Jeffrey Lucas - Chief Financial Officer Andrew Sculley - Chief Executive Officer

Andrew Uerkwitz - Oppenheimer Dennis Van Zelfden - Brazos Research Aaron Martin - AIGH Investment Partners Orin Hirschman - AIGH Investment Partners Tom Rath - Salzer Valley Asset Management

Good morning, and welcome to the eMagin Third Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I’d now like to turn the conference over to Jeffrey Lucas, Chief Financial Officer. Please go ahead, sir.

Thanks. Good morning, everyone. We’re very glad to have you join us today for our third quarter 2016 earnings conference call. 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 include references to projections of future revenues, plans for product development and production, the company’s ability to ramp up production, future contracts, product benefits, operations, liquidity and capital resources as well as statements containing words like believe, expect, plan, target, et cetera. Our risk factors are included in the company’s Form 10-K for 2015 on file with the Securities and Exchange Commission and in company’s Form 10-Q for the quarter ended September 30, 2016 to be filed with the Securities and Exchange Commission on Monday, November 14, 2016 because of today being the Veterans Day holiday. Except where required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements for any reason. With that, I’d like to turn the call over to eMagin’s Chief Executive Officer, Andrew Sculley. Andrew?

Thank you, Jeff. While not reflected in our Q3 results, we’re very excited by the amount of business development progress we made in this quarter. Yesterday we announced the launch of our consumer products business with the introduction of the first two products one of which has already garnered a prestigious award from the upcoming 2017 Consumer Electronics Show in January. We are expecting some initial revenue from our consumer products in the current quarter. I will go onto greater detail on our consumer product launch in a minute. We also continue to make significant progress in expanding the market reach of our leading OLED microdisplays in the greater commercial sector with another key design win in the medical device space. This time it was with a leading company for one of their next generation device platforms. The device will use our very high resolution displays. This is the second key win for us in this important vertical market in as many quarters and underscores our view that the form factor and resolution of our technology is steadily finding its way into more applications. And while our domestic military business saw anticipated softness this quarter as current contracts are generating lower volumes, we’re encouraged by a pickup in order levels in our newest U.S. military contracts. We expect volumes of these newer contracts to continue to ramp in 2017. Additionally, our foreign military business saw several new multiyear agreements, including a contract with a major European defense company for a new generation thermal sight and goggle system, another for our new simulation and training helmet display for a European military customer and another for our displays to be integrated into a missile defense system scheduled to be rolled out across 19 countries. Finally and importantly we’re very encouraged by the significant progress we made in the quarter in our discussions with large Tier One potential strategic partners who are interested in incorporating our technology into their next-generation devices. Although, we spoke of this during our other conference calls, it’s worth repeating, we have proposed new display design concepts to a number of Tier One companies for next-generation VR devices. The concepts include high brightness full-color OLED using our direct patterning technology, higher resolution, a larger display to make the optics easier, a path to mass production was the strategic partner. Also included are things like high frame rate, global addressing and the ability to have low persistence, all which you may have read are necessary for the industries needs. We are working with these multiple Tier One companies on this path. Our first step will be a contract related to the design of that next-generation display, which we could finish one or more of these contracts by year-end. These companies are discussing the display design with us because only we have demonstrated full-color high brightness OLED and we have demonstrated outstanding design capabilities for silicon displays using OLED. Those two things are absolutely necessary. I would like now to discuss in more detail our exciting announcement yesterday about our entry into the consumer products market. You will recall we announced hiring leaders for our HMD Group in 2015. After considerable research and product development, we announced our first two products focused on significantly expanding the size of the market for consumer and industrial night vision systems. Our BlazeTorch product is a headset-based night vision system incorporating our low-power, high resolution OLED microdisplays in a newly designed prism optic. Our BlazeSpark product is a smartphone case and associated app-based system, which allows users to use their handheld device to see and record events at night with live streaming video. Last evening BlazeSpark was designated as an honorary in the digital imaging category at the 2017 CES Innovation Award Ceremony. We are excited and proud not only to receive such a prestigious award but to have done so with the very first product launch into this market. Both the BlazeTorch and BlazeSpark products provide a superior night vision experience versus existing products on the market at disruptive prices. Because our products enter this market at prices significantly lower than existing solutions, we believe the products can significantly expand the market for consumer and industrial night vision solutions. Outdoor enthusiasts can now enjoy and even record their activities at night at affordable prices. We also believe that these new products could find broad appeal in industries where work is performed at night, including law enforcement and utilities maintenance for example. Not only are we excited by this new revenue stream for eMagin, but we are leveraging our existing manufacturing infrastructure for production of the displays for BlazeTorch. This will benefit our gross margins across all display. On the technology and product design front, we have upgraded our direct patterning equipment to provide significant improvements in display performance and higher production volumes. There is interest from both military and commercial customers in this technology. Under the existing ManTech program, our development work progressed and is on track. Many customers including both the military and VR companies will be sampling direct pattern displays in Q1 of 2017. We will be selling them to military scale customers in the second half of 2017 as products. On our new 2K x 2K full color microdisplay, which expands our offering for the commercial marketplace, it’s on schedule to produce engineering samples in December and will also be sending samples to select customers including the customer with whom we entered into the licensing agreement last December. With the launch of our consumer products business, we see three distinctive businesses emerging, all of which leverage our leading OLED microdisplays whereas a year ago we’re almost solely focused on military and related markets. Today, we have two additional growing revenue streams in the commercial/industrial and now in the consumer products. This significantly expanded business has been driven over the last several quarters by some very significant reorganizations internally. We have expanded our marketing and sales activity in a new focus on commercial and industrial verticals while maintaining our leading position in military markets. These efforts have already begun to bear fruit including accelerating traction in large market for advanced medical devices I mentioned previously. We have also streamlined many of our internal processes having now fully relocated our accounting and finance operations to our headquarters in Hopewell Junction. Additionally, we recently made key hires in manufacturing and business development. All of these moves provide us with a better ability to improve yields and scale our manufacturing volumes in anticipation of growing demand in our consumer group and in support of our strategic partner efforts. In short, this is not the same imagine as it was a year ago and we are excited by what 2017 potentially holds for the company. With that, I’ll hand it over to Jeff for some more detailed look at the quarterly financials.

