Welcome to Kopin's Q1 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Richard Sneider, Chief Financial Officer. Please go ahead.
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 first 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 Tuesday, May 8, 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 materially differ from our forward-looking statements.
Potential risks include, are not limited to, demand for our products, operating results of our subsidiaries, market conditions, and other factors discussed in our most recent annual report on Form 10-K and other documents filed with the Securities and Exchange Commission. The company undertakes no obligation to update the forward-looking statements made during today's call. With that, I'll turn the call over to John.
Thank you for joining us this morning to discuss our first quarter results. Strengthening our military operations primarily drove performance in this quarter. As we have talked about in the past, our displays and optics have been developed initially for military, meaning it's demand for quality and reliability. The military has always been a key market for Kopin. In Q1, we have the continued ramp of the F-35 fighter jet program, where Kopin is the sole supplier of displays for the pilots' helmets. In addition to our current purchase agreement, we have been notified that we'll receive shortly follow-up orders through 2019. After quarter end, we'll receive the initial production authorization for the FWS-I program consisting of 5,000 eyepieces to be delivered over the next year, with shipments beginning in this August.
The second part of the program, the FWS-C, is also tracking on plan in the initial phase of development. At the same time, we're moving through the early development process on the armored vehicle program we won the last quarter. We're pleased that the program was just expanded to include the development of additional eyepiece scopes, increasing the potential total value of the program for Kopin from $40 million to $80 million. Finally, our new Brillian LCD microdisplay product line, which was created specifically to meet the extremely high brightness requirements of the next generation avionics AR applications, and they have been well received by our customers. We expect follow-on orders as development continues on the new helmet using this new display. We're also seeing good uptake in the industrial enterprise AR business. Many of our partners have indicated strong reception for their new industrial products.
In addition, we are excited to report a major design win with a global USA high Tier 1 company for a new AR smart glass for enterprise applications. Perhaps it is appropriate for us to discuss briefly the current status of AR and VR headsets. Without any doubt, the developments of AR/VR headsets have been undergoing major adjustments, with winners and losers. There should be no doubt that the transformation of handheld smartphones to hands-free wearable will certainly happen. Like all major disruptive transformations, there will be many twists and turns along the way. It always has been our belief the adoption and transformation will start with the military, then move to enterprise industrial applications, where the benefits are clearly substantial. In this respect, Kopin has been very successful as we are dominant providers of critical displays and other components to both military and enterprise markets.
The adoption of smart glasses consumer has also began. We are excited about the reception of our Solos smart glasses, which start shipping tomorrow. Solos has been called the world's lightest and most advanced AR smart glasses for sports and consumer fitness. Was designed using Kopin's unique insight into AR forms and functions. We're targeting cyclists, triathletes, and runners with those smart glasses, which contain a heads-up see-through pupil display optics module. Athletes can see real-time updates such as speed, power, and pace, and measure their progress. This generation of Solos added new features, such as music, voice control, group chats, and phone calls. Solos includes our Whisper Voice chip so the users can make phone calls or communicate with others in their group, benefiting from our unique noise cancellation technology, so loud noises do not ruin their audio experience.
We anticipate rolling our Solos through a number of distribution formats during 2018. Last month, we announced USA Cycling has teamed up with Solos to train for the 2020 Olympic Games. We have high expectations for Solos, as this is the one AR glass available that sets our main rules for developing AR glasses. For VR, we have been working with the military for many years. For the past 12 months, we have been working on consumer products, including advanced VR glass assets such as ELF, which utilize Kopin's Lightning, the world's leading 2K by 2K on the displays. We believe we have gained much insight and experience and plan to discuss these insights in my keynote address in the coming AWE conference in Santa Clara, California, at the end of this month. Let's discuss the status of our on-silicon microdisplays.
It has been our conviction that successful transformation from smartphones to hands-free wearables assets requires small, high-resolution, low-power consumption microdisplays. For AR applications, we believe LCD microdisplays will be effective for these applications. Both our military and enterprise customers certainly have adopted our LCD displays. For VR applications, we believe on-silicon offer many performance advantages, including especially in speed and image quality. We have been focused on providing such on-silicon displays for the VR world, including developing the world's leading 2K by 2K one-inch display to establishing a supply chain through a joint venture with BOE, the world's leading smartphone display supplier. We're delighted that the world's largest on-silicon factory has broken ground in Kunming, China, and we expect it to be operational by the end of next year. In summary, we continue to be excited about the opportunities for AR and VR.
As we discussed last quarter, we believe the continued ramp of our military displays, the growing adoption of AR systems for industry and enterprise, and the demand for Solos, along with other new product offerings, will allow us to increase revenue in 2018 by 25%-40%. There is no change in our expectation that revenue for 2018 will be between $35 million-$40 million. In addition, we remain confident that the anticipated increased demand for our products and components should allow us to achieve break-even profitability by year-end 2019. As always, we are carefully utilizing our capital, so over $60 million in cash now and no debt, we'll continue to move forward on our global vision for AR and VR. Now I'll let Rich provide the details.
Thank you, John. As you may have seen in our press release, Kopin has adopted ASC Topic 606 using the modified retrospective approach, meaning that the standard was applied only to financial results of the first quarter of 2018 with a cumulative adjustment to retained earnings. Under this transition method, we applied the standard only to contracts that were not complete at the initial adoption date. In the press release for comparative purposes, we also provided results that would have been under ASC 605. All right, so turning to the results. Beginning with the results for the first quarter of 2018, total revenues were $5.7 million, compared with $4.4 million for the first quarter of 2017. The increase in quarterly revenue year-over-year was primarily driven by military applications. Cost of sales for the first quarter was 80.5% of product revenues, compared with 79.3% for the first quarter of last year.
Gross margins decreased due to lower utilization in one of our facilities, which was partially offset by the increase in military revenues, which have higher gross margins as compared to our other products. R&D expense in the first quarter of 2018 was $4.5 million, compared with $4.3 million in the first quarter of 2017, essentially flat. SG&A expenses were $6.9 million in the first quarter of 2018, compared with $5.6 million in the first quarter of 2017, reflecting incremental SG&A of $0.6 million from our acquisition of NVIS in the first quarter of 2017, and an increase in sales and marketing compensation expenses, partially offset by lower professional services. The incremental SG&A for NVIS for the three months ended March 31, 2018, primarily relates to the amortization of intangibles resulting from the acquisition.
Other income expense was income of $5 million in the first quarter of 2018 as compared with an expense of approximately $400,000 in the first quarter of 2017. The first quarter of 2018 includes approximately $200,000 of foreign currency gains as compared with approximately $1.2 million of foreign currency losses in the first quarter of 2017. The first quarter of 2018 includes a $1 million gain from the receipt of insurance proceeds related to our fraud in our Korean subsidiary and a $3.6 million non-cash gain from the exchange of certain intellectual property for an equity investment. In the first quarter of 2018, we contributed certain patents valued at $3.6 million and $1 million in cash for a 12.5% equity investment in a joint venture located in China.
Turning to the bottom line, our net loss attributable to controlling interest for the quarter was approximately $4.8 million, or $0.07 per share, compared with a loss of $7.9 million or $0.12 per share in the first quarter of 2017. Turning to our 2018 guidance, we continue to expect 2018 revenues to be in the range of $35 million-$40 million. We expect the revenue ramp to be second-half loaded, corresponding with the introduction of new products. We believe operating expense will remain largely flat compared to 2017. We concluded the quarter with approximately $61 million of cash and marketable securities and no long-term debts. The amounts we just discussed are our current estimates, and we will be continuing to evaluate Topic 606 and the equity investment accounting.
I would remind our listeners to review our Form 10-Q for the first quarter, March 31st, 2018, when filed for all final amounts. With that, operator will take questions.
Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 Jeffrey Bernstein with Cowen and Company. Please proceed with your question.
Hi, guys. Just a couple of questions. What's going on with the OLiGHTEK line?
You're talking about the OLiGHTEK line, which is also in Kunming, China. The line is running. I think it will start operational third quarter of this year.
Great. Just a question on the win that you announced with the North America tier 1. Is that a company you've done business with before?
Jeff, I'm afraid I cannot comment on it. Suffice to say, they're a large global company.
Got you. Can you say, is it an industrial type company or is it a Silicon Valley type company?
It would be nice to be if it's a Silicon Valley company, I think.
Okay. Okay, thanks.
As a reminder, if you would like to ask a question, please press *1 on your telephone keypad. As a reminder, if you would like to ask a question, please press *1 on your telephone keypad. One moment, please, while we pull for questions. We have a follow-up question from Jeffrey Bernstein with Cowen and Company. Please proceed with your question.
All right. Can you give us an update on what's going on with 3D machine vision?
Yeah, that's a market we're talking about using displays for 3D metrology. That market is still growing very well. I would say they're growing about 30% a year. We're now beginning to penetrate the Chinese market, if that happens, hopefully happen this coming quarter, it'll be very exciting.
You had some, I guess, lower factory loading in one of the facilities. Can you just talk about that?
Sure. We obviously have facilities in Scotland, down in Reston, Virginia, and here in Westborough, Massachusetts. In a typical semiconductor model, we have a high fixed cost. Utilization in one of the plants was lower than we had anticipated, so the fixed cost per unit was higher, which negatively impacted gross margins. The other facilities did well, so it for the most part, offset it. We were off about 0.8% on the gross margin.
Is that just a timing issue?
Yes. We thought some orders were going to come through in the first quarter that didn't materialize, but I understand are showing up in the second quarter.
Got you. That's great. Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Dr. John Fan for closing remarks.
Yeah, thank you, operator. I would like to remind everybody that tomorrow morning we have our annual meeting at nine o'clock. That's our annual Kopin Inc. meeting. Please, hopefully you can attend the meeting. With that, I will see you guys next quarter. Thank you. Bye-bye.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.