Kopin Corp (KOPN) 2020 Q4 法說會逐字稿

Good day and welcome to the Kopin Corporation Fourth Quarter and Full Year 2020 Earnings Conference Call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Chief Financial Officer, Rich Sneider.

Please go ahead, sir.

Thank you, operator.

Welcome, everyone, and thank you for joining us this morning.

John will begin today's call with a discussion of the market environment that we see and our progress in executing our strategy, including our sales activity and technology development.

I will go through the fourth quarter results at a high level.

John will conclude our prepared remarks, and we'll be happy to take your questions.

I'd like to remind everyone that during today's call taking place on Tuesday, March 2, 2021, 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 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.

And with that, I'll turn the call over to John.

Good morning.

Thank you for joining us to discuss our fourth quarter and 2020 results.

I want to start by expressing our hope that you and your families continue to stay well and safe during this pandemic time.

We are delighted to have finished 2020 with very strong results on both our top and bottom line, with full year revenue growth of 36% year-over-year and increased efficiencies in our operations.

Our fourth quarter 2020 revenue growth was particularly strong, growing to 60% from a year ago to $13.9 million.

We also made great progress in streamlining our cost structure, along with increasing our private yields and production efficiency, resulting in a net income of $1.3 million for the fourth quarter of 2020.

We are very proud of this achievement.

While the company worked hard to achieve this wonderful result, our focus is on the longer term as demonstrated by our target increase in R&D spending, which we believe will position the company well for the coming era of AR and VR.

This could be a once-in-a-decade occurrence, a radical transformation from handheld devices to hands-free devices.

Now let's get to a more detailed discussion of our business.

Our business was strong across multiple segments and was, again, led by our defense product revenues, which increased 112% in the fourth quarter of 2020 compared with the fourth quarter of 2021 -- 2019.

This very significant increase was driven by our 2 production programs.

The displays subassembly system for the FWS-I thermal weapon sight system and display for F-35 Fighter jet program.

As announced in September 2020, we were awarded a $22.9 million follow-on contract for the FWS-I program, with shipments scheduled through the third quarter of this year.

We expect these 2 production programs will continue to generate strong revenue in the coming years.

We are also on track this year to transition 3 more products, out of a dozen programs currently in development, to initial low-rate production, with revenues expected to begin ramping in the second half of this year.

We believe these programs will provide accelerated growth momentum for 2022 and beyond.

Our active pipeline of development programs includes using our advanced display products in armored vehicle targeting systems, rotary-wing aircraft type helmets, automatic and semi-automatic rifle day scopes and targeting systems, among other applications.

These programs all relate to AV/VR and are all using our advanced microdisplays and also increasingly utilizing our sophisticated optical systems, electronics and dust-free assemblies.

We believe we are the sole source supplier to most of these programs.

In the fourth quarter, we saw solid growth in our industrial wearables, led by sales to RealWear, located in Washington state, along with sales to 3D metrology applications.

The ability to collaborate with remote experts this product, and we are seeing increasing activities in December.

For example, in Q4, we announced that Iristick, a European company, has designed our microdisplay optical module for its smart glass product.

For 3D metrology application, our unique ferroelectric LCOS microdisplays are very suited for industrial 3D automatic optical inspection, which we call AOI equipment.

Due to the increasing quality requirements of the complex [tricircuit] box using the coming generation of electric vehicles and 5G phones, 2D AOI inspection machines are now being replaced by 3D inspection machines.

This market is still in its early stages of growth.

Our main competitor in this application is Texas Instruments' DMD, digital micromirror device.

We're 2 market leaders currently at similar market share.

We expect both industrial wearable revenue and 3D metrology will continue good growth in 2021 and beyond.

However, revenue from sales of products for public safety applications were down in the fourth quarter of 2020, which we believe was attributable to the negative impact of COVID-19 on municipal budgets.

We expect this segment will recover in the second half this year.

We also recently announced that HMDmd, located in San Diego, California, and Kopin have entered an agreement to develop a specialized precision surgery headset for a major medical technology company.

This is our initial entry into the expanding use of AR headsets for medical applications.

