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eMagin Corporation (NYSEMKT:EMAN)

Q4 2012 Earnings Conference Call

March 11, 2013 17:00 PM ET

Executives

Andrew Sculley - President & CEO

Paul Campbell - CFO

Analysts

Jagadish Iyer - Piper Jaffray

Steve Shaw - Sidoti & Company

Dennis Van Zelfden - Brazos Research

Aram Fuchs - Fertilemind Capital

Tom McGuire - Private Investor

Vincent Pangio - Private Investor

Eugene Conroy - Private Investor

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter Full Year 2012 eMagin Corporation Earnings Conference Call. My name is Jeff and I’ll be your coordinator for today. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Paul Campbell, Chief Financial Officer. And you’ve the floor Mr. Campbell.

Paul Campbell

Thanks Jeff. Welcome everyone and thanks for joining us today for our earnings call. Andrew and I are speaking today from our manufacturing facility in Hopewell Junction, New York. We’re anxious to begin I first need to remind everybody that we will be referring to numbers that are part of our 10K for the fiscal year ended December 31, 2012. 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, beliefs and estimates and are subject to a number of risks and uncertainties.

Such statements include reference to projections of future revenues, plans for product development and production, the company’s ability to ramp up production at its manufacturing facilities, future contracts and commercial arrangements, future product benefits, future operations, liquidity and capital resources as well as statements containing words like believes, expects, estimates, plans, target, will, intend, could and other similar expressions.

Risk factors are included in the company’s Form 10-K for 2011 filed last year and for 2012 which is scheduled to be filed with the Securities and Exchange Commission by Thursday of this week. . Except where required by federal securities laws, we undertake no obligation to publicly update or revise any forward looking statements whether as a result of new information, future events, changes in circumstances or any other reasons.

And with that I’d like to turn the call over to Andrew Sculley, our President and CEO of eMagin.

Andrew Sculley

Thank you Paul and thank you everyone on the phone today for joining us. I would like to begin with some highlights for the fourth quarter and full year, Paul will then discuss our financial results then I’ll update you on some specific programs and finally we will open up the call for your questions. 2012 was an important year for us at eMagin we continued to strengthen our position as a leading innovator and manufacture of active matrix OLED microdisplays, our domestic and international customers recognizes our products for their ability to deliver unmatched performance even under the most challenging circumstances and conditions. During the fourth quarter we gained additional market share as OLED technology continued to supplant LCD technology particularly and the demanding applications, despite some measure of uncertainty around potential U.S. military cut backs under sequestration during 2013. We really remain optimistic about the demand from the U.S. military, as soldier modernization continues to be a high priority with our military and also that’s the same thing as true with respect to our foreign military customers, we continue to expect (inaudible) plus demand for microdisplays and our backlog for the fourth quarter was at the end of the fourth quarter was $13.4 million and we believe our backlog will remain strong this year. eMagin has the largest portfolio of OLED microdisplays available today and I’m going to spend a few minutes to review these with you. We have a 9.6 micron pixel pitch WUXGA and that has a resolution of 1925x1200, full color pixels so each pixel has three sub-pixels and so largest resolution of any OLED microdisplays on the market.

And just to remind you what this looks like it's got a higher resolution than your full HDTV in your living room and it's under an inch in diameter so very small display, compact 9.6 micron pixel. We also have a 12 micron pixel pitch SXGA, that’s 1280x1024 that we supply in electronic viewfinder to a digital motion picture cameraman manufacturer and also to a high end Japanese manufacturer. The Japanese manufacturer does augmented reality type applications, very high end now and we look to see them come down in application so it's more broadly available. We have taken our ability to shrink the pixel size and produce the new SXGA instead of 12 micro this is at 9.6 micron pixel pitch, so it's same as the WUXGA.

This we have targeted both commercial and military applications that require the SXGA resolution but one at smaller size. Now we are also selling our VGA displays to customers with thermal weapon sights for both commercial and military applications. We’ve developed a new digital version of our largest running SVGA product; this is a much more uniform product incorporating the great features of our other digital products like automatic color correction, over temperature and luminance with virtually no motion blur and full dynamic range at very low luminance. These features of the digital products are critical for our military customers but also very important for other customers who use these products under various temperatures and conditions and just think of the motion picture camera that I mentioned earlier in these filmy in the Antarctic or desert or in dark environments et cetera. We have prototypes of our XGA with improved color game that we’re working with a strategic partner on high end consumer electronic view finders or consumer cameras. We have improved the color gamut significantly 50% increase and we expect to go one step further than that and by 50% improvement in our color gamut and this next run we expect to be better.

