Good morning, and welcome to the eMagin Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I'd now like to turn the conference over to Mr. Mark Koch, Vice President of Finance. Please go ahead.

Good morning, everyone. We're very glad to have you join us today for our second quarter 2019 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 and agreements, product benefits, operations, future financing, liquidity and capital resources as well as statements containing words like believes, 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 second quarter of 2019 and the company's filings with the Securities and Exchange Commission for information concerning factors that could 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 would like to turn the call over to Jeff Lucas, our President and CFO.

Thanks, Mark, and welcome all to our second quarter 2019 call. I will start by providing an overview of the trends and results for the quarter, discuss the impact of production issues we are encountering and the actions we are taking to resolve them. And we'll then provide a business update. Finally, I will conclude the call with a discussion on the financial results followed by your questions. The second quarter of 2019 was a challenging one for the company. While we enjoy a solid base of customers and a healthy backlog, deliveries were impacted by continuing production issues and, as a result, revenue and profitability fell short of our expectations. We are taking several actions to address the shortfall, which I will discuss shortly, and are seeing early signs of progress. There are a few key points to note about the quarter. Revenue decreased year-over-year and sequentially due to a display production-related issues. Our product gross profit and gross margins suffered due to low production yields resulting in higher unit material costs and lower production volumes over which we allocate our fixed manufacturing cost. Our R&D and SG&A expenses declined both year-over-year and sequentially as we made expense reductions and have implemented additional cost control actions. Our backlog of products scheduled for delivery through June 30, 2020, continues to be solid at $11.6 million, an increase of approximately $1 million over the backlog of $10.6 million at December 31, 2018. During the quarter, we also completed 2 separate registered direct offerings, raising total proceeds to eMagin of $4 million before fees and other operating expenses. Net proceeds from the offerings were $3.3 million, of which $1.6 million was applied to the repayment of our outstanding credit facility balance. We are taking several actions and accelerating several ongoing efforts to improve our operating performance. Most noteworthy is that we are focusing our R&D team to work closely with our manufacturing team to identify and resolve the production issues. They are meeting daily on yield and throughput improvement. As you know, the manufacture of OLED microdisplays is a highly complex and sophisticated process. By working together, R&D and manufacturing are collectively developing the remedial practices for our engineers and operators to implement. To help improve our throughput, we are retaining inside and engineer from our primary OLED deposition tool vendor. We brought this individual onboard during the second quarter and just tied him along for a few more months. He is working closely with our engineers and technicians to help us refine the operating processes associated with this tool to increase his throughput. We have also enhanced our equipment and maintenance practice and expanded our equipment maintenance team to improve equipment reliability and to minimize unscheduled downtime. With our current staffing level, we have equipment maintenance coverage available for all of our shifts. Lastly, while we are working on these operational improvements, we are seeking to pair our cost structure. We have reduced expenses at the operating level, including discretionary and other expenses. These measures reduce our overhead structure resulting in lower R&D and SG&A in the second quarter in comparison to the first quarter and the prior year quarter. So far in this quarter, we are seeing some early successes. We produced 25% more displays in July, the first month this quarter than we produced in April, the first month of the previous quarter. Second, the combined efforts of our R&D and our production teams are developing remedial processes and practices. The measures that they are implementing are beginning to raise our overall yield above those of the second quarter and are consistent with the targeted yields of our recovery plan. In summary, improving our yields, increasing our production throughput and fulfilling our customer orders are the overarching priorities throughout our company as we focus on stemming our operating losses and returning to profitability. With that, I will turn the call over to Andrew, who will discuss the current state of our business.

