John Fan - Chairman and Chief Executive Officer Richard Sneider - Chief Financial Officer.

Robert Mertens - Needham and Company Jeff Bernstein - Cowen & Company.

Good morning, and welcome to the Kopin Corporation's Conference Call to Provide a Business Update and Results for the Fiscal Second Quarter Ended July 1, 2017. 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 You may access an archived version of the call on Kopin's Website at www.kopin.com.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. Fan and Chief Financial Officer Mr. Richard Sneider. Please go ahead, sir..

Thank you. 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 2017 fiscal second quarter results at a high level. John will conclude our prepared remarks, and then we'll be happy to take your calls, or your questions.

I would like to remind everyone that, during today's call, taking place on Tuesday, August 8, 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..

It was an experiment three years ago. Now we are in full-on production with our customers and with our partners. Google identified customers across many industries, including houseware, aviation, aerospace and automobiles, with over 30 companies using Glass 2.

As you know, Kopin has been a long-term partner with Google, supplying the display modules for Google Glass 2. The momentum for AR/VR assets for enterprise applications is now well underway. In this morning's press release, we mentioned we expect five new assets to be introduced later this year with our key components.

Of these five new assets, three of them are for enterprise. The benefit of such assets for enterprise applications are now well acknowledged in the industry. And we expect rapid adoptions throughout the industry in the next couple of years. How about VR/AR for consumer? Certainly, the drone racing assets are for consumers.

The Garmin and Recon assets are also for consumers. Two of the five new assets we mentioned earlier are for consumers. One of the two consumer assets actually plan to use our Lightning OLED microdisplay. We'll now bring us to our OLED strategy. As a reminder, we introduced our first Lightning OLED display 2k by 2k resolution at CES last January.

This display has the world's best performance. And our basic technology is protected by 10 patents issued or pending. The response for the VR customers has been overwhelming. We obviously have presented solution that's badly needed for VR assets.

It's important to stress that, not only it's important to have the best VR display in the world, but also to provide stable and scalable supply chain. We have developed a unique supply chain model.

For the near term, with our Chinese partner, we plan to start volume production of Lightning OLED displays in first quarter of 2018 for one of the new assets for consumer applications.

For longer term and much higher volume, we are establishing a joint venture with BOE and OliGHTEK to build Kunming, China, the world's largest OLED on silicon manufacturing site. As you all know, BOE is one of the top global display manufacturers. The JV plans to begin volume production in two years.

The other new consumer asset is, of course, Kopin SOLOS. We have shipped more than 300 units via Tipstar program. And the feedback from the users has been excellent. From the feedback, we'll make major enhancements in SOLOS and transfer the manufacturing to our partner Goertek. Goertek has done an excellent job.

And we expect the enhanced SOLOS asset to be available in a few months. I saw the early samples in China two weeks ago. And I must say I was very impressed. SOLOS will be a great product. I must not neglect to discuss our order activities. For wearable's, the voice interface is like the touch interface for a smart-phone. Voice is the next touch.

We are making very good progress in our audio Whisper technology. Four of the five new AR/VR assets to be introduced in the second half this year will have our Whisper chips inside. In addition, we have recently made great advancement in extending our Whisper technology for near field applications to far field applications.

Early tests have shown we have maintained all our superior advantages in noise cancellation, voice quality and speech recognition in far field equal to those advantages in the near-field applications. As a reminder, our Whisper technology is protected by 30 patents issued and pending.

And we're delighted that our new patent application, extending our Whisper to far field, was immediately allowed. We'll continue our filing on far field applications. With our successful far-field application extension, Whisper should be useful not only for AR/VR and wearable's, but also for many other applications.

Whisper provides better voice experiences. We have recently began describing publicly our thoughts on the AR/VR markets and where they're going.

I delivered two keynote speeches this quarter, one at the Annual Society of Information Display Conference in Los Angeles in May and the other one at the Augmented Reality World Expo, AWE, in Santa Clara in June. Both of those talks have been very well received and furthered the buzz about Kopin and our AR/VR solutions.

The talk from AWE is available on the News section of Kopin's Website. And I encourage you to watch it to help you understand how we see AR/VR industry growing. Also, at the AWE Expo, we demonstrated a VR headset prototype called Elf that incorporate our 2k by 2k Lightning OLED.

Amazingly, it is about half the size and half the weight of conventional VR assets, and yet providing much better and lifelike smooth images. Our partner Goertek and Kopin are now busily refining this first prototype. It should be pointed out that this is a demonstration prototype and is not one of the five assets I've mentioned.

We believe even smaller and better performance prototypes can be demonstrated with our Lightning display. I also wanted to talk a little bit about the news, some of the news on AR/VR. You may have heard about the successful news on Google. But you may also be hearing a different story for some of the early companies.

