Today, welcome to the Kopin Corporation fourth quarter and full year 2020 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Chief Financial Officer, Rich Sneider. Please go ahead, sir.
Thank you, operator. Welcome everyone, and thank you for joining us this morning. John will begin today's call with a discussion of the market environment that we see and our progress in executing our strategy, inclusive of 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 taking place on Tuesday, March 2nd, 2021, we will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on the company's current expectations, projections, beliefs, and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those forward-looking statements.
Potential risks include, but are not limited to, demand for our products, operating results of our subsidiaries, market conditions, and other factors discussed in our most recent annual report on Form 10-K and other documents filed with the Securities and Exchange Commission. The company undertakes no obligation to update the forward-looking statements made during today's call. With that, I'll turn the call over to John.
Good morning. Thank you for joining us to discuss our fourth quarter and 2020 results. I want to start by expressing our hope that you and your families continue to stay well and safe during this pandemic time. We are delighted to have finished 2020 with very strong results on both our top and bottom line, with full-year revenue growth of 36% year-over-year and increased efficiencies in our operations. Our fourth quarter 2020 revenue growth was particularly strong, growing to 60% from a year ago to $13.9 million. We also made great progress in streamlining our cost structure along with increasing our product yields and production efficiency, resulting in a net income of $1.3 million for the fourth quarter of 2020. We are very proud of this achievement.
While the company worked hard to achieve these wonderful results, our focus is on the longer term, as demonstrated by our targeted 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 of the decades currently. A radical transformation for handheld devices to hands-free devices. Now, let's get back to a more detailed discussion of our business. Our business was strong across multiple segments and again led by our defense product revenues, which increased 112% in the fourth quarter of 2020 compared with the fourth quarter of 2019. This very significant increase was driven by our two production programs, the display sub assembly system for the FWS-I Individual Weapon Sight system and display for F-35 fighter jet program.
Now in September 2020, we were awarded a $22.9 million follow-on contract for the FWS-I program, with shipments scheduled through the third quarter of this year. We expect these two production programs will continue to generate strong revenue in the coming years. 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 using our advanced display products in armor vehicle targeting systems, rotary-wing aircraft type helmets, automatic and semi-automatic rifle base scopes and targeting systems, among other applications.
These programs are related to AR/VR and are all using our advanced microdisplays 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, led by sales to RealWear, located in Washington State, along with sales to 3D metrology applications. The ability to collaborate with remote experts is strong, we are seeing increasing activities in this segment. For example, in Q4, we announced that Everysight, as a European company, has designed our microdisplay optical modules for its smart glass product. For 3D metrology applications, our unique ferroelectric LCOS microdisplays are very suited for industrial 3D Automated Optical Inspection, which were called AOI equipment.
Due to the increasing quality requirements of the complex electronic circuit boards used in the coming generation of electric vehicles and 5G phones, 2D AOI inspection machines are now being replaced by 3D inspection machines. This market is still in its early stages of growth. Our main competitor in this application is Texas Instruments' DMD, Digital Micromirror Device. We two market leaders currently have similar market shares. We expect both industrial wearable revenue and 3D metrology will continue good growth in 2021 and beyond. Revenue 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 this year.
We also recently announced that HMDmd, located in San Diego, California, and Kopin, 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 AR headsets for medical applications. In the fourth quarter, we received our first production order and began shipment of our 720p, patent pending, duo-stack ColorMax OLED microdisplays with high brightness, good color fidelity, combined with low power consumption. High brightness and color fidelity are critical for high performance AR, VR, and mixed reality headsets. We also announced our Lightning 2.6k by 2.6k Micro -OLED display on chip was incorporated in Panasonic VR glasses, which were shown in CES 2021. The Panasonic VR glasses are the world's first high dynamic range-capable, ultra-high definition VR eyeglasses, 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, jointly developed by 3M and Kopin, making them much smaller and lighter than the large, bulky headsets traditionally and currently used for VR. The glasses also feature Panasonic integrated ultra-high fidelity audio, which, combined with our super high-resolution Micro-OLED displays, create a truly amazing sensory experience for viewing sports, content, or games. We're very excited about progress and believe all these wins in defense, industrial, medical, and consumer AR/VR will fuel our growth in 2021 and beyond. Kopin has always been a very innovation company at our core. We continue to be a leader in the next generation of microdisplay technology. An example of this is our recent announcement of a multi-year agreement with Jade Bird Display to develop super bright MicroLED microdisplays.
