Kopin - Earnings Call - Q3 2020
November 3, 2020
Transcript
Speaker 0
Good day, and welcome to the Kopin Corporation Third Quarter twenty twenty Earnings Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Richard Schneider, Chief Financial Officer. Please go ahead.
Speaker 1
Thank you, operator. Welcome, 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 for 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'll have to take your questions.
I would like to remind everyone that during today's call, place on Tuesday, 11/03/2020, we will be making forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, projections, beliefs or 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 ks 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 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're very pleased with many aspects of our business. Our current product sales are increasing.
Our funded development program, Belloq, has never been stronger, and we continue to make major improvements in our product cost and use while maintaining high expense control. In addition, we're making quick strides in our next generation display development. Our total revenue increased 55% compared to the 2019, which represents the fifth straight quarter with double digit year on U. S. Top line growth, excluding our onetime asset sales in quarter three twenty nineteen.
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 for the strength in defense product revenues, which grew 140% year over year. Our two primary production programs are the F-thirty five fighter jet helmet and the FWSI program. In September, we announced that we were awarded a 22,900,000 follow-up follow on contractor for the FWSI thermal weapon site program with deliveries through the 2021. Including this regional order, we have received total orders to date of approximately 33,000,000 for this program.
Let's discuss in the news release announced announcing that contract win. The FWSR program is a clip on thermal weapon site that provides users with the abilities to identify target in the most extreme circumstances. Cooking is the sole source on that contract as it is in F-thirty five. 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 and 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 the strongest lineup in our history. This is a advanced program including use of our product in armored vehicle, parking systems, rotary wing aircraft helmets, soldier weapon base scopes, and other programs.
Three of these defense development programs are expected to start the production next year, heading to our two current production program. 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 first remote and social distance approach to work driven by COVID nineteen has shown the power of wearable technology, and we're seeing accelerated adoption and roll out of AR to enterprises enterprise workforce. We expect the enterprise market AR to continue to gain traction and the ecosystem infrastructure element necessary for the end market such as five g will help to accelerate the mass market for consumer, AR, and VR projects. Coker is already benefiting on the defense and enterprise adoption.
We are and we are ideally positioned to meet those demands of those market with our broad line lineup of microdisplay products and module solutions, including both LCD and OLED microdisplay. In fact, it is important to emphasize here the importance of a module solution. For microdisplay to be used in practice, It must be offered in dust free free module, which consists of sophisticated optics and electronics within a sealed housing. Coping has deep experience in this area, and that's why many customers turn to Coping for their microdisplay solutions. We're also excited about the technical advances in our field stack organic light emitting diodes or OLED microdisplays.
We had the opportunity to highlight this high OLED technical analysis in a recent webinar sponsored by Insight Media, where we shared results of our patent methods to achieve industry leading high brightness on the optical displays. As mentioned in the second quarter, achieving high brightness with low power consumption while maintaining color fidelity has been an obstacle to create ARVI headsets that misuses the climate. In the webinar, we describe our color seven twenty p audio cycle space that emits 7,000 nits of brightness using much lower power than what previously needed to achieve this level of brightness. We also outline 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 use that my OLED microdisplay normally result in poor color performance due to color mixing of the individual OLED duct pixels.
Rendering dual stack structures not practical for color displays. We took on this challenge and introduced our color mix technology, which controls the color mixing amount of episodes in our dual stack on its architecture. The ColorMax technology now enable a much wider color image of up to 115% sRGB, which is recognized as a very significant breakthrough. We believe our innovative approach is more manufacturable and cost competitive. It's a huge achievement for the OLED microdisplay field as an important step in opening up the market for extended use of AR.
Our view of the market is that the long awaited adoption ARVR system is finally beginning to grow. As we stated, these systems are being adopted first in the defense, followed by industrial enterprise and consumer application. Almost all our defense programs are related to ARVR applications. If VR and AR continue to gain gain traction in this new remote world, we feel we are very well positioned to meet the growing demand. Our technology and products have been aiming for this AIR applications and solutions.