Thanks, Jeff. Despite the production challenges discussed by Jeff, consumer demand remains positive, and we continue to expand our market presence. In the second quarter, we continued to see strong demand for our product especially for military and aviation programs both domestic and international. We have mentioned in the past, many of the programs we provide product for extend over multiple years. A good example of this would be the ENVG II program, which we began working on in 2013 and received an order for $627,000 in April. Once your product has been designed in a program and qualified, there's often ongoing demand for the displays. For the F-35 Lightning II helmet, we continued to deliver displays throughout the second quarter enabling helmets to be delivered for fleet testing. We began engineering work on the improved microdisplay in July, which will lead us into the Low Rate Initial Production phase of the program. We're very excited to showcase our OLED microdisplays in these helmets and look forward to receiving additional feedback from the test pilots. As we mentioned last quarter, we continue to further diversify our end-market exposure and are having success in the medical equipment market, getting the equipment manufacturers to see the advantages of our OLED displays and incorporate them in their next-generation products. This quarter, we received 12 orders from medical device customers totaling $380,000. Overall, this quarter, we received 98 orders, of which 13 were new customers and supplied products for 22 new programs. Our backlog through June 2020 has grown to $11.6 million or about $1 million more than we reported at the end of 2018. We continue to receive funding from the U.S. Army for OLED display production and yield improvement projects. In the second quarter, we received $197,000, which brings our year-to-date total to $347,000. Additionally, we received an award of $330,000 to bring a new OLED architecture to qualification at year-end. We have demonstrated this new display of the OLED XLE for which we have received $330,000 award. It is receiving a great deal of interest from our customers. It is significantly brighter than our current displays. And at the same brightness, it is more power-efficient and has a longer lifetime. This is a full-color display using our white with color filter technology so it can be produced in volume with our existing equipment. We expect to have it ready for sampling in the fourth quarter. Finally, I want to thank all our employees for their commitment and tremendous effort they are making and the support they have provided to the management team, the engineering teams and to each other. We are all working together on our common goal. In summary, we're making progress on several fronts. We continue to gain traction towards our goals of securing new U.S. military programs and broadening our presence in foreign military applications and in enterprise, industrial and medical markets. We continue to work closely with the government to receive further funding for production enhancements, and believe we are well positioned in the future for awards as the only OLED manufacturer of microdisplays in the United States. From an operations perspective, we continue to work on our production issues and are solely focused on yield improvement and manufacturing stability. Finally, we enter the third quarter 2019 with an order backlog of $11.6 million in products. Jeff will now review the financials. Jeff?

Thank you, Andrew. Let me now discuss in greater detail our quarterly results. Revenues for the second quarter of 2019 were $5.4 million, a decrease of $1.7 million from revenues of $7.1 million reported a year ago and down sequentially by $700,000 from the first quarter of 2019. As far as the components of revenue, product revenues were $5 million compared to $6.2 million in the second quarter 2019. On a sequential basis, product revenues fell 10% from the first quarter of 2019. The decrease in product revenue was due to the production-related issues to which I previously referred. Contract revenues totaled $400,000 in the second quarter compared to $900,000 in the same quarter of last year, reflecting less revenues from military and government-funded contracts. Consolidated gross margin for the second quarter was 4% on gross profit of $0.2 million compared to a gross margin of 2% on gross profit of $0.1 million in the prior year period. The gross margin and profit in the prior year period included $2.7 million impairment charge related to the consumer night vision business that we exited. Excluding this charge, the gross margin and gross profit for the second quarter of 2018 would have been 40% and $2.8 million, respectively. Operating expenses for the second quarter of 2019 including R&D expenses were $3.1 million as compared to $3.8 million in the second quarter of 2018. SG&A expenses were $1.8 million versus $2 million in the year ago quarter and R&D expense was $1.3 million versus $1.7 million in the year ago quarter. The decrease in SG&A expenses this period versus the year ago period reflects in part our cost control and spending reduction efforts. R&D expenses were $400,000 lower in this year's second quarter primarily reflecting our shift in engineering efforts to resolving our production challenges and the result in decrease in allocated production cost to R&D. Operating loss for the second quarter was $2.9 million versus an operating loss of $3.6 million in the second quarter of last year. Excluding the previously mentioned impairment charge related to the consumer night vision business inventory, operating loss for the second quarter of 2018 was $0.9 million. Net loss for the second quarter 2019 was $2.3 million or $0.05 per diluted share compared to a net loss of $5.1 million or $0.11 per diluted share in the second quarter of 2018. The net loss included income related to the change in the fair value of the warrant liability of $500,000 and a loss of $1.4 million, respectively, for the second quarter of 2019 and 2018. Our non-GAAP EBITDA was negative $2.3 million for the second quarter of 2019 compared to negative EBITDA of approximately $3 million in the second quarter of 2018. That included the $2.7 million impairment charge noted above. Turning to the balance sheet. As of June 30, 2019, the company had cash and cash equivalents of $3.7 million, working capital of $8.3 million, outstanding borrowings of $945,000 under our ABL facility and borrowing availability under that facility of $1 million. Operator, we can now open up the call for questions.

[Operator Instructions]. And our first question today comes from Mike Malouf with Craig-Hallum.

Let's start first with the production issues, so I can make sure I understand that because I think, last quarter, if I look back at the commentary, it was -- that we have resolved our production issues. I think that was a quote, Jeff, that you had said and -- or maybe it was Andrew. And it was really pointed to one piece of equipment that was down that hadn't been down, I think, in over a decade. So can you just give us a little bit more color on what happened during the quarter? What changed during the quarter especially relative to your expectations?

