Kopin Corp (KOPN) 2020 Q3 法說會逐字稿

Good day, and welcome to the Kopin Corporation Third Quarter 2020 Earnings Call. As a reminder, today's conference is being recorded.

At this time, I would like to turn the conference over to Richard Sneider, Chief Financial Officer. Please go ahead.

Thank you, operator. Welcome, everyone, and thank you for joining us this morning. John will begin today's call with a discussion about 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 third quarter results at a high level. John will conclude our prepared remarks, and then we're happy to take your questions.

I would like to remind everyone that during today's call taking place on Tuesday, November 3, 2020, we'll 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, estimates, and 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 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.

And with that, I will turn it over to John.

Good morning. Thank you for joining us to discuss our third quarter results. I want to start by expressing our hope that you and your families continue to stay well and safe during this unprecedented time. Looking into our third quarter. We are very pleased with many aspects of our business. Our current product sales are increasing. Our underdevelopment program (inaudible) have never been stronger. We continue to make major improvements in our product cost and yield while maintaining tight expense control.

In addition, we're making great strides in our next-generation display development. Our total revenue increased 55% compared to the third quarter of 2019, which represents the fifth straight quarter with double-digit year-on-year top line growth, excluding our onetime asset sale in quarter 3 2019. It has been a very good year for us so far. And we look forward to continue strong momentum through the fourth quarter and into 2021.

Leading our third quarter revenue growth with our strength in defense product revenues, which grew 140% year-over-year. Our 2 primary production programs are the F-35 pilot jet helmet and FWS-I program. In September, we announced that we were awarded a $22.9 million follow-on contract for the FWSI from weapon sight program with deliveries through the third quarter of 2021. Including this (inaudible), we have received total orders to date of approximately $33 million for this program. As discussed in the news release announcing that contract win, the FWS-I program is a (inaudible) thermal weapon sight that provides users with the abilities to identify targets in the most extreme circumstances. Kopin is the sole source on that contract as it is in F-35. We expect both programs to continue for many years into the future.

Our funded development program revenues grew over 100% year-over-year, which is a clear indication of the strength of our future growth potential. These programs funded by our customers, including both product-specific development as well as new advanced microdisplay technology development. In fact, much of the new fund R&D growth is for advanced microdisplay development. We expect this development program will further build on our current production business in the coming years. We currently have over 10 different programs in various stages of development, which is a stronger sign up in our history. These development programs, including use of our product, the armored vehicles, targeting systems, rotary-wing aircraft helmets, so the weapon [day] scope and other programs.

Three of these defense development programs are expected to start the production next year, adding to our 2 current production programs. We are also very excited to see growth coming from our enterprise customers who have incorporated our displays and modules into their AR products.

The forced remote and socially distanced approach to work driven by COVID-19 has shown the power aware of technology. And we're seeing a solid adoption and roll out AR devices to enterprise workforces. We expect the enterprise market to continue to gain traction. And the ecosystem infrastructure elements necessary for the enterprise markets, such as 5G, will help to accelerate the mass market for consumers, AR and VR adoption.

Kopin is already benefiting on the defense and enterprise adoption. We are -- and we are ideally positioned to meet those demands of this market with our broad lineup of microdisplay products and module solutions, including both LCD and OLED microdisplays. In fact, it is important to emphasize here the importance of our module solutions. The microdisplay could be used in practice. It must be offered in dust-free module, which consists of sophisticated optics and electronics within a sealed housing.

Kopin has deep experience in this area, and it's why many customers turn to Kopin for their microdisplay solutions. We're also excited about the technical advances in our duo-stack Organic Light Emitting Diode, or OLED microdisplays. We had the opportunity to highlight these OLED technical advances in a recent webinar sponsored by Insight Media, where we shared results of our (inaudible) method to achieve industry-leading high brightness OLED microdisplays.

