Welcome everyone, thank you for joining us this morning. John will begin today's call with a discussion on our strategy, technology, and markets. I will go through the second quarter results at a high level. John will conclude our prepared remarks, we'll be happy to take your questions. I would like to remind everyone that during today's call taking place on Thursday, August 8th, 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 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 report, 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 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 the cooperation changes we have undertaken. Because the importance of these moves, we will then expand on each of the topics. Over the past months, the management team, working closely with our board of directors, has taken a very thoughtful approach in analyzing and evaluating every aspect of our business. We weighed the technology expertise, session leadership, and competitive landscape, as well as the maturity of the relevant AR and VR markets. Our analysis confirmed that Kopin's greatest asset is our ability to develop innovative technology with the superior engineering capabilities to turn innovations into high-quality component products. We have used this innovation and engineering skill over the past few years in developing advanced concept wearable systems for both enterprise and consumer markets.
Leveraging these concept systems, we were uniquely positioned to understand the needs of the market. This led to the development of industry-leading microdisplays, such as our product, which is now included recently in the new Google Glass. Our technology also helped accelerate the growth of enterprise markets, which we believe is now the fastest-growing application for AR. Much of this momentum has come through RealWear, an early Kopin customer, which is recognized as one of the leaders in the emerging market. In fact, Kopin's early generation Golden-i technology was key to RealWear's position, as we licensed Golden-i technology to RealWear for an equity position and ongoing royalty stream, as well as for component sales. This model works so well that we have long looked for to replicate this.
One of the strategic steps put in place this quarter is the result of our goal to repeat our success with RealWear, along with reducing our cost structure while strengthening our position in microdisplays. Our strategy and focus mission is to become the leading microdisplay component and IP company. Following the very successful examples of great semiconductor IC companies. Let me outline four key parts of our strategy. First, our focus will be on our core LCD display module and subsystem products for military, enterprise, and public safety customers, as well as developing our Lightning 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 for the emerging consumer applications for AR and VR. Second, we have entered an agreement with RealWear to commercialize our Golden-i Infinity product.
Also, we anticipate reaching an agreement shortly that will end our direct participation in the consumer system business. Third, we have streamlined operational elements of our core display business with corresponding reductions in expenses. Finally, with all these changes outlined, including our expected Solos transaction by the end of quarter three. We anticipate reducing our total company payroll expenses by about 30% and eliminate significant product development costs. Kopin will still benefit from our prior investments in the wearable system technology and products as we focus more tightly on our core microdisplay space business. Let's look at each of the elements of the plan in more detail. Our LCD business currently serves many military, enterprise, and customers, which design our components into their finished products. Our military business comprise of both display components and what we call HLA or higher level assemblies, which include sophisticated electronics and recognized hardware design elements.
The HLA provides significant value to our military customers, as well as for some of our enterprise customers. Currently, our military revenues reflect investment in key military programs such as FWS-I and F-35 Joint Strike Fighter. We expect revenue for our military programs to continue increasing. In addition, we're making excellent progress in developing programs such as the FWS Crew Served and armor vehicles. In the enterprise area, we are seeing a good growth for our microdisplay. We have long discussed that enterprise market for AR is developing faster than the consumer market, which is reflected in our success with partners such as RealWear. RealWear sells to Fortune 500 companies across many industries, including Pepsi-Cola, Georgia-Pacific, Cisco, [Hillbacker], and Colgate, to name only a few. Of course, we have talked about our success with Google Glass, which is deploying their glass in many enterprise applications.
The consumer applications for AR, however, has been slow to develop. Just recently, we're seeing some series of announcements. In addition to our own cycling solutions, there are now displays using swimming goggles and motorcycle helmets, for just a few examples. Kopin dominates this area of the market for microdisplays. We continue to invest in development of a Lightning micro-OLED technology, which has unique capabilities that we believe will meet the needs of customers across a range of market applications, military, enterprise, and consumers. As we have described previously, we have a unique fabless business model with our OLED, which give us flexibility and requires less working capital while enabling us to deliver highly sophisticated OLED displays with key performance advantages. This year, we have entered to development contract with customers.
Kopin is really the only microdisplay company in the world that offers 3 different types of display technologies, transmissive LCDs, reflective LCDs, and OLED microdisplays. This is a unique competitive advantage, as our customer can work with us no matter what specific display they need for their application or product. As I mentioned earlier, our mission is to be the microdisplay provider to the world. Regarding commercialized Golden-i Infinity and Solos. We have executed a transaction for our Golden-i Infinity product designs and technology with RealWear. With their success in enterprise AR, they have the experience in developing product with Golden-i Infinity technology and the infrastructure and relationships in place to maximize the distribution and drive the adoption of the product. In the most recent transaction, Kopin received $3.5 million. We used the two and a half million to invest in RealWear Series B equity.
Similar to our first agreement with them, Kopin will sell displays to 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 most recent Series B equity offering is a good indication of the strength of the company. Certain Kopin employees connected to Golden-i joined RealWear, which therefore reduced our cost structure. We have also engaged in negotiation to spin out Solos, along with our Whisper technology, to a 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 subset that supplies us the current Whisper or the 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 this anticipated transaction, we expect to eliminate all spending on Solos and Whisper technology development. We believe the focus and flexibility available to the new company will allow it to monetize the growth of consumer AR eyeglasses. Similar, we should emphasize here, similar to RealWear case, we will be supplying microdisplay to the new company. To turn to more operation issues. During quarter two, revenue were at $9.1 million, which includes $3.5 million proceeds for commercializing Golden-i Infinity. During the quarter, we also announced Google as our tier 1 enterprise customer, as well.
We're also very pleased that Kopin is supplying the display for Google Glass 2. As you well know, we have also been supplying to Google Glass 1. In Q2, the enterprise AR market was F2 as a key contributor to our results, and will continue to drive growth in the second half of the year. Our military business continued to develop in line with the plan. The F-35 program has been consistent, as demand for the plane continues to expand globally. We're confident this is a significant revenue opportunity for us in long term. We currently receive another purchase order for the FWS-i. We currently have orders for both F-35 and FWS-i, which will go through the middle of 2020. On the development side, both FWS-CS and armored vehicle programs continue to be on schedule.
In short, working with U.S. Military takes a long-term commitment, and our partnership that have established with U.S. Military for the last 30 years is a very important asset, and will continue to drive our growth. Micro-OLED, as I mentioned, will be the coming microdisplay of choice in many AR and VR applications. We are now the leading Micro-OLED companies in the world. We currently have two development contracts for very advanced Micro-OLED display, and we'll continue to engage aggressively with additional customers for other opportunities. To summarize, these strategic changes accomplish a number of our objectives. First, they allow us to monetize supplier and invest the IP and product design while reducing our patent maintenance costs. Partner with companies to drive the adoptions of AR/VR, allowing us to benefit from the growth in the industry through component sales, royalties for IPs, and our equity position in those partner positions.
Also, significantly reduce our cost structures, allowing us to focus time and resources on our core strength in microdisplays. With our strategic realignment, Kopin is a streamlined, simplified company, laser-focused on positioning as a leading microdisplay supplier to companies building the next generation AR/VR products. We are excited about the opportunities ahead and greatly appreciate your loyalty and support for our next chapter of the journey. Now, Rich can provide additional details, and then I will 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 of 2019, we licensed our Golden-i Infinity IP to RealWear for $3.5 million. Under the agreement, we receive future royalties based on sales of products, and we will sell them display components. Cost of goods sold for the second quarter of 2019 was $5.2 million, or 118% of product revenues, compared with $3.5 million or 78% for the first quarter of last year. Included in cost of product revenues for Q2 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 with $4.5 million in the second quarter of 2018, reflecting some of the expense reductions 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 decrease for the 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 NVIS earn-out, all which were partially offset by an increase in legal expenses. As mentioned in our press release, we made certain expense reductions and anticipate further reductions if we can 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-month period ended June 29th, and the fiscal year ended December 29, 2018, were approximately $4.4 million and $9 million, respectively.
Other income expense was approximately $627,000 for the second quarter of 2019, compared with an expense of approximately $52,000 for the second quarter of 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 a net loss of $9.2 million or $0.13 per share in the second quarter of 2018. Second quarter amounts for depreciation and stock compensation expense are attached in a table to the Q2 press release. The amounts discussed above are based on current estimates, and listeners should review our Form 10-Q for the second quarter of 2019 for any possible additional disclosures.
With that, we'll take questions, operator.
At this time, we will 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 would 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 pull for questions. Our first question comes from the line of Glenn Mattson with Ladenburg Thalmann. Please proceed with your question.
Hi, guys. Thanks for taking my question. A 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. I think last quarter you said that you received an order from Google Glass and that you thought another one would be forthcoming relatively shortly. Perhaps you could update us on whether or not that came through or if you still expect it in the short run.
Glenn, you really have to talk to Google about their perception of the success of the product in the market. We don't really talk about our customers' individual products. We continue to ship to Google.
Okay. Thanks. Then a question on this deal with RealWear on the Infinity product. How long to market before they release a product there, and as far as getting display revenue and royalties and whatnot, is there a lot of development still on their side, or is this something they'll turn over pretty quickly?
The question is about Golden-i Infinity. Now, of course, the introduction of the product will depend on the RealWear schedule. Of course, we're seeing a lot of activities on their part, and we're seeing growing requirement from them now for their overall product line.
I think you'd have to talk to RealWear directly.
Yeah
for their product launch.
Yeah.
I think they put out a press release shortly after we did.
Yeah, I think they would.
Okay.
again, this is really a
Okay. Last for me is just as far as what your guidance was prior as far as the growth in unit volume and things like that, were Golden-i Infinity and Solos part of that calculation or not? Can you give us some sort of feedback on how you're feeling about that former guidance as far as unit growth this year?
We think overall this year we'll grow about 60% unit volume based on current estimates. 6 [unsure] growth is very good, and on top of that, it's been more favorable. The sales that we've been making are to more what we call value-added customers as opposed to straight display sales. The mix has been very favorable along with good growth.
Okay, thanks. I'll jump back. Thank you.
Our next question comes from the line of Matthew Galinko with National Securities. Please proceed with your question.
Hi. Good morning. Thanks for taking my questions. You mentioned two OLED development contracts. Can you say whether those are military or enterprise or if you can't talk about that, maybe if might be similar timelines to military program?
Sorry. I think I answered that question on the OLED contracts we have with two companies. Are they military related or they are commercial related? Is that the question?
Yeah.
These two programs are consumer related.
Okay
commercial related. Yeah, commercial related.
Okay. Do you have a sense of what the timeline is on the development? Is it a multi-year kind of setup, or is it something that might be you complete your work on it by year-end, let's say?
The anticipation is they'll be finishing up by year end or early next year.
Got it. All right.
It is for a product in mind. It is for product in mind, yes.
Got it. 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?
We have been engaged in that contract for a year now. It will be the most advanced display for both AR and VR.
Got it. Okay. I guess just asking that 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?
It's multiple equations there, but again, we feel this display is what market needs at this point. Not just these two customers, but maybe many customers.
Got it. All right. Just a quick cleanup on the math here. Did you say you had an inventory write-off in Q2? Did I hear that correctly?
Yes. $1.2 million.
Okay, excellent. You also had realized gain on RealWear this quarter as well?
That's correct. $768,000.
Okay. Last one for me before I jump back in the queue. You talked about a 30% reduction, taking sort of everything into account. Can you kind of share, is that starting from kind of our 2018 OPEX number, or what should we be framing that against?
Well, I try to give you some direction there. It's very hard to predict what future savings would have been since there are costs that never were incurred. That's why I try to give you the $9 million for last year, just to give you a sense of magnitude.
Right, I think you also executed some or are executing some sort of core cost reductions, is what it sounded like. For the all-in number, I'm just trying to get a sense of if we take kind of the Q2 OPEX number, what does it look like in Q4?
The $9 million is direct program cost, and I don't have an estimate that I could reasonably give you that. Obviously, certain overhead costs from the corporate are going to go down, certain insurance costs, all that. Certain fringe benefits will go down. There was a lot of subjectivity in coming up with that type of number, and so we went with the hard cost. We expect additional savings in addition to the nine, but I honestly couldn't come up with a number that I thought was auditable, for lack of a better term.
Fair enough. Thank you.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Patrick Metcalf with Newbridge. Please proceed with your question.
Good morning, guys.
Good morning, Patrick.
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. What is the royalty rate you get from RealWear per device?
We couldn't disclose that. Obviously, we negotiate with other customers, so we would never disclose that rate.
Okay. Is the licensing deal with Golden-i Infinity exclusive or is it open to license to others?
For certain fields, it's exclusive.
Exclusive. Okay. I guess the goal here is to get RealWear as profitable as fast as possible, and maybe IPO it as quick as possible?
You'd have to talk to RealWear.
Okay. You guys have an Elf VR headset that you designed maybe a year and a half ago. Is that design part of Kopin, or will that design be part of Solos now, going forward?
We have a VR headset?
He's talking about the Elf headset.
Oh, the Elf headset. No, it's not part of Solos.
It's not?
No, I don't think so. No.
Okay. Guys, you're breaking up two important pieces of the growth puzzle, Solos and Whisper. 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, large tech companies, or would it be large venture 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?
No. Honestly, it's being negotiated. There are a number of people who have expressed interest. How it will shake out, we hope to know shortly.
Okay, great. We'll see announcements on that, those two situations when they come to closure.
Again, I think it's important to understand, we still retain rights to Whisper and future improvements for the military industrial applications.
Okay. 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 not 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, where you think you're going to stand at the end of the day here, percentage-wise maybe? Do we go down to 50%? Do we go down to 30%? Just some sort of 30,000 feet type of view on the industry would be great.
This is a very good question because the AR market is getting very hot right now. There are many different new entrants or people who want to enter. We cannot look at the number of people entering the field. We have to look at the number of people, the companies who actually go into production and selling the units, like Google, like RealWear, like Vuzix. Those guys are selling units and therefore our market share is based on the things going to production.
Okay. In 12 months, do you see you holding firm with a strong double-digit % of the market?
That's why we are laser-focused now.
Okay.
We're laser-focused.
I guess 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 AR, new type of devices, whether they're low-end, high-end, or is this all you have, the Golden-i Infinity and the Golden-i?
I don't even know exactly how I can answer the guy without revealing other companies. We're working with multiple companies at this point. In fact, very busy right now. Obviously, I think we are seeing also a real engagement now on Micro-OLEDs. There are a lot of expectations that Micro-OLEDs will be a display of choice for many applications. We're the number one in Micro-OLED, so people do talk to us and work with us now.
Okay, and then with Micro-OLED, let me conclude on this.
Oh, yeah, Micro-OLED.
Is there any way that? Excuse me?
Go ahead, I'm sorry.
Okay.
Go ahead.
Is there any way you guys could potentially, since you're in the business of spinning off some assets here, 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 a royalty stream on the Micro-OLEDs, or do you plan on keeping the model the way it is?
Are you advocating if we should spin it out, or have I become a holding company? Are you actually helping us to formalize and crystallize the strategy? I think the Micro-OLED is very interesting right now. It is still a growing, emerging business. It is a component business, and it's divided into three parts. One is the military part, and one is the industrial commercial part, public safety part, and then finally, the consumer part.
Yeah, one might be able, depends on the maturity and depend on the opportunity. We may, I mean, it has to be opportunistic, to slice the salami.
Okay. I just figured since you're doing business with Chinese, maybe get the money upfront and then get the royalty payment down the line.
Yeah. I think as I say, we would like to be the company that's very much like some of the semiconductor companies. They get royalty streams, and sell components, or at least sell technology components, technologies. In this case, also get some equity stake in the situation. Meanwhile, we minimize some of the capital intensive or development intensive costs, which we like to minimize. I think the strategy is a good one.
Okay. Lastly, did we see any revenue from BOE this past quarter? When do you see revenue coming, any kind of revenue coming from BOE?
I would not be able to answer your question, but our relationship with BOE 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 lines at this time. Thank you for your participation.