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

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

Good day. And welcome to the Kopin Corporation's Fourth Quarter and Fiscal Year 2014 Financial Results Conference Call. Today's call is being recorded for internet replay. You may access an archived version of the call on Kopin website at www.kopin.com. 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 business update. I will go through fourth quarter and full year 2014 results at a high level, 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, March 10, 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 the call over to John..

Thank you, Rich. And thank you all for joining us today. 2014 was an important year for Kopin and we are extremely pleased with the progress we've made towards position ourselves as the leading provider of technologies and solutions for the coming wearable world. We have exceeded our all metrics, we established at the beginning of 2014.

In revenue, in cash preservation, in technical advances, in IP filings, in partnership and customer acquisition and in product development. The overall strategy that we've discussed all along is right on track. As a reminder, our overall strategy has been in 2013 was our reorienting and reinventing year.

2014 was for product development and customer acquisition. This year 2015 will be focused on product introduction. And 2016 will be our revenue-ramping year. As I discussed in January, we have now completed construction of new product line capabilities at our Westborough site, providing additional production capability and capacity.

We have also made significant progress with some of world's leading player in a growing wearable space. And we look forward for those partnerships to begin bearing fruit to later on this year.

We now expect during this year, two tier-one global corporations will introduce exciting product into the enterprise world with substantial Kopin content in their devices. Of course, companies such as Vuzix and Recon have already announced product with Kopin's content inside.

Additionally, we have been focusing on consumer wearable applications and believe the first explosive consumer market may well be in Asia. We've already noticed early signs of this. Wearable smart assets are challenging to be designed well, requiring various hardware and software advances.

We believe we are very well positioned to provide a market with all the necessary technologies for a design of smart headset for enterprise and for consumers. We are excited with our momentum as we head into 2015. It is important IP area.

In the year 2014, we have been granted 25 new patents and we have had 74 new patent applications, bringing our total 285 patents and patents pending by the end of 2014. Our better than expected initially expected results for 2014 was driven in part by the sales of products for military application which increased over 65% in 2014 as compared to 2013.

The orders we received for wearable additional unit for thermal weapon rights. Our 2014 orders will carry through the first quarter of 2015. And we are in discussion with customers to determine 2015 demand.

Longer term, we have developed a precision acquisition targeting system which we call PAT which overlays critical data over weapon sized radicals via our design C2 optics to enhance the soldier's effectiveness. This data is provided by laser range finder and the ballistic calculator which were integrated into a system.

The PAT technology is useful in both day and night situations and can be clip on to assist the weapon site and embedded into a new site. We have developed the complete system and discussing how to introduce the system to the market with several potential customers and partners. Also we are pleased that Mr.

Bill Maffucci has joined as Vice President of Business Development focusing on emerging application in the defense market. Bill has more than 35 years of working with defense contractors in the areas of display, optics and head-mounted system.

Bill's talent will not only be very positive impact on defense related activities but also with our commercial wearable technology. So let's move on to wearable. It is clear that wearable technology is a huge and growing technology category and is growing mainstream.

For smart headsets, the market has recently shifted more towards enterprise application. You most likely are aware that Google recently announced the closure of its explorer program for Google glass. It is suggest that may initially aim the next generation Google glass for enterprise application.

The news was somewhat surprised to the market and may have caused some confusion in the wearable category. Frankly, some our policy sees this is an opportunity while for others it gave them a pause. Kopin has always been the pioneer in both the enterprise and consumer world.

Our Golden-i headset activity has been focusing on the enterprise market for the past five years and we are extremely positioned well in the enterprise category. Additionally, three years ago we commenced development system for consumer application.

We believe a consumer application that device should be different from that aimed for enterprise application. The consumer device has to be very simple for consumer to use. And would most likely be accessory to the smartphone and tablet. To achieve mass consumer adoption, the fashion element is just as critical as the functional element.