As mentioned in the second quarter, achieving high brightness with low power consumption while maintaining colorful gallery has been an obstacle to create AR/VR assets that (inaudible). In the webinar, we described our color 720p OLED microdisplays, that in the 7,000 nits of brightness through the much lower power that was previously to achieve this level brightness. We also outlined our technical path to achieve even greater brightness as high as 30,000 nits for color OLED microdisplay in the coming years.

It is important to note that (inaudible) OLED microdisplays normally result in poor color performance due to color mixing of individual OLED sub-pixels rendering duo-stack structures not practical for color displays. We took on this challenge and introduced our ColorMax technology, which controls the color mixing among the sub-pixels in a duo-stack OLED architecture. The ColorMax technology now enables a much wider color in it of up to 115% sRGB, which is recognized as a very significant breakthrough.

We believe our innovative approach is volume manufacturable and cost competitor. It is a huge achievement for the OLED microdisplays. As an important step in opening up the market for expanded use of AR/VR. Our view of the market is that the long-awaited adoption AR/VR system is finally beginning to come. As we said, these systems are being adopted first in defense, followed by industrial enterprise and consumer application. Almost all our defense programs are related to AR/VR applications. As VR and AR continue to gain traction in this new remote world, we feel we are very well positioned to meet this growing demand. Our technology and products have been aiming for these AR/VR applications and solutions.

In short, we are making great progress in executing our strategy and in showing our performance. The market conditions are favorable, and we are very well positioned to capitalize in our Q4 and beyond. We are very excited about our future. Finally, I would like to, once again, thank our Kopin employees, who are continuing working through these unprecedented target and are the reason of Kopin's growing success.

Now I'll turn this call to Richard.

Thank you, John. Turning to our financial results. Product revenues for the third quarter ended September 26, 2020, were $6.5 million compared with $5 million for the third quarter September 28, 2019, a 31% increase year-over-year. Funded research, development and all other types of revenue were $3 million for the third quarter September 26, 2020, compared with $1.2 million for the third quarter ended September 28, 2019, an increase of over 100%.

Total revenues for Q3 2020 were $9.5 million versus $6.1 million the prior year. Cost of goods sold for the third quarter of 2020 was $4.8 million or 74% of product revenues compared with $4.7 million or 95% for the third quarter of last year. The significant decrease in cost of product revenues as a percent of net product revenues for the 3 months ended September 26, 2020, as compared to the 3 months ended September 28, 2019, was primarily due to lower material costs, along with improved manufacturing yields and efficiencies gained due to higher sales, which reduced fixed cost per unit at our U.S. plant.

In addition, we are commencing production of certain products, and we experienced higher-than-normal scrap for the first 3 and 9 months of 2019 as compared to the same period of 2020. Combined internal and externally funded R&D expenses in the third quarter of 2020 were $2.7 million compared with $2.4 million for the third quarter of 2019. The higher R&D costs for the third quarter of 2020 as compared to the prior year was a result of an increase in customer-funded R&D expense of approximately $500,000 in support of several development programs.

SG&A expenses were $3.1 million in the third quarter of 2020 compared to $5.1 million in the third quarter of 2019. The decrease was primarily due to lower compensation expenses, including stock-based compensation, bad debt expenses, professional fees, information technology and travel expenses. Other income expense was income of approximately $168,000 for the third quarter of 2020 compared with a loss of $78,000 for the third quarter of 2019.

During the 3 months ended September 26, 2020, we recorded $184,000 of foreign currency gains as compared to $88,000 of foreign currency losses for the 3 months ended September 28, 2019.

Turning to the bottom line. Our net loss attributable to controlling interest for the quarter was approximately $1 million or $0.01 per share compared with a loss of $6.6 million or $0.08 per share in the third quarter of 2019, an 87% improvement.

Kopin's cash and marketable securities were approximately $15.6 million at September 26, 2020, as compared to $21.8 million at December 28, 2019. Net cash provided by operating activities for the third quarter ended September 26, 2020, was approximately $500,000, which was the result of improving operations and managing working capital.

