Good day, and welcome to the Kopin Corporation Fourth Quarter and Full Year 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Rich Sneider, CFO. Please go ahead, sir.
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 fourth quarter and 2019 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 Tuesday, March 10th, 2020, we'll 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. With that, I'll turn it over to John.
Thank you, Rich. Thank you for joining us this morning to discuss our fourth quarter and 2019 results. We are very pleased with the way the year ended. From an operations perspective, we saw strong demand for our products from the military and public safety segments. We continued to make improvements in our cost structure.
From a technology perspective, we had a very successful Consumer Electronics Show in January, at which we highlighted our proprietary double-stack organic light-emitting diode, or OLED microdisplays, including a super-bright monochrome green display that emits over 20,000 nits. Honestly, it was too bright that it's difficult to look at. For the fourth quarter, military was the key revenue driver with the F-35 Joint Strike Fighter and FWS-I programs representing the majority of those revenues, consistent with our experience all year.
As we noted in our earnings call of third quarter 2019, we received a new FWS-I order and begin filling it in fourth quarter. In 2020, we expect FWS-I Crew Served and our armored vehicle development programs to be completed. They will join the F-35 and FWS-I in product revenue generation. Historically, we have had only one or two major military programs in place in any given time.
Today, we have in place over 10 military programs that are either in volume production or advanced development stage. While some of them may not impact revenue generation until 2021-2023 timeframe, and we cannot be sure all will reach production after moving through development, the overall strength of our military programs and our success in winning programs over competition is the strongest in our history.
Turning to public safety, we had a very strong Q4 for shipments of our display products for the fireman's mask application. We believe this is a great application for our technology, and we expect new products to be developed for public safety applications in 2020. You may recall in the third quarter of 2019, we took significant steps to reduce our cost structure.
These reductions have improved our cash for operations, reducing it from $7.8 million of cash used in operations in Q1 of 2019 to $4.2 million of cash used in operations in Q4. We're making good progress in rationalizing the business and expect further progress as we move through 2020. As I mentioned, we had a very good showing at our CES event.
We demonstrated 2K and 720p displays using our new double-stack OLED microdisplay technology, which has a much higher brightness and longer lifetime. We also gave a preview of our new, and world first, 1.3 diagonal, 2.6K x 2.6K display. That means 2,560 pixels x 2,560 pixels resolution for the next generation AR, VR, and XR applications.
Our OLED technologies advances include a patent-pending silicon backplane technology, which enables the creation of double-stack OLED structures for microdisplays. A double-stack OLED is two OLED structures on top of each other and connected in series, so that the charge carriers pass through the double-stack OLED and generate photon twice instead of once in a conventional single-step OLED structure. This results in much higher efficiency, higher brightness, lower power consumption, and longer life.
While this approach have been used for large panel displays, maintaining a good color fidelity has been a very serious barrier for small pixel microdisplays. We have succeeded in solving this with a unique method in our silicon backplane design and process. In addition, our patented backplane device architecture enables a superior dynamic range, which allows our display to be used in a very bright sunlight and pitch black darkness.
This display can meet the demand of consumer enterprise applications being developed for the 5G networks. Finally, our stock is below $1, and we received a notice from NASDAQ that the company is not in compliance with NASDAQ minimum bid price listing, rules. On March 2nd, 2020, we held a special shareholder meeting in which the shareholders authorized the company to effect a reverse stock split.
The board will decide the timing and size of the reverse split once we have clarity in a number of pending opportunities. In the meantime, we expect to request an extension from NASDAQ to enable our options. To summarize, we had a strong fourth quarter of 2019. We are excited about Kopin's long-term opportunities as we see increased revenues and the benefits of our continuous cost reduction efforts.
To further increase our efficiency, at year-end, we created the new position of VP of Operations and hired Eric Whitman. Eric brings extensive experience gained on operation positions at several aerospace, defense, and technology companies, and is focused on improving our manufacturing efficiency. Now, we turn the call over to Rich, so he can provide additional details, especially around the cost structure.
Beginning with the results for the quarter, total revenues for the fourth quarter of 2019 was $8.7 million, compared with $7.7 million fourth quarter of 2018, a 13% increase year-over-year. The increase in sales in 2019 compared to 2018 was primarily due to increased sales of products for public safety applications and funded military programs.
