Good morning, welcome to Kopin Corporation's Conference Call to provide a business update and results for the fiscal fourth quarter and year ended December 29th, 2018. 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 You may access an archived version of the call on Kopin's website at www.kopin.com.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. C. Fan, and Chief Financial Officer, Mr. Richard Sneider. Please go ahead, sir.
Thank you, operator. Welcome, everyone, 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 2018 results at a high level, then John will conclude our prepared remarks, and we'll be happy to take your questions. I would like to remind everyone that during today's call taking place on Tuesday, March 12th, 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, 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, are not limited to, demand for our products, operating results for 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 today to discuss our fourth quarter and full-year results. 2018 was a solid year for both our military and enterprise customers. We look to leverage this progress in 2019, with these two product lines driving our growth. In 2018, our military revenues were closely tied to the progress in the F-35 fighter jet program. The global demand for the world's most advanced fighter jets continue to grow. We are pleased to see the announcement from Collins Elbit Vision Systems, who manufactures the helmet, that they just delivered the 1,000th HMD for the F-35. The unmatched situational awareness provided by the HMD has been a key factor in driving the strong demand for the jet. In order to see the image in very bright sky, the HMD requires displays with extreme brightness and ruggedness.
Kopin is the sole display provider to this program. The F-35 is expected to be our Defense Department's primary fighter jet program throughout at least to 2035. We're still very early in monetizing this program. The F-35 programs are also being sold to friendly governments around the world. In 2018, we also began shipping into the Family of Weapons Sight-Individual Military Program, or FWS-I. The shipments are expected to continue to ramp in 2019 for this program. Another Family of Weapon Sights program, FWS-CS for crew-served, met its expected milestones in the development phase. With continued success in this phase, we expect FWS-CS to have initial production shipments starting in 2020. These two FWS programs are the follow-up programs after our very successful TWS program. We're very pleased with the win for the Armored Vehicle Display program for General Dynamics.
This win was a joint effort with our wholly-owned subsidiaries of Forth Dimension Displays and NVIS. It is early days for the Armored Vehicle Display program. The development and test will continue through 2020, followed by production. We are sole source for this program, which provides us a revenue potential of about $100 million over the decade. Forth Dimension Displays recently also announced it has launched a 2K x 2K LCOS imager. This imager will be very useful for high-end 3D optical metrology applications. Forth Dimension Displays already has a majority share in 3D optical inspection systems, which inspect small mechanical parts or printed circuit boards during the assembly process. In addition, the 2K x 2K square format will be ideal for specialized near-eye applications such as surgical microscope and electronic viewfinders for medical imaging.
We expected, our enterprise customers have a very good year, as many of the products are moving from testing to commercialization. The benefits of HMD to the enterprise are being recognized by many companies around the world for safety, for efficiency, and for cost saving, among others. We have discussed, our partner, RealWear, has been leading much of the growth, is now selling to companies across many different industries and markets. In just the past few weeks, we have seen very exciting development at RealWear. They really understand the opportunity to combine data with all the benefits of hands-free users, whereby the human machine interface provides the safety and cost savings I just mentioned, all within a very harsh environment. Kopin display modules are a key element in creating RealWear HMD headset.
We also expect our global Tier 1 enterprise customer, which we mentioned last quarter, and which has purchased 5,000 units in late 2018, to begin shipping commercially shortly. Their sole display supplier, we look for this customer to help drive our enterprise business and further our leadership in the market. The initial feedback on Golden-i Infinity evaluation program has been very positive. We began shipping evaluation units to a wide range of customers, including over a dozen Fortune 500 companies and leaders in oil, gas, transportation, wireless, telecom, logistic, and manufacturing industries as part of our Golden-i Infinity evaluation program. With approximately 100 companies already registered, the evaluation program is designed to assist enterprise customers in making informed purchasing decisions when it comes to wearable mobile computing and assistive reality systems solutions.
Golden-i Infinity is purpose-built for enterprise level clients who want a voice-enabled, hands-free wearable computing system designed to increase workers' productivity, efficiency, and safety. We continue our marketing efforts in Solos Smart Glasses by porting the workout programs to Solos Smart Glasses on the user's platform. Real-time performance, such as duration, intensity, and compliances, is easily communicated via visual and audio prompts to athletes who can quickly know if they are meeting or missing their workout targets. Solos also partner with CTS, a pioneer company in the endurance coaching industry. CTS will provide its coaches, athletes, training camp participants to access to our innovative high performance Solos S mart Glasses.
