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

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

Good morning and welcome to Kopin Corporation's Third Quarter 2015 Conference Call. Today's call is being recorded for Internet replay. You may access an archived version of the call on Kopin’s website at www.kopin.com.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. Thank you, Mr. Sneider. Please go ahead..

Thank you, operator. Welcome everyone and thank you for joining us this morning. John will begin today's call with a discussion of our strategy, technology and markets. I will go through the 2015 fiscal 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 03, 2015, we will -- 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, market conditions and other factors discussed 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'll turn the call over to John..

Thank you, Rich. Thank you for joining us today. During the third quarter we continue fueling on the progress that make it here and we have a very strong momentum as we head into 2016. On the technology and strategic front, we continue our efforts to deliver the leading technology and design to create wearable products for [indiscernible].

Please allow me to review the wearable market for a minute. We believe the ultimate wearable will be long on the head, where our most important human sensors are located, our mouth, our ears, our eyes and our nose.

The advances in a smart phone have provide many important enabling technologies either for wearable headsets such as micro processors, micro controllers, power sensors, wireless connectivity, cloud services etcetera.

However, there are few some important missing parts for headsets so to speak as successful handset should be very light and fashionable for consumes to accept and wear. To achieve this goal one needs specialized micro optics and micro display.

We will need much better voice recognition system, which are not immune and provide excellent and error free voice-to-machine interfaces and one will need much smaller factories with high energy density with much longer uses.

We've be focusing on these missing elements for the past two years and we're delighted to say we've made good progress in making in getting those products ready. We've enough cost providing micro display and micro optics to our customers and partners for a while and we will discuss our designing successes a bit later.

I would also like to stress that we’re now almost ready through introduce to the world our progress in voice and speech enhancements and battery technologies and products. We believe rapid designing of these new products will come soon. I believe it is important for investors to understand our business model.

Kopin's internal resources are primarily focused on display, optics, speech enhancement and overall system design. For other important technologies, we have established partnerships with leading companies and industries. For example Olympus in micro optics and Hitachi in tiny batteries.

Our role is those partnerships is to use our unique position and knowledge of the handset market to define the requirement necessary for the wearable systems and to sharing the funding. For this partnership, we typically obtained exclusive use of the technology and products for the wearable headset every day to the market.

That's the designing process. Our audio and battery products are new and they will be introduced shortly. So with our micro optical products, which have been available earlier we’ve already make extensive inroads into wearable headset markets.

We believe our new category such as hands free headset, the initial successes would be in narrow vertical markets instead of general purposes in the headsets. This is eminent for types of headsets that we successfully introduced today.

For enterprise handset market which is very broad by itself, the current focus is for hands free repair and maintenance. Motorola and Fujitsu have already introduced their headset products based on licenses for our coding weapon systems and they're using our optical products.

We also have very strong proposition in other enterprises products including Google and several small companies such as VI Vicks in U.S. and [Web] [ph] in Japan. We must say for enterprise headsets our dominance is very strong. Some of our advance military avionics headsets these are the ultimate and most emerging headsets in the world.

Our market share of providing this very system to U.S. military avionics market headset is close to 100%. For example we are so soft for headsets in the F-35, the most advanced private Jet in the history.

Our Tier 1 avionics customers including Rockwell Collins, [Nova Systems] [ph], these three companies dominate the military product helmet market in the world. Kopin has one big part here.

Now Kopin has one enterprise military headsets but how about consumer headset? Needless to say there was much confusion and perhaps delay in wearable consumer headsets when these past February, the press reported that Google has decided to pivot Google Glass for consumer to enterprise.

We should consumer headset also need to focus on narrow surgical application and the important vertical application is for health and fitness. For example recall now in health a long time customer of Kopin is in the market for a Recon Jet, they are used for cycling and other outdoor activities.

We also have taken a simpler approach in developing our own headset for health and fitness using our optics to create a lighter and more streamlined system. We just introduced our solo headset at North America’s largest cycling trade show Interbike this past September through extremely review.

Solo is pair of sunglasses with a tiny optical pod that is unique micro lens provide a five inch virtual full hardware solution and readable image.

