Kopin (NASDAQ:KOPN) Q4 2020 Earnings Call

0:00 Good day and welcome to the Corporation Fourth Quarter and Full Year 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Chief Financial Officer, Rich Schneider. Please go ahead, sir.

0:16 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 strategies for sales activity and technology development. I'll go through the fourth quarter results at a high level. John will conclude in prepared remarks, and they'll be happy to take your questions. I'd like to remind everyone that during today's call taking place on Tuesday, March 2nd, 2021, we were making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on the company's current expectations, projections, beliefs, and estimates, and are subject to a number of risks and uncertainties that could cause actual results to differ materially in those forward-looking statements.

1:04 Potential risks include, but are not limited to, demand for our products, operating results of our subsidiaries, market conditions, and other factors discussed in our most recent annual report on Form 10-K and other documents filed with the Securities Exchange Commission. The company undertakes no obligation to update the forward-looking statements made during today's call. And with that, I'll turn the call over to John. Good morning. Thank you for joining us to discuss our fourth quarter and 2020 results. I want to start by spreading our hope that you and your families continue to stay well and safe during this pandemic time. We are delighted to have finished 2020 with very strong results on both our top and bottom lines.

1:57 The full-year revenue growth of 36% year-over-year and increased efficiencies in our operations. Our four-quarter 2020 revenue growth was particularly strong, going to 60% from a year ago to $13.9 million. We also made great progress. We are very proud of this achievement. While the company worked hard to achieve these wonderful results, Our focus is on the longer term.

3:03 As demonstrated by a topic increase in R&D spending, which we believe will position the company well for the coming era of AR and VR. This could be one single decade of killing, a radical transformation from handheld devices to hand-free devices. Now let's back to a more detailed discussion of our business. Our business was strong across multiple segments and again led by our defense partner revenues which increased 112% in the fourth quarter of 2020 compared with the fourth quarter of 2019.

4:00 This very significant increase was driven by our two production programs. The displays of assembly systems for the SWSI Civil Weapons Site System and display for F-35 fighter jet programs. As announced in September 2020, we were awarded a $22.9 million follow our contracts for the FWSI program with shipments scheduled through the third quarter of this year. We expect these two protection programs will continue to generate strong revenue in the coming years.

4:51 We're also 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 these programs will provide accelerated growth momentum for 2022 and beyond. Our active pipeline of development programs includes in using our advanced spray products in armored vehicle targeting systems, rotary wing aircraft type helmets, automatic and semi-automatic rifles, base scopes, and targeting systems, among other applications.

5:51 These programs are related to ARVR. and are all using our advanced micro-displays and also increasingly utilizing our sophisticated optical systems, 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 that are sales to real wear located in Washington State, along with sales to 3D metrology applications.

6:37 The ability to collaborate with remote experts is growing, and we're seeing increasing activities in December. For example, in Q4, we announced that everything and a European company has designed a micro-display optical module for this smart glass product. For 3D metrology applications, our unique ferroelectric L-course micro-displays are very suited for industrial 3D automatic optical inspection, which we call AOI equipment.

7:27 Due to the increasing quality requirements of the complex electronic circuit boards used in the coming generation of electric vehicles and 5G phones, 2D AOR inspection machines are now being replaced by 3D inspection machines. This market is still in its early stages of growth. Our main competitor in this application is Texas Instruments, EMD, Digital Micro Mirror Device. We're two market leaders currently have similar market shares.

8:17 We expect both industrial wearable revenue and 3D metrology will continue to grow in 2021 and beyond. However, revenues from sales of product for public safety applications were down in the fourth quarter of 2020, which we believe was attributable to the negative impact of COVID-19 on municipal budgets. We expect this segment will recover in the second half of this year. We also recently announced that HMDMD, located in San Diego, California.

9:04 And Coping has entered an agreement to develop a specialized precision surgery headset for a major medical technology company. This is our initial entry into the expanding use of the AR headset for medical applications. In the fourth quarter, who received our production order, first production order, and began shipment of our 720p pattern-pending dual-step ColorMax OLED micro-displays with high brightness, good color fidelity, combined with low power consumption.

