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

Mike Malouf – Craig-Hallum Dennis Van Zelfden – Brazos Research Orin Hirschman – AIGH Investment Partners

Good morning, and welcome to the eMagin First Quarter 2017 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 that today’s event is also being recorded. At this time, I’d like to turn the conference call over to Jeffrey Lucas, Chief Financial Officer. Please go ahead, sir.

Thanks. Good morning, everyone. We are glad to have you join us today for our first quarter 2017 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. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. Please refer to our earnings release for the first quarter of 2017 and the company’s filings with the Securities and Exchange Commission for information concerning factors that would cause actual results to differ materially from those expressed or implied by such statements. We undertake no obligation to update or revise any forward-looking statements to reflect future events or circumstances. With that, I’d like to turn the call over to eMagin’s Chief Executive Officer, Andrew Sculley. Andrew?

Thank you, Jeff. Although it is only been about six weeks since our year end call, we do have a lot to update you on today. Activity within the virtual reality and augmented reality space is really heating up. And we are actively working with several companies and in discussions with others that are pushing hard for the next-generation displays. To date we have announced three strategic partnerships including the multi-million dollar agreement with a Tier 1 consumer electronics company to design and develop a microdisplay for their headset, which we announced on our last call. Activity amongst this group is accelerating and we continue to provide sample high-resolution direct pattern displays, engage in conversations about modifications to meet their requirements and work to find suitable volume production manufacturers who can help us meet the commercial demand. It is clear to us that our direct patterning technology is the game changer in AR and VR. With the highest brightness in the market we can give our partners displays that avoid blurring and motion artifacts with the speed and contrast required. We have demonstrated over 5,000 nits in color and have in production monochrome displays with brightness levels exceeding 15,000 nits. No one has come close to this and we know this because our partners and customers have told us this repeatedly. We recently completed a prototype of a full color 2Kx2K device with an advanced backplane and direct patterning. This is a very high performance display, which can enable the highest brightness with wide dynamic range, high frame rates, variable persistence and global shutter operations. Initial tests showed more than 5,000 nits in brightness, which would make this the world’s highest resolution, highest brightness full color OLED microdisplay. As you know, we are actively talking to high volume manufacturers to join our commercial display partners and us to fund and build the production capacity to handle the volumes required for the commercial market. Our commercial display partners are also introducing potential mass production partners to us. We started this quest by listening to what the AR, VR, HMD companies needed. That is high brightness, OLED microdisplays. We develop the technology that provides the brightest microdisplays available today and showed our prototypes at the Society of Information Displays last year, and to a number of Tier 1 companies. Our goal is to get funding for the next-generation display design as a precursor to establishing the mass production capacity that the consumer market would require. I’m pleased to report that we’ve had great success here. One company is funding a next-generation display that we are currently developing, another is actively involved in discussions and for whom we have done preliminary work and the third is keenly interested in our current 2Kx2K design. In addition several companies have come back to us for discussions that had been silent during the first quarter. The other important considerations were our recommended path to mass production, which we have shown multiple companies including cost estimates for display in high volume production the companies’ working with us now has studied this information and are moving towards the next-generation displays and mass production. In summary we listen to the customers, develop the technology are working on the next-generation display design and working towards mass production with partners. Now, turning to our military business. We are definitely seeing the ramp up of new multi-year military programs replacing those that wound down in 2016. We have excellent long standing relationships with our customers and we are recognized as the only company manufacturing Active Matrix OLED microdisplays in the United States, which puts us in an enviable position as the military upgrades their displays. First of all we were selected as the sole source provider of OLED microdisplays for a major U.S. Army helicopter helmet upgrade program to retrofit high brightness monochrome green microdisplays into the current fielded helmet. As well we completed the requirements review with a major aviation prime contractor for an OLED upgrade to a fixed wing production helmet. These are both examples of programs where the military wants to upgrade and our OLED is the technology of choice. Aside from the programs I just mentioned we are also starting new projects. One project is for OLED stack improvements to provide higher light emission and efficiency, another is for improved thin film encapsulation to obtain better yield and reliability. And finally an advancement for all displays, including direct pattern displays for better yield and improved cycle time for production. So if you’ve heard, this has been a very active time for us both with the military and commercial display partners as well as ongoing discussions for volume production. Our team is actively engaged across the board we have big expectations for 2017 and we are all working to make them happen. But now I’ll like to turn the call over to Jeff to review the financials.

