eMagin Corporation (AMEX:EMAN) Q4 2022 Earnings Call Transcript

eMagin Corporation (AMEX:EMAN) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Good morning and welcome to the eMagin Corporation’s Fourth Quarter and Full Year 2022 Earnings Conference Call. Please note this event is being recorded. I will now turn the conference over to Mark Koch, eMagin CFO. Please go ahead.

Mark Koch: Thank you and good morning, everyone. Welcome to eMagin’s fourth quarter and year-end 2022 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 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, uncertainties and assumptions that are difficult to predict and may prove not to be accurate, especially in light of the effects of the ongoing 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 and our 2022 10-K filed later this afternoon. 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.

Andrew Sculley: Thank you, Mark and hello, everyone. Thank you for joining us today. We ended 2022 with another strong quarter. We achieved near-record revenues of $8.4 million in the fourth quarter and $30.5 million in revenue for the full year. This represents significant year-over-year growth for both the quarter and the full year. Moreover, Q4 was the fifth consecutive quarter in which eMagin achieved year-over-year growth in product revenue and exceeded $7 million in quarterly product revenue. Thanks to our improved performance, we generated $2 million of positive EBITDA for the fourth quarter and $2.2 million in positive EBITDA for the full year. We finished the year with robust shipments of displays used in the enhanced night vision goggle binocular or ENVG-B program, along with displays for thermal weapon sites and medical applications.

Bookings for the fourth quarter were strong, including a $1.7 million order for the F-35 helmet mounted display system and more than $2 million in medical applications. Our backlog of open orders as of December 31, 2022 and shippable within 12 months was $14.8 million. 2022 included a number of contract wins and operational highlights. In June, the U.S. Army’s Program Executive Office for simulation training and instrumentation, or PEO STI awarded us a $2.5 million 2-year development contract to secure a U.S. source for high-performance micro displays that provide high brightness and visual acuity even in bright daylight conditions. Upon completion, this contract has the option of a follow-on production agreement. The developments in this project will allow us to produce a 20,000 candela per meter square display in the second half of 2024.

In October, we achieved AS9100 Rev D and ISO 90012015 quality certifications. These were important milestones for eMagin because these certifications are required by most customers in the aerospace, aviation and defense industries. Throughout 2022, we improved our positioning as a supplier of choice to address the rapidly expanding AR/VR market with our patented direct patterning technology, DPD. In April, we announced several patents related to this technology. In May, our dazzling Full Color 10,000 candela per meter square WUXGA display with DPD technology won the People’s Choice Award for the best new display technology at Display Week, the Annual Symposium and trade show of the Society for Information Display. Additionally, we designed an improvement to the R&D chamber for our existing OLED deposition tool that will enable us to further enhance this technology.

This improved R&D chamber was delivered in December and is currently being set up for DPD runs. The production-capable DPD organic deposition tool that we purchased last year under Title III funding has passed acceptance testing at the vendors facility and will be delivered to our newly expanded clean room this April to begin the installation and qualification process. It is worth noting that this tool will be able to produce DPD displays, including the 20,000 candela per meter square display in production when qualified in the second half of 2024. We continue to be the only U.S. manufacturer of OLED microdisplays and our manufacturing operations in New York’s Hudson Valley have benefited greatly from the equipment installed under our Defense Production Act Title III and IBAS funding grants.

We are seeking increases in our main increases in our manufacturing yields throughput inefficiencies. Furthermore, we anticipate continued improvements as we take delivery and of the remaining tools under the program, including the new DPD capable organic deposition tool. We appreciate the continued support provided by these programs and remain on track and within the requirements of the Title III and IBAS funding grants. In the year ahead, we will present our next set of DPD technology-based products for customers building consumer devices, a market in which we see great potential. Also, we will start the qualification process for our new production tool. We look forward to updating you regarding both developments on future calls. With that, I’ll turn the call over to Mark for a discussion of our financial results.