Thank you, Andrew. I will start with the income statement. Revenue for the third quarter was $4.3 million, down 20% from third quarter 2015. The decline was mainly due to anticipated lower volume from some of our maturing U.S. military program. This is consistent with what we’ve mentioned last quarter and was the driver behind the decline in product revenues in the quarter. We are starting to see initial volume production ramps coming from newer U.S. military program and expect to see higher volumes as we move into 2017. We remain a key technology partner for many different clients in a very large market for U.S. military night vision VR enabled training system. Additionally, we continue to see a solid activity with four military defense contractors. So despite the timing issues with contracts and initial ramp up on our new ones, our position in these markets remain solid. Focusing on our revenue components, product revenue was $3.5 million in the quarter down 24% compared to last year. The decline reflects the U.S. military activity I just mentioned. R&D contract revenues totaled approximately $769,000 in line with the prior quarter and up 2% sequentially from this year’s second quarter. Gross profit for the third quarter was $1.3 million, down from the second quarter but up nearly 16% from third quarter of last year. This resulted in a gross margin of 30%, up from 20% in the same quarter last year. This increase in gross profit and gross margin reflect higher profitability in both our product sales and our R&D contract revenue. Gross profit from product sales increased by approximately 10% to $991,000 with an increase in gross margin of 9 percentage points to 28% from 19% in the same quarter last year. This is mainly the result of the favorable impact of higher production volumes as we built inventory in the third quarter for the launch of our consumer product that Andrew discussed in his comments. The higher volumes allocated to fixed costs from manufacturing which comprise a large proportion of our overall product cost to a larger number of unit to lowering our unit cost. This was offset to a degree by higher labor and equipment maintenance cost incurred during the quarter. Contract gross profit was up approximately 41% to $291,000 with gross margin expanding to 38% from 27% from the third quarter of 2015. Last year’s contract profitability was affected by unfavorable revenue and profit adjustment to incorporate higher total project cost with action as acquired by GAAP contract accounting. Moving to our expenses, total operating expenses was $3.7 million in the quarter, up $372,000 or 11% from $3.3 million a year ago. R&D expenses in the quarter totaled $1.7 million or 39% of revenue compared to $1.2 million or 22% of revenues from a year ago. The approximate $500,000 increase is due to a lower allocation of R&D cost to R&D contracts which are reflected in R&D contracts margin. In higher spending on development cost associated with our consumer products. Selling, general and administrative expenses or SG&A for the quarter was $2 million compared with $2.1 million in the same quarter last year. Last year’s expenses included charges for severance and include for the anticipated settlement cost of a legal. This year that SG&A includes higher non-cash stock compensation charges and costs associated with the launch of our consumer product. Operating loss for the third quarter was $2.4 million, up from $2.2 million in the third quarter last year. Net loss for the third quarter was $2.4 million or $0.08 per basic diluted share, compared to $0.09 per basic diluted share of last year. Adjusted earnings before interest, taxes, depreciation, amortization and stock compensation or adjusted EBITDAS in the quarter was negative $1.6 million approximately the same as last year. This year’s adjusted EBITDA included higher non-cash compensation expense to reflect employee option grant during the quarter. These grants are made to employees for the work over the past year and given the many exciting and demanding initiatives ahead of us and for the hard work ahead. Turning now to our balance sheet, on September 30, 2016, we had cash and cash equivalents of $6.9 million, compared to $9.3 million on December 31, 2015. During the quarter, we increased we increased our R&D investment and began to build inventory for our consumer product launch. While our working capital requirements increased in the third quarter due to our pre-launch inventory built, we are encouraged by the potential revenue stream of this production and the contribution to our overall profitability. From a financing standpoint, warrants issued on December 2015 financing were expedited in August and generated approximately $4.3 million for general working capital purposes. We continue to have no debt, we are however negotiating an expanded credit facility from which we can draw if volumes across expanded lines of business increase and require additional working capital. Our outlook for the remainder of 2016 is focused on continuing to drive shareholder value through our existing operations, to carry new contracts and military programs, successfully launching our new customer products and, as Andrew mentioned, furthering our discussions with Tier 1s OEMs interested in incorporating our leading OLED displays into the next generation of products. Operationally, we will continue our progress in manufacturing improvements including yield enhancement and production capacity expansion. In closing, I echo Andrew’s comment that we believe that eMagin is the only company whose products can meet the brightness and resolution requirements for high pixel density displays that the market demands. We are excited by our technology and intellectual capital and the level of interest that we are seeing in our product and in our company. We look forward to updating the market on our progress of the company initiatives in the coming months and join the next quarterly call. So with that, I will turn it back over to Andrew for final comments before we take your question. Andrew?