9:53 High brightness and color fidelity are critical for high-performance AR displays. We also announced that Lightning 2.6K and 2.6K micro-OLED display on chips was incorporated in Panasonic VR glasses, which were shown at CES 2021. The Panasonic VR glasses are the worst are the first high dynamic range capable ultra high definition Viagra eyeglasses and offering stunning lifelike images.

10:41 The glasses have a very small form factor thanks to our advanced 1.3 inch display and our proprietary thin pancake optics jointly developed by 3M and Cobain. making them much smaller and wider than the large bulky headsets 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-ILED display create a truly amazing sensory experience for viewing sports, content, or games.

11:36 We're very excited about our project and believe all this will be in defense, industrial, medical, and consumer AR, VR will fuel our growth in 2021 and beyond. Copeland has always been a very innovative innovation company. They are called. We continue to be a leader in the next generation of micro-display technology. An example of this is our recent announcement of a multi-year agreement with JPEG Display to develop super-bright monochrome LED micro-displays.

12:23 JPEG Display, based in Shanghai, China, is a leader in micro-LED displays. Upon the collaboration, J-Bird Display will provide the LED wafers and hybrid volume surfaces on coping designs and supplied silicon backplane high-feed wafers, a monolithic 2K by 2K LED 1-inch diagonal micro-display. This will be the most advanced Micro OLED displays in the world. Micro LED displays provide the promise of super high brightness micro displays, especially useful for many AR applications.

13:16 We expect our advanced color maps, OLED and micro OLED, micro LED displays now being developed will be the key enablers or we see as the coming wave of AR and VR products in defense, enterprise, and consumer applications. Coping offers the widest range of leading micro-display technology in the world for AR and VR. As expected, these systems are being adopted further in defense, followed by industrial, enterprise, medical, and then customer applications.

14:02 Almost all of our development programs are related to AR VR applications. When we can make great progress in executing our strategy to improve the performance in all aspects of the company. Rich will cover the financial details of the quarter and the full year 2020. I want to end by sharing how pleased I am to have matched our strong revenue growth with significant bottom-line improvement by still significantly increasing our IND activities. In fact, in the fourth quarter, we achieved possibilities and generated cash while growing revenue by 60%.

14:58 I want to convey, we will remain profitable. I do want to convey that we will remain profitable throughout 2021. As we are ramping up several new defense protection programs, and we continue aggressively to invest in our micro LED and micro OLED displays, as well as advanced optics and specialized electronics. It is very encouraging to see the progress we achieve across the board in our technology, in our operations, and in our financial strength. We look for this trend to continue.

15:46 Now we'll turn the call off to Rich to reveal the financial details.

15:50 Thank you, John. Beginning with the results for the fourth quarter of 2020, total revenues were $13.9 million, compared with 8.7 million in the fourth quarter of 2019, a 60% increase year over year. Product sales for defense customers increased in the fourth quarter of 2020 compared to 2019 due to an increase in shipments of products in the family of weapons sites individual, FWSI program. FWSI 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.

16:44 R&D expense in the fourth quarter of 2020 was $4.4 million compared with $2.7 million in the fourth quarter of 2019, a 65% increase. Funded R&D expense for the fourth quarter of 2020 increased 87% as compared to the fourth quarter of 2019, primarily due to an increase in the number of defense-related contracts we've been awarded. SG&A expenses were $2.4 million in the fourth quarter of 2020 compared with $4.5 million in the fourth quarter of 2019, a reduction of 47%. SG&A for the fourth quarter of 2020 decreased as compared to 2019, primarily due to a decrease of $1.2 million in professional fees and $500,000 in bad debt expense.

17:32 Other incomes were approximately $206,000 in the fourth quarter of 2020 as compared to an expense of $3.7 million in the fourth quarter of 2019. In 2020, we recorded approximately $300,000 of foreign currency gains compared to $200,000 of foreign currency gains in 2019. In the fourth quarter of last fiscal year 2019, we recorded a non-cash $600,000 gain on equity investments, which was offset by an impairment charge of $5.2 million on an equity investment. Turning to the bottom line, our net income material to controlling interest for the quarter was approximately $1.3 million or $0.02 per share, compared with a loss of $7.3 million or $0.09 per share for the fourth quarter of 2019.

18:23 Here are the results for the full year. Total revenues for 2020 were $40.1 million compared with $29.5 million for 2019, a 36% increase. Product sales to defense customers increased in 2020 compared to 2019 due to an increase in shipments of products of the FWSI program and the Joint Strike Fighter program. FWSI and Joint Strike Fighter revenues increased in 2020 over 2019, by 167% and 139% 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.

19:14 In addition, 2019 was our initial production of the FWSI program and we experienced initial low yields on the program. R&D expense in 2020 was $11.7 million or a 13% decrease as compared with $13.3 million in 2019. Funded R&D expense for 2020 increased as compared to 2019, primarily due to an increase in the number of expense related contracts being awarded. Internal R&D expense for 2020 decreased as compared to the prior year, primarily due to licensing of certain products and other development programs being curtailed. SG&A expenses were $11.8 million for 2020, a 45% decrease compared with $21.3 million for 2019.

20:07 SG&A for 2020 decreased as compared to 2019, primarily due to a decrease of $1.2 million in non-cash stock-based compensation. 2.9 million in professional fees, 1.3 million in bad debt expense, 1.6 million in promotion and marketing expense, and $700,000 in travel and related expenses. Other income expense was income of $361,000 for 2020 as compared with expense of $2.9 million 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 non-tax $1.4 million gain on equity investments and an impairment charge of $5.2 million on an equity investment.

21:00 Turning to our bottom line, our net loss in terms of controlling interest for 2020 was approximately $4.4 million, or $0.05 per share, compared with a net loss of $29.5 million, or $0.37 per share, for 2019. 10% customers for 2020 were DRS Network Imaging Systems LLC at 35%, Collins Aerospace at 25%. Fourth quarter and year-end amounts of depreciation and stock compensation are attached to the table at the year-end pressure week. In the fourth quarter of 2020, we issued 1.9 million shares of our common stock under our At the Market or ATM equity program. for $4 million in growth proceeds, or $2.05 per share, before deducting broker expenses of approximately $100,000.

21:54 The net proceeds from sale to common shares are used for general corporate purposes, including working capital. In January of 2021, we sold 2.4 million shares of Common Sock for growth fees of $16 million, or $6.66 per share. Thank you very much. Thank you. If you'd like to ask a question, you could press star 1 on your telephone keypad. Again, if you'd like to ask a question, that's star 1.

22:44 And we'll take our first question from Glenn Napton from Lattenburg, Maryland.

22:51 Hi, good morning, and thanks for taking the question, and congrats on the results. Thank you. So curious first on the defense business for the... For the FWSI, you mentioned the $23 million award that's going to ship through Q3, but 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?

23:20 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.

23:28 Okay, great. And then as far as the, you know, you highlighted three programs that you think are likely to begin, you know, 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, you know, what the general size of that program could be?

23:57 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. So I understand you're asking about the total program, but just 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, if you use FWSI as kind of a benchmark, the date scope could be significantly bigger and then the other programs are probably slightly less.

24:48 John, how would I make a comment on this? Our programs are really divided in several areas. For the avionics, like F-35 or rotary aircraft, those pilot helmets are very sophisticated, very expensive, and the performance is quite low. However, for the date scope or F-35s are for soldiers, so their quantities in many ways are similar to the quantities for the enterprise applications. They are talking about 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 actually prepare ourselves to make very, very high quality samples for avionics.

25:36 Also high volume samples for soldiers. And that allows us to learn both sides of the equation.

25:45 Great. Thanks for that, John. And then perhaps shift it over to the to the industrial consumer side. So you highlighted, you know, industrial wearables and 3D metrology. And, you know, obviously those are, you know, 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 guess when I look at the Oculus device, I know you're not in that, 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 the quality seems to have taken a step up for a bit.

26:35 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 will be a lot of devices coming out and the VR market could really take off from here? Yeah, Glenn, it's a very good question. I think the time to really outline our strategies was what I see in the market right now. If we're using defense, it's all AR and VR related. they are very rugged, they pay a higher price, but they want high performance. Then we see enterprise, real wear and a whole bunch of smart glasses, Google Glass included.

27:20 And then we are seeing medical, we are seeing became specialty medical AR glasses. And people are on superior because you know, not only that we have good display in electronics and optics, but we also know about economics. But now we see, begin to see The replacement, not replacement, but I would say high-end type of Oculus Glass. And I'm sorry this is a good example. The Oculus Glass Quest 2 is a very good device. I'm actually amazed how good they are. And they're selling quite a lot. I think they sold about a million units last quarter, fourth quarter. But they have problems, too. I mean, they're too heavy, too big. It has good image, but people want better image.

28:06 It is pretty fast, but still has latency. Okay, so there are a lot of things that are there. And obviously, they're going to improve. But I think Panasonic and several other companies now are trying to do a quantum jump on it. And that market will, if you do a quantum jump, the market will not be one million and 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 a Maybe next year you will see some end of this year, begin next year. And as far as definitely planning for that, the day change will come.

28:46 That's great, Kyle. Thanks. I'll step back in the queue. All right. And we will take our next question from Kevin from HCW. Good morning, Jens. Thanks for taking my questions. I think the big elephant in the room, John, is and I think I understood you correctly, regarding what you think Copen will be positive for the balance this year. Did I hear that correctly? Could you add some more color to that and maybe give us some revenue boundaries on how you expect that to happen given that Most of the new stuff you're speaking to, the three new programs, are coming on to bolster second half 21 revenue.

29:39 Yeah, I will make a few comments that I didn't leave it to Rich to talk about it. I mean, we have three new programs coming in. From the experience we have on the FWSI, who's going to really stop production last year, 2019 actually, and then go to full production in 2020. They are learning curve to be paid. So we are now putting new equipment and new processes in there. Plus, going back to the question that Glenn has, the ARVR adoption cycle, especially for consumers, has been really brought in. We are really talking about maybe two or three years because of pandemics. So accordingly, we actually increase our R&D development program for people.

30:29 And I think all these things make this year, not entirely certain, but we're feeling to be much better, continue to get better than last year. And I think Rich should take comment on that.

30:42 Yeah, just to clarify, so John indicated that he was not expecting profitability for the year. That's in our forecast right now. Just to shine a little light on Q4, where the revenue came out was very, very strong. But understand that if you look at the P&L, R&D revenue was very strong. And as we've announced, we have a number of collaborations going on to develop new technologies for new products. One of the issues with that is that to the extent that these are customer-funded development programs, and most of them are, to the extent a subcontractor invoices us, we essentially can pass that invoice through to the customer and it shows up as our revenue.

31:31 Since it was year-end, we had a number of vendors who sent in a significant number of invoices. Thank you for joining us. was a result of our efficiency efforts. And again, to John's point, the learning curve on FCFA Westside 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 continue to 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.

32:23 and so which actually does make our results even more impressive that in the pandemic we were able to produce results that were but so 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 going to be in the future. Yeah I think it's important to mention that micro LED is Okay, John, and thanks, Rich. Appreciate the call. I apologize for misunderstanding and prepared remarks. Could you... Could you dive in a little bit on the yield improvement?

33:13 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 on the enterprise side, because I think I've lost track of which technology you're using there. Yeah, I think... This is a very good question. FWSI is really different from the F35 program. F35 program, we find most of our products deliver is a display.

34:00 The FWSI is a full eyepiece, basically. We have display, optics, very, very hermetically still assembly. So we have to go through a whole different type of process, quality control, and these unions are all very different. F35 makes a few thousand a year. Now it will be tens of thousands a year for FWSR. So it's a very different type of process to learn. Now the new free programs coming in are mostly like FWSR. So we have learned lessons, but they are different products. and none of God's things. There's a different product and we believe we can do some learning to pay. So we have mastered the process last year of producing FWSI. It's a wonderful success.

35:00 Okay. Is FWSI based on Elkos technology? I guess maybe that's the best way to trying to get to where I was going. Yeah, FWSI is using our proprietary pandemic LCT process. Okay. Can you talk a little bit about more – sorry, John, a little bit more about Jade Bird? I understand micro-LED, but what makes you feel – or what – What makes you feel so strongly about that technology emerging as maybe the foremost in the industry? And how do you see it supplanting micro-OLED?

35:54 It is also a very insightful question, Kevin. It looks like the situation right now, again, this is my personal view, My feeling in the AR, VR, the first thing to come in the consumer will be VR. The Oculus Quest 2 is already the case there. 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, is micro-OLED to be bright, but they don't have to be super bright, to be extremely fast, and to be fast with no latency. and also beautiful color and a big screen. And see, the eyeglasses can wear on your head.

36:42 That part, micro-on-air would be perfect. It's perfect. So our micro-on-air activities use that and color maps is good enough. I don't know, once you go to AR, especially once you go outside in the sunlight, you need much brighter space. And the optics in AR are usually not that efficient. The people are looking much higher for a high price, especially for food products. So the color requirement is high, the brightness may be at the margin of what microelectronics do. So there's a lot of activity, because we're now Facebooking everybody, now on Facebook, the spread of microelectronics.

37:27 And the same person meeting, they're based in China, but they are very aggressive. So, again, we have a different technology, especially with the backplate. The color of our backplate, I see, all these designs are unique. And so, of course, it's cheaper to purchase. You don't have to give us the LED layers because it's fast. You call it for us. It's a great thing. I think if this succeeds, then all the AI will become very real. I think, for example, I think AI will still be here three years. Okay, that helps, John.

38:17 Yeah. 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? Well, as you all know, Kevin, once you make a design IC and process the IC, when you deliver the design for people to deposit layers on it, there's no way they can really easily reverse engineer. That's why people like to do that. That's why all the founded systems as well. I guess with Nivellia, they design it, and in that case they even sent KFMD to process the wafer because it's very hard to reverse engineer the design once it's done.

39:11 Okay. And then can you talk a little bit about... You always remember the wafers to any country, whether it's Asia, Africa, China or Japan, the wafers are already made, already designed by corporate. Right, right. In the United States. We don't even design outside the United States. Thank you for reminding me. I wasn't exactly sure you had intended to make the wafers there. I get it. Thank you for clarifying. Can you just give us maybe an indication on how you see that development path going? How long do you think it's before you'll have maybe beta displays that you could ship to customers for tests?

40:01 or the LED? Yeah, correct. So the micro-LED is a very interesting thing. I mean, originally we thought the program might take about five years. But our customers and our partners say, no, no, no, we want it earlier. So that's why we increase our activities. In doing so, we actually pass on the functions which we were thinking about doing ourselves to partners, which is not that critical. Like J-Birds, certain things we pass on to our partners. So this, we might speed it up the whole thing. We'll hopefully prepare it in about two years or so. Wow. OK. Well, congratulations on that. I think the other thing is just sort of general demand within the enterprise.

40:51 I mean, you talk to safety being down on a count on municipal budgets. Do you think that's sort of a post-pandemic resurgence? Do you think that doesn't come back until the second half next year? Or, sorry, second half this year as well? We think that the major economy half, which I can really tell people right through here, 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 area for other countries and other companies. So I think this will continue to grow, especially 2022 and beyond. So this is still a very good segment to focus on.

41:49 Okay. I'm going to give you a break, John. Last question for me. Can you talk about some of the end products, the real wear products, and the success that they are having in the end market and how you see their projections.

