Paul Campbell - CFO Andrew Sculley - President and CEO

Andrew Uerkwitz - Oppenheimer & Co. Dennis Van Zelfden - Brazos Research Tom Rath - Davidson Investment Advisors

Good afternoon, everyone and welcome to the eMagin Fourth Quarter 2014 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]. Please also note that today’s event is being recorded. At this time I would like to turn the conference call over to Mr. Paul Campbell, Chief Financial Officer. Sir, please go ahead.

Thanks very much, Jamie. Welcome everyone and thanks for joining us today for our fourth quarter 2014 earnings conference call. Andrew and I are in Bellevue today. We are not able to enjoy the "warmer weather" back in New York right now, but we will be back there soon enough. Before we begin, as always, I must read the forward-looking statements. So here it is; please note that we will be referring to numbers that are part of our Annual Report on Form 10-K for the fiscal year quarter ended December 31, 2014. 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 projections, beliefs, expectations, and estimates, which are subject to a number of risks and uncertainties. Such statements include references to projections of future revenues, plans for product development and production, the company's ability to ramp up production at its manufacturing facilities, future contracts and commercial arrangements, future product benefits, future operations, liquidity and capital resources, as well as statements containing words like believe, expect, estimate, plan, target, will, intend, could, and other similar expressions. Our risk factors are included in the company's Form 10-K for 2014 and 2013; 2013 is already on file with the Securities and Exchange Commission and 2014 is expected to be filed as soon as today. Except where required by federal securities laws we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, and changes in circumstances or any other reasons. So with that I would like to turn it over to Andrew Sculley, our President and CEO.