Like any new technology adoption, the growth of wearable has not been a straight line. This has always happened with revolutionary technologies. The journey usually starts with many activities and many companies springing up and a lot of money flowing in.

Then you start to see consolidation as the strong technologies take over and the smaller companies are acquired or just shut down. There are always some winners and some losers. For Kopin, our strategy has been focusing on developing key enabling technologies and products.

Our displays, optics and Whisper are all revolutionary and has make us leader in AR/VR, in military and enterprise worlds certainly, and now onward to consumer. Also, many of the projects that are struggling with our on touch, now voice, on the very early beginning, Kopin always said voice is the future and not touch.

So again, the market's proving that voice is critical for wearables. Many of you have heard about the Gartner's Hype Cycle, which is the lifecycle for revolutionary technology. The cycle usually goes through an inflated expectation of peak, then rapidly dropping to a deep trough, before it goes up and on enlight a slope of growth and enlightenment.

Gartner says that AR/VR has come out of this ugly trough and now climbing up along the growth path. Kopin's results indicate the same trend. In summary, as I said earlier, after significant growth this quarter, we are expecting second half of the year to have revenues 70% higher than the first half of this year.

The five new products being introduced by yearend will have very little impact on the second half revenues. So we're very excited about 2018 as these products start to ramp. With the Goertek investment, we end the second quarter with $85 million and no debt.

And as always, we maintain very careful in selecting our investment and deploying our resources. We're excited about success to date in utilizing our resources. And I encourage we will maintain and retain the capital to monetize and commercialize our investments. Now I will turn the call to Richard..

Thank you, John. For the quarter, total revenues for the second quarter of 2017 were 5.9 million compared with 4.4 million for the second quarter of 2016. The increase in Q2 revenue year-over-year was primarily driven by an increase in sales of our products for military and industrial applications.

Cost of goods sold for the fourth quarter was 83% of product revenues compared with 113% for the second quarter of last year. R&D expenses in the second quarter of 2017 were 4.7 million compared with 4.1 million in the second quarter of 2016.

SG&A expenses were 5.2 million in the second quarter of 2017 compared with 4.3 million in the second quarter of 2016. The increase in second quarter 2017 as compared to the same quarter in 2016 was primarily due to additional expense of approximately $500,000 from the Invis acquisition and professional fees of $400,000.

Included in operating income for the second quarter of 2016 was a $7.7 million gain from the sale of our facility in Korea. Other income expense was income of approximately 800,000 for the second quarter of 2017 compared with approximately 100,000 for the second quarter of 2016.

Second quarter of 2017 included approximately $250,000 of interest and other income and $600,000 on gain in foreign currency. The second quarter of 2016 includes approximately, $60,000 of interest and other income and approximately $40,000 of foreign currency gains.

Turning to the bottom line, our net loss for the quarter was approximately 7.3 million or $0.10 per share compared with a net loss of $3.2 million or $0.05 per share in the second quarter of 2016. Second quarter amounts for depreciation and stock compensation are attached in the tables for the Q2 press release.

Turning to 2017, our expectation is for revenues for the second half of 2017 will increase in the range of approximately 70% over the first half of the year. We believe operating expenses will remain largely flat with 2016. We concluded the quarter with approximately $85 million of cash and marketable securities, and 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. With that, operator, we will now take questions..

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Rajvindra Gill with Needham and Company..

Hi, this is Robert Mertens on behalf of Rajiv. Just a real quick question on your military business. So you had stated that all four projects are going to start to ramp. And I'm assuming that this is a large part of that 70% guidance to second half of this year over first half.

But on the last call, I think you were stating that the Family of Weapon Sights to individuals were already shipping, but the crew was still in development phase and wouldn't hit production until the second half of '18.

So I guess my question's just trying to get a little bit more clarity on the overall military business line and how you see that going forward. And then I have a follow up..

Sure. So the FWSI, which is the individual, is in what's called LRIP, low-rate initial production. And so that actually -- the revenues from that program are including in our R&D revenues. They're not part of or product revenues because, again, it's still getting shake and baked. And the FWSC, the crew, is actually in an even earlier stage than that.

So we would expect in '18 that we go out of low-rate initial production into full production on the individual product. Development will continue on the crew through '18 into early '19. And then in '19, it will start to go into production if everything goes according to plan..

So most of what we'd see in the back half of this year would be from the F-35 contract?.

The F-35 and also we have an armored vehicle virtual reality product that's ramping..

And then a follow up. I see a nice uptick on the industrial side.

Could you talk me through just some of the higher-level points that are driving this business and how we think about that going forward?.

That's our -- a lot of that's coming from our Forth Dimension Display subsidiary in Scotland, which makes -- our display is used in a 3D metrology setup. John's much better qualified to explain how the system works. But essentially, the equipment is used for high-speed quality inspection of PCB boards and things like that.