Thanks, Jeff. Before we open the call to questions, I would like to underscore what I said last quarter about our strong focus on achieving material and measurable milestones that can drive shareholder value for eMagin. And we believe we are beginning to deliver on these key milestones. We have significantly expanded our addressable market as we move well beyond our core military markets with growing traction in commercial, industrial and our entry into the consumer market at disruptive prices. We are also very focused on keeping the pace and tempo of discussions going with large strategic partners and hope to be able to provide you more news as quickly as possible. We also continue to see our U.S. military business as a strong foundation for our overall business with a healthy number of existing and future contracts, which help fund advanced technology development to power the next generation of high performance display technologies. These are exciting times at eMagin and we look forward to updating you on our progress next quarter. Thank you for your interest and now we should open it up to questions.

Thank you. [Operator Instructions] And your first question will come from Andrew Uerkwitz of Oppenheimer. Please go ahead.

Hi, thank you, gentlemen. I appreciate it. On the consumer product side, is this just the first of many that we’ll plan to see or are these – or how should we kind of think about the product roadmap as we go into 2017 and 2018? Thank you.

Good morning, Andrew. Clearly, we’re thinking of the next steps in this. We do have a roadmap, but we’re not willing to let it out at the moment. So there will be other products.

Okay, thank you. And then can you talk about – as you continue to move into the consumer market both with your own products and partnering with Tier 1s, how should we think about the OpEx ramp going forward?

Andrew, this is Jeff. Let answer that comment for you. At this point, I think, the OpEx that we saw in the quarter that just ended clear representative of what our OpEx is going to be. If indeed the consumer products begin to accelerate rapidly, we may incur some additional expense as we are building out the marketing effort here. To give a little bit more color on this, in the third quarter, we had some expenses we don’t anticipate recurring in the future being those associated with the transition of the finance procurement function. However, offsetting that is that, as Andrew pointed out, we made some pretty critical senior management hires during the quarter with business development and operation. So we are going to have the full quarter effect of those, but outside of that it’s going to be pretty judicious in terms of the increase and OpEx going forward.

I appreciate it. And then one last one, with the change in presidency here, does your outlook for the military business change at all? Thank you.

Well, I think that the programs that we are – we have bid for with, obliviously, the integrators and the integrators have won those will not change are long-range programs. So even if the new president wanted to change it, it wouldn’t happen over the next few years. And these programs are run for a few years each, so for example, ENVG III it will be – it’s a big program, so I don’t see any issue with that.

Great. Thank you, gentlemen, I appreciate it. And pretty exciting time right now. Thank you.

Absolutely, it is indeed. Thank you, Andrew.

It is indeed.

And the next question will come from Dennis Van Zelfden of Brazos Research. Please go ahead.

Good morning, gentlemen.

Hi, Dennis.

Hi, Dennis.

I was wondering what kind of research did you guys do on each of your two new consumer products to determine potential demand and what did that research indicate in terms of demand?

Well, we looked at the night vision market and we also have – we looked at the recreational space by going to places that have recreational activities and we know after talking to many of them that there is a interest in recreational activities at night and we developed the concept with that in mind.

Let’s expand upon – if I can expand upon that just a bit, part of the channel – we have a sense of what the overall night vision market. It’s around $5 billion market. Naturally the military is a title portion of that. We wanted to get a handle on how much is consumer and how much is recreational. And the opportunity that we found here in doing that research is that the market on the consumer and particularly the recreational side is relatively underserved because of the price point. So when we sat back and looked at what we can achieve here, what our cost structure would be to get these products out to the market competitively, profitably and at very attractive price, we recognize that there is a change here that we can really have an impact in terms of maybe growing the market overall. So from our standpoint, the work we did, it seem like a pretty compelling case for us to expand in this space.

So you basically found that there is a big demand for a product that can see at night without lights being around, meaning, you talked about recreation, I mean, things like football games have lights and stuff. Did you go into that?

So let me give you an example, I will give you an easy one. If you are going on a safari, be it anywhere in the world, and some animals are out at night, so would you like to take a picture of them using the Spark – BlazeSpark, that’s an easy thing using your phone. If you are – if you ride motorcycles at night and I know this sounds dangerous to you, but people do this sort of thing with lights on their helmets, et cetera, ride mountain bikes. So using the BlazeTorch makes that much and much better.

And you can even expand that when you think of some areas like resorts, ski resorts, and places like that, that are really looking to how can they better utilize their assets by having – using some of our products and we are in discussions with them, which allows more night activities and it’s very, very appealing to them and very appealing to the market.

Okay.

And this is actually how we – what we did to sample the market by going to recreational facilities and they made us very interested in getting the stuff out.

And did they only become available for sale literally in the last couple of days?

We held off for the CES award. We thought that was a great time to start.

That’s correct.

Okay. And last question, Jeff, the increase in inventory, I don’t have it in front of me, but it was about $3 million I think, was it all consumer products or was there just other regular inventory build for other displays in there as well?

Some of it is – a small portion of that is inventory build out for what’s happening in our military business, so that begin to ramp up, but it’s predominantly the consumer build. But I do – yeah, so, it’s predominantly the consumer build.

Okay, thanks, guys. Good luck.

Thank you.

By the way, let me add one comment here if I can, just to finish up. As I indicated primarily consumer build, a fair portion of that actually has to do with our displays that we build specifically for these products, so that they have of course a variety of uses.

Thank you, sir. Our next question will come from Aaron Martin of AIGH Investment Partners. Please go ahead.

Hi, good morning, Andrew and Jeff.

Hi, Andrew.

Very exciting on the launch. Can you talk a little bit about your launching plans in terms of distribution and that kind of stuff? It’s the first time you guys have a consumer products, that’s a new world for you, so what is your game plan there?

Well, just to note, it isn’t quite the first time the company has had. In 2006, we actually won a CES award for a first generation VR headset using the Prism Optic and then – that time it was in SVGA display, so it is quite the first time. But we learned something from that and we did hire a couple of folks who are very skilled in this market as I mentioned. So here the idea is website first and then recreational groups next and that’s the start of the launch and we are not going to big-box retailers at the moment until this launch is in the fashion that I just mentioned.

Aaron, this is a collective launch, we are being careful off. And the reason for that is because obviously we are not a large company, we don’t have immense working capital at our disposal, we have to use it very selectively and carefully. So we’ve done this very sort of specialized launch here. And as we get validation – further validation in the marketplace, as soon as [indiscernible] exploring ramping up. But at this point in time, we want to make sure, one, we have enough with the existing interest out there; but secondly, that we are in a position that we are not exposed – overly exposed, but in the other hand, we can ramp up pretty quickly.