Yes. Sure, Mike. So first of all, I think that statement when it was made last quarter was indeed in reference to that one particular issue with the tool that we had, in particular referenced during the fourth quarter of 2018. As Andrew and we have pointed out, the development and manufacturing of our displays are indeed very complex, and that can have a sort of a trickle-down effect in terms of affecting some of the yields and the performance issues that we saw into the second quarter. So our yield actually suffered due to certain particular issues that we did experience in the second quarter. Clearly, they're not acceptable to us. And a lot of the issues, for example, has to do with particles, just to give a bit of a context here. If you look at our 2K x 2K display, so on a space, there's about 3/4 of an inch by 3/4 of an inch, you have 4 million pixels. And if you look at the subject, you have 12 million. So you can appreciate the risk or the challenge that are imposed by particles, there are even sub-1 micron in size. So that's part of what's led to some of the issues here, and it's caused sort of revamp overall, how we're looking at our production processes. So with that and some of the other things that we're working towards resolving here, we are actually working with the R&D guys here, as you pointed out, who are helping us get to the root cause of the problems here. We've been developing and executing a number of what they call EAs, or experimental authorizations, from which we then assess results to determine how to minimize these issues like the particles and other factors and then developing the engineering change notices to modify that. So again, just sort of in summary here, working with our R&D folks, we are trying to get to their root cause of a number of the issues that had maybe some minimally, some larger and impacting overall yields to get -- to improve the overall yield performance. Andrew, do you want to add to that at all?

Well, the other thing is we do have three items that we're looking at very carefully and that was causing us problems, and we have meetings everyday on these items. I join in, the R&D team, including the CTO is leading this effort with manufacturing, and it is going well right now. I'm very pleased with what it is we're doing.

Okay. And then maybe you could -- I think on the last quarter, we talked about gross margins potentially getting back. And I think Jeff you said close to where they were in June and September of '18, which should have been sort of the mid- to high-30s. Obviously, this quarter didn't come close to that. How do you see the back half shaping up with regards to gross margin? How long will it take you to sort of get back up into the sort of mid- to high-30s?

Sure. I'm glad. First of all, the comment made wasn't mid- to high-30s. Actually, it was in the low to mid-30s. I'm not trying to parse words here. But to give you a context of that, right now, actually, the -- given the effort that we're doing here, our current yields are about 50% better than they were actually in the second quarter. So we are seeing a material improvement in some of our gross margin. But also very importantly, Mike, that our current yields right now are actually about the same level that they were in the second quarter of last year. Secondly, we are seeing higher volumes than we saw in the second quarter of last year. And given a substantial portion of our costs, R&D fixed, with more displays that were manufacturing and selling that was to spend that cost and of course, also lowers the unit cost that helps our gross margins as well. So while we're not in a position yet to say that we're going to achieve those margins in the quarter that we're in now, although we're certainly moving towards that run rate, we do have an element of confidence that with the efforts that were put in place here that those margins will indeed be a very worthy target for the fourth quarter.

Okay. Great. And then maybe, Andrew, you can give us a little update on what's going on with the consumer side of the opportunities that you've faced over the next year, specifically maybe some commentary that came out of the Display Week. I know you were doing a lot of meetings around that and just kind of an update there.

Sure. I'll talk about Display Week because we demonstrated the 4K display during that. We put OLED on it, brought it there. We had meetings -- joint meeting with the customer of that display and our chip partner where we're all 3 of us are working together. We also, with the permission of that customer for the display, had multiple meetings with other potential companies both manufacturing companies and Tier 1 companies that are interested in these displays. Everybody was pleased that you could actually make a 4,000-resolution display and look very good. So we did -- it did generate a lot of interest. Obviously, this is a long-running process that we have here. We've taken steps to change the 4K display a little bit. We've done that, and we're waiting for the Tier 1 customer to kick off the revamp design. It's a small change in the design we felt would make it much better. So it's still positive that people want to have a display like this, it just obviously takes a long time.

[Operator Instructions]. And our next question comes from Kevin Dede with H.C. Wainwright.

So I guess I'm a little tripped up on supply/demand balance. Given revenue shortfall, I'm just curious, Jeff, walk me through the inventory levels. They were only down about 400. And despite strong orders, it doesn't seem that the backlog went up as much as one might expect given sort of a stalled-out production in the quarter.

Well, a couple of comments here. Let me give some details to what you're asking here. As Andrew pointed out, our backlog was $11.6 million. That is indeed $1 million higher than it was at December 31, the year-end. And about $400,000 of that is -- was attributable, I think, to some of the production issues and not going to get sufficient product out the door in the second quarter. So we actually did indeed have an improvement in backlog. I do want to just sort of underscore and remind folks that backlog is what is scheduled to ship in the next year. So while we're enjoying a book-to-bill that's north of 1, bookings -- it comprises not just what's going to ship -- are scheduled to ship in the next 12 months, but the total size of the order itself. And there are many circumstances where you may have a very large order, but maybe the customer have chosen, for particular reasons of their own making, chosen not to define the scheduled ship date on those. So actually, we are -- as Andrew alluded to, we're actually -- we feel we're doing pretty well in terms of getting our bookings and our orders. We are, during this time, as I know you can appreciate, communicating very, very closely and frequently with all of our customers. That's crazily important to them. And as they -- because we are designing the programs, we enjoy the position, of course, of being when designed in, you're there often put life of program. So we have been spending a great deal of our time working with the customers and also moving towards getting the next orders in place here. So actually, we feel that we're doing pretty well here. We're never satisfied with our bookings, needless to say. We've got a very, very capable teams and -- particularly in the military side and otherwise, maybe doing a great job of really getting things lined up and working closely with the costumers.

Okay. So just help me understand the inventory change, too, Jeff.

Oh sorry about that.

Yes. No, no, no, it's okay, it's okay. The -- I guess what I'm -- I'm just trying to balance. So I mean it's still a substantial number. One would have thought that, that may have come down more. Can you kind of balance what's in there vis-à-vis now that, right, you did take, I guess, some additional write-down on the consumer night vision stuff. I'm just wondering what might be left of that and what may the balance be versus some of the demand that you're seeing?

Sure. So first of all, the inventory came down about $200,000. And on the one hand, you have material WIP that is higher because, quite frankly, we are anticipating and building and selling for a much higher volume and revenues than we had in the second quarter. So therefore, of course, you can have a higher level of raw materials and work in process. Secondly, a point to make here, by the way, we did not take a further write-down this quarter. The write-down we took of $2.7 million was in the second quarter of last year. We have...

Oh, I'm sorry, yes.

No problem. We have not taken any further write-downs. And the write-down we took last year actually was for inventory associated with those night vision product business that we actually had, and then we sort of terminated last year. As for the inventory that was particular to those products. In addition to those products, we also built a number of displays, what we call our 096 displays for those products. Those did not write down because we've been selling those and are continuing. We do have a very high inventory level of those that makes up a very large portion of our finished goods. And actually, we are right now in discussions with 2 customers about long-range purchase orders for those that would actually consume, by far, the lion's share, not even more, of that former 096 HMD inventory. So that really hasn't changed all that much, and that's why if you look at the total inventory values here of $8.6 million at year-end, $8.4 million now, you have to recognize a large component of that are these 096 displays that we are now putting in the processes, that means we're moving them after selling them and generating cash. Next question, please.

Yes, yes, yes. Sorry, sorry, I got just tripped up on your commentary. And I was -- so there's nothing left then to the consumer night vision currently?

Outside of the displays that have alternative uses and alternative customer demand, that's correct.

Great. Okay. All right. Andrew, could you just run through the commercial programs? I know that there were many things in development, and I know that the 4K is the big one, you made some design modifications. But I remember there being many other opportunities for you, and I'm just wondering if you could give us an update on where those stick.

In the case of their opportunities, we did review the 4K display with others and again complete permission from the customer of that display. Actually, we had our foundry partner, another company and us together at SID, and that made quite an impression on the company. So there is interest in the design there. Of course, we'd rather have them take the design we already did, but that doesn't always work out. So there's -- that is a -- made your customer interested. We also had discussions with manufacturing companies during that showing them the display, and that -- with our chip partner also, and there's interest in that. The issue is the chicken or the egg always. We want to mention that at first, and then people would be interested in manufacturing. So really, the -- besides the chip partner of the foundry, some couple of manufacturing companies, there are -- our current customer for the 4K and one other who's very interested in kicking something off and taking -- you're interested in our technology as well because you need high brightness.

Okay. Last question for me. You gave us some pretty great numbers on the orders, and I kind of remember hearing you discuss a little bit of that at the end of early May, the end of the March quarter, 98 new orders, 13 new customers and 12 in medical equipment. Do you have comparable figures for the March quarter at your fingertips, Jeff?

For the March quarter?

Yes.