During the third quarter, we had 4 patents granted. Third quarter amounts for depreciation and stock compensation are attached in the table to the Q3 press release. The amounts discussed above are based on current estimates, and listeners should review our Form 10-Q for the third quarter 2020 for any possible changes and additional disclosures.

Operator, we'll now take questions.

(Operator Instructions) We will now take our first question from Glenn Mattson from Ladenburg Thalmann.

Congrats on a great quarter. So first, on the military side, I'm curious, you talked about, John, you mentioned the potential for 3 products in production -- 3 systems in production next year in addition to the 3 you have going now. So can you give us a sense of what you think -- I recognize that these programs will build over time, but what do you think the revenue opportunity on the military side is next year, kind of on a quarterly basis or annual basis when these things have begun to kick in a little bit?

So I'm not sure we want to give guidance today on 2021 revenues. But I can tell you over the next several years, we expect these to go into the $80 million to $100 million range of annual revenues.

Yes. I think, Glenn, this is John Fan speaking. Those programs are all quite sizeable programs. As you all know, when this starts ramping up, at the beginning, it will go slow and then it ramp, just like the other 2 programs we have now. But they are sizeable programs.

Great. And being that its election day, obviously, no one knows the outcome, but what's your confidence that under either administration that these programs would continue to advance the way they've been going?

Well, all I can tell you, right now, for the next 3, 4 months, everything we're doing is for the 2022 budget. 2021 from (inaudible) purposes as well. So not much is going to change. And so -- and literally, by January, most of the 2022 budgets kind of a lot.

I think it is a very good question, Glenn. The defense budget especially are decided a long time before this election, okay? Second is our 10 programs for military defense systems are confirming a long time ago, and we are soul sourced now. It was system that's decided years ago. So today's brand-new programs, which may be coming to line in 5, 10 years from now, those are the programs that can be affected. But weapon systems are decided many, many years ago, and we're soul sourced, we're coming through a very elaborate connection process and testing. So those programs are usually not affected.

Great. That's helpful. And so moving on to the enterprise side, the industrial side, for a lot of reasons, the pandemic ought -- should accelerate demand there, right? Because people can't travel as much. So that was one key drivers for -- on the industrial side, it's kind of like that see what I see, remote maintenance-type of thing. And then on the consumer side, obviously, consumers can no longer go to live event any longer. So maybe there's a lot of brainstorming going on around how to bring a better experience into the home and things like that. And obviously, the AR/VR application would do well for that. So maybe, John, can you just talk about the progress you're seeing if there's like a big period of innovation going on now that maybe will help spur that segment in the next 12 to 18 months?

Yes. It's a very interesting phenomenon going out, all this remote learning, as remote -- working from home. We see a lot of traffic, in fact, I think, increase to us has never been higher. It's come from all sectors, the enterprise sectors as well as the consumer sectors. But I'm must caution when those things get designed into the products, it would take at least a year. Even consumer products will take a year from today to go to products. So those are a little bit further out, but we have never seen as higher traffic current before. So this is all very encouraging. I mean positive things happened in defense.

In a defense world, as I will talk about the defense area, we have more than 10 programs going on and lot of funded programs coming in from all sectors, enterprise sectors, consumer sectors, defense sectors. We're seeing a lot of traffic. And we're here because we provide displays, we provide the optics, we provide the electronics, we provide the assembly, we provide the whole solutions. And people want them right away because of the pool in, they have no time to shop around, they went to the top guy, which we are -- which is us.

And on the industrial side, in particular, the 2019 seems to be like a big year where a lot of people adopted some products and tried to maybe work them into their workflow and things. But 2020 maybe has been a little quieter. So that period of digestion kind of played itself out? And do you expect that to pick back up a little bit in the medium term?