This is an augmented reality system, so the image appears to floating state, using Cellolos, the cyclist can see biometrics and situational data in their upside while maintaining proper form maximum performance.

Solo we helped define a user wearable for health and fitness and demonstrate that technology can be providing a best stylish front which is very critical for adoption. We expect to demonstrate solos and see it coming January together with latest feature enhancement and battery technology.

We also see for now that in the third quarter an additional Tier 1 global customer face order for our wearable technology for health and fitness application. [Expectation] [ph] is to launch a product in first half of 2016 and they may be demonstrating their product at CVS in January.

Therefore for the emerging health and fitness market we have also done very well. This is yet another consumer market, where Kopin as per our reputation for high performance optics and display. In future day we've not discussed our efforts with the spot strength.

We're aware for the past few years drones have been grown every year, they're growing market and there is one market their focus on the spot of drones raising. This is a unique sentiment and actionably has show virtual reality headset that can provide first person viewing and control over this fast moving rating drones.

In fact the high speed is one of the reasons occurs risk and virtual reality companies cannot supply to this market because it requires special optics and display and must accommodate the high speed of those drones. This spot is growing rapidly all over the world especially in North America and Europe and outside in China and Asia.

There are three companies in China that are providing this specialized headset and we believe these three companies have almost 100% of the world market. I’m pleased to say Kopin provides critical optic and display components to all these three companies.

We expect this specialized virtual reality consumer has that market will be a vast fast growing area similar to headsets for health and fitness. In summary, in 2015, we have had very strong product and customer development.

They’re differentiable and innovative products have been developed which we’re trying to announce in the coming months and next year.

Our wearable technology revenue through the three quarters in 2015 is about $10.5 million, more than two-fold increase over the same period in 2014 and this does not include the products for avionic headsets which are classified as military product category.

We've spent wearable revenue including for the avionic headset to continue ramping rapidly in 2016 as we will anticipate between five to 10 companies has CVS virtual products based on our technology. As a reminder, our customers and partners are introducing products this year based on our optical and display products they have introduced earlier.

We will not have new innovative audio and battery products becoming available early next year, which we'll present with more options to provide more advanced products into the market. The wearable headset market is starting to emerge from early application and we’re delighted to say we have a very leading position in both product and designing.

One more important point, while we have made significant investments in research and development activities to attain our leading position, we've managed to maintain a very strong financial position. And in fact our cash balance is even ahead of time.

Before I turn the call to Rich, I would like to mention that we're celebrating our 30th anniversary in October. We will join by many former employees as well as current partners and partners.

We just want to discuss our early innovative products for our leading edge solar cells through our junction bipolar expertise which I was a key enabler for the wireless consumer product we look today. So our micro displays which play a big role in the miniaturization of customer electronic products in the early days.

We have now successfully reinvented ourselves with new set of very innovative products focused on wearable. Personally I believe our feature enhancement and our battery technology can also have game changing effects on wearable. I will now turn the call back to Rich to discuss our third quarter results in greater detail..

Thank you, John. Beginning with the results for the quarter, total revenues for the third quarter of 2015 were $8 million compared with $9.5 million for the third quarter of 2014. The decrease in Q3 revenue year-over-year was primarily driven by the decline in sales of our products used in thermal weapon sights.

Included in Q3 2015 revenues was approximately $1.8 million related to the final payments for units shipped under the renegotiated contract term we discussed in Q2 2015. Cost of goods sold for the second quarter was 75.3% of product revenue compared with 57.4% in the third quarter of last year.

The decline was due to the fact that military products of higher gross margins as compared to our other products and the under absorption of fixed cost. R&D expenses in the second quarter of 2015 were $4.0 million compared to $4.8 million in the third quarter of 2014.

The decline in R&D expense year-over-year was primarily driven by lower funded R&D expense at cluster move to production phase. SG&A expenses were $4.6 million in the third quarter of 2015 as compared to $5 million in the third quarter of 2014.

The decrease in the third quarter of 2015 as compared to the same quarter in 2014 was primarily due to a decrease in professional fees and stock-based compensation expense, which were partially offset by higher patent and insurance cost.

Other income and expense was income of $1.4 million for the third quarter of 2015 as compared with $500,000 for the third quarter of 2014.