For example, the optical element has to be so small that into design they are effectively in the development. However, the images they use to see from optical element need to be large enough for consumers to easy read text and visual information. These images also need to be bright enough to very sunlight readable and yet use very low power.

Additionally, the principal use of interface should be voiced under very, any noisy and unfriendly environment. In another words, we believe voice will become the next new touch. This has very touch requirement to satisfy. We are pleased that we have made good progress in this enabling key technology in the last two years.

And we believe we have found the keys and unlock the door to successful acceptance of consumer wearable asset. 2015 will be our year to introduce this product and technologies to the market. We are confident that consumers' smart assets are viable and actually close to reality.

We also recently announced that Yoichi Iba, formerly Senior General Manager with the Olympus Corporation has joined Kopin Corporation as the Chief Optical System Scientist. Mr. Iba is one of inventors and the team leader of free shape prism and Pupil optics. Mr.

Iba will focus on designing innovative optic and system solutions for wearable headsets including augmented reality and virtual reality applications. We are very excited to have Mr. Yoichi Iba joining Kopin team. We have been collaborating with Mr. Iba at Olympus for many years. Now with Mr.

Iba joining us, we expect our relationship with Iba and Olympus will become even stronger. With Iba's help we expect to expand our lines of innovative optical solution which will currently include our pupil and pearl module products. 2015 marks our 30 year anniversary for Kopin.

During this long journey we have developed our initial nanomaterial technologies to innovate power transistor for smartphones and LCD for commercial, defense and consumer application. We were successful in those endeavors.

We expect continuing our current advances and sometime later this year we plan to hold another wearable tech event that we get last year. Again, this event will not only mark our 30 year anniversary, we also plan to demonstrate and unveil some of our disruptive and exciting technology. We will provide more detail in a later date.

In summary, the past two years of reinventing has been very successful. We are now adding a few more talented executive with key technical, product, sales and marketing capability. We are delighted that we have become the merit for those industry leaders to join us.

And importantly, we have more than sufficient financial resources to achieve our ambition -- our big ambitious business goals. We are all very excited here. With that I'll now turn the call to Rich to discuss financial results.

Rich?.

Thank you, John. Beginning with the results for the quarter, total revenues for the fourth quarter of 2014 were $10.6 million compared with $5.5 million for the fourth quarter of 2013. The increase in Q4 revenue year-over-year was primarily driven by military revenues which were $6 million in Q4 of 2014 as compared to $1.1 million in Q4 of 2013.

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 revenue projections, but to our longer-term goals. Cost of goods sold for the fourth quarter was 69.1% of product revenues compared with 85.7% for the fourth quarter of last year.

R&D expenses in the fourth quarter of 2014 were $5.7 million compared with $4 million in the fourth quarter of 2013. Increase reflects continued investment in wearable technology. SG&A expenses were $5 million in fourth quarter of 2014 compared with $3.5 million in the fourth quarter of 2013.

The increase was primarily driven by an increase in stock compensation expense. Other income expense was income of $635,000 million for the fourth quarter of 2014 as compared with expense of $2.3 million for the fourth quarter of 2013. The fourth quarter of 2013 includes a $2.5 million non cash write-down of an investment.

Turning to the bottom-line, our net loss for the quarter was $5.3 million or $0.08 per fully diluted share compared with a net loss of $9.7 million or $0.16 per share in the fourth quarter of 2013. Now turning to the result for the full year, total revenues for 2014 were $31.8 million, compared with $22.9 million for 2013.

Cost of good sold for the full year was approximately 72.9% of revenues compared with approximately 100% for the prior year. The increase is a result of the increased sales of military product which increased 65% year-over-year and have better margin. R&D expense in 2014 was $20.7 million compared with $17.5 million for the prior year.

The increase reflected increase in invested wearable technology. SG&A expense increased to $19.1 million in 2013 to $19.9 million in 2014. Turning to the bottom line. Our net loss for the 12 months ended December 27, 2014 were $28.2 million, or $0.45 per share.

