended July 1, 2017, represents the net benefit of $0.1 million for foreign income taxes relatedincluding loss carryback to 2016, uncertain tax positions and a benefit for the net reduction in estimated foreign withholding. In addition, as a result of the acquisition of a company,NVIS, Inc. in the first quarter of 2017, we recognized $1.0 million of net deferred tax liabilities which providesprovided evidence of recoverability of our net deferred tax assets that previously carried a full valuation allowance. We reduced the valuation allowance on our net deferred tax assets in the amount of $1.0 million and such reduction was recognized as a benefit for income taxes for the ninesix months ended September 30,July 1, 2017. For the three and nine months ended September 24, 2016, we recorded a tax provision of $0.1 million and $2.2 million, respectively, for estimated foreign income taxes, an increase in estimated foreign withholding on anticipated future remitted earnings of a foreign subsidiary and estimated state income tax.
Net Income Attributable to Noncontrolling Interest. As of SeptemberJune 30, 2018 and July 1, 2017, we owned approximately 93% of the equity of Kowon and 80% of the equity of eMDT.eMDT America ("eMDT"). Net loss attributable to noncontrolling interest on our consolidated statement of operations represents the portion of the results of operations of our majority owned subsidiaries which is allocated to the shareholders of the equity interests not owned by us. The change in net income attributable to

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noncontrolling interest is the result of the change in the results of operations of Kowon and eMDT for the three and ninesix months ended SeptemberJune 30, 20172018 and September 24, 2016.July 1, 2017.
Liquidity and Capital Resources
At SeptemberJune 30, 2018 and December 30, 2017, we had cash and cash equivalents and marketable securities of $77.3$53.4 million and $68.8 million, respectively, and working capital of $70.5 million compared to $77.2$54.8 million and $70.0$67.6 million respectively, as ofat June 30, 2018 and December 31, 2016.30, 2017, respectively. The change in cash and cash equivalents and marketable securities was primarily due to net outflow of cash used in operating activities of $19.8$13.2 million and acquisitionan equity investment purchase of a company for $3.7$1.0 million, partially offset by cash provided byproceeds from the sale of 7.6 million shares of treasury stock for $24.7 million.marketable debt securities.
Cash and cash equivalents and marketable debt securities held in U.S. dollars at September 30, 2017:Dollars at:
Domestic$58,739,986
Foreign9,166,205
Subtotal cash and marketable debt securities67,906,191
Cash and marketable debt securities held in other currencies and converted to U.S. dollars9,431,273
Total cash and marketable debt securities$77,337,464
 June 30, 2018 December 30, 2017
Domestic locations$41,937,712
 $55,488,190
International locations5,982,088
 6,110,496
Subtotal cash and cash equivalents marketable debt securities held in U.S. dollars47,919,800
 61,598,686
Cash and cash equivalents held in other currencies and converted to U.S. dollars5,503,904
 7,156,998
Total cash and cash equivalents and marketable debt securities$53,423,704
 $68,755,684
We have no plans to repatriate the cash and marketable debt securitiescash equivalents held in our foreign subsidiaries FDD and Kopin Software Ltd. and, as such, we have not recorded any deferred tax liability with respect to such cash. The manufacturing operations at our Korean facility, Kowon, have ceased. Kowon has approximately $18.0$11.0 million of cash and marketable debt securitiescash equivalents at June 30, 2018, which we anticipate will eventually be remitted to the U.S. and, accordingly, we have recorded deferred tax liabilities associated with its unremitted earnings.
In March 2017, we acquired 100%As part of the outstanding stockNVIS acquisition, additional payments by the Company of a company for $3.7 million plus contingent consideration. An additionalup to $2.0 million canmay be earnedrequired if certain cash flowfuture operating performance milestones are met and certain employeesthe selling shareholders remain employed with the companyNVIS through March 2020. As there is a requirement to remain employed to earn the contingent payments, these contingent payments will be treated as compensation expense.
We expect to expend between $2.0 million and $3.0$2.5 million on capital expenditures over the next twelve months. We own approximately 93% of Kowon, our Korean subsidiary. The owners of the remaining 7% have expressed a desire to sell their shares to us. We are evaluating whether to purchase the shares.
The Company has entered into two joint venture agreements and other agreements which arean agreement that is subject to certain closing conditions, including government approvals. IfUnder the transactions closeagreement the Company will contribute certain intellectual property andis to make a capital contribution of approximately $8.0$5.3 million
As of September 30, 2017, we had U.S. federal and state tax loss carry-forwards, which may be used to offset U.S. future federal and state taxable income. We also had tax loss carry-forwards generated in our foreign subsidiaries which may be used to offset future foreign taxable income. We may be subject to alternative minimum taxes, foreign taxes and state income taxes depending on our taxable income and sources of taxable income. (the Company's capital contribution under the agreement is 35.0 million RMB).
Historically, we have financed our operations primarily through public and private placements of our equity securities and cash generated from operations. We believe our available cash resources will support our operations and capital needs for at least the next twelve months.
Seasonality
There has been no seasonal pattern to our sales in fiscal years 20172018 and 2016.2017.