42:08 Ted, you really should contact RealWear to talk about their business. They are very active in their website and the newsletter. They are obviously very successful right now, and we are so surprised that we know they are good right now. We are cheering for them. Okay, fair enough. Thank you very much, gentlemen. I appreciate you entertaining my questions. Thank you. And if you'd like to ask a question, that's star one. Again, that's star one to ask a question. And we'll take our next question from Dennis Piatian from Mead Human Company.

42:55 Good morning. Thank you for taking my question. I wanted to ask a few on behalf of Roger Gill. So regarding the AR and VR initiatives in progress, I 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? Sorry, can you repeat the question? I just want to make sure I answer it exactly right.

43:28 Sure, so I think you 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. 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? Okay, so I would answer AR first, okay? The AR, I would say that applications like real-world remote experts is definitely the first one that's coming out. And we have software and hardware to provide productivity for the workers, especially remote workers. That one's definitely coming in first.

44:20 Google Glass is also focused on that. As you all know, we have the social supply to Google Glass. It's great. The second one, I actually become more and more thinking about. Maybe it's medical. There's a need there. I couldn't believe how surgeons really desperately want it. So that will be a surprise now. There's some FDA requirements there, so we don't know how long this certification process will go. But the advantage is definitely there. So I guess that makes sense. Now for the consumer side, I honestly did not see the Cura app yet for the consumer until maybe later. Hopefully Apple will do something for us.

45:09 On the VR, it's very clear. We always have been using that for training. As you all know, military training, pilot training is very useful and also soldier training and also adult training for the workers and actually used for education. A lot of people are using it for education. but my really soft spot is still games. Games, sports, content, watching like IMAX theater. A dream, a fantasy world. I think that is a real big consumer application after the enterprise and the training and military. So I really think it is a game changer. You're not holding your computer in your hand. As you all know, our first product, with Prada last two years, about 20 years ago, is the transistors for cell phones.

46:02 The cell phone is a handheld computer. I think time for a hand-free on the head, wearable, is here. And we were trying to help the segment transformation right now. And it has many applications.

46:15 You'll love it. Great. Could you provide a little bit more color on exactly what kind of applications the surgeons would use kind of the AR products for? Is there anything you can talk about more specifically? Well, that obviously I cannot talk about because obviously it's a startup working for a major medical company who we identified as we announced the last time a few months ago. We actually built an initial set and they try on surgeons before we actually identify how to build this product. So he has gone through at least a trial period and he can do this.

47:03 But I can't talk about it, obviously, for proprietary reasons.

47:11 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 head-mounted system where you're looking at the patient and then using the head-mounted system to be able to obviously focus on very specific tasks. So there are a number of studies that say, believe it or not, it actually is good that the doctor is looking at the patient. They find that there's benefits to that. Well, I think like all new technology of this time, you try to start with some functions in mind before you can have one that satisfies everybody.

47:57 So that medical, especially in your medical area, you figure the best way to do is satisfy one thing in the medical, which is surgery.

48:09 Understood. Thank you for that. That was helpful. And then I guess the last question that I have is... Are you able to provide any kind of color on your gross margin profiles by category? So kind of like, you know, which of your categories is above kind of corporate average, which is below, or any kind of details like that?

48:30 Military, when the programs reach steady state historically are 40% or better. Industrials in the mid-30s. and then consumer really can go anywhere. It can go into low 20s and 30s. It really depends on the size of the market segment. Consumer tends to be more of an absolute dollar versus percentage type of situation. So, you know, you take a lower percentage, the absolute dollars are much greater. And that's the Apple. The Apple changing equation. So, it's very interesting. It is still a new area, like the whole area of going from handheld to hands-free. So at the beginning, they do a lot of technology and a lot of investments, and you try several methods. Some of them may not exactly succeed, and you pivot again. But the last five years, you can see the image become clear. And what we're trying to do is, We are not trying to make a final device. Even in the medical surgery, we designed it for them. And they could market it.

49:44 So other companies market it. We don't wear it the same way. The HMV-1 is actually designed in here and licensed to them. And they're very successful. They use our displays, use our optics. These are electronics. I think it's all very good. It's a win-win situation for everybody. So I want to make people know that we are not just a display company. We are displays at home, but we now have optics, electronics, economics, and also we know because of the military reasons, we already know how this headset should be done and how it can be worn, how it can be used and rugged. So everybody, many people come to us and I say, why didn't you just do the whole thing with licenses?

50:33 And we sell it. They say, great, but you have to use our displays.

50:39 Got it, John. Thank you for that. And Richard, just to follow up really quickly, so for the R&D and the licensing work that he could have almost all pure profit, close to 100% margin on those? I'm sorry, you broke up a little bit. Could you repeat the question? Just to follow up on the gross margins, would R&D and the license and royalties then be almost all pure margin, around 90% plus?

51:06 The royalties is pure profit. There are margins on the R&D contracts. The margin varies by contract. We try to look for contracts that fit along our technology roadmap. And so sometimes, you know, as long as the contract is paid 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 getting it funded for free.

51:44 That's perfect. That's exactly what I was looking for. Thank you, gentlemen. All the questions that I have. 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 usually have loyalties, and actually many times we even have equities together with selling products to them, and also they're sticky. With the government, same way. Most of our new programs all have complex eyepieces, maybe even complex devices. Thank you. Those are all the questions that I had. I will jump back in the queue. Thanks. And again, that's star one to ask a question.

52:51 And we'll take our next question from Craig Rose from Axiom. Hello, John. Craig from Axiom. What can you tell us about SOLAS, the progress you've made there, the product that you recently introduced, and then how do you see the trajectory of the advancement to that product in the future? Which product do you have in mind? The smart glasses, the solos, the AR glasses. It actually, it actually be in my heart. I have to say, I've been wearing solos every day at home.

53:38 And this generation, the first generation solos, I use for listening to music, making phone calls, and making Zoom calls. It's very great for Zoom calls. It's very good for phone calls. And I hate to say it, I no longer use my Apple Airpods. Everything's a habit. I have Apple Airpods. I don't use it anymore. So anyway, that product is the first generation. It's a test market. The test marketing in Asia for a few months, the pandemic has slowed down. So I'm very excited about Solos. I think Solos, just like real wear, Our technologies for now, we are understanding the units and we license Solos.

54:51 Of course, Solos, we try to license to them. We have significant equity and we're cheering for them. You will use this product, I tell you. Especially the second generation to come out, I think everybody will use it. Would we expect a next generation product to have screens? or would it still go along the lines? I mean, I know you've discussed the idea of baby steps introducing such a new product. So how do you think that moves forward? It's a very, I mean, remember our first product was at the screen without display, right? And because we're at the display house with Google Glass and everything and then we learned from the Harvard Business School this is too aggressive at the beginning.

55:47 and we strip it out. And once we do that, we found something that never occurred to us. Actually, you hear and you speak three times faster than you can read or type. So voice is the next screen. So you look at all the products out there, a lot of them are all voice driven now. And the AIs, allow you to do that, to search everything. You get by 80% what you need with voice, and it's invisible. So we say, wow, sooner or later you will put a screen on it, but let's wait for a couple of years and get the audio right.

56:34 So, yeah, I think sooner or later you may want to sleep in a display house too. So I think the voice will go on for the next two years. Okay. And do you think a Gen 2 product would be, you know, is it a 2021 event or is it a 2022 event? In the next couple of months. We'll catch Christmas. Okay. And last question. You have a lot of equity interest in companies like RealWear and, you know, the companies have spun off. and a bunch of others. If those companies such as RealWear go out and have funding rounds, are you required to update the value of your shares or your equity interest in that company based on the newest funding round?

57:35 Mark's Market, the investments, and to the extent that we would equity round and it's harm's way and it's a real price, then we would update our evaluation. Okay. Yeah, it's a hidden treasure. Yeah, it's a hidden treasure. Okay. All right. Thanks for answering the questions. Thank you. And it appears there are no further questions at this time. Well, thank you very much for joining us today, and we're looking forward to the next meeting with you. Thank you. Thank you, and that does conclude today's call. You may now disconnect.