Q3 2021 eMagin Corp Earnings Call
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Good morning, and welcome to imagine corporations third quarter 2021 earnings conference call.
Please note this event is being recorded.
After management's prepared remarks, there'll be a question and answer session.
I will now turn the conference over to Mark Koch Imagine CFO. Please go ahead.
Thank you and good morning, everyone welcome to imagine <unk> third quarter 2021 earnings conference call.
Before we begin I would like to remind you that in the following prepared remarks and in our Q&A session. We will make statements about expected future results that may be forward looking statements for the purpose of the federal Securities laws. These statements relate to our current expectations estimates and projections.
Not guarantees of future performance they involve.
All of the risks uncertainties and assumptions that are difficult to predict that may not prove to be accurate.
Especially in light of the effects of the current pandemic.
Actual results may vary materially from those expressed or implied by these forward looking statements and we undertake no obligation to update these disclosures.
These forward looking statements should be considered only in conjunction with the detailed information contained in our SEC filings, including the risk factors described in our 2020 annual report on Form 10-K, and our Form 10-Q to be filed later today.
During this call. We will also refer to adjusted EBITDA, a non-GAAP financial measure to provide additional information to investors.
Conciliation 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 our GAAP financial measures and financial statements with 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 and your loved ones and work colleagues are continuing to stay safe.
Today's call I'll provide some key takeaways from our quarterly results and provide color regarding our technological advances and equipment schedule. Mark will then discuss our consolidated results in greater detail.
In the third quarter, we reached a number of important milestones and continue to set the standard for innovation and performance in the micro display industry.
In addition to our proof of concept display work for tier one <unk> customer, we develop that production capability to satisfy demand for our high brightness led displays and created prototypes of what we believe are the world's brightest full color OLED micro displays.
These prototypes micro displays use our patented direct patterning or <unk> technology to fabricate industry, leading combinations of luminance and resolution.
On October 29, we unveiled these displays to an audience of leading OLED industry analyst showcasing their visit full color high resolution performance with a maximum luminance of over 10000 candela per meter squared.
This was at historic moment, not only for imagine, but also for the industry and it positions us as a true disruptor in the OLED micro display space.
Our proprietary DPP technology directly patterns primary RGB color OLED emitters on our silicon back plane, which creates ultra high brightness light output at ultra high resolutions with brilliant colors. This is in stark contrast to competing products that require color filters.
With white, OLED, which sacrifice significant light output that 10000 candela per meter squared or nits full color brightness high resolution high contrast that we achieved is beyond the threshold requirements for fully immersive AR and VR devices.
It will alleviate motion artifacts and helped overcome inefficient optics. According to our customers, even immersive VR headsets for which we have designed high resolution displays require over 10000 candela per meter square this brightness will allow our military.
Harry consumer and commercial customers to implement new and advanced features that to date have not been technically feasible.
This achievement represents a 20 fold improvement over our typical white with color filter excel micro displays.
And the brightness three to four times greater than our new X L. E micro displays by comparison to our D. P. D luminance atypical laptop monitor achieves a brightness of 250 candela per meter squared, while our high end smartphone approaches only a thousand candela per meter squared.
Furthermore, our DVD displays contain more than 2500 individually addressable pixels per inch or PPI, which generate remarkable clarity and resolution compared with typical laptop screens of 330, PPI and OLED smartphone screens of six.
Hundred PPI.
As we continue to advance this technology future D. P. D. Milestones. We will include the addition of tandem OLED structures and other enhancements that will take the performance of our VR headsets and heads up displays to even greater heights, we believe our OLED <unk> technology is ahead today and will remain.
<unk> ahead.
Regarding our other technical achievements this quarter in September we completed the manufacturing qualification process for our high luminance and power efficient X L. Lee displays and began to ramp up production to meet customer demand.
Our current actually displays are qualified at over 1500 candela per meter squared and are already included in a major design with a military customer.
These displays use our existing back plane and are compatible with designs used by many customers and in that way provide an upgrade in luminance levels.
We also completed a medical version of our white color filter OLED display that uses an advanced color filter to render these level of color fidelity required during surgery and other medical procedures.
Also on the third quarter as previously announced we completed the process of designing specifying and ordering equipment to be purchased under our $39 million.