This partnership will bring together a company at the leading edge of performance in durable wearable technology with a leader in the endurance sports coaching space. We look forward to the spring season to see these partnerships will bring a lot of bear fruits. Despite the disappointing speed of the adoption of VR and AR by the consumer market in 2018, we are optimistic that our organic light-emitting diode or OLED business will begin to ramp this year. There's no question that consumer demand for VR/AR has not developed at the rate industry experts and Kopin expected. But with our history of sitting at the center of developing technology markets, we have already seen the necessity of lower cost, high performance components before a market can develop.
Most recently, we saw this with LEDs, who did not really begin traction until the price of LED chips were driven down by increased supply. With the expected completion shortly of BOE $150 million state-of-the-art OLED fabrication system, we believe we'll see a substantial increase in the supply of low-cost displays. We believe the scale of BOE facility, along with other new fabs coming online shortly, will increase the necessary component pricing curve, which will really help stimulate the new application for VR and AR. Recently, I shared Kopin's view at MIT Media Lab as part of AI in Motion in Action conference, and also at Harvard as part of a Dean's lecture series. I outlined our rules on AR/VR, which support everything we have developed at Kopin.
We show the benefits of taking a human first approach, voice approach as the next touch, and be selective about what you expect people to wear on the head, among other rules. I'm very encouraged by very positive feedback from the audience. To summarize, our goal in 2019 is to continue to drive our military enterprise business as we wait for the consumer market to gain traction. To help drive the consumer demand, our development efforts will be focusing on the OLED technology. With this, let me turn the call to Rich to review the financial details.
Thank you, John. Beginning with the results for the quarter. Total revenues for the fourth quarter of 2018 were $7.7 million, compared with $11.4 million for the fourth quarter of 2017. The decrease in sales in 2018 compared to 2017 was primarily due to the completion of a military program at our subsidiary, NVIS, in 2017. Cost of sales for the fourth quarter was 76.2% of product revenues, compared with 64.8% for the fourth quarter of last year. Cost of product revenues increased as a percentage of revenues in 2018 as compared to 2017 because of a decline in sales of our military products, which have higher growth margins than the average growth margin of our other products sold during the same period in 2017. R&D expense in the fourth quarter of 2018 was $3.9 million, compared with $4.7 million in the fourth quarter of 2017.
Internal R&D expenses for 2018 decreased $1.1 million as compared to the prior year, primarily due to the products moving into commercialization phase. This was partially offset by funded R&D expense increase of $0.3 million for 2018 as compared to the prior period, due to an increase in spending on military programs. SG&A expenses were $6.2 million in the fourth quarter of 2018, compared with $4.4 million in the fourth quarter of 2017. SG&A for 2018 increased as compared to the prior year period, primarily due to an increase of $1.7 million in non-cash stock-based compensation. Included in Q4 2018 operating expenses are $2.2 million from the write-down of fixed assets and $1.4 million from the impairment of goodwill. Included in 2017, Q4 2017 operating expenses is a $600,000 charge for the impairment of goodwill.
Other income and expense was expense of approximately $250,000 in the fourth quarter of 2018, as compared with $1.3 million in the fourth quarter of 2017. The fourth quarter of 2017 includes a $1.7 million gain from the mark to market of a warrant we received when we licensed technology to a customer. The fourth quarter of 2018 includes approximately $90,000 of foreign currency gains as compared to approximately $700,000 of foreign currency losses in 2017. Turning to the bottom line net, our net loss attributable to controlling interest for the quarter was approximately $11 million or $0.15 per share, compared with a loss of $1.8 million or $0.02 per share in the fourth quarter of 2017. Turning to the results for a full year. Total revenues for 2018 were $24.5 million, compared with $27.8 million for 2017.
The decrease in sales of product for military applications in 2018 compared to 2017 was primarily due to the completion of the military program at our NVIS subsidiary in the fourth quarter of 2017. Cost of goods sold for 2018 was 82.4%, compared with 72.8% of product revenues for 2017. The decline was due to an increase in the sale of military products, which have higher growth margins than our other products. R&D expense in 2018 was $17.4 million, compared with $18.9 million in 2017. Decrease in R&D expense year-over-year was primarily by a decrease in internal R&D expenses for 2018 of $3 million as compared to the prior year. Primarily due to the products moving into the commercialization phase.