Thank you, Andrew. As Andrew pointed out we are seeing a continued increase in interest in our technology and in our displays, even from our last call which was just six weeks ago. Our numbers especially when you look on a year-over-year basis do not yet tell the full story. As we communicated in previous quarters calls our revenue and consequently our performance in 2016 was impacted by a base business in the military that experience a wind down of a number of OLED programs as they entered maintenance mode. We stated that a pick up would be expected towards the end of 2016 and through 2017 with several new military programs coming online in LRIP or Low Rate Initial Production mode and progressing to higher volumes. Our revenues are reflecting that ramp up as you see sequential quarter to quarter improvement in our product revenues. This is the third quarter in which we are seeing sequential revenue growth. So let me begin by walking through the income statement. Revenue for the first quarter was $6.1 million down 13% from the $7 million in the first quarter of 2016. The first quarter of 2016 revenue included $1 million licensing fee from a prospective partner, and excluding the licensing fee revenue was up marginally from last year. However, on a sequential basis from the fourth quarter of 2016 revenue was up about 33%. This resulted from the increase in product revenues for new military programs mentioned previously in addition to a significant increase in commercial R&D contract revenue from one of our strategic partners. Focusing on the revenue components product revenue was $4.4 million in the quarter down 17% compared to last year but up 45% from the fourth quarter of 2016. R&D contract revenue totaled approximately $1.7 million an increase of $1 million or almost 140% from the prior quarter in a sequentially by $780,000 or 86% sequentially from the fourth quarter of 2016 due to the commercial R&D work. Gross margin for the fourth quarter was 30% on gross profit of $1.8 million compared to a gross margin of 48% on gross profit of $3.3 million in the first quarter of 2016. The decline in gross profit margins was due to the impact of the previously mentioned $1 million in licensing revenue recorded in the first quarter of 2016, forced to no cost of revenues associated with it, and the impact of lower production volumes on our fixed production costs. While gross margin was lower on a year-over-year basis, we saw a nice improvement from the fourth quarter, where it was 11% in gross profit of $490,000. This demonstrates, the importance of our revenues returning to normalized levels and covering our fixed costs and our activities in the commercial and military sectors to expand the customer base in the volume of our business. Gross profit from product sales was about $0.9 million, in comparison of $2 million in the first quarter of 2016. Gross margin declined to 21% from 38% in the same quarter last year, due to lower product revenue in the current period and the favorable impact of higher production volume in the corresponding quarter a year ago. For the three months ended March 31, 2016, contract gross profit was $900,000 as compared to $300,000 for the comparable 2016 period. The increase in contract gross profit in the first quarter of 2017 was due to a higher proportion of commercial contract work performed in the current period as well as the change to the niche and both the individual contracts and/or completed during the period. Moving to our expenses, total operating expenses was $3.8 million in the quarter, up $484,000 or 13% from $3.3 million a year ago. R&D expenses in the quarter totaled $1.3 million or 22% of revenues, compared to again $1.3 million or 19% of revenues from a year ago. The higher R&D spending during the quarter was due to the application of our engineering resources to direct pattern display development and towards achieving higher volume production of these displays. Selling, general and administrative expenses or SG&A for the quarter totaled $2.4 million, compared with $2 million in the same quarter of last year, this increase is reflected at the level of activity related to our partnering projects that have necessitated higher legal and other professional service costs, as we negotiate with prospective partners and draft various agreements associated with these partnerships. In addition, there was higher stock-based compensation cost during the quarter as well as travel, marketing and promotional activates for our night vision consumer products group. Operating loss for the first quarter was $1.9 million versus income of $22,000 in the first quarter of last year. Net loss for the first quarter was $2 million or $0.06 per diluted share compared to breakeven last year. Cash and cash equivalents were $3.8 million in the end of the first quarter. There were outstanding borrowings of $1.4 million, net of issuance costs, and $2.3 million of additional borrowing availability under our working capital facility. In addition, there were no borrowings under our $5 million unsecured credit facility. In closing, I echo Andrew’s comments, that we continued our focus on advancing our product initiatives with our strategic partners in evaluating relationships for a larger scale production to support our commercial programs. We continue to ramp up our core military business both domestic and foreign as well as support the multi-year programs currently underway, while working to expand our presence in commercial markets. We have a very talented group of people here who are driven to move our technology forward and up eMagin achieve the AR and VR market recognition that we believe we deserved. We look forward to update in the market on our progress in the coming months and in the next quarterly call. So with that, I’ll turn it back over to the operator to take your questions.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] And our first question today comes from Mike Malouf from Craig-Hallum. Please go ahead with your question.