In the fourth quarter, we received our production -- or our first production order and began shipments of our 720p patent pending duo-stack, ColorMax OLED microdisplays with high brightness, good color fidelity combined with low power consumption.

High brightness and color fidelity are critical for high-performance AR, VR and mixed reality headsets.

We also announced our Lightning 2.6K x 2.6K micro OLED display on chip was incorporated in Panasonic's VR glasses, which was shown in CES 2021.

The Panasonic VR Glasses are the world's first high-dynamic-range capable, ultra-high-definition VR eyeglasses and offering stunning lifelike images.

The glasses have a rare small form factor, thanks to our advanced 1.3 inch display and our proprietary slim Pancake optics, jointly developed by 3M and Kopin, making them much smaller and lighter than the large bulky headsets traditionally and currently used for VR.

The glasses also feature Panasonic integrated ultra-high fidelity audio, which combined with a super high-resolution micro OLED display, create a truly amazing sensory experience for viewing sports, content or games.

We are very excited of our progress and believe all these wins in defense, industrial, medical and consumer AR/VR will see our growth in 2021 and beyond.

Kopin has always been a very innovation company at our core.

We continue to be a leader in the next-generation microdisplay technology.

An example of this is our recent announcement of a multiyear agreement with Jade Bird Display to develop superbright monochrome LED microdisplays.

Jade Bird Display, based in Shanghai, China, is a leader in microLED displays.

Under the collaboration, Jade Bird Display will provide the LED wafers and hybrid bonding service on Kopin-designed and supplied Silicon backplane IC wafers for monolithic 2K x 2K LED 1 inch diagonal microdisplays.

This will be the most advanced micro OLED display in the world.

MicroLED display provides promise of super high brightness microdisplays, especially useful for many AR applications.

We expect that our advanced ColorMax OLED and our micro OLED -- microLED displays now being developed will be the key enablers of what we see as the coming wave of AR and VR products in defense, enterprise and consumer applications.

Kopin offers the widest range of leading microdisplay technology in the world for AR and VR..

As expected, these systems are being adopted first in defense, followed by industrial, enterprise, medical and then consumer applications.

Almost all of our development programs are related to AR/VR applications.

We are making great progress in executing our strategy to improve the performance in all aspects of the company.

Rich will cover the financial details of the quarter and the full year 2020.

However, I want to end by sharing how pleased I am to have matched our strong revenue growth with significant dollar-lined improvement while still significantly increasing our R&D activities.

In fact, in the fourth quarter, we achieved profitability and generated cash while growing revenue by 50%.

I want to convey we will remain profitable.

I do want to convey that we will remain profitable throughout 2021 as we are ramping up several new defense production programs and we continue aggressively to invest in our microLED and micro OLED displays as well as advanced optics and specialized electronics.

It's very encouraging to see the progress we achieved across the board in our technology, in our operations and in our financial streams.

We look for this trend to continue.

Now I will turn the call to Rich to review the financial details.

Thank you, John.

Beginning with the results for the fourth quarter of 2020.

Total revenues were $13.9 million compared with $8.7 million for the fourth quarter of 2019, a 60% increase year-over-year.

Product sales in defense customers increased in the fourth quarter of 2020 compared to 2019 due to an increase in shipments of products in the Family of Weapon Sight-Individual, or FWS-I, program.

FWS-I revenues increased in 2020 over 2019 by 177%.

Cost of sales for the fourth quarter was 65% of product revenues compared to 81% for the fourth quarter of last year.

Cost of product revenues decreased as a percentage of revenues in 2020 as compared to 2019 due to higher volumes and improving manufacturing efficiencies.

R&D expense in the fourth quarter of 2020 was $4.4 million compared with $2.7 million in the fourth quarter of 2019, a 65% increase.

Funded R&D expense in the fourth quarter of 2020 increased 87% as compared to the fourth quarter of 2019 primarily due to increase in the number of defense-related contracts we've been awarded.

SG&A expenses were $2.4 million in the fourth quarter of 2020 compared to -- with $4.5 million in the fourth quarter of 2019, a reduction of 47%.

SG&A for the fourth quarter of 2020 decreased as compared to 2019 primarily due to a decrease of $1.2 million in professional fees and $0.5 million in bad debt expense.