Yes. I think what happen is you still have to -- for every (inaudible), you have to provide values and benefits to users. So there's a lot of software being built and customers are testing fields. And I think -- I mean Rich probably mentioned the last time, many of our customers' customers are making testimonials how well they are coming out. So the return ROI is so much bigger than they expected. So I think those pulling is happening. And I think our release also mentioned, we're seeing actually a significant increase in orders for our customers in the enterprise as well. So this has all led into the whole idea, people are designing, people are using it and people find the benefits are really significant.

Great. Just last thing for me, Rich, just on the gross margin. It's 2 quarters in a row where it's been better than expected. So is that perhaps as a function of the products getting a little more mature and the processes getting a little more advanced? So is that something we should expect kind of these high 40s or so in the total gross margin line?

That's 35% to 40%, that's our goal. And so we've -- obviously, as we go through the experience curve, we're getting smarter and then now that you've got 1 solid unit being built, we're now being able to go out to multiple vendors and qualify more vendors, which allows you more pricing power. So all those things are happening, which are driving gross margin improvements. And we expect that to continue on these programs off to next year.

Yes. Glenn, this is actually important thing. I mean we're trying to say in the text today, but it's not as clear. But I would like to say one more thing is as we go through productions and the larger productions, we found out that especially in a case like gun sight that those assembly have to be really dust free. And because you are taking a display and magnify it with a lens, optics. So all of those are know-how. So we learn now -- once we know our duo, we can get a high yield and you see a very rapid improvement in yield and reduce in cost of goods, like better gross margin. So all those things, I know how they will learn who's become very useful for enterprise and consumer, too.

We'll now take our next question from Kevin Dede from H.C. Wainwright.

So I know that Glenn touched on a lot of these things. I guess maybe I'd look for a little more color. The research and development and obviously, both -- what Rich has specifically talked about in his prepared remarks, but it was up pretty strongly sequentially, and you talked about the 10 programs that you're working on next year, are there any of them specifically that are key drivers of that? And how much of that can you say was on the commercial side versus defense?

So I assume you're talking about the funded R&D revenue, not expense.

Correct, yes.

So in any given quarter, who drives, it changes by programs. So some programs that do a lot of development, then we sent it off to the customer, and we're kind of doing it for a while as they run through their test and of course, then we out -- resource it to another program. So there's no one particular program that's a significantly bigger driver per se than all the rest right now. It just changes month-to-month really based upon where they are in the program and where various resources are coming through. So no, there's no one particular one big guy driver.

Yes. I think, Kevin, I'd like to make a comment is this fund R&D activities really increase now year-to-year over 100%. In fact, it's continuing increasing right now. And a lot of the -- a lot of this increase come from activities from very different sectors, defense and other sectors to develop new advanced microdisplay technologies for AR/VR. So those activities, which in later years will be very useful for us for production. So these are very interesting. I already mentioned in the text. For the first part, I think as I said, we have also funded activities, and those are usually trying to result into designing, which is already designing into production, [better] production, better deals and all these activities right now. Yes.

Okay. The enterprise, industrial revenue was still about 1/3 of the defense revenue, John. But your commentary speaks to growth that's there. And I think it was up, I don't know, a couple of hundred thousand dollars sequentially. Can we just hear a little bit more about the specific products and their use that drove that increase?

Yes. As you well know, Kevin, we've been waiting for this wearable hands-free transformation for years. And what we've noticed is that actually, like we thought, but we never see the waves that way, that the first wave is actually in the defense world. And when you start it, it's one and not 2, but also some 10 programs and more. So we begin to understand when the transformation occurs, it will be (inaudible). In the enterprise world, we've seen some, and we see especially 1 or 2 companies are doing very well. I think the value and benefits are still to be fully recognized. And once they occur, I think it's probably just like defense want to be (inaudible). The consumer world, I'm still looking at it. I think the pace for AR in consumer world, I still think that people are still looking for the whole where the benefits are and how we're going to provide it to the customer.

