Greetings and welcome to Kopin Second Quarter 2019 Earnings’ Call. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host Rich Sneider, Chief Financial Officer..

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 second 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 Thursday, August 8, 2019, 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 materially differ 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. I would like to begin by giving you a brief summary of the strategic and incorporation changes we have undertaken and because the importance of this move, we will then expand on each of the topics.

Over the past months, the management team working closely with our Board of Directors have taken a very thoughtful approach in analyzing and evaluating every aspect of our business. We waited the technology expertise, section leadership and competitive landscape as well as the maturity of the relevant AR and VR market.

Our analysis confirmed that Kopin’s greatest assets is our ability to develop innovative technology with the superior engineering capabilities to turn innovations into a high quality component product.

We have used this innovation and engineering skill over the past few years in developing advanced concept wearable systems for both enterprise and customer markets. Leveraging this concept systems, we will uniquely position to understand the needs of the market.

This have led to the development of industry leading microdisplay such as our product which now included recently in the new Google Glass. Our technology also helped accelerate the growth of enterprise market which we believe is now the fastest growing application for AR.

Much of this momentum have come through RealWear in early Kopin customer which has recognized as one of the leaders in the emerging markets. In fact, Kopin’s early generation Golden-I technology was key to RealWear’s position.

As we license Golden-I technology to RealWear for our equity positioned in ongoing royalty stream as well as full component sales. This model worked so well that we have now looked for through rapid changes.

One of the strategic steps we’ve taken this quarter is to reserve our goal to repeat our success with RealWear along with reducing our cost structure while strengthening our position in microdisplay.

Our strategy and focus mission is to become the leading microdisplay components and IP company following into wear successful examples, of great semiconductor IC companies. Let me outline four key paths of our strategy.

First our focus would be on our core LCD display margin and sub system products for military, enterprise and public safety customers as well as developing our lightening OLED microdisplay products.

Our unique product portfolio was specifically developed to address the requirements of the military enterprise segments as well as also fulfilling the demands of the emerging consumer applications for AR and VR. Second, we have entered agreement with RealWear to commercialize our Golden-I Infinity product.

Also we anticipate reaching an agreement shortly that will add our direct participation in the consumer system business. Third; we’ve streamlined operational elements of our core display business with corresponding reduction via expenses. Finally, with all these changes our lines including our expected Solos transaction by the end of quarter three.

We anticipate reducing our total company payroll expenses by about 30% and we eliminate significant product development cost. Kopin will still benefit from our prior [ph] investors in the wearable system technology and products as we’re focused both tightening of our core microdisplay business. Let’s look at each element of the play in more detail.

Our LCD business currently first many military enterprise and customers which designed our components into their finished products. Our military business comprised of both display components and what we call, HLA or High Level Assemblies which include sophisticated electronics and ruggedized hardware design elements.

The HLA provides significant value to our military customers as well as to some of our enterprise customers. Currently, our military revenue reflect investment in key military programs such as FWSI and F-35 joint strike fighter. We expect revenue from our military programs to continue increasing.

In addition, we’re making excellent progress in developing programs such as the FWS Crew Served and armored vehicles. In the enterprise area, we’re seeing group of our microdisplay. We’ve long discussed that enterprise market for AR is developing faster than the consumer markets, which is reflected in our steps with partner such as RealWear.

RealWear sells to Fortune 500 companies across many industries including Pepsi-Cola, Georgia Pacific, Cisco, [indiscernible] and Colgate to name only a few. Of course we’ve talked about our success in Google Glass which is deploying the accolade in many enterprise applications. The consumer applications for AR however has been slowed to develop.

But just recently we’re seeing some periods of announcements. In addition to our own cycle solutions there are larger displays using swimming goggles and motorcycle helmets were just a few examples. Kopin dominate is area of the market for microdisplay. We continue to invest in development of lightening micro OLED technology.

we have unique capabilities that we believe will meet the need of customers across the range of market applications military, enterprise and consumers. As we’ve described previously, we have a unique fabless business model with our OLED which give us stability and as well as and required less working capital.

For enabling us deliver highly sophisticated OLED display with key performance advantages. You see we’ve entered through development consumer custom while KOPIN is the really the only microdisplay company in the world, we offer three different type of display technologies transmissive LCD, reflective LCDs and OLED microdisplay.

This is a unique competitive advantage as our customer can work with us no matter what specific display they need for the application of product. As I mentioned earlier, our mission is to be the microdisplay provider to the world. Regarding commercialized Golden-I Infinity and Solos.

We’ve executed a transaction for our Golden-I Infinity product design and technology with RealWear. We’re just accepting enterprise AR. We have the experience in developing product with Golden-I Infinity technology and the infrastructure and relationships in place to maximize a distribution and drive the adoption of the production.

