Rich Sneider - Treasurer and CFO John Fan - Chairman and CEO.

Matt Robison - Wunderlich Securities Jeff Bernstein - Cowen & Company.

Greetings, and welcome to the Kopin Corporation's Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Rich Sneider, Treasurer and CFO. Please go ahead, sir..

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 market; I will go through the 2016 fiscal fourth quarter and year-end results at a high level, John will then 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 Monday, March 13, 2017, we will be making 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 of 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 it over to John..

Thank you for joining us this morning to discuss our results. We have made good progress this past quarter. We announced very important partnership agreements with Goertek and Lenovo New Vision, and we've made great showings at the CES [ph], in January. In addition, we received four CES Innovation Awards.

They are our 2K by 2K OLED display microdisplay for VR, our Pupil Optic optical modules for AR, our Whisper Voice Chip that significantly improves the automatic speech recognition to accuracy in noisy environment, and our Solos smart glasses for sports.

These partnerships and new products have positioned Kopin for substantially increase revenue in late 2017 and beyond. We must say that we are excited, and proud of what we have achieved. All me to explain more in details what has happened. It is important to stress we're particularly excited about our opportunities in Asia.

I just came back 10 days ago from a two weeks trip in Asia. And it's clear our views are aligned well with many Asian global companies for both AR and VR opportunities. The key for user acceptance of AR and VR is mobile. As we have said all along, the headsets need to be small, lightweight, comfortable, and attractive.

The initial products should be focused to clear and value-added vertical applications, with preference to us being accessories to smart phones. Furthermore, touch is really not preferred interface in wearables. Voice would be the next user interface, and speech recognition will be wildly used.

However, speech recognition has to be very reliable in any environment. Our technology and our visions address those challenges very well. Let me discuss what's happening in OLED microdisplays. We had stress [ph] for a while for many VR applications the preferred microdisplays are OLED displays.

In this year's CES, we introduced Kopin's new Lightning OLED microdisplays. This new one-inch display panel has a high resolution of 2048 by 2048, and a fast 120 hertz frame rate, which are the first for VR industry. It has dramatically raised the bar on performance and size. The resolution is now three to four times higher than currently available.

The panel size many times smaller. The current frame rate and latency effect that has often caused users discomfort can now be overcome by this display. Our Lightning protected by 10 patents pending, also have low power consumption, and is capable to upgrade to even higher resolution necessary for future high-end VR products.

Furthermore, Kopin introduced and produced this revolutionary display using an OLED industry first; a surplus and vast scalable model for both the silicon backplane and OLED fun pad [ph]. The established model enables Kopin to provide auto microdisplays to the market rapidly. We now plan to introduce OLED display products later this year.

The potential of our 2K by 2K OLED microdisplay cannot be underestimated. The responses at CES and the following one-on-one meetings in the U.S. and Asia with more than a dozen global VR companies, confirmed that the new OLED display has now make a giant leap to work for VR.

The realization of a more compact higher performance and lightweight VR headset is done here. One can expect such game-changing headsets with this revolutionary OLED display will be strong later on this year.

Kopin now supplies LCDs, LCOS, and OLED microdisplays, plus associated innovative optical modules providing a full suite of microdisplays for military, industrial, and consumer electronic segments. In the coming era of AR and VR microdisplays will be needed, and Kopin is ready. Now let's discuss Solo. This is a very good example of AR-focused display.

It is truly mobile AR headsets using our innovative tiny Pupil display modules, providing a sunlight-readable [ph] heads up digital image while it is see-through. As we have stated for AR applications, our super bright tiny LCD cyber displays are very well matched with our Pupil Optics. Initially, Solos are focused for serious cyclists.

But it will also be very useful for many other sports. Solos headset has been used by our Olympian cyclists in their training for the last year Rio Olympics, and they won two silver medals at Rio.

This lightweight, well-balanced heads-up sunglasses provide digital data during rides, such as miles, speed, cadence, heart rate, elevation, calories, directions among others. The headset syncs with android phones, iPhones, and microsensors, and can receive any phone calls.

We have initiated a crowd funding campaign so as to ship to early adopters and need to collect feedback for our future enhancements. All certifications have been passed for US and some selected international countries. We have begun shipping. The response so far has been very good.

To scale up to much larger volumes, we have just arranged to move one of manufacturing of Solos to Goertek. Many of you probably do not know of Goertek. It is a large Chinese public company with global reach.