Got it. Sometimes you talk about the inventory, a lot of it being display that you could theoretically use for other products?

Yeah, and it’s not theoretically, we know we can use it for other products.

It’s true. Absolutely.

And in terms of – I guess the gross margin and that sort of stuff and the financial impact of a consumer product, how does that compare to your current business?

Well, I think that’s going to be driven naturally in large part how well we determine in terms of the pricing, but at this point in time, certainly, the gross profit is going to be attractive. The gross margin percent, it’s in the range of what our – where our current product grouping should be in terms of this delays in the contract work. But very important point to note there particularly regarding our displays that we said many times in the past and I pointed out in the call earlier that so much of our production costs are fixed. And if we have higher volumes, the fixed portion comes down dramatically, so we are actually anticipating that with the current price structure we have in place that it will have a pretty positive impact on margins going forward with margins – gross margin percentages that will be superior to our existing product groups – product in contract services.

Got it. Okay, great. Thanks a lot.

Thank you.

The next question will come from Orin Hirschman of AIGH Investment Partners. Please go ahead.

Hi, good morning. How are you?

Good. How are you?

Hi, Orin.

Hi. A couple of different questions in different areas. So the night vision in the consumer product, is the technology to the night vision itself new or is it the integration with the OLED displays that makes it unique and still cost effective? What’s the proprietary aspect here and what’s the closest competitive product that you are aware of?

Well, in this case on the BlazeTorch, the Prism Optics are new, we designed them for another purpose used it to display SXGA that we have for a while now, not too long, it’s new and very growing product. So the integration of that with a thermal camera is what is new here. And actually the thermal camera is new as well. I can’t tell you anything about that, however, because we’d like to keep that as secret. And on the phone case, the new thing is an app that takes the image from the thermal camera, send it to the phone and then send it to a website, you can record, et cetera, and live stream.

And what’s the closest competitive product that you’ve seen?

In this case – I will give you an example, there are industrial, which you can have as a consumer handheld, it looks like little cameras, those are close, if you will, for the camera, but it’s not live streaming and – so I think that difference is different from what I’ve seen. And here I’m not talking about military devices, right? The other one, obviously, on the consumer even as a hunting scope, you can have a night vision hunting scope for hunting animals and we do sell displays into that space as well.

There are devices out there, like, Bushnell, Armasight, Firefield [ph], FLIR and others but the point to make here that they are not in our price range, our – I should say price level, and actually those that are, don’t have the quality, don’t have the resolution by any means that ours offers here. So, we feel that actually or the reason we are doing this is, there is not much of a presence of a real competitor – many competitors at this point in time. That’s pretty exciting for us to come out with something of this resolution and this quality at this price point.

Okay.

We do sell displays into many of these night vision items like ones is the Jeff mentioned and they are handheld.

Exactly. They don’t have the convenience, the ease of use. We have this – you can have an attachment to your smartphone or you have goggles that you wear hands free. What’s out there now, really don’t – doesn’t offer that.

Okay. And resolution wise, they are also not close in that price range or anywhere near that price range?

Obviously, it depends on what you buy. But resolution wise for the headset, we are in a good price range and very nice resolution, hands free, et cetera, it’s very compact, very nicely designed. And the phone, of course, is the resolution of the phone, but the camera feeds that resolutions.

You mentioned additional consumer products, is that in the near-term or is that for 2017?

Well, I think, you’d say on the consumer product side, we are working with Tier 1 companies to design, we’ve given them – this is the display technology that we think you should have and they agree with us and we are working to sign up and design display for that.

Okay. In terms – I will break the question into two. In terms of your own additional consumer products, anymore coming near-term, 2017, what should we think about on that?

We do have a roadmap, but we would like to concentrate on this first, what we have right now.

Okay.

And as we make offshoots from this first, we don’t want to bite off too much.

Exactly.

Okay.

And the same thing that we said on the launching of the products, we are not going to big-box stores, we are doing it in a more controlled fashion to see it take off and we believe -- 100% belief that this is going to take off, but we want to be a little conservative here.

Okay. In terms of some of the bigger companies that are working on consumer products including the one that gave you the $1 million NRE where are we up to now in those process developments, so those product developments go on-track, any of them going off-track?