In the most recent transaction, Kopin received $3.5 million. We then used $2.5 million to invest in RealWear Series B equity. Similar to our first agreement with them, Kopin will sell displays for them for their systems and receive a royalty for each unit sold.

Our expectation is that, Kopin will benefit as RealWear ramps their sales as well as for any increase in value of RealWear due to their equity position. RealWear’s both [indiscernible] Series B equity offering is a good indication of the strength of the company.

Certain Kopin employees connected to Golden-I joined RealWear which also reduced, will therefore reduce our cost structure. We’ve also engaging negotiations to spin our Solos along with our Whisper technology to group of employees and outside investors.

If the transaction is completed, we expect to receive equity and royalties in the new company in exchange for the transfer of intellectual property, inventory and equipment.

In addition, Kopin expects to maintain the right to utilize and sublicense the current Whisper Audio Technology, as well as any future enhancements for defense and enterprise applications. We anticipate this transaction will close by the end of the third quarter, this year.

With these anticipated transactions we expect to eliminate all spending on Solos and Whisper technology development. We believe the focus and accessibility [ph] available to new companies will allow it to monetize the growth of consumer AR, eye glasses.

Similar, we should emphasize here similar to RealWear case, we will be providing supply in microdisplays with new company. To turn into more operational issues; during quarter two revenue we’re with Homeland [ph] meeting which includes $3.5 million proceeds for commercializing Golden-I Infinity.

During the quarter, we also announced Google is our tier one enterprise customer. We’re also very pleased that Kopin is the supplying the display for Google Glass 2. As you all know, we’ve been supplying for Google Glass 1.

In Q2, the enterprise AR market was [indiscernible] as a key contributor to our results and will continue to drive growth in the second half of the year. Our military business continues to develop inline with the plan. They have 35 programs in consistent and event for the plan by playing continue displaying globally.

We’re confident these are significant revenue opportunity for us in long-term. We currently receive another purchase order for the FWS-I. Now we currently have orders for both F-35 and FWS-I which will go through the middle of 2020. On a development side both FWS-CS and the armoured vehicle progress continue to be on schedule.

In short, working with military takes a long-term commitment and our partnership staff issued US military for the last 30 years is a very important asset and will continue to add our growth. Micro OLED as I mentioned will becoming microdisplay of choice in many AR and VR applications. We’re now the leading micro OLED companies in the world.

We currently have two development contracts for their advance micro OLED display and will continue to engage aggressively with additional customers for other opportunities. To summarize, these strategic changes accomplish a number of our key objectives.

First; they allow us to monetize the prior and investment and IP and product design by reducing our petty maintenance cost. Partner within companies to withdraw their adoptions of AR, VR allowing us benefit on growth in the industries through components sales - IPs and our equity positions in those partner position.

Also significantly reduce our cost structure allowing us to focus time and resolve this on a cost strength in microdisplay. With our strategic realignment, Kopin’s streamlined simplified company. Laser focused our position as a leading microdisplay supplier to companies to be the next generation AR, VR partner.

We are excited about the opportunity they had and greatly appreciate your loyalty and support for our next chapter of the journey. Now Rich can provide additional details and then I’ll take your questions..

Thank you, John. For the quarter total revenues for the second quarter of 2019 were $9.1 million compared with $5.9 million for the second quarter of 2018. In the second quarter 2019 we licensed our Golden-I Infinity IP to RealWear for $3.5 million.

Early in the agreement, we will receive future royalties based on sales and products and we will sell them display components. Cost of goods sold for the second quarter 2019 was $5.2 million or 118% of product revenues compared with $3.5 million or 78% for the first quarter last year.

Included in cost of product revenues for 2019, is a $1.2 million write-off of excess inventory. R&D expenses in the second quarter of 2019 were $3.3 million compared to $4.5 million in the second quarter of 2018 reflecting some of the expense reduction John previously discussed.

SG&A expenses were $5.4 million in the second quarter of 2019 compared to $6.9 million in the second quarter of 2018.

SG&A decreased with three months ended 2019 as compared to three months ended June, 2018 primarily due to a decrease in compensation expenses including stock-based compensation, amortization of intangible assets, marketing expenses including product promotion and the accretion of [indiscernible] earn-out all which were partially offset by an increase in legal expense.

As mentioned in our press release, we made certain expense reductions and anticipate further reductions, if we can’t complete the Solos transaction.

To give you a sense of the amount of direct Solos, Whisper and Golden-I Infinity expenses included in the six months period ended June 29 and the fiscal year ended December 29, 2018 were approximately $4.4 million and $9 million respectively.

Other income expenses approximately $627,000 for the second quarter of 2019 compared with an expense of approximately $52,000 of second quarter, 2018. During the three months ended June 29, 2019 and June 30, 2018 we recorded $200,000 of foreign currency losses. In the second quarter of 2019 we recorded a gain on our RealWear investment of $768,000.

Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $4.3 million or $0.05 per share compared with the net loss of $9.2 million or $0.13 per share in the second quarter of 2018.

Second quarter amounts to depreciation of stock compensation expense are attached in the table to the Q2 press release. The amounts we discussed above are based on current estimates and this should review our Form 10-Q for the second quarter of 2019 for any possible additional disclosures and with that, we’ll take questions, operator..

[Operator Instructions] our first question comes from the line of Glenn Mattson with Ladenburg Thalmann. Please proceed with your question..

Thanks for taking my question. Lot going on obviously for you guys in the quarter. Curious we haven’t heard much, there hasn’t been a lot of publicity from Google on the Glass 2.

Maybe you can give us some feedback on how you guys think it’s doing in the marketplace and I think last quarter you said, that you received an order from Google Glass and then you thought another would be forthcoming relatively shortly so perhaps you can update us on whether or not, that came through or if you still expect it in the short run..

So, Glenn, you really have to talk to Google about their perception of the success product to market, we don’t really talk about our customers individual products and we continue to ship to Google..

Okay, thanks. Question on this deal with RealWear on the Infinity product. As far as, how long to market before they release a product there and just far as getting display revenue in royalty - is there lot of development still on their side or is there something else will turn over frequently..

The question about Golden-I Infinity now of course the transaction with product depends how the RealWear schedule, of course we see a lot of activities on their part and we’re seeing growing requirements on them now, with their overall products are, so..

But I think you’d have to talk to RealWear directly for their product launch. I think they put out a press release shortly after we did..

Yes, I think there was. Again, this is really a situation that below with them, yes..

And then last for me, it’s just as far as like what your guidance was prior as far as the growth in unit volume and things like that, where Golden-I Infinity and Solos is part of that calculation and if so or not and can you give us some sort of feedback on how you’re feeling about that former guidance as far as unit growth this year?.

Well we think overall this year we’ll grow about 60% unit volume based on current estimates. The better part $6 million growth is very good and on top of that, it’s been more favorable.

The sales that we were making are to more what we call value added customers as opposed to straight display sales, so the mix has been very favorable along with the good growth..

Okay, thanks. I’ll jump back in the queue..

Our next question comes from the line of Matthew Galinko with National Securities. Please proceed with your question..

[Indiscernible] OLED development contract, can you say whether those are military or enterprise or they are or if you can’t talk about that. Maybe it might be similar timeline to military program..

I think I answered the question on the OLED contract we have, with two companies.

Are they military related or they are commercial related, is that the question?.

Yes..

These two programs are commercial related..

Okay and do you have a sense of what the timeline is on the development, is that a multi-year kind of set up or is it something that might be that you would complete your work on it in the next by year end, let’s say..

The anticipation is that we’ll be finishing up by year end and early next year..

Got it. All right and just a couple..

It is for product in mind, it is for product in mind..

Got it. I mean is there a lot of heavy lifting that you need to do to sort of get the product in shape for those products or are you pretty much there technically..

Yes, we have been engaging that contract about a year now. It will be the most advanced display for both AR and VR..

Got it. Okay. I guess I just have another way, is there anything dependent on you to get that out the door or is it purely the customer’s timeline at this point to start shipping units..

Its multiple equations there, but again we feel this display was market need at this point, not just [indiscernible] customer maybe many customers too..

Got it, all right and just a quick clean up on the map here.

Did you say you had an inventory write-off in Q2, did I hear that correctly?.

Yes, $1.2 million..

Okay excellent and then you also had realized gain on RealWear this quarter as well..

That’s correct, $768,000..

Okay and then last one from me before I jump back in the queue. So, you talked about 30% reduction taking sort of everything into account.

Can you kind of share - is that hurting from kind of 2018 OpEx number or what should will be framing that again?.

Well I’ll try to give you some direction. I mean it’s very hard to predict what future savings would have been since their costs never were incurred. So that’s why if I give you the $9 million for last year just to give you a sense of magnitude..

Right, but I think you also executed some - or excuse me some sort of four [indiscernible] so I mean like so for the all in number. I’m just trying to get a sense of if we take kind of Q2 OpEx number, what will that look like in Q4..

So, the $9 million is direct program cost and I don’t have an estimate that I could reasonably give you that. Obviously certain overhead cost from the corporate are going to go down to insurance cost and all that, certain fringe benefits will go down.

There was a lot of subjectivity in using - and coming up with that type of number and so I just, we went with the hard cost. So, we expect additional savings in addition to the $9 million, but I honestly couldn’t come up with the number that I thought was possible for lack of better term..

Fair enough. Thank you..

[Operator Instructions] our next question comes from the line of Patrick Metcalf with Newbridge. Please proceed with your question..