Thanks, Paul, and thanks everyone for being on the call today. I'll begin with some corporate highlights, and then Paul will discuss our financial results. Following Paul's remark I'll update you on new products and few other things and then we'll open the call up to questions. So during the quarter we produced ultra-high brightness color displays using our new equipment. We reached about 7000 candelas per meter squares or nit and you will recall maybe your popular cellphone, if you have one when you dial it up as bright as possible, it will reach about 450 nits. Although I'll tell you I measured only 400, that's okay. So this is - this 7000 nit is very bright, almost 15 times brighter than your cellphone. In the last few months as part of our Manufacturing Technology or ManTech program, we got with the U.S. government, we installed additional equipment. Now the purpose of this additional equipment is to improve the manufacturing process. This is going to improve the efficiency of the display, allow us to have better control of the manufacturing process and improve the color. You'll recall that this high brightness that I'm talking about is for color display at this point. Today we are finishing the setup for the equipment and in the near future we'll be running prototype displays using this, our newest equipment. And again this will enable us to do much better production. I'll take a moment to review the progress that we've made so far in high brightness technology. We're ahead of - and this is both monochrome and color that I'm talking about now, so we're ahead of any company on monochrome high brightness displays. Our 24,000 nit monochrome green has a 50,000 to one contrast ratio at this high luminance. The best we've heard from any other micro-display company was 10,000 nits and 5,000 to one contrast ratio. So we're 2.5 times brighter and 10 times better contrast. Of course at normal luminance the displays have a 100,000 to one contrast ratio. We have contracts with two companies for avionics displays using this technology, and just a reminder, in the avionics world the reason people are coming to OLED in the first place versus LCOS is because of this high contrast. So it's very important to have this high contrast like we do even at the maximum range. Our high brightness color displays are well beyond anything we have seen in any OLED display company technology. Over 5,000 nits color is not done by any other company, even those producing cellphone or TV-sized displays. High brightness is important for mobile applications but also for other applications. For example you may have heard that LG announced a high dynamic range and a high brightness TV at 800 nits. So our display at over 5000 nits brightness is an amazing accomplishment for this company and it's extremely difficult to do for our very small pixel sizes of under 10 microns. You can imagine how TV pixel is so much larger than our pixels and that would make it much easier to do. Our first prototype have used our WUXGA display configuration that's 1920X1200. So as a reminder it's higher than your full HD TV, but we can use this technology on any of our display configurations. This technology will be outstanding for all augmented reality applications beyond avionics and the other advantage for this technology is that the power consumption and lifetime are much better than our current technology when run at normal luminance. So very important for us and an outstanding progress that we are making. In summary, higher brightness for all applications, extreme brightness when needed, lower power and longer life is what is needed. Finally we have made customer deliveries of our prototype WUXGA ultra-high brightness and that we're calling ULT color displays in the first quarter of this year. Last quarter we discussed three programs worth about $6.8 million in revenue. One of the programs was for $6.45 million, over 30 months and is meant to improve our ability to manufacture these ultra-high brightness color displays at low cost. Our progress on the program is going well, as you can see by what I've heard just said above. The next program is focused on an enhanced ultra-brightness color OLED technology and will improve the brightness of our full color displays to above 10,000 nits. We have completed phase one and have started on phase two of this program. Again this high brightness technology results in brighter displays with lower power and longer life that are also capable of extreme brightness when needed. This is just what the pilot of a jet or helicopter needs for direct sunlight readability and longer life, but it's also what an augmented reality user in a warehouse or a consumer on the street needs for lower power mobile application. You may recall a consumer, the last [ph] product that lasted only about two hours on the battery and this we actually had a guy go - one of our gentlemen, Olivier Prache went skiing with his glass on and he confirmed two hours. So they need better power efficiency which our displays can give. The third program is for an advanced backplane. We build our displays on silicon wafers which are used for computer chips or phone chips and we expect this new backplane to improve the power efficiency by about 30%. At the end of these three programs we will have manufacture able displays with below 10 micron pixels capable of extreme brightness at 10,000 nits color and above which will run at normal brightness, have better power and lifetime plus a backplane that reduces power by 30%. For example using our monochrome green displays, they use one-fifth the power with normal backplanes and have 13 times longer life versus our typical displays. You add the new backplane, that's going to reduce the power even further by about 30%. So this is an amazing technology. We are making outstanding progress here with great teamwork between the R&D and manufacturing group. We need everyone to cooperate and it’s going very well and remember compared to LCOS or LCD technology our displays have outstanding contrast and that's why as I mentioned before the avionic companies are integrating our displays today for future applications and why we also believe that more industrial and commercial customers will use them in the future. In a press release last year, we announced work on a new immersive Head Mounted Display system or HMD. This is worth a bit of time to mention our history in head mounted displays. It was in 2006 that our first HMD won an Innovation Award at the Consumer Electronics Show. This used 800X600 or SVGA resolution displays, one for each eye, had 3D capability and head tracking. So it was an outstanding gaming device. It was ahead of its time. We sold it for many years subsequently we have developed and sold two additional HMDs for the military. The first one was for the U.S. Army Technology and Training Research Centre for using medical applications. It had two 1920X1200 resolution displays, again one for each eye with a small optic and a 65 degree diagonal field of view. The second one we did was - or the one after this one we did was for the U.S. Military Training and Simulation. It had two SXGA resolution or 1280X1024 displays with a 70 degree diagonal field of view. These were very small military programs but it gave us more experience. We did a small gaming focus group with a company that I can't mention. And this study was using these two HMDs that we did, and two others. One of the other HMDs used a cellphone sized display with two optics; one half of the display was used for each eye. This other HMD, it wasn't ours again, had a wide field of view of over 100 degree diagonal and it had the same field of view in both the vertical and a horizontal direction, had a resolution of almost 1000X1000 or 1 megapixel per eye. The focus group told us that they love this wide field of view and wanted the same field of view both vertically and horizontally which our past HMDs did not have. However, the focus group told us that the HMD with this large field of view had poor resolution. They could see the pixels. It was like looking through a screen door. It was also too big and heavy so that when they turned their head quickly, the jiggling of the headset made it hard to again - well they actually lost focus on the point they were looking at. So the focus group loved that HMD for its resolution but not for its - for its field of view but not for its resolution. And the focus group loved the clear resolution and small size of our HMD. Our challenge then was to make an HMD with a large field of view and high resolution. The fourth HMD in this study had lower resolution and lower field of view and none of the gamers liked it. So we took that knowledge and we took a 2000X2000 display that we had made and we modified the optics used in the prior military applications and we made a prototype HMD. The result is a small size HMD, the fact is, I put it on, my nose sticks out a little more than it does. So it's small size, it has 4 million pixels per eye, 110 degree diagonal field of view which produces an 80 degree field of view in both the horizontal and vertical direction. And the people who have seen this so far, this prototype for virtual reality applications like gaming are very impressed. And again all the things we learned, large field of view, both vertical and horizontal, same field of view and very high resolution, so that you can’t see the pixels that's in this device. We have a few more steps to be able to run games with head tracking on the device and compared to other HMDs and then we are going to show the HMD more broadly. Now this 4 million pixel or megapixel per eye is four times better than the other HMDs using mobile phone sized displays. And from the focus group we know that this device that we produced is a very good one and the cellphone displays do not provide enough resolution for the immersive gaming experience that the gamers demand. We believe our HMD will show both the virtual reality and augmented reality communities that micro displays are the way to go for both of these types of application. The community will also see that the eMagin HMD technology which we have patent protection is an outstanding headset. The company will benefit from both of these things, both displays going into other virtual reality and augmented reality applications and this HMD. Our manufacturing yield has improved now during 2015, thanks to the great effort by the yield teams. The team consisted people from manufacturing, quality, R&D, product development, so everybody in New York is holding hands and going in the right direction and we have a number of different teams working in yield in different places in our factory and it has been very successful. We expect these teams will continue the improvement that we've seen. The yield effort plus production, the R&D work mentioned above in the significant new product, development efforts in the product development group have been an outstanding team effort in the company. In addition, to yield our teams are expanding, our statistical process controls to reach all the important parts in the factory. We're also adding equipment to improve our capacity, uptime and capability. This is very important and the work on the clean room last year brings us the full ISO 4 or class 10 for those of you who are a display person like me. So we are where we need to be after all the work we did last year and the yield improvement teams this year. So now I will turn the call back over to Paul to take you through our third [ph] quarter financial results.

