Richard Sneider - CFO John Fan - CEO.

Matthew Galinko - National Securities Patrick Metcalf - Newbridge.

Good morning. My name is Emily and I will be your conference operator today. At this time, I would like to welcome everyone to the Kopin Corporation Q3 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Rich Sneider, Chief Financial Officer, you may begin your conference..

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 third quarter 2018 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 Thursday, November 8, 2018, 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 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. Thank you for joining us this morning to discuss our third quarter results and the industry developments to accelerating cost option as our AR cost in enterprise and industrial sales. The adoption of enterprise wearable is at enterprise space was a highlight for Kopin in Q3 as well as for many of our partners.

Let me review some of the events that occur in Q3. First, we have at least with the initial development our shipments of display module to a tier 1 U.S. customers was an early mover in the development of smart glasses.

The shipment of 5,000 display modules of that company was soon to be launched next generation in our smart glasses was a major milestone for Kopin. The benefits of AR handset to enterprise has improved productivity and safety by enabling workers to communicate with remote experts to document data and to provide other functions in a hands-free manner.

AR smart glasses are also very useful for training, medical applications and [indiscernible] environment. We expect shipment to ramp in 2019 rapidly as that product moves to full production.

We are also seeing significant order increases by other enterprise headset customers, reflecting the spending interest of our companies across many verticals that see the benefits of AR.

For example, our partner RealWear has recently announced deals for its HMT-1 headset with consumer product companies like Colgate-Palmolive while it's being deployed in 20 manufacturing facilities in 11 countries to the industrial leaders like Honeywell.

RealWear is also working with a number of auto companies such as Volkswagen and [indiscernible] which show how AR is being utilized across many verticals each with unique applications and goals in new technology. Another Kopin's customers [indiscernible] as a non-similar block demand for its N300 device.

We expect to ship over 100,000 units or our display modules for enterprise AR smart glasses in 2019. We also anticipate our [indiscernible] Infinity smart glasses targeting the enterprise market will begin fuel testing with customers this quarter.

We have demonstrated Infinity to many potential customers including approximately 30 Fortune 500 companies and their interest helping restaurant. Golden-i Infinity is quite different from what our partners are providing. It has a unique form factor that connects directly to a smartphone or mini-PC by cable.

It has a very high-resolution display, a high-resolution camera and a multi-access head tracker. But it has no radio or battery residing on the device.

[Indiscernible] Chile that utility utilize Kopin’s parental core technologies, including our display, our whisper voice instruction by improved speech recognitions and advanced hands-free user interface controls. The integrated benefit rate into industrial workers daily tasks, we look for commercial shipments to begin in Q1 2019.

Let’s now discuss military business. F-35 sales again was a significant contributor in our military business. We’ve announced in September that we have received a production contract for F-35 pilot’s helmet to late next year. Our FWS-I unit has been fully qualified, and we received the first production order.

We expect to begin shipping in November under the $4.2 million contract and we’re just being informed that eminent follow-up order is coming. Our shipment was slightly delayed, because the issue of our suppliers. We believe the issue is now resolved and the supplier is getting on track.

Let’s turn to the development program for our next defense contract defense product. We continue to achieve the milestones for both the FWS-TS and armored vehicle program. These two programs by the two previous products are expected to bring Kopin pay a significant production revenue.

In summary, we’re seeing very strong demand for enterprise AI smart glasses. And we continue to be the dominant supplier for the military applications. While enterprise AI is gaining traction, it is certainly a challenging time for VR and AR wearables, especially VR is undergoing a reassessment by the market.

After the initial VR assignment, a strong push for consumer adoption, we noticed a sharp pause in the momentum. It’s likely that VR applications similar to AR will move to enterprise industry applications before becoming a wide spread product [ph].

Further complicating the matter, there is a tariff situation in China, which we believe negatively affected our Chinese customers, especially those who buy our components for drone [ph] applications.