My first question will be, what percent of RealWear does Kopin own post the $2.5 million investment?.

Less than 10%..

Less than 10%, okay.

And what is the royalty rate you get from RealWear per device?.

We couldn’t disclose that. We obviously we negotiate with our customer, so we would never disclose that rate..

Okay.

And is the licensing deal with Golden-I Infinity exclusive or is it open to license to others?.

So, for certain field it’s exclusive..

Exclusive. Okay. So, I guess the goal here is to get RealWear as profitable as best as possible and maybe IPO it as quick as possible..

You’ll have to talk to RealWear..

Okay and then you guys have an else VR headset that you designed maybe a year and half ago, is that design part of Kopin or will design be part of Solos now going forward?.

We have VR headset?.

He’s talking about the Elf headset..

The elf headset, it’s not part of the Solos..

It’s not..

No, I don’t. I don’t think so..

Okay. And then guys you’re breaking up two important pieces of the growth puzzle Solos and Whisper. And you’re not giving us any detail on the valuation of them or the investors that are actually participating in them.

Would these be large companies that are participating or large tech companies or would it be large venture capture capital or small-time players?.

We’re still negotiating with multiple parties right now, so we’re not privy to talk about it right now..

Can you give us a little bit of flavor to it?.

Honestly, it’s been negotiated. There are number of people expressed interest, how it will shake out. We hope to know it shortly..

Okay, great. So, we’ll see announcements on that oppose to situations when they come to closure..

But I think it’s important to understand, we still retain rights to Whisper and future improvements for the military industrial application..

Okay and then my question is regarding IDC is calling for 31 million enterprise AR headsets by 2023. Recently you guys have come out and said you had 90% market share in the enterprise AR.

If you can look out, a year, 12 months from now are you seeing new players coming on that you’re now participating with? Are you seeing new players that you will be participating with? Can you give us some transparency on the whole AR enterprise market? What kind of players you’re seeing entering? Will you think you’re going to spend at the end of the day here percentage-wise maybe or do we go down to 50% or we go down to 30%? Just some sort of 30,000-foot view on the industry would be great..

This is a good question because the AR market is getting very hot right now. There are many, many different new entrants or people want to enter. So, we cannot look at the number of people entering the field.

We have to look at the number of people the companies who [indiscernible] going to production in selling the units, like Google, like RealWear, like [indiscernible] those guys are selling unit and therefore our market share is based on, if things go into production..

Okay, so do you see - in 12 months do you see, in holding firm with strong double-digit percentage of the market..

That’s why we’re laser focused now..

Okay. My question is this John do you have more design wins for the enterprise that you’re not showcasing to the public yet. Are you guys sitting on - how many design wins are you sitting on for enterprise they are new type of devices.

Whether they’re low end, high end or is it, all you have the Golden-I Infinity and the Golden Eye?.

I don’t even know exactly how I can answer [indiscernible] without reviewing other companies. We’re working with multiple companies at this point. In fact, we are very busy right now. Obviously, I think we’re seeing also real engagement now in micro OLED. There are lot of expectations in micro OLEDs will be display of choice for many applications.

So, we’re the number one in micro OLED so maybe - talk to you, I don’t know - now..

Okay and then with micro OLED include on this.

Excuse me?.

Go ahead, I’m sorry..

[Indiscernible] potentially secure in the business [indiscernible] some assets this year becoming what looks to be a holding company.

Is there any way you could maybe work a deal out where you get a big upfront, payment and royalties’ stream on micro OLEDs or do you plan on keeping the model away at this?.

Are you advocating, we should state it now or what is that - become a holding company? Are you actually helping us to do formalize and crystallize the strategy? I think the micro OLED is very interesting right now. It is still growing and emerging business. It is a component business and its divided into three parts.

One use the military part and one use the industrial, commercial part, safety part and therefore [indiscernible] leave [ph] the consumer. So yes, you might be able to - depends on the maturity and depend on opportunities. We may - I mean you have to be opportunistic to slice the Salami..

Okay, I just figured since you’re doing business with Chinese maybe get the money upfront and get the royalty payment down the line..

Yes, I think as it says, we would like to be the company. That’s may much like some of the semiconductor companies. They get royalty streams and sell components on these sell technology components, technology and in this case, also get some equity stake in a situation.

Meanwhile we minimize some of the capital-intensive development intensive cost, which we’d like to minimize. So, I think the strategy is a good one..

Okay and lastly when do you see - did we see any review from the BOE [ph] this part quarter and when do you see revenue coming, any kind of revenue coming from BOE [ph]?.

I would not be able to answer your question, but our relationship with BOE [ph] is very strong..

Okay, all right. Thank you so much..

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

Well thank you very much for joining us this morning and I hope to talk to you again, the next time. thank you..

This concludes today’s conference. You may disconnect your line at this time. thank you for your participation..