Thanks Andrew. I'll start with the fourth quarter income statement. Revenues for the fourth quarter were $6.7 million and as Andrew mentioned that's a strong increase 18% from third quarter and up 10% over fourth quarter last year, so we got a nice quarter four revenues. The product revenue was up 1% and that was due to an 18% increase in the average selling price. And this is a function of the mix of the products sold in the quarter and the extent of the volume discounts in the customer mix for the quarter. It’s not due to any kind of a price increase or anything. In the quarter, we completed some of the new R&D contracts awarded to us in 2014. The largest of these was the ManTech Program Award which Andrew mentioned and is a 30 month contract, so we'll be benefiting financially from that for a while. The R&D contract revenue for fourth quarter was greatly improved, totaling a $1,045,000 up 115% over the $487,000 in Q4 last year. The total R&D contract revenue for the first three quarters of 2014 combined was just $609,000. So doing over $1 million in R&D contract revenue for the quarter was a big improvement. Most of our contract revenues are comprised of U.S. government related spending. And we've reported previously how we believe the R&D funding has been impacted the past few years by government budget issues and sequestration. For many years prior to 2013, our R&D contract revenue ranged from about 15% to as high as 22% of total revenue. We've recorded R&D revenues of less than 1% of revenue for Q1 last year and also less than 1% in Q2 and then Q3 was 9% and now Q4 is about 16% of revenue. So that's the ramp in the R&D contract revenue that we've seen over the last few quarters. So we're very excited about this, about our new awards and we expect strong R&D contract revenues to continue going forward. Gross margin for 2014 was 29% versus 30% in 2013, about the same. Q4 was 23% compared to 1% in Q4 last year. Last quarter or third quarter 2014 was 31%. The gross margin decrease from last quarter was due to lower production volume primarily but also to some increased production cost and a slightly lower average selling price. Operating expenses are comprised of internal non-funded R&D expenses and selling, general and administrative or SG&A expenses. R&D expense for the fourth quarter of 2014 decreased by $295,000 or 26% to $846,000 or 13% of revenue versus $1.2 million or 18% of revenue in the fourth quarter of last year. The decrease was due more to our R&D expense going against the funded R&D contract, as it goes in there as cost of goods sold for those contracts. We had more of that than we had last year and that caused a decrease into our internal R&D operating expense. SG&A expenses for the fourth quarter were $2.3 million, up $9,000 from Q4 last year. However, we added $550,000 to our allowance for doubtful accounts in Q4 or bad debt expense. This was due to a slow paying customer. Without that otherwise our Q4 SG&A expense would have been down about $0.5 million from Q4 last year and of course we fully expect we'll get paid from that customer, he's just slow. The operating loss for Q4 was $1.6 million versus operating loss of $3.3 million for Q4 last year. Adjusted EBITDA was a loss of approximately $1.1 million compared to a loss of approximately $2.2 million in Q4 last year. If we were to adjust out the bad debt expense increment I mentioned as we do expect we'll receive that payment and it adjust out probably the first half of this year, our adjusted EBITDA would have been about a loss of $544,000 for Q4. Taking a look at the balance sheet at December 31, 2014 we had cash and cash equivalents of $6 million and this is the same cash balance we had at the end of Q3 last September. So no change there really. So we continue to have no debt and we haven't done any equity raises since 2008 so we haven't suffered any of that kind of dilution in the stock for the last six years. And finally, regarding our initial guidance for 2015, based on current and forecasted market conditions expected orders and current backlog we expect revenues will total between $26 million and $29 million in 2015. With that, I'll turn it back over to Andrew. He has got some further comments.