I'm flying over to Asia tonight to discuss with our pilots, customers, and suppliers to further understand the fail, the trade war and what can be done to minimize this impact. Now, I would turn the call to Rich to discuss the financial details of this quarter..

Thank you, John. Beginning with the results for the third quarter 2018, total revenues were $5.1 million compared to $6.1 million for the third quarter of 2017. As a reminder in 2017 we acquired - NVIS and they had certain military contracts in place.

In the third quarter of 2017, two of those contracts were essentially filled in Q3 and Q4 2017, representing about $1.5 million of the $6.1 million of 2017 revenues. Cost of sales for the third quarter was approximately a 100% of product revenues compared with 74% for the third quarter of last year.

Gross margins decreased due to lower absorption and lower head cost as a result of lower volumes. R&D expense in the third quarter of 2018 was $4.6 million compared with $5.3 million in the third quarter of 2017, reflecting $1.2 million increase in funded R&D expense offset by a $1.9 million decrease in internal R&D.

SG&A expenses were $7.2 million in the third quarter of 2018 compared with $5.3 million in the third quarter of 2017.

SG&A increased for the three months ended September 29, 2018 as compared to the three months ended September 30, 2017, primarily due to an increase in stock-based compensation, legal expenses, product promotion expenses and patent maintenance fees.

Other income expense was a $175,000 in the third quarter of 2018 as compared with income of roughly $300,000 in the third quarter of 2017. The third quarter of 2018 includes approximately $227,000 of foreign currency losses as compared with approximately $224,000 of foreign currency gains in the third quarter of 2017.

Turning to the bottom-line, our net loss attributable to controlling interest for the quarter was approximately $9.8 million or $0.13 per share compared with a loss of $8.2 million or $0.11 per share in the third quarter of 2017.

While we expect strong results in military and industrial sales in the fourth quarter with the weakness in consumer AR and VR demand and the slight delay in FS-1 shipments, we are reducing our full year revenue outlook to $24.5 million to $26.5 million from the previous $30 million to $35 million.

We conclude the quarter with approximately $46 million of cash from marketable securities and no long-term debt. The amounts I just discussed are our current estimates. So, I’ll remind listeners to review our Form 10-K for the third quarter ended September 29, 2018 was filed or final amounts. And with that, I’ll turn the call over to John.

Excuse me, I’m sorry. With that operator, we’ll take questions..

Of course. [Operator Instructions] And our first question comes from the line of Matthew Galinko from National Securities. Your line is open..

Hey, good morning. Thank you for taking my questions. I guess maybe….

Good morning, Matt..

Good morning. So, just one quick one on the -- I think you mentioned you expect to ship a 100,000 of display modules for enterprise AR in 2019.

Is that inclusive of what you expect to ship as part of the ramp in Golden-i?.

No, that’s external customers..

Okay. Got you. And then on the consumer wearables front, particularly your internal product that you developed, I didn’t hear you touch on that, curious how commercialization is going there? And in the past, we’ve talked a little bit about sort of building a distribution channel for it.

So, how are efforts going on that front?.

So, as we mentioned, we expect -- while we showed the product recently at AWE several months back, the reception has been very strong as we noted in our remarks, up to over 30 Fortune 500 companies have looked at it and are awaiting samples and we expect to get those into people’s hand this quarter with production and shipment starting in Q1.

We’re going to use a bar model as we’ve discussed to distribute it. And we’ve also identified and signed contracts with fulfillment centers. So, the distribution network is coming together and for the most part it’s in place. So, those issues should all be behind us as we enter Q1. So, at this point, we just need the initial feedback on the product.

And then as we expected, shipments in Q1 would start generating revenue..

And Matt, are you talking about the Golden-i Infinity or are you talking about the consumer aspect of the AR glass?.

The consumer athletic wearable..

Yes. I think this is about SOLOS. Let me answer -- this is John Fan speaking in here. And the SOLOS actually introduced late second quarter, sometime late second quarter and there are two things that are happening. One is the hardware. We actually find the hardware is actually pretty good.