In short, we are making great progress in executing our strategy and ensuring our performance. The market conditions are favorable, and we are well positioned to capitalize beyond Q4 and beyond. We are very excited about our future. Finally, I would like to once again thank our Kopin employees for continued working through this unprecedented times 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 09/26/2020, were $6,500,000 compared with $5,000,000 for the September 2839, a 31% increase year over year. Funded research, development and other types of revenue were $3,000,000 for the September, compared with $1,200,000 for the third quarter ended September 2839, an increase of over 100%. Total revenues for Q3 twenty twenty were $9,500,000 versus $6,100,000 the prior year.
Cost of goods sold for the 2020 was $4,800,000 or 74% of product revenues compared with $4,700,000 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 three months ended 09/26/2020, as compared to the three months ended September 2839, 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. Plants. In addition, we are commencing production of certain products and we've spared higher than normal scrap for the first and three nine months of twenty nineteen as compared to the same periods of 2020.
Combined internal and externally funded R and D expenses in the 2020 were $2,700,000 compared with $2,400,000 for the 2019. The higher R and D costs for the 2020 as compared to the prior year was a result of an increase in customer funded R and D expense of approximately $500,000 in support of several development programs. SG and A expenses were $3,100,000 in the 2020 compared to $5,100,000 in the 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 2020 compared with a loss of $78,000 for the 2019.
During the three months ended 09/26/2020, we recorded $184,000 of foreign currency gains as compared to $88,000 of foreign currency losses for the three months ended September 2839. Turning to the bottom line. Our net loss attributable to controlling interest for the quarter was approximately $1,000,000 or $01 per share compared with a loss of $6,600,000 or $08 per share in the 2019, an 87% improvement. Goldman's cash and marketable securities were approximately 15,600,000.0 09/26/2020, as compared to $21,800,000 at December 2839. Net cash provided by operating activities for the third quarter ended 09/26/2020, was approximately 500,000 which was the result of improving operations and managing working capital.
During the third quarter, we had four patents granted. Third quarter amounts of depreciation and stock compensation are attached in the tables 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 twenty twenty for any possible changes and additional disclosures. Operator, we'll now take questions.
Speaker 0
Thank you. We will now take our first question from Glen Matson from Ladenburg Thalmann. Please go ahead. Your line is now open.
Speaker 2
Hi. Thanks for taking the question and congrats on a great quarter. So first on the military side, I'm curious you talked about John, you mentioned the potential for three products in production three systems in production next year in addition to the two 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?
Speaker 1
So I'm not sure we want to give guidance today But I can tell you, over the next several years, we expect these to go into the 80,000,000 to $100,000,000 range of annual revenues. I think, Glenn, this is Jonathan speaking. Those programs are all quite sizable programs. But as you all know, when these start ramping up, at the beginning, it goes slow and then you ramp just like the other two programs we have now.
But they are sizable programs.
Speaker 2
Great. And being that it's 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?
Speaker 1
Well, all I can tell you right now and for the next three, four months, everything we're doing is for the 2022 budget. 2021, for all kinds of purposes, is locked. So not much is going to change. And so literally, by January, most of the 2022 budget is kind of locked. I think it is a very good question, Glenn.
Know, the defense budget especially has decided a long time before this election. Okay? Secondly, our 10 programs are for military defense systems are determined long time ago, and we are so soft now. And this system that decided years ago. So it's very brand new programs, which may be coming online maybe five, ten years from now.
I know the program can be affected, but the weapons systems have decided many, many years ago, and we're so soft. We're already going through a very elaborate collection process and testing. So those are are programs I usually got.
Speaker 2
Great. Helpful. And so moving on to the enterprise side, the industrial
Speaker 3
side, for a lot
Speaker 2
of reasons, this pandemic 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 thing. And then on the consumer side, obviously, consumers can no longer go to live events any longer.
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 VR the ARVR 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 twelve to eighteen months?
Speaker 1
It's a a very a interesting phenomenon going on. All these remote learning and 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, enterprise sectors as well as the consumer sectors. But I must caution when those things get designed into the product, it will take at least a year.
Even consumer products will take a year from today to go into products. So those are a little bit further out, but we have never seen as high a traffic kind of before. So this is very encouraging. Mean, all these things happen in defense. Defense in the defense world, right, as we talk about the defense area, we have more than 10 programs going on and a lot of funded programs coming 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 solution. And and people want it right away because of the pull in. They have no time to shop around. They went to the top guy, which we is us.