I don't write it on me, we can get back to you with that information, such as public, we can provide -- I'll gladly provide that to you, but I don't have them on at my fingertips. But I will say -- I have one comment I do want to make here though is the trend we have been establishing here particularly increasing those new customers and those programs and new project is continuing. So we haven't seen any change in terms of the trend there. It continues to be positive.

And we are very, very happy about what we see and what we're doing. Again, remember, the 12 orders from the medical device customers totaling $380,000, that's very good for us.

And our next question comes from Mike Well [ph], Private Investor.

Just a quick follow-up on Kevin's consumer update question. Towards the end of 2017, you guys announced that you had signed a licensing agreement with one of these consumer Tier 1s. I was hoping that you might be able to update us on that specific opportunity. Is that something that you are still engaged with that prospect on? Or any indications that they continue to pursue a product using your technology?

Well, we still have a licensing agreement. It was developed in licensing agreement that we worked on the development side during 2017. There is interest from this company, we know, to develop a product, and I can't say that our technology is generation 1. It probably is not, but there is a great interest in the technology.

Okay. And then next question related to the Title III program. There was a concern on the RFI, I guess, related to any of these activities potentially creating excess capacity. And I guess maybe it's implied some of your efforts on the commercial and consumer markets would be welcomed to address that and create a viable industry here. I was wondering if you would agree with that comment and maybe you could speak a little bit to the funding for that production equipment. Can that be a joint effort between military and consumer partners? Or how would you think about that?

So let me speak to that a little bit, and Andrew you can certainly add as well. Mike, if I understand what you're asking, the issue here is not excess capacity. Quite frankly, a big source of the funding, what's behind the whole Title III program overall since we've put in place is the fact that there isn't sufficient capacity for the critical technologies and products that are mandated, required by the military. And that's as well in terms of where we see a lot of our programs going the F-35 and others, we just don't have the sufficient capacity nor do we have the up-to-date equipment that allows us to produce these displays in a more economical fashion that, of course, the military base would be looking for. So the -- actually, the emphasis here is to get this funding is not only to give us more capacity to meet the needs of the various U.S. government programs of which we're on more than 20 programs of record in the future, but also to help in terms of operational effectiveness, our yield improvements to help bring, in time, the cost and prices. And then thirdly, it also provides us some of the capital that we need for the equipment to advance the direct patterning, which is, as you all know, is the cutting-edge technology in the microdisplay industry. So that's the emphasis behind it. Now in terms of your second question as to what's happening with the funding, we've been working very, very diligently, actually, with Congress and also with The Pentagon to try to secure and get in place this funding. We feel we're making a lot of progress here. I think the biggest challenge that we're finding, quite frankly, right now working with the government and military is the timing of when that money is going to come. And I can't speak for how that business process works. I know how frustrating it is for us, and I'm sure for you as well. But we are pursuing that aggressively. And I'll even add that in addition to looking at Title III, I mean we're trying to turn over every rock that we can here, and there are other programs that we're pursuing as well. One of them is called the IBAS program, which is also part of the DoD's industrial base effort. And IBAS, by the way, stands for Industrial Base Analysis and Sustainment. So we are actually looking for substantial funds from a number of different sources.

And ladies and gentlemen, this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Andrew Sculley for any closing remarks.

Thank you. I want to thank everybody on the phone for joining us this morning. It is -- although it's a tough time for us, we have taken the right steps getting our R&D folks involved, retaining the engineer from our production equipment company to input new items that will help us with throughput and also the 24/7 maintenance. I also want to thank again our employees. It's very important that we all are working together. And I'm very pleased with the progress so far. It's early in the quarter, but still very pleased with the progress we're making. So again, thank you all.

And let me just add to that, a couple of -- I'll get right to the point here. $2.3 million negative EBITDA does not work. It's not acceptable to us, and that's why we are taking such great effort now to get that repaired. And we -- throughout the whole company, from the folks who operate it and the text whom we depend upon to the administrative and engineering focus, we all are unilaterally focused on improving our operating performance and our financial performance. That is encompassing some cost reductions and cost cutting. But of a far greater impact on us is what we can do with our yields. Yields affect how much product we can get out the door, but this not only helps our revenues but helps spread our fixed cost and also reduce our unit material costs materially, significantly. And that's why we made such a keen effort here. We are very fortunate to have the talented group of engineers, operators, technicians and administrative folks that we have to get this done. We are all singularly focused on getting this addressed. So in closing, I do want to say that we appreciate the support of our customers, the U.S. military, our shareholders and vendors and, of course, our very dedicated and capable employees. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time, and have a wonderful day.