Thanks Paul. Now I will add a few points or highlights for this quarter. We continued deliveries of micro-display products in the fourth quarter to more than 64 domestic and international customers. And we worked on funded development for seven customers, four of which are more recent small but strategically important R&D contracts that further our efforts in high brightness displays and immersive HMD technology, so we're very happy to have them. As mentioned above, we delivered ultra-high brightness color displays this month to customers and they were the WUXGA displays made with the equipment we installed last year. Our next batch of displays will use the equipment we just installed and we also delivered ultra-high brightness monochrome displays for aviation customer. Again the interest in these displays confirms that these displays offer advantages for applications that use low efficiency optical systems so you need a bright display or must provide augmented reality in the daytime such as avionics or commercial data glass application. As a result of further R&D effort, the lifetime of our high brightness OLED XLS technology was improved by about 25% in 2014 and first part of this year so far. The full qualification of these displays is expected shortly this year. And eMagin's R&D team has completed the qualification of a new seal structure that can increase the overall yield and reliability of the company's product. The new seal system is already being phased into production for a number of displays and customers. We expect to expand the improved process to all displays over time. The system was tested by an outside company in 85 degree centigrade which is about 185 degrees Fahrenheit and 85% relative humidity for 1,000 hours with no issues. And just to remind you all that OLED is - has to be kept away from water vapor or the water vapor will destroy the chemistry and your carbonated beverage that you keep in your refrigerator in one of those PET bottles is not impervious enough to water vapor for OLED. That gives you a feeling how really tough it is. The other thing I might mention is that our seal is about one-fifth to one-tenth the size of the ones that are on in large display company tests by measurement. To the OLED display community, this 1000 hour success is nothing short of amazing for a thin film encapsulation, especially one as thin as ours. Our new digital SVGA display has been sold to customers and is qualified for sales to all customers and we are getting good feedback. This display is targeted to be the replacement of our long running SVGA plus product and will provide significant improvements because of its digital technology. Just as a reminder our SVGA plus was first made in 2001 we have made many improvements to it but it was the first active matrix OLED display ever sold bar none. The first examples or first samples of the new SXGA with a 9.6 micron pixel structure, we called the SXGA096 product have been shipped to select customers. The SXGA096 will provide eMagin's customers with the resolution of an SXGA display with a smaller form factor and therefore it has a lower cost than the larger pixel SXGA displays and it will leverage all the advantages of our new digital SVGA. Dr. Margaret Kohin has been promoted to Senior Vice President of Business Development last year. Margaret is a Technology Executive with more than 20 years of experience developing and selling electro-optical systems in defense and commercial markets. She came to eMagin in 2013 from BAE Systems, where she held executive positions in business development, product line management and engineering. She did nice work for us when she first came to the company and now we are doing well in business development with her help. She's leading an effort to improve the team itself and driving us forward. So this completes our formal remarks. I'd like to open the call up now to your questions.

Ladies and gentlemen, we'll begin the question-and-answer session at this time. [Operator Instructions]. Our first question comes from Andrew Uerkwitz from Oppenheimer & Co. Please go ahead.

Hey, gentlemen, thanks for taking my question. You talked a little bit about the opportunity of virtual reality, that you know obviously that would be more on the consumer side and your strengths have been on the military side. Could you talk about few things, one the potential capacity needs that you might need; the timing how we should think about the timing of this opportunity? And then finally kind of where you stand relative to some of your competition?

In terms of the gaming head mounted display, it would be a consumer application of course and therefore very high volume is possible for us. Now we don’t expect that, that will develop overnight. As you know there have been companies selling - trying to sell gaming headsets now for a while since in fact Oculus came out with theirs as an example and the ramp hasn’t been very quickly, so that we feel we have the time to develop partnership and develop the manufacturing capacity needed with those partnership for our displays. And again here as I mentioned, it's both on the display side, we will benefit but also the headset itself is outstanding. So we expect other companies will feel that they have to put together virtual reality headsets with these small displays, they are so much better. So our displays and the headset will be valuable. And the other thing you asked about competition, now, were you speaking just, I want to make sure I understand your question, are you speaking about competition for our displays or competition for the headset.