Speaker 2
And on the industrial side, in particular, the, you know, 2019 seemed to be like a big year where a lot of people adopted some 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 in the medium term?
Speaker 1
Yeah. I I think what's happening is that you still have to whatever it is, 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 that last time, many of our customers are making testimonials how well they are coming out. So the ROI is so much bigger than they expected.
So I think those pooling is happening. And I think in the end, release also mentioned, we're seeing actually significant increase in orders for our customers in the enterprise world. So this is all leading to the whole idea, these things are designing, people are using it, and people find the benefits are really significant.
Speaker 2
Great. Just last thing for me, Rich, just on the gross margin. It's two quarters in a row where it's been better than unexpected. So is that perhaps as a function of the products getting a little more mature and the process even get a little more advanced. So is that something we should expect kind of these high 40s or so in the total gross margin line?
Speaker 1
That 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 one 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 the next year.
Yes. Actually an important thing. We tried to say it in the text today, but it's not as clear. But I would like to say one more thing is, as we go into projections and the larger projections, we found out that especially in the case like gun sights and the those assembly had to be really dust free and because you're taking a display and magnifier with a lens optics. So all those are know hows that we learn now.
And once we know how to do it, we can get a high yield and you see a very rapid improvement in yield and reduce in cost of goods, better by gross margin. So all those things are no hard to learn because it's become very useful for enterprise and consumer work too.
Speaker 2
Great. Okay, thanks. I'll pass it along. Thank you very much.
Speaker 0
Thank you. We'll now take our next question from Kevin Davy from H. C. Wainwright. Please go ahead.
Your line is now open.
Speaker 4
Thanks. Hi, John, Rich. Thanks for taking my questions.
Speaker 1
Hi, Kevin. Hi. Good morning. So I know that Glenn touched on
Speaker 4
a lot of these things, but I guess maybe I'd look for a little more color. The research and development and obviously, you both well, Rich has specifically talked about it 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?
Speaker 1
So I assume you're talking about the funded R and D revenue, not expense. Correct. So in any given quarter, who drives So some programs, we do a lot of development, then we send it off to the customer, and we're kind of doing it for a while as they run through their tests. And of course, then we allocate resources 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. Think think, Carol, I like to make a comment is that this fund R and D activities really increased now what year to year is over 100%.
In fact, it's continuing increasing right now. And a lot of them a lot of this increase comes from activities from very short different sectors, defense and other sectors, to develop new advanced microdisplay technologies for AR and VR. So those activities, which in later years, will be very useful for us, for productions. So these are very interesting activities I already mentioned in the past. For the first part, I think as I say, we have also funded activities, and those are usually trial results into designing which is already designing into production, better production, better news and all these activities right now.
Speaker 4
The enterprise industrial revenue was still about onethree 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 $100,000 sequentially. Can we just hear a little bit more about the specific products and their use that drove the increase? Yeah.
Speaker 1
Everyone knows, Kevin. We've been waiting for this wearable hands free transformation for years. And what we noticed is that actually it's like 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 not one and not two, but also some 10 programs and more.
So we begin to understand when the transformation occurs, it will like a hockey stick. In the enterprise world, we've seen some and we see especially one or two companies are doing very well. I think their value and benefits are still to be fully recognized. And once they occur, I think it's going to just like defense will be another hockey stick. The consumer world, I'm still looking at it.
I think the case for AR in consumer world, still think that people are still looking for the whole where the benefits are and how we're gonna provide it to the consumer.
Speaker 4
Okay. So I guess still not a hockey stick yet, but a mix No.
Speaker 1
Not hockey stick. Well, we expect that. Not not right now. Maybe a couple years from now.
Speaker 4
Okay. Okay. But I I guess it's a mix of wearables, really, I guess, is what you're what you're pointing to in terms of Yeah. You know, what you're seeing driving the revenues now?
Speaker 1
Well, I think it's very interesting. It's not like the revenue growth in defense would be very interesting indeed. It is very surprising to us.
Speaker 4
Okay. John, you referenced color mattes in 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 in your OLED design?