Item 3.Quantitative and Qualitative Disclosures about Market Risk
We invest our excess cash in high-quality U.S. government, government-backed (i.e.: 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 interest ratedebt 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.non-U.S. dollar denominated cash flows related to business activities in Asia and Europe, and remeasurement of U.S. dollars to the British pound and the Korean won, the functional currency of our U.K. and Kowon subsidiaries.subsidiaries, respectively. 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 debt securities is subject to interest rate risk although our intent is to hold securities until maturity. 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.contracts to mitigate against risks related to the price of silicon.

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Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures

Based onAs of June 30, 2018, 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 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 this evaluation, our Chief Executive Officer and Chief Financial Officer as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) were not effective. This conclusion was based on the existence of the material weaknesses in our internal control over financial reporting previously disclosed and discussed below and as more fully discussed in our Annual Report on Form 10-K for the year ended December 31, 2016.

As disclosed in our Annual Report on Form 10-K, Item 9A, for the year ended December 31, 2016, our management concluded that our internal control over financial reporting was not effective at December 31, 2016. We are actively engaged in the implementation of a remediation plan, described below, to ensure that controls contributing to the material weaknesses are designed appropriately and will operate effectively.

Management's Plan to Remediate the Material Weaknesses

Our Korean subsidiary stopped production in 2013 and was maintained by a small staff, pending the sale of the facilities, which occurred in June of 2016. The employee responsible for the embezzlement was able, in large part, to perpetrate the fraud by obtaining the Company’s seal and using it to authenticate fraudulent documents. The Company's seal was removed from local management’s control by December 31, 2016 and now resides with an independent party. Local management must now make requests of our corporate accounting department to execute transactions. Our corporate accounting department coordinates with the independent party to execute any transactions. Our Korean subsidiaries' accounting function has been outsourced to an independent third party who reports directly to the corporate accounting department. In addition, enhanced reviews of bank statements, account reconciliations and supporting analysis are being performed by our corporate accounting department. We have also hired additional qualified personnel in our corporate accounting department who are implementing additional internal reporting procedures, including those designed to add depth to our review processes.

We expect that our remediation efforts will continue, although the material weaknesses will not be considered remediated until our controls have been operational for a period of time, such controls are tested and management concludes that such controls are effective.

Notwithstanding the identified material weakness and management’s assessment that internal control over financial reporting was ineffective as of SeptemberJune 30, 2017, management believes that the consolidated financial statements contained in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.


2018.

Changes in Internal Control over Financial Reporting

There werehave been no changes in the ourCompany’s internal controlscontrol over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conductedoccurred during the quarter ended SeptemberJune 30, 20172018 that have materially affected, or are reasonably likely to materially affect, ourthe Company’s internal control over financial reporting, except for our remediation efforts described above.reporting.


Part II. OTHER INFORMATION
Item 1.Legal Proceedings
WeThe Company may engage in legal proceedings arising in the ordinary course of business. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of such matters and our business, financial condition, results of operations or cash flows could be affected in any particular period.
BlueRadios, Inc. v. Kopin Corporation, Civil Action No. 16-02052-JLK (D. Col.):
On August 12, 2016, BlueRadios, Inc. ("BlueRadios") filed a complaint in the U.S. District Court for the District of Colorado, alleging that the Company breached a contract between it and BlueRadios concerning a joint venture between the Company and BlueRadios to design, develop and commercialize micro-display products with embedded wireless technology referred to as “Golden-i”, breached the covenant of good faith and fair dealing associated with that contract, breached its fiduciary duty to BlueRadios, and misappropriated trade secrets owned by BlueRadios in violation of Colorado law (C.R.S. § 7-74-104(4)) and the Defend Trade Secrets Act (18 U.S.C. § 1836(b)(1)). BlueRadios further alleges that the Company was unjustly enriched by its alleged misconduct, BlueRadios is entitled to an accounting to determine the amount of profits obtained by the Company as a result of its alleged misconduct, and the inventorship on at least ten patents or patent applications owned by the Company need to be corrected to list BlueRadios’ employees as inventors and thereby list BlueRadios as co-assignees of the patents. BlueRadios seeks monetary, declaratory, and injunctive relief.
On October 11, 2016, the Company filed its Answer and Affirmative Defenses. The parties are in the midst of discovery, with the close of all discovery currently set for January 14, 2019. A trial date has not yet been set by the Court. The Company has not concluded a loss from this matter is probable; therefore, we have not recorded an accrual for litigation or claims related to this matter for the period ended June 30, 2018. The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.
Item 1A.Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2016.30, 2017. The risks discussed in our Annual Report on Form 10-K, as modified by the following additional and revised risk factor, and the information in “Forward-Looking Statements” included in this Form 10-Q, could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K and this Form 10-Q are not the only risks we face. Additional