We’re working on a 2000x2000 resolution display that when combined with our high brightness will be a great solution for avionics. Pilots want to be able to see icons during the day and when they fly it and it was very brightness during the day and when they fly at the night they want to be able to see using night vision, using the same displays and we can do that and that’s a significant accomplishment, we will talk about that later.

All of the resolutions above can be combined with our outstanding OLED structures, these are full color, white or monochrome of the single color, in addition we’ve the high brightness I mentioned a moment ago monochrome green which is unmatched in both luminance and contrast and the critical point here is even at very high luminance it maintains an outstanding contrast and we’ve been to multiple shows where competitive products have talked about theirs and ours is unmatched. In the future we intend to add full color high brightness and again we expect to be first to be there first. Also we’ve demonstrated an 8.1 micron pixel pitch with 3 sub-pixels for our color display. This gives us a smallest pixel pitch for our microdisplay that exist today and as you recall a smaller pixel size means more displays will fit on a wafer and that means we can make them at a lower cost.

Now let me take a moment to bring you up-to-date on the new deposition machine. As you know we installed the machine in 2012, it's the state of the art deposition machine built by SNU precision to our design specifications. We were running production at during the fourth quarter and also before that and we had a problem in the fourth quarter, the machine had a number of issues with one of the chambers, this caused us to take the machine down for repairs, we lost production capability for much of November and December, the manufacturer SNU was required to produce a replace or broken unit in the chamber and we worked on the design and the process so that we can avoid future issues. This was a big issue for us, the downtime actually continued in the first quarter of 2013 and after much testing we didn’t want to run waste products, so we did a lot of testing here to be sure we had this under control and when we did we started production again in the first quarter.

And a friendly competition between the two OLED deposition machines the SNU was way ahead of the Satella so we’re very pleased with its operation today. That said there is still work to be done on optimization of the machine and that’s where we will continue over this year.

Although we ran the Satella machine at full capacity during the period the SNU this is during the fourth quarter we’re talking about now, the SNU was offline from much of that and we’re not able to fully make up for the lost production and therefore our fourth quarter of revenues were impacted and I just want to remind you that now we have all those products that I just we got finished talking about with the Satella has changed from one to the other which we had to do often in the fourth quarter, it takes a day and half at minimum to make that change. However we didn’t lose the orders that we couldn’t fill during that quarter, expect to be able to capture the revenue in the first quarter which has traditionally being our slowest quarter, so during this current quarter we’ll capture that revenue.

Going forward we’re confident that these problems have been addressed and that we continue to move towards full optimization and cooperation. Despite the challenges we have encountered with the new machine we’re highly confident that we will be able to optimize the new machine, it's going to deliver the expected improvements in both deposition capacity and yield and we’ll continue to update you with respective production capacity and our ability to meet expected demand.

I’ll turn the call now over to Paul to take you through our financial results.

Paul Campbell

Thanks Andrew, total fourth quarter 2012 revenues were 8.3 million compared to 8 million in Q4 last year so we’re up nicely from Q4 last year despite the issues with the machine that Andrew talked about and we tied to second highest revenue quarter in our history and we have over 2 million of fields (ph) in hand that did slip into the first quarter so that will help us with our Q1 revenues, So product revenues ended up at 6.8 million for Q4 and the R&D contract revenue for Q4 was 1.5 million compared to 1.1 million in Q4 last year so it was up nicely and Navair and SOCOM, Special Ops Command were the two large contracts that we had going during Q4 and Navair will continue on through most of this year.

Growth margin in the quarter was 49% or 4.1 million compared to 65% or 5.2 million in Q4 last year. Gross margin for third quarter and a quarter before fourth quarter was also 49% as was the full year 2012 was 49%. On the display side the decrease in margin was due to some higher personnel depreciation and a lower average price, average price per unit was about 4% lower due to the mix of display sold and the mix volumes purchased, a lot of our business is done based on the volume of the purchase. So the more units a customer buys the better price they get so if the mix of our sales is in those sort of customers that have the volume buying agreements the price may be a little lower.