So they are – we are working with, as I mentioned, we gave them a path. As I mentioned during my remarks, we gave a path, we need a display design little bigger, very high brightness and, by the way, the reason these companies talk to us is because that technology – very high brightness OLED is only available from us. That’s – when we said this is the type of display you need and, of course, they say, well, we need something a little different, change in resolution, et cetera, et cetera, now we are waiting for – actually working towards signing up a couple of these display designs.

Okay. So, in terms of the one that you actually have signed up or the ones that you have signed off, are they on trajectory for consumer launches through 2017?

I think you are probably remembering the $1 million deal we did on R&D and we are on track to deliver displays to them, sample displays in December of 2000 x 2000 display. And they are not talking to us about of force when they are going to launch, et cetera, they are very secretive, but we are on track to deliver the displays that they need to start.

Okay. And any of these companies agreed to take the display as is or they are only custom want?

Here – there’s two separate things going on here. That particular company – the $1 million company, we will call them, actually it’s a display that we are designing. We did a 2000 x 2000 resolution display before, we designed a new one that’s a little bigger and that display they are interested in. They haven't told us they weren't interested in a different display, but there's a number of – a few companies working with us on a new design display that we’re very excited about.

Okay. And do you think any of those companies would let you announce their names or you can give some details for us to be able to understand the magnitude of whether they are big designs or smaller ones?

They will be very secretive.

But do you think you can give us – do you think you can give us some less details to know whether they are major designs or minor design?

Okay. Well, they are Tier One companies we are speaking with right now, a few of them.

Okay. And my last question is on the military business where you said you built some inventory, is that because you are hoping to be up sequentially on the military business?

It’s a small amount of inventory and we do expect this quarter to be better as we start feeding more of these programs. And just to give you an example ENVG II has stopped or the French soldier modernization program has stopped and we’re – and that’s because they launch a program, it’s ENVG III and we expect that to be ramping up a little bit now and then next year.

So just to expand upon Andrew’s response, we do expect the military stay up this quarter over last quarter based on what we see in the shipments for the quarter to date versus this time last quarter, we are actually well ahead of that, converse we do have of course the holiday season in the back end of this as well, but again overall we do expect this quarter military sales to be higher than they were last quarter.

Okay, great. Thanks very much.

You are welcome.

And the next question will come from Tom McGuire, a Private Investor. Please go ahead.

Congratulations gentlemen on the new consumer products. I have one question and that’s regarding the statements you make about – in the press release; Jeff, said it on the line too that you guys believe you're the only company that can provide the brightness and resolution that’s needed for the displays for these new markets. I think that's pretty bold and I don't disagree with it, but I wonder where are you really in the discussions with these Tier 1s? Is it tweaking product specs for them or have you advanced past that to get to maybe some negotiations like upfront investment by these Tier 1s and assurances of ability to perform in and kind of stuff? Is that – are we there yet or not?

Let me take your first part of that question, it’s a bold statement. So we have demonstrated very high brightness directly patterned OLED at these fine pixel pitches, so if I take round figures, the one we’re working on now is 2645 pixels per inch. Samsung cell phone, which is used in – cell phone type displays used in the ones that you know of today, those are under 600 pixels per inch and Samsung – alright, probably shouldn’t mention the name, those cell phones are directly patterned, but there is big space between the sub-pixels and ours is very, very small space between the sub-pixels and again 2645 pixels per inch. That’s what the companies need in order to get a good immersive feeling. And the high brightness, no one else has demonstrated, 4500 nit OLED display and especially at these small pixel pitches. That’s just fact, no one did. So the other question you asked is where are we, we are working on the display design and looking to sign contracts.

And I will expand upon that just a bit and that is – we are far align certainly with the design specs and we are continuing obviously our engineers with their engineers. But further we are also in discussions in negotiating some of the longer term elements of the arrangements that you alluded to, Tom, because in face these folks want and we have a path to high-volume production and that – there’s multiple steps there, of course, design, developing a prototype, get into a low rate production capability and then moving on to a higher rate and that part of our discussion, we try to outline and define those aspects of our discussion in our agreement now, [indiscernible] some point down the road because in part we are looking to get a longer term commitment from these folks and we are trying to seal that in so to speak by addressing these challenging negotiations now.

Okay. Thanks again gentlemen and congratulations.

Thanks.

Thank you, Tom.

And the next question will come from Tom Rath of Salzer Valley Asset Management. Please go ahead.