The third quarter of 2015 included approximately $500,000 from the gain and sale of an investment and the third quarter of 2015 also included approximately $600,000 of foreign currency gain as compared to approximately $250,000 of foreign currency gain in 2014.

Turning to the bottom line, our net loss for the quarter was approximately $4.6 million or $0.07 per share, compared with a net loss of $5 million or $0.08 per share in the third quarter of 2014. Cash flow used in operating activities for the nine months ended September 26, 2015, was approximately $10.4 million.

Through the second quarter of 2015 it was approximately $8.9 million. During the quarter we filed for 15 new patents and had eight patents issued.

As John mentioned, we concluded the quarter with approximately $87 million of cash and marketable securities and we anticipate receiving the final $15 million payment from the sale of our three, five and KTC businesses in January 2016.

We have no long term debt and we continue to maintain a very strong cash and marketable securities position in order to execute our strategy. And with that, I will turn it back over to John..

Yes, I think now we're ready for Q&A.

Operator?.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Matt Robison of Wunderlich. Please go ahead..

Thanks for taking the question. I've got actually several. Let's start with the drone headset John.

The surpassing application, I am hoping you could provide a little color on what you bring that differentiates you for the high speed aspect of it and also give us a sense for timing? Are we to expect products with your technology at the CE Show in January or are we looking further out in the future before we get to look at these and I have so follow-ups..

Yes, good question Matt Robinson is that how those strong headsets are differentiable for other headsets and when are these going to available to the market.

Those drones headsets are virtually early headsets is totally immersive, but however they're not because of the way the drones are moving so fast your eye cannot move fast enough if the things give you 180 degree of total view. So it's always focusing around 50 degrees FOV view and our displays and optics are perfectly for that type of view.

The display and images also move very, very fast because the drones are very, very fast. So we're very unique. Remember we've been working on military for a long time and we dominate the market and with some of the performance are similar. Now that is when they're available. They're already available.

Those headsets are available, The market actually is going rapidly right now and we're going above 50% a year. Last year our customers were hungry around this year around close to $25 million of such headsets. It might be the highest revenue which we have today.

But yet their focus on used to control rates in drones and the spot is growing very rapidly. They're growing about 50% a year right now. So such handsets are available and they're by company and we are in all those systems, all three companies right now..

Okay.

A quick update on -- you mentioned 15 patents filed, eight issued, what's the patent count up to now overall?.

Over 300..

Okay.

And can you give -- John, can you give us the status on your noise cancelling circuits and what the milestones are to those products becoming available?.

Yes, the question Matt is that our audio voice chip, our technology which we actually call Whisper Technology it has many functions. This certainly is very, very nice immunity. In other words our technology will allow you speak with the leading noise -- the noise interferences. Also we can allow you to have natural speech.

So wherever -- no matter how noisy it is, your voice continues to be natural voice, which is absolutely necessary for voice through machine communication and this is lot of people in the field achieve that.

We use a special technology which is now surrounded by Chinese handsets we have and we also revealed that technology into a chip and such chip will be available sometime early next year. In fact we’re now testing and putting some also shitting the early system that will be shown at CES.

So that technology bodes, very, very well and is essential for hands-free headsets or hands free wearable and such technology also now reduce through a chip that we have introduced and we call Whisper chip. It will be available early next year..

Thank you, And I just, three more I think that are pretty quick, one would if you can provide a patch update also the region for your additional Tier 1 you announced and then whether the R&D revenue that you saw in the quarter was military or commercial?.

Sure, so the first question was patch update. We've gone through a number of tapping with the U.S. military over the summer and we've then their feedback and interpreting that into the product. Just patch is precision acquisition targeting system.

It's a scope system that goes on to the rifle to help improve the accuracy of the soldier, encompasses a laser range finder, holds a calculator and some other things. And so we've gone through as I mentioned couple of trainings testing with the U.S. military. We've gotten their feedback.

We're tweaking this, we're tweaking that and so that's on progress. Right now we have and as John mentioned earlier between that we have the aviation, avionics program, John mentioned the F 35 we have a couple of other avionics.