The R&D contract gross margin was 53% better than Q4 last year slightly and that’s the function of each contract and the nature of the work completed during the quarter. Operating expenses were comprised of internal non-funded R&D expenses and selling, general and administrative expenses or SG&A. The R&D expenses were up 18% to 1.2 million that’s primarily due to increased new display development including the new digital SVGA product that Andrew spoke about. SG&A expenses for the fourth quarter were down 2.1 million total or 25% of revenue versus 2.8 million same quarter last year or 35% of revenue, so we have done a really nice job on the SG&A keeping that under control and the reduction that we have had was mainly due to some lower expenses, lower non-cash compensation, lower incentive compensation, lower accounting fees and so on, pretty much a broad expense reduction. The income from operation was 0.9 million in the fourth quarter versus 1.5 million last year.

Net income for the fourth quarter was 1.8 million or $0.04 per diluted share compared to net income of 1.2 million or $0.04 per diluted share in Q4 last year. In Q4 the company had a net tax benefit from evaluation allowance adjustment resulting from the company’s net operating loss carry forwards and we expect in the future that we will occasionally have drawdowns of these NOLs based on our future profitability.

We have a $105 million still in net operating loss carry forwards and NOLs and as our future forecast changes we will drawdown more and more of those NOLs overtime. So every once in a while we will have one of these tax benefits flow through the P&L.

Adjusted EBITDA was 1.6 million for the fourth quarter of 2012 compared to 2.6 million in Q4 last year and for the full year 2012 we earned 2.3 million in net income. Also for the full year 2012 revenues were 30.6 million the highest in the company’s history, we met our original full year guidance we gave last March on this call, we said our revenues at that time would be between 30 and 34 million for the year. So even with the push of some of the POs from Q4 into Q1 we still met our original guidance last year.

As we mentioned our order bookings and the backlog and the business all remain strong, at January 31, 2013 our backlog was about 13.4 million or purchases through next December and just as a remainder our backlog reflects display orders only so there is no POs for R&D contract revenue or any of that they are just for displays and those consist primarily of short cycle time, non-binding purchase orders so we don’t generally get purchase orders six months or nine months in advance only on occasion.

So based on our market expectations and expectations for the performance of the new deposition machine, the current backlog and business conditions we anticipated that 2013 revenue will be in the range of $34 million to $39 million. In addition due to the new OLED deposition machine being offline during parts of Q1 we anticipate our first quarter revenue to be approximately 8.5 million that will be the current quarter.

Looking at the balance sheet at December 31 we had cash, cash equivalent, CDs and corporate bonds, those are all basically cash equivalents totaling $13.4 million compared to 14.3 million at the end of 2011. So we’re down a little less than a $1 million in cash but during 2012 we invested 2.5 million in additional equipment and mostly in manufacturing, also during the fourth quarter we paid a onetime special cash dividend totaling $3.1 million or $0.10 per share and we also repurchased a 125,000 shares of eMagin stock during the year although none were purchased in Q4 and therefore as of the end of the year we had approximately $2 million left in our stock repurchase program.

We continue to have no debt and we have been self-funding for more than four years and haven’t done any equity raises in four years, over four years. In summary our financial position remains very strong, our business is growing and well controlled and we’re looking forward to the rest of 2013 and beyond and with that I’ll turn it back over to Andrew for some more updates on our current programs.

Andrew Sculley

Thanks Paul, as Paul just said I will take you through some updates on specific programs and then we will take your questions. The U.S. SOCOM program that’s U.S. Special Operations Command program for the commercialization of the WUXGA display was an outstanding success. The technical planning and execution of the display qualification and commercialization effort far exceed any expectation coming out of the small R&D program as noted by the U.S. SOCOM program office so we received quite a compliment from them although it wasn’t a small program for us it is for them. We finished the program including the extension three months ahead of schedule as part of the program the customer integrated displays in a device that was tested for two days by the night vision labs and in addition to night vision labs performed life time and other reliably tests and they passed all the milestones required for commercialization. As an outcome of the program we now offer the WUXGA as a commercial product with a stamp of approval by U.S. Night Vision Lab and SOCOM so we feel very good about that. We signed a contract extension with Sagem, if you remember the Safran group in Paris, France for the exclusive supply of OLED microdisplays for the FELIN, that’s French Military Modernization Program, today eMagin has delivered more than 17,000 with matrix OLED displays for this program with approximately 15,000 additional microdisplays to be delivered during the extend contract period so we’re very proud of that as well, I would say vote of confidence by the French in our displays.