Okay. So I guess, so not a hockey stick, yes, but a mix...

No, not in the -- well, we expect, not right now, maybe a couple of years right now.

Okay. Okay. But I guess it's a mix of wearables really, I guess, is what you're pointing to in terms of what you're seeing driving the revenues now?

Well, I think it's very interesting. It's not like the revenue growth in defense will be very interesting indeed and is very surprising to us.

Okay. John, you referenced ColorMax in your press release. And I was wondering if that references the dual-stack or the fact that you're just able to, I guess, keep colors from mixing and decreasing that fidelity. What specifically does that refer to in your OLED design?

Yes. See in our situation, especially in AR applications, people would like to have the OLED pretty much brighter than what they have today. So there are 2 ways to solve it. And one, of course, in the webinar, we described it. One is in the direct happening, which are -- it's actually for very small display and very small pixels, it's very, very high -- difficult to manufacture. So what we did is, okay, what if we do double-stack? So instead of one junction, we put two junctions on it. Now we were not the first one who tried it, people tried it and they all failed because in a small microdisplay, the pixels are so small that they begin to talk to each other and cross-talk and the colors fade away.

So what we did is we're doing a wafer in a backplane, some structures in there to control the spreading of -- basically spreading of current between different points. So we did it, voila, the color goes back in very good. But now allows you to go double-stack. Once it's double-stack, it can get much brighter. And in fact, it's not just the fact that, too, like you say, "Oh, okay, double-stack." No, it's already over 5x brighter than single stack. And we think can even go best in that. So this is really our target.

And it has a shocking thing. And I'd say, when we first released it, we were shocked, the world was shocked. And then we actually had webinar to explain why it is. And I think it was absolutely difficult to explain how it works, how can you get double-stacking, instead of getting double, we got more than 5x better. So it's a very significant improvement. And it's true, and that's what we explained to people, it's not through we explain it, and people, they understand it now. And with that, we can go even higher. We think we can go the 30,000 nits. So the whole world with micro on it's different now.

So your -- John, is your 30,000 nit brightness target for year-end next year? Or do you think it might take longer?

Well, that's in development, we need to say it'd take a few years. If you all know, it's not something that has ever been achieved. In fact, 3 months ago, nobody would even say that. Even you say it, people would think, you're crazy. So we'll not say something is possible, but we'll say it will take a few years.

Okay. The -- I know you spoke a little bit, both gentlemen, to the $22.9 million Family Weapon Sight individual follow-on order. How much of that do you think you recognize the balance of this year and next?

I don't think we're going to go into details on a particular program. Our production rates are increasing, but by end of this year, we should probably reach a steady state and should be ratable for the remainder of the period. So will increase a little bit in Q4. And then by the end of this year, we'll probably hit a steady-state run rate, and it will be ratable over the previous 3 quarters -- over the next 3 quarters. The contract is 12 months -- the contract is like 12 months.

Okay. Do you think there is more beyond that? Or do you think the Army switches to something else?

Oh, no. The TWS program that this is replacing is like 10 years. And so we think this has a long life to it.

If I understand correctly -- I'm sorry, John, go ahead.

Go ahead and finish your question before I make a comment. Yes. Go ahead.

Okay. Okay. Yes. So a 10-year life program, if you were to comp it against what it's replacing? And if I remember correctly, went into production about this time last year. Is that true?

Yes. Yes, I think the way -- well, of course, we can learn from what happened last time. Last time TWS program, our total shipment to the customer is around 200,000 units, okay? To give order, of course, we will not say exactly how many units are, is still a very small part of the 200,000 units that we shipped for TWS.

Okay. Okay. But am I right in assuming that FWS-I started about a year ago, I mean, at production? Is that right?

Yes. Yes.