Speaker 1
Yes. See, at the in in in the OLED, situation, especially in AR applications, people would like to have, the OLED pretty much brighter than what they have today. So there are two ways to solve it. And, well, of course, in the in the webinar, we described it. One is the indirect happening, which is actually for very small display and very small pixels.
It's very, very difficult to manufacture. So what we did is say, okay, why don't we do double stack? So instead of one junction, we put two junctions on it. Now we were not the first one to try that. People tried it, and they all failed because in a small microdisplay, the pixels are so small that 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 the backplate, some structures in there to control the spreading of basically spreading of current between different particles. So we did it and voila, the color goes back in very good. But now it allows people to go double stack. Once it double stack, it can get much brighter. And in fact, it's not just a factor of two, like you say, oh, okay.
Double stack. No. It's already over five times brighter than single stack, and we think it can even go better than that. So this is really our it's kind a shocking thing, and I think when we first released it, we were shocked. The world was shocked, and then we actually have webinar to explain why it is.
I think it was last week, to explain how it works. How can you get double sag instead of getting double o? We got more than five times better. So it's a very significant improvement, and it's true. And that's how we explain to people.
It's not fluke. We explain it and people say, understand it now. And with that, we can go even higher. We can go to 30,000 nits. So the whole world of microRNA is different now.
Speaker 4
So your John, is your 30,000 mid brightness a target for year end next year, or do you think it might take longer?
Speaker 1
Well, that's a development. We we just say it takes a few years. If you will know, we we it's not something that has ever been achieved. In fact, three months ago, nobody would even say that. They even said it, people would think you're you're crazy.
So we're not saying something is possible, but we're saying it would take a few years.
Speaker 2
Okay.
Speaker 1
The I I know
Speaker 4
little bit, both gentlemen, the 22.9 Family Weapon Site individual follow on order.
Speaker 1
How much of that do you
Speaker 4
think you recognize the balance of this year and next?
Speaker 1
I don't think we're going go into details on a particular program. Our production rates are increasing, but by the end of this year, we should probably reach a steady state and should be ratable for the remainder of the period. So we'll 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 three quarters over the next three quarters. But the contract Okay.
For a trial the contract is for trial night.
Speaker 4
Okay.
Speaker 1
Do you think there's
Speaker 4
more beyond that, or do you think the army switches to something else?
Speaker 1
Oh, no. You know, the the PWS program that this is replacing went 10, and so we think this has a long life to it.
Speaker 4
If I if I understand correctly
Speaker 1
I'm sorry, John. Go ahead. Go ahead and finish your question for me to comment. Yeah. Go ahead.
Quote the question. Okay. Okay.
Speaker 4
Yeah. So ten ten year life program, if you were to comp it against what it's replacing. And if I remember correctly, it went into production about this time last year. Is that true?
Speaker 1
Yes. I think the way well, of course, can learn from what happened last time. Last time, TWS program, our total shipment to the customer is around 200,000 units. Okay? So this order, of course, we will not see how exactly how many units are.
It's still a very small part of the 200,000 units that we ship for TWS.
Speaker 4
Okay. Okay. But am am I right in assuming that SWSI started about a year ago? I mean, at production?
Speaker 1
Is is that right? Yeah. Okay. Yep.
Speaker 4
Okay. I know Glenn asked about gross margin already, Rich, but I 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 haven't gone given your commentary. Or do you start getting pushback from your customers? I'm wondering if they pretty much are stuck with their you see the yield improvement
Speaker 1
and you'll
Speaker 4
be able to recognize that as production levels increase, but do you start getting some pushback from some of your customers at all?
Speaker 1
Well, as John said, we're full sourcing these programs. These are competitively bid programs. And so we did it. And neither the in most cases, neither government nor the customer have any right to ask us about our costs and everything 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. In those programs, Kevin, at the military, at the Fed programs, and maybe in some cases, enterprise programs same way, the customer knows that you're not making any money when you first start because they use your your learning curve is so big. So it's the investment. So when the investment goes, later on, it turn into some harvesting. They actually wanted to be able to do some harvesting so it can support the next program.
Program. So everybody understood is that even now, at the beginning, you lose money, and then later on, you'll try to recover some of them. So we're going through this harvesting period on this program right now.