We shipped samples during the quarter of the XGA display for high end consumer digital cameras for the electronic viewfinder, recently our team visited most of the Asia camera manufacturers with samples of the display, we continue to work with our strategic customer on this display. We have improved the color significantly and we will make additional improvements, our work with the strategic customer also includes the packaging on the display to match with this customer camera design and people who buy you will remember perhaps people who buy higher and digital cameras generally want a high quality viewfinder.

The advantages of using electronic viewfinder as opposed to an optical one or you can make this camera smaller and simpler, you can track most images through the viewfinder while taking motion pictures and this can’t be done with an optical viewfinder and you can have additional information in the viewfinder like the camera settings what’s the speed et cetera, what’s the battery life, things like that. We think OLED is the right way to go given its key advantages, it's very high contrast, high speed low power, large temperature range and also our ability to pack many, many pixels in a small space that gives OLED an advantage.

So we’re very happy with our work with the strategic customer, our VGA display has the potential for significant volume in the near future for thermal weapon sites, we began shipping 10,000 unit contract for the U.S. army light weapon thermal sight, that’s TWS2 for those few how follow the military jargon. Here I can’t mention the customer, I apologize for that but this is a new thermal weapon sight customer for us. In addition to the military however we also secured a consumer customer for this and that’s tracking point incorporated, they market a precision guided firearm integrating hardware, digital optics and tracking technology to provide a higher quality for sports shooting and deliveries are expected to begin this quarter in 2013 so again now we’re seeing consumer applications for our VGA display as well.

We’ve successfully completed Phase I of the higher brightness 2000x2000 resolution Navair and it's a Navy Air program all requirements and deliverables were met. Phase II of the program we started that and it's ongoing through much of this year. It's scheduled however to be completed this year, the program includes a demonstration of full color high brightness and high resolution microdisplays; it's something that again we’re going to be there first. This technology is strategic for us in our company and will result in a capability of a high brightness 2000x2000 resolution color display for aviation plus high brightness full color displays for commercial augmented reality and that includes see through applications. The follow-up to this work will include an effort to build the capability for volume production of this type of technology and recall our high brightness color effort will result in direct patterning which eliminates the color filter and this alone will increase our efficiency or brightness by four to five times that plus high brightness in the RGB OLED stack will get us where we need to be for Navair and any commercial application.

We’ve successfully delivered on our contracts for the ENVG-2 and that’s Enhanced Night Vision Goggle program. We’re successfully building display beam combiner assembly for one of this customers and we’ve multiple customers here. This is important because it demonstrates our ability to handle more than just a display and this capability it needed commercial efforts like the electronic view finder with a frame that our strategic customers ask us to build and next year’s award from the army has not been released yet but the program is expected to continue into the second half of 2013 through 2014.

We continue deliveries to be AE systems, Oasis Technology or Oasis BA or Oasis for technology for the U.S. thermal weapons remote viewer program. This is approximately 12,000 displays, we’ve delivered in 2012 and it will continue into 2013. Our largest running product is in SBGA display it's been manufactured since 2002 and it was the first active matrix OLED display sole, not OLED microdisplay it was the first ever. Now we made a large number of improvements to that products, OLED structure over the years and we have used those improvements in the newer resolutions that we talked about earlier what we have not changed the silicon design in the back plane until now.

We’ve produced samples of our new digital drive SVGA and delivered them to customers the product introduced is some of the characteristics of displays like pixel to pixel uniformity and fill factor, it also allows us to incorporate the newest drive features like automatic gamma correction, think of that as color correction over temperature and luminance so it's something that customers very much appreciate and it also gives us the ability to have full dynamic range at low luminance and you can think of that as important and military application or again a view finder application.