Okay. Okay. I know Glenn asked about gross margin already, Rich, but I'm just -- I guess what I'm wondering is where you think it can go if product revenues nudge a little bit higher, which is sort of where my estimates have been going given your commentary. Or do you start getting pushback from your customers? I'm wondering if they pretty much are stuck with their -- will you see a yield improvement? And you'll be able to recognize that as production levels increase, but do you start getting some pushback from some of your customers at all?

Well, as John said, we're still sourcing these programs, these are competitively big programs. And so we did it. And neither the -- in most cases, neither the government nor the customer has any right to ask us about our cost anything like that. So assuming that it's competitively bid and the government agrees to the price, what we can make on it, we can make on it.

Yes. Those programs, Kevin, those military defense programs and maybe, in some cases, enterprise go in some way. The customer knows they're not making any money when you first start because you use low, your learning curve is so big. So the investment. So as the investment goes, later on, it turns into some harvesting, they actually wanted to be able to do some harvesting so they can support the next program. So everybody understood is that even now at the beginning you lose money, and then later on your trial will be covered, some of them. So we're going through this harvesting period on this program right now.

Okay. I guess it's a good way to look at it. I really appreciate it. Rich, last question for me. You mentioned currency gains. I'm just kind of wondering, I know it's inconsequential, but I'm just sort of wondering how that happened in your other income.

A lot of -- yes, it's Europe. U.S. dollar against the British pound in our ForthDD subsidiary.

Okay. All right. Listen, you didn't speak too much about this. And I guess it will be interesting just to get my arms sort of around how you're handling your employees. I mean, I know that you're really careful in manufacturing location in Massachusetts. I'm just sort of wondering how you're handling safety for some of your other manufacturing sites given the pandemic.

Well, yes. I mean in all our sites, we've implemented CDC-required procedures, and we've also implemented our own common sense, and knock on wood, we've had no issues at all. In FDD, in Scotland, the government is a little bit more heavy handed. So they -- as we mentioned in Q2, they were shut down for some time, I believe it was in April, and then they were allowed to come back online. But otherwise, really has not been an issue. Just common sense approach is we -- if it came to Kopin today, we've done a lot as far as we've made the environment as best as possible non-touch, employees just walk in and log in. And now everything is done on app using their smartphone. That's how they check in and out. We changed the flow of the building. We socially distanced all the tables in the cafeteria so everyone's 6 feet apart, no more than 1 person at table. All in all, all the things the folks have done. Certain elevators or other -- excuse me, stairwells are up, other stairwells are down, so on and so forth.

And then, of course, you look at our clean room, and we have the benefit, in fact, that we have a Class 100 clean room that we run at Class 10, so went fully gown, gloves, masks, and the air has its positive pressure and it flow out of the floor through the ceiling and make a [far] so on and so forth. Our clean room is a big benefit to vis-à-vis most companies. And our Scottish facility also is done in a clean room environment -- so all of that has really contributed to our success so far. Talk on that again.

Are you considering like taking employees temperatures kind of the way they do in restaurants here in San Francisco?

No. We did look into it. Obviously, we tell employees, if you don't feel well, if there's any issue, don't come to work. We had it somewhat of -- a couple of people that were nervous last week. We set them off, get tested, they were fine. So no, we haven't gone through the temperature taking step. We've looked at it. But -- and again, even in the clean room, we separate workers, similar to what they're doing to schools as far as having the cohorts. And so if someone did get skilled to be contributed -- confined to a certain number of people and so on.

Okay. Congratulations on the results.

We will now take our next question in the queue. This comes from Jeff Bernstein from Cowen.

Congratulations, first off, on the positive cash flow from operations. And it seems like you're on a positive track here. Do you think we're going to be free cash flow positive for 2021?

Correct. We expect to peak break exit 2021 breakeven cash flow positive. I don't want to say for the whole year right now.