Cost of sales for the fourth quarter was 81.1% of product revenues, compared with 76.2% for the fourth quarter of last year. Cost of product revenues increased as a percentage of revenues in 2019 as compared to 2018 because of a lower than historical yield from our manufacturing process. R&D expense in the fourth quarter of 2019 was $2.7 million, compared with $3.9 million in the fourth quarter of 2018, a 31% reduction.
Material R&D expense for Q4 2019 decreased $1.7 million as compared to the prior year, primarily due to the licensing of certain products and other development programs being curtailed. This decrease was partially offset by an increase in funded R&D expense of $500,000 for Q4 2019 compared to the prior year, due to an increase in funded R&D revenue from military programs. SG&A expenses were $4.5 million in the fourth quarter of 2019, compared with $6.2 million in the fourth quarter of 2018, a reduction of 27%.
SG&A for Q4 2019 decreased as compared to the prior year, primarily due to a decrease in non-cash stock-based compensation of approximately $500,000, compensation expenses of $700,000, marketing expenses of $400,000, and IT and consulting spending of approximately $400,000, which were partially offset by approximate increase of $500,000 in professional fees and $800,000 of bad debt expense.
Including Q4 2018 operating expenses are $2.5 million from the write-off of fixed assets and $1.4 million from the impairment of goodwill charge. Other income expense was expense of approximately $3.7 million in the fourth quarter of 2019 as compared to $1.1 million of income in the fourth quarter of 2018. Included in the fourth quarter of 2019 was a net write-down of equity investment of $4.6 million. The fourth quarter of 2019 includes approximately $238,000 of foreign currency gains as compared to approximately $1.4 million of foreign currency gains in 2018.
Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $7.3 million, or $0.09 per share, compared with a loss of $10 million or $0.14 per share for the fourth quarter of 2018. Turning to the results for the full year. Total revenues for 2019 were $29.5 million, compared with $24.4 million for 2018, a 21% increase.
The increase in 2019 revenues as compared to 2018 was primarily due to an increase of sales for industrial applications and funded development programs, partially offset by a decline in sales of our products for consumer applications. Cost of goods sold for 2019 was 103% compared with 82% of product revenues for 2018.
Cost of product revenues increased as a percentage of revenues in 2019 as compared to 2018 due to lower than historical yields from our manufacturing process as a result of the initial volume production of our FWS program and a charge for inventory obsolescence. This charge was due to the discontinuance of certain products and the write-off of materials as we found substitute materials that will provide for better long-term manufacturing yields.
The FWS program went into volume production in 2019, our yields were lower than historical levels as our supply chain works to consistently meet quality standards. R&D expense in 2019 was $13.3 million, a 23% decrease compared with $17.4 million in 2018. Funded R&D expense for 2019 decreased $700,000 as compared to 2018, primarily due to completion of performance obligations on funded U.S. military programs.
Internal R&D expense for 2019 decreased $3.4 million as compared to the prior year, primarily due to the licensing of certain products and other development programs being curtailed as part of our strategic realignment. SG&A expenses were $21.3 million for 2019, a 22% decrease compared with $27.2 million for 2018.
SG&A for 2019 decreased as compared to the prior year, primarily due to a decrease of $2 million in non-cash stock-based compensation, $1 million in product promotion and marketing expenses, $900,000 in IT spending, $900,000 amortization of intangibles, and $800,000 of accrued continued consideration, which were partially offset by an increase of $1 million in professional fees. Included in 2019 and 2018 operating expenses was approximately $300,000 and $1.4 million respectively from the impairment of goodwill, and in 2018, $2.5 million from the write-down of fixed assets.
Other income expense was expense of $2.9 million for 2019 as compared with income of $5.5 million for 2018. In 2019, we recorded a net write-down of equity investments of $3.9 million. In 2018, we recorded a non-cash $2.8 million gain on equity investment, and we received $1 million of insurance proceeds. 2019 included approximately $200,000 of foreign currency gains as compared to 2018, which had approximately $1.2 million of foreign currency gains.
