Kopin - Earnings Call - Q4 2020
March 2, 2021
Transcript
Speaker 0
Good day, and welcome to the Kopin Corporation Fourth Quarter and Full Year twenty twenty 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 Schneider. Please go ahead, sir.
Speaker 1
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, includes our sales activity and technology development. I'll go through the fourth quarter results at a high level. John will conclude our prepared remarks, and then we'll be happy to take your questions.
I'd like to remind everyone that during today's call, place on Tuesday, 03/02/2021, we will make the 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 ks and other documents filed with the Securities and Exchange Commission. 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.
Speaker 2
Thank you for joining us to discuss our fourth quarter and twenty twenty 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 of 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 twenty twenty revenue growth was particularly strong, going to 60% from a year ago to 13,900,000.0. We also made great progress in streamline our cost structure, along with increasing our product use and production efficiency, resulting in a net income of $1,300,000 for the 2020.
We are very proud of this achievement. While the company worked hard to achieve these wonderful results, Our focus is on the longer term. As demonstrated by a target increase in R and D spending, which we believe will position the company well for the coming era of AR and VR. This could be once in a decade of current, a radical transformation for handheld devices to a hands free devices. Now let's back to a more detailed discussion about this.
Our business was strong across multiple segments. And again, led by our defense product revenues, which increased 112% in the 2020 compared with the 2019. This less significant increase was driven by our two production programs. The display sub assembly system for the FWSI civil weapon sight system and display for f 35 fighter jet program. As announced in September 2020, we were awarded a 22,900,000 follow-up contract for the FWSI program with shipments scheduled through the third quarter of this year.
We expect these two production programs will continue to generate strong revenue in the coming year. We also are on track this year to transition three 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 this program will provide accelerated growth momentum for 2022 and beyond. Our active pipeline of development programs includes in using our advanced display products, the armored vehicle targeting systems, rotary wing aircraft type helmet, automatic a semi automatic rifle base scope and targeting system among other applications.
These programs are related to ARBR and are all using our advanced microdisplay. And also increasingly utilizing our sophisticated optical system, electronics, and dust free assemblies. We believe we're 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 three d metrology applications. The ability to collaborate with remote experts is part of it, and we are seeing increasing activities in December.
For example, in q four, we announced that EverStick as a European company has designed a microdisplay optical modules for its smart glass product. For three d metrology application, our unique ferroelectric LCOS microdisplays are very suited for industrial three d automatic optical inspection, which we call which we call AOI equipment. Due to the increasing quality requirements of the complex electronic circuit boards using the coming generation of electric vehicles and five g phones. Two d AOI inspection machines are now being replaced by three d inspection machines. This market is still in its early stages of growth.
Our main competitor in this application is Texas Instrument, DMD, digital micromirror device. With two market leaders, currently have similar market share. We expect both industrial wearable revenue and three d metrology will continue good growth in 2021 and beyond. However, revenues of sales of product for public safety applications were down in the 2020, which we believe was attributable to the negative impact of COVID-nineteen 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 Coping has entered an agreement to develop a specialized precision surgery asset for 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 order first production order and begin shipments of our seven twenty p patent pending two step COLOMAX OLED microdisplay 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 headset. We also announced our Lightning 2.6 k and 2.6 k micro OLED display on chip was incorporated in Panasonic VR class, which was shown in CES two thousand twenty one.
The Panasonic VR class are the worst first high dynamic range capable ultra high definition via the eyeglasses and offering stunning lifelike images. The glasses have a very small form factor. Thanks to our advanced 1.3 inch display. And our proprietary slim pancake optics, strongly developed by three m and Kopin, making them much smaller and wider than the large bulky headset traditionally and currently used for the app. The glasses also feature Panasonic integrated ultra high fidelity audio, which combined with a super high resolution micro OLED display, create a truly amazing amazing standard sensory experience for using for viewing sports, content, or games.