As a reminder, on January 16, 2013, we sold our III-V product line and investment in Kopin Taiwan Corporation. The gain on the sale and the results of operations of our III-V product line and KTC through the date of sale were shown as discontinued operations.

Accordingly for the year ended December 28, 2013, our net losses from continuing operations were $24.9 million, or $0.40 per share. Our net income from discontinued operations was $20.1 million, or $0.32 per share and our net loss for the year ended December 28, 2013 was $4.7 million, or $0.08 per share.

Our cash used in operating activities was $19.6 million for 2014. Cash and marketable securities totaled $90.9 million at December 27, 2014. And with no long-term debt, we are well positioned to execute and fund our strategies as the wearable category begin to ramp.

Fourth quarter and year-to-date amounts for depreciation and stock compensation are attached through table to the press release. As we think about our outlook for 2015, there are number of moving pieces. As such we are not going to provide full year guidance. However, we will give perspective on thinking about 2015.

To echo John's statement, we are extremely excited about the wearable category and expect this category to grow as we have two tier-one customers that we expect to introduce products this year. However, as John mentioned, his team have been shift more towards enterprise applications.

When we think about military, we received the large order in Q2 of 2014 and we don't know if that will repeat in 2015. As we have discussed previously for our consumer electronic applications, we have been in the process of exiting that segment.

We have those revenues decreased from $5.3 million in 2013 to $2.8 million for 2014 and we expect them to further decline in 2015.

We expect the revenues from the sale of our products to wearable applications to increase over 2014 but it is difficult to predict a new product launch as you can see those there is a lot of moving pieces as we head into 2015, so we prefer more clarity before we give revenue guidance.

In terms of cash usage, we expect the use of cash to be similar to as of 2014. But we will remind everyone that in early January, 2016, we are to receive the final payments from the sale of our III- V product line and investment in KTC of $15 million.

So we expect to start 2016 with a strong in cash and marketable securities position with a debt free balance sheet. Until we are comfortable with our means to execute our strategy and maintain our levels investment in the growing wearable systems market. And with that we will turn it over to the operator for questions. .

[Operator Instructions] Our first question comes from Matt Robison from Wunderlich Securities. .

Hey, thanks for taking the question, John and Rich. First, I'll bore people with housekeeping items.

Rich, can you tell me how much for the other income was interest income and what are the other major features of that category were?.

It was almost all interest income. For the year, there was roughly $95,000 of foreign currency gain..

Okay .What was cash flow from operations in the fourth quarter?.

I don't have that in front of me. .

All right. May be you can follow up later in the call or --.

Yes..

I heard 285 patents and patents applied for.

Did I hear that right? And how many were in the fourth quarter?.

I don't have a breakdown in the fourth quarter, for the year we have 25 new ones granted and 74 new patents applied. So which is about that 2014.

I just wondered what the total was..

Yes. Total you can added it, so obviously with two patent our timing right now so we are probably over 300 now, yes. .

Okay. You had a pretty good year for R&D revenue.

Do you have any kind of visibility for that component in 2015?.

At this point in time I think we would expect it to decrease, a lot of that came from customers who were looking to launch wearable products and so I think we passed the R&D stage..

You have pretty fourth quarter was a good too, so is that what the case was in the fourth quarter?.

Yes. .

And do you -- is there any kind of way we can bracket the potential for the military outcome?.

The military for R&D contract or military in total?.

Total..

The government really honestly isn't doing a lot of funding in R&D anymore so we have seen a significant decline in R&D contract funding by the US military, it's all part of sequestration, as far as the military revenues, we would expect, we aren't in about the same position we were last year, but we just haven't seen what's going to happen in the second half of the year.

And that's what holding up our guidance. .

Does the precision acquisition targeting system coming this year with anything?.

No. This year will be partnership. And then we had some discussion and they think the product size will probably take it by the year and then we will start seeing revenues thereafter. .

Now you had -- you talked about this production capacity build that -- is there -- when do you start seeing revenue from that?.