Great. Thanks guys for taking my questions.

No problem, how are you?

Hey. Mike.

Good. Andrew, I’m wondering if you can – as we look out over the next six or so months through the end of the year. Can you give us a sense of the kind of milestones that you’re shooting for and what we should be expecting and sort of hoping for over that time period with regards to putting these partnerships and manufacturing partnerships and customers together and any other potential signing?

Sure. As we’ve mentioned, we – one milestone, we can check off is we already have a display design kicked off in the April. And we’re working on that new display design. We did preliminary work and you saw that in our numbers for the first quarter with another company when we can expect in reasonable time to kick off that design as well, so we’ll have two going. We also are working with that company that we expect a new design to come in on manufacturing, testing of the tools et cetera. And that we expect to happen, the pressing is very hard and we’re running like mad to make sure we can do it. So those are three things that have to be done and two or one thing that has been done or two things that have been done. And then the other things coming, new display design and working with manufacturing tooling.

Let me add to that just a little bit, Mike if can. So, to be clear Andrew spoke to a manufacturing arrangement or agreement in place we are targeting that – the pace and the cadence of our discussions with the various, the multiple partners we speak to that, they accomplish in that period of time. We have to also recognize, we are working with large company tier. And that can be drawn our process some time because of what’s going on in their end. But we are having multiple discussions with those goals in mind within that timeframe.

There is one other thing, I reminded of. We do have a company now that’s interested in our 2Kx2K and they would like some of those at the end of the year. And then more in the following year and they understand capacity constraints et cetera. So they are pushing hard as well. So we have three companies pushing hard.

And would those be for commercial or just for testing?

All, those are for commercial. They want to get a product out.

Consumer or more military or…

No, all the things I have mentioned are for the consumer market.

Yes, yes. Okay.

Here reminded as we’ve talked about many times. Mike, I just interrupt you for a second here. The partners with whom we’re working recognize they are themselves are under very tight time constraints here in terms of when they need to get the next-generation headset out in the marketplace. And that’s why, I think, we’re seeing a very fast pace here in our discussion with them.

Great, that’s good to hear. And then speaking of consumer, I was wondering if you could give us an update on the BlazeTorch and the BlazeSpark, and just see how the consumer products are progressing and how you expect that to progress with regards to marketing and promotions throughout rest of the year.

Yes. Let me add and speak to that a little bit here. We mentioned in the last call, that one of the pleasant things we’ve discovered. Now that we have these products developed and the technology risk is enlarge part behind us. As we’ve been promoting our products to different interests, what we’re finding here, is that there are some broader markets out there and applications beyond just the direct-to-consumer. I think we’ve talked in the past about opportunities with first responders and also a very strong market here and a very robust market with field service particular among the utilities. So we made it very constitution to focus some of our resources here, on the marketing and promotional elements in those directions. So the good news about that is that it speaks to much larger market in much greater potential revenue. The element we have to all be aware of here that is indeed a longer sales cycle. And we’ve made the conscious effort that we are still advancing our direct-to-consumer, we’re also putting a lot of time and effort towards expending these broader and greater markets including, as I mentioned the first responders and the field service up here.

Okay. And then just a final question R&D was down quite a bit from the fourth quarter and even the third quarter, correctly I guess the second quarter as well. So just kind of wondering where you expect R&D to shake out throughout the year.

While we generally don’t give guidance going forward, I think what you saw in the first quarter to be representable of what we expect to for the other quarters out there. And part of that reason that is down because our R&D is a large part fixed, I mean, we have material cost that we’re doing to do all of the work. But the lion share of our expenses are engineers, scientists and that’s not changing. Why it had been down but if you have an allocation of some of their time and effort to some of the contract work they were doing. So we’re slightly higher at contract revenues particularly and what’s going on in the commercial side here, the commercial R&D we are sort of allocating more of their time and then turn more their expense towards some of the costs of services for those contract revenues. So overall though our total R&D cost do not go down, as a matter of fact, they have gone up a little bit overall but we’ve been investing in some of our engineering talent over the past year. And we’re going to continue to do so.