And, John, maybe you want to explain how it works..

Yes, I think that, on the industrial side, there are several areas. In fact, I would say we even consider the firemen's -- the Scott firemen's helmets -- we already advised the street we're getting additional orders, which is industrial.

We're getting additional orders for the drone racing, which now we consider is consumer, but they're also ramping up. We are also shipping display for FDD, which is our Scotland series to this armored vehicle training. So that's ramping up.

And we're also shipping displays to 3D metrology, which are used in those displays to make three dimensional mapping of PCB boards in the industry. So that part's also ramping. In fact, that particular area, we own about 60%, 70% of the market share. And our competitor there is TI's DLP.

So that part's also ramping as more and more people go into looking at 3D metrology of PCB boards in the production lines. So all areas are kicking in. So as Rich said, even the military programs, of the four, two of them are growing very rapidly, and two of them are shipping early samples, early production samples.

And that will also give us additional momentum in 2018. So we see our military programs will continue to grow into 2018. In fact, they look very good right now..

Great. Thank you. And one last question from me before I hop back in the line. You said, going forward, you're expecting OpEx sort of in the same range as 2016. Are you thinking about that sort of on a quarterly basis? I noticed that, this quarter, it seemed to jump up a little bit. So I'm just trying to get an idea of how to best model that..

Yes, the increase is because of the Invis acquisition. We had a -- they brought with them roughly somewhere around $400,000 to $500,000 a quarter in SG&A expense. But overall, the levels should be comparable to what we saw in 2016, or frankly, what we've done in the first half of the year should be relatively stable into the second half..

Okay..

So for modeling purposes, you can even use Q2, if you'd like, as a good representation of a standard quarter for 3 and 4..

Okay. Great. Thank you..

Yes, I think to -- really to just make a little comment is that, well, obviously, we have been -- the last year been very, very focused on developing new products and providing the manufacturing abilities. Those areas are most finishing up the products that coming out, and we're shifting more and more to sales and marketing arena..

That's very helpful..

Our next question is from Jeff Bernstein with Cowen & Company..

Congratulations on the design win activity. That sounds great. So just a couple questions for you. So, John, there was a transition going on in the drone racing product, and it sounds like that's finished now.

But can you just talk about that and expectations going forward there?.

Yes, the drone racing has also gone through their little trough, as they moved from one resolution to higher resolutions. So now the higher resolutions samples have been shipping robustly. And the interesting ones, people saw the high resolution ones, everybody wanted the high resolution ones, which actually give us better margins.

So that thing's going very well..

And then do you have any update on what's going on with the battery development? Has your partner made any kind of decisions on a production facility?.

Yes, I was afraid that you would ask the question. As I would say that really, there are many progress in many areas. This is one area we don't really have real great progress in. The battery works. It does give you a high capacity and for the same volume. The only problem is we have not been able to set up the manufacturing site.

Our partner is still debating, and they have something going on in their organization. So that thing still has been slow in developing. So I'm afraid we don't have any good news for you except that the technology works..

And then I just wanted to make sure I understood correctly.

You're actually going to have some OLED display sales in 2017?.

Not 2017, 2018..

2018. Gotcha. Okay. Okay. Terrific. Thank you..

Our plan is to have production starts in the first quarter of 2018 and, yes, with the line that we're setting up. And of course, in 2019, late 2019, the joint venture factory hopefully is running. And that will be a huge increase in capacity. In fact, it's the biggest one in the world..

Great. Thank you..

[Operator Instructions] We have a follow-up question from Jeff Bernstein..

You were talking about the application of Whisper technology to far field. And I just want to make sure I got it right.

You said you had a patent already granted there?.

Yes, that is -- that was actually a surprise to us because, as you already know, usually, patents don't get granted immediately..

Yes..

This one, the way we solved the problem for the extension to the far field is so unique, U.S. Patent Office immediately granted. So it's a shocker to us and so was a pleasant surprise..

And so, John, where are you on prototyping that? Is that something you're like doing on an FPGA right now, and you'll have some silicon at some point in the next six months or something, or where are we?.

Okay. That -- I'm glad you asked the question, Jeff. For us, we'll always be looking for scalability. So therefore, in the OLED, we set up our supply chain. In our product, we set up the supply chain with Goertek. In Whisper, actually, it's very scalable. The Whisper algorithm, of course, is software, is extremely scalable.

And Whisper chip is also very scalable. Now the question you may ask is, say, your Whisper chip used in the four assets coming out end of this year, are they also applicable for far field? My answer is that, for that version, is not. So we modified the version to -- for far field, and samples are coming out, and we're checking right.

So we actually also modified our chip for far field. As I say, it just came out, and we're testing it..

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Dr. John Fan for closing remarks..

We're very happy that you joined us this morning, and I hope to talk to you soon. Thank you..