This was partially offset by an increase in funded R&D expense of $1.5 million as compared to 2017 for military programs. SG&A expenses were $27.2 million for 2018, compared with $20.5 million for 2017. SG&A for 2018 increased as compared to the prior year, primarily due to an increase of $2.6 million in non-cash stock-based compensation, $1.2 million in product promotion, $0.8 million or $800,000 of accrued contingent consideration, and $800,000 of legal expense and patent maintenance costs. Included in 2018 operating expenses are $2.2 million from the write-down of fixed assets and $1 .4 million for the impairment of goodwill. Included in 2017 operating expense is $600,000 for the impairment of goodwill. Other income expense was income of $4.2 million for 2018 as compared to $2 million in 2017. In 2018, we recorded non-cash $2.8 million gain on equity investments, and we received $1 million of insurance proceeds.
In 2017, we recorded a non-cash $2 million gain on the fair value adjustment of a warrant we received as part of the licensing of our technology. 2018 includes approximately $200,000 of foreign currency losses as compared to 2017, which had approximately $700,000 of foreign currency losses. Turning to bottom line, our net loss attributable to controlling interest for 2018 was approximately $35.6 million or $0.49 per share, compared with a net loss of $25.2 million or $0.36 per share for 2017. 10% of customers for 2018 was Collins Aerospace at 20% and General Dynamics at 11%. Fourth quarter and year-end amounts of depreciation and stock compensation are attached in a table to the Q4 and year-end press release. We conclude the year with approximately $37.2 million of cash and marketable securities and no long-term debt. With that, we'll take calls, operator.
Thank you. We will now be conducting a question -and- answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from the line of Glenn Mattson with Ladenburg Thalmann, please proceed with your question.
Hi, good morning. Thanks for taking the questions. John, you mentioned the global Tier 1. Congratulations on shipping those 5,000 units. You mentioned that you expected that a broader shipment would commence shortly. Can you talk about just a general sense on timing? Do you think it's more first half or second half? Then can you give us any sense at all on what kind of volumes we're talking about as far as it relates to 2019?
Yeah. Obviously, this is still a program that has not been officially announced yet. The general plan is to have regular shipments throughout the year, we're expecting that they will announce the product very soon.
Okay, great. That's helpful.
Yeah, I think the initial response is very good.
Great. In the past, you've talked about on the commercial kind of headset space that you perhaps would grow to about 100,000 units in 2019. Would you still stand by that number, do you think it's too difficult to tell at this point?
We still stand by the number from the forecast from our customers. They're still very bullish.
Okay. Great. Thanks. One more on the defense side. For the Family of Weapons Sights, for the individual side, I think you began shipping on the, I think it was a $4.2 million contract. Is there a lot of leeway left in that contract to go still and is there any talk yet on a follow-on order or any type of timing on that?
Okay, Rich, why don't you make a comment?
This is going to be a long-running program. We're in constant communication with the government. We expect many follow-on orders to the program, and we do expect the program to ramp from its current volumes.
I think I'll just add on to that, put a little bit more color to it. It is a very interesting program. This program is actually to replace our armored vehicles. Many armored vehicles still using CRT tubes as imaging. We're going to replace it with solid state. This is just the initial of tip of the iceberg. There are a lot of vehicles have CRTs in the military vehicles. Again, we're the sole source for that.
Okay. Sorry. I'm curious about the Whisper Chip. Any feedback from the product that's perhaps in the field now, on how it's performing?
Yeah. Of course, Whisper is actually now in the Golden-i Infinity and in Solos, and we have also licensed the Whisper Chip or Whisper technology to RealWear. There are additional activities going on right now, which we cannot talk about right now.
Lastly, Rich, on the OpEx plans for 2019, can you just talk about directionally or if you want to go more specific, that would be great too, but just on how you feel about sales and marketing and R&D and what they are going to look like year-over-year.
We expect development expenses to decline. Particularly, as we have said, we have finished a lot of the Solos and a lot of the Golden-i Infinity. We are really moving those into commercialization stage. As John mentioned in his prepared remarks, on the OLED, we do expect that to increase. However, we are in discussions with a number of folks who are looking to potentially fund a lot of that development.
Thank you. Our next question comes from the line of Jeff Bernstein with Cowen. Please proceed with your question.
Yeah. Hi, guys. Just wanted to follow up on that line. Can you just talk about when you think BOE will start to ship? I know, John, you guys have been doing a lot of work on brightness, while you've been waiting for the factory to get built, et cetera. Where do you think you'll be when you start to ship product in terms of brightness?