Mark Koch: Thank you, Andrew. And hello, everyone. As Andrew mentioned, total revenues for the fourth quarter of 2022 were $8.4 million, up 17% from $7.2 million in the prior year periods and up $0.8 million sequentially. Total revenues consist of both product revenues and contract revenues. Product revenues for Q4 were $7.8 million, an increase of $0.7 million from a year ago and up $0.7 million sequentially. The year-over-year quarterly increase in product revenue was due primarily to increased military market revenues, including shipments of displays used for night vision and thermal weapon sites as well as increased industrial and commercial market revenues. Contract revenues were $0.6 million compared with $0.2 million in the prior year period due to development associated with the high brightness display design for PEO stride and a proof-of-concept display for a Tier 1 consumer company.

Total gross margin for the fourth quarter was 41% on gross profit of $3.4 million compared with a gross margin of 24% on gross profit of 1-year period. The increase in gross margin was due in part to the successful qualification and sale of reclaim displays that were previously written off due to an initial quality issue that was subsequently resolved. Total gross profit and total gross margin do not reflect costs associated with the production of such reclaim displays. As such, these costs were recorded in prior quarters. Sales have previously written off reclaim displays had a positive effect on total gross profit of approximately $0.6 million. Excluding gross profits attributable to such previously written-off products, total gross profit would have been $2.8 million and total gross margin would have been 34%.

While we may sell additional products in the future that were previously written off the gross margin and yields may vary from current quarter levels. Operating expenses for the fourth quarter of 2022, including R&D expenses, were $3.3 million compared with $3.5 million in the prior year period. Operating expenses as a percentage of sales were 39% in the fourth quarter of 2022 and compared with 49% in the prior year period. R&D expenses as a percentage of sales were lower in the fourth quarter due to higher cost allocated to cost of goods sold for contract programs. SG&A expenses were higher versus the prior year period due primarily to an increase in legal costs. Also in the fourth quarter, operating loss narrowed to $0.1 million compared with $1.8 million in the prior year period.

Net income for the fourth quarter of 2022 was $0.8 million or $0.01 per share which includes $0.8 million of other income related to a claim for an employee retention credit filed in the fourth quarter of ’22. Excluding the impact of the change in the warrant liabilities, net loss was $1.9 million or $0.03 per share in the prior year period. Adjusted EBITDA for the fourth quarter was a positive $2 million compared with a negative $0.8 million in the prior year period. As of the end of 2022, the company’s backlog of open orders scheduled for delivery over the next year was $14.8 million which represented a 7% increase from the end of 2021. Revenues for 2022 increased 17% to $30.5 million from $26 million in 2021. Product revenues increased 19% to $28.8 million from $24.2 million in 2021.

The increase was primarily due to higher military revenues, including shipments of displays used for the ENVG-B program and higher revenue contributions from medical customers. Contract revenues totaled approximately $1.7 million, representing a 10% decrease from $1.9 million in 2021. Contract revenues primarily reflected development costs with a high brightness display design for the Department of Defense and a proof-of-concept display for a Tier 1 consumer company. Contract revenues are milestone based and are not uniformly distributed throughout the duration of the project. Gross margin for 2022 increased to 34% compared with 18% in 2021. Gross margin was positively impacted by the aforementioned sales of reclaim displays. Total gross profit and total gross margin do not reflect costs associated with the production of such reclaim displays.

These costs were recorded in prior quarters. Sales have previously written off reclaim displays had a positive impact on total gross profit of approximately $1.3 million. Excluding gross profits attributable to such previously written off products total gross profit would have been $9.1 million and total gross margin would have been 30%. Operating expenses for 2022, including R&D expenses were $13.3 million compared with $14.6 million in 2021. The majority of the decrease was in R&D expenses due to significant investments in the prior year period related to the development and qualification of high brightness XLE and DPD processes and costs allocated to COGS in the current period. SG&A expense increased compared to 2021, reflecting an increase in legal cost and noncash compensation.

