eMagin Corporation

Good morning and welcome to Imagine Corporation's fourth quarter 2021 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 turn the conference over to Mark Koch, Imagine's CFO. Please go ahead.

Thank you and good morning, everyone. Welcome to Imagine's fourth quarter and full year 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 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, uncertainties, and assumptions that are difficult to predict and may prove not 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 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 Scully.

Thank you, Mark, and hello, everyone. Thank you for joining us today. On today's call, I'll provide some highlights from our quarterly and full-year results and provide color regarding the development of our technology and our equipment schedule. Mark will then discuss our consolidated results in greater detail. 2021 was a year of great technical achievement for Imagine, thanks to our skilled people and their commitment to producing the world's leading OLED micro displays. Among our many operational highlights in 2021, the R&D milestones related to our direct patterning technology, or DPD, rank among the highest, In addition to securing a number of new patents for this technology, we introduced a prototype for a micro-display with a resolution of 1920 by 1200 that achieved over 10,000 candela per meter squared of maximum luminance with vivid color. We believe it is the world's brightest, high-resolution, full-color OLED micro-display. In December, as you may recall, This micro-display was showcased at a trade show in the monocular and binocular AR headsets of an imagined customer. With this technology, we are continuing to build proof-of-concept displays for AR VR applications with a Tier 1 consumer electronics company. The addition of advanced production machinery, which we expect to have online next year, will allow us to produce our industry-leading DPD displays in production quantities at our fab. Tool qualification will begin in the first half of 2023 as we prepare to shift from R&D to production. Compared to white with color filter displays, these displays have greater brightness and at the same brightness have much better power efficiency, which is a priority for our military customers. We expect our DPD technology will ultimately replace current full-color OLED technologies. Brightness of 10,000 candela per meter squared is an important threshold for VR headset customers, including the Tier 1 for whom we have designed a high-resolution VR display. 2021 also saw the qualification of our newest high-brightness XLE display, This display is more than five times brighter than our standard color displays that use white OLED with color filters. It can provide our customers with higher brightness performance in the interim before production of our direct pattern displays begins next year. We ended 2021 with strong shipments of displays used in the ENVGB program as we continue to work on this advanced goggle to provide superior situation awareness mobility, lethality, and protection on the battlefield. The ENVGB incorporates rapid target acquisition, which allows soldiers to fire around corners. It also employs AR technology to deliver real-time video and target information through imagined displays. The reception among soldiers in the field has been very positive, including praise for the ruggedness and reliability of the device. Our core military business is benefiting from a ramp-up in volume of our existing programs. We are actively pursuing several others, as well as opportunities in the defense markets for thermal weapons sites. This year, we expect to continue to ship displays under ENVGB program and to compete for other large U.S. military programs. At the same time, we expect to capitalize on improved yields and capacity as we install new equipment purchased under our Defense Production Act Title III and IBAS funding grants. We stabilized our manufacturing yield in the fourth quarter and expect improvements in 2022. Our manufacturing equipment acquisitions and installations are on track and within the requirements of these funding grants. In response to what our persistent and global supply chain constraints and pricing pressures We continue to work closely with our wafer suppliers. We created a backplane designed for an alternative foundry so that we can optimize our wafer allocations. We also have implemented product price increases for 2022. Overall, as of the end of the fourth quarter, our sales backlog was up 26% to $13.8 million compared with the end of 2020. This reflects continued strength in our bookings for the military night vision and medical eye care markets. In 2022, we look forward to demonstrating our DPD technology to more consumer-oriented customers and continuing our business development efforts in the medical eye care, surgical, veterinary, and hunting scope markets. Additionally, we expect to benefit from contributions of new engineering talent that joined us late last year. With that, I'll turn the call over to Mark, who will discuss our financials.