Okay. Great. And I apologize, I don't have the best connection, so I think I might have missed a couple of things. I wanted to just make sure, you said the FWS-I follow on order, $22.9 million, was that on top of $33 million already awarded? Or did that total $33 million with what was already awarded?

$33 million is a total. It includes the $22 million.

Got you. Okay. So that's it. All right. And then I want to make sure you were talking about the externally funded R&D and that it's not just military. So you have some commercial customers who are actually paying some money for you to do R&D?

Yes.

Great. And then I wanted you to touch on Forth Dimension and what's going on with 3D Machine Vision. I think Chinese economy seems to be rebounding at the big end market. What are we looking forward to hear in the next 12 months?

So with ForthDD, very closely aligned with the capital equipment market. And that has been down. And so it's probably -- it's looking at our portfolio of products. It's showing weakness, particularly to the automobile industry rebounds. But the other issue is that the customers are being very tight on their forecast. Backlog is not as big as it normally is because I think there were concerns about a possible second spike in COVID. So sitting here today, our backlog is not as big it was this time last year and the forecast we're getting are more conservative. So it's really tied to capital market, and it's following the same trends. The other place that there is some COVID impact is on public safety because municipal budgets and where those are. But offsetting those are increases in the wearables and in defense and some of the other programs.

Got you. Okay. And then -- so can you just remind us who are the current customers for AR in the commercial space?

So as you know that we're working with the 3 big Chinese foundries. And so we really can't talk about who their customers are.

Yes. I think it's also clear for the enterprise world, as you well know, RealWear definitely we announced one. Google Glass, we announced one. So there's the usual suspect. And there are obviously a lot of traffic right now. So we're [on pet] to talk about, yes.

So you're saying you have some additional customers that are customers of the Chinese foundries?

Yes. The Chinese is very interesting [well] . And Richard touched upon that. They definitely has recovered a lot more than here, and there are a lot of activities. But let's face it, we cannot go there. I'm not on there for almost a year. So a lot of things, we try to not say too much about that because I don't have this face-to-face. We are people that have not gone there for a year. So they seem to recover. There's not quite a lot of activity. And how they're going to sell-through and everything we are more cautious about until we go there with our staff.

Okay. And then ColorMax, is that in those foundries now? Is that being produced on a scale basis? Or is it just a prototype? Or where are we on that, the anode technology?

ColorMax is manufacturable. In fact, we are manufacturing them and people are using it and displays are coming out from them and customers are sampling the machine now.

That's terrific. That's just great, guys. And then just to beat up one more time on the gross margin. So the incremental gross margins have been crazy, they're 90% this quarter. So are you telling us that new military programs will come in with lower margins that kind of tamp that down? Or are there some reversals from some prior written off inventory or something that's helping that incremental gross margin right now?

Yes. So I think it's a combination of anything that you mentioned. So the first couple of quarters of 2019, were artificially low because of FWS-I was just really getting going, and we had a lot of scrap associated with design changes and so on and so forth. And so now it's hitting its stride, and we're continuing to make improvements, both in how we manufacture. So our yields are going up and being able to get the lower pricing for materials by having multiple vendors and so on.

So knock on wood, FWS-I has been a nice move right now and doing well. F-35 is in a nice, steady state, and we continue to make improvements on the yield. F-35 is really just a display sale. So it's really just manufacturing efficiencies. And then next year, as John indicated, some of these new products will come on, and they will have lower gross margins that are ultimately steady state, but the sheer volume of having these additional programs is going to suck up more fixed cost per unit over the whole broad base. And so we think that will ultimately increase the margins on everything. It helps us continue to grow towards our goal of 35% to 40%.

That's great. Okay. And then, Rich, did you say for some of the new programs, it was a total of $80 million of potential revenues or something next year? I missed that.

I was talking 3, 4 years out.

We'll now take our next question from Patrick Metcalf from I-bankers Direct.