Defense production title III and Ipass funded grants that we were awarded last year.
As of the end of the quarter, we have taken delivery of four pieces of equipment and expanded $12 $2 million in progress payments.
We also completed the design phase and placed an order with the vendor for an advanced production capable <unk> organic deposition tool.
Once delivered and installed this tool should help to improve our yield and throughput and result in qualified production of our full color OLED high brightness <unk> technology.
Overall, we remain on track and on budget with the requirements of these important government grants. Moreover, we're excited to have the support of U S. Senate majority leader, Charles Schumer, who recognizes the importance of our efforts and support of National security priorities and the continued growth of the hub.
<unk> Valley is a hub of technological innovation.
In terms of revenue our third quarter results were mixed with continued display revenue growth in our <unk> program and increased shipments to medical customers.
However, our year over year decrease in total revenue reflected the timing of certain military orders and $1 3 million in shipments that.
Delayed until the fourth quarter due to production issues and unexpected manufacturing tools downtime to address manufacturing throughput and yield issues. We are working with an industrial engineering firm to improve our overall operating effectiveness. In addition, this firm is providing support and our effort.
To obtain the S 9100 quality certification during the first quarter of 2022, we expect these efforts to have a positive impact beginning in the fourth quarter and to be added to the yield and throughput improvement anticipated from the new equipment provided under our title III and I.
The best programs overall.
Overall as of the end of the third quarter, our sales backlog grew to $14 9 million up from $10 3 million at the end of the second quarter, reflecting continued strength in bookings for the military night vision and eye care markets. Additionally, we are experiencing experiencing raw.
Material pricing pressures and are working to manage potential changes in allocation from vendors due to supply chain issues in the semiconductor industry with that I will turn the call over to Mark who will discuss our financials.
Thank you, Andrew and Hello, everyone.
Turning to our Q3 numbers total revenues were $5 8 million compared with $7 3 million reported in the prior year period total revenue consist of both product revenue and contract revenue.
Product revenues for the third quarter were $5 3 million a decrease of $1 7 billion for product revenues of $7 million reported in the prior year period.
The year over year decrease primarily resulted from unexpected downtime experienced with manufacturing equipment, and resulting capacity constraints that delayed one $3 million in display shipments into the fourth quarter.
Contract revenues were 0.5 million compared with 0.3 million reported in the prior year.
<unk> an increase in development at work associated with the contract of a tier one consumer company.
Imagine, it's continuing to work on a proof of concept and anticipates ongoing contract revenue with this customer.
Total gross margin for the third quarter was 10% on gross profit of 0.6 million compared with a gross margin of 23% on gross profit of $1 7 billion in the prior year period.
Year over year decline reflects decreased shipments of displays combined with the impact of lower manufacturing volumes and decrease in period costs capitalized into inventory due to equipment downtime that occurred during the third quarter of 2021.
Operating expenses for the third quarter of 2021, including R&D expenses.
We're at $3 9 million compared with $3 6 million in the prior year period.
Operating expenses as a percentage of sales were 67% in the third quarter of 2021, compared with 49% in the prior year period.
Year over year increase primarily reflects the impact of increased share prices on or calculation of noncash stock compensation expense during the current quarter.
Operating loss for the third quarter of 2021 was $3 3 million compared with an operating loss of $1 9 million in the prior year period, primarily reflecting the decreased gross profit I just mentioned above.
Net income for the third quarter of 2021 was $1 3 million or <unk> <unk> per share.
After adjusting for the $4 7 billion change in the fair value of the warrant liability during the third quarter net loss was $3 7 billion or 0.5 share on a fully diluted basis.
Paired with a loss of $3 5 billion or six cents per share in the prior year period.
Excluding the impact of the $1 8 million change in the fair value of the warrant liability for the prior year's period net loss for the third quarter of 2020 was.
It was $1 7 million or <unk> <unk> per share.
Adjusted EBITDA for the third quarter was negative $2 1 million compared with a negative $1 1 million in the prior year period.
Turning to the balance sheet.
As of September 30 of 2021, the company had cash and cash equivalents of $7 3 million and working capital of $11 1 million.
During the third quarter, the company borrowed $1 6 million under its asset based lending facility.
Arlington availability under the ABL facility were 2 million and $1 9 million, respectively as of September 30th 2021.
With that we will open the call for questions.
Operator, Please go ahead.
Thank you.
Question, you would need to press Star then one on your telephone to.
Withdraw your question. Please press the pound key giving them a star then one to ask a question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Kevin Dede with H C. W. Your line is now open.
Thank you good morning, Andrew Good morning, Thanks for taking my question Kevin.
So.
Uh huh.
Can we just sort of dive in a little bit more on the $1 3 million of delay.
The tool issue. Meanwhile, you've got 12 million span from Ipass in title III.
Just wondering I know you say this situation.
Rectifies itself this quarter.
I guess I'm just wondering you know how.
How are you.
Sort of prevent that going forward.
A couple of things are important is one is the although we took delivery of four tools theyre not all qualified and installed so we have to do that and the other thing that.
You remember of course is we do have.
Tools that go down that need to have maintenance in terms of the vendor coming in to help us out in spare parts and we are experiencing some difficulty with the situation in the supply chain.
Taking a little longer than the $12 $2 million, although that's a large percentage of the $39 million. Some of it is for example, a payment upfront for the OLED deposition tool that will be in at the end of 2022.
And why do we think it will be better than this quarter.
We're clearly doing a lot of work on many things and we mentioned during the call.
The external help we have and that external help with significantly around the setup for a tool and the setup.
We improved the <unk>.
The time of the set up by 50% and that time will then go to manufacturing as opposed to tool set up and that was something that is done by sorry for the word but it's Kaiser on is the Japanese word and then an effort that we are familiar with but they helped us do this.
And that is that is giving us some real benefit.
Okay. Thanks, Andrew So on me.
Can we talk a little about the F 35, I know one of your competitors got an extension.
We.
We haven't really talked about it very much but I think.
Since the June quarter, even and I was wondering where you think.
The review of your OLED screen is and in that upgrade cycle.
Well I'll I'll broaden that to aviation because.
Can't really talk about it unfortunately, maybe our competitor Ken but we cannot.
But we are supplying displays.
With the monochrome green very high brightness.
We can drive them beyond 40000 candela per meter squared.
And the vendors.
To whom we supply really one vendor is is getting them and they we have orders that go next year and the erector.
And there are they are performing very well.
We're very excited about this.
And then so as you know we did design it displays specifically for aviation.
Yes, no I understand it has fixed wing applications as well as our rotary applications.
Understand correctly, yes.
That is correct. Let me just say that the OLED structure that would be designed that gets beyond 40000, nits or candela per meter squared.
When we can put on other display resolutions.
Other display resolutions are going into.
Rotary as well.
By the way that's not just a U S statement there are.
Other very important international customers.
Okay.
Yes.
The.
Can you say that its moved to production or is it still sort of L. Rip.
<unk> is a good statement, but it feels to us like it's moved beyond qualification.
Okay.
Can we dive in a little bit more on the S 9100 quality certification coming up in the March quarter sure how does that change your appearance to customers.
Remember that says the aviation version of ISO and forgive me for saying it that way, but so it's.
A step beyond ISO and our customers really every time they come to us to say are you ISO certified the answer is no, but we're going to be a S 9100.
So it's a it's a real plus.
And we are especially interested in implementing the things that will help us improve.
Okay.
I still I'm little unclear on.
The marketing positives.
Customers are impressed with the S 9100.
Beyond ISO.
Just because they know there are certain quality measures, Matt I guess of course, that's the whole purpose there are quality measures and really what happens is.
You have somebody who looks at us as a tweak this tweak this and then we.
Have an external auditor come in and say this company has certified as a quality vendor under the 90.
<unk> 9100.
It's a tough standard to meet and we believe were.
No problem at all.
Okay. So so backlog was up more than $4 5 million sequentially, yes.
Just wondering if you see a lot of that going out in the fourth quarter or if you think it'll take longer given <unk>.
Supply constraints.
So Kevin Yes, I mean, we have.
We have a significant volume of shippable orders in the fourth quarter. The backlog extends obviously longer than one quarter. If we're continuing to see good bookings in.
Really in the military space or backlog is continuing to increase.
Obviously some of the increase was due to the one 3 million that did not ship in Q3, but we're in a good order position for Q4.
The other note is that the good news here too is that the enhanced night vision goggle binocular for which we supply displays to both prime contractors as.
Continuing to increase because the second vendor is coming on board significantly.
Yes, it's good news and we're also seeing some good orders in the eye care I care market as well Kevin.
Yeah No no no you you've made both those points your prepared remarks.
The N V B, Andrew could you, please remind me, which branch of the military that addresses and.
I guess sort of a deployment within that branch well its foot soldiers. So it can be in the army it can be in the <unk>.
Marines for example, and there are other versions of that that are going outside the U S and not not from US obviously, the prime contractors are selling other versions of that outside the U S. So the volume is significant.
And it's been very well received by you know by the troops in the fields, we do get feedback from our vendors.
We're very happy with what we've done.
Very happy to support the U S military and the other militaries that are friendly to us.
Okay can we talk a little about the eye care market Mark as you alluded to it's more if I understand correctly, it's more than one customer.
And I think the main ones overseas can you just talk a little bit about how you see that business expanding.
Well, yes, I mean, we just see it continuing its four.
For surgery right for mapping the eye for the.
Corn here.
We just continue to get strong order flow from that.
I think it's.
Ongoing market, we probably think it.
To grow as we sort of move past the Covid and you know.
Elective surgeries come back fully online.
A couple of other things that just we did mentioned in our prepared remark about the.
Color space that we use some new material for color space and this goes beyond.
It goes to surgery, we're working with a company, who really appreciated our R&D efforts to move beyond where we were and satisfy what they need and we would expect that to grow too because.
Near eye display works very well in this.
In this case also the other tools that are growing is one is the veterinary medicine, we have additional companies coming to us for that and that's put it on a headset and go out to the large animal as opposed to bring the large animal.
To your office I'd say with a little humor. So that's a very important market and the other one the pandemic had squashed four.
Long time was the.
Thermal scope for hunters and Thats going well now too.
So we see continued growth in these.
And military markets.
Okay.
And continuing that thought you mentioned in October.
Event, where you showed your prototype for the OLED at 10-K Nit, Yes.
Can you add a little more color to that Andrew what was sort of the construct what sort of feedback did you get in I mean, I know you said, it's positive, but I guess, who offered it to you. Okay. We ended up getting a number of industry analysts in the room with US we showed.
W. <unk>, which is 1920 by 1200 resolution and measured it with him in the room. They saw it measure it and they could hold the measuring device too and we actually got as one of them said too.
11, <unk> hundred <unk>.
<unk> so one.
11000, sorry 311300.
And they were very impressed with what they saw we also showed a 4000 resolution display full color with high brightness.
It was the first one that we did and they were very impressed with that resolution and everyone realizes in that room. There were three analysts companies in that room, plus additional people on the phone. Unfortunately, they couldnt see the display the analyst for example were from the display.
Supply chain company that does market research and they put out articles on it.
The other person work put out an article in the magazine and the one other guy has put out an article also so there are technical articles out there on the displays.
Dimension that it's sometimes it's tough for people to understand but for the virtual reality market, let's use that because thats.
One that it should include a view you can't see the outside it's only what the display against Euro and people, sometimes don't understand why high brightness is necessary and this these statements are not coming from me. They are what we hear when we go up and down.
The U S West Coast and Asia everyone's tells us for virtual reality even.
And immersive virtual reality I need high brightness for two reasons one of them is <unk>.
Need to have virtually no motion artifacts. So when it's a head tracking device. So when I spend my head I can't have anything in my view blurring and when I run the display normally that's what happens so what do I need to do is I need to run the display only for 10% of the on time and that means I need.
10 times the brightness.
I want 200 candela per meter squared to my eye I need 2000, and then as you might have guessed all optics are not 100% efficient and the optics wanted for these VR devices are 20% or less efficient and the reason there that way is because I want a small.
Form factor, so that I don't have a big dive mass type thing on my head. So if I take 20% I need five times that 2000, and so I need 10000, that's the minimum that everyone has told us and the good news here is we have reached that threshold beyond it as as I said.
Earlier, so that we are opening up the market for immersive VR and obviously if you have it.
Our device that's immersive you need the same thing.
It has to fight the the light from the outside also so it even requires more so we have the threshold, we havent seen anybody's display above that we've heard things like 7000 of our 5000, when they talk about tenda market texture and the thing you have to understand is <unk>.
Our displays that reached 11300 <unk>.
Or just single stack OLED.
Use a very efficient OLED in their red and Green phosphorescent, sorry for the word and the Blue is still fluorescent but the good news is we can do tend to market texture too and double that the.
Light output.
And everything else to white with color filter display can do like micro lens array or microcavities et cetera, and by the way our microcavities can be done.
Direct lead pattern. So we can do even better. So the point is we're ahead today of white with color filter and we'll stay ahead and one other thing you have to realize is that when you think about white with color filter you know that the color filters throw away two thirds of the light by design. So you.
We're only left with one third the light so if we're at the same luminance.
We start three times, better, but COVID-19 filters aren't 100% efficient. So it was really three to five times better. So remember why the military came to us in the first place it was power.
So if we run our direct pattern display at the same brightness as a white with color filter our power is going to be three to five times better. So when it's up up and running with the new tool you have to ask the question why would anybody want to use white with color filter for full color.
That's important to us in our current military full color markets.
So the new tool that we're getting that's part of the $39 million funding for the government that new tool.
Is.
Capable of directly patterning in production as opposed to the R&D effort, we have now.
And it's a much bigger tool it will be able to do all of the displays we do today.
It can do white with color filter it can do monochrome green et cetera, and it can do direct pattern. So when that's up and running well remember the tools delivered at the end of next year, when that's up and running well youre going to see efficiency and color that no one else can match.
That's why we're so excited.
Okay and that tool slated for about a year from now Chris Yes.
But you expect it up and running right <unk> expect it to be in and install do we have to qualify it.
Alright, but how long is that process would you imagine.
I think.
Three to six months is what we're guessing however, just think for a minute, we actually make and sell direct pattern displays today from this R&D equipment. So during that qualification process, we will make and sell engineering prototypes.
Okay.
So I just didn't want to leave you with hey, wait six months and you'll get one display out there.
Right right right, Yeah, I appreciate that I appreciate that so the.
The tested display at all 11300 nits was that full color and could you give us an idea on the dimensions, because I know field of view is a big deal to in this case to remember the display was 1920 by 1200, so its about 0.86 inches in diameter.
Remember incorrectly so that end.
And by the way the measurement was a full white screen. So it's was the maximum illuminance, we got with <unk> was 11300 normally when the display is measured for peak luminance. It's a small box. Because then you can send more current through that small box, we didn't do that full white. So its full color if you.
We'll red Green and Blue all turned on.
11300 candela per meter squared.
Okay. I know you were working on taking display a similar dimensions and stitching. It. So that you could you could increase the diagonal.
Oh, sorry, yes, let's be careful with stitching I afraid everybody on the phone will think that were pasting displays together. So we did and showed during that a display that was two one inches in diagonal now.
It's just.
One piece of silicon under there and directly patterned OLED on it and.
And the stitching comes about because the foundry has to stitch and by that I mean, you can't get the.
The.
Field done in one shot you need to do multiple shots from there.
Agra fee equipment.
In other words, the stepper isn't as big as the display.
The field of the steppers and as big as the display.
Okay.
The foundry had the stitch and we by the way we had to stitch, our anode and it's something to remember is that if we were off in that stitching. If we weren't capable of doing it perfectly the human eye will pick up on something Thats a little off one line is a little higher in the second half of the.
Versus the first but no one saw any issue whatever and we measured no issues. So we have the capability of making these displays.
So a $2 one where do you think you'd be able to generate.
Greater than 10000, Nits Oh, yes.
The goal absolutely.
Okay and what's your what do you think your timeline to that Oh, well, we may be working on a with a tier one today its not the 4000 resolution display and I can't say anything about it but obviously the minimum goal has to be above 10000 candela per meter squared and when you think about VR display.
As I've said in the past and technical talks I want a immersive view so I want the field of view my eye can see E. Chai has to be large and if I do.
100 degree field of view I'm, making the arithmetic easy for me.
And I want to have at least 40 pixels in every degree.
We're between 30 and 60 is good if I want 40 pixels in every degree I need to display this 4000 resolution.
Where that.
Resolution came from so yes, we're working on a high resolution display with direct patterning.
<unk>.
It's got to get above 10000.
Every carrier display has to be above 10000 candela per meter squared for merchant immersive view.
Okay.
I apologize for hogging the call.
No problem.
Thank you for.
Taking all of my questions gentlemen.
Well, it's a pleasure to talk to Kevin and it's a pleasure to.
Be able to show my enthusiasm because this is really a terrific moment and we have.
We have shown that we can do it on larger displays.
Yeah.
Thank you Kevin.
Our last question comes from the line of Mike well. Your line is now open.
Good morning, guys, Hey, good morning, Michael.
Are you.
Good.
Andrew I was hoping you might be able to share an update on any progress with our manufacturing partner on the consumer side.
Well as I had mentioned.
There are companies that were talking to that are interested in the the goal as well our goal is to.
Make a deal with them and we're working on that.
The other goal is to produce the proof of concept for this tier one that we're doing today and then get them to sit down with us with the right manufacturing product progress or partner sorry, So we are making progress on that.
We have one okay, thats very interested and has lots of capacity.
Okay.
I'm not sure how much you can share on that but how do you think that that something like that looks when it gets done at that.
Is that similar to a royalty payment that you would receive.
What the licensing agreement or.
Or what does that look like well certainly there are a few ways that it could be done.
Royalty licensing is an easy way, we can also be a sales arm and we can see if you could think of about doing something jointly and having us be involved significantly and the entire venture.
So I think the easier way to think about it for your bench.
Benefit is.
Royalty license royalty bearing license.
Okay.
And I, just I think you've kind of touched a little bit on this with Kevin but.
It seems the markets anticipating several consumer companies to come up with next Gen headsets in 2022.
I know you have to be careful with your confidence.
Potentiality agreements.
But maybe if I ask it this way.
As these headsets are stolen or download and some of the specs come out can.
Can you remind us of maybe a few things that.
That we might look for that would kind of that maybe a light bulbs would come off and say that's gotta be imagine them there.
Well.
Right now as some of the top end headsets.
Are using LCD displays so what they do for this the brightness no problem at all the LC material is slow so what they do is pulse the backlight and when I say LCD displays I'm not talking about micro displays I'm talking about ones that our cell phone size style.
So its LCD material with.
On a glass back plane and Leds for example, lighting so that.
Those high end headsets now are for example, the <unk>.
Does that come to mind immediately or the index or the quest to ones like that R.
Are using LCD. So if you see an OLED micro display that's high resolution.
I think 4000, something like that and is very very bright because it has no motion artifacts. Then you can think about us.
Okay today, the only company I know who's done over 10000 candela per meter squared on a micro display is imagine and this is my knowledge.
And even the.
Looking at.
Press releases by companies et cetera.
Okay is there with those with those NDA or is there.
Any term to those that.
Maybe maybe one that when that product is released.
You can stand up and say hey that stuff or.
What I'm trying to just go and definitely they go on indefinitely.
But ultimately the.
The company is not going to have.
A problem I wouldn't think in the long run, saying, it's an OLED micro display of pipeline strength.
Right Okay.
Alright, well ill, let you guys go appreciate you taken a couple of questions. There. So thank you Michael and just go just these companies are so secretive that.
They feel more secretive and so calm the special operations group.
Understood.
Congrats on your.
And the reason that 10000 golf yeah.
It was a terrific terrific so that the team here did an outstanding job.
Our model had his team there to demo.
The displays.
Displays and they were very impressive and not only that measurement and brightness, but also the 4000 resolution display was well received.
That's awesome. Thanks again, thank you Mike.
Thank you. This concludes today's question and answer session I will now turn the call back to Mark Koch for closing remarks.
Thank you again for joining us today, we'd like to remind everybody will be presenting at the Ladenburg virtual technology Expo on November 18th.
This concludes concludes the conference call have a great day.
Ladies and gentlemen, thank you for your participation you may now disconnect.
Okay.
Yes.
Sure.
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