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risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
Changes in government trade policies could increase the cost of our products, which may materially adversely affect our sales or profitability. We depend on Chinese, Taiwanese, and Korean foundries for the manufacture of integrated circuits for our Display products. The U.S. government recently proposed, among other actions, imposing new or higher tariffs on specified imported products originating from China in response to what it characterizes as unfair trade practices, and China has responded by proposing new or higher tariffs on specified products imported from the U.S. In notices published on April 6, 2018 and June 20, 2018, the Office of the United States Trade Representative issued a determination and requests for public comment under Section 301 under the Trade Act of 1974 (the “Notices”) concerning the proposed imposition of an additional 25% tariff on specified products from China, which products comprised approximately $50.0 billion in estimated annual trade value for calendar year 2018. The list of products set forth in the Notices included diodes, integrated circuits and other products that we import from China as part of our supply chain. Further tariffs may be imposed in the future, including a tariff of 25% on integrated circuits, which may be imposed after the completion of a public comment period, which was expected to end on July 31, 2018. Tariffs on components that we import from China or other nations that have imposed, or may in the future impose, tariffs will cause our expenses to increase, which will adversely affect our profitability unless we are able to exclude our products from the tariffs or we raise prices for our products, which may result in our products becoming less attractive relative to products offered by our competitors. In addition, future actions or escalations by either the U.S. or China that affect trade relations may also affect our business, or that of our suppliers or customers, and we cannot provide any assurances as to whether such actions will occur or the form that they may take. Moreover, it is uncertain to what extent, if any, the U.S. tariffs on components that we import from China will affect the Taiwanese foundries on which we depend, in part because many Taiwanese foundries conduct parts of their manufacturing in China.
A protectionist trade environment in either the U.S. or those foreign countries in which we do business, such as a change in the current tariff structures, export compliance or other trade policies, may materially and adversely affect our ability to sell our products in foreign markets. To the extent that our sales or profitability are affected negatively by any such tariffs or other trade actions, our business and results of operations may be materially adversely affected.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Sale of Unregistered Securities
In December 2016, we entered into an agreement with a Chinese company, Goertek Inc. (“Goertek”) pursuant to which Goertek would acquire 7,589,000 shares of unregistered stock of the Company for approximately $24.7 million. The transaction was completed on April 20, 2017. Other than the sale to Goertek we haveWe did not soldsell any securities induring the past three years whichmonths ended June 30, 2018 that were not registered under the Securities Act.
Use of Proceeds
The information required by this item regarding use of proceeds by the Company is reported herein in Part I, Item 2 under “Liquidity and Capital Resources”. 



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Item 6.        Exhibits
*Submitted electronically herewith
**Furnished and not filed herewith

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at SeptemberJune 30, 20172018 (Unaudited) and December 31, 2016,30, 2017, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the three and ninesix months ended SeptemberJune 30, 20172018 and September 24, 2016,July 1, 2017, (iii) Condensed Consolidated Statement of Comprehensive (Loss) Income (Unaudited) for the three and ninesix months ended SeptemberJune 30, 20172018 and September 24, 2016,July 1, 2017, (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the ninesix months ended SeptemberJune 30, 2017,2018, (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the ninesix months ended SeptemberJune 30, 20172018 and September 24, 2016,July 1, 2017, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
   
KOPIN CORPORATION
(Registrant)
     
Date:NovemberAugust 9, 20172018 By:
/S/    John C.C. Fan        
    John C.C. Fan
    
President, Chief Executive Officer and
Chairman of the Board of Directors
    (Principal Executive Officer)
     
Date:NovemberAugust 9, 20172018 By:
/S/    RICHARD A. SNEIDER        
    Richard A. Sneider
    Treasurer and Chief Financial Officer
    (Principal Financial and Accounting Officer)

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