Q4 2020 eMagin Corp Earnings Call
[music].
Good morning, and welcome to the imagine corporations fourth quarter and full year 2020 earnings conference call.
Please note. This event is being recorded after management's prepared remarks, there will be a question and answer session I will now.
Ill turn the conference over to Mark Koch.
<unk> acting CFO. Please go ahead.
Yeah.
Thank you and good morning, everyone welcome to imagine its fourth quarter and full year 2020 earnings Conference call. Please note that during today's call. We may make forward looking statements as defined in the private Securities Litigation Reform Act of 1995 day.
These forward looking statements are based on the company's current expectations projections and beliefs and are subject to a number of risks and uncertainties. Such statements may include references to projections of future revenue plans for product development and production income.
<unk> ability to ramp up production, the company's ability to reduce its cost structure future contracts and agreements product benefits operations future financing liquidity and capital resources as well as statements containing words like believe expect plan target et cetera.
You should not place undue reliance on these forward looking statements because they involve known and unknown risks uncertainties and other factors that are in some cases beyond our control.
Please refer to our earnings release for the fourth quarter of 2020, along with the company's filings with the Securities and Exchange Commission for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements. We undertake no obligation to update or revise.
Any forward looking statements to reflect future events or circumstances.
During this call. We will also refer to adjusted EBITDA, a non-GAAP financial measure to provide additional information to investors.
A reconciliation of adjusted EBITDA to net income, which is the most directly comparable GAAP financial measure is provided in the press release that we issued this morning.
Non-GAAP financial measures such as adjusted EBITDA are not meant to be considered in isolation or as a substitute for GAAP financial measures and financial statements.
That I will turn the call over to our CEO Andrew Sculley.
Thank you Mark and Hello, everyone.
Thank you for joining us today, we hope that you your loved ones and work colleagues continue to stay safe.
On today's call I will provide some key takeaways from our quarterly and full year results and provide color regarding our end markets.
Technological advances in equipment schedule, Mark will then discuss our consolidated results in greater detail.
In 2020, thanks to the courage and tireless efforts of our employees. We've moved forward on several initiatives, while increasing revenues.
Despite the unfavorable conditions brought on by the pandemic.
As Youll recall last year, we announced the award of more than $39 million in government funding for the purchase of factory equipment to protect and enhance our ability to manufacture and our Hopewell junction facility.
And we are proud to be the sole U S manufacturer of OLED micro displays we greatly appreciate the support of the U S military and helping to protect our vital U S production line.
As well as the U S manufacturing jobs that we provide.
In December we signed a long term lease and increased our manufacturing footprint by more than 25% to accommodate the new equipment and clean room funded by the U S Department of defense.
Furthermore, we are hiring additional engineers to improve our technical.
Technical capabilities, and increasing R&D investment in our direct patterning or <unk> technology.
Which in the near term should drive more contract revenue.
Our proprietary DPP technology greatly enhances laid out but relative to competing products that require color filters with white OLED.
Our road map targets full color displays in excess of 28000 nits brightness by mid 2023.
With an intermediate brightness up 10000 net this year. This intermediate target brightness is approximately 20 times brighter than our current full color OLED micro displays.
Combining our roadmap for high brightness and the government funding, we secured for equipment, we expect to enhance our technological edge and manufacturing capabilities.
Part of our customer needs.
As we announced earlier this month, we were granted a new patent that relates to the apparatus and method for direct patterning of an organic material.
We continue to extend our technological leadership.
And brilliant full color OLED displays with our portfolio of 18, foundational DPT patents and utility applications for OLED patterning processes and equipment.
Turning to bookings in the fourth quarter, we had strong bookings of $8 $3 million, which led to a 22% increase in our backlog from the third quarter of 2020.
We received significant orders from night vision eye care and veterinary customers and as of the end of 2020, our total backlog of open orders was $12 $2 million.
In addition to strong bookings under the continuing programs, we received orders for 10, new programs in the fourth quarter.
Including thermal sites thermal imaging glasses, and automotive manufacturing monitoring.
At the same time, we supplied sole source displays under the enhanced night vision Goggle binocular program as it continues to ramp to volume along with other key military programs worldwide.
