eMagin Corporation
Q4 2020 Earnings Call Transcript

Published: 18 Mar 2021

[Operator:]

Good morning and welcome to the eMagin Corporation’s Fourth Quarter and Full Year 2020 Earnings Conference Call. Please note this event is being recorded. I will now turn the conference over to Mark Koch, eMagin’s Acting CFO. Please go ahead.

[Mark Koch:]

Thank you and good morning everyone. Welcome to eMagin’s 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. 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 revenues, plans for product development and production, the company’s 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, etcetera.

[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 and 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 moved forward on several initiatives, while increasing revenues despite the unfavorable conditions brought on by the pandemic. As you will 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 in our Hopewell Junction facility. And we are proud to be the sole U.S. manufacturer of OLED microdisplays. We greatly appreciate the support of the U.S. military in 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 capabilities and increasing R&D investment in our direct patterning, or dPd, technology, which in the near term, should drive more contract revenue. Our proprietary dPd technology greatly enhances light output relative to competing products that require color filters with white OLED.

[Mark Koch:]

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. Fourth quarter revenues were $7.7 million compared with $7.3 million in the prior year period. Contract revenues were $1.5 million compared with $0.5 million a year ago, reflecting continued dPd development work for a Tier 1 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 1 consumer company for an advanced display design and proof-of-concept for a consumer AR/VR device. Drilling down to margins, total gross margin for the fourth quarter was 17% 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 cost into inventory due to equipment issues and repair delays related to COVID-19 travel restrictions. However, we expect a recovery in yields in 2021, thanks to 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 the year ago period. Part of the increase was attributed to higher R&D expenses, including additional headcount and internal costs related to the development of our dPd and XLE 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.

[Operator:]

Thank you. And the first question is coming from Kevin Dede. Kevin, your line is live. Please announce your affiliation and pose your question.

[Kevin Dede:]

Hi. It’s Kevin Dede, good morning, with H.C. Wainwright. Andrew thanks for taking my call. Hi, Mark. Could you guys just let me know about the – a little bit more color please on the 10 new programs, are those new, brand new? Are they development programs? Are you shipping real production orders? Can you give us a little more insight on that, please?

[Andrew Sculley:]

Yes, thank you. Yes, those 10 new programs are shipping of displays for integrating into existing programs and it’s not like a development for a new display as we are in the consumer side.

[Kevin Dede:]

Okay. So they are all DoD related?

[Andrew Sculley:]

Actually...

[Mark Koch:]

No.

[Andrew Sculley:]

Yes, I think Kevin one of them is also for like a thermal imaging for industrial building heat leakage and another one is for – in the factory automation field.

[Mark Koch:]

We mentioned the automotive manufacturing.

[Andrew Sculley:]

Yes.

[Kevin Dede:]

Okay. So does that mean they are just taking stock parts off of inventory?

[Andrew Sculley:]

Oh, they are taking regular production parts.

[Kevin Dede:]

Yes, okay, okay. Andrew, you didn’t talk to the F-35 at all and I am wondering given that there is a little controversy around who is going to ship what to where and how. I am wondering if you think we should still consider eMagin shipping production for that helmet renovation project this year?

[Andrew Sculley:]

Well, the F-35 has been delayed. In this case, we are still shipping parts for testing. And as you know, the Navy helmet is the one that is very interested in what we are doing. And so we are still working on it.

[Kevin Dede:]

Okay, okay. Fair enough. Thanks. Could you talk a little bit more about the XLE development? How do you see that technology rivaling dPd and where are the advantages for you and your customers over time?

[Andrew Sculley:]

Yes. The advantage is very easy right now, because we can do that in production as we do any display today, whereas as you know the direct patterning is an R&D effort now until the new equipment that the government is funding comes in and we can do that in production as well. So, the XLE is really a bridge to dPd. And I will just mention that as you know, the direct patterning eliminates the color filters, which throws away 80% 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, the power advantage will be significantly better, because it doesn’t throw away 80% of the light. The other thing you have to remember is why did the military come to eMagin in the first place? Size, weight and power, power was a big driver. So, dPd will be very important when this production equipment is in.

[Mark Koch:]

Yes. Kevin, just one other thing our BD colleague mentioned is the XLE is incompatible with existing designs. So it’s considerably higher brightness of 1,500 nits or higher.

[Andrew Sculley:]

Yes, nominal 1,500 is what we’ve got.

[Mark Koch:]

So it makes a nice upgrade for existing designs – existing devices of our customers.

[Andrew Sculley:]

What Mark is saying is, in other words, the OLED stack is different and brighter, but the display itself is the same. So you just plug it into anything you’re using today of our displays and run it.

[Kevin Dede:]

Okay, okay.

[Andrew Sculley:]

Drop and replace.

[Mark Koch:]

Then we have been shipping some to selected customers. There is a great deal of interest because of the brightness.

[Andrew Sculley:]

Yes. I’ll just mention one very important customer is taking samples.

[Kevin Dede:]

Okay. Then my standard question for you, Andrew, is, could you run through your AR/VR customer list again? Well, actually, it’s more as a VR customer list. I know there have been projects that come in and out, and I have to – I appreciate that you’ve granted me exalted status and figuring that I know these things. And I know at one point I’ve asked you or at many points I’ve asked you, but unfortunately, I lose track of where we are. So – yes, if you wouldn’t mind reviewing that.

[Andrew Sculley:]

Sure. So last year – I’m going to talk about two efforts we have here. As you know, we produced a 4K display. And actually, we have put the direct patterning on that now, and we will be showing it through 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 VR and AR. And displays with high resolution, high brightness. So that’s a very important display. And we were allowed to demonstrate that display to another – allowed by the owner, to demonstrate that display to another company. And that other 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 will come back to us from the foundry. And then we will put the OLED on, and that will be in Q2. And then there are a number of other steps – and the company that is paying for this design will use it as a proof-of-concept for an advanced device. And this company is very interested in the device. And we also have an effort going on, as you know, to demonstrate the scalability of our direct patterning to work together with the consumer company to get a mass production partner.

[Kevin Dede:]

Okay. Thanks gentlemen. I’ll hop back in the queue. Otherwise, I’ll just keep going.

[Andrew Sculley:]

Just one mention one other one. We did have a – as you know, in the past, we had an effort – we did a licensing agreement with the company. We’ve talked to that company again, and they are very interested in when our dPd has a mass production partner. So there is three I mentioned.

[Kevin Dede:]

Three. Okay, three in total. Got it.

[Andrew Sculley:]

Those are the 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 then can we do it, etcetera.

[Kevin Dede:]

So when you say three real things going on, you actually mean that there is money changing hands and contracts signed?

[Andrew Sculley:]

Well, the one is a licensing agreement, which until we have a mass production partner, there will be no money. And the one, obviously, you can look at our numbers, you see there is a lot of money from that one. And the other one we owe the demonstration of the display. That’s the 4k.

[Kevin Dede:]

Okay, okay. Thanks again gentlemen. Appreciate the color. And thanks for taking my questions.

[Andrew Sculley:]

Thanks. Thanks, Kevin.

[Operator:]

Thank you. And there were no other – we did have a question come in, we had a follow-up come in from Kevin Dede. Kevin, your line is left.

[Kevin Dede:]

Okay. I just thought I’d hand over the reins. So thanks for taking me back. Mark, you mentioned I think, increase in headcount. Can you speak to the OpEx effect of that a little bit, vis-à-vis what you reported this quarter and how we should think about it during the current year?

[Mark Koch:]

Well, it’s a modest increase, Kevin. There was one or two people. We also added a person a program manager to manage the government funding, which – the $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 headcount also will be funded by the Title III programs. So as we’re bringing in this new equipment over the next few years, we’re just making a real effort to maximize the return on that, which is, again, quite significant for us. So we’ve done a lot with say, a relatively small base of capital equipment. Our book value is $9 million. And now with the government, we’re looking at over $39 million in capital equipment. So we’re quite excited about that and making sure we have the right resources to put that to productive use.

[Kevin Dede:]

So, will that include, Mark expanding the facilities in Hopewell?

[Mark Koch:]

Yes, yes. So we did – we’re – we expanded our footprint, about 25%, although we did get a – we did get some good concessions from the landlord. So our rent will only increase very modestly, and that does include another 8,000 square foot of cleanroom space. And we went out 10 years. So we have ample space, and we don’t have to worry about, obviously, it’d be very difficult to move a business of this kind. So we’re – we have plenty of protection for our equipment and room to house the new Title III and IVAS equipment.

[Andrew Sculley:]

May I also mention that the OLED equipment will be capable of producing every display we produce today, plus production – real production of direct patterning. So that’s an outstanding addition.