Operating loss for 2022 narrowed to $2.9 million versus $10 million in 2021. Net loss for 2022 narrowed to $1.1 million or $0.01 per share. This compares with a net loss of $5.2 million or $0.07 per share in 2021. Excluding the impact of the noncash change in the fair value of the warrant liability for both years, net loss for 2022 was $0.03 per share versus a net loss of $0.12 per share in 2021. Adjusted EBITDA for 2022 was a positive $2.2 million compared with a negative $4.1 million in the prior year. eMagin’s financial position as of December 31, ’22, reflects a total of $4.3 million in unrestricted cash and cash equivalents a year-over-year decrease of $1.4 million. This is in addition to $0.3 million of cash reserved for purchases of equipment under Title III and IVAS government grants.

The company had $1 million in outstanding borrowings and $1.8 million in credit availability under its revolving credit facility as of year-end 2022. This compares with outstanding borrowings of $2 million and borrowing availability of $2.3 million at year-end 2021. In 2022, the company realized $5.8 million in net proceeds from the sale of common shares under our ATM program. Lastly, as Andrew mentioned, we’re seeing continued benefits from the Title III and IBAS funding grants and we remain on track and within the requirements of these programs. We look forward to updating you on our progress on our Q1 call. With that, we will open the call for questions. Operator, please go ahead.

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Q&A Session

Operator: Our first question comes from Glenn Mattson with Ladenburg. Your line is open.

Glenn Mattson: Yeah, hi. Thanks for taking the questions. Congrats on the quarter. It seems to be a little bit of confusion about the F-35. Can you just give us a sense of a little bit more color on the background there as to the scope of your development market and how you expect that to kind of play out over the next kind of year or two or so?

Andrew Sculley: Well, it’s not in development. We have developed a product and it is in production for the F-35, our OLED displays. And I know you’re probably referring to a press release I saw but remember, those OLEDs are done in China.

Glenn Mattson: Right. Right. Okay.

Andrew Sculley: Ours are made right here in the United States.

Glenn Mattson: I understand. Great question on the U.S. Army, order the $2.5 million development deal that you talked about. Can you give us some sense of what the scope of that program could be? I understand that’s sensitive to talk about it or whatever but just kind of the — a little more color on how the size of what that program could turn into over time?

Andrew Sculley: There’s two things to think about. One of them is the technology we’re developing for that will let us get to 20,000 per meter square just to give everyone on the phone a background, the best iPhone possible with an OLED display gets up to about 1,000 candela per meter square. So this is a very bright display. And the other thing to think about is the military came to OLED in the first place because of power efficiencies. So even if you need to run this display at 10 per meter square, the power will be 5x better than an OLED display is today using white with color filter. So it’s a tremendous advantage. So that just gives you a feeling for what it is we’re doing and why we’re so excited about it. The other thing is we don’t have an exact number of what this could be in terms of revenue.

I’ll just mention that our Chief Operating Officer was talking to a group about this in PEO stride, just yes, yesterday, day before. And they’re very excited about our technology and the brightness it could bring. So I think this will be a great project.

Mark Koch: Yes. And Glenn, the contract references the potential for follow-on orders or actually like no bid. So I mean that’s yet to be developed but we think it’s a very influential organization within the DoD and should lead to bigger and better things.

Glenn Mattson: Great, thanks for that. Do you care to update on any of the progress being made on that with the Tier 1 partner or partners that you’ve been discussing for a few quarters now?

Andrew Sculley: Well, the progress will — when the R&D tool is up and running, we’re going to do more OLED work on displays for Tier 1 customers plural because we still have some more things that we’d like to do with the 4K display.

Glenn Mattson: Great. And last one for me, Mark. The — can you give us just a sense of the mix between on the military side between U.S. and foreign governments?

Mark Koch: Well, this quarter, Glenn, it was about between around 65% to 70% on the U.S. side and remain to foreign. It was higher on the U.S. side because of the strength with the ENVG-B program. which both primes have or either in the U.S. or have U.S. operations.

Glenn Mattson: Right, right. Okay, great. That’s it from me. Thanks guys.

Operator: Our next question comes from Kevin Dede with HCW. Your line is open.