It has virtually no motion artifacts and other drive capabilities that our newer technology has. We accelerated our plan for this product when asked by customers for earlier samples so we did work like mad to get it out to them to meet their deadlines and we have kept the pixel size in this same as our SVGA that exists earlier so the customers could leverage their current designs with this next generation technology so we’re happy to be providing again a much better SVGA display today to new customers.

The deliveries continued for the U.S. Army Javelin Program and the BCF goggle for veterinarians and also the electronic viewfinder for FLIR’s industrial thermal cameras. As we optimize the SNU OLED deposition tool we’re also making changes to other areas of manufacturing. We’re installing Eyelit’s MES system software platform to enable product traceability and precise manufacturing controls for the company’s complex processes that combine both semi-conductor and display technologies for our microdisplays. Now this is absolutely necessary given our complexity of products now it was one thing where we had just an SVGA and a flavor of some of that but now we really need this system capability and this is something that our new manufacturing VP John Coleman is driving so I’m very pleased to have him taken the (inaudible) and make this improvement for us. So also necessary to make these changes for the volume of displays that we’re now making and we made a significant volume increase in displays last year. They are also as necessary as we prepare for volume increases in the future. As always we appreciate your confidence and we remain pleased with our progress, we know we have a long way to go and we know what we have to do and we’re working like mad on that both right now and for this entire year and now I would like to open up the call for your questions. So Jeff please help us out.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions). Up first we have Jagadish Iyer with Piper Jaffray. Please proceed.

Jagadish Iyer - Piper Jaffray

Couple of questions actually I wanted to ask, so how much was the product coming out from Satella versus the new tool in the fourth quarter and how do you think the production will be this year in a Satella versus new tool, can you give us some idea on that one please?

Andrew Sculley

Well if I take for example the last half of most of November and December the SNU was producing nothing and the Satella was producing everything that we had in October the SNU was going well and if I take the first quarter the last number of weeks, the SNU is I’m going to guess now at probably depends on exactly what time frame we’re going in twice the Satella rate but I want you to be cautious there because also we’re putting all the short runners on the Satella so we’re handicapping it and we’re trying to get up the big volumes on the SNU now. So fourth quarter October beginning of November we ran on the SNU until we had the problem and so I can say most of the fourth quarter was Satella.

Jagadish Iyer - Piper Jaffray

Yeah so the question is what gives you the confidence now that the problems on the new tool are pretty much behind you at this point in time?

Andrew Sculley

Well in terms of there is two things, one is the particular problems we were having in one of the chambers there we can look hence see that we’re not having those problems but we do have to optimize the tool it will take sometime over this year to do that and we’re pleased with the way that the tool is working now and again we have realized we have optimization to do and things like exactly what’s the temperature with respect to some of the materials that degrade more recently than others and things like that.

So the performance of the tool today that gives us that confidence.

Jagadish Iyer - Piper Jaffray

Couple of more questions just to make sure I understand it right, how should we be thinking about the margins Paul if you’re going to have some output form the new tool at this point of time?

Paul Campbell

Right, we did 49% gross margin last year and that’s down from our historical margins generally and we would expect margins to improve from there, how much is going to be a function of the curve that the new tool has in increase its yield, generally when a new machine comes on the yield is not so great and as it has more time as we operate it for more and more time it will get better and as you know we’re hoping at some point it will surpass the yield that we get on the Satella and actually become much, much better. So, it all depends on what that curve is overtime on how much we can improve on the 49%, so we will have to I’ll to have see to give a definitive answer but we will expect to move north of where it was last year.

Jagadish Iyer - Piper Jaffray

And Andrew finally on your press release you said that you’re in the final stages of completing an agreement with a new customer on a military program so I was just wondering the guidance that you have given does that include contribution from this particular customer or it's probably outside at this point of time?

Andrew Sculley

Well it does include some of it, we’ve tampered it and that’s why there is a range because without the customer and with the full range of the customer we have also tampered that range as largely because of 2013 sequestration, we’ve had you can worry about whether some of this stuff will be delayed and so that’s why the range. Some of that is in there.

Operator

Our next question comes from the line of Steve Shaw with Sidoti & Company. Please proceed.

Steve Shaw - Sidoti & Company

I just have one quick one, just can you guys provide some color on and I hope you mentioned this earlier on and if I missed some color on how the medical industry by shaping up in the near future for OLED technology?

Andrew Sculley

The interesting thing is like the BCF this is medical for large animal so something with a mobile application, the one thing that has always interested me as the U.S. Army Telemedicine program that we did I think we need to spend a little more time with how they are using the display and headset because you can see that they had two ideas in mind one of them telemedicine so I can have a surgeon get a 3D vision of somebody out in the field who is injured and they also want to use it for training and simulation. Right now we’re only in training and simulation areas for the medical so we need to work a little bit more with U.S. Army Telemedicine and there are other industrial applications as well beyond medicine.

Operator

Our next question comes from the line of Dennis Van Zelfden with Brazos Research.

Dennis Van Zelfden - Brazos Research

The first couple are for Paul, Paul can we go through the earnings per share calculation, I must not be doing something right because when I take 1.786 million on net income and divide it by the diluted shares outstanding of 25.445 I don’t get $0.04, am I not doing something correctly here?

Paul Campbell

You’re not, the calculation is a little bit not so straightforward as that the dividend that we pay was for all shareholders and part of it went to the preferred stock, so when you calculate earnings per share you’re calculating earnings per common share. So you got to take your net income, subtract out the preferred stockholders portion of the dividend and then do your division with the shares outstanding so that’s why you’re not getting it using your calculation.

Dennis Van Zelfden - Brazos Research

Okay so that will not be the case when there is not a dividend being paid?

Paul Campbell

Correct. Now when there is not a dividend being paid the other little wrinkle on that calculation is that the profits that accrue to the preferred shares also get subtracted out of the net income, so again the EPS that you’re getting to is just for the common share. So about 25% of our income goes to the preferred shares and about 75, this is sort of round numbers but about 75% of it goes to the common shares.

Dennis Van Zelfden - Brazos Research

Okay moving on quickly the revenue guidance does it include or exclude any potential electronic viewfinder revenue?

Paul Campbell

We don’t want to breakdown what it includes and what it doesn’t include because when we come up with that range we have a lot of customers and variables to consider about what might happen during the year and those sorts of things and electronic viewfinder with the camera is one thing that’s one of the things that could happen but there is we have 100s of customers and some will come out better than we project and some will come out worse and we try to factor all of that into our guidance and we assign probabilities and you know we do a lot of work on this but we don’t want to start breaking it down and saying well you know this particular event is going to impact the guidance in this particular because that would be too fine a call that we couldn’t really do that.

Dennis Van Zelfden - Brazos Research

Okay well let’s just continue on with the electronic viewfinder, then if we read the press release correctly the company is late on shipping the modified electronic viewfinders to that strategic customers correct?

Andrew Sculley

There are couple of things that the company wanted us to do other than that and in that case we had hoped to ship it earlier but they have asked for it in the middle of March.

Dennis Van Zelfden - Brazos Research

So did they ask you to do some more stuff on it other than the enhanced color stuff?

Paul Campbell

Yeah actually they did.

Dennis Van Zelfden - Brazos Research

Do they ever stop doing that?

Andrew Sculley

I hope I can say the answer is yes but we’re very nice to them, we don’t tell them that’s it, take it.

Dennis Van Zelfden - Brazos Research

Okay well in the press release also I don’t have it in front of me but it said something that to be effect of you could be shipping product i.e. EBS through the strategic customer as early as August? That’s correct right?

Andrew Sculley

Yes that’s what it said.

Dennis Van Zelfden - Brazos Research

Okay now does that mean that you have even greater confidence that you will infact actually get an order?

Andrew Sculley

I think we’re doing well, I can’t it's a tough business the electronic viewfinder but we’re working like mad to make it happen.

Dennis Van Zelfden - Brazos Research

Okay given the sequester what’s the outlook for contract revenues and I don’t mean a specific number just is it likely to go down and then comeback up later on?

Andrew Sculley

Well if I give you some history here if I look back I would see that the I’m just going to give you in general Paul handed me all the details I’m not going to go there. He is better at that, so, if I look back in history we had a number of programs going like the Patrick (ph), we thought we had a shot last year for a (inaudible) of that and I think you can see that the government spending putting caps on things have actually affected our R&D revenue between the years and given that I have this piece in front of me we did 4.4 million in 2012 and almost 5.7 million in 2011.