[Kevin Dede:]

How will that help you on the volume side, Andrew? Will you have two separate lines now for OLED, for dPd OLED?

[Andrew Sculley:]

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’ll have more capacity. And just think of it this way. This tool is – has more capacity than the one – bigger one we have today. So to be quite efficient and be able to produce every product we do today.

[Kevin Dede:]

Do you have a timeline on full implementation for that?

[Andrew Sculley:]

We like to be cautious. We think it will be sooner than – but we’re setting up and running in 2023. That’s the idea. But it will be here earlier, and we will be qualifying it.

[Mark Koch:]

Yes. And Kevin, that’s for the dPd tools. Other tools are coming online throughout that period. We already had a $1 million piece of testing equipment. We took delivery, and that’s expected to be fully qualified in June and the nearest. That with a dozen other pieces of key equipment for our process that will like automate it, kind of reduce our sort of failure prone equipment, improve our yields, reduce some particles. So again, quite a significant upgrade and we have a plan and analyze the expected yield improvements as these come online.

[Andrew Sculley:]

Again, the idea is greater throughput and greater yield. And the equipment, as Mark said, comes in – came in last year, one of these, this year. And 2022, the only – the long tent-pole is the new OLED machine.

[Kevin Dede:]

Okay. Okay. Was there anything specific during the regular production runs in the December quarter that, I don’t know, hindered yield at all?

[Andrew Sculley:]

Not – we had one issue that we solved due to the great work of the team under a miles direction one thing that worked very, very well. And then we simply had – because the COVID, we couldn’t get the person here who we needed to help fix a particular tool. And that was – and that’s was the large OLED machine that we have now. So that was an issue for us. So we didn’t build enough inventory, but we did ship to our customers, and we – this very little.

[Kevin Dede:]

Okay. So do you – is your key guy on board now, Andrew, so we shouldn’t expect that through March?

[Andrew Sculley:]

Yes. The key guy – he is onboard in March. He is from a different country. So that’s part of the problem. He came here in March, and we’re going much, much better now.

[Kevin Dede:]

Okay. Remember the discussion, Andrew, about working with a foundry partner on a VR display and mass production can you speak to the progress there or where that project is?

[Andrew Sculley:]

Well, we do have a foundry partner for the 4k display and the other display we’re making, very important foundry partner and they are working as hard as we are to make sure this works out. So partner is a very good one. And it’s a...

[Kevin Dede:]

Okay. So that agreement has been reached, and you believe that they’ll be able to generate the scale that you might need to satisfy consumer demand?

[Andrew Sculley:]

They have the capability to make the wafers for consumer demand. They are very interested in doing this.

[Kevin Dede:]

Would they also do dPd on site?

[Andrew Sculley:]

I’m sorry, what did you say, Kevin?

[Kevin Dede:]

Yes. I apologize, Andrew. Would they also be doing a direct pattern deposition?

[Andrew Sculley:]

I’m sorry. No, they there would not be doing direct patterning. Remember, I mentioned that we’re working with a particular company. And actually, there is more interested in making sure we have a mass production partner.

[Kevin Dede:]

Okay, okay. Alright, gentlemen. I went through my second list. Thanks very much.

[Andrew Sculley:]

Let me just – one other thing, Kevin. It’s much easier to get a mass production partner with a consumer electronics company who wants to buy the volumes standing next to you and that’s the idea. We are going to do that together.

[Kevin Dede:]

Okay, okay.

[Andrew Sculley:]

If concept comes out well, they are going to sit right next to us.

[Kevin Dede:]

Right, right. Makes sense. Absolutely makes sense. Okay, thank you.

[Andrew Sculley:]

Okay. Thanks you, Kevin.

[Operator:]

Thank you. And there are no more questions in the queue at this time.

[Andrew Sculley:]

Okay. Well, let me say a few things, just then and Mark can say a few things as well. First of all, I appreciate all of you on the 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. The U.S. government with $39 million, this will be an enormous advantage to our production in terms of throughput and yield and the – that program is going well. We are on time and on schedule and on budget, and that’s unusual. Sometimes we’re told for these U.S. government programs from the DOD, but we are moving forward with it. And we’re very happy about the XLE. It’s performing very well. And again, one very important customer and another – a number of others are using it. So this will be a great step forward for us with color filter and the consumer direct patterning efforts are very important to us and going well at this time. Okay, thank you very much.

[Mark Koch:]

Alright. Thank you.

[Operator:]

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.

[Mark Koch:]

Thank you.