We're very excited about progress and believe all this wins in defense, industrial, medical and consumer ARBR will fuel our growth in 2021 and beyond. Cognizant has always been a big innovation innovation company They are called to continue to be a leader in the next generation microdisplay technology. An example of this is our recent announcement of a multiyear agreement with Jper Display to develop super bright micro LED microdisplay. Jper Display, based in Shanghai, China, is a leader in micro LED display. Upon the collaboration, Geber display will provide the LED wafers and hybrid volume surface on coping design and supplied silicon back and IC wafers.
A more like two k by two k LED one inch diagonal microdisplay. This will be the most advanced micro OLED display in the world. Micro LED display provides a promise of super high brightness microdisplay, especially useful for many AI applications. We install our advanced color max OLED and our micro OLED micro LED displays now being developed will be the key enabler. What we see is the coming wave of ARVR 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, the system that being adopted first in defense, followed by industrial, enterprise, medical, and then customer applications. Almost all of our development programs are related to ARVR applications. While we can make progress in executing our strategy to improve the performance in all aspects of the company, which 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 solid line improvement by still significantly increasing our R and D activities.
In fact, in the fourth quarter, we achieved profitability and generate cash while growing revenue by by 50%. I want to convey we will remain profitable. I want I do wanna convey that we will remain profitable throughout 02/2021. As we are ramping up several new defense production programs, and we continue aggressively you know, to invest in our micro LED 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 strength.
We look for this trend to continue. Now I'll turn the call to Rich to review the financial details. Thank you, John. Beginning with
Speaker 1
the results for the 2020, total revenues were $13,900,000 compared with 8,700,000.0 for the 2019, a 60% increase year over year. Product sales for defense customers increased in the 2020 compared to 2019 due to an increase in shipments of products in the Failure Weapon Site 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 improved manufacturing efficiency.
R and D expense in the 2020 was $4,400,000 compared with $2,700,000 in the 2019, a 65% increase. Funded R and D expense for the 2020 increased 87% as compared to the 2019, primarily due to an increase in the number of defense related contracts we've been awarded. SG and A expenses were $2,400,000 in the 2020 compared to with $4,500,000 in the 2019, a reduction of 47%. SG and A for the 2020 decreased as compared to 2019, primarily due to a decrease of $1,200,000 in professional fees and $500,000 in bad debt expense. Other income was approximately $286,000 in the 2020 as compared to an expense of $3,700,000 in the 2019.
In 2020, we recorded approximately $300,000 of foreign currency gains compared to $200,000 foreign currency gains in 2019. In the 2019, we recorded a noncash $600,000 gain on equity investments, which was offset by an impairment charge of 5,200,000 on an equity investment. Turning to the bottom line, our net income attributable to controlling interest for the quarter was approximately $1,300,000 or $02 per share compared with a loss of $7,300,000 or $09 per share for the 2019. Here are the results for the full year. Total revenues for 2020 were $40,100,000 compared with $29,500,000 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 FWSI program and the Joint Strike Fighter program. FWSI and Joint Strike Fighter revenues increased in 2020 over 2019 by 167139%, respectively. Cost of goods sold for 2020 was 75% of product revenues 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 yields from our manufacturing process. In addition, 2019 was our initial production of FWSI program, and we experienced initial yields low yields on the program.
R and D expense in 2020 was $11,700,000 or 13% decrease as compared with $13,300,000 in 2019. Funded R and D expense for 2020 increased as compared to 2019, primarily due to an increase in the number of expense related contracts we have awarded. Internal R and D expense for 2020 decreased as compared to prior year, primarily due to licensing of certain products and other development programs being curtailed. SG and A expenses were $11,800,000 for 2020, a 45% decrease compared with $21,300,000 for 2019. SG and A for 2020 decreased as compared to 2019, primarily due to a decrease of $1,200,000 in noncash stock based compensation, 2,900,000.0 in professional fees, 1,300,000.0 in bad debt expense, dollars 1,600,000.0 in product promotion and marketing expense and $700,000 in travel related expenses.
Other income expense was income of $361,000 for 2020 as compared with expense of $2,900,000 for 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 $1,400,000 gain on equity investments and an impairment charge of $5,200,000 on an equity investment. Turning to our bottom line. Our net loss attributable to controlling interest for 2020 was approximately $4,400,000 or $05 per share compared with a net loss of $29,500,000 or $0.37 per share for 2019.