So we have seen that but the programs we’ve going forward right now are the Navair goes to the let’s see September this year we should be done and we’re working on other ones, so we’re working on some other ones to see if we can do some other things. So I already see our revenue in R&D is down in 2012 versus 2011.

Operator

Our next question comes from the line of Aram Fuchs with Fertilemind Capital. Please proceed.

Aram Fuchs – Fertilemind Capital

I’m a little surprised that you’re able to be confident that you haven’t lost this products in your backlog, what gives you that confidence? Are you still up getting these POs?

Andrew Sculley

The issue with something in our backlog is I will give you an example you know we have the DBCA for example with Exelis formerly ITT and our display and that beam combiner is a pair, the beam combiner is designed for the display. If Exelis wanted to say hey you don’t have a display ready and I’m just using this as example please it's not a particular one you can’t take somebody else’s display and stick it in there within a quarter. So that’s why we’re confident.

Paul Campbell

Pretty much all of our business is (technical difficulty) for the customers product so that gives us some installation on what might be a delay and we do try very mildly to make sure we satisfy our customers on a priority basis so they don’t get behind in their manufacturing schedule.

Andrew Sculley

In trying to satisfying those customers we do that at some times at our expense by changing from one product to the other more readily, more frequently than we would like to but again this is something we know we need to do to keep the customers on our side.

Paul Campbell

Yeah it costs us money, it costs us yield to do that and time on the machine all of that but we do it, so we try to keep the customers happy.

Aram Fuchs – Fertilemind Capital

Okay and Andrew you mentioned you still have some optimizing to do on the new machine, is that specifically around increasing yield and what is the difference between what happened in Q4 and for this optimizer?

Andrew Sculley

Yes it is to increase yield to know exactly what parameters, let me give you an example how often should we clean a chamber that is particularly dirty and by dirty I mean generates a lot of particles. How often should we clean that that’s type of thing I mean what happens in the November, December time frame as we actually had a failure of the piece of equipment within the chamber and then we had with that failure there was also an issue with continuing operations on it once we fix that particular piece of equipment and we’re continuing operations, we’re it's an issue for us. We had something going along every couple of days, so we had to make a design change so that particular issue didn’t happen anymore, so here we’re optimizing, we’re fixing the tool, we couldn’t run like that.

And so now since we have started up again we haven’t had that same problem occur I think it's true for January, February when we have been testing machine that same problem hasn’t occurred, so we feel good about that.

And again optimization is, what you need to do to increase the yield well beyond where the Satella is today, that’s what we need to do now.

Aram Fuchs – Fertilemind Capital

Okay and Andrew usually I have recorded you give an overview of the market of microdisplays not just OLEDs but the LCDs, the LCOS of the world, it seems like LCOS has really been able to produce a low priced shipped you know OLEDs are still high quality but high priced I was wondering if you can just give a survey of the market.

Andrew Sculley

Well if I were to take transmissive LCD the military programs of course and this isn’t a U.S. statement this is a worldwide statement, the military programs are going to OLED in particular I would imagine that we have most of them, if you look at the other place where transmissive LCD goes it's really viewfinders for cameras and there is two things happening in that market one of them that cellphone you’ve in your pocket so the very low end that used low quality and low resolution LCDs is going away the smartphones and it's the market that is in the high end but still high end high consumer but they are still electronic viewfinders those are that market is increasing and we’re expect OLED to be a significant part in that market and if I were to go to LCOS where you see them is a very low resolution QVGA for example and very low resolution and very low price markets I think we’ll compete as our volume increases and we optimize the equipment we have now I think we’ll compete with them, I don’t know if when we talk to companies who maybe want that LCOS that you’re talking about they would say yeah, yeah but we don’t want a QVGA they want higher resolution out of us and we have had a number of conversations with other companies they’re interested in higher resolution of course they all want cheap price so by the way those electronic viewfinder guys. I think the I don’t know specifically if you want to specifically what you’re referring to I can guess but I can answer you better.