This year. .

Can you be more specific about that?.

Second half of this year. .

Okay.

So you are not -- you ramped up capacity in the fourth quarter and the first quarter, you don't expect actually the lead time are going to be longer than a quarter to build the stuff?.

Yes. Our lead time is coming out of foundry these days like 16 weeks. .

Okay. And so we will have initial build then we have to see how the consumer acceptance goes after that.

Is that correct?.

Correct. That's exactly right, Matt..

What kind of protection do you have for your investments if the sale through or the consumer response is not what your customers predict?.

It is typical in almost all our --whether it is military or commercial, if they place orders and they understand our lead times, our raw materials and stuff. So to the extent that they decrease their order, there are no hope for it..

Now both of these tier-ones for enterprise type application?.

Yes. .

Okay.

And did you have any 10% customers in the quarter or year?.

For the year we had two, Raytheon at 26% and Google at 11%. The third one is just barely missed it. .

Okay.

And there was the second one you mentioned was that all R&D?.

Yes. There were units; you go through an EBT or DBT.

Run that that by me again may be without the abbreviation..

Yes. The answer is yes. .

And so that sounds like a military and enterprise setup occasion. .

I am not sure I understand your question. .

Raytheon is military right so and Google is more enterprise..

Yes. Well, I think there was a Rich said that we had just three who almost reached at 10% so the second one and that is the one that still one argue miss a little bit, both second and third are for wearable.

Great.

Now can you tell us what's the third one was?.

No. Because it is below 10%.

Okay, all right. I'll digest some of this, maybe come back with another question, if there's another caller..

Thank you. Our next question comes from Raji Gill from Needham & Company.

Hi, congrats on a good quarter. And thank you for taking my question .This is Josh in for Raji. Could you maybe give us more details on the enterprise? Like what kind of product, is that's falling into the wearable applications or is industrial. Thank you. .

Yes, the question Raji is that how you pick up is where enterprise world, I think you know the Google glass is not going to -- they I think probably go to the enterprise world, how they are going to use it obviously where they stay put and see how big announcement, for us, in the case of recon they are using for sports, in case of music they are using for maintenance and repair and we have I think most of the enterprise were the beginning will be for medical and repair, sports and maintenance, and we are very well situated on that, I think we are basically in almost every major enterprise application headset.

.

Okay.

And then that in your revenue segment that shows up in wearable or industrial?.

It is wearable.

Okay, thank you. And then I know you haven't touched on military but can you give us any color on gross margins, it is been lumpy so just trying to figure out how to model it..

I would let Rich to talk about model but our basic situation military; it is margin always very good north of 50%, for military. .

Okay. So military is above the other one. Then is the Westborough is ever focused on anything in particular and just any segment? Thanks..

Westborough has a couple of things they do, it is the manufacturing site for our display which are of course go to wearable as well as for military. Now they are offering as new assembly facilities we just finished in Westborough and that would assemble mostly for wearable consumer enterprise applications. .

[Operator Instructions] Our next question is a follow from Matt Robison from Wunderlich Securities..

Thanks.

On the industrial, so we can look at that is mostly fourth dimension?.

Yes. Hopefully with 3G metrology.

Yes, okay.

In terms of your first -- your two largest customers would be -- is it theory kind of look at them as being similarly positioned as per two largest customers in the fourth quarter or the second half of the year?.

Yes. .

And are your two tier-ones; are they different than your second and third largest customers for 2014?.

Yes. .

That's all I have got..

Hey, Matt, fourth quarter cash using operating activities was $2.2 million. .

[Operator Instructions] And there are no further questions. I'll turn the call back over to our speakers for closing comments. .

Well, in conclusion, we are delighted with our progress in 2014. And look forward to an exciting 2015 when wearable products will be introduced into the marketplace. Thank you for joining us today. .

Thank you. This does conclude today's teleconference. You may disconnect your line at this time. Thank you for your participation..