Other income was approximately $286,000 in the fourth quarter of 2020 as compared to an expense of $3.7 million in the fourth quarter of 2019.

In 2020, we recorded approximately $300,000 of foreign currency gains compared to $200,000 of foreign currency gains in 2019.

In the fourth quarter of last -- of fiscal year 2019, we recorded a noncash $600,000 gain on equity investments, which was offset by an impairment charge of $5.2 million on an equity investment.

Turning to the bottom line.

Our net income material to controlling interest for the quarter was approximately $1.3 million or $0.02 per share compared with a loss of $7.3 million or $0.09 per share for the fourth quarter of 2019.

Turning to results for the full year.

Total revenues for 2020 were $40.1 million compared with $29.5 million for 2019, a 36% increase.

Product sales to defense customers increased in 2020 compared to 2019 due to an increase in shipments of products of the FWS-I program and the Joint Strike Fighter program.

FWS-I and Joint Strike Fighter revenues increase in 2020 over 2019 by 167% and 139%, respectively.

Cost of goods sold for 2020 was 75% of product revenue compared with 103% of product revenues in 2019.

Cost of product revenues decreased as a percentage of revenues in 2020 as compared to 2019 primarily due to improved yield from our manufacturing process.

In addition, 2019 was our initial production of FWS-I program, and we experienced initial yields -- low yields on the program.

R&D expense in 2020 was $11.7 million or a 13% decrease as compared with $13.3 million in 2019.

Funded R&D expense for 2020 increased as compared to 2019 primarily due to an increase in the number of defense-related contracts we were awarded.

In total, R&D expense for 2020 decreased as compared to the prior year primarily due to licensing of certain products and other development programs being curtailed.

SG&A expenses were $11.8 million for 2020, a 45% decrease compared with $21.3 million for 2019.

SG&A for 2020 decreased as compared to 2019 primarily due to a decrease of $1.2 million in noncash stock-based compensation, $2.9 million in professional fees, $1.3 million in bad debt expense, $1.6 million in products promotion and marketing expense and $700,000 in travel and related expenses.

Other income expense was income of $361,000 for 2020 as compared with expense of $2.9 million in 2019.

In 2020, we recorded $300,000 of foreign currency gains compared with $200,000 of foreign currency gains recorded in 2019.

In 2019, we recorded a noncash $1.4 million gain on equity investments and an impairment charge of $5.2 million on an equity investment.

Turning to our bottom line.

Our net loss attributable to controlling interest for 2020 was approximately $4.4 million or $0.05 per share compared with a net loss of $29.5 million or $0.37 per share for 2019.

10% customers for 2020 were DRS Network & Imaging Systems LLC at 35%, Collins Aerospace at 25%.

Fourth quarter and year-end amounts for depreciation and stock compensation are attached in a table to the year-end press release.

In the fourth quarter of 2020, we issued 1.9 million shares of our common stock under our At The Market, or ATM, equity program for $4 million in gross proceeds or $2.05 per share before deducting broker expenses of approximately $100,000.

The net proceeds from the sale of common shares are used for general corporate purposes, including working capital.

In January of 2021, we sold 2.4 million shares of common stock for gross fees of $16 million or $6.66 per share before deducting broker expenses paid by us of $0.5 million.

This completes our ATM program.

The amounts discussed above are based on our current estimates, and listeners should review our Form 10-K for the year ended December 26, 2020, for any possible changes and, of course, additional disclosures.

And with that, operator, we'll take questions.

(Operator Instructions) And our -- we'll take our first question from Glenn Mattson from Ladenburg Thalmann.

Congrats on the results.

So curious, first, on the defense business, for the FWS-I, you mentioned the $23 million award that's going to shift through Q3.

But was the -- was there a bit of a budget flush related to that deal?

Can you give us a sense of how much is left as we go into 2021 from that contract?

No.

I don't think we'll disclose the actual balance, too, but we have shipments scheduled through October under the current deal.

Great.

And then as far as the -- you highlighted 3 programs that you think are likely to begin ramping in the second half and then beyond.

Can you give us the scope -- you've said it before, but maybe just refresh us on how big collectively they are.

And it seems like maybe the day scope would be the biggest.