We did mention about the outside interest for -- when I say outside out by United States interest in our thermal weapon fight products and so next year looks to be fairly good year for the military all things considered..

Okay, And the other two questions were the new Tier 1 region, the defense versus -- military versus commercial component of R&D and may be a couple of comments on your non-wearable commercial business and where that’s going?.

So it’s a health and fitness application and there are global companies, there are Tier 1. So we’re dealing with their operations located in the United States and in Asia. I am not really sure I understand exactly the question..

I think you understood it fine..

Okay, so that’s what they are and we see the progress that we sold around the world and the third question, Matt?.

I was curious the mix of R&D between military and commercial and what’s the update on what you're doing in the non-wearable commercial products?.

So R&D was primarily Military and as relates to the other non-wearable revenue, the industrial segment that you see is 3D metrology equipment and then the consumer numbers that you see are primarily they're just cameras, camcorder a lot of legacy business and that’s why you see the instrument numbers going down each quarter as we've exited those markets.

As far as industrial, the 3D metrology, right now we’re in most of the big systems and that is a market that continues to grow every year..

Thanks a lot..

Thank you. The next question if from Rajvindra Gill of Needham & Co. Please go ahead..

Hey this is Josh Buchalter on behalf of Rajiv. Thanks for taking my question.

A lot of them are addressed, but maybe we can go a little more detail into what we should expect towards the end of the year and into next year within military? You mentioned some of the longer term drivers, but it would be helpful given the drop-off in thermal weapons program to see even what you guys are working on now. Thank you..

So we would expect the avionics program to start to ramp in 2016 and the other programs that we're in, we're in qualification right now. The family weapon site system that is the next individual I should say the SWSI, which is the next large military procurement.

We're also in qualification right now with the SM25 which is rocket propelled grenade launcher and we're in a very, very early phases of the SWS crew.

So those are all the big procurement and we feel very good about our chances and between the avionics as John talked about and these other weapon size programs we think the military should start to -- it will come down a little bit as we've indicated, but then it should start to ramp back up in 2016..

Thanks, that's very helpful. And then within the consumer, you mentioned how some of the legacy businesses winding down, but you also have the exciting verticals from the drone racing and the health and fitness. Can you maybe help us understand when should we -- when over the magnitude of an impact you would expect.

When can we start to see that begin to pick up?.

Yes, I'll make a comment on this, but I think as we all know, we think our focus on military and also on wearable and last versus this year we see more than couple in revenue on the wearable and that's not even having the avionics part. The avionics part on the wearable for military was also more in double.

So we're seeing beginning to see that kick off this year and we expect next year will be very well also especially so far our growth is really on that using our optics, optics and display. Now we have two more new product lines coming out. The audio product line with a chip as well as the battery.

We think that the wearable is going to take off next year and we do very well.

We're already designing -- if you look at the designing situation on this in our vertical, which I believe for new categories once you focus on narrow verticals, what is a vertical for health and fitness, what is for repair and maintenance, what is for avionics, the helmet and headset control and drones, a fast drone.

Our market share or demand is over 90%..

Okay. Thank you. And then last thing for me, you mentioned you have three enterprise customers, can you maybe help us understand the timing and magnitude of those and how that's contributing to the current export, thank you..

Josh, can you repeat the question?.

Yes, sure, it was just around the timing and magnitude of the three Tier 1 enterprise partners..

Motorola and Fujitsu are already in the marketplace and our third Tier 1 you don't really know the status. We've been told that the product is being released, but we haven't got anything official..

And can you maybe help us understand what kind of application that is or too early?.

As John mentioned, its repair and maintenance is the revenue we're really focused now in the enterprise segment..

Okay. Got it. Thank you guys and good progress..

Thank you. We have no further questions at this time. I would like to turn the conference back over to Management for any closing comments..

Executing here we're very excited of our progress so far this year. The agreements we've now reached with Tier 1 wearable customers around the globe are on track and our cash position is even better than we planned.

We're focusing on getting ready for CES where we expect a great show for Kopin and we’re getting ready for our new product announcement and introduction that we've discussed. We look forward to share our statement in 2016 where when we have next quarter and also we hope to see some of you at the coming CES. Thank you..

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation..