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

Good morning, everyone. We're very glad to have you join us today for our third 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 may include references to projections of future revenues, plans for product development and production, the company's ability to ramp up production, the company's ability to reduce its cost structure, future contracts and agreements, product benefits, operations, future financing, 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 third 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. During this call, we will also refer to adjusted EBITDA, a non-GAAP financial measure, to provide additional information to investors. A reconciliation of adjusted EBITDA to net income, which is the most directly comparable GAAP financial measure, is provided in the press release that we issued this morning. Non-GAAP financial measures such as adjusted EBITDA are not meant to be considered in isolation or as a substitute for our GAAP financial measures and financial statements. With that, I would like to turn the call over to Andrew Sculley, our CEO.

Thank you, Mark. And good morning, everyone. Welcome to our third quarter earnings conference call. We are very pleased with our results this quarter, which improved on several fronts, including yield, throughput and profitability. Our output for the quarter was 50% higher than the second quarter, supported by initiatives such as optimizing production runs, enhanced maintenance support and yield improvement projects. As a result, we were able to ship $7.3 million worth of product and record an operating loss of $400,000 versus a $1.3 million loss in the same quarter last year. Our adjusted EBITDA for the period was positive by approximately $300,000 versus a negative $600,000 a year ago. Jeff will discuss the operational improvements and cost reduction efforts that have helped us post these much improved results. Then he will provide further details on the third quarter financial highlights. I will then talk about some of our ongoing programs, new opportunities for eMagin and progress on new products. After that, we'll open the call for Q&A. I'll turn the call over to Jeffrey Lucas, our President and Chief Financial Officer. Jeff?

Thank you, Andrew. As you can see from our release this morning and as Andrew pointed out, we have reported significantly improved operating and financial results this quarter. Our product revenues of over $7.3 million were at the highest level in six years and the second highest in the company's history. We have been targeting cash breakeven run rate by year-end, and we achieved cash profitability in the third quarter with adjusted EBITDA of positive $263,000. Operationally, our gross profit improved significantly due to the combined efforts of our research and manufacturing engineering teams, who working with our operators and technicians drove throughput and yield improvements. Our output this quarter was 50% higher than the second quarter. And we were able to build inventory to meet customer requirements, improve delivery times and shorten order lead times. Our on-time delivery at the end of this quarter was 96%, the highest in several years. Our production yield was up substantially over the second quarter; and at a comparable level to 2018's third quarter, our recent year's high watermark for the company. This puts us back on track towards the targets we set under our long-term yield improvement initiatives. And we expect production improvements to continue into the fourth quarter as well, as we are implementing other actions that we anticipate will further improve yields and throughput. This improvement in operating performance was due to many factors, including daily collaboration between our R&D team and manufacturing engineers to identify and resolve yield and production issues; the on-site engagement of an operating engineer from one of our OLED deposition tool vendors to work with our people to improve throughput; enhancement of our equipment maintenance, including a round-the-clock maintenance staffing and rigorous preventive maintenance practices; and implementation of expense reductions and controls to reduce our overall cost structure, which also lowered R&D and SG&A expenses on both a year-over-year basis as well as sequentially from the second quarter. As a result of these efforts, operating expenses were 21% lower than the year ago quarter. Operating expenses as a percent of sales declined to 36% in the third quarter compared to 53% a year ago and 57% from the second quarter of 2019. We have taken more cost actions in October, including changes to our senior management compensation structure and negotiating lower fees with service providers, which will be reflected in the current quarter's results. Overall, we anticipate that on an annualized basis these measures will reduce our expenses by over $2 million. Turning to our third quarter numbers. Total revenue was $7.9 million, an increase of $1 million over the third quarter 2018 and an increase of $2.8 million sequentially from the second quarter of 2019. Product revenue was $7.3 million, an increase of $1.3 million year-over-year and a $2.3 million increase from the second quarter of 2019. The year-over-year increase in product revenue was due to higher customer demand and the ability to meet the demand through higher production volumes from increases in throughput and manufacturing yields. Contract revenues totaled $600,000 in the third quarter compared to $800,000 in the third quarter of 2018, as higher military and government-funded contract revenues did not totally offset lower commercial contract revenues. Overall gross margin for the third quarter was 31% on gross profit of $2.5 million compared to a gross margin of 35% on a gross profit of $2.4 million in the prior year period. The higher gross profit dollars reflects both higher product revenues as well as lower unit costs from the yield improvements and higher production volumes over which fixed production costs are spread. The lower gross margin percentage, however, reflects spending on production improvements and a lower allocation of production capacity costs to R&D as a result of the engineering focus during the quarter on production improvements. Operating expenses for the third quarter 2019, including R&D expenses were $2.9 million as compared to $3.6 million in the third quarter of 2018. As I mentioned above, operating expenses as a percentage of sales were 36% in the third quarter of 2019 compared to 53% in the year ago period. R&D expenses were lower in the third quarter in comparison to the prior year quarter and the previous quarter, reflecting lower internal R&D activity as we focus on production improvements. SG&A expenses were lower in the third quarter versus the year ago period due in part to lower spending on professional services legal and travel and other discretionary expenses, which were all part of our ongoing cost reduction initiatives. The lower SG&A does not include the impact of further cost reductions made during October, including a reduction in management compensation, that are expected to benefit results in the fourth quarter. Operating loss in the third quarter of 2019 was $394,000 versus an operating loss of $1.3 million in the third quarter of last year. Net loss for the third quarter of 2019 was $315,000 or $0.01 per diluted share. The net loss included other income related to the change in fair value of warrant liability of $120,000. In the third quarter of 2018, the company reported net income of $63,000, inclusive of other income of $1.3 million for the warrant liability revaluation. Adjusted EBITDA for the third quarter was $263,000 versus negative $600,000 a year ago. As of September 30, 2019, the company had cash and working capital of $2.6 million and $8.5 million respectively and borrowings and availability under our ABL working capital facility of $2 million and $1.2 million, respectively. With that, I will turn the call back to Andrew.

Thanks, Jeff. Demand for our OLED microdisplays continues to be strong. Our backlog of $6.3 million reflects the fulfillment of several sizable orders during the quarter and an approximate $1.1 million reduction from the government’s cancellation of the ENVG III program as it begins fielding the large ENVG-B program, where we are supplying displays to the two prime contractors on the program. We believe our backlog in the near term will return to or exceed recent levels, as our business development team is currently negotiating a number of large orders. Let me now highlight a few of our new programs. We won a helicopter program and are currently manufacturing displays, with shipments to begin in the fourth quarter. With respect to our medical business, we received initial orders from two new customers in the third quarter and continued to supply Alcon’s ophthalmic surgery group in Germany under a long-term contract. Our high brightness SXGA displays for Alcon are being used in a new cataract operating system. A surgeon using this high resolution OLED image guided technology can digitally measure and mark the preoperative eye to ensure customized incisions, alignment and lens placement for each patient. We also have a number of ongoing high-volume military programs that are expected to run for several years. As mentioned above, we are supplying both prime contractors for the ENVG-B program, which is expected to encompass more than 108,000 systems. Additionally, we are receiving orders and supplying OLED microdisplays for the F-35 program. On our website, we have posted an article from Naval Aviation News that appeared over the summer. In that article, it was reported that the improved generation-3 helmet, which incorporates our OLED displays, will be fully implemented to the entire F-35 community. I would encourage you to take a look and read it. It is very interesting and highlights how new naval pilots have successfully completed night carrier qualifications using our OLED in the F-35 helmet-mounted display systems. From a new product perspective, there are a few items to highlight. As we noted in the release, we are still on target to reach a brightness of 10,000 nits in full color by the second quarter of 2020. Our 3-year goal is a brightness of 25,000 nits in full color, and this is what has been requested by the U.S. military. As part of this effort, we expect to receive some government fundings to support the project. Also, for the XLE, our newest display, we are planning to have engineering samples through the fourth quarter and to have product qualified by the end of Q1 2020. Before I turn the call over to the operator for questions and answers, I personally want to thank all of our employees for their hard work and collaboration. We are all very pleased with what we have accomplished together this quarter and are excited with the many new opportunities that our business development people are bringing to the table. Operator?

[Operator Instructions]. Our first question comes from Mike Malouf with Craig-Hallum.

Great. Well done on the rebound. Pretty dramatic, so it's nice to see.

Thank you, Mike.

I wanted to talk about a couple of things, but first off, maybe you can give us just a little bit of an update, if there is one at all, on the consumer product.

Yes. I'll give you a general update on what we're doing in the consumer side. We are in discussions with a number of companies both on the design of a new product and as well as manufacturing. In fact, just to give you some feeling for that: We had a meeting last week in California on manufacturing, and we have 2 next week. And we have weekly calls with another Tier 1 company on kicking off a design. And the reason these companies come to us is because we have both the capability to design a very high-resolution display. As you all know, we did a 4,000-resolution display, and this requires more skill than a simple small display. And we also have the capability to do very high brightness display with our direct patterning technology, and to this date, we have not seen anyone else who can duplicate that. And that's one of the reasons why the manufacturing companies talk to us about moving this forward. So that's where we are there. The other one I think you were asking about is the 4K display. The company asked us to deliver displays in the -- talking about the first quarter. And this is their own item because they're working on something, the prior generation before the OLED display. The other thing is we've actually taken our direct patterning equipment down for a moment. And we have a few more updates that we want to do on it, so it's back to the vendor's location. So that will be back at the end of the year so that we can start up again.

Okay, great. That's good to hear. And then just a comment on gross profit. Obviously a big improvement there, running close to 30% now on the product side. I'm just kind of wondering. As you look out over the next several quarters, where should that trend to?

So we will see. We have been seeing a continuation and improvement in terms of by the gross margin percentage. And the gross profit, we expect to continue to increase as well. Not only the top line grows, but as we make improvements or continued improvements in both our yields and our throughput -- so we are actually -- we're anticipating getting to the mid-30s and then moving -- even moving up from there as part of our long-term yield improvement plans.

Okay. That's great. And then just one final question. When you talk about some of the cost savings you've had, you're certainly seeing that in the P&L. Particularly on the R&D side, where do you plan to keep that R&D over the next several quarters? It's come down dramatically over the last two quarters.

Yes. So it has come down, as we pointed out, in the quarter just ended because our -- a lot of our engineering folks were dedicating their efforts working hand-in-hand with our production engineers and our operators and technicians to improve the yields. We do anticipate that the R&D spending is going to return to the more normalized level that we've seen over the past couple of quarters.

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

So Andrew, you mentioned your customer in Germany. I'm wondering when you -- if you peel the onion back a little bit on product revenue, can you talk to the mix now? It seems that the commercial side is kicking up a little bit. And I'm just wondering -- I have great numbers coming out this quarter. I'm just wondering if you can tell us a little bit more about how the commercial side and the military side mix for that.

Well, let me -- as you know -- before Andrew speaks, let me just give context to that. You're right. If you take a look at where we were in the third quarter of last year for comparison, roughly 80% of our business was truly military. About 11% was commercial. And roughly 10% was a mix of the two, whereas in the quarter that just ended, overall about 60% was truly military. 20% was commercial; and 20% was sort of a mix of the two, predominantly military. So you're right, just to put that into context here, that there was a large proportion during this quarter of our revenues that were commercial. But bear in mind, again, that we are enjoying growth in all of our sectors here. So despite the fact that the percentage mix may have changed a little bit, we are still getting a lot of support and a lot of efforts here going on both at military as well as what’s happening in the commercial side.

And I just wanted to add that both military and commercial is very important to us, and that’s why we’re pushing hard to make sure both of them grow.

Okay. Andrew, you mentioned that you’d expect to see a little government funding on the 25,000 nit initiative over the next three years. How do you see that influencing contract revenue?

Oh, it will be an add to contract revenue, but obviously other contracts will come off as we complete them. A –Jeffrey Lucas: But overall, Kevin, let me just add a little bit of color there, if I may. In addition to what Andrew just said, I think we’re going to start seeing a little more of a ticking up of our engineering revenue or contract revenue than we’ve had actually in the past year. I think, getting closer to some of the levels that we saw two years ago and even 1.5 years ago. And that the engineering, the funds, or I should say the engineering contract work increases, both to getting to 28,000 nits, by the way; as well as support for our yield improvement initiatives.

Okay. Just on that thought, Jeff: What other contracts do you see or can you speak to that you see supporting that number? And is it all military?

No. We’re obviously working on the consumer side. It’s very important for us. And we are working to kick off another design on the consumer side and also to complete the design that we did for the 4K. Both of those are important to us.

Okay. Now, obviously ENVG III is gone, but ENVG-B is here to stay. Can you help us think about the pricing on the display in that deal?

We are always very careful what we share about pricing. So if you don’t mind, we’ll get them - answering that question. Because obviously we’re doing it. But it’s we feel it’s good pricing and competitive pricing. I’m going to have to leave it at there.

Good and competitive. Okay. Can we, you I know you’ve talked about having one of your equipment supplier engineers onboard to help you manage through the production improvement process. I’m wondering if that person is no longer there, if and if the fact that, that person has gone has benefited costs, your OpEx costs. A –Andrew Sculley: Oh, it’s one person, yes. And I know it’s a consultant’s, very small.

Okay. All right. Still onboard, though, Andrew? Or we he was through...

Well, no. Person isn’t here today, but we’re thinking about bringing him back because he was an outstanding help to us.

He was a great resource to us and we have an ongoing relationship with him. And we are right now actually in discussion when it comes to the next steps of working with him.

Okay. Now Andrew, in response to Mike’s question, you talked about not having a particular production or a tool onboard I guess, through until later in the year. Can you kind of refresh my memory on that? I apologize for not being familiar with it.

Yeah, no problem. It’s a direct patterning tool. We had it back here. You’ll remember we redesigned it so that it was had numerous improvements and could show the path to mass production. We redesigned it had it back here, sent it back because we had a few other things that we wanted to put into it. It will be back later this year so that we can start direct patterning again.

And that's for what -- your bright color displays, right...

Yes, very high brightness color displays. And as Jeff reminded us all, it's really 28,000 nits is the government number. And we do have a path, by the way, to get to 10,000. We know exactly what we're going to do. And a path to get to 15,000 after that and then the 28,000. We have that path line down. And again, no one has demonstrated anything close to this in OLED microdisplays.

So you're confident you can -- you'll get to 28,000 within that 3-year time frame.

Yes, we are, and we're excited to get moving on this. So we want that tool back here. This is an outstanding time for us.

Last question for me. Could you just review the F-35 time line, production time line, again? When -- I mean I understand you're shipping displays now, but clearly it's not full production.

Yes, sure. I can talk to that a little bit. So we are continuing to provide them displays for what's called IOC, our initial operational capability stage, and we're anticipating that those shipments are going to continue into early next year. We are now actually working on the production readiness development mode, and so far, our work is actually progressing ahead of plan. And that's allowing actually for some scheduled compression, which the primes are quite pleased about. So that's moving ahead. We anticipate production, limited-rate initial production, for us beginning probably around the fourth quarter of '20 into the first quarter of 2021. So that's actually progressing quite -- that program for us is progressing quite nicely.

Okay. And could you just refresh our memory on the quantity that you might see once you go beyond LRIP?

We have not disclosed quantities for this program in the past, but it's sizable. Leave it at that. I mean we're talking discussions already 7,000 to 9,000 displays approximately over the initial life of the project, that program.

Okay.

By the way, I'm sorry, 7,000 to 9,000 -- yes, that's correct. I'm sorry. Go ahead.

Okay.

Our next question comes from [John Pearson] with [indiscernible].

Congratulations on an excellent quarter. I'd like to ask about the 4K prototypes that you delivered to your customer. I guess I just want to clarify. They -- were they delivered, the prototypes that you had to direct pattern? And can you talk about that, the response?

Well, there are a few things we have to change in the display itself, i.e., the backplane. So the customer asked us to deliver after the direct patterning comes back, and we'll be doing that. They have seen and got a chance to be very impressed by the display that we put together for them. So deliveries would be next year beginning. And remember it's small volume because that's -- it's a small-volume effort that we have here. Did we lose you, John?

Yes, I lost the connection on that, but I'll re-listen to your answer later.

Sorry, John. That's fine.

I don't know what happened there, but anyways, did you mention you would have to wait until your equipment came back before you made those prototypes?

Well, certainly before we do the -- what we would like to do is change the design of the backplane a little bit to satisfy a few other things that both the customer and we would like to put in the display, and then we will directly pattern those. And when we directly pattern, we obviously have to wait for the equipment to come back. The other thing we have to do is we have to implement those designs with a wafer foundry. And we're waiting for the kickoff from the customer on that.

Okay. And this other design that you mentioned, is this with the same customer, or is it a different customer?

No, it's different. And again, the thing the first -- the 4K customer allowed us to show this product to many people at the society of information display last year, and it was impressive. And that is why this next design kickoff can happen.

I guess -- so this new -- this different customer has already seen the 4K, and they have -- they must have some different requirements that they need.

Oh, yes. I've learned that everybody has a different requirement.

Okay. Could you talk a little bit about your non-military aviation markets? And how -- are they shaping up? Are they something to get excited about?

In the future, certainly. It's small right now, but there are companies that are military focused that also are looking at commercial.

Right. And as a matter of fact, there's one in particular, a large prime with whom we're working with for several years, and they have actually been involved in expanding their efforts on the commercial side as well. So it's an area that we haven't realized a lot of value at this juncture, but it's something that has a lot of value potential going forward.

And again, it's the same thing that drives us, and the military drives us here too: our displays, our outstanding displays with high brightness, high contrast...

Okay. I think I lost the connection again. Are you guys still there?

Yes, we're here.

Okay. Great. Can I ask a little bit about this Soldier System 2030 technology suite, if you have any more information? And I guess, as part of that, I am a little bit confused with there's the TAR, the IVAS, the SVIT. I'm not sure they're all in -- are they all different kind of programs? Or are they different? Did they get swallowed up by the IVAS program? Can you talk a little bit about that?

You've got an outfit suit there with acronyms in the various programs, all of which are largely different. We're involved in one capacity or another with those and including talking to many different of the prime contractors for various parts of the 2030 program. So that’s kind of I think I’ll leave it that at this juncture. We may down in the future have a little more to report about that, but that's largely where we are. We’re in discussions and working with a lot of folks at this point on those programs.

Okay. I guess my last question would be along the lines of funding. You have mentioned in the past that DPA Title III is a possibility and IBAS is a possibility. And I’m just wondering if you could just give us an update on that situation.

Yeah. So we it’s we are making progress there. As a matter of fact, our discussions are intensifying. We just had a visit last week from several of the various departments there. So that's moving ahead. We’re optimistic. Our feeling is its not going to be a question of if. Its a question of when. And we feel that time frame is actually sort of compressing a little bit, but we can’t speak definitively with how the government works and the timing. And further challenges with the CR, the continuing resolution. So with all those elements out there which we have no control, all we can really say at this point is that we’re making great progress in terms of getting a message out there. We’re seeing a lot of evidence of support from the various branches and various departments, but we're just not in a position to give an exact time or time frame for when that's going to happen. But we're still very optimistic about that.

Do you -- if funding did happen, do you foresee any kind of -- would you foresee that equipment coming to your location in New York? Would you actually expand at that location and have a dedicated line? Or is that could that be another location? Or and I guess, as part of that, would that be dedicated to military? Or would it be also possibly for commercial and consumer displays manufacturing?

So the place that would make the most sense in terms of where the equipment is would be right here. We have the people. We have the other equipment that it needs to fit into, so it has to be here really. And the lines, the equipment would be dedicated to our customers in total. There are some military programs that, of course, are defense related. And we have to make sure we get them out, but as we improve the manufacturing, the and increase the capacity due to the throughput, the yield, the issue of being constrained goes away. So we don’t have a problem.

Yeah, yes, yes. Look, the primary purpose of this is for military applications, but recognize the fact that given the cost structure we have here where the more units we produce, the lower the unit costs are, the opportunity here and the interest in having some availability of the secondary or excess capacity applying for the commercial usage. Because by doing that, we’re going to have higher volumes. And that’s going to lower our costs and lower the price for everyone, including the military.

So is that situation possibly delaying your consumer side manufacturing plans, where you’re trying to see what’s going to happen with military funding? Or are these two only separate plans?

No, they’re really separate. The title three funding would implement would be an addition to the factory here.

All right. Thanks a lot.

As we have no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Andrew Sculley for any closing remarks.

I want to thank you all for joining us. We're very excited with the effort that the team has put in. We have spurned great, gotten great creativity for the team. And much of the improvement you see is, is from that creativity. And we're very happy to continue and make improvements in the future as well.

So, I just want to add here. We are a competitive company. And I want to underscore that we are the only U.S. manufacturable in microdisplays. And we recognize the critical role that we play in the military as well as the opportunities that we see in commercial markets. And that's critical because, as an example here, we had the question about the F-35 program. All F-35 helmets will be migrating over to OLED microdisplays. That puts us in a terrific position going forward. And I do want to just sort of echo Andrew's comments about the role everyone here has played: our dedicated production folks, production engineers, the R&D engineers, who have worked hand-in-hand to get our yields back and to improve our throughput and meet the growth ahead; our business development team that works closely with our customers and fosters deep relationships with them; and all the support folks who keep this place humming. So on that note, we say thank you very much.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.