Can you give us just a reminder of just what the size and what the general size of that program could be?

Well, as it affects 2021 results, they'll come into the second half of the year, and it's going to be low-rate initial production.

So I understand you asked about the total program, but I'll just give you the 2021 results.

So we're not expecting significant revenues from those programs with the except of one.

One possibly could be meaningful this year, but they will all be low-rate initial production to start off.

And as John said in the press release and prepared remarks, they're really designed to propel our 2022 growth.

Now turning to the specific programs.

If you use the FWS-I as kind of a benchmark, the day scope could be significantly bigger, and then the other programs are probably slightly less.

Yes.

This is John.

I would like to make a comment on this.

Our programs are really divided in several areas.

For the avionics, like F-35 or our rotary aircraft, those pilots' helmets are very sophisticated, very expensive, and the performance is quite low.

However, for the day scope or FWS-I for soldier, so their quantities, in many ways, are similar to the quantities for the enterprise applications.

We are talking about tens of thousands a year.

So these are very significant quantities.

The price [ties] are a little bit lower, I am assuming lower, but volume is very large.

So we actually prepare ourselves to maintain the high quality of samples for avionics, also high-volume samples for soldiers.

And that allows to learn both sides of the equation.

Great.

And perhaps shifting over to the industrial and consumer side.

So you highlighted industrial wearables and 3D metrology.

And obviously, those are -- the thought process would be those would come before consumer, right?

But it does seem like perhaps we're at a moment where there's a -- I mean, I guess, when I look at the Oculus device, I know you're not in that.

But it does feel like that VR headset has made significant inroads with the consumer.

What has impressed me the most with it is just how many games, how many programs have been written for the device and just in general, the quality seems to have taken a step-up for a bit.

So I guess my question is John, do you see this as maybe like a significant shift in the market at a significant moment where maybe kind of like an iPhone moment, where over the next few years, there'll be a lot of devices coming out, and the VR market could really take off from here?

Yes.

Glenn, it's a very good question.

I think it's a time to really align our strategy as well as what I see in the market right now.

The first we'll use in defense, it's all AR and VR are related.

They will get -- they pay higher price, but they want high performance.

And we see enterprise, we're in a whole bunch of smart glasses, Google Glass included.

And then we are seeing medical.

We are seeing picking specialty medical AR glasses.

And people want [stability] because not only that we are good display in electronics and optics, but we also know about economics.

But now we see -- begin to see the replacement -- not replacement, but I would say, high-end type of Oculus glass.

Panasonic is a good example.

The Oculus glass -- Quest 2 is a very good device.

I'm actually amazed how good they are.

And they have sold quite a lot.

I think they've sold about 1 million units last quarter, the fourth quarter.

But they have problems, too.

I mean they're too heavy, too big.

It has good image, but shouldn't people want better image?

It is pretty fast, but still has latency, okay?

So there are a lot of things that are there.

And obviously, it's going to improve.

But I think Panasonic and several other companies now are trying to quantum jump on it.

And the market, well, if you do a quantum jump, the market will not be 1 million a quarter.

It could be, who knows, the number will be very big.

And that's what we are targeting now.

And I don't think it's that far away.

My prediction is maybe next year, you will see some -- end of this year, beginning next year, Panasonic is definitely planning for that, that will -- the game changer will come.

And we will take our next question from Kevin Dede from H.C.W.

I think the big elephant in the room, John, is -- and I think I understood you correctly, regarding what you think -- that you think Kopin will be positive for the balance of this year.

Did I hear that correctly?

Could you add some more color to that?

And maybe give us some revenue boundaries on how you expect that to happen given that most of the new stuff you're speaking to, the 3 new programs, are coming on to bolster second half '21 revenue.

Yes.

I will make a few comments, and I can leave it to Rich to talk about it.

I know we have 3 new programs coming in.

From the experience we have on the FWS-I, who's going to really hit -- start production last year, 2019 actually, and then go to full -- more full production 2020, there are learning curves to be paid.

So we are now putting new equipment and new processes there.

Plus going back to the question that Glenn has, the AR/VR adoption cycle, especially for consumer, has been really broadened.

We are really talking about -- they have broadened maybe 2 or 3 years because of pandemic.

So accordingly, we actually increased our R&D development programs for people.

And I think all these things make it true this year, not entirely certain, but we are still doing much better, continue to still get better than last year.

And I think Rich can comment on that.

Rich?

Yes.

Just to clarify, so John indicated that he was not expecting profitability for the year.

That's not in our forecast right now, just trying to -- a little light on Q4 where revenue came out very, very strong.

But understand that if you look at the P&L, R&D revenue was very strong.

And as we've announced, we have a number of collaborations going on to develop the technologies for the new products.

And one of the issues with that is that to the extent that these are customer-funded development programs, and most of them are, instead, a subcontractor invoices us.

We essentially could pass that invoice through to the customer and shows up as our revenue.

And so since it was year-end, we had a number of vendors who sent in a significant number of invoices.

So frankly, the revenue was a couple of million dollars higher than we probably would have expected, but that was really just pass-through of revenue from contractors.

Now we do get a margin on that number.

So it did help the profitability equation.

So that was one effect, it's just our profitability.

The rest, margin improvement, was the result of our efficiency efforts.

And again, to John's point, the learning curve on FWS-I tells us to be cautious with the learning curve on these new programs because we are still in a pandemic situation and we still have to continually work with our supply chain.

We're not seeing the same type of issues that we saw a year ago.

But from time to time, we do get a notice that some supply is slowing down.

And so -- which actually does make our results even more impressive that in a pandemic, we were able to produce results that work.

But -- so we're being cautious.

And as John indicated, we are still investing significantly in micro OLED and microLED because that's where the big money is going to be in the future.

Yes.

I think it's important to mention microLED is one of the hardest things right now people are pursuing.

We obviously are involved with people and some R&D on it.

On the efficiency gap, we also have many active contracts that are developing these wafers to put in our (inaudible).

Okay, John.

And Rich, appreciate the color.

I apologize for misunderstanding your prepared remarks.

Could you dive in a little bit on the yield improvement?

Obviously, it's tied into your commentary regarding FWS-I.

But I'd like to understand a little bit more about that.

And I'd like to understand how you expect that improvement to translate to some of the other programs you're working on, primarily in the enterprise side.

Because I think I've lost track of which technology you're using there.

Yes.

I think it's a very good question.

FWS-I is really different from the F-35 program.

The F-35 program will still need most of our products delivered with a display.

The FWS-I is the full eye piece, basically.

We have display, optics.

They are there for medical and industrial assembly.

So we have to go through a whole different type of process, quality control, and these units are also very different.

F-35, we make 2,000 a year.

Now we make tens of thousands a year for FWS-I.

So it's a different type of process to learn.

Now the new 3 programs coming in are very -- mostly like FWS-I.

So we have learned the lessons, but they are different products, and none of them are same.

So they're different products.

We believe we will test different learning curves today, but we have mastered the process at the start of the year at producing FWS-I.

[So while it was a success, it was not by design].

Okay.

Is FWS-I based on LCOS technology?

I guess maybe that's the best way to try to get to where I was going.

Yes.

The FWS-I is using our proprietary candidate LCD process.

Okay.

Can you talk a little bit about more -- sorry, John, a little bit more about Jade Bird?

I understand microLED.

But what makes you feel so strongly about that technology emerging as maybe the foremost in the industry?

And how do you see it supplanting micro OLED?

It is also a very insightful question, Kevin.

Look at the situation right now.

Again, this is my personal view.

My feeling is in the AR/VR, the first thing to come in the consumer will be VR.

The Oculus Quest 2 will indicate that.

In the case of VR glass, that display they need, I can describe what the display people want, for the VR -- the next-generation VR, its micro OLED to be bright, but [they look likely] to be bright, to be extremely fast and to be fast with no latency and also beautiful color and a big screen.

And still, the eye glass, you can wear on your head.

That's why micro OLED will be perfect -- is perfect.

So our micro OLED activity is (inaudible) -- automatically, it's going up.

However, once we go to AR, especially once you got outside in the sunlight, you need much brighter specs.

And the [output] in AR is usually not very efficient.

But people are looking at much higher cost -- a higher price, especially for color.

So the color requirement, besides the brightness, easily [is the market] of what micro OLED is doing, which gives us a lot of activity because we are now on Facebook and everybody.

Now the spread of microLED, and the Jade Bird is leading.

They are based in China, but they are very aggressive.

So we have a different technology, actually the best one, the color -- our best-priced [IP.] And also, our designs are unique.

And so Kopin increases capacity on emerging LED layers (inaudible) in dollars terms like wafer.

I think this is still, in the older AR, becoming very real.

I think for depth, I think AR will still be a clear consumer after (inaudible).

And we need -- it's mainly LED for AR.

Okay.

That helps, John.

Yes.

So are you at all concerned about -- I mean, using your backplane ICs in that environment, are you concerned about maintaining control over your intellectual property?

What everyone knows, Kevin, once you make a designed IC and process that IC, when you deliver the design for people to [just add] layers on that, there's no way they can really easily do reverse engineer.

That's why people like to do that.

That's why all the foundry systems go up.

That was (inaudible) design it.

And they invested delivery like TSMC to process the wafer, but it's very hard to reverse engineer, the design, once you study it.

And then can you talk a little bit about...

Deliver -- we already delivered the wafers to any countries, whether it's Asia, either China or Japan.

The wafers are already made, are redesigned by Kopin in the United States.

We don't even design outside the United States.

Okay.

Yes.

No, thank you for reminding me.

I wasn't exactly sure you had intended to make the wafers there.

I get it.

So thank you for clarifying.

Can you just give us maybe an indication on how you see that development path going?

How long do you think it's -- before you'll have maybe beta displays that you could ship to customers for test?

For the LED?

Yes.

Correct.

For the microLED, it's a very interesting thing, okay?

I mean, we -- originally, we thought we'll just get a program, might take about 5 years.

So our customers and our partners say, "No.

No, we want it earlier." So that's why we increased our activities.

In doing so, we actually passed some of the functions which we were thinking about doing ourselves to partners, which is not that critical like a (inaudible) which we pass on to our partners.

So this will make -- speed it up, the whole thing.

We're hopeful that we can get it done in the next 2 years as well.

Okay.

Well, congratulations on that.

I think the -- yes.

So the other thing is just sort of general demand in -- within the enterprise.

I mean, you talked to safety being down on account of municipal budgets.

Do you think that's sort of a post-pandemic resurgence?

Are we -- do you think that doesn't come back until the second half next year -- or sorry, second half of this year as well?

We think that -- certainly, the major account we have, which I think were 2 people, right, through the year, it slowed down.

They're selling mostly domestic.

And the municipal budget obviously has been hurt, but we predict it will come back up in the second half.

But we've seen other activities now in this area for other countries and other companies.

So I think this will continue to grow, especially 2022 and/or beyond.

So this is still a very good assembly to focus on, yes.

Yes.

I'll give you a break on, John.

Last question for me, can you talk about some of the end products that RealWear is designing and the success that they are having in the end market and how you see their projections?

You should just contact RealWear to talk about their business.

Yes.

They are very active in their website and the newsletter.

They're obviously very successful right now, and we're the sole supplier to them.

We know they're very good right now.

We are cheering for them.

(Operator Instructions) So we'll take our next question from Denis Pyatchanin from Needham & Company.

I wanted to ask a few on behalf of our Raji Gill.

So regarding the AR and VR initiatives in progress, I think you guys had mentioned that the first kind of groups of adopters would be industrial, enterprise and medical.

I mean, if you had to pick kind of 1 out of the 3, which one do you think would be most likely to kind of be a first adopter?

And what kind of applications would they use these products for?

Sorry, can you repeat the question?

I just want to be sure I answer it exactly right.

Sure.

So I think you'd mentioned in the press release that in terms of the kind of AR and VR first adopters that's kind of in the first group, you would be basically looking at kind of industrial, enterprise or medical customers.

Could you -- if you had to pick 1 out of those 3, which one do you think would be the most likely big first adopter of the AR and VR technologies?

And what kind of applications would they use them for?

Okay.

So I will answer AR first, okay?

The AR, I would say that applications like RealWear Remote Expert is definitely the first one -- it's coming out.

And we have software/hardware to provide productivity for the workers, especially with mobile workers.

