Richard Sneider - Treasurer & CFO John C.C. Fan - Chairman, President & CEO.

Matt Robison - Wunderlich Securities Josh Buchalter - Needham & Company.

Good afternoon and welcome to Kopin Corporation's Third Quarter 2014 Financial Results Conference Call. (Operator Instructions). With us today from the company are Chairman and Chief Executive Officer, Dr. John C.C. Fan and Chief Financial Officer, Mr. Richard Sneider. Please go ahead, sir..

Thank you, operator. Welcome everyone, and thank you for joining us this afternoon. John will begin today's call with a discussion of our strategy, technology and market. I will go through third quarter results at a high level, John will conclude our prepared remarks and then we'll be happy to take your questions.

I would like to remind everyone that during today's call taking place on Tuesday, November 4, 2014 we will be making forward-looking statement as defined in the Private Securities Litigation Reform Act of 1995.

These statements are based on the company's current expectations, projections, beliefs and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those forward-looking statements.

Potential risks include, but are not limited to, demand for our products, operating results of our subsidiaries and market conditions and other factors described in our most recent Annual Report on Form 10-K and other documents filed with the Securities and Exchange Commission.

The company undertakes no obligation to update the forward-looking statements made during today's call. And with that I will turn it over to John..

Thanks, Rich. Good afternoon, everyone and thanks for joining us. As you can see from our business update press release today, we had a very, very good third quarter on many levels.

As some of you’re aware, after we sold our (indiscernible) from our HBT business in January of 2013 we launched into a two year journey of transforming our business for the emerging wearable market while still maintaining our strength in military business. Let's first discuss our military business. We’ve made great strides in our military sector.

We not only have significant increase in production orders, but also have announced in the third quarter that we’re developing a smart gunsight to enhance the effectiveness of our soldiers. Such a smart gunsight is a logical extension of our thermal gunsight program.

Over time Kopin has delivered over 200,000 thermal gunsight units resulting in over $300 million of revenue to Kopin. We believe our new smart gunsight has even higher market potential. Let me comment on a few other areas where we've made progress in the third quarter.

We continued the strengthening of our IP portfolio with the filing of 12 patent applications in the quarter and we had 4 patents granted. The patent applications cover a range of areas from the technical details of our display design to the overall ergonomics of eyewear design.

Through the first nine months of 2014 we’ve filed 55 patent applications and have 16 patents granted, bringing our patent portfolio to over 250 patents and applications. Few companies can rival our impressive IP portfolio in this area. During this quarter we met with various businesses that are or wish to be a player in the wearable space.

Some of these are the world's leading suppliers of components and software in the smartphone, tablet and PC space. While I cannot discuss the details of our discussions, what is significant to note is that each of them have comprehensive product plans and buying [ph] from the highest level of their management.

We’re beginning to see the results of our continued efforts as the efficient military product sales both wearable and industrial product sales have excellent year-on-year growth. In this quarter, our cash burn rate for operating activities moderated which is really consistent with the guidance we gave at the beginning of this year.

We ended this quarter with $94 million in cash and no debt and we're very well positioned to execute on our strategies. Also, as a result of meetings with our customers and certain programs we expect in win in 2015. We commenced construction of additional production capacity which is scheduled to be completed by the end of this year.

This capacity is for modules and high level assembly products both for our military and wearable programs. As I mentioned, the resources that some of the top technology companies are devoting to develop products for the wearable industry confirm our belief that wearables will be a substantial growth market.

A recent report by analysts at Cowen & Company project the wearable market will grow dramatically to about $170 billion global market by year 2020. Consumer applications for wearable technology are expected to comprise about 40% of this market and enterprise and healthcare will grow and quickly make up the remainder.

With our steady, already strong position in these verticals we believe that we are the ideal company for the investors that play in this huge emerging market.

The confluence of wireless technology, the cloud, low-power semiconductor components, the ever-improving voice interface, the advances in (indiscernible) optical engines have made this type of personal device now possible.

Our products, our wearable system knowhow, our strong IP positions and capacities are the reasons that companies partner with us to capitalize on this growing market and over the course of this year we have continued to strengthen our competitive advantage in these critical areas. Let me speak on a few of them.

In software, we understand the compatibility with other platforms is a key requirement and that user interface and user experience is critical to successful adoption of these products. Our software development take all of these into consideration.

As such, we have integrated our proprietary and patented technologies around speech enhancement and noise cancellation into our products; we believe that voice will be the next touch.

In the low-power display our transmissive display has the lowest power requirement, smallest form factor and highest level of brightness combination compared to anything else in the market. Furthermore, it is clear that optics will also be a strong differentiating factor.

We have developed a series of optical engines integrating our display with specifically designed optical elements, together with our low-power driver chips we're providing our customers with complete optical solutions. In ergonomics wearable devices must blend naturally with the user's lifestyle or work functions.

We have demonstrated our ability to design and produce reference and concept systems that do exactly like that with our Golden-i platform for industrial applications and concept systems we show in our showcase in February 2014.

For example, we’re the first and the only one that show early this year smart eyewear that resemble glasses that you and I wear today, but have the functionality of fully-computing device. We’re extremely excited that our vision of a world where wearable headsets will be prevalent is actually very near.

We’ve about $94 million in cash on the book and we're close to completing our two year transformation journey. We’ve already noticed early signs of ramping up and we believe 2015 will be the year of significant growth. It is a kick-off year for wearable. We’re well-positioned to capture this coming wave.