Thank you, Andrew. Starting with our Q4 numbers, total revenues for the fourth quarter of 2021 were $7.2 million, a decrease of $0.5 million from $7.7 million in the prior year period, and a sequential increase of 1.4 million from the third quarter of 2021. Total revenues consist of both product revenues and contract revenues. Product revenues for the fourth quarter of 2021 were 7.0 million, an increase of 0.8 million from product revenues of 6.2 million reported in the prior year period, and an increase of 1.7 million compared with the third quarter of 2021. The year-over-year quarterly increase in product revenue was due primarily to the timing of certain orders from prime defense contractors and shipments under the ENVGB program. This was partially offset by approximately $1.1 million in fourth quarter shipments that were delayed into 2022 due to capacity constraints related to unexpected machine downtime. Contract revenues were $0.2 million compared with 1.5 million in the prior year period, due to the timing of activities under our development agreement with a Tier 1 consumer customer that is milestone-based, rather than uniformly distributed each month. Total gross margin for the fourth quarter was 24% on gross profit of 1.8 million, compared with gross margin of 16% on gross profit of 1.3 million in the prior year period. The increase in gross margin was due to higher product revenues, increased production and absorption of fixed costs into inventory, as well as improved yields during the fourth quarter of 2021. Operating expenses for the fourth quarter of 2021, including R&D expenses, were $3.5 million compared with $3.6 million in the prior year period. Operating expenses as a percentage of sales were 49% in the fourth quarter of 2021 compared with 47% in the prior year period. R&D expenses as a percentage of sales were higher in the fourth quarter of 2021 due to lower costs allocated to contract cost of goods sold. SG&A expenses were lower in the fourth quarter versus the prior year period due primarily to a reduction in legal costs. In the fourth quarter, our operating loss narrowed to 1.8 million, compared with 2.4 million in the prior year period. Despite the operating loss, net income allocated to common shares for the fourth quarter of 2021 was 0.9 million, or one cent per share, due to $3.1 million in income related to a non-cash change in the fair value of the warrant liability during the fourth quarter. Excluding the impact of the change in the warrant liabilities in both quarters, net loss was $2.2 million, or $0.03 per share on a fully diluted basis, compared with a loss of $2.4 million, or $0.04 per share in the prior year period. Adjusted EBITDA for the fourth quarter was negative 0.8 million, compared with negative 1.7 million in the prior year period. As Andrew mentioned, as of the end of 2021, our backlog of open orders scheduled for delivery over the next year was 13.8 million, which represented a 26% increase from the end of year 2020. Turning to our full year results. Revenues for 2021 were $26.0 million, down 12% from $29.4 million in 2020. Product revenues totaled $24.2 million, representing a 3% decrease from $25.0 million in 2020, primarily due to unexpected downtime of our manufacturing equipment and resulting capacity constraints. This resulted in approximately 1.1 million in late orders that did not shift during 2021. Contract revenues totaled approximately 1.9 million, representing a 57% decrease from 4.4 million in 2020. Contract revenues primarily reflected development work for an advanced display design and proof of concept for consumer AR, VR device. This work is expected to continue through 2022. Gross margin for 2021 was 18% compared with 22% in 2020. Gross margin for 2021 was primarily impacted by decreases in contract revenue gross profit related to the timing of activities under the agreement for development work with the Tier 1 consumer company. Operating expenses for 2021, including R&D expenses, were $14.6 million, compared with $13.3 million in 2020. The majority of the increase was due to materials and other overhead costs related to the development and qualification of the company's higher brightness XLE and DPD displays, as well as a decrease of $0.8 million in costs allocated to contract cost of goods relative to 2020 due to lower contract revenues in 2021. Operating loss for 2021 was $10.0 million versus $6.9 million in 2020. Net loss for 2021 was $5.2 million or $0.07 per share. This compares to a net loss of 11.4 million or 19 cents per share in 2020. Excluding the impact of the non-cash change and the fair value of the warrant liability for both years, net loss for 2021 was 12 cents per share versus a net loss of 11 cents per share in 2020. Adjusted EBITDA for the year was a negative 4.1 million compared with the negative $4.4 million in the prior year. Turning to the balance sheet. As of December 31st, 2021, the company had a total of $5.7 million in unrestricted cash and cash equivalents, a decrease of $2.6 million compared to year-end 2020. This is in addition to $0.8 million of cash restricted for purchases of equipment under Title III and IBAS government grants. The company had $2.0 million in outstanding borrowings and $2.3 million in credit availability under its revolving credit facility as of year end 2021. This compares to outstanding borrowings of $1.9 million and borrowing availability of $2.1 million at year end 2020. In November of 2021, the company entered into an at-the-market or ATM facility with H.C. Wainwright, pursuant to which we may offer and sell shares of common stock, having an aggregate offering price of up to $10 million. We anticipate that the ATM facility will provide additional liquidity during 2022. With that, we will open the call for questions. Operator, please go ahead.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question goes in the line of Kevin Deedy from HCW. Your line is now open.

Good morning, gentlemen. Thanks for taking my call.

Good morning, Kevin. Good morning, Kevin.

Andrew, you mentioned a new foundry. Can you elaborate on that? Is that really to deal with supply constraints, or is that also a step to, I guess, increase your ability to deliver volume?

No. The issue is we have some supply constraints with foundries, and we have a new development on how to fix an issue we had with one foundry. We've done the design of a new wafer for a particular product, and that will free up some constraints on production at the other foundry, but it will also give us the ability to fix a problem on one of the large foundries we have. So it's a very good thing, and it will be good for new designs as we move forward.

Okay. Could you characterize the supply constraints that you're seeing now versus, let's say, last quarter or six months ago or even a year earlier?

Actually, I feel like we've done a reasonable good job in terms of fixing them. We have a few things that we have to work through, continue. We do see price increases from not only foundries but other places, and that's why we raise prices on our products. So we feel reasonable now. It's not over.