That one is definitely coming in first.

Google Glass is also focused on that.

As you all now, we are the sole supplier of the Google Glass displays.

The second one I actually doubt become more and more thinking now maybe is medical.

They have a need there.

I couldn't believe how surgeons really desperately want it.

So that -- they'll be a supplier now based on the FDA kind of requirements there.

So we don't know how long the certification process will go, but the advantage is definitely there, okay?

So I do have (inaudible).

Now for the consumer side, I honesty still have not seen the [QA] yet for the consumer.

And so maybe later, hopefully, Apple will do something for us.

On the VR, it's very clear.

We always have been using that for training, okay?

As you well know, military training, pilot training, they were useful and also soldiers training and most of the jobs training for the workers.

And they actually use it for education.

A lot of people are using it for education.

But my really soft spot is still games, games, sports content watching via the IMAX theater, streaming a fantasy world.

I think that is the very big consumer applications after the consumer enterprise and the training and military.

So I really think it is a game changer.

You are not holding your computer in your hand.

As you well know, our first products out 2 years -- 20 years ago is the transistors for cellphones.

The cellphones are handheld computer.

I think it's time for a hands-free on the head wearable this year, and we will try to help the second transformation right now.

And it has many applications.

You will love it.

Great.

Is there -- could you provide a little bit more color on exactly what kind of applications out of the surgeons will they use kind of the AR products for?

Is there anything you can talk about more specifically?

Well, that, obviously, I cannot talk about because it's a start-up who are working for a major medical company who we identified, as we announced last time -- a few months ago.

We actually built an initial set, and they tried it on surgeons before we actually identified how to build this product.

So it has gone through at least a trial period.

And this is it.

I can't talk about it, obviously, for proprietary reasons.

What we can tell you, though, is that they -- a lot of the medical applications, the doctor is looking literally up at a monitor.

And so the idea is to be wearing a head-mounted system where you're looking at the patient and then using the head-mounted system to be able to obviously focus on very specific tasks.

So there are a number of studies that say -- believe it or not, it actually is good that the doctor is looking at the patient.

They find it has benefits to that.

Well, I think like all new technology of this type, so at the start, we focus with some functions in mind before you can have one that satisfies everybody.

So that medical -- especially in the medical area, we figured the best way to do it is to satisfy what is [assembly] in the medical, which is surgery.

Understood.

That was helpful.

And then I guess the last question that I have is, are you able to provide any kind of color on your gross margin profile by category?

So kind of like which of your categories is above kind of corporate average, which is below or any kind of details like that?

Military, when the programs reach steady state, historically, are 40% or better.

Industrial is in the mid-30s, and then consumer really can go anywhere.

It can go into low 20s and into 30s.

It really depends on the size of the market segment.

Consumer tends to do on an absolute dollar versus percentage type situation.

So if you take a lower percentage, the absolute dollars are much greater.

Unless you are Apple.

Yes, Apple changes the equation.

So it is very interesting.

It is still a new area, right, the whole area of going from handheld to hands-free.

So at the beginning, there's still a lot of technology and [dry] investments.

And you try several methods, some of them may not exactly will succeed, and you pivot again.

But the last 5 years, you can see the image becomes clear.

And what we're trying to do is we are not trying to make a final device.

Even in the medical surgery headset, we designed for them and they go to market and they -- so it's -- other companies market.

We were always the same way.

The HMD we won is actually designed in here, and we licensed to them.

And they are very successful.

They use our display with our optics, use our electronics.

And that, I think, is all very good, a win-win situation for everybody.

So I want to make people know that we are not just a display company.

We are displays at core, but we now have optics, electronics, ergonomics.

And also, we know -- because of the military reasons, we already know how this should be done and how to keep it warm, how it can be used and rugged.

So everybody -- many people come to us, and I say, "Why don't we just build the whole same licenses?

And we sell it." We said, "Great, but you have to use our displays."

Got it.

Yes.

And Richard, just a follow-up really quickly.

So for the R&D license and royalty, I take it that's almost all pure profit, close to 100% margins on those?

I'm sorry, you broke up a little bit.

Could you repeat the question?

Yes.

So just a follow-up on the gross margins.