In fact, we are the only one now in the market that is everybody’s reviews said hardware is very good.

What we are doing now is connecting with people for the benefit with people’s software, application softwares and we are making very good inroads and I’m sure people will be seeing a lot of additional partnerships with the software companies that are coming soon. With that, I think the benefits that you as a cyclist become very clear.

So, actually we are very happy with the hardware and we are easily and rapidly working with the benefit. So, I think that’s a very interesting problem because as we said, AR even for consumer, people are still hesitating. Remember everything has to go from military to enterprise to consumer.

The AR glass has really transitioned today enterprise world now. I think the next stage is -- it is going to be the consumer. We are has jumped from military and nearly to a consumer. I think now they are pausing and then [Indiscernible] work for the enterprise world first..

Got you. Okay. I appreciate that. And then maybe on the Golden-i, you have this cast and sort of established that it’s a fairly different design and approach to industrial wearables than kind of what your partners are doing.

How is reception and are the potential customers are talking to kind of lining up the existing design of wearables against Golden-i and sort of comparing or are they sort of looking at their first industrial wearable and sort of evaluating on its own merit without necessarily looking at other units on the market?.

Let me answer this question. See in the wearable world, especially the enterprise, I think eventually even for consumer world, it is going through different layers especially in industrial world.

They ruggedized [ph] industrial application and get that middle of applications and that is where broad industrial workers where they really want mobile assistance. So, what we are targeting is in fact truly their mobile workers. So, they are lightweight, probably very low -- much lower cost because they had no battery, no radio and no processor.

You just coup up to their existing cellphone or existing mini PC people in industrial who are already using. So, it’s a very different category. It’s actually in some way contrary to normal thoughts is that you’re tied to a phone want me to cut that PC and don’t have any battery. So, it’s a different thing and I think appealing too entire workers.

They have mobile, they broadly distributed. There is no such thing in the market right now. And as we know, we work with our partners and recognize do the pioneer jobs.

And also, because we did talk to the customers and the ultimate customers, the industrial world a lot because we probably have about 80% of all the enterprise handsets kind of in the world right now which were in production. So, we know our customers.

And that some of the customers -- actually many of the customers say this is what we’d like to see there, broad, lower cost, lighter weight more -- in many ways also I would say really -- because it’s just really liked a smart screen with a camera.

So, all the PCs and phones, if they change their performance is already piggyback, you don’t get outdated, it’s a very, very good system for enterprise world. Maybe I speak too much on that. So, I’ll take the next question..

I think I’ll stop hogging the mic and I’ll jump back in the queue. So, I appreciate the color..

[Operator Instructions] And our next question comes from the line of Patrick Metcalf from Newbridge. Your line is open..

Hey good morning guys..

Good morning..

John, can you give us an update on the product roadmap for Whisper Chip how you see it playing out and how good the technology is the feedback you’re getting from customers and maybe some more information on that? And then my next question is on the U.S.

internet company that you shipped 5000 units to have you done business with this customer before or is this is a brand-new customer?.

Okay it is John - thank you Peter for that question. I’ll answer the customers question first, there is a customer that we know and have been doing business with before. It is a good partner to us for many years. Back to the Whisper actually one of the purposes of my trip to Asia is talk about Whisper.

What we have now noticed is that it’s both in the AR in the whole wearable world people begin to recognize one of the humans, importing human interface is going to be voice, now going to be done by touch. The touch screen is very-very good for hand held smartphones and it was a wonderful thing that they have invented for smartphones.

But one good wearable is ready on a touch look AI glasses or touch anything you can avoid it so is voice. And so, a lot of activities now are on the voice as there were the voice is going to be the next touch.

So, we actually in our product both in our Golden-i Infinity in fact that’s why we launched the power the Whisper is actually in Golden-i Infinity. Golden-i Infinity Golden-i the Whisper is also of course in SOLOS and Whisper’s also in real wear handsets.