Speaker 4
Okay. I guess it's a good way to look at it. Thank you for the color, John. 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? Yes.
Speaker 1
It's Europe, US dollar against the the British pound in our Fort BD subsidiary. Oh, okay.
Speaker 4
Oh, alright. I listen. You didn't speak too much about this, and and I guess it would be interesting just to get my arm sort of around how you're handling, your employees. I I mean, I 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.
Speaker 1
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 approaches.
If you came to Copen today, we've done a lot as far as we've made the environment as best as possible non touch. Know, toys just walk in and log in, and now everything's done on apps using their smartphone. That's how they check-in and out. We changed the flow of the building. We socially distanced all of the tables in the cafeteria, so everyone's six feet apart, no more than one person at a table.
On and on, all the things that other folks have done, certain elevators are up, other elevators excuse me, stairwells are up, other stairwells are down, so on and so forth. And then of course, get to our clean room and we have the benefit of the fact that we have a Class 100 clean room that we run at Class 10, so it's fully gowned, gloves, masks and the air has its positive pressure laminates flow out of the floor through the ceiling and makeup there, so on and so forth. So our clean room is a big benefit vis a vis most companies. And our Scottish facility also is done in a clean room environment. So so all of that is really considered to us successful part.
Not done. What again? I are
Speaker 4
are you considering, like, taking employees' temperatures kind of the way they do in restaurants here in San Francisco?
Speaker 1
No. We we we did look into it. You know, obviously, we, you know, we tell employees, if you don't feel well, you know, if there's any issue, you know, don't come to work. We had somewhat of a couple of people that were nervous last week. We sent them off to 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, separate workers, similar to what they're doing to schools as far as having them in cohorts. And so if someone did get killed, could be confined to a certain number of people and so on.
Speaker 4
Okay. Well, thank you, Congratulations on the results. And thanks again for taking
Speaker 1
Thank you very much, Kevin.
Speaker 0
Thank you. We'll now take our next question in the queue. This comes from Jeff Bernstein from Cowen. Please go ahead. Your line is now open.
Speaker 5
Hi, good morning. Congratulations, first half, on the positive cash flow from operations. And it seems like you're on a positive track here. Do we think we're going be free cash flow positive for 2021?
Speaker 1
We expect to be break exit 2021 breakeven cash flow positive. I don't want to say for the whole year right now. Okay. Great.
Speaker 5
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 FWSI saw on order 22,900,000. Was was that on top of 33,000,000 already awarded? Or did that total 33,000,000 with what was already awarded?
Speaker 1
33 is the total. Includes the 22. Gotcha. Okay. That's what I thought.
Speaker 5
Alright. And then I wanna make sure you were talking about the externally funded r and 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 and
Speaker 1
d? Yes. Great.
Speaker 5
And then I wanted you to touch on fourth dimension and what's going on with three d machine. The reason I think Chinese economy seems to be rebounding as a big end market. What are we looking forward to here in the next twelve months?
Speaker 1
So with Fort BD, they're 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 until the automobile industry rebounds. 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 as it was this time last year, and the forecast we're getting are more conservative.
So it's really tied to the 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 where those are. Offsetting those are increases in the wearables and in defense and some of the other programs.
Speaker 4
Got you. Okay. And then so can you just remind
Speaker 5
us who are the current customers for AR in the commercial space?
Speaker 1
So so you know that we're working with the three big Chinese foundries. And so I we really can't talk about who their customers are. Yeah. I think it's also clear for the enterprise world. If you will know, RealWear definitely will announce one.
Google Cloud is the announced one. So so that that's the usual suspects, and then, obviously, a lot of traffic right now. So we we go Yes. Right now, please talk about. Yeah.
Speaker 5
So so the but you're saying you have some additional customers that are customers of the Chinese foundries?
Speaker 1
Yeah. Chinese is a very interesting world, which you touched upon that. They definitely has recovered a lot more than here and a lot of activities. But let's face it, we cannot go there. I'm not on there for almost a year.
So so a lot of things, we we try to not say too much about it because I don't have this face to face. We are people that have been out there for a year. So they they seem to recover. There's a lot quite a lot of activity. And how they're sell through and everything, we are more cautious about until we go there with ourselves.