Jade Bird Display, based in Shanghai, China, is a leader in MicroLED displays. Upon the collaboration, Jade Bird Display will provide the LED wafers and hybrid bonding service on Kopin design and supplied silicon backplane IC wafers from our rigid 2K by 2K LED 1-inch diagonal microdisplay. This will be the most advanced Micro-OLED display in the world. MicroLED displays provide the promise of super high brightness microdisplays, especially useful for many AR applications. We expect our advanced ColorMax, OLED and our Micro-OLED, MicroLED displays now being developed will be the key enablers for we see as the coming wave of AR/VR products in defense, enterprise, and consumer applications. Kopin offers the widest range of leading microdisplay technology in the world for AR and VR. As expected, these systems are being adopted first in defense, followed by industrial, enterprise, medical, and then consumer applications.
Almost all of our development programs are related to AR/VR applications. While 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 improvements by still significantly increasing our R&D activities. In fact, in the fourth quarter, we achieved profitability and generated cash while growing revenue by 50%. I want to convey, we will remain profitable. I do want to convey that we will remain profitable throughout 2021, as we are ramping our several new defense production programs. We're continuing 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 have achieved across the board in our technologies, in our operations, and in our financial strength. We look for this trend to continue. It's time to call off to Rich to reveal the financial details.
Thank you, John. Beginning with the results for the fourth quarter of 2020, total revenues were $13.9 million, compared with $8.7 million for the fourth quarter of 2019, a 60% increase year-over-year. Product sales to defense customers increased in the fourth quarter of 2020 compared to 2019 due to an increase in shipments of products in the Family of Weapon Sights-Individual, or FWS-I program. FWS-I revenues increased in 2020 over 2019 by 177%. Cost of sale 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&D expense in the fourth quarter of 2020 was $4.4 million, compared with $2.7 million in the fourth quarter of 2019, a 65% increase.
Funded R&D expense in the fourth quarter of 2020 increased 87% as compared to the fourth quarter of 2019, primarily due to 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 a half a million dollars in bad debt expense. Other income was approximately $286,000 in the fourth quarter of 2020 as compared to an expense of $3.7 million in the fourth quarter of 2019. In 2020, we recorded approximately $300,000 of foreign currency gains compared to $200,000 of foreign currency gains in 2019.
In the fourth quarter of 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 attributable 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. 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 FWS-I program and the Joint Strike Fighter program. FWS-I 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. In addition, 2019 was our initial production of the FWS-I 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 defense-related contracts we awarded. Internal R&D expense for 2020 decreased as compared to the prior year, primarily due to the likes of certain products and other development programs being curtailed. SG&A expenses were $11.8 million for 2020, a 45% decrease compared with $21.3 million for 2019.
SG&A for 2020 decreased as compared to 2019, primarily due to a decrease of $1.2 million in non-cash stock-based compensation, $2.9 million in professional fees, $1.3 million in bad debt expense, $1.6 million in product promotion and marketing expense, and $700,000 in travel and related expenses. Other income expense was income of $361,000 for 2020 as compared with expense of $2.9 million in 2019. In 2020, we recorded $300,000 of foreign currency gains compared with $200,000 of foreign currency gains recorded in 2019. In 2019, we recorded a non-cash $1.4 million gain on equity investments and an impairment charge of $5.2 million on an equity investment. Turning to our bottom line, our net loss attributed to controlling interests for 2020 was approximately $4.4 million or $0.05 per share, compared with a net loss of $29.5 million or $0.37 per share for 2019.
10% customers for 2020 were DRS Network & Imaging Systems, LLC at 35%, Collins Aerospace at 25%. Fourth quarter and year-end amounts for depreciation and stock compensation are attached to the table at the year-end press release. In the fourth quarter of 2020, we issued 1.9 million shares of our common stock under our at-the-market or ATM equity program for $4 million in gross proceeds or $2.05 per share before deducting broker expenses of approximately $100,000. The net proceeds from the sale of common shares are used for general corporate purposes, including working capital. In January 2021, we sold 2.4 million shares of our common stock for gross proceeds of $16 million or $6.66 per share before deducting broker expenses paid by us of $500,000. 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 December 26th, 2020, for any possible changes and, of course, additional disclosures. With that, operator, we'll take questions.
Thank you. If you'd like to ask a question, you can press star one on your telephone keypad. Again, if you'd like to ask a question, that's star one. We'll take our first question from Glenn Mattson from Ladenburg Thalmann.