So, but the ability is going on and we check our Whisper now and our customer and panel check it, the performance is better in LED in the market right now especially in a noisy environment.

So, we are active right now and I think by the time people see and experience the Golden-i Infinity which is really there’s no touch, there’s no tapping that you accustom to is going to be totally hands free, so all done by control by voice, by whisper voice as well as by the head gesture.

The whole thing the whole human interface in Golden-i Infinity is no touch and this is the first thing first time ever has come up in any product, so we should see Whisper is doing well it has very good performance and there’s - it is going to the product it has been starting to go in the products and I’ll be in Asia talking more about it..

Okay, great.

And then one follow-up on the Whisper Chip you had been granted a patent with the Whisper Chip to be embedded in a Bluetooth or chip I believe is there any chance the roadmap would have you licensing the Whisper software to a Bluetooth company like a Qualcomm or something like that is that possible?.

Yes, we appealed I think it’s importantly that Whisper can be loaded into any processor of many kinds, micro-controllers can be loaded in there too.

So, there is a licensing model we also have a Whisper chip so it’s a chip model and then of course there is a model that people will get our algorithm into a standard processor which deal with the sale of the processor. So, there are different kinds of models coming up.

And in many ways, I’m very, very excited by it, but it takes a little time because I think people begin to -- had to recognize that what is VR next interface..

Okay, great. And I just saw you signed a partnership with this -- a medical device….

We have about 30 patents around Whisper. Most of them -- a lot of them are issued. So, we’re very excited about Whisper. I’m glad that you asked the question, yes..

Okay. Good, good. And then lastly, you had signed a deal with a company just recently in the medical device for an AR device for surgeons. Did you guys give your IP up to them for equity stake in that company, like you have done with RealWear, BOE, New Vision, Lenovo’s joint venture.

Can you give us a little bit of an idea or color on how you’re using your IP to build up your equity stakes in so many different ventures in the AR VR world because I don’t think the market appreciates that?.

Yes. Let me answer that. It’s an important question actually. In the BOE case, it is joint venture, but there is no IP transfer at all. In fact, there is no technology or IP transfer. And so, that is a very clear case.

In the Lenovo case, in the joint venture with Lenovo, of which actually we licensed one of our models, remember we do a lot of lot of concept models and reference model of our smart glasses. We licensed one of our models and of which we get some equity. We do care for significant equity there.

In the RealWear the involvement is deeper with normally a license, a reference model, which again the reference -- reference model is a concept model, a full product like our Infinity, somewhere in between.

So, the reference -- license and reference model, also license some of our patents now exclusive of course and they are on top of that, the promise by our components loss as well as pay royalties and they are significant part of our equity.

And this is the model that we can’t kind of favor right now anyway especially for small very aggressive start-ups. We will license them especially reference models..

Okay. Well, I like what you’re doing. And I think when the tide turns; this is going to be a big opportunity. Keep up the good work..

Yes. I think we were certainly disappointed. The whole industry is disappointed with what’s happening especially in the VR wearables. The VR wearables was a huge spike and then everybody fell to the earth. And it happened very rapidly, and everybody is aiming it.

And if you recognize and look around between the trade war and what’s happening in the VR area, many of the stock companies here as well as the overseas have seen some significant impact. However, it’s different from a nice 3D TV. We think it’s a pause and reassessment, regroup and things will come back again..

Okay. Great, John. You referred one last point, with the market seems -- AR VR market seems to be bottoming here, it would be great like you’ve done in the past step in and buy your stock, it would be greatly appreciated. Thank you..

Thank you very much..

[Operator Instructions] And we have no further questions at this time. I will turn the call back over to John Fan for closing remarks..

Thank you very much for joining us this morning. I hope to see some of you in the coming CES next January. Thank you..

This concludes today’s conference call. You may now disconnect..