Overall, we continue to see strong interest in our high brightness <unk> technology and believe it is the best display solution for VR applications, we are making steady progress with our <unk> technology and have developed and tested the color OLED device stacks consistent.
With the 10000 candela per meter squared goal I mentioned earlier.
These stacks will be used in direct patterning of the prototype displays by Q3 of this year.
Our <unk> technology directly pattern, the OLED color stacks for the micro display.
Future DPT roadmaps milestones can make use of tandem or double OLED structures per each color.
Along with other improvements that we believe will enable us to stay ahead of the competition and providing the highest brightness displays to the marketplace.
Moreover, our OLED micro displays will satisfy the brightness contrast speed and resolution.
Needed for AR and VR headsets.
We expect our consumer contract revenue will continue in 2021, as we work with customers on continued development and scalability of our <unk> technology to serve the consumer AR VR markets.
In parallel with our <unk> efforts, we continue to advance the state of the art micro displays that utilize white OLED with color filters in.
In the fourth quarter, we significantly advanced development efforts related to our <unk> technology, which will give customers a sizable boost in luminance and our lifetime over their current imagine displays.
And we shipped early samples to key customers.
We expect to qualify initial products in the first half of 2021.
Nominal luminance of 1500 candela per meter squared with a roadmap to even brighter color filter based displays to follow we feel confident.
That further improvements in this technology will be manufacturer of ball in volume in the near term and serve as a bridge to <unk> technology as that continues to mature.
With that I'll turn the call over to Mark.
Thank you Andrew before I discuss our fourth quarter and full year 2020 results for the period ending December 31, 2020, I'd like to provide you with some key takeaways.
First quarter revenues were $7 7 million compared with $7 3 million in the prior year period.
Contract revenues were $1 5 million compared with zero point $5 million a year ago, reflecting continued <unk> development work for a tier one consumer company.
Fourth quarter 2020 display sales totaled $6 2 million compared with sales of $6 8 million a year ago, reflecting the timing of certain orders with large military customers.
Full year revenues increased to 29 4 million compared with $26 7 million for 2019, reflecting increases in both product and contract revenue.
Higher contract revenues of $4 4 million in 2020, primarily reflected development work for a tier one consumer company for an advanced display design and proof of concept for our consumer AR VR device.
Drilling down to margins.
Gross margin for the fourth quarter was 70% on gross profit of $1 3 million compared to a gross margin of 37% on gross profit of $2 7 million in the year ago period.
The decrease in gross margins was a result of lower revenues and lower production and absorption of fixed costs into inventory due to equipment issues and repair delays related to COVID-19 travel restrictions.
However, we expect to recovery in yields in 2021. Thanks. Your arrival of a key vendor technician plus the contributions of new equipment purchased through our government grants.
For full year 2020, gross margin was 22% compared with 25% in 2019.
The decrease was a result of issues related to the pandemic, including employee absences stricter cleaning requirements and the repair delays I mentioned.
Turning to expenses.
Operating expenses for the fourth quarter of 2020, including R&D expenses were $3 6 million compared to $2 8 million in the year ago period.
Operating expenses as a percentage of sales were 47% in the fourth quarter of 2020, compared with 38% in a year ago period.
Part of the increase was attributed to higher R&D expenses, including additional head count and internal costs related to the development of our DPP and ex LCD displays.
SG&A expenses were also higher in the fourth quarter versus the year ago period, due primarily to increased legal costs related to our consumer contract work along with the arbitration of a dispute with a former contract manufacturer.
We expect to see a reduction in these legal costs going forward.
For full year 2020, operating expenses, including R&D expenses were $13 3 million compared with $12 3 million in 2019. The majority of the increase was due to higher legal cost and planned investment in R&D expenses for D. P D and <unk> development.
Along with improvements through our manufacturing process.
Operating loss for the fourth quarter of 2020 was $2 4 million compared with zero point $1 million in the year ago period.
The result was mainly due to a decrease in non military revenues production equipment issues legal fees plus increased investment in R&D.
Net loss for the fourth quarter of 2020 was $3 7 billion or five cents per share compared with a loss of zero point $2 million or zero per share in the year ago period.
Excluding the impact of the non cash change in the fair value of our warrant liability net loss for the fourth quarter of 2020 was <unk> <unk> per share versus zero per share in the year ago fourth quarter.
Operating loss for full year, 2020 was $6 9 million versus $5 6 billion from 2019 net loss for 2020 was $11 5 million or 19 cents per diluted share. This compares to net loss of $4 3 million or nine cents per diluted share.
For 2019, excluding the impact of the change in the fair value of the warrant liability net loss for full year 2020 was <unk> 11 per share versus a net loss of <unk> 12 per share in 2019.
Adjusted EBITDA for the fourth quarter of 2020 was negative $1 7 million compared with zero point $4 million in the year ago period.
For full year 2020, adjusted EBITDA was negative $4 4 million compared with a negative $3 1 billion for 2019.
Turning to the balance sheet.
As of December 31, 2020, the company had cash and cash equivalents of $8 3 million compared with $3 5 million at December 31, 2019.
As of year end 2020, the company had working capital of $12 1 billion, while borrowings and availability under our ABL facility were one nine and $2 1 billion respectively.
During the quarter, we applied for forgiveness of $1 9 million in PPP funding under the SBA loan program.
Regarding our new equipment in early January we took delivery of $1 1 billion of wafer inspection equipment, which was the first purchased under our $39 1 million and U S government funding water to imagine to enhance its manufacturing capabilities.
Only U S provider of OLED micro displays.
Lastly, as of December 31, 2020, the company's backlog of orders Shippable within 12 months was $10 9 million compared with a backlog of $11 7 million as of December 31, 2019.
With that we will open the call for questions. Operator. Please go ahead.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We asked them about posing your question you. Please pick up your handset if listening on speaker phone to provide optimum sound quality. Once again. Please press star one on your phone if you have a question at this time.
On the first question is coming from Kevin D D. Kevin Your line is live please announce your affiliation and pose your question.
Hi, It's Kevin D. G. Good morning, with H C Wainwright.
Andrew.
Thanks for taking my call.
Hi, Marc could you guys just let me know about the a little bit more color. Please on the 10 new programs are those.
Our new brand new are they development programs are you shipping real production orders can you give us a little more insight on that thank.
Thank you yeah, those those 10 new programs are shipping.
Shipping of displays for integrating into existing programs.
And it's not like a development of a new display as we are in the consumer side.
Okay. So they're all D O D related.
Actually no yeah, I think Kevin one of them is also for like a thermal imaging for industrial building heap Leach leakage and another one is for in the factory automation field.
We mentioned the auto automotive manufacturing.
Okay. So does that mean, they're just taking stock parts off off of inventory.
They're taking regular production partner.
Yeah, Okay. Okay. Okay.
Yeah, Andrew didn't talk to the F 35 at all and I'm wondering.
Given that there is a little controversy around who's going to share what where and how.
I'm wondering if you think we should still consider imagine shipping production.
For that helmet renovation project this year.
Well the the F 35 is a bin.
And delayed in this case, we're still shipping parts for for testing.
As you know the day Navy helmet is the one that is.
Very interested in what we're doing.
And so we're still working on it.
Okay, Okay fair enough. Thanks.
Could you talk a little bit more about the <unk> development.
How how do you see that technology rivaling D. P D and where are the advantages for you and your customers.
Overtime, Yeah. The advantage is very easy right now because we can do.
Do that in production as we do any display today, whereas as you know the direct patterning is a is an R&D effort now until the new equipment that the government is funding comes in and we can do that day in production as well. So the X L. A is really a bridge to D. P D and I'll just mention that.
As you know the direct patterning eliminates the color filters, which throws away 80 per cent of the life. The light I mean and in that case, you would ask the question, even if I don't need that brightness and I run at 150 nits.
Power advantage will be significantly better because it doesn't throw away 80 per cent of the light and the other thing you have to remember is why isn't the military come to imagine in the first place size weight and power power was a big driver. So D. P. D will be very important when this production equipment is.
In.
Yeah, Kevin just one other thing our BD caller you mentioned, it's the X L. Lee is pin compatible with existing designs. So it's considerably higher brightness 1500 nits or.
Higher nominal <unk> zone it's.
It makes it a nice upgrade for <unk>.
Existing designs existing devices of our customers.
What Mark is saying is in other words, the OLED stack is different and brighter.
Display itself is the same so you just plug it into anything you're using today of our displays and run it.
Okay. Okay.
Drop in replacement than we have been shipping some to selected customers that you have a great deal of interest because of the brightness yeah. I'll just mention one very important customer is is taking samples.
Okay.
Then my standard question Yeah. My standard question for you Andrew is could you run through your <unk>.
Our V. Our customer list again, well actually it's more as the VR customer list.
I know there have been projects that come in and out and I have that you know.
I I appreciate that you've granted me.
<unk> status and figuring that I know these things and I know at one point I've asked you or many points Ive asked you, but unfortunately I.
Lose track of where we are sure though.
So if you wouldn't mind reviewing that fact going to talk about too.
We have here as you know we produced a four K display and actually we have.
But the direct patterning on that now and we will be showing it to its owner in a moment, but also there are many other companies a number of companies interested in that that we've talked to and here. They are interested in high resolution displays for.
And they are.
Displays with high resolution high brightness.
That's in a very important display and we were allowed to demonstrate that displays to another allowed by the owner to demonstrate that display to another company. Another company kicked off a design last year and we've designed that display. So that's another high resolution I can't tell you how high or what it is forgive me.
We designed that last year, it's in the foundry it would come back to us from the foundry in.
Then we will put the OLED <unk> and that'll be in our Q2 and then there are a number of other steps.
The company that is paying for this design will.
Use it as a proof of concept for our <unk>.
Advanced device.
In this company.
Very interested in the device and we also have a an effort going on as you know to.
Demonstrates the scalability of our direct patterning and work together.
With a consumer company.
Get them mass production partner.
Okay.
Thanks, gentlemen, I'll I'll hop back in the queue, otherwise I'll just keep going.
One other one we did have a as you know in the past we had a an effort and did a licensing agreement with a company we've talked to that company again, they are very interested in.
When when our D. P D has a mass production partner.
So there's three I mentioned.
Three okay. Three in total Gotcha hoes are three real things that are going on now and the other things as I mentioned there are a number of companies who have come to us and talk to us about the specs and what they need and can we do it et cetera.
So when you say three real things going on you actually mean that there is money changing hands and contracts signed.
The one is a is a licensing agreement, which until we have mass production partner there would be no money.
The one obviously you can look at our numbers you can see there's a lot of money from that one.
And the other one we owe the demonstration of the display.
The four K.
Okay. Okay.
Thanks, again, gentlemen, appreciate the color and thanks for taking my question.
Thanks, Kevin.
Thank you once again, ladies and gentlemen, if there are any further questions. Please press star one on your phone at this time.
And there were no. Other we did have a question come in we have a follow up coming from Kevin D Day, Kevin Your line is less.
Okay.
I just thought I'd hand over the range so.
Thanks for taking me back.
You mentioned.
I think increase in and head count can you speak to the.
Opex affect of that a little bit vis vis what you are what you reported this quarter and how we should think about it.
During the current year.
Well, it's it's a modest Ah <unk>.
Increase of Kevin There were one or two people. We also added a person a.
A program manager to manage the.
The government funding.
$39 million, which we didn't talk about and we're also.
Looking at some people some yield improvement employees as well.
So we're.
So it's a modest increase some of the head count also would be funded by the titled titled Free programs.
So you know as we're bringing in the new equipment over the next few years were made.
Making a real effort to maximize the return on that.
Again quite significant for us.
We've done a lot with.
It's a relatively small base of capital equipment or a book value was $9 million and now with the government. We're looking at you know over 39 billion in capital equipment.
So we're quite.
Quite excited about that and making sure we have the right resources to put that to productive use.
So will that include bark expanding the facilities and.
In Hopewell.
Yeah. So we did.
Where we expanded our footprint about 25 per cent, although we did get a we did get some good concessions from the landlords who are rent.
The increased very modestly and that doesn't include another 8000 square foot of clean room space.
And we you know we.
Went out 10 years. So we have you know.
Ample.
Ample space, we don't have to worry about obviously would be very difficult to move a business of this of the sky. So weird.
We have.
Plenty of protection for our for equipment and room to room to house the new.
<unk> title III in Ipass equipment.
I also mentioned that the.
OLED equipment will be capable of producing every display we produced a day plus <unk>.
<unk> real production of direct patterning. So that's an outstanding addition.
How will that help you on the volume side, Andrew will you have two separate lines now for all that detail.
We have two tools today and this will be a third tool. The one can be devoted to R&D because the smaller tool can be devoted to R&D. So yes, absolutely we will have more capacity.
And just think of it. This way. This this tool is has more capacity than the.
The one bigger one we have today.
So it would be okay.
And be able to produce every product we do today.
Do you have a timeline on a full implementation for that.
We like to be cautious, we think where it'll be sooner than that but we're setting up and running in 2023, that's the idea, but it'll be here earlier, and we will be quantifying it and Kevin that's where the D. V. D tools other tools are coming online throughout that period, we already had a.
It was a million dollar piece of testing equipment, we took delivery in that.
It to be fully qualified and in June in New York.
It does in other pieces of key you know from Cui.
For a process that will like automated.
Our Oh.
Failure prone equipment improve our yields.
The particles so.
Getting quite a significant upgrade and.
We have a plan and analyze the expected yield improvements.
As these come up as these come online.
Again, the idea is greater throughput.
And greater yield and the equipment as Mark said comes in.
It came in last year, one piece this year and 2022, the only as a long tent pole as the new OLED machine.
Okay. Okay was there anything specific there.
During the regular production runs in the December quarter that.
I dunno hindered yield at all Oh, that's not a we had one issue that we solved a due to the great work of the team.
Under a mouse a direction one thing that worked very very well and then we simply had a because the COVID-19, we couldnt get the.
Person here, we needed to help fix a particular tool and that was announced the large OLED machine that we have now so that was an issue for us so that we didn't build enough inventory.
We did ship to our customers and.
There's very little.
Okay. So do you is your.
Is your key Guy on board now Andrew So we Shouldnt expect that through March.
A key Guy is an on board in March is from a different country. So that's part of the problem. He said he came here in March and we're.
We're going much much better now.
Okay.
Remember the discussion Andrew about working with our with our foundry partner.
On a V. Our display in mass production can can you speak to the progress there or where that project is.
Well, we do have a foundry partner for the <unk> display and the other display we're making very important foundry partner and.
And there are they are working as hard as we are to make sure. This works out.
<unk> is a very good one.
And it's okay. So.
I think that that agreement has been reached and do you believe that they'll be able to generate the scale that you might need to satisfy.
Consumer demand.
They have the capability to make the wafers for consumer demand and they're very interested in doing this.
Would they also do D P D on site.
I'm sorry, what did you say, Kevin Yeah, I apologize Andrew.
They also be doing a direct pattern deposition I'm, sorry, I know they there would not be doing the direct patterning remember I mentioned that we're working with a particular company and actually theres more interested in making sure we have a mass production partner.
Okay. Okay.
Alright, gentlemen.
Let me just I went through I went through my second list [laughter]. Thanks, very much one other thing Kevin it's much easier to get in mass production partner with a.
Consumer Electronics company, who wants to buy the volumes standing next to you and that's the idea we're going to do that together.
Wow, Okay. Okay concept comes out well, they're going to sit right next to us.
Right right makes sense, absolutely makes sense okay. Thank you.
Thank you Kevin.
Thank you and there were no more questions in the queue at this time.
Okay, well, let me, let me say a few things just in a market and say a few things as well first of all I appreciate all of you on them.
Line, we have a lot of people we have some follow ups with you. So we'll answer more questions offline.
And the.
Employees have done a very nice job on the Covid side, we've gotten some great progress U S government with $39 million. This will be an enormous advantage to our.
Our production in terms of throughput and yield and the that program is going well, we are on time and unscheduled and on budget and that's unusual sometimes we're told for these are U S government programs from the D. O D. But we are moving forward with it and we're very happy about the X L.
It's performing very well.
Again, one very important customer and a number of another a number of others are using it. So this will be a great step forward for us with white with color filter.
In the consumer direct patterning efforts are a very important to us and going well at this time.
Okay. Thank you very much thank you.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
Thank you.
Yeah.