10% customers for 2020 were ERS Network Imaging Systems, LLC at 35%, Collins Aerospace at 25%. Fourth quarter and year end amounts of depreciation and stock compensation are attached to the table as of the year end press release. In the 2020, we issued 1,900,000.0 shares of our common stock under our at the market or ATM equity program for $4,000,000 in growth proceeds or $2.05 per share before deducting broker expenses of approximately $100,000 The net proceeds from sale of common shares are used for general corporate purposes, including working capital. In January 2021, we sold 2,400,000.0 shares of common stock for gross fees of $16,000,000 or $6.66 per share for deducting broker expenses paid by us of half a million dollars. 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 ending 12/26/2020 for any possible changes and, of course, additional disclosures. And with that, operator, we'll take questions.
Speaker 0
Thank you. If you'd like to ask a question, you could press star one on your telephone keypad. And our take we'll take our first question from Glenn Napson from Ladenburg Thalmann.
Speaker 3
Hi. Good morning, and thanks for taking the question, and congrats on the results.
Speaker 2
Thank you.
Speaker 3
So curious first on the defense business for the FWSI, you mentioned the $23,000,000 award that's going to ship 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?
Speaker 1
No. I don't think we'll disclose the actual balance due, but we have shipments scheduled through October on it under the current deal.
Speaker 3
Okay. Great. And then as far as the you highlighted three programs that you think are likely to begin ramping in the second half and then beyond. Can you give us a 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?
Speaker 1
Well, as it affects 2021 results, they'll come in, in the second half of the year, and it's going to be low rate initial production. I understand you're asking about the total program, but just to give you the 2021 results. So we're not expecting significant revenues from those programs with the exception of one. One possibly could be meaningful this year, but they'll 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. You know, if you use FWSI as kind of a a benchmark, the dayscope could be significantly bigger, and then the other programs are probably slightly less.
Speaker 2
Yeah. This is Jonathan. I would like to make a comment on this. It's that our programs are really dividing several areas. For the avionics, our f 35 our rotary aircraft, Those pilots helmets are very sophisticated, very expensive.
The performance is quite low. However, for the dayscope or FWSR for soldiers, So their quantities, in many ways, are similar to the quantities for the enterprise applications. They are talking about tens of millions tens of thousands a year. So these are very significant quantities. The price points are a little bit lower, are certainly lower, but volume is very large.
So we have to prepare ourselves to make very, very high quality samples for avionics, also high volume samples for soldiers. And that allows us to learn both sides of equation.
Speaker 3
Great. Thanks for that, John. And then perhaps shifting over to the industrial and consumer side. So you highlighted industrial wearables and three d 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 you know, where there's a consumer I mean, I guess when I look at the Oculus device, I know you're not in that, but, you know, it does feel like that VR headset has made significant inroads with the consumer. What has impressed me the most with it is how many games, how many programs have been written for the device and just in general, 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 and 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?
Speaker 2
Yeah. Correct. Very good question. I I think it's a time to to really outline our strategy as well as what I see in the market right now. The first one using defense, it's all AI and VR related.
They are very rugged. They pay higher price, but they want a high performance. Then we see enterprise. Right? We wear a whole bunch of smart glasses, Google Glass included.
And then we are seeing medical. We are seeing between specialty medical AR process. And people will ask the dealer because, you know, not only that we have good display in electronics and optics, but we also have no economics. But now we're seeing begin to see the replace not replacement, but I would say high end type of Oculus glass. And as far as it good example, the Oculus glass Quest two is a very good device.
I actually amazed how good they are. And they just sell them quite a lot. I think they sold about new units last quarter, fourth quarter. But they have problems too. I mean, they're too heavy, too big.
They have good image, but it shouldn't people want better image. It is pretty fast, but still has latency. Okay. So there are of things out there. And, obviously, it could improve, but I think Panasonic and several other companies now are trying to quantum jump on it.
And that market where you could do a quantum jump, the market will not be a 1,000,000 a quarter. It could be who knows? The number will be very big. And that's what we're targeting now. And I don't think it's that far away.