With that I'll now turn the call to Richard for the quarter's financial results and guidance..

Thank you, John. Beginning with the results for the quarter, total revenues for the third quarter of 2014 were $9.5 million compared with $5 million for the third quarter of 2013.

The increase in Q3 revenue year-over-year was primarily driven by military revenues which were $5.7 million in Q3 of 2014 as compared to $1.5 million in Q3 2013, an approximately 280% increase. In addition, revenues from the sale of products for industrial and wearable applications both increased on a year-over-year basis.

Before we go into operating expenses, it is important to remember that our expense structure is not tied to the current quarterly revenues or fiscal year revenue projections, but to our longer-term goals. Cost of goods sold for the third quarter was 57.4% of product revenues compared with 94.5% for the third quarter of last year.

The improvement in gross margin reflects a higher percentage of our sales being driven by higher margin products, the overall increase in sales volume which resulted in lower fixed costs per unit and the use of certain raw materials used to produce military products that were previously written off as excess but were used in the 2014 production.

R&D expenses in the third quarter of 2014 was $4.8 million compared with $5.6 million for the third quarter of 2013. The decrease in Q3 2014 R&D expenses as compared to the same period in the prior year reflects a shift of certain engineering resources to preproduction and production activities.

SG&A expenses were $5 million in both the third quarter of 2014 and 2013. Other income and expense was income of $0.5 million for the third quarter of 2014 as compared with income of $1.5 million for the third quarter of 2013.

We recorded foreign exchange gains of $246,000 for the third quarter of 2014 as compared to foreign exchange losses of $773,000 for the same period in 2013. In 2013, we had a gain on the sale of investments of $1.9 million.

Turning to the bottom-line, our net loss for the quarter was $5 million or $0.08 per fully diluted share compared with a net loss of $8.8 million or $0.14 per diluted share for the third quarter of 2013. For the nine months ended September 27, 2014 cash flows used in operating activities was approximately $17.4 million.

Third quarter amounts for depreciation, amortization and stock compensation as well as CapEx and share repurchase amounts are included in the table attached to the Q3 press release. Now for the guidance, for the full year 2014 we expect revenues to be in the range of $24 million to $28 million.

We’re updating our guidance and we now expect our consolidated loss to be in the range of $29 million to $33 million based on the strength of military orders.

In conjunction with the revised operating results we expect to reduce our cash burn rate this year and we now estimate we will use between $23 million and $26 million to fund operating activities for 2014. And with that I'll turn the call back over to John..

Thank you, Rich. I just want to reiterate that the market is clearly moving in our direction. Analyst projections indicate we’re on the right track in an enormous and growing space and we have the products and IP for the whole spectrum of end-user markets.

Our partners are gearing up investments into their wearable products for launch in the next 6 to 12 months. We believe for investor who wish to play the growth of the wearable market, Kopin is the best pure-play technology and product provider. We're clearly in the right space in the right time and we’re ready.

We look forward to report exciting development on future calls. And now operator, please open the line for questions..

Thank you. (Operator Instructions). Our first question is from Matt Robison with Wunderlich Securities..

What should I expect capital spending to be in the fourth quarter?.

CapEx right now looks to be somewhere around a shade lower than $1 million..

Okay. And I guess your revenue guidance seems to imply most of your second half military sales were in the September quarter.

Is that the way we should look at it?.

No, actually -- some of the wearable and industrial products, a relatively new space and so we're probably a little bit more conservative in taking our customers' forecasts and chopping those down to come up with our range. Military should stay relatively strong..

Okay.

And should we expect military to kind of sustain a similar level next year or throughout next year or will it be mostly the back half again?.

Well we're not going to give guidance for 2015 on this call, but you will recall when we did the announcement of the award of the program in Q2 that we said we would not finish the whole program this year. So there is clearly some amount that will carry over into Q1 if not into Q2..

Our next question is from Rajvindra Gill from Needham & Company..

Gross margins have been over 40% each of the last two quarters.

Could you maybe give us some puts and takes on what's going on this quarter and maybe how we should think about it going into the last quarter of the year?.

Yes. So as I said in the prepared remarks it was the absorption of fixed costs over a larger volume. The other thing I mentioned is that we probably had the benefit of somewhere in the neighborhood of between $400,000 and $500,000 of raw materials that were written off in 2013 which we've actually used in the quarter.

And so that probably won't repeat itself in Q4 so we expect the gross margins to come down a little bit..

And then you mentioned it was also due to better mix.

Could you maybe elaborate a bit more on which products are driving the margins higher?.

Military, we've always said consistently over the last few years that our military products have gross margins in excess of 50%..

And then how should we think about OpEx? I know you said it's not tied to revenue, but how should we think about that going forward?.

SG&A should stay around the same level as it has. The swing in SG&A really is we have certain stock comp that -- non-cash, but it's tied to the price of the stock and so that fluctuates some up and down and then R&D has been running somewhere around that $5 million to $5.5 million range per quarter..

And we should expect that going forward?.

Again we're not giving 2015 guidance; we're only talking about the 2014..

There are no further questions at this time and I would like to turn it back to Dr. Fan for closing comments..

Well thank you everyone for joining us today. I look forward to speaking with you again in the near future. Thank you..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation..