Q1 2022 eMagin Corp Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the imagine Q1 2022 earnings call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone if you read.
Any further assistance. Please press star Zero I would now like to hand, the conference over to your Speaker, Mr. Mark <unk> Chief Financial Officer. Please go ahead.
Thank you and good morning, everyone welcome to imagine <unk> first quarter 2022 earnings conference call before we begin I would like to remind you that in the following prepared remarks, and our Q&A session. We will.
Make statements about expected future results that may be forward looking statements for the purposes of federal Securities laws. These statements relate to our current expectations estimates and projections and are not guarantees of future performance. They involve risks uncertainty and assumptions that are difficult.
Predict that may prove not to be accurate, especially in the light of 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 2021 annual report on Form 10-K.
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 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.
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.
I mentioned had a terrific first quarter highlighted by display revenues of $7 million that were up 15% year over year at the same time, our quarterly display revenue gross margin improved from 23% a year ago to 32% in the first quarter of this year.
The quarter was marked by diversified sales and contract revenue and we began to realize the contribution of the new engineering talent as demonstrated by a 27% increase in display production from the first quarter of last year.
The increase in gross margin was driven in part by a favorable sales mix along with the impact of higher manufacturing volumes.
We achieved <unk>.
<unk> growth in display revenue from our enhanced night vision goggle or <unk> program with shipments to customers in NATO countries.
As of the end of the first quarter, our backlog of open orders remained strong at $13 $6 million, reflecting demand for our displays for use in thermal weapon sights military night vision goggles and medical applications.
In Q1, we continued our proof of concept display work for a tier one <unk> customer, while designing and refining our production capabilities to satisfy demand for our high brightness XL displays and DPP micro displays we are in active discussions with <unk>.
Several consumer companies, including tier one Oems regarding potential applications of our proprietary DPP technology.
As you May know, our DPP technology supports directly patterning primary RGB color OLED emitters on our silicon back plane, which creates ultra high brightness light output at ultra high resolution with brilliant colors.
The 10000 candela per meter squared or niche.
Full color brightness high resolution high contrast that we have achieved is beyond the threshold requirements for immersive AR and VR devices.
And we will help to overcome inefficient optics and alleviate motion artifacts.
Our R&D efforts continue to break new ground during the quarter, We announced the award of four additional patents related to the creation of high resolution displays with unique pixel structures and proprietary fabrication methods to further protect our market position as the only micro display company with.
<unk> technology.
Furthermore, we are designing a tandem architecture that will allow for dramatically higher luminance of our <unk> displays and will ultimately leverage the full potential of the equipment. We are acquiring under our defense production Act title III.
And Ipass funding grants on.
On the production side of the business, we have completed a preliminary internal audit and expect to obtain Aaas 9100 quality certification in Q4 of this year, we expect our quality control efforts will be additive to the yield and throughput improvements that should come from the new equipment.
Wired under the title III and IV <unk> programs.
We have already committed to funds and ordered all of the equipment to be purchased under these programs.
As of the end of Q1, we have qualified and added four pieces of equipment to our production line and received three additional pieces of equipment that have been installed and are currently being qualified. Additionally, we have five more major pieces of equipment on order, including an advanced production capable DP.
Organic deposition tool that is expected to improve yield and throughput.
This innovative technology for the benefit of our customers.
Overall, we are on track.
On budget with the requirements of these important government grants.
As noted in our earnings release in April we welcome Kevin Trump pack to the imaging team as our new VP of business development, Kevin has more than 25 years of industry experience with expertise and advanced displays and the displays value chain. He led.
Global sales and business development for Veeco insurance and was previously VP of global sales for H C. Stark before that he was VP of sales for GT advanced technologies.
In closing looking ahead.
Key to displays for ARV, our high brightness high resolution High contrast, OLED micro displays.
Where in the past with tandem direct pattern displays to reach about 20000 candela per meter squared or niche peak Lou minutes.
This is about a two year program.
<unk> DPT OLED tool will be qualified in time to make this in manufacturing as moderate volumes.
These displays will have better efficiency and better lifetime when run even at low luminance.
With that I will turn the call over to Mark who will discuss our financials.
Thank you, Andrew and Hello, everyone.
Starting with the top line as Andrew noted total revenues for Q1 of 2022 increased to seven 4 million compared with $6 $8 million reported in the prior year period.
Total revenue consists of both product revenue and contract revenue.
Product revenues for Q1 of 2022 were $7 8 million, an increase of 0.9 million from product revenues of $6 $1 million reported.
Our year period.
The year over year increase in display revenue resulted primarily from higher shipments to customers in NATO countries and shipments of displays used for the ENV G Dash B program.
Contract revenues were zero point $3 million compared with 0.7 billion reported in the prior year.
This reflects the pace of development work associated with the contract of a tier one consumer company.
<unk> is continuing to work on a proof of concept and anticipate ongoing contract revenue with this customer.
Total gross margin for the first quarter was 34% on gross profit of $2 5 million compared with gross margin of 25% gross profit of $1 7 billion in the prior year period.
The increase in gross margin.
Primarily reflects increased product revenues and the impact of higher average selling prices in the current year period due to the price increases and a favorable sales mix combined with the impact of higher manufacturing volumes operating expenses for the first quarter of 2022.
<unk> R&D expenses were $3 7 billion, which were comparable to the prior year period.
Operating expenses as a percent.
As a percentage of sales were 51% in the first quarter of 'twenty, two compared with 54% in the prior year period.
Operating loss for the first quarter of 2022 narrowed to $1 2 million compared with an operating loss of $2 million in the prior year period, primarily reflecting the increased gross profit as mentioned above.
Net loss for the first quarter of 2022 was Europe $1 billion or zero cents per share.
After adjusting for the change in the fair value of the warrant liability net loss for the first quarter of 2022 was $1 3 million or <unk> <unk> per share on a fully diluted basis compared with a loss of $7 4 million or <unk> 10 per share in the prior year period.
Excluding the impact of the $7 2 million change in the fair value of the warrant liability for the prior year period and the gain on forgiveness of a PPP loan net loss for the first quarter of 2021 was $2 1 million or <unk> <unk> per share.
Adjusted EBITDA for the first quarter of 2022 improved to negative <unk> 2 million compared with a positive zero point $8 million in the prior year period.
Excluding the $1 9 million gain from the forgiveness of the PPP loan in the year ago period.
Adjusted EBITDA would have been negative $1 2 million in the first quarter of 2021.
As of March 31, 2022, the company had cash and cash equivalents of $3 9 million and working capital of 11 4 million during.
During Q1, the company repaid 0.5 million under its asset base lending facility.
Boeing's and availability under the ABL facility.
We're $1 5 million and $2 $3 million, respectively as of March 31, 2022.
Also during the quarter the company realized <unk> 5 million in net proceeds from sales of common shares under our ATM program.
With that we will open the call for questions. Operator. Please go ahead.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
We do have a question from Kevin Dede with H C. Wainwright. Please go ahead.
Good morning, gentlemen, thanks for having me.
Good morning, good morning, Kevin.
I've got a list of questions per usual.
If I go too long just kicked me off.
Christine can we can we talk about the display shipment I think you said, a 27% increase in year over year volume.
Is that just the number of displays.
Yes, Kevin.
Increase in display production.
So I mean.
We're up 15%, but.
For us that's a good number it was an indication that our equipment is functioning we did not have any equipment malfunctions. So we were you know.
Gets hit our stride this quarter in terms of producing displays.
Great.
Can we talk a little bit about.
Granted levels remained pretty strong after the fourth quarter and I know you alluded to the.
<unk> and also demand in Europe , and I'm wondering if you can sort of disaggregate.
Date that works a little bit in terms of what you think may have been instigated by the Russian invasion.
Yes.
And the just let me mention.
And one thing on the.
Shipments to NATO, we mentioned about that you can't say how much is due to the Russian invasion. If you will but certainly the bookings we had for example in the last month April you would've expected, 50% U S and.
50% outside the U S, which isn't all NATO, but we had a very large percentage of bookings for NATO now remember bookings go from now until for one year. So we expect that NATO is.
Countries are going to be ordering more of the displays for the.
Yeah.
Things that we.
We see them put the displays in.
And we already have customers there.
Mark do you want to add to that or a mall.
No I think that's accurate I mean.
I think we saw close to.
$1 million increase in revenue from those customers located in NATO countries, but I guess to be fair those orders were placed.
Before I think it was.
At the end of February the invasion, but as Andrew said, we are seeing some incurred.
Encouraging bookings in April so.
We are hopeful this would be a trend that continues.
Okay.
Do you need to follow up on that Kevin.
We did lose Kevin So now we have a question from Mike Wells. Please go ahead.
Hi, guys, Hey, Michael Hi, Mike.
I just had a few questions here, Andrew I would like to start with a question on the <unk> design.
And if I remember right at one point the idea there was that that.
That could be a common display several consumer companies would use.
I'm wondering if that number were gained any traction do you still expect that.
Maybe more than one consumer company would look at using that same display just the way that it is.
Okay.
The forecast that we have designed really is a prototype. So we did that quickly do the back plane and then put some OLED on it so we have.
A ways to go on that but the customer who asked us to.
Design that display actually paid us to design. The display is willing to have its shared by others right. Now we are tied up with another company in terms of all our efforts are going towards producing their new display they are not willing to share.
So my point is on the <unk>, we'd have to re spin that to make it.
A display that everyone might use before everyone uses it.
Okay.
Okay more I was getting at.
Youre finding that each one of these companies have their own unique needs or is it.
As far as spending is that something that could happen like pretty easily.
Well certainly re spinning it is easy we've found that everybody. We talk to has a little tweak if you will but everybody has the same.
Let's do a VR display because that's.
Easy enough to understand everybody wants a wide field of view.
And they want the number of pixels in every degree of that field of view.
To be.
Good enough. So that you don't have any screen door effect. So if I take 100 degree field of view and I want 40 pixels per degree I need 4000, and that's where the <unk> display came from.
He also wanted very bright and they wanted a very bright because they want the display to have no motion artifacts and that can only be occur. If you have a display actually lit for 10% of every frame.
And so when you put all those things together the display that we made is.
What many people would like and re spin of a display would take a little bit of time.
Because of the the Dizzy.
Design of the wafer with the other thing you have to remember is that in order to make it in mass production. It would obviously need a mass production partner certainly we can make the displays when the.
Title III equipment is in and that title III equipment will be sent to us and installed at the end of this year, but then.
We need time to qualify it for it so think of the second half of next year.
And that will be able to make the displays a four K type displays with the direct patterning and production at a volume that we do today or at volumes, we do today.
So that's why we're very excited it will be able to be demonstrated in.
Used by many people.
Okay.
Maybe turning to the other design that you were.
Talking about where most of your efforts going into right now.
Well I think you've been at this proof of concept.
Work for a while now.
I wanted to just kind of check in and see.
You might be able to give us any idea of how close you might be there with that with that customer I would I would guess that that.
At 10000, nits or does it hurt you.
A big milestone to hit but.
There'll be some other boxes.
Checked off the list.
That's something that Ah.
That you see happening sometime in the near term here.
Or is there any well certainly with color.
<unk>.
The 10000 this was important because it was the minimum.
They want it and by the way the same is true for the <unk> company. So we just hit that as of the fourth quarter of last year.
And that that was important now there's a obviously we can produce the put the OLED. We designed the wafer we can put the OLED on the wafer.
But the customer has some work to do to right at the very least build the headset.
And test it so that the.
The next step is in their hands.
Okay, and I can't tell you what their timing is.
Okay I wasn't.
And it's more complicated.
It's more complicated than what I'm, telling you but.
I can't give you any more information because the customer we need to maintain their secrecy.
Okay, I was more trying to get a better idea of when.
When that customer might might.
I feel comfortable in now.
With the proof of concept that they would like.
Let's go for marathon.
Talking of this manufacturing partner in.
And getting this going.
I certainly can.
Give you that timing because it would be a conversation between us and them.
But they are highly interested in this.
Okay.
Alright, Thank you and maybe the last question might be for Mark.
I know you kind of put some information out there on the ATM and you've been there.
Exceeding pretty conservatively, what that which I think given the.
Given the market conditions and stuff is.
From my point of view good to see.
I just wanted to see if you could share any thoughts.
Behind that is that is that.
Is that kind of the playbook.
Going forward or just kind of conservative with that.
Maybe.
Maybe just any outlook for our cash breakeven in the quarters ahead.
Comfortable sharing there.
Yes, well, Michael I think we are.
I guess this quarter, we got close right. We were negative 182000 of EBITDA, we did have some.
About 600 K of <unk>.
Non.
I'd ask title III, Capex, which we expect to decrease as we go forward.
I mean, we're looking towards the second.
Latter half of the year.
To get to near cash breakeven. So I mean, the answer is we're considering.
We will continue to be conservative with the ATM, we wanted to manage any potential dilution and where.
I guess the good news for this quarter is we.
We were near breakeven on an on an EBITDA basis.
Okay.
Appreciate that and congrats on the margin improvement to that was really nice to see so.
I think that's everything for me so.
So good luck as you move.
Thanks, Mike Thanks, Michael Thank you Mike.
And we do have a follow up question from Kevin Dede with H C. Wainwright. Please go ahead.
Hello, again, gentlemen, apologies that fell off the line.
No problem, yes. So.
Can you talk a little bit about the F 30, fives and the OLED design there.
Would you mind offerings status update I think you may have talked a little bit about it.
Year end call wondering if anything's changed there that you think is important.
Well, we certainly are.
I always have.
Supplying the F 35, four with some of our OLED displays where they are in.
Which aircrafts et cetera, they're putting it in.
They don't share with us.
So that's still moving.
Okay.
How 'bout alternate airframe so in other words.
Docs, you've offered last year, Andrew about helicopters.
I understand that I think the big driver <unk> bet.
Sure.
Interested in hearing what might else be coming down the defense budget.
Well there are other aircrafts that have used our our displays notably a coupling of helicopters.
And that's those are still going.
<unk> is a big thing for us of course, and if you're interested in more.
We are working on additional.
Do supply displays for additional programs every time, there's a request for a program with the primes know us well and we work with the primes to get it in.
In fact, we have done that.
For the a quote on a thermal weapon sight to a number of brands.
Okay.
Changing gears little bit understand.
The <unk> III design might be Oh, and I was wondering if you can even look at it or.
What you've heard.
The technology that.
Being considered in.
Gail design of that program.
So I have not seen the quest III.
Okay.
You mentioned in tandem.
For 28000 Nits Andrey.
Is.
Is that the dual stack technology is that what youre going to and you need the new equipment that you referenced b coming operational second half next year in order to get there.
Oh, thank you.
Tandem is the the term that was given by the in long time ago from that company that is giving credit for inventing or led some some other people are calling it a little stack with tandem is.
Youre doing at tandem architecture. It can be two stacks III stacks et cetera, but in this case, we would put two stacks with direct patterning, it's easier to do if you do it for individual colors red Green and Blue So direct patterning is easier to do than.
Common white color tandem.
Problems with a common white color in terms of.
The white point that luminance.
Varying luminance that is so it's easier to do for us and we can do it on our R&D tool to do it in production it would be <unk>.
Very good to have the new tool in and running and that's the idea that tool was designed to be able to do direct patterning and tandem architecture.
So when the tool was in at the end of this year and then qualify then.
Beginning.
Of next year, then we'll be able to produce tandem displays.
In.
In manufacturing.
Well.
Well the new tool also enable and increase in display size or are you still need to pitch in order to get the.
I think that <unk> design.
Okay. So the stitching problem comes about on the two places one of them is the foundry.
Andre.
Can not do anything more than $26 33, and you know there is a plus or minus minus a little bit on some foundries as well.
And those are millimeters and that's the size of the display that it can be done in one shot if it's bigger than that it has to be multiple shots to four K is doing 2.1 inch diagonal. So yes, it's bigger than that so it has to be stitch at the foundry level.
And then when you look at US we put down the anode.
We would have to stitch it too.
I'll just point out that the <unk> display no. One has said that there is any stitching artifacts that they could see and we're showing the displays.
During this week at display week. So we had many companies come in and look at it.
And no one can see any stitching artifacts and if you could see the stitching artifact it would be from our on our side because the foundry. The only issue is trying to fit all the transistors in the capacitance in ace smaller space.
On the sub pixels as long the stitching line.
So.
We can't direct change in the foundries.
Until yesterday.
Rich.
But let me mention one other thing one of the key things when we did the <unk> display we did it so that we could get the design quickly.
And we're doing another we've done another design that was recommended by us in order to still such as display would get the costs down on the foundry side and so that's what we have done with this other tier one.
And I think this will be a very good demonstrations.
My understanding is that.
Display cost.
<unk>.
Pretty big issue.
In.
Obviously addressing the consumer market.
Could you give us sort of a relative comparison on the call.
<unk> been able to M&A.
Where you think the cost per display has to go in order to address the mass market.
That's a good question of course.
Actually the mass market side, well the cost that we've been given our actually from working with individual customers.
I'm, a little bit worried about divulging their opinion, but certainly some customers, who said to us around $100 less than $100 and what we've done is put together models.
Based on the foundry, who we've worked.
Hand in hand with a foundry.
This new technology that we have thought of using and then we've worked with them to give us estimates of the costs and we've put together a model of a large fab with consumer volume and estimated the cost on that and shared that with the <unk>.
<unk> customer for example.
And we got really close to their goal.
And I think the tier one that we're working with now would not be doing this and less.
The cost was close to their goal, but they haven't shared their goal with us.
Well congrats I think.
Yes.
Yes. Thank you.
Think it's a what we have done and what we have shown in our estimates are.
Very exciting for the consumer companies.
And we've had a number of them sit.
Sit down with us.
And we've done it before with with many of them, but sit down with US again and talk about next steps you get a chance to look at the 10000 Nit display actually it's over 10000 nits.
And then new customers coming to see that are very excited about working with us.
Hum.
Yes.
Let's hope end market help me understand a little bit about the deferred income that youre showing in Hawaii the liability side of the.
The balance sheet, Mark I know it's.
It's up.
Year over year very significantly could you just offer a little background on that and the accounting behind it.
Sure Kevin So.
That's R represents the funds we've got from government grants so.
Just bear with me for a Little example, if we got say $5 million and a government grant we would basically increase our PPE and <unk> 5 million and then.
Set up this deferred income for the government award so that's step one.
Step two as we depreciate that equipment typically over seven years, we will actually relieve the government.
Grant liability and take that to income over the seven years commensurate with the depreciation.
So it's a specialized type of accounting when the company received a grant because on a macroeconomic basis, we've gotten a grant which is.
Sort of something for nothing in a way so I would say.
It's a pick up to the company right. It's an income to the company.
So the debt.
That reflects the fact that we've continued to make progress payments as we move through this program that we've made.
Most of the $6 million in progress payments with funded by the government. So therefore that deferred liability goes up.
Okay.
So I'm looking at the cost side.
Yes.
As that depreciation goes through your P&L it is going to look like.
Youre not going to have an offset for it and that will depress earnings.
How.
Yeah.
Yes.
Obviously, you've taken the equipment now you.
That equipment on board now so you must be depreciating. It can you give us a ballpark on.
Uh huh.
How much depreciation is related to that 18 million that youre showing.
Well actually it's even a little more nuanced than that so most of the.
Most of the equipment at this point as progress payments to vendors and then we have received four pieces of equipment, which are going through qualifications.
To get into the weeds of the accounting, we don't start depreciating until the equipment is placed in service, which means that it actually producing displays.
At this point I think it was.
100000, or two of depreciation in the current period as from the all of the equipment that came online really later in the fourth quarter and the rest of the equipment, we're still making progress payments to vendors. It's all been designed its specified so.
So far not a lot of depreciation going through with that.
The offset to the depreciation.
Which will show up in our gross profit margins as we will.
Youll amortize the deferred rent to income.
So the net impact on the P&L will be zero, because you know as we depreciate. It over seven years will realize that deferred liability the income over seven years.
The geography on the P&L will be a little different with the.
At AMR amortizing the deferred revenue will come through in other income below the line.
So you know again somewhat unusual.
No impact on the net loss.
Okay, including tax effects.
Yes, I mean right now we're in an NOL position. So there is no tax effect.
Okay.
Okay. Thank you for entertaining my questions gentlemen, really appreciate all the color.
Thank you. Thank you Kevin you should've been display week.
And speakers I'm showing no further questions in queue. At this time I will now turn the call back over to CEO , Andrew Sculley for any further remarks.
Yeah.
Thank you.
Well, ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
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