Congratulations not only on a great quarter, cash flow positive, but the military contract you guys announced last quarter that went unrecognized, unappreciated. Very thankful for that. And I'm just very excited.

Secondly, I want to ask you about double-stack. John, last quarter, you told, I believe, Jeffrey, last quarter on the conference call that no one will be doing a couple stack in a year. That being said, I've always viewed you as a competitor to other OLED players. But to me, today, after the white paper and the webinar teaching, you're almost agnostic to me where you can supply the wafers to as many fabs as you want. Is your architecture similar in nature to Sony, to BOE, to LG, to Samsung? Can you give me some color on how you see yourself being agnostic or someone as a competitor to these type of players in the marketplace? I have a follow-up question after that.

I tried to understand what is correct. I think it's very -- I mean, obviously, you're less mass, I'm trying to understand the meaning of your call, that question.

Our wafers, we have 2 business models. One is providing the bad plane, the wafer -- silicon wafer, which already has a lot of design inside, a lot of modules. And then we now put in a ColorMax structure on the wafer. And the way we do our wafer is such that we can provide to any foundries who does on the deposition, they can depart on that. And with very little difficultly, you should be able to benefit from the ColorMax structure and get very good results on used stack.

Doing that, we're obviously working with foundries, and if you say it's only another people, if they use our ColorMax wafers, they will benefit if they do double-stack. Remember, nobody in the world right now really, really cannot reduce that yet. Except now, our foundry and us are beginning to sample our samples now for design in. So we actually -- yes, it is getting into early sampling right now, yes, with ColorMax. So I think people [work through] find out, this is really a shocking result into the year.

Okay. Yes. Because the reason why I ask that is, because COVID has come unexpectedly. We've had AR/VR Tier 1 players in our hopper, in our pipeline. And I'm thinking if you have now found double-stack where numerous parties have not reached double-stack. If they're found, they're found. Maybe these fabs will come to us quicker because the Tier 1s and COVID want to push these products out the door faster. And Kopin now has a display, double-stacked, 5x brighter, more power efficient. And I believe you should be able to win business that people don't even think that you could be in. Is that possible?

It's a possible result of what we wish for. And I think it's very interesting. For the VR case, you may not need such a high brightness, that doesn't matter because you can certainly turn the power down and people have much lower power consumption and much longer lifetime. So either way, when you make the display efficient is always good. So yes, people begin to recognize it. And then the wearable, you don't want to carry too much battery on your body. So all these are all benefits. So we just see.

But remember, things take time to go to full protection, people go and try it. And by time you see product out a year later. So we're not going to see an immediate large revenue growth from these activities for these sometime out. Right now, current growth is going to be for our [some] defense project, which has been around. We are working with them for years and how they're going to production. So those are the revenue growth and then the rest of them will come a year, 2 years from now.

Okay. Great. And then lastly, John, this goes to Rich, I guess. You guys have 4 equity stakes in Lenovo New Vision, RealWear, SOLOS and HMDmd the way I see it. And they all contain licensing agreements. I'd like to know, are there any new developments or updates on these investments? Because the analysts initiated coverage on us, but they never talk about our off-balance sheet assets for these things that I think represent a lot more value than some of our competitors. So I'd like to know if you guys can just add a little bit more color on these equity stakes. How you it? Anything you can add that could bring some value out in our stock because the equity, I think, doesn't represent these off-balance sheet assets, if you will?

Yes. Just one correction, HMDmd, we do not have an equity stake in it. But we are working with them. Lenovo continues to make progress. We get their financial statements, and we mark-to-market the investment as needed. SOLOS is a new company, launching a new product, obviously. They're dealing with COVID over in China. And I think you really have talked to RealWear about how they're doing. But I think they put out in a press to indicate that they're having -- they're being pretty bullish right now.

There are no more questions in the queue at this time. I'd like to pass back to the room.

Thank you very much for joining us this morning, and we look forward to talk to you again in the next quarter. Stay safe. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.