Great, that’s helpful. Thanks.

[Operator Instructions] And our next question comes from Dennis Van Zelfden from Brazos Research. Please go ahead with your question.

Thanks. Good morning, gentlemen.

Hi, Dennis.

My question is really a clarification of the potential 2Kx2K commercial customer you alluded to – the understanding that whereas the Tier 1’s want a customized display to their specs. Are you implying that this 2Kx2K customer that’s kind of like an off the shelf product that you have already developed and they’re just going to take your specs on that product or am I wrong?

Yes. In that case, this one is interested in that display as it stands to start, but of course like everyone else the next-generation after that is going to be a customized new display and that’s great for us.

Okay. But they are interested in the off the shelf product right now? Is that what you are saying?

Yes.

Okay. And what is your production capacity for that product?

Well, obviously that’s the – we don’t talk about our production capacity, its small volume, but they need small volume to start at the end of this year.

Okay. Okay, that was going to be my last question. They want this product at the end of the year not like right now?

Well, that’s correct. But they would like some right now but small, small numbers. Because they’re designing and they’re designing the headset, actually they have also asked us for some help there too, because as you know, we’ve done it before.

They are chopping at a bit for our product.

Is just that not only do you not have them on the shelf, so to speak, but they also haven’t quite developed their product, yet. So they don’t really need them at the moment?

Yes. That is correct. But we have made these displays and sell them to other companies besides them.

Okay. All right, that’s all I had. Thanks, appreciate it.

[Operator Instructions] Our next question comes from Orin Hirschman from AIGH Investment Partners. Please go ahead with your question.

Hi, Andrew just a few quick questions.

Sure.

If you have to summarize, what changed in the last six weeks since you last spoke, publicly to everybody? What would you be the bullet points that you would focus on?

Well. The company that did some work with us preliminary to a design in the first quarter and you saw the numbers right, that the design revenue or that effort revenue, that company is heated up and we’re – we’ve must had multiple meetings with them in the last few days. And they want to move forward on this stuff. And we’re also talking about tooling, equipment that type of thing, really, heating up.

Andrew mentioned three companies, turned up for a second – Andrew mentioned three companies on when he spoke about his script. The third one is the new player that’s been very active and want to move very, very fast, very fast and that’s taking a fair amount of our time and that’s exciting. And the last thing to bring to light is we did provide, we had the licensing agreement, we provided 2Kx2K display back in December, that company was relatively quiet in the first quarter, they have to come back to us, and they – we having discussions with them. So there’s a lot going on in that front.

And the company that Jeff mentioned with the new one essentially although we’ve been talking to them for a little while, they decide on the 2Kx2K display to start. And that’s very good for us.

And they’re very excited about it.

What does that mean to you in terms of timing? Now that they have kind of – and what does it mean in terms of additional we spin and do they need more spin and again re-spinning up…

No, the 2Kx2K, we’ve mentioned before as the end of the year. They’re interested in a number that we can provide. And then they do have to work a little bit more on their headset. But they want the displays at the end of the year. And you can imagine, why? So that company is essentially new, we’ve never talked about them before.

Okay.

And the kick off of the design – the new design that’s going well. We’re excited.

Okay. Thanks very much.

[Operator Instructions] And ladies and gentlemen, at this time, I’m showing no additional questions. I’d like to turn the conference call back over for any closing remarks.

Well, thank you, Jamie. I’d like to underscore what I said, last quarter about our strong focus on achieving material and measurable milestones that can drive the shareholder value for eMagin and moreover we believe we’re 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 and industrial. We’re focused on strategic partners and how to work with them in producing the next-generation AR and VR displays. We have engaged in numerous discussions with other potential commercial partners as well as manufacturing partners and look forward to announcing additional agreements during this year. Our U.S. military business serves as a strong foundation for our overall business with a healthy number of existing and future contracts. This helps us fund the advance technology development to power the next-generation of high performance display technologies. We’re excited with this progress and continue to firmly believe that 2017 will be a transformative year for eMagin. I want to thank all of you for being on the call and asking the questions, this is an exciting moment for us and it’s paying off. So thank you.

Thank you everybody.

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