Yeah, well kind of on the display side, just kind of it seems like there is multiple technologies out there. You kind of - you spoke a little bit about the advantages of power efficiency and whatnot. Is there anything else that separates what you guys are doing from what others are doing on the technology side?

Okay, if I do technologies, so I am going to talk now about - I'll talk about first of all the LCD technologies, and if I were to look at transmissive LCD so I've got a clear backplane with the electronics on that clear backplane and I am shining light through it in the liquid crystal material either turns the light off or on. In that case it's very difficult at our small pixel pitches to make a display that high resolution could get compact. So to make a display like our 2000X2000 full color display to make that we require a large sheet or a large display. So we're better in form factor with respect to that and I think our competitor has admitted such a thing in the past at a conference in fact at the end of last year. And the other one is LCOS; LCOS is thicker in the vertical direction because on top of the silicon wafer with the liquid crystal material you need a beam splitter and around that beam splitter you need LEDs. It depends on whether you're color sequential or not. So it's thicker in the vertical direction, and that gives people trying to make very small data glasses headaches. It's one of the reasons some of these customers want to use OLED display. So the other advantage compared to LCOS as an example is contrast, same with LCD but LCOS, I'll use as the example. That's why the military avionics, the government asked us to develop high brightness green because the pilots complained about flying in the sunlight with the fighter helmet or helicopter helmet and having the dialogue of brightness with the display in the entire visor loaded a green color. So we're given the opportunity by the U.S. government in this case to develop a high brightness screen display which has, as we know as I said, very high contrasts, it doesn't suffer from this and the pilot love it. And we also put a color display in one of these headsets and they loved that. So that's one of the reasons we're developing that ultra-high brightness color. So contrast is definitely an advantage. And if you ask yourself, why did the military move to OLED in the first place, if you remember military is 70% of our business, the reason they moved is size, weight and power. So power is a key item that our OLED displays are much better than the competing technology. Size, I mentioned already is smaller and therefore weight is smaller too. So those are the advantage over LCDs. If I turn to other OLED manufacturers no one has shown a display that is just bright as ours either monochrome or no one is far enough along or has announced anything on color technology. In fact one of our competitors in a European show said they're not trying to direct pattern feel, that it's too difficult to do. Well we've done it and we're improving that technology to make it manufacturable with this new equipment we're putting in.

That's excellent, it’s what I was looking for. Appreciate it guys. One last question on this, clearly the ramp’s going to be, a little slower on some of the consumer stuff from an adoption perspective but as you guys start to prepare for that, should we expect any material incremental increases on OpEx or R&D spend, or how should we kind of think about that going forward?

Well obviously we'll try and keep all of that in control. I think the R&D spending that we're doing on direct patterning is being supported by the government, not all of it because the capital equipment that I mentioned, two different times; one we put in last year, one this year was on our dime. So there will be some more expenditure, but if we need more than what we're doing now we'll certainly be letting you know.

Perfect. Appreciate it. Thank you guys.

Thanks Andrew.

[Operator Instructions]. Our next question comes from Dennis Van Zelfden from Brazos Research. Please go ahead with you question.

Thanks. Hello Paul and Andrew.

Hi Dennis.

Hi Dennis.

Hey Paul I was wondering why the product gross margin in the fourth quarter was only 19.5% versus 29.5% in the third quarter. Now you did mention some increased product cost but can you go into a little bit more detail there?

Yeah I can. A couple of things happened in both of those quarters that make a difference in the cost. In third quarter, our two OLED deposition machines were actually turned off for quite a while, as we were doing maintenance. You might recall from our last quarter's call that we had an extended maintenance period where we were making some clean room improvements et cetera. And so actually our chemical usage was a lot higher in fourth quarter because of the two machines we're running the whole quarter, and when they run they burn chemical. So chemical cost was up and most of the other cost were in the same area, little bit of an increase, but then we've actually produced fewer units in fourth quarter, than we did in third quarter. And so our - as you know you've been on with us quite some time you know that most of our cost in the gross margin is in fixed and semi-fixed expenses. So those got spread over fewer units produced in fourth quarter and that caused the lower gross margin. Had we produced a large number in the quarter it would have been quite a different quarter.

Okay, as a general comment for 2015, what level of product gross margins are we looking at? I mean more like the 19.5 or more like the - in the mid-30’s like it was several quarters ago? I asked because...