My prediction is maybe maybe next year, you will see some end of this year, beginning next year. So I definitely plan for that. That would the the game changer will come.
Speaker 3
That's great color, John. Thanks. I'll step back in the queue.
Speaker 0
Alright. And we will take our next question from Kevin Hee from HCW.
Speaker 4
I think the big elephant in the room, John, is and I think I understood you correctly, Regarding what you think cope that you think Copen 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, you know, revenue boundaries on on how you expect that to happen given that most of the new stuff you're speaking to, the three new programs are coming on to bolster second half twenty one revenue?
Speaker 2
Yeah. I will make a few comments. I think I'll leave it to Rich to talk about it. I mean, we have three new program coming in. From the experience we have on the FWSI, which going to really hit stop production last year, 02/2019, actually, and then go to full small full production 02/2020.
They are learning curve to be paid. So we are now putting new equipment and new process in there. Plus, going back to the question that Glenn has, the ARVR adoption cycle, especially for consumer, has been really brought in. We are really talking about mean, it's brought in maybe two, three years because of pandemic. So accordingly, we actually increase our R and D development program to people.
And I think, all these things make it to this year, not entirely certain, but we're feeling pretty much better, continues to get better than last year. And I think Rich should take comment on that, Rich.
Speaker 1
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 the revenue came out was very, very strong. But understand that if look at the P and L, R and D revenue was very strong.
And as we've announced, we have a number of collaborations going on to develop new technologies for 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 of a subcontractor invoices us, we essentially can pass that invoice through to the customer and it 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 half through of revenue from contractors. Now we do get a margin on that number, so we did help profitability inflation.
So that was one of factors that drove our profitability. The rest margin improvement was a result of our efficiency efforts. And again, to John's point, the learning curve on FCF USI 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 makes our results even more impressive that in the pandemic, were able to produce results we were. But we're being cautious. And as John indicated, we are still investing significantly in micro OLED and micro LED because that's where the big money is gonna be in the future.
Speaker 2
Yeah. I think it's important to mention that micro LED is one of the hardest things right now people are pursuing. We obviously are involved with people and some of IND on it. And, know, I think you can we also have many contractors developing these data to put them out.
Speaker 4
Okay, John. Thanks, Rich. Appreciate the color. I apologize for misunderstanding in prepared remarks. Could you dive in a little bit on the yield improvement?
Obviously, it's tied into your commentary regarding FWSI. 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 I think I've lost track of which which technology you're using there.
Speaker 2
Yeah. I I think it's it's a very good question. F w s I is really different from the f for the f 35 program. F 35 program, we currently most of our products deliver is a display. The f w s I is full IPs, basically.
We have display optics. They they automatically do assembly. So we have to go to a whole different type of process, already control, and this unit is all very different. F 35 makes a few thousand a year. Now it's been 10,000 a year for FWSR.
So it's a different type of process we learn. Now the new three programs coming in are very are mostly like FWSR. So we have learned the lessons, but they are different products. And none of them are the same. So the different products, I would be we believe we test.
We're gonna do some learning code today. But we have mastered the process that we have to do the SBI. It's one of the best Dollar credit card.
Speaker 4
Okay. Is SWSI based on LCOS technology? I guess maybe that's the best way to try to get to where I was going.
Speaker 2
Yeah. The AWS side is using our proprietary candidate LTT process.
Speaker 5
Okay.
Speaker 4
Can can you talk a little bit about more sorry, John. A little bit more about JBIRD. Understand micro LED, but what makes you feel what what makes you feel so strongly about that technology emerging as as, you know, maybe the the the foremost in the industry? And how do you see it supplanting, you know, micro OLED?
Speaker 2
It is also very insightful question, Kevin. It looks like the situation right now. Again, this is my personal view. My feeling in the in the ARVR, the first thing to come in the consumer will be VR. The Oculus has to very indicate that.
In the case of VR glass, that the display they need, I can describe what the display people want for the VR, the next generation of VR. It's a micro OLED to be bright, but it looks like it's super bright. It should be extremely fast and to be fast with no latency. And also beautiful color and a big screen and thin. The icon, it can wear on your head.
