John Fan - Chairman and CEO Richard Sneider - CFO.

Matt Robison - Wunderlich Securities.

Good morning and welcome to Kopin Corporation's Q1 2016 Earnings 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 You may access an archived version of the call on Kopin's website at www.kopin.com.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 the 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 markets. I will go through the first quarter results for the fiscal 2016 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 Wednesday, May 04, 2016, we will make some forward-looking statements 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, 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, Richard. Good morning everyone and thank you for joining us this morning. At a high level, let me start by saying we continue to make excellent progress in the commercialization of our wearable technologies and products. We continue to work through the qualification process for the military Family of Weapon Sights, or FWS programs.

And we are just notified that we are selected by our prime contractor to supply eyepiece assemblies for the FWS-I. Our solo health and fitness product is on track for this summer launch and we collected the final payment from the sales of our three, five business which further strengthen our strong balance sheet.

Also we just signed a purchases and sales agreement to sale our Korean facility for about $8 million. The facility was used for eyepiece assembly for digital cameras and camcorders manufactured by Nikon, Samsung, Panasonic, JVC et cetera. Throughout the year, Kopin shipped over 30 million LCD eyepieces to these customers.

Kopin has moved out of business - the current business and finish supporting our remaining customers in 2015. Starting with our strategy, we continue to see growing assignment about virtual reality, augmented reality, and just recently we saw articles discussing mixed reality.

By those articles a lot of challenge are understandably centered on the possible future application of these technologies. And we do provide components through some of these companies who look on these long term technologies. We are more focused on what can be provided to the market in the near term.

For example, for BI applications our customers create patches which are linked to raising drill and provides the users the much reality experience of being inside a drones and raising today. This application started about three years ago with our displays and scoring directly now.

Our current drawn customers are forecasting an annual revenue growth between 30% to 40% a year and we are close to 100% market share. We're now having discussions with makers of drones used for applications and raising to offer the same exciting experience. Yesterday of the current commercial drone market, i.e.

millions of dollars with strong growth predicted for many years to come which is why we focus on it. The basic to large we are using for drones was originally developed for the advanced avionics headsets used such as the F-35 pilot helmet.

As we discussed before, Kopin has been providing display products used in the military avionic helmets for quite some time and we enjoyed close to 100% market share in this market. Another good example of near term application is that VR helmets or handsets for health and fitness.

As you know, Recon now spot by retail has been using our display in their helmets and the handsets. And we recently mentioned another large Tier I global wearable company has launched a cycling asset product SCS in January this year to favorable reviews. During Q1 we commenced shipping product for them for their rollout.

Turning to our Whisper technology, we continue to work with customers towards the designing of our technology. We have integrated our Whisper technology into a semiconductor chip which greatly enhanced our voice quality and speech recognitions in a extreme noise environment. Currently our efforts are focused in near and mid field applications.

A near field application will be lagging a asset with their microphones out of 3 to 6 inches from the mouth. Via mid field application product will be something like a smartwatch which will be held about 12 inches away for the mouth. We have previously discussed our Whisper technology is tunable.

So you can also even achieve for further application, but that's not our current focus. Our business model here is to become a fabulous semiconductor chip provider. We're actively working with Tier I companies for designing into our system.

Regarding our solar products, we expect to commence our direct marketing campaign in the second quarter with product deliveries later this summer. Solar is our health and fitness AI headset. It allows athletes to maximize their performance so easy asses to real time data.

We have developed a app, when loaded onto smartphone headset - smartphone collect a data through wireless connections for sensors located on the body, closing, machines offer on the cloud, and send the information to solars to be displayed on the world's smallest see through optical module.

Solos was recently showcased at IDN Conference focused on using analytics for spot and fitness and the response was very positive. Again, our design and average cooperates many years of experience and knowledge of assets from large and long history working with the military.

I'd like to mention that much of the Solos product definitions came from partnering with U.S. cycling, the athletes in their final 100 days of preparation for the Rio Olympics. I wish them the best of luck. During the quarter, we continue our development efforts with net sales on the SiMax battery.

This is a unique silicon air lithium-ion battery which can have twice energy density for the same size, as compared to traditional lithium-ion battery. A new battery is going through refinements and qualification, which upon out, this is a high risk and high payoff project.