Turning to the bottom line, our net loss attributable to controlling interest for 2019 was approximately $29.5 million, or $0.37 per share, compared with a net loss of $34.5 million or $0.47 per share for 2018. Fourth quarter and year-end amounts for depreciation and stock compensation are attached in the table to the year-end press release. We concluded the year with approximately $21.8 million of cash and marketable securities and no long-term debt.
Regarding the coronavirus, it is affecting delivery of a couple of product parts that we procure from China. Although it has not yet had a significant effect, we are currently working with our suppliers to establish alternative sources for these components as a contingency plan.
We are currently forecasting an increase in military revenues in 2020 as compared to 2019, but this will partially be offset by lower forecast demand from our industrial customers. All amounts discussed are estimates, and listeners should refer to our Form 10-K for the year ended December 28, 2019, for final disposition as well as important risk factors. With that, operator, we'll take questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal. Our first question comes from Glenn Mattson with Ladenburg Thalmann.
Hi. Thanks for taking the question. Just to, Rich, for a minute on the guidance, talked about increase in military partially offset by some other factors. Being that it's partially offset, I assume you're talking about revenue growth for the year in aggregate. Just as far as the industrial side, in the press release, you talk about issues perhaps around getting supply that you need, but then you say lower demand from industrial customers. Is supply the issue or demand the issue?
Maybe you could give us some more color as to how the quarter performed in some of the other sectors, industrial, notably things like RealWear and perhaps from partners like Google Glass, and just how you think that those guys will perform in 2020.
Sure. As it relates to the coronavirus on the supply side, we have not yet had any specific issues. Our vendors are meeting their deliveries as required in the purchase order. I will say, though, there are a couple of parts, literally two, that we're living somewhat hands-on out. They're meeting deliveries, we are concerned that there might be a hiccup.
We are working with our vendors for possibly sourcing these parts in the United States. Otherwise, no real issues on the supply side. On the demand side, our customers are forecasting lower demand. I think it's all part of just the industry trends associated with the coronavirus and whatever else they may be factoring in. We're using those forecasts from our customers to come up with our guidance.
Okay. As it relates to the military business, maybe John mentioned that you expect maybe later in the year that the Crew Served, the FWS Crew business begins to ramp and the armored vehicle begins to ramp or begins to produce revenue later in the year. Those programs kicking in, how confident are you in that? Is the guidance relying on those kicking in the second half? I guess the last thing I'll ask is just how gross margins shake out if the business is more skewed towards military in 2020.
As it relates to the programs, the first half of the year is essentially delivering prototypes. Assuming that those prototypes go through the normal shake and bake, at this point, based on our progress on those programs, we do think that Q4 will be generating revenues and that they'll go into production. That's the schedule. We've been meeting the schedule for the most part to date, we don't see anything changing on that.
As it relates to gross margin, last year, we honestly took some significant hits on the yield on the FWS-I program. During the course of that development, honestly, we identified better raw materials as the year went along, the decision was made to scrap old material rather than run it through the line at low yield. We took some significant inventory obsolescence. What we're looking for is something in the neighborhood of a 5% improvement in cost to sales, gross margin, each quarter during the year.
Yeah, I just want to add, of course, we also have added additional management. Eric Whitman, who's very experienced in this particular area, just joined us at the end of the year last year.
Okay, great. Thanks for the color.
We'll take our next question from Jeff Bernstein with Cowen.
Hi, guys. A couple of questions. A number of months back, you had a press release about a customer for Forth Dimension that was using the LCOS displays in an optical compute platform, and I was just wondering what the update there was. Has that ever become commercial?
That's still in development.
Got you. What's the expectation on when that might have a commercial product?
I really couldn't talk to what their plans are.
Okay. I think you guys were working on a helmet that was more for rotary drive aircraft helos and stuff. What's the status on that program?
That's the Common Area Helmet program that working with Elbit. It continues to go through. It's taking our old AMLCD and adding an ITO layer to it. I don't know what ITO really means. I'll have to explain that to you. It supposedly dramatically improves contrast. That program continues along. We believe Elbit has already been awarded the program, now we're in just the continued development phase. We expect somewhere between the second and third quarter that development phase will be completed.
Yeah, just to add that that program, Elbit already got awarded. Now we are in the pre-production phase, trying to get into production. That's a multi-year program, and there's a big win for them. Yeah.
Got you. That's one of the 10 that you talked about.