That part, micro will be perfect. It's perfect. So our micro OLED activity, use that in automatic, is good enough. However, once you go to the ER, if you wanna go outside, you know, so nice, you need much brighter space. And the optics in AR usually not the efficient.
The people are looking at much higher or a higher price. So the color requirement requires the brightness, deep in the margin of what micro OLED can do. So there's a lot of activity because we're now Facebook and everybody now face players of my feet. And the same person leading the the they're based in China, but they are very aggressive. So, you know, we have a different technology, especially with the backplate.
I think this is huge and all the AR and very real. I think for that part of AR, still be the clear consumer with the app that's stuck. Okay.
Speaker 4
That that helps, John.
Speaker 2
Yeah.
Speaker 1
Yeah.
Speaker 4
So so are you at all concerned about I mean, using your backplane ICs in that environment, are you concerned about maintaining control over your your intellectual property?
Speaker 2
Well, as you will know, Kevin, once you make a design IC and process the IC, when you deliver the the design for people to deposit layers on it, there's no way they can really easily do this engineer. It's it's it's a that's why people like to do that. That's why all the foundry system works well. I definitely call call. They designed it, and they in that case, they even get TSMC to process the wafer.
But it's very hard to reverse engineer the design with the stuff.
Speaker 4
Okay. And then can you talk a little bit about
Speaker 2
We only deliver the wafers to any countries, whether it's Asia or to China or Japan. The wafers are already made, already designed by COVID. Right. In in United States. In United States.
We don't even design outside United States.
Speaker 4
Okay. Yeah. No. Thank you for reminding me. I, you know, I I wasn't exactly sure, you know, if you had intended to make the wafers there.
I I get it. So thank you for clarifying. Can can you just give us maybe an indication on how you see that development path going? How how long do you think it's be before you'll have maybe, you know, beta displays that you could ship to customers for test?
Speaker 2
Oh, the LED? Yeah. Correct. So the micro LED is a very interesting thing. I mean, we originally, we thought we took a program.
It take about five years. But our customers and our partners say, no. No. No. We want earlier.
So that's why we increase our activities. In doing so, we actually pass on the functions, which we were thinking about doing it ourselves to partners, which is not the critical, like, but certain things we just pass on to our partner. So this thing might speed it up the whole thing. We'll hopefully prepare it done in about two years or so.
Speaker 4
Wow. Okay. Well, congratulations on that.
Speaker 2
I I think the yeah.
Speaker 4
Sort of
Speaker 3
the the other thing
Speaker 4
is just sort of general demand in within the 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 this year as well?
Speaker 2
We think that so the the the major account we have, which I think we're two people, right, three m, it slows down. They're they're selling mostly domestic, and the municipal budget, obviously, has been hurt. But they predicted it would come back up in the second half. But we've seen other activities now on this the area for other countries and other other companies. So I think this continue to grow, especially 2022 and beyond.
So this is still a very good segment to focus on.
Speaker 4
Okay. I'm gonna give you a break, John. Last question for me. Can you 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, you know, their projections?
Speaker 1
You'd really just contact RealWear to talk about their business.
Speaker 2
They they are very they are very actively in their website and the newsletter. They're all obviously, they're successful right now. And we we we we we have we're so surprised that we know they're very very good right now. We're cheering for them.
Speaker 4
Okay. Fair enough. Thank you very much, gentlemen. I appreciate you entertaining my questions.
Speaker 2
Thank you.
Speaker 0
And we'll take our next question from Dennis Piatryan from Needham and Company.
Speaker 5
I wanted to ask a few on behalf of Raji Gill. So regarding the AR and VR initiatives and progress, are you think you guys had mentioned that the first kind of group of adopters would be industrial, enterprise, and medical. I mean, if you had to pick kind of one out of the three, 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?
Speaker 2
Sorry. I I I can you repeat the question? I I I just wanna make sure I answer exactly right.
Speaker 5
Sure. So I think you 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 one out of those three, 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?