Thank you, Jeff. It's a very good question on this. BOE's factory is actually finished. The equipment's already in. They are, at this moment, start test running now. I think, I will be there hopefully in 10 days, to hopefully celebrate the first run coming out. I expect they will be very good in brightness. In fact, I think just give you the scope of the situation. BOE is the biggest supplier of displays for smartphones. Their market share in the world is now over 20% in the whole world of the displays coming out is coming from them. They have teams of engineers that can turn a factory on very quickly. The factories are also very big, fully automatic.
I think the world of AR/VR will be different in about the next, certainly by second half this year, everybody will be very surprised what's happening to the world. First of all, the AR/VR is basically limited, as I talk about it. They don't have any constant supply of display, of low-cost, high-performance display. I think this large gem is going to be opened in the second half of this year.
That's great. Thanks. I just wanted to make sure I heard it right. Did you say you have 100 companies now registered for the Golden-i Infinity evaluations?
Yes.
Great. Thanks.
Thank you. Our next question comes from the line of Matthew Galinko with National Securities. Please proceed with your question.
Hey, good morning. Thanks for taking my questions. I guess firstly, you talked about needing to drive component pricing on the display down to enable consumer AR/VR, I guess I'm just curious if you could opine on what else needs to happen to drive that business, whether it's application design or form factor. What needs to happen to move that business along?
Now you touch upon the five rules I outlined for AR/VR. Anything to put on the head, there's a lot of economics, fashion, willingness, comfort. The necessary condition is to put, the people will be willing to put it on the head and stay on the head. Those economic issues are being solved right now, I think the enterprise world will be the first one that will see it, the military world already seeing it. To give you some idea, our market share on military and enterprise are pretty large, we know what people are willing to wear for benefits. For consumers, always a much bigger target because consumers are much more fussy what they will put on their head. I think that issue also being conquered.
Once you'd have that particular issue, the people willing to put it on their head, the next thing is really the cost of the elements, how expensive it is. Consumer does not want to pay too high a cost. You've got to have supply. Nobody want to go to consumer product if you don't have a constant supply. The BOE will solve that problem. They will have the supply. They will have to bring the cost down. The curve with the journey will start. With supply chain problem solved, I would say the consumer headset will begin to show up at the second half of this year.
Got it. Thank you. That's helpful. Maybe on the consumer revenue side for 2019, how should we think about that, just given that you are working with some partners on Solos, and I guess that could probably move the needle on the consumer revenues a little bit quicker than, I guess, component sales.
On this year, we're really not going to give specific guidance on the growth of the consumer. We'll see how Solos works out, and we'll see how Golden-i. They're really brand-new markets. Particularly, Golden-i Infinity, where we draw strength from the fact that RealWear has done very well with our first design that we licensed to them. We expect Golden-i to do as well. We're going to hold off, as it is a new market, giving any specific guidance.
I guess maybe just directional then on the consumer business. Do we expect it to sort of be flattish this year? I know we talked last quarter about it being under a fair amount of pressure.
I think the only thing that we would say at this point is that we expect OLED revenues to come into play this year. That's what we're really focused on.
All right. Thank you.
Thank you. Once again, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our next question comes from the line of Patrick Metcalf with NewBridge Securities. Please proceed with your question.
Hey, good morning, guys. Congratulations on the BOE fab coming online a little bit early.
Thank you, Patrick.
Okay. I have a couple of quick questions. Not quick questions, I ask you to have a little patience with me like I've been having with you guys. The Tier 1 customer, is it a customer or is it a partnership? Basically, I ask that based on, do you believe this Tier 1 will be coming to the market with an ecosystem, meaning some software partners behind them, maybe their cloud, maybe their AI, maybe your AI. Can you give us a little color on how you see that unfolding, maybe? That's my first question.
The question from Patrick is about this global Tier 1 company that have got 5,000 units late last year, they expect to announce it soon. I expect this is going to be a very reasonable shock to the system. We really can encourage the enterprise world to really grow. I assume when the announcement comes, there will be a lot of good data that comes with the announcement to show that people are, in fact, getting a lot of good benefit from it, for the software, hardware, and the return on investment having those type of systems. We're all expecting it to happen soon, I think it will.
Okay, great. I look forward to it. My next question is for Rich on the balance sheet. I see you have an equity investment line of about $5.5 million, up from zero a year ago. Can you highlight where that comes from?
Yes. As I mentioned in the prepared remarks, we had a warrant from a customer as part of a licensing of technology, we exercised that warrant. That's roughly, not exactly, roughly half of it. The other half is in a JV that we did in China last year, where we contributed $1 million in cash and IP.