One of the 10, yeah.
that are in various stages. Is there a theme among the others? Are there other ones that are additional sort of LCD replacement type contracts or is there anything to talk about on the others?
This is John Fan speaking. Hi, Jeff. The situation with the microdisplay is, of course, dominant was the LCD, but there's a significant new activity now going on trying to go to the next generation of microdisplays. It's very active right now, and I think we're very well-positioned because we are the king of microdisplays.
Okay. Just to clarify, there was this confusion about the supply side versus demand side in China. On the demand side, we're talking about the demand for the 3D machine vision for board inspection out of China. That's the demand side where customers right now are forecasting some lower demand. Is that right?
Yes. We also have customers who are doing some of the wearable technologies, and they're being cautious on their forecasts also at this point in time.
Got you.
Yeah. I think in near term, you'll see some impact on this particular area. For the longer term, we think the customers and Chinese customers who are in the factories will try to go for more automation and some of these new instruments we have been developing with these new displays, they're useful for them. You will see a short-term hit and maybe in longer term, it will actually come out better.
Okay. With regard to the Panasonic development, I guess you were showing some prototype at CES. I think you're still working on getting the color fidelity right on that. That is, I guess, the first contract that would use the BOE capacity that's coming up. Just give us an update on that and talk about what the pipeline looks like for additional people looking to use that BOE capacity potentially.
Yeah. The question on this CES, Panasonic has demonstrated their, they call it, eyeglass or eyewear, VR system. It really looks very cool. The one they demonstrated openly, of course, is using 2K. We obviously are doing 2.6, which is, will affect even more. The demand after the demonstrator from the customers, their customers, are very strong.
They are making very active movement towards making a lot more systems. I actually personally think that is the way it's going to go. I gave a talk at MIT about three weeks ago, and it's now on YouTube if you want to see it, is I said that's what's going to happen. The VR will come in first, and then comes the AR. The VR, our display is perfect for it, especially the 1.3 inch diagonal, 2.6K x 2.6K display using double-stack, which we are at work first now, will be the perfect for VR.
John, the issue on the color fidelity, has that been worked out, or you're working on that now?
The color fidelity was a huge problem for double-stack, and I said it, we succeeded in solving the problem by using a special scheme on the backplane. It's transparent to the OLED guys. The OLED deposition guys do not need to do anything, I think because we solved it on our backplane design.
Got you. Okay. You're saying this Panasonic 2.6K x 2.6K, that's what they're going to go to market with, and that is all ready to proceed?
I don't know how we define proceed because that's our customer's decision, but they are moving very strongly forward. Yeah.
Got you. Okay. Lastly, you talked about something about getting an extension for the reverse split, a number of opportunities, et cetera. Could you just flesh out exactly what you mean there? Are you saying you expect a lot of good news to come, and you think the stock will be a lot higher, and you don't need to do a reverse split, or what's this all about?
Yeah. It's a combination of things. One, this uncertainty over the coronavirus. To be perfectly frank, we don't want to go through the whole process of reverse split if this corona thing blows up, and the next thing you know, the whole market's coming down, and we're getting dragged down with it. We did want more visibility in the overall effect of corona. We also do think that organically, the company's going to do better over the next few quarters, we want to give that an opportunity to filter into the stock price.
Okay. All right. Rich, I think you've talked about that Kolibri is an R&D house, that people want to spend money on R&D, and you've had to fight to bring that down. Do you need me to beat up John any more about that, or are you guys on track for getting the cost saves you need?
I will answer that question, Jeff. I mean, this is a very loaded question. Remember the last year or so where we said that we have been doing a lot of investment in military programs, in technology investment, like all that, and we expect the investment will go down and the revenue generation to start. I think we're pretty much online.
We finish up these 10, probably more than 10 now, military program development, and there will be revenue generation. We solved the micro display OLED problems that the world people had never solved. We are actually going from investment to revenue generation with our plan. It just happened to be we actually did it on schedule.
Okay, good. We're looking forward to it.
It appears there are no further questions at this time. I'd like to turn the conference back to Dr. Fan for any additional or closing remarks.
Well, thank you for joining us, and everybody stay healthy. Thank you.
That does conclude today's conference. We thank you for your participation. You may now disconnect.