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 third quarter of 2018 results at a high level. John will conclude our prepared remarks, then we'll be happy to take your questions. I would like to remind everyone that during today's call, taking place on Thursday, November 8th, 2018, we will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on the company's current expectations, projections, beliefs, and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those forward-looking statements.
Potential risks include, but are not limited to, demand 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 the call over to John.
Thank you. Thank you for joining us this morning to discuss our third quarter results and the industry developments that point to accelerating the adoptions of AR glasses in the enterprise industrial space. The adoption of enterprise wearables in the enterprise space was a highlight for Kopin in Q3, as well as for many of our partners. Let me review some of the events that occurred in Q3. First, we are very pleased with the initial development of shipments of display modules to a tier 1 U.S. customer who was an early mover in the development of smart glasses. The shipment of 5,000 display modules to that company for its soon-to-be-launched next-generation AR smart glasses was a major milestone for Kopin.
The benefits of AR headsets to enterprise is improved productivity and safety by enabling workers to communicate with remote experts, to document data, and to provide other functions in a hands-free manner. AR smart glasses are also very useful for training, medical applications, and in manufacturing environments. We expect shipments to ramp in 2019 rapidly as that product moves to full production. We're also seeing significant order increases from our other enterprise headset customers, reflecting their spending interest from companies across many verticals that are seeing the benefits of AR. For example, our partner, RealWear, has recently announced deals for its HMT-1 headsets with consumer product companies like Colgate-Palmolive, where it's being deployed in 20 manufacturing facilities in 11 countries to industrial leaders like Honeywell.
RealWear is also working with a number of auto companies such as Volkswagen and Lexus, which show how AR is being utilized across many verticals, each with unique applications and goals in using the technology. Another of Kopin's customer, Vuzix, has announced similar broad demands for its M300 device. We expect to ship over 100,000 units of our display modules for enterprise AR smart glasses in 2019. We also anticipate our own Golden-i Infinity smart glasses targeting the enterprise market will begin field testing with customers this quarter. We have demonstrated Infinity to many potential customers, including approximately 30 Fortune 500 companies, and their interest has been very strong. Golden-i Infinity is quite different from what our partners are providing. It has a unique form factor and connects directly to a smartphone or mini PC by a cable.
It has a very high-resolution display, a high-resolution camera, and a multi-axis head tracker. It has no radio or battery residing on the device. Golden-i Infinity utilize Kopin's patented core technologies, including our display, our Whisper Voice Extraction for improved speech recognitions, and advanced hands-free user interface controls.To integrate the benefits of AR into an industrial worker's daily task. We look for commercial shipments to begin in Q1 2019. Let's now discuss military business. F-35 sales again was a significant contributor to our military business. We announced in September that we had received a production contract for F-35 pilot helmets through late next year. Our FWS-I unit has been fully qualified, and we received the first production order. We expect to begin shipping in November under the $4.2 million contract, and we have just been informed that imminent follow-up order comes coming.
Our shipment was slightly delayed because of an issue raised by our suppliers. We believe the issue is now resolved, and the supplier is getting on track. Let's turn to the development program for our next defense contract, defense products. We continue to achieve the milestones for both the FWS-CS and the armored vehicle programs. These two programs are the two previous products are expected to bring Kopin very significant production revenues. In summary, we're seeing very strong demand for enterprise AR smart glasses, and we continue to be the dominant supplier for the military applications. While enterprise AR is gaining traction, it is certainly a challenging time for VR and AR wearables, especially VR is undergoing a reassessment by the market. After the initial VR excitement and strong push for consumer adoption, we noticed a sharp pause in the momentum.
It's likely that VR applications, similar to AR, will move to enterprise industrial applications before becoming a widespread consumer product. Further complicating the matter is the tariff situation in China, which we believe negatively affected our Chinese customers, especially those who buy our components for drones applications. I'm flying over to Asia tonight to discuss with our partners, customers, and suppliers to fully understand the effect of this trade war and what can be done to minimize its impact. Now I will turn the call to Rich to discuss the financial details of this quarter.
Thank you, John. Beginning with results for the third quarter of 2018, total revenues were $5.1 million compared to $6.1 million for the third quarter of 2017. As a reminder, in 2017, we acquired NVIS, and they had certain military contracts in place. In the third quarter of 2017, two of those contracts were essentially filled in Q3 and Q4 of 2017, represented about $1.5 million of the $6.1 million of 2017 revenues. Cost of sales for the third quarter was approximately 100% of product revenues compared with 74% for the third quarter of last year. Both margins decreased due to a lower absorption of overhead costs as a result of lower volumes.
R&D expense in the third quarter of 2018 was $4.6 million, compared with $5.3 million in the third quarter of 2017, reflecting a $1.2 million increase in funded R&D expense, offset by a $1.9 million decrease in internal R&D. SG&A expenses were $7.2 million in the third quarter of 2018, compared with $5.3 million in the third quarter of 2017. SG&A increased for the three months ended September 29th, 2018, as compared to the three months ended September 30th, 2017, primarily due to an increase in stock-based compensation, legal expenses, product promotion expenses, and patent maintenance fees. Other income expense was $175,000 in the third quarter of 2018 as compared with income of approximately $300,000 in the third quarter of 2017. The third quarter of 2018 includes approximately $227,000 of foreign currency losses, as compared to approximately $224,000 of foreign currency gains in the third quarter of 2017.
Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $9.8 million, or $0.13 per share, compared with a loss of $8.2 million or $0.11 per share in the third quarter of 2017. While we expect strong results in military and industrial sales in the fourth quarter, with the weakness in consumer AR and VR demand and the slight delay in FWS-I shipments, we are reducing our full-year revenue outlook to $24.5 million-$26.5 million from the previous $30 million-$35 million. We conclude the quarter with approximately $46 million of cash and marketable securities and no long-term debt. The amounts I just discussed are our current estimates, so I remind listeners to review our Form 10-K for the third quarter ended September 29th, 2018, when filed for final amounts. With that, I'll turn the call over to John.
Oh, excuse me. I'm sorry. With that, operator, we'll take questions.
Of course. At this time, if you would like to ask a question over the phone, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Again, that's star one on your telephone keypad if you would like to ask a question over the phone. Our first question comes from the line of Matthew Galinko from National Securities. Your line is open.
Hey, good morning. Thank you for taking my questions.
Good morning, Matt.
Good morning. Just one quick one on the I think you mentioned you expect to ship 100,000 of display modules for enterprise AR in 2019. Is that inclusive of what you expect to ship as part of the ramp in Golden-i?
No, that's to external customers.
Okay, got you. On the consumer wearables front, particularly your internal product that you developed, I didn't hear you touch on that. I'm curious how commercialization is going there. In the past, we've talked a little bit about sort of building a distribution channel for it. How are efforts going on that front?
As we mentioned, we showed the product originally at AWE several months back. The reception has been very strong. As we noted in our remarks, up to over 30 Fortune 500 companies have looked at it and are awaiting samples, and we expect to get those into people's hands this quarter, with production and shipments starting in Q1. We're going to use a VAR model, as we've discussed, to distribute it. We've also identified and signed contracts with fulfillment centers. The distribution network is coming together, and for the most part, it's in place. Those issues should all be behind us as we enter Q1. At this point, we just need the initial feedback on the product and then, as we expect shipments in Q1, start generating revenue.
Matt, are you talking about the Golden-i Infinity or are you talking about the consumer aspect of the AR glass?
The consumer athletic wearable.
Yeah. I think this is about Solos. This is John Fan speaking, Matt. The Solos actually introduced, I think, late second quarter, sometime in late second quarter. There are two things that are happening. One is the hardware. We actually found the hardware is actually pretty good. In fact, we're the only one now in the market that everybody reviews say the hardware is very good. What we are doing now is connecting with people for the benefits, with people's software, application software, and we're making very good inroads, and I'm sure people will be seeing a lot of additional partnerships with the software companies are coming soon. With that, I think the benefits to users, cyclists, runners, become very clear. Actually, we're very happy with the hardware, and we're busily and rapidly working with the benefits.
I think that's a very interesting problem because as we said, AR, even for consumer, people are still hesitating. Remember, everything has to go from military to enterprise to consumer. The AR glass has immediately transitioned to the enterprise world now. I think the next stage, it is going to be the consumer. VR has jumped from military immediately to consumer. I think now they are pausing and then the priority will for the enterprise world first.
Got you. Okay. Appreciate that. Then maybe on the Golden-i, you have discussed and sort of established that it's a fairly different design and approach to an industrial wearable than what your partners are doing. How is reception? Are the potential customers you're talking to kind of lining up the existing design of wearables against Golden-i and sort of comparing? Are they sort of looking at their first industrial wearable and sort of evaluating on its own merit without necessarily looking at other units on the market?
Let me answer this question. In the wearable world, especially in enterprise, I think eventually even for consumer world, it's going to different layers, especially industrial world. There are very ruggedized industrial applications, and there's middle applications, and there's this very broad industrial workers, where they would really want mobile assistance. What we are targeting is, in fact, the truly very mobile workers. Very lightweight, probably much lower cost because they have no battery, no radio, and no processor. It just hooks up to the existing cell phone or existing mini PC people industrial world already using. It's a very different category. It's actually, in some way, contrary to normal thoughts, is that you're actually tied to a phone or mini PC and don't have any battery in it. It's a different thing, and I think appealing to different type of workers.
They are mobile, very broadly distributed segments. There's no such thing in the market right now. As we know, we work with our partners, sometimes to do the pioneer job. Also because we did talk to the customers and the ultimate customers, the industrial world, a lot, because we probably have about 80% of all the enterprise headsets kind of in the world right now, which are in production. We know our customers, and that some of the customers, and actually many of the customers say, "This is what we like to see, a very broad, lower cost, lighter weight." In many ways also, I would say, because it's just really like a smart screen with a camera. All the PCs and the phones, if they change, their performance is already piggybacking. You don't get outdated. It's a very, very good system for enterprise world.
Yes. Maybe I speak too much on that. Next, I'll take the next question.
I think I'll stop hogging the mic, I'll jump back in the queue. I appreciate the caller.
Again, that's star one on your telephone keypad if you would like to ask a question over the phone. Our next question comes from the line of Patrick Metcalf from Newbridge. Your line is open.
Hey, good morning, guys.
Good morning.
Good morning, Pat.
John, can you give us an update on the product roadmap for Whisper Chip, how you see it playing out, and how good the technology is, the feedback you're getting from customers, and maybe some more information on that? My next question is, on the U.S. Internet company that you shipped 5,000 units to, have you done business with this customer before, or is this a brand-new customer?
Okay. This is John Fan. Thank you, Peter, for that question. I will answer the customer question first. That's a customer that we know and have been doing business with before. Is a good partner to us for many years. Back to the Whisper. Actually, one of the purpose of my trip is, to Asia, talk about Whisper. What we have now noticed is both in the AR world, in the whole wearable world, people begin to recognize one of the important human interface is going to be voice, not going to be done by touch. The touch screen is very, very good for handheld smartphones, and it was a wonderful thing that they have invented for smartphones. Once you go to wearable, you really don't want to touch your eyeglasses or touch anything if you can avoid it. It's voice.
A lot of activities now are done with voice. As you well know, the voice is going to be the next touch. We actually, in our product, both in our Golden-i Infinity, in fact, that's where we want to show the power of the Whisper, is actually going to be in the Golden-i Infinity. Whisper is also, of course, in Solos, and Whisper is also in RealWear headsets. There are other activities going on, and we check our Whisper now, and our customer and partners check it. The performance is better than anything in the market right now, especially in a noisy environment. We are very active right now, and I think that by the time people see and experience the Golden-i Infinity, which is really, there's no touch, there's no tapping that you're accustomed to. It's going to be totally hands-free.
It's all done by control, by voice, by Whisper voice, as well as by the head gesture. The whole thing, the whole human interface in Golden-i Infinity is no touch. This is the first time ever it's come up in any product. We shall see. Whisper is doing well. It has very, very good performance, and it has been proven. It has been starting to go into the product, and I'll be in Asia talking more about it.
Okay, great. One follow-up on the Whisper Chip. You've been granted a patent with the Whisper Chip to be embedded in a Bluetooth chip, I believe. Is there any chance the roadmap would have you licensing the Whisper software to a Bluetooth company like a Qualcomm or something like that? Is that possible?
Yeah. I think, it's more importantly, the Whisper can be loaded into any processors of many kinds. Microcontrollers can be loaded in there, too. There is a licensing model. We also have a Whisper Chip, so there's a chip model. Of course, there's a model that people will get our algorithm into a standard processor, of which they will sell the processor. There are different kinds of models coming up. In many ways, I'm very excited about Whisper. It takes a little time because I think people had to recognize that voice is really our next interface.
Okay, great. I just saw you signed a partnership with a medical device-
Just a reminder, we have about 30 patents around Whisper. Most of them have already issued. We're excited about Whisper. I'm glad that you asked the question, yeah.
Okay, good. Lastly, you had signed a deal with a company just recently in the medical device for an AR device for surgeons. Did you guys give your IP up to them for equity stake in that company like you have done with RealWear, BOE, New Vision, Lenovo's joint venture? Can you give us a little bit of idea or color on how you're using your IP to build up your equity stakes in so many different ventures in the AR/VR world? I don't think the market appreciates that.
Yeah. Let me answer that. It's an important question, actually. In the BOE case, it is joint venture, there's no IP transfer at all. In fact, there's no technology or IP transfer. That is a very clear case. In the Lenovo case, it's a joint venture with Lenovo, of which we actually licensed one of our models. Remember, we do a lot of concept models or reference model of smart glasses. They licensed one of our models, okay? Involve which we get some equity. We do get some significant equity there. In the RealWear, the involvement is deeper, with not only a licensed reference model, which again, the reference model is somewhere between a concept model and a full product like Infinity. Somewhere in between. They licensed the reference model. Also licensed some of our patents, non-exclusive, of course.
On top of it, they promised to buy components for us, as well as pay royalties. We also get a very significant part of our equity. This is the model that we favor right now anyway, especially for small, very aggressive startups. We would license them certain ways, especially reference models.
Okay. Well, I like what you're doing, and I think when the tide turns, this is going to be a big opportunity. Keep up the good work.
I think we're certainly disappointed. I think the whole industry is disappointed with what's happening, especially in the VR wearables. The VR wearables was a huge spike, and then everybody fell to the earth, and it happened very rapidly, and everybody's examining it. If you recognize and look around between the trade war and of course, what's happening in the VR/AR, many of the stocks, companies here as well as overseas, have seen some significant impact. However, it's different for 3D TV. We think it's a pause and reassessment, regroup, and things will come back out again.
Okay. Great, John. You just brought up one last point. With the AR/VR market seems to be bottoming here, it would be great, like you've done in the past, step in and buy your stock. It would be greatly appreciated. Thank you.
Thank you very much.
Again, that's star one on your telephone keypad if you would like to ask a question. We have no further questions at this time. I will turn the call back over to John Fan for closing remarks.
Thank you very much for joining us this morning, and hope to see some of you in the coming CES next January. Thank you.
This concludes today's conference call. You may now disconnect.