So would R&D and the license and royalty is going to be almost all pure margin, around 90% plus?

The royalty is pure profit.

There are margins on the R&D contracts, and the margin varies by contract.

We try to look for contracts that sit along our technology road map.

And so sometimes as long as the contract just pays for itself, that's good enough for us because it's providing valuable technology.

Because in most cases, we retain the technology rights to what's developed.

So essentially, we're getting it funded for free.

Yes.

Got it.

Perfect.

That's exactly what I was looking for.

Yes.

I think we did business model as we're beginning -- we see more people asking us to help them to design the device for them.

So we usually have royalties.

And actually, many times, we will have equities together with selling products for them.

They're also very sticky.

With the government, same way: Most of our new programs all have complete eye pieces, maybe even complete head device, the whole headset.

And yes, they're so very, very sticky.

So that's why we are almost all so soft now.

(Operator Instructions) We'll take our next question from Craig Rose from Axiom.

John, Craig from Axiom.

How -- what can you tell us about SOLOS, the progress you've made there, the product that you recently introduced?

And then how do you see the trajectory of the advancements of that product in the future?

Which product do you have in mind?

We have several.

SOLOS.

So the smart glasses, the SOLOS, the AR glasses.

It's actually (inaudible).

I have to say, I've been wearing SOLOS every day, okay, at home.

And this generation, the first generation of SOLOS, I used for listening to music, making phone calls and making Zoom calls.

It's very, very great for Zoom calls.

It's very good for phone calls.

And I no -- I hate I say it, I no longer use my Apple AirPods.

Everything is I have it, I have Apple AirPods ever since I have it.

I have Apple AirPods, I don't use it anymore.

So anyway, that product is the first generation in the test market.

The test market is in Asia for a few months.

Remember, the pandemic slowed them down a few months.

But it did come out last summer in Asia.

And it sold 6,000 units in just test market.

And we've got lots and lots of feedback.

And wait until you see the second one, which I can't reveal yet.

The second one is a game changer.

Nothing like it in the market is going to be ever like that.

We're probably 2 or 3 years ahead of everybody.

So I'm very excited about SOLOS.

I think SOLOS, just like RealWear, our technologies, for now, understanding the unit, and we license SOLOS.

Of course, SOLOS -- we've got a license to them.

We -- there is significant equity, and we sell for them.

We will use this product, especially the second generation that come up.

I think everybody will use it.

Would we expect the next-generation product to have screens?

Or would it still go along the lines?

I mean, I know you've discussed the idea of baby steps introducing such a new product.

So how do you think that moves forward?

It's a very -- I mean, remember, our first product was -- had a screen with a display, right?

And because we had a display housed with Google glass and everything, and then we learned from how the business goes, this is too aggressive at the beginning.

And we strip it out.

And once we do that, we found something that we -- never occurred to us.

Actually, you hear and you speak 3x faster than you can read or type.

So voice is the next screen.

So you look at all the product out there, a lot of them are voice-driven now.

And the AR is allowing to do that, to search everything.

You get by 80% what you need with voice, anything visible.

So we say, "Wow, sooner or later, you will put a screen on it.

But let's wait for a couple of years and get the audio right." So yes, I think sooner or later, you may want a speaking -- a display -- well, a display (inaudible).

So I think that voice will go on for the next 2 years.

Okay.

And do you think a gen 2 product would be -- is it a 2021 event?

Or is it a 2022 event?

In the next couple of months.

We will catch Christmas.

Okay.

And last question, you have a lot of equity interest in companies like RealWear and the companies that spun off, Lenovo, a bunch of others.

If those companies such as RealWear go out -- and this is more of an accounting issue, if they go out and have funding rounds, are you required to update the value of your shares or your equity interest in that company based on the newest funding round?

Yes.

We mark to market the investments.

And to the extent we do an equity round and it's within arms' length and it's a real price, then we would update our valuations.

Yes.

I think they're called our hidden treasure.

Yes, we call that hidden treasure.

And it appears there are no further questions at this time.

Well, thank you very much for joining us today, and we're looking forward to the next meeting with you.

Thank you.

Thank you.

And that does conclude today's call.

You may now disconnect.