This is normal lithium-ion battery has never been able to reach production phase. If the partnership proceeds, it could be a game changer. We remain optimistic. On the mercury front, we have been competing for two new military designing. The FWS-I and FWS-C which are integrated into a night vision systems.

Kopin was just selected by one of the two large U.S. prime contractors picked by U.S. Army for FWS-I and is well positioned to wing FWSC too. With so many webs designed it [indiscernible] which confirms the superiority of our technology and our execution.

This selection couples very, very well with our process in the previous similar weapon site programs. The FWS-C is expected to be awarded late in this year. These two programs could generate over $100 million in revenue for Kopin over the projected life cycle. We also started shipping products into the F35 program.

The most advanced John strike fighter jets as you well know. And we expect production to start ramping this year. We are so soft to their program. We anticipate revenue for F35 to be around $4 million to $5 million range per year for the first couple of years. Range ramping up to about over $10 million a year annually.

We are about $100 million revenue for – over the projected life cycle. In summary, we are delighted with our Q1 result in progress.

Remember, last year, we had our last Tier 1 global company customer who designed in our display and actually three other Kopin components in their headsets with significant change of deployment strategy from consumer applications to enterprise applications, which significantly lowered our revenue ramp which we expected for 2016 for this customer.

We have been focused on recovering on this unfortunate pivot as now regained our momentum. With the solid developments I just discussed on both the commercial and military fronts in Q1, we expect revenue growth to resume and we will be more - enroll it creating a solid 2016 with increase in revenue momentum into 2017.

We will now turn the call back to Rich to discover our first quarter results in greater detail..

Thank you, John. Beginning with the results for the quarter, total revenues for the first quarter of 2016 was $6.1 million compared to $8.6 million for the first quarter of 2015. As expected, revenues from the sales of products for military applications declined from $4.6 million in Q1 of 2015 to $1.5 million in Q1 of 2016.

As John discussed, we are making excellent progress towards securing orders under the FWS program and we are in the transition period of military procurements. Sales of our products for Wearable applications more than doubled to $2.6 million in Q1 of 2016 as compared to 1.1 million in Q1 of 2015.

Cost of goods sold for the first quarter was 77.7% of component revenues compared with 74.1% for the first quarter of last year. The decline in margin was due to the fact that military parts have higher gross margins as compared to our other products.

R&D expense in the first quarter of 2016 was $4.0 million compared with $4.9 million in the first quarter of 2015. The decline in R&D expense year-over-year was primarily driven by lower funded R&D expense. SG&A expenses were $3.8 million for the first quarter of 2016 compared to $4.4 million in the first quarter of 2015.

The decrease in the first quarter of 2016 as compared to the same quarter in 2015 was primarily due to a decrease in stock based compensation expense. Other income expense was of $349,000 for the first quarter of 2016 as compared with income of $2.2 million for the first quarter of 2015.

The first quarter of 2016 had interest and other income of $200,000 offset by foreign currency losses of $550,000. The first quarter of 2015 included an approximately 2.1 million gain from the sale of an investment, 230,000 of interest and other income and a 139,000 of foreign currency losses. Turning to the bottom line.

Our net loss for the quarter was approximately $6.9 million or $0.11 per share compared with a net loss of $3.8 million or $0.06 per share in the first quarter of 2015. First quarter depreciation and stock comp and expense are included in the table with the Q1 press release.

In the first quarter of 2016, we filed for 13 patents and had 9 patents granted to bring our total patent portfolio to over 300 patents and patent pending. I’d like to remind you that 2016 will be a 53-week year for Kopin.

Turning to full year 2016, we are not providing guidance to the lack of feasibility inherent to any new developing market like wearables. We believe operating expenses will remain relatively flat with 2015, although we expect lower R&D and higher SG&A as we commercialize our products.

We concluded the quarter with approximately $91 million of cash and marketable securities and we have no long term debt, giving us a very strong financial position to execute our strategy. And with that, operator, we are ready for questions..

[Operator Instructions] Our first question comes from the line of Matt Robison with Wunderlich Securities. Please proceed with your question..

Thanks for taking the question. Congrats on the progress. I got a few questions here. First of all, John, encouraging - sounds like you, maybe have a little bit more revenue visibility than you had back in March.

Can you give us a little bit – what's given you that kind of visibility for the back half?.

First because of designing and also the current customers are giving us some very positive feedbacks..

Okay. So you’ve actually gotten some orders and some timeframes for them to go to market that are incremental to what you had back to the last conference call..

That's right. Also we have new products coming out as we - as said in CES which is January, we introduced whole budget new products, the Whisper technology and of course Solos, and all those things are beginning to come into the market in the second half of the year..

Can you give us some milestones for Whisper sampling and then some - what your assessment is on the time to market for the customers of it?.

Yes, the chip - as managed to the chip is actually ready, its semiconductor chips, you need to get the design into big product. So new shade of designing product usually takes about a year.

So I think that the schedule into the product is about normal, but what we're seeing is a way large interest for all the - for all application via mid-field and also long field – far field.

So, we said in this - we're going to focus on near field which is headset and mid-field which is small and a smartwatch and it would leave to far field to next year..

Okay.

On the FWS projects, you mentioned two primes, how are you situated with - and it sounds like you made progress - tangible progress with one of them how you're situated with the other one?.

We continue to work with the other one and then there are other - for little bit more detail, the FWS-C actually has different products. So what we have done with the FWS-I that has two, we've been awarded by one and we’ll work with the second one, but we're not the primary of a second one to be honest with you.

And FWS-C those are different primes and we’re working with them but that yet have not been awarded, that will be later in the year..

Okay, Rich I got you.

I head you mentioned 550,000 for exchange losses, I'm sorry if I missed the other components to other income can you repeat those?.

200,000 of interest and other income mostly interest..

Okay. And then the exchange rate at the time when you mark the Korean sales price at $8 million..

I don't know, it's top of my head, Orlando and whatever was on March 26 for the exchange that we use..

That's good enough. Is there any - where there any revenue coming for that..

Matt, when we file - we’ll be filling our - we anticipate filing our Q today and there will be more discussion about it in the footnotes, so give you the Korean one numbers in the U.S. equivalence..

Okay.

Was there any revenue at all coming from that operation likely?.

No..

The operation ended last year..

Okay. Great, thanks. That's it for me for now..

[Operator Instructions] Our next question is a follow-up question from Matt Robison with Wunderlich Securities. Please proceed with your question..

To ask you about the patterns, so you had 9 granted plus another 13 new applications is that correct?.

Yes, right, in the second quarter, yes..

That's a bit stronger than some of the reporting agencies had indicated. So I think you had over 300 when you last had a call and of course that was well in the first quarter, so remember there is a couple more – I've seen - you've got a couple interesting patterns that came out in April those would be incremental I presume..

Yes, I think as we know we’ve been patterning wearables for a lot of time since early days. So recently as we developed new products we’re patterning even more aggressively. We advised industry already, we are averaging about patterning about power 40 to 50 patterns per year, so you can get that. So, we’re extremely a huge IT I portfolio right now..

So are you still in the steam upon a little bit as you see the market materializing I know you've - it seems like you had a practice of filing and then trying to time the actual prosecution so it's maximizing the opportunity in the market is - are you seeing more urgency now to bring these things to fruition?.

I think wearable - is it hard to say that be a way it's a tipping point wearable is. As you all know, because of the customers pivot in many way wearable has been a slow down for quite few months. But we've seen resumption again, so I think the tipping point for there will be sometime late this year or early next year for wearable enterprise.

So we are actually increasing our pace on the IT filing and I think that will be rewarded..

Are you thinking licensing is more than a year from now or might you have an opportunity some licensing sooner than that?.

We've opened our business models..

So you probably don't have anything in the pipeline that you want to talk about now..

We certainly have license to Motorola and Fujitsu before. So licenses are not new to us..

Okay, we’ll visit that later. Thanks a lot..

There are no further questions at this time. I would like to turn the floor back over to Dr. Fan for any closing comments..

As we came here, we are very excited about progress so far this year. And I look forward to sharing our excitement about wearables in 2016 when we talk next quarter. As a reminder, we have our Annual Meeting next Wednesday May, 11, 2016. All the information about the Annual Meeting is in the Investors section of our website, www.kopin.com.

Thank you and see you next time..

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