Speaker 2
Okay. So I will answer AR first. Okay? The AR, I I I would say that applications like RealWear Remote Expert is definitely the first one is coming out. And we have software, hardware provide productivity for the workers, especially remote workers.
That one definitely coming in first. The Google Glass is also focused on that. Yeah. As you know, we have to still supply the Google Glass display. The second one, I actually doubt become more and more thinking now.
Maybe it's medical. There's a need there. I couldn't believe how surgeons really desperately want it. So that they'll be a supplier now. There's some FDA kind of requirements there, so we don't know how long this certification process will go.
But the advantage is is definitely there. Okay? So I I that's that's missing. Now for the consumer side, I honestly did not see the the QURA app yet for the consumer until maybe later. Hopefully, Apple will do something for On the VR, it's very clear.
We always have been using that for training. Okay? As you wanna know, military training, pilot training, the radio for and also soldiers training. And also a child is trained for the for the workers. And actually, it's used for education.
A lot of people are using it for education. But my really soft spot is still games games, sports, content, watching the IMAX theater. A dream, a fantasy world. I I think that is a real big console applications after the enterprise and the training and military. So I I really think it is a it is a game changer.
You have you have not been holding your computer in your hand. As you will know, our first product with product last two years twenty years ago is the transistors for cell phones. The cell phone is a handheld computer. I think time for hands free on the head wearable is here, and we were trying to help the second transformation right now. And it has many applications.
You'll you'll love it.
Speaker 5
Great. Is there could you provide a little bit more color on exactly what kind of applications out of the surgeons would you use kind of the AR products for? Is there anything you can talk about more specifically?
Speaker 2
Well, that obviously, I cannot talk about because, obviously, it's a start up working for a major medical company who they already identified. We as we announced last time, a few months ago, we actually do an initial set and they pay and they try on surgeons before we actually identify how to build this product. So you have to go through a lease trial period. And he's a. But I can't talk about it, obviously, for for positive reasons.
Speaker 1
Understood. We can tell you, though what we can tell you, though, is that they in a lot of the medical applications, the doctor is looking literally up at a monitor. And so the idea is to be wearing a a head mounted system where you're looking at the patient and then using the head mounted system to be able to focus on very specific tasks. So they've done a number of studies that say, believe it or not, it actually is good that the doctor is looking at the patient. They find that there's benefits to that.
Speaker 2
Well, I I think, like, all the new technology of this type, it's only the starter will focus on some solutions in mind before you can have one that satisfy everybody. So that medical especially in the medical area, we figured the best way to do is satisfy one seven in medical, which is surgery.
Speaker 5
Understood. Thank you for that. That was helpful. And then I guess the last question that I have is, are you 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?
Speaker 1
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 It really depends on the size of the of the market segment.
Consumer tends to be more of an absolute dollar versus percentage type of situation. So we're you know, you take a lower percentage, the the absolute dollars are much greater.
Speaker 2
And that's the apple. The Apple change in 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, just do a lot of technology and drive investments, and you try several methods. Some of them may not exactly do us succeed, and you repeat repeat again. We designed it for them, and they could market it, and they could get so so it's other company market. We don't wear the same way.
The h m d h m v one is designed in here, and we license to them. And they're very successful. They use our display, use the optics, use our electronics. And I I think it's all very good. It's a win win situation for everybody.
So I wanna make people know that we are not just a display company. We are displays our core, but we now have optics, electronics, ergonomics. And also, we know because of the military reasons, we already know how this headset should be done and how can be the wrong, how can be used and rugged. So everybody many many people come to us,
Speaker 1
and I say, wait. Why didn't
Speaker 2
we just do the whole thing with licenses and we sell it? We said, great. But you have to use our display.
Speaker 5
Got it, John. Thank you for that, sir. And, Richard, just to follow-up really quickly. So so for the r and d or in the license and works, I think that's almost all pure profit, close to a 100% margin on those?
Speaker 2
You broke up a little bit. Could you repeat the question?
Speaker 5
Yes. So just to follow-up on the gross margins. So would R and D and the license and royalties then be almost all pure margin, around 90% plus?