We're definitely not looking for 19%. We don’t give guidance on that. We do have a target of 50% which we’d like to get back to, we've been there before in our past but we would certainly expect a higher gross margin than what we had in Q4 and hopefully at some point it backup and approaches that 50% gross margin that we had a couple of years ago.

Okay. And as a just another general comment, your 2014 as you mentioned, the machine had all sorts of problem with low yields, downtime, tweaking the production process, installing add-on equipment and so on and so forth. I know things happen in manufacturing, but do you think the vast majority of those tweaking of the machine issues are now behind us?

I think that's a reasonable thing, we certainly feel better about the machine. Some of the new equipment that I talked about that will help with our downtime et cetera is not - I assume you are talking about the OLED deposition tool, some of the other new equipment we're putting in is not in OLED deposition but rather there is some equipment before OLED and some equipment in the backend for finishing that we're putting in. So we're going to continue to tweak the manufacturing process but we're feeling more comfortable about the OLED deposition.

Okay, thanks guys. Good luck.

Thank you, sir.

Thanks Dennis.

[Operator Instructions]. Our next question comes from Tim Rath from Davidson Investment Advisors. Please go ahead with your question.

Hi, guys, this is Tom.

Hi.

Hi. So I am curious about in your prepared remarks you talked about the HMD demos that are occurring. So it sounds like a presently tense kind of a statement and then I think you referenced also some early feedback. Can you give us a little more color there? What kinds of parties are - you're showing this to and what kind of feedback you're getting?

Well there are companies who are interested in virtual reality devices and actually we have also shown to companies who are interested in displays, the headset - show what our displays look like in headsets like that. They would be some companies you would guess I think and others you probably would not. I can’t name their names, forgive me, they don’t allow us to do that. And the feedback is the resolution is outstanding. You can’t see any of the pixels or the space between the pixel, I should say. The device has very wide field of view and it's very small. The device also has a headset that has inter pupil adjustment. Now in this case you have to get the headset very close to your eyes because it's made to be very small and it has a diopter adjustments for those of us, including me who don’t have perfect eyes. Now the only problem with that is if you - if the diopter adjustment isn’t good enough for your eyes and you need to use glasses that’s a problem. You can’t get the headset close enough, so you really need to use contacts. So the feedback was great resolution, great wide viewing angle and they gave us other thoughts on what we need to do for the rest of the product and I think we are in good shape to go forward. We do need to finish some pieces of the electronics, so that we can run things like games that are also being run on other headsets and do a comparison.

I'm sorry - go ahead.

Go ahead, this will be a terrific comparison, I put on other headset for example I won't name them and ours is much better.

So how long will it be to complete those steps and then you said you will be showing it more broadly, when could we expect this to happen?

Those are not too far off. We're counting down weeks. On the other hand there is - one other thing we'd like to do is change the display a little bit to improve the color but that will not stop us for going on in this process.

So if I understand you'll be showing it more broadly within a matter of weeks, is that true?

Yes.

Okay. Thank you.

And quite a few - [ph] as it is but not more broadly.

Okay. If I may ask another, am I still on?

Yeah, you're still on.

Okay. You, also in your press release I think it was, you mentioned high brightness I think it’s high brightness color displays being added to the system architecture was the quote and it was referencing both commercial and military. What exactly does that mean, is that sort of like a design in type of process?

It's actually people using this high brightness color in applications. The - an example of high brightness in application we're actually designing a display for couple of R&D type people, companies not R&D type companies but an R&D effort on a display in this case, the military application. We can't mention to you what exactly we're doing with it because there are customers but we do have a few customers who are interested in high brightness and in fact that's not only the color but the monochrome as well.

Okay. So they are designed products around your display is that what I'm understanding?

Yeah R&D, they doing some product development using our displays.

Okay. Thank you. And then my last question is you spoke to the new seal structure and that would drive some yield improvement. What order of yield improvement are we expecting to see there?

Well, we will tell you what the yield, the numbers are but they're expected to drastically cut, we will call it black spot, that's what we call it within the company and that if the water vapor gets through the seal and touches the OLED it will develop a black spot, looks like a dead structure in the display. And we expect it to drastically reduce that occurring. And obviously we - it will not only reduce it in manufacturing but it will make it much more like or less likely that a problem occurs in the field as well. And you know our applications were 70% military so they have to go through all sorts of environmental issues. So this is also helpful for our customers in the long run.

So is that a significant increase in the overall yield.

Yeah, what it really says is we're going to reduce this black spot and that's one of our biggest yield issue. So it should help yield significantly, that is correct.

All right. Thank you.

And our next question comes from Tom McGuire [ph]. Please go ahead with your question.

Okay. Hi good afternoon Andrew and Paul. I just had some questions that follow-on from some of the previous questioners. And Paul you mentioned that your target is a 50% gross margin and I’d love for you to get there but I remember you got there before when you just had the old machine and you're probably not running as many different SKUs as you're doing with the new machine. So my question is, how do you get from 20% to 30% gross margin on product to 50%? Is it all volume related or primarily volume related or if that's the case then how do you get the volume just kind of help me there?

Yeah of course. Well first of all we had several quarters where we were over 60% gross margin in our past. And you're correct we have more SKUs today and we also have the new OLED deposition tool. So there are some as you mentioned there is some different factors that we have to deal with. And even today we our original SVGA plus analogue product tends to get the highest yield even today after all this time. So what we hope to do is as the newer SKUs, as we have experienced with the newer SKUs we hope to improve the yield on those as well to approach what we do with the old SVGA SKU. And it's a process but there is no reason why the yield on these newer displays can’t be as high as the yield on the older displays. So that's the goal and target at 50%. It's not - we're not saying we'll get this 60 or 55 and those were routine numbers for a few years in our past. And the way to do it is that we just announced the couple of new products here, the 096 and the SVGA out, that we have experienced with those and volume does come into play as well and longer runs on the tool comes into play as well where you don't have line changes occurring so often you run the same product for longer runs, tend to get better yield on those as well because you lose a little yield when you start it up and then you change it and you start it up again, you lose more yield. So we're trying to organize our production where we'll get longer runs and we'll be able and with experience we'll have better yield on some of these new products. And that will make a nice difference in the overall gross margin, but volume, just volume in general helps tremendously. If you go back overtime and you compare our gross margin to our overall revenue you'll see a high correlation with gross margin being high when revenue is high and usually when revenue is high that means you produced and shipped a lot of units in that quarter. So volume alone even if you didn't have any yield improvement, volume alone has a tremendous effect on your gross margin. So we're running at volumes now that are below where we've run in the past, revenue is not as high as it was a few years ago and the volume of display production is not as high either. So yes, volume would help tremendously to get us to that target.

Just one other thing Tom on the short runs, Paul made a very good point on that. Yield is an issue when you start up and if you're only making a short run the yields never gets to where it should be. But the other thing on short runs that hurt you is chemical usage and the chemistry that for the organics for OLED is a few hundred dollars a gram to it could be few thousand dollars a gram. So here you're tuning the - tweaking the tool to get it to where you need to do to run it and you're wasting all this material. So long runs are important. So all these new products for short runs have hurt us and that's why getting them, getting sales behind them and making more of the runs is very important.

Okay thank you. So if I look at the product sales this quarter versus last quarter I wrongly was expecting to see significantly higher product sales than you reported and that's just because the third quarter was affected due to lot of downtime on your machines. And so I figured you'd play some catch up in the fourth quarter. And you did have an increase of about $0.5 million. So what's the main reason that your product sales were so - or not as good as I was expecting. Is it a lack of orders, is the military business plateauing, what's happening that it's not better than I thought.

Well we did have in Q3 we did build up our inventory of - in width. We anticipated that we'd be down in part of Q3 for the clean room enhancements and maintenance. So we did build inventory. So we were able to finish more product in Q3 than one would have expected based on the amount of time that the clean room was down. So that was one factor that we had going on. And we've had some juggling of orders where - and this is something that we can work on in the company is where customers order and then they push out an order and we're all geared up to make that order. And we try to find other orders to take its place and sometimes that shifting around isn't so efficient and we don't get as many displays produced as we would have hoped. So it comes down to maybe getting longer lead times from customers and getting more harder timeframes on the PO, so that we know exactly what we're going to produce and when. And then I think we would have produced more displays and sold more than before.

Okay thanks Paul. And then your outlook of $26 million to $29 million for 2015, first of all thanks for giving us some guidance. Second of all if it doesn't show a lot of growth versus this past year, and also it's still - the high end of the range it's still below what you did in 2010 and 2012. So what's happened in here do you think and are you just being overly conservative which isn't a bad thing, or is it you’re just kind of stuck in this rut that with the $30 million kind of talk.