It's actually one of the world largest audio device companies and is world's largest manufacturer of AR/VR headsets and audio wearables such as smartwatches. It may be difficult to name well-known headsets that are not manufactured by Goertek. Revealed Goertek's keen appreciation of products and technology is truly satisfying.

Goertek not only was closely with us to manufacture Kopin's products such as the Solos and adopt our displaying audio components products in the offering, also invest and acquired 10% of our stocks. The stock transaction is scheduled to be completed at the end of this March.

Our Whisper chip and technology, protected by Sony patent issues and pending [ph] enables voice interface to be very reliable and dependable. Last year with the success of Amazon ECHO and Google Home, it is clear that voice will become a primary user interface and speech recognition capabilities will be applied to wearables.

So far, the voice has been on the frustrating side. It is great when it works, but it can be awful in various types noisy environments. Our Whisper chip effectively handles speech recognition in any type of noisy environment.

This technology has been proven in a military and enterprise world we are now -- we are working with consumer product companies with innovative technology.

After many months of testing with global companies, the data has definitely proved that Whisper technology is far superior to any other existing technologies for voice recognition in noisier environment.

As consumers increasingly choose voice over touch as a preferred interface to electronic devices, the opportunity for Kopin's Whisper technology is vast. The Whisper chip is currently designed into four products that go into production later on this year.

In fact Whisper's chip is also key to our new partnership with Lenovo New Vision, an announcement we made at CES. Lenovo New Vision was formed to develop and produce AR smart headsets for enterprise. This new product will include Whisper Chip as well as our micro display optics and software.

Combining Kopin's technology with Lenovo's precision as a global solution provider will allow us to accelerate the commercialization of AR products around the globe. There are so many developments going on.

We continue working no additional partnership and we are in multiple discussions on how to distribute our innovative component products as well as our AR/VR finished products. We look forward to sharing details later on this year as they develop.

As always, we are careful in protecting our intellectual properties in the wearable technology so that we can maintain and monetize our leadership position in the years to come. In 2006, we had 37 granted patents, submitted 30 patent applications, and ended the year with more than 300 patents. We also continue to provide military business.

The F-35 fighter jet is ramping on schedule. And we believe the momentum behind this program will accelerate. We will also ship products this year under the FWSC and FWSI [ph] and look for all these programs to be multi-year opportunities for Kopin. At the same time, our historical leadership in providing avionics and [indiscernible] to U.S.

military should benefit Kopin with a new administration focus on increasing US military strength. As a source of the supplier of optics and display for many military programs, Kopin is excited by its position and opportunity. And finally, we continue to make progress across other programs.

I have discussed in the past including drone racing and health and fitness and safety applications. While some of the early excitements around AR/VR may have slowed resulting in some doubts and re-examination of the whole category, however, we do believe the AR/VR provides unique values and experiences to users.

We and our partners believe we are on the right track. Our products and technology will enable the AR/VR to re-emerge providing an exciting future for Kopin. We that, I am going to Rich..

Thank you, John. Beginning with the results for the quarter, total revenues for the fourth quarter of 2016 were 6.4 million compared with 4.6 million for the fourth quarter of 2015. The increase in quarter revenue year-over-year was primarily driven by sales of our products used in military and industrial applications.

Cost of sales for the fourth quarter was 72% of product revenues compared with a 103% for the fourth quarter of last year. The improvement was due to fact that industrial and military products of higher gross margins than the other products.

R&D expense in the fourth quarter of 2016 was 3.8 million compared with 3.9 million in the fourth quarter of 2015, essentially flat. SG&A expenses were 4.9 million in the fourth quarter of 2016 compared with 4.1 million in the fourth quarter of 2015.

The increase in the fourth quarter of 2016 as compared with the same quarter of 2015 was primarily due to an increase in stock based compensation and professional fees. Other income and expense was income of 2 million in the fourth quarter of 2016 as compared with 1 million in the fourth quarter of 2015.

The fourth quarter of 2016 included approximately 1 million of gain from the payment of an amount held in escrow from a previously sale of an investment. The fourth quarter of 2015 also included a gain of approximately 1.2 million from the sale of an investment.

The fourth quarter of 2016 includes approximately 900,000 of foreign currency gains as compared to approximately 600,000 of foreign currency losses in 2015.

Turning to the bottom line, our net loss for the quarter was approximately 5.2 million or 8 cents per share compared with a loss of 6.8 million or 11 cents per share in the fourth quarter of 2015. Turning to results for the full year, total revenues for 2016 were 2.6 million compared with $32.1 million for 2015.

Revenues from the sales of products for military applications declined from $10.2 million in '15 to $5.2 million in 2016 as a result of the anticipated declining sales of our products for use in thermal weapon sights.

We are, as John mentioned, currently in the successor program, the Family of Weapon Sight Program which is programmed to ramp over the coming year. Sales of our products for wearable application decreased from $12.3 million in '15 to $7.4 million in 2016 as a customer decided not to target its product at consumer market.

Cost of goods sold for 2016 was 84% compared with 76% of product revenues for 2015. Decline was due to the under absorption of fixed overhead costs due to lower sales. R&D expense in 2016 was $16.0 million compared with $17.76 million in 2015. The decline in R&D expense year-over-year was primarily driven by lower funded R&D.

SG&A expenses were $17 million for 2016 compared with $18.1 million for 2015. The decrease in 2016 as compared to 2015 was primarily due to a decrease in patent amortization expenses. In June of 2016, we completed the sale of our Korean facility and recognized a gain of $7.8 million.

Other income expense was income of approximately $500,000 for 2016 as compared with $10 4 million for 2015. 2015 included approximately $9.2 million gain from the sale of investments. 2016 includes approximately $700,000 of foreign currency losses as compared to 2015, which has approximately $400,000 foreign currency gains.

The 2016 other expense also includes approximately $500,000 from the loss from the embezzlement at our Korean subsidiary. Turning to the bottom line, our net loss for 2016 was approximately $23.4 million or $0.36 per share, compared with a net loss of $14.7 million or $0.23 per share for 2015.

10% customers for 2016 were Rockwell Collins at 12%, and [indiscernible] at 20%. Fourth quarter and year-end amounts of depreciation and stock compensation are attached in a table to the Q4 and year-end press release.

Turning to 2017, we're not providing guidance due to lack of visibility inherently in any new developing market, like wearables, however just to give you a sense of what we see developing we expect revenue to be backend loaded as the products John discussed ramp in the fourth quarter. We believe operating expense will remain largely flat with 2016.

We conclude the year with approximately $77 million of cash and marketable securities. And as we previously discussed, we've entered to an agreement to sell approximately 7.5 million shares of our common stock for $24.5 million. The sale of the shares is subject to government approval, which we anticipate we'll receive this quarter.

We have no long-term debt. We continue to maintain a very strong cash and marketable security position in order to execute our strategy. Finally, we are delinquent in the filing of our Form 10-Q for the three-month ending period September 30, 2016 due to the discovery of an embezzlement at our Korean subsidiary.

We expect to file both our Form 10-Q and our Form 10-K shortly. And with that I'll turn it over to John..

Thank you very much. And we are open now for Q&A. Thank you..

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Matt Robison from Wunderlich Securities. Please proceed with your question..

Thanks for the overview.

Can you comment on if you've had any follow on orders on the wearables side and it looks like Goertek investment was delayed, I think there was discussion of closing at the end of January, can you indicate is there any other factors besides government approval in the delay? And then if you could, just for housekeeping, give the CapEx and depreciation for the fourth quarter..

Okay, I will answer the question on Goertek thing, I just came back, as I mentioned, 10 days ago from Goertek. And the delay, if you call it delay, is the government, as will know, starting January this year slowed down the export of moving the money out of the country in China.

So they told me everything is fine, and everything should be done by the end of this month..

By the end of this month?.

Yes..

Matt, what were the housekeeping questions? CapEx was….

The other two questions were just the usual deprecation CapEx, and then what to the extent that you had follow on orders from any customers that were in the wearable. I know that last year you had some initial production orders in the first quarter and the third quarter.

And we're kind of interested to hear if there are follow on orders from those customers..

Yes, well, I mean, we continue to have wearable sales to a variety of folks in a variety of programs. Don't know if there's a specific. I mean, the decrease is obviously last year we had expectation -- when I say last year, '15, expectations of a large program with Google that didn't materialize, that's really the decline.

But with the rest of the customers we continue to ship. With regards to the cleanup questions, depreciation amortization was 44,000 in the fourth quarter, and CapEx was actually a negative number due to translation of a few thousand dollars..

Actually, your revenue was a little bit higher than I was expecting because I was not expecting any follow on orders of significance to the degree that you had last year in the first quarter and the third quarter.

So I was just kind of curious if you had -- if any of those customers had started to see some significant uptick from the market from their initial production activities so they were coming back and ordering more….

Yes, I think maybe I'll make a comment, Matt, is that we do see still pretty strong growth in the drone racing, and that area is also very strong in the wearable.

And we also now notice that, as we will know, the wearable, especially the VR AR headset has gone through with these reexaminations, Rich mentioned about Google, it's one of them, but there are quite a few of them. I think that particular reexamination is over.

I think a new set of products will be coming out and will certainly be involved in many of them. And I think the product will be simpler and more accessory to the smart phones, and I think it's more -- I actually think it's more in tune what is needed right now. So we very optimistic, I think everybody now realign again..

Okay, that sounds practical.

Does it change your role in terms of components versus reference designs versus IP and combinations thereof? Or I guess a simpler way to ask that would be, would this accessory orientation do you see more or less content or is it just essentially the same?.

Well, I think the content, especially with Goertek is a -- Goertek is a very big audio company, so they certainly appreciate our Whisper Chips, and they also have the biggest AR/VR headset, and they really think that they totally believe what we have on the display and optics are the key for the AR/VR. So everything is going online now.

We are now working with the biggest company who are manufacturing AR/VR headsets and audio products. And they are also investing in our company..

Thank you..

Thank you. [Operator Instructions] Our next question today is coming from Jeff Bernstein from Cowen & Company. Please proceed with your question..

Hi guys, congratulations on traction you're getting. A couple of quick ones, any update on the Hitachi Maxell battery technology and where you think that's going..

Yes, this is John Fan. And we were also in Asia. As I mentioned, there was a meeting with them. They are making quick progress. Now we are in the midst of deciding how to get the manufacturing line going. I didn't discuss in this earning call because we have so many other things to talk about. But I am glad you asked. Things are going well there too..

And is power as big of an issue on OLED side? Or, is it less important?.

Power is one of the features. Currently as you will know, the headsets that usually tethered into a PC system or into a PlayStation. In this case, power is not so important except that those headsets are very hot, and people don't like to be hot on your face, on your head. So, that initially is still a issue.

But when it goes [ph] to mobile case, now power becomes very useful and important. So, we just have to solve the problem in several things. I do believe at the end, it should be in mobile world. It should be tethered into a smartphone, not to a PC system. The market is maybe 5, 10 times bigger. And so, our belief is the same thing.

So, OLED actually in many way enable this lower power, smaller sized, faster, higher resolution. Everything that's what's now the -- our first generation headset people are facing challenges. And we in many ways resolve, especially we are so very well respected [ph] and everybody want to talk to us.

But in addition to that, I think it's clear that with this 2k x 2k, which is the world's first, but the fact that we can do OLED by using a totally a fabless model actually as I say, we will enter all the microdisplay in a very big way by the end of this year..

And so, John, just to make sure I understand correctly on the battery side, obviously bar has increased very significantly on battery safety just in the last 18 months or so, you feel like the Hitachi Maxell technology has now tested out?.

Yes, the question but, Jeff, is that the safety. Safety is definitely issue. Everybody is sensitive to it, especially to wearable on your body. I can tell you this, that battery technology that particular battery has passed all the certifications already..

Terrific. And then, you mentioned that you'll be shipping for revenue on the FWSC.

So I guess that you were having a development contract at first and there is a bake off with a competitor, can you just give us more detail on what your win was? And, you are the majority winner of this contract or the minority winner?.

Hi, Jeff, Rich. We received from one of the selected prime contractors a contract for engineering manufacturing development for the weapon side assembly and head mounted display. And we will begin delivering initial units later this year with follow-on units in 2018.

And then, production in 2019, and then, it will continue and ramp to several thousand units per year by 2020. That's the current program of record..

Okay.

And so, you have won the award?.

Well, we have been selected by one of the primes..

Got you.

Okay, so now the question is whether you get this sort of majority or minority of the units and that's to be determined later?.

Right. And we saw this in the thermal weapon side program even though we probably shipped 99% of them in Syria, there was always a stock [technical difficulty] to keep you honest..

Yes, okay. All right, great.

And then, any update on the Scott Sight, it was one of the earlier interesting enterprise kind of commercial kinds of applications in AR and understandably the procurement for that kind of a thing is maybe not as straightforward as a consumer type products? Any update on what you've seen in the Scott Sight for fire fighters..

Sure. So, without giving in too much information really Scott Safety should be providing. But I can tell you from our side the unit went out, it was very well received, but there will be a redesign as you would expect that sort of first power units, and so we're working on V2, as we speak..

Got you. Great, thanks very much..

Thank you. We have reached end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments..

Yes, thank you for joining us this morning, and we look-forward to providing future updates very soon. Thank you..

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today..