Speaker 1
The royalties is pure profit. There are margins on the R and D contracts. And the margin varies by contract. We try to look for contracts that fit along our technology roadmap. 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 right to what's developed. So, essentially, we're
Speaker 5
getting it funded for free.
Speaker 2
Yeah.
Speaker 5
Got it. Perfect. That's exactly what I was looking for. Thank you, gentlemen.
Speaker 2
Yeah. I Hold on. Go ahead. Yeah. I think with this business model, as we begin, we'll see more people asking us to help them to design the device for them.
So we'll usually have to lower these lower these. And, actually, many times, we even have equities together with selling products to them and also they're sticky. But the government, way. Most of our new programs all have complete eyepieces, maybe even complete device, the whole headset. And, yeah, they're so very, very sticky.
So that's why we are almost also soft now.
Speaker 5
Got it, John. Thank you. Those are all the questions that I had. I will jump back in the queue. Thanks.
Speaker 0
And, again, that's star one to ask a question. And we'll take our next question from Craig Rose from Axione.
Speaker 6
Hello, John. Craig from Axione.
Speaker 5
How what can you tell
Speaker 6
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 pro product in the future?
Speaker 2
Which product you have in mind? We have
Speaker 6
So the the smart glasses. The Solas, the the AR glasses.
Speaker 2
It's actually that's a theme in my heart. I have to say, I've been wearing solos every day, okay, at home. And this generation, the first generation 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 and I I I don't I know I hate to say, I no longer use my Apple AirPods ever since I have it. I have Apple AirPods. I don't use it anymore. So, anyway, that that product is the first generation. It's a test market.
The test market in Asia for a few months the pandemic slowed down slowed them down a few months, but it it come out last summer in in Asia, and they sold 6,000 units. Just test market, and we got a lot of feedback. And which you see the second one, which I can't reveal yet, the second one is a game changer. Nothing like that in the market is gonna be ever like that. We're probably two, three years ahead of everybody.
So I'm very excited about Solos. I think Solos, just like RealWear, our technology spend now, we are understanding the unit and we license Solos. Of course, Solos, regarding a license to them. We own a fair significant equity and and we're cheering for them. You will you will use this product, I tell you.
Actually, the second generation that come out, I think everybody will use it.
Speaker 6
Would we expect the next generation product to have screens, or would it still go along the lines? I mean, I I know you've discussed the idea of baby steps introducing such a new product. So how do you think that moves forward?
Speaker 2
It's a it's a it's a very I mean, remember, our first product was like a screen without display. Right? Because we're at display house with Google Glass and everything. And and then we we learned from how this is good. This is too too aggressive at the beginning.
And we strip it out. And once we do that, we found something that will never occur to us. Actually, you you you hear and you speak three times faster than you can read or type. So voice is is the next screen. So you look at all the product out there, lots of the voice driven now.
And the AI allows you to do that, to search everything. You can buy 80% what you need with voice and it's invisible. So we we say, wow. Soon or later, you will put screen on it, but let's wait for a couple of years and get the get the get the audio right. So, yeah, I I think sooner or later, you may want speaking at a a display where display how soon.
So I think the voice will go on for the next two years.
Speaker 6
Okay. And do you think a Gen two product would be you know, is it a 2021 event, or is it 2022 event?
Speaker 2
In the next couple of months. We will catch the Christmas. Okay.
Speaker 6
And last question. You have a lot of equity interest in companies like RealWear and, you know, the companies that spun off, Lenovo, a bunch of others. Could if 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 are you required to update the value of your shares or your equity interest in that company based on the the newest funding round?
Speaker 1
Yeah. We mark to market the investments and to the extent to do an equity round at arm's length, and it's a real price, and we would update our evaluation.
Speaker 2
Okay. Yeah. I do not go back treasure. In Yeah. I just go back hidden treasure.
Speaker 6
Okay. Alright. Thanks for answering the questions.
Speaker 2
Thank you.
Speaker 0
And it appears there are no further questions at this time.
Speaker 2
Well, thank you very much for joining us today, and we're looking forward for the next meeting with you. Thank you.
Speaker 0
Thank you. And that does conclude today's call. You may now disconnect.