Hi, good morning, and thanks for taking the question, and congrats on the results.
Thank you.
Curious first on the defense business for the FWS-I, you mentioned the $23 million award that's going to ship through Q3. 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?
I don't think we'll disclose the actual balance due, but we have shipments scheduled through October on it under the current PO.
Okay, great. As far as 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, maybe just refresh us on how big collectively they are. It seems like maybe the DayVAS scope would be the biggest. Can you give us just a reminder of just what the size and what the general size of that program could be?
Well, as it affects 2021 results, they'll come 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 give you the 2021 results. 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. 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 FWS-I as kind of a benchmark, the day scope could be significantly bigger, and then the other programs are probably slightly less.
This is John Fan. I would like to make a comment on this, is that our programs are really divided in several areas. For the avionics, our F-35 or our rotary aircraft, those pilots' helmets are very sophisticated, very expensive, and the performance is quite low. However, for the day scope or FWS-I for soldiers, so their quantities in many ways are similar to the quantities for the enterprise applications. We are talking about tens of millions or tens of thousands a year. These are very significant quantities. The price points are a little bit lower, are certainly lower, but volume is very large. We have to prepare ourselves to make very high-quality samples for avionics, also high volume samples for soldiers. That allows to learn both sides of the equation.
Great. Thanks for that, John. Then, perhaps shifting over to the industrial consumer side. You highlighted industrial wearables and 3D metrology, and obviously, the thought process would be those would come before consumer, right? It does seem like perhaps we're at a moment where there's a consumer. I guess, when I look at the Oculus device, I know you're not in that, but it does feel like that VR headset has made significant inroads with the consumer. What has impressed me the most with it is 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.
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?
Yeah, Glenn, it's a very good question. I think it's a time to really ally our strategy as well as what I see in the market right now. It first was used in defense. It's all AR and VR related. They are very rugged, they pay a higher price, but they want high performance. We see enterprise, like Vuzix and whole bunch of smartglasses, Google Glass included. We are seeing medical. We are seeing between specialty medical AR glasses, and people want to build it because, not only that we have good display in electronics and optics, but we also know about ergonomics. Now we're beginning to see the replacement, not replacement, but I would say high-end type of Oculus. Sorry, this is a good example. The Oculus Quest 2 is a very good device. I'm actually amazed how good they are.
They're selling quite a lot. I think they sold about 1 million units last quarter, fourth quarter. They have problems, too. They are too heavy, too big. It has good image, but people want better image. It is pretty fast but still has latency. There are a lot of things that there, and obviously, they're going to improve, but I think Panasonic and several other companies now are trying to quantum jump on it. That market will, if you do a quantum jump, the market will not be at 1 million a quarter. It could be, who knows? The number will be very big. That's what we're targeting now, and I don't think it's that far away. My prediction is maybe next year you will see some, end of this year, beginning next year.
Panasonic is definitely planning for that the game changer will come.
That's great color, John. Thanks. I'll step back in the queue.
All right. We will take our next question from Kevin Dede, from HCW.
Morning, gents. Thanks for taking my questions. I think the big elephant in the room, John, is, and I think I understood you correctly, regarding that you think Kopin will be positive for the balance of this year. Did I hear that correctly? Could you add some more color to that and maybe give us some revenue boundaries on how you expect that to happen, given that most of the new stuff you're speaking to, the three new programs, are coming on to bolster second half 2021 revenue?
Yeah, only a few comments. I think I'll leave it to Rich to talk about it. I think we have three new programs coming in. From the experience we have on the FWS-I, which going to really start production last year, 2019, actually. Then go to small full production 2020. They are really improved to be paced. We are now putting new commitments and new processes in there. Plus, going back to the question that Glenn has, the AR/VR adoption cycle, especially for consumer, has been really brought in. We are really talking about maybe it's brought in two or three years because of pandemic. Accordingly, we actually increased our R&D development programs to keep pace.
I think all these things make this year not entirely certain, but we're feeling pretty much better, continues to get better than last year. I think Rich should comment on that ratio.
Yeah, just to clarify, John indicated that he was not expecting profitability for the year. That's not in our forecast right now. Just trying a little light on Q4, where the revenue came out was very, very strong. Understand that if you look at the P&L, our R&D revenue was very strong. As we've announced, we have a number of collaborations going on to develop next 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. Essentially, year-end, we had a number of vendors who sent in a significant number of invoices.
Frankly, the revenue was a couple of million dollars higher than we probably would have expected, but that was really just pass-through of revenue from contractors. We do get a margin on that number, so it did help profitability inflation. That was one of the factors that drove our profitability. The rest margin improvement was a result of our efficiency efforts. Again, to John's point, the learning curve on FWS-I tells us to be cautious with the learning curve on these new programs because we are still in a pandemic situation and we still have to continually work with our supply chain. We're not seeing the same type of issues that we saw a year ago, but from time to time, we do get a notice that some supply is slowing down.
Which actually to us makes our results even more impressive, that in the pandemic, we were able to produce the results we were. We're being cautious and as John indicated, we are still investing significantly in Micro-OLED and MicroLED, because that's where the big money's going to be in the future.
Yeah, I think it's important to mention that MicroLED is one of the hottest things right now people are pursuing. We obviously are involved with people and some R&D on it. In addition to that, we also have many sub-contractors developing these programs with different technologies.
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 FWS-I, but I'd like to understand a little bit more about that, and I'd like to understand how you expect that improvement to translate to some of the other programs you're working on, primarily on the enterprise side. I think I've lost track of which technology you're using there.
Yeah, I think it's a very good question. FWS-I is really different from the F-35 program. F-35 program, we currently, most of our products delivered is a display. The FWS-I is a full eyepiece, basically. We have display, optics, and they automatically do assembly. We have to go through a whole different type of process, quality control, and the units are very different. F-35 makes a few thousand a year. Now it will be tens of thousands a year for FWS-I. It's an entire different process we learn. Now, the new three programs coming in are mostly like the FWS-I. We have learned the lessons, but they are different products, and none of them are the same.
The different products, there's going to be some learning curves to pay, but we have mastered the process last year with producing FWS-I with wonderful success, and I'm quite excited.
Okay. Is FWS-I based on LCOS technology? I guess maybe that's the best way to try to get to where I was going.
Yeah. The FWS-I is using our proprietary patented LCOS process.
Okay. Can you talk a little bit about sorry, John, a little bit more about Jade Bird? Understand MicroLED, but what makes you feel so strongly about that technology emerging as maybe the foremost in the industry? How do you see it supplanting Micro-OLED?
It is also a very insightful question, Kevin. Look at the situation right now. Again, this is my personal view. My feeling is that in AR/VR, the first thing to come in the consumer will be VR. The Oculus Quest 2 indicates that. In the case of VR glass, 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 thin, so the eyepiece you can wear on your head. Micro -OLED will be perfect. It's perfect. Our Micro- OLED activity is duo -stack and ColorMax is good enough.
Once you go to the AR, especially once you go outside in the sunlight, you need much brighter display. The optics in AR usually are not that efficient. The people are looking at much higher or a higher brightness, especially for consumer. The color requirement requires the brightness maybe at the margin of what Micro-OLED can improve. There's a lot of activity because now Facebook and everybody is now on pace to catch up MicroLED. The same person leading this, they're based in China, they are very aggressive. We have a different technology, especially with the backplane. The color, our backplane IC. Those are designs are unique, it costs us cheaper to package one compared to LED layer to take less in volume for the wafer.
I think if this succeeds, then all AR will become very real. I think for sure, I think AR will still be the clear consumer with the optics. You need a MicroLED for AR.
Okay. That helps, John.
Yeah.
Yeah. Are you at all concerned about using your backplane ICs in that environment? Are you concerned about maintaining control over your intellectual property?
Well, as you well know, Kevin, once you make a design the 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 foundry system works well. That was the earlier Qualcomm, they design it, and in that case, they even get TSMC to process the wafer. It's very hard to reverse engineer the design once it's done.
Okay. Can you talk a little bit about?
We only deliver the wafers to any countries, whether it's Asia, I think China or Japan. The wafers are already made, already designed by Kopin.
Right.
In the United States. We don't even design outside United States.
Okay. Yeah. No, 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 test?
Of the LED? Yeah.
Correct. Yeah.
The MicroLED is a very interesting thing. Originally, we thought we could get program may take about five years, our customers and our partners say, "No, we want it earlier." That's why we increased our activity. In doing so, we actually passed some of the functions, which we were thinking about doing ourselves, to partners, which is not that critical, like gate, but certain things we just pass on to our partners. This thing might speed it up the whole thing. We'll hopefully get it done in about two years or so.
Wow. Okay. Well, congratulations on that. The other thing is just sort of general demand within the enterprise. You talked to safety being down on account of 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 this year as well?
We think that certainly the major account we have, which I think we already told people, right? 3M, it slows down. They're selling mostly domestic, and the municipal budget obviously has been hurt. They predict that it will come back up in the second half. We're seeing other activities now under this area for other countries and other companies. I think this company will grow, especially 2022 and beyond. This is still a very good segment to focus on. Yeah.
Okay. I'm going to give you a break, John. Last question from me. Can you talk about some of the end products that RealWear is designing and the success that they are having in the end market, and how you see their projections?
Kevin, you really should contact RealWear to talk about their business.
They're very actively in their website and the newsletters. They're obviously very successful right now, and we're so surprised with them. We know they are very good right now. We're cheering for them.
Okay. Fair enough. Thank you very much, gentlemen. I appreciate you entertaining my questions.
Thank you. If you'd like to ask a question, that's star one. Again, that's star one to ask a question. We'll take our next question from Denis Pyatchanin from Needham & Company.
Good morning. Thank you for taking my question. I wanted to ask a few on behalf of our, Raji Gill. Regarding the AR and VR initiatives and progress, you guys had mentioned that the first group of adopters would be industrial, enterprise, and medical. If you had to pick one out of the three, which one do you think would be most likely to be a first adopter? What kind of applications would they use these products for?
Sorry, can you repeat the question? I just want to be sure I answer it exactly right.
Sure. I think you'd mentioned in the press release that in terms of the kind of AR and VR first adopters, in the first group, you would be basically looking at 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?
I will answer AR first. Okay. The AR, I would say that applications like RealWear remote expert is definitely the first one is coming out, and with software, hardware could provide productivity for the workers, especially remote workers. That one definitely coming in first. The Google Glass is also focused on that. As you well know, we are the sole supplier to Google Glass display. The second one, actually, that has become more and more thinking now maybe it's medical. There's a need there. I couldn't believe how surgeons really desperate and want it. That will be a surprise now. There's some FDA kind of requirements there, so we don't know how long the certification process will go. The advantage is definitely there. Okay, I definitely say.
For the consumer side, I honestly still not seeing the killer app yet for the consumer until maybe later. Hopefully, Apple will do something for us. On the VR, it's very clear. We always have been using that for training. Okay? As you well know, military training, pilot training, very useful. Also soldier training, also as well as training for the workers, actually used for education. A lot of people using it for education. My really soft spot is still games. Games, sports, contents, watching like an IMAX theater, a dream, a fantasy world. I think that is the real big consumer applications after the enterprise and the training and military. I really think it is a game changer. You're not holding your computer in hand.
As you well know, our first product last two years ago, 20 years ago, is the transistor for cell phones. The cell phones are a handheld computer. I think time for a hands-free on the head wearable is here, we will try to help the second transformation right now. It has many applications. You'll love it.
Great. Could you provide a little bit more color on exactly what kind of applications the surgeons would use the AR products for? Is there anything you can talk about more specifically?
Well, that obviously, I cannot talk about because obvious it's a startup we're working for. They have major medical company who they are identified, as we announced the last time, a few months ago. We actually built an initial set and a trial of surgeons before we actually identify how to build this product. Yes, gone through at least trial period. If it does it, but I can't talk about it obviously for proprietary reasons.
Understood. Thank you.
What we can tell you, though, is that today, in a lot of the medical applications, the doctor is looking literally up at a monitor. 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. There's a number of studies that say, believe it or not, it actually is good that the doctor is looking at the patient. They find there's benefits to that.
Well, I think like all new technology of this type, you somehow have to start with focus on some functions in mind, before you can have one just satisfy everybody. The medical, especially even medical area, we figure the best way to satisfy one segment of medical, which is surgery.
Understood. Thank you for that. That was helpful. 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? Like, which of your categories is above corporate average, which is below, or any kind of details like that?
Military, when the programs reach steady state, historically are 40% or better. Industrial is in the mid-30s. Consumer really can go anywhere. It can go into low 20s, 30s. It really depends on size of the market segment. Consumer tends to be more of an absolute dollar versus percentage type of situation. You take a lower percentage because the absolute dollars are much greater.
Where's your Apple? The Apple changing equation. It is very interesting. It is still a new area, right? The whole area of going from handheld to hands-free. At the beginning, just do a lot of technology and a lot of investments, and you try several methods. Some of them may not exactly work, succeed, and you'll re-pivot again. The last five years, you can see the image become clear. What we're trying to do is, we're not trying to make a final device. Even in the medical surgery headsets, we design it for them, and they could market it. This other company market, we work the same way. The HMDmd is actually designed in here and we license to them, and they're very successful. They use our display, use our optics, use our electronics. I think it's all very good.
A win-win situation for everybody. I want to let people know that we are not just a display company. We are displays at core, but we now have optics, electronics, ergonomics, and also we know because of the military reasons, we already know how this headset should be done and how it can be worn, how can it be used and rugged. Many people come to us and I say, "Why don't you just build the whole thing, we license it, and we sell it?" They say, "Great, but you have to use our displays."
Got it, John. Thank you for that. Rich, just to follow up really quickly. For the R&D and the license and the royalties, I take it that's almost all pure profit, close to 100% margin on those?
I'm sorry, you broke up a little bit. Could you repeat the question?
Yeah. Just to follow up on the gross margins. Would R&D and the license and royalties then be almost all pure margin, around 90%+?
The royalties is pure profit. There are margins on the R&D contracts and the margin varies by contract. We try to look for contracts that sit along our technology roadmap. Sometimes as long as the contract just pays for itself, that's good enough for us because it's providing valuable technology. In most cases, we retain the technology rights to what's developed, so essentially we're getting it funded for free.
Yeah. Got it. Perfect. That is exactly what I was looking for. Thank you, John. That is all the questions that I had.
I think with this business model, as we begin, we hear more people asking us to help them to design the device for them. We usually have royalties, 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 complete eyepieces, maybe even complete device, the whole headset. They're so very sticky. That's what we are almost all sourced now.
Got it, John. Thank you. Those are all the questions that I had. I will jump back in the queue. Thanks.
Again, that's star one to ask a question. We'll take our next question from Craig Rose from Axiom.
Hello, John. Craig from Axiom. What can you tell us about Solos, the progress you've made there, the product that you recently introduced, and then how do you see the trajectory of the advancement to that product in the future?
Which product you have in mind? We have several.
The smart glasses. The Solos, the AR glasses.
It actually, you hit the nail on my head. I have to say, I've been wearing Solos every day at home. This generation, the first generation of 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. I hate to say it, I no longer use my Apple AirPods ever since I have it. I have Apple AirPods, I don't use it anymore. Anyway, that product is a first generation, is a test market. We test marketed in Asia for a few months. The pandemic slowed them down a few months, but it come out last summer in Asia, and it sold 6,000 units. Just test market, we got a lot of feedback. Wait till you see the second one, which I can't reveal yet.
The second one is a game changer. Nothing like that in the market. It's not going to be ever like that. We're probably two, three years ahead of everybody. I'm very excited about Solos. I think Solos, just like RealWear, our technology is for now, our understanding the unit, and we license Solos, of course. Solos, we're going to license to them. We will have significant equity. We're cheering for them. You will use this product, I tell you. Actually, the second generation to come out, I think everybody will use it.
Would we expect the next generation product to have screens, or would it still go along the lines I know you've discussed the idea of baby steps introducing such a new product? How do you think that moves forward?
Remember, our first product was like a screen without display. Because we're a display house with Google Glass and everything. Then we learned from the Harvard Business School, this is too aggressive at the beginning. We stripped it out. Once we do that, we found something that would never occur to us. Actually, you hear and you speak three times faster than you can read or type. Voice is the next screen. You look at all the product out there, a lot of them are all voice-driven now. The AI allows you to do that, to search everything. You get about 80% what you need with voice, and it's invisible. 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.
Yeah, I think sooner or later, you may want speaking, a display. We're a display house, too. I think the voice will go on for the next two years.
Okay. Do you think a Gen 2 product, is it a 2021 event, or is it a 2022 event?
In the next couple of months. We'll catch the Christmas.
Okay. Last question. You have a lot of equity interest in companies like RealWear and the companies that spun off, Lenovo, a bunch of others. If those companies, such as RealWear, go out and, this is more of an accounting issue, if they go out and have funding rounds, are you required to update the value of your shares or your equity interest in that company based on the newest funding round?
Yeah. We mark-to-market the investments. To the extent they do an equity round and it's arm's length and it's a real price, then we would update our evaluations.
Okay.
Yeah, I think it's some kind of hidden treasure.
Okay. All right. Thanks for answering the questions.
Thank you.
It appears there are no further questions at this time.
Well, thank you very much for joining us today, and we're looking forward for the next meeting with you. Thank you.
Thank you. That does conclude today's call. You may now disconnect.