Speaker 5
Okay. And then ColorMax, is that in those foundries now? Is that being produced on a on
Speaker 1
a scale basis, or is it just a prototype?
Speaker 5
Or or or where are we on that, the the analog technology?
Speaker 1
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 them right now. That's terrific. That's just great guys.
Speaker 5
And then just to beat you up one more time on the gross margins. 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? There's some reversals from some prior written off inventory or something that's helping that incremental gross margin right now?
Speaker 1
Yes. So I think it's a combination of everything that you mentioned. So the 2019 were artificially low because of FWSI 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 it, 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, FWSI has been a nice move right now and doing well.
F-thirty five is in a nice steady state, and we continue to make improvements on the yield. F-thirty five 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 growth margins than their ultimate steady state. But the sheer volume of having these additional programs is going to suck up more fixed costs per unit over the whole broad base. And so we think that will ultimately increase the margins on everything and help us continue to grow towards our goal of 35% to 40%.
Speaker 5
That's great. Okay. Then miss, did you say that for some of the new programs, it was a total of 80,000,000 of potential revenues or something next year? I I I missed that.
Speaker 1
No. I I was talking three, four years out. We'll now take our next question
Speaker 0
from Patrick Metcalf from iBankers Direct. Please go ahead. Your line is now open.
Speaker 3
Good morning, guys. 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
Speaker 4
ask you about double stack.
Speaker 3
John, last quarter, you told, I believe, Jeffrey, last quarter on the conference call that no one will be doing double 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 and 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?
Speaker 1
I have a follow-up question after that. I try to understand what what what I think it's a rare I mean, obviously, you're less smart. I'm trying to understand the meaning of your call, that question. Our wafers, we we have two business model. One is providing the the backplane, the wafer, silicon wafer, which already has a lot of design inside, a lot of modules, and then we're now putting a columnar structure on the wafer.
And the way we do our wafer is such that we can provide to any foundry who does all the deposition. They can deposit on it. And with very little difficulty, you should be able to benefit from the ColorMax structure and get very good results on USAC. By doing that, we're obviously working with foundry. And if you say Sony and other people, if they use our ColorMax wafer, they will benefit if they do dual stack.
Remember, nobody in the world right now really, really come out with dual stack yet, except now our foundry and us are beginning to sample our samples now for design in. So we actually yeah. It is getting into early early sampling right now, yeah, with with ColorMed. So I think people will quite soon find out this is really a shocking result, actually. Yeah.
Okay. Yeah. Because the reason why I
Speaker 3
asked that is because COVID has come unexpectedly. We've had ARBR tier one players in our hopper, in our pipeline. And I'm thinking if you have now found DoubleStack where numerous parties have not reached DoubleStack after failing after failing, Maybe these these fabs will come to us quicker because the tier ones in COVID wanna push these products up the door faster. And Copen now has a display double stacked, five times brighter, more power efficient. And I I believe you should be able to win business that people don't even think that you could be in.
Is that possible?
Speaker 1
It's possible. It's also what we wish for. And this is very interesting. For the VR case, you might not need such a high brightness. It doesn't matter because you can really turn the power down, and people have much lower power consumptions and much longer lifetime.
So either way, when you make the display efficient, it's always good. So, yes, people begin to recognize it. And then in the wearable, you don't want to carry too much battery on your body. So all these are our benefits. So we just see.
But remember, things take time to go to full protection. People go and try it. And by the time you see a product out, say, a year later. So we're not going to see an immediate, large revenue growth from these activities for at least some time out. Right now, growth is going to be for our some of our defense projects, which has been around.
We're working with them for years and now they're going to production. So those are the revenue growth. And then the rest of them will come a year, two years from now.
Speaker 3
Okay, great. And then lastly, John, let's go to Rich, guess. You guys have four equity stakes in Lenovo NuVision, RealWear, Solas, and HMD MD, 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 initiate coverage on us, but they never talked 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
Speaker 4
guys can just add a little
Speaker 3
bit more color on these equity stakes, how you see them, 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.
Speaker 1
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.
Speaker 0
There are no more questions in the queue at this time. I'd like to pass back to the room.
Speaker 1
Well, 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.
Speaker 0
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.