Hi, good morning.

Good morning.

Just a couple of clarifications I guess. You spoke to the fourth quarter; you expect military business to be ramping a bit. If I recall, I think there was one major contract that’s starting to deliver in the fourth quarter, is that correct?

Well, there are – there is one major contract. There is – actually we expect few more to deliver. But these are starting to ramp essentially.

Okay. So the major ramp occurs in – after the first of the year?

Yes.

And then on this discussion about Tier 1s and the contract that you are – or contracts that you are pursuing, those would be, if I understand, development contract that you had then work for an additional 9 months to 12 months to produce that display?

Yeah, you actually have this right. Our development contracts and it takes – depending upon what the display looks like, how different it is – and just a warning, these are different – it takes approximately a year. That is correct.

Okay.

And then, as Jeff mentioned, very importantly we are also interested in production of these and we are working on mass production partnerships as well.

At what point would you on a practical basis call that as a design in – I mean have they – do they make a commitment to you upfront that if you produce that to that spec that they will buy a certain number of units?

Well, typically, remember, they are paying for the design and this is no different from designs we’ve done in the past and we pay for the design and the ideas that the design must be built by us or on our behalf using other mass production partners.

Okay.

We don’t actually commit upfront to certain volume.

I’m sorry.

Companies don’t commit to a volume upfront.

Okay. And then my final question is – because we haven’t talked about this in quite some time is, is there anything going on in the competitive front in the micro OLED display market that you are aware of in terms of new or enhanced competition?

Well, we do know that companies have – everyone is trying to do this brighter display micro display world using OLED and the brighter display, there are ways to do it, we could do this too, but frankly the way we are doing is much better, so companies are getting close to 1500 nits, even 2000 nits, but there is no way they are going to match the 4500. And I will just give you an example of why, if you are a consumer company, you need this. You want to have the display have a good life time and you want to run the displays such that it’s only on for a fraction of the time of the frame and that’s because you get no motion artifacts and with that you need to increase the display brightness, for example, if you are only running by 10% of the frame, you need a 10 times brighter display, that’s why they need us.

Okay. Thank you for your response. I appreciate it.

No problem.

[Operator Instructions] Your next question will be a follow-up from Orin Hirschman of AIGH Investment Partners.

Hi, just one quick follow-up really on the last two questions. The technology that you have is originally developed by IBM if I recall correctly, is that correct?

I’m sorry. What technology?

The original – the OLED technology that you’ve developed.

No, no. The origin of OLED technology actually was – the inventory of it was gentlemen by name of Ching Tang at Kodak. So he is a colleague of ours. Those of us who worked in the OLED group at Kodak, I ran that group. It’s originally invented by Kodak.

So where did your – where did your base originally come from? Where did the technology that you use come from?

Well, by that you mean we actually – we were – when we started to go into OLED in the very late 1990, we actually talked to Kodak about it. With the IBM, the only relationship there is they had clean room space and some equipment like a [indiscernible] deposition tool. So that’s why we came here.

Okay. Just one final question on this point that the amount of money that was actually put into the development of your OLED screen all the years has been approximately how much, do you have any idea?

I think if you maybe account the money over the years and look at our retained earnings, may be that would give you an indication.

Okay.

Over 20-plus years. That’s the fair line.

And the other thing is, I should add one other thing that the first part of that – the company actually started in 1993, the first part of that was trying to develop field-emission displays at 2 inch size, so all that money was…

But you know, Aaron, you make an interesting point there because when we have discussions with these Tier 1s and others naturally they are going to ask themselves the question the make versus buy so to speak, do they want to do themselves or work with us. And I think they recognize and appreciate just how much of an investment is required to get even close to where we are now. So that is really factoring to their calculation.

Okay. Thanks.

And ladies and gentlemen, this will conclude the question-and-answer session. I would like to hand the conference back over to Andrew Sculley for his closing remarks.

Well, thank you everyone for joining us today and it is an exciting time, it’s an exciting time because of the launch of the consumer products and again winning the award from CES as the honorary, it’s amazing. The group working on that has done an outstanding job and the group putting together this display technology for direct patterning brightness displays is doing an outstanding job. And I just also need to mention that on the silicon design capability we have is outstanding. And those two reasons are the reasons these Tier 1s are coming to us. So thank you everybody for joining us. I appreciate it very much.

Thank you all.

Thank you, gentlemen. Ladies and gentlemen, this conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.