Okay. Okay, great. You guys keep talking about having 300+ patents in the portfolio. It's been going on for a year and a half. I witness these patents coming out quarter after quarter after quarter. I see you have a patent specialist on your Board of Directors. Can you talk to us about how we can monetize these things like you have with your partner and your Chinese JV? Can you talk about how these patents may come into play in the next three months, nine months, two years? Is there anything you can add to that?
I think that we are in what we call monetizing phase right now. As you well know, we mentioned that we have licensed some of our patents or designs to companies in return not only for royalties, but in addition for equities, as well as to have contracts of buying our components. This has been starting carrying on the last 18 months, and it's been successful. We'll continue this effort. I think that we recently announced another license to a startup to make AR glasses for surgeons, for medical. This is another case where we license technology as well as getting equity and royalties.
Okay.
We're doing more of that. We found out that more and more people coming to us because, as you well know, RealWear case is already pretty well known. People seen that, they licensed a system from us, and voila, RealWear become a very successful company. We're going to have a lot more people doing that now.
Okay, just to add one thing, do you see any Tier 1 companies looking to license any of your IP or coming to you and asking you about your IP if they're going into wearables or voice? Are you having any Tier 1, Tier 2 conversations?
I think maybe we should mention, I don't know, I assume people will consider Lenovo as a Tier 1 company. They spin out Lenovo New Vision. That particular arrangement is they license design from us. They buy components for us as well as they give us equity.
Okay. The BOE fab news and the fact that's ahead of schedule as far as I'm concerned, I'm really excited about that. I think that's going to turn the VR needle up faster than people expect. I just want to know, John, are you engaged with numerous Tier 1s over the past nine months since VR has gone silent, reassessment stage? Are you coming out with better designs? You talk about situational awareness with VR. Can you talk to the audience about how excited you are and how much attention you're getting maybe from Tier 1s regarding your OLEDs and your virtual reality designs?
I think, Patrick, as you said, we are giving the talk at MIT and Harvard the last two months. I outlined the situation with VR. There's no question about it, VR has been disappointing year 2018. Out of that, as you well know, out of that, people begin to see the light at the end of the tunnel. What's missing is a better display. The display has to be a higher resolution, faster even, to make sure there's no latency as you move your head, so you don't get sick when you wear them. The display should be higher resolution, maybe even higher than the 2K x 2K, which we have, which is a world record, but even that may not be enough. People have to go to higher resolution and much lower cost. Right now, there's no supply.
We've got our 2K display in every company that you can name of in VR. I don't think there's any VR company doesn't have our display in there, in their systems. It's just that now that all the feedback comes back and say, "Could you give us a little bit better display, faster display, lower power? By the way, it better have good supply and very low cost." We have many check marks now by the end of this first or second quarter.
Okay, great. Guys, I'm just going to end it with this. Underpromise and overdeliver. Okay. I want to see that in 2019, and I think it's clear skies ahead. Thank you.
Thank you very much.
Thank you. Our next question is a follow-up from Jeff Bernstein with Cowen. Please proceed with your question.
Hey, I'll second the last comment. John, I just wanted to get an update on Forth Dimension. What's going on with the 3D vision in terms of ramp in China? I know we've been sort of expecting that technology to finally cross the chasm over there. Then just talk a little bit about some of the other things on the display side, which I know are kind of higher end, but maybe more in the realm of HoloLens and that kind of thing that Forth Dimension is doing.
Yeah. The question is, in the case of 3D optical metrology, people are using that, 3D machines, to look at 3D, look at the PCB board. Now, people are start looking at it for other application, look at the three-dimensional things in inspection as well as quality control. The China market, we're seeing some activities there. We're actually, I don't know whether we. Maybe we'll announce it. That there are some activities going on in China right now, and are positive activities. Again, go back to what you're saying, we will not make a big deal out of that until we see consistent order from them.
Okay. Then just on the display side, I think in very high-end simulation kinds of systems, et cetera, those Forth Dimension LCOS displays are being used even for holographic kinds of things, et cetera. Just talk a little bit about that and where you see the markets for that right now.
It's a very high-end spatial light modulator and a display. That does make a very good high end. The thing about Forth Dimension is their market is a lot involved with military and industrial application and medical applications. The price point by nature, we set very good price point. They are aiming still not for consumers.
Yeah.
The consumers are really go for the OLED and hopefully coming from BOE fabs.
Got you. Thank you.
Thank you. We have reached the end of our question- and- answer session. I would like to turn the call back over to Dr. Fan for any closing remarks.
Well, thank you very much for joining us. Also, thank you for the many good, excellent questions. Hope to see you the next quarter. Bye-bye.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.