Part of that is really given still 70% of our business military part of it is where we expect the military spending to go. And we do want a little time to look at how that's going. We are getting the R&D back from the U.S. military at least. And we are - therefore expect orders in the future based on this. But the worry is so worldwide where is military spending going to go. Some of our programs are - were in the French, still are in the French soldier modernization program and some things like that are coming to an end. So we have less orders because of that. So we're a little bit cautious maybe, but again we still think the range is a reasonable one to start out with.

Okay good. And then the last question is. I think it's extremely important that you guys are doing and what you're doing in terms of all the increased technology on high brightness and that HMD product is real exciting also. I would hope that you can come close in 2015 with if you fall within the range of the $26 million to $29 million, that you could be darn near EBITDA neutral and I don't know what your breakeven point is there but can you lend any guidance as to cash used at a $27.5 million or $28 million revenue rate for 2015.

Yes. We might be able to give you some guidance there. Obviously it depends on certain business conditions within the quarter on what we have to spend. But our goal, I can tell you, our goal is to be cash neutral at a minimum. You've been around a long time and we’ve always tried to adjust the business to what we can earn with the business and I guess that’s why it's been so long since we've had to raise money or take on any debt. So we try to adjust to - if we're spending more in one place we try to save somewhere else, so that we don’t spend more than we take in. And even and we made the comparison that we had $6 million at the end of December and we also had $6 million at the end of September. So I think we made some adjustments in that regard in 2014 and if we needed to in 2015 I'd expect we'd make similar adjustments but we look forward to profitability and breaking even and that’s certainly the goal and we can do it on, not a lot more revenues than we're currently doing. If you took my - in my remarks I had an adjustment on our adjusted EBITDA that we're about 0.5 million short of EBITDA neutral. And that’s really not a lot of money and with some revenue increase we'd be right there at neutral already. So I certainly think it's in the near term if the things happen the way we expect.

Okay that’s really positive to hear. So I have one another question, I thought of, over the past few conference calls and in the Qs that have come out when you talk about new business or whatever I don’t have the Q in front of me but you talk about all the interest from companies out there in OLED and your high brightness displays and all that now and Andrew I believe you’ve said there is like 40 companies working in the virtual reality kind of area and you've kind of got a top 10 list and that you've had a lot of discussion and there is a lot of interest. Can you just update us as to is interest still with OLED and with what you are producing or what you're trying to get to in OLED and just give us a run down if none of that interest is waning?

The 40 companies, that's by companies both rumored to be doing virtually reality or augmented reality are ones who we actually know about, have announced it, in fact there has been announcements of companies coming out with devices in that list. An example might be Samsung actually did a phone thing in the front of an Oculus like headset and actually came out with us it first in example [ph] when they came out. So there are about 40 companies by our count maybe a few more. We pick ones that make sense to us and that are interested in talking to us and they are still interested in micro displays, from a number of companies both on the virtual reality side and also augmented reality side. And frankly some of these companies are so stingy with information I’ll say they don’t tell us what they're doing. So sometimes it’s even difficult to work with them like that because we have to go to build a display that are - tell them what we would do with the display and we don’t know what it's going to be used for. So the answer is still yes. I don’t have a count on how many we talked to but when we talk to people about the HMD we put together over last week and a half we are actually talking to some companies who are interested in displays as well. So yes the answer is still there are a number of companies interested in high brightness display, displays with OLED technology that we know we can make.

Okay, thanks again. Thanks for all the answers and taking my question.

Thanks Tom.

Thanks Tom.

And ladies and gentlemen at this time we've reached the end of the allotted time for today’s question and answer session. I’d like to turn the conference call back over to management for any closing remarks.

This is Andrew again. I want to thank everyone again for being on the call and also your questions and any suggestions you have for us. We get ideas from customers and actually we've done some great work because of our - that focus group I've talked about and I'd like to thank the team itself for the efforts, for example on the yield team; Olivier, Amal and Robert’s groups and my group too for seeing the quality head, that did a very nice job on particle reduction with Ivan and Igor [ph] did a very nice job on the uniformity issue we had. So these guys are working like mad and I just want to let everyone know that I appreciate their efforts and those folks here in Bellevue who are keeping the books straight and keeping Paul and I out of trouble, it's a great effort in this company. It is one of the best teams and teamwork among people I have ever seen. So I am very pleased to be a part of it. So again thank you all for being on the call and listening to us and thank you for your suggestions. Okay, see you next time.

Ladies and gentlemen that does conclude today’s conference call. We thank you for attending. You may now disconnect your telephone lines.