Okay, so I guess maybe broad-breasted say that the environment's improved?

Well, our environment's improved because of the actions we took.

Okay, thank you. The... Mark also mentioned continued work on consumer AR, VR. Could you just add a little more color to that?

Oh, well, what we're talking about there is we have a design that we have designed already, and we have the OLED. We put OLED on a number of the wafers, and we're going through the next steps in the process because this is a different process for this particular design that we recommended. and it will be able to improve the end result significantly and also improve the cost.

Is it outside of your DPD development that you've been working on?

Oh, no, we continue to work on DPD, obviously, but the rest of the design is something different that we have suggested. I don't want to tell everybody in the world what it is, so I apologize.

Okay, now I understand the sensitivities.

Let me just mention that the DPD is going well. We've, as you know, did the 10,000 nit display or cantilever per meter squared, and actually the analysts measured it at the meeting, and they measured 11,300. And again, I'll remind everyone, that is the – The starting point, 10,000 nits is the starting point from all of the Tier 1s with whom we have spoken about a VR design. We're also speaking about AR designs with a Tier 1. And the two Tier 1s who kicked off designs, we have two of them. One's the 4K that we showed, and the other one is this new one. They both needed to be above 10,000 nits. So we have made it.

Well, congratulations on that, Andrew. Could you just maybe talk a little bit more about the field of view that you're seeing on those? And one of them, if I remember correctly, is a stitched display to increase the display size.

Yeah. Now, here's the story. Everybody, I'm going to use just 100-degree field of view. And if you look at all of the major players in this market, and by that I mean all the major headsets in the market, They all want above the 100 degree field of view, but because of the arithmetic, I'll simply use that. Your eyes are probably better than mine, but the range of pixels in every degree that your eye can see is anywhere, 60 is the maximum, but most people say somewhere between 30 and 60 is okay, and we did a design of a headset, a 2K by 2K with 80 degree field of view, That was 25 pixels in every degree to the eye. And everybody who wore the thing said, this is great. So the screen door effect wasn't there. So when you say 100 degree field of view and 40 pixels per degree, you need 4,000 pixels. And that's why the display is designed that way. Now, you mentioned stitch. We, of course, wanted to make the pixel pitch, the size of the pixel, much smaller than what we did, but the company who wanted the design said, they all tell us around 10 microns. Now, some of them are getting smaller now, and that's good, but the two that we've designed were around 10 microns. If you go small, you get a smaller size. So the 4K display is approximately two inches in diagonal, and therefore it has to be stitched. But again, remember I said that we're going through other efforts after the OLED is on the display for the current one. We've taken steps to ensure that a stitched display can be made reasonably priced as well. And again, I can't talk about how we did that.

Okay. Thanks. Last question for me, could you just give us a quick update on the machine purchase? I understand that you're hoping to get a new deposition machine to, I guess, address larger volumes with the DPD technology under the Title III allotment. Can you just sort of give us an update on that?

Sure. We did place the order, and there are multiple companies involved in this because – the OLED machine, but also some of the other things that must go in it for direct patterning. So we've placed the orders for these. We've worked very hard on what the design should be to make it in mass production. I'll put quotes around that because we're not a high-volume company. I don't want to mislead anyone. But the machine is placed, the order. It will be here near the end of this year, and then we're will be qualifying the machine at the first part of next year. We're very excited about this. It will be a machine that can do all of our displays and not only direct patterning, but monochrome green, white with color filter, it can do them all. On the other hand, when you think about it, because of the energy efficiency in the future, You could argue that all color displays will be direct pattern because the energy efficiency will be much better. And here what I'm talking about, as you know, is two things. One is color filters throw away two-thirds of the light by design, but they're not 100% efficient, so they really throw away something like 80% of the light. So if you do away with the need for color filters, you get much better. Also, you can use... much more efficient materials for the red and the green. And then you can adjust the blue so that it does well. So that's what we have done in the design of the machine. And the machine will be able to do tandem, etc. So direct pattern with tandem. The point is we're ahead today with direct patterning than anyone with white with color filter that we know of. And we'll maintain maintain that lead because we will do tandem as well on red, green, and blue. It's easier to do tandem on individual colors than it is white. We're really excited. Sorry, I interrupted you.

Yeah, no problem. By you mean in tandem, you mean stacking the emitters, correct?

Yeah, sorry about that. It's the industry speak. In other words, if you do a red sub-pixel, instead of just doing one emitter stack, you do two. Very good, thanks. One electron gives you two photons. I'm being a little bit simplified here. And that creates much more light.

Thank you, Andrew, for walking me through all that. I really appreciate it.

You're welcome. Thanks for the question. It's always good to talk to you, Kevin.

Thanks, Andrew. Take care, Mark.

Thanks, Kevin. Take care.

Thank you. This concludes today's conference call. Thanks for participating. You may now disconnect.