Aram Fuchs – Fertilemind Capital

For the whole (inaudible) here is the consumer market with an AR glasses type system and it seems like the LCOS from what I’ve been reading and hearing is…

Andrew Sculley

In this case no matter who we have talked to everybody tells us we don’t want that QVGA we want something higher resolution and therefore we get a higher price but it's still a low price and we’re happy to work with anyone if it's an augmented reality like you just said the other thing they want is high brightness color and that fits right into our program that we’re working on that we mentioned high brightness color?

Paul Campbell

You want to think about the use on something like that if – if the use for the headset is to look at words or something, now QVGA might be okay and we don’t even make a resolution that low and we’re probably not going to and so that market would go to maybe somebody like LCOS or something but most of the other applications besides maybe just words any kind of video or pictures or anything where the quality of the picture makes a difference they are going to want to have higher resolution and maybe an OLED display rather than the other technology.

Aram Fuchs – Fertilemind Capital

Okay and then Paul on the balance sheet I was just a little confused by that, when you mentioned the dividend and shares outstanding that doesn’t dividend payment doesn’t change EPS of course, it sounded like you’re implying that it doesn’t not change EPS.

Paul Campbell

It does change EPS, the preferred portion of the dividend does get subtracted out from our net income because we’re again we’re what you’re looking on an EPS is the EPS to the common share holder.

Aram Fuchs – Fertilemind Capital

Okay in this specific instance right.

Paul Campbell

Yeah it's a little bit confusing but and a lot of times we don’t remember that we’ve that preferred stock out there so it does impact our calculation.

Aram Fuchs – Fertilemind Capital

Right and then during the year you bought some shares back and dividend that one time dividend you’ve got little left on the buyback is are you content with what you’re doing maybe just give a little bit of context there.

Paul Campbell

Yeah we bought back in total 150,000 shares and spent about a $0.5 million doing that since the program started and we have bought mostly on an opportunistic basis and we’re probably continue to do that and we don’t really, I can’t really share with you a plan for how we’re going to finish that program up but we have 2 million left and so we could be the way we buyback is in the open market you know our broker goes in and buy shares so we just have to turn him on and off whenever we want to do that but as far as how much we’re going to do I can’t really say.

Operator

Our next question comes from the line of (inaudible).

Unidentified Analyst

I wanted to focus on the 2000x2000 display and adding the high brightness capability to that, can you maybe it sounds like that’s a development that may materially increase the market that you guys can serve, can you talk about what the past to commercialization and eventual revenue looks like for that I mean obviously there is a lot of things probably that have to fall into place but just can you give us some general sense as to how you see the timing on that playing out?

Andrew Sculley

There is really two things to think about one is we’re building a new display it's 2000x2000 pixels and then we’re also using high brightness on that and in monochrome and then we go to high brightness color, so I will talk about the military first the aviation market. The military would like starting with high brightness 2000x2000 with a green color that’s fine for us night vision and also icons during the day and we did show them some color displays and they liked it very much they loved so they also want high brightness color, it's helpful to us because anyone else who asks about a see through application wants color, anyone high brightness in order to get there so the first application for the 2000x2000 will be a military high brightness screen, next high brightness color and then the commercial market probably will not want that high resolution so we can imply the high brightness capability to other resolutions.

They may want a lower resolution and SVGA, XGA or something like that, now the program this year will give us the will show the capability of doing direct patterning and deposition with colors and make a high brightness display and then we in order to turn that into a volume production it will take additional machinery to do that. This year we’re going to spend money on machinery precision tools to do a prototype that equipment will be used for the manufacturing but we need additional pieces to do that, I’m being a little bit vague because I’m sure our competitors are listening to me and I don’t want to give them any hints at all. So forgive me.

Unidentified Analyst

Okay.

Andrew Sculley

So the further thing to that is high brightness color has applications which are any augmented reality that you can imagine.

Unidentified Analyst

Right, can you give us any sense of the likely investment that’s needed to get into production on this stuff as well as the lead time to get all the production capability in a place? I mean is this 2014 or 2015?

Andrew Sculley

In this case for high brightness color, high brightness screen or anything like that we can do today no problem, for high brightness color we will have prototypes, other programs at the end of this year we’ll have prototypes and that’s what we’re looking for and then for more volume production that will be into 2014 and the tools that we’re talking about are not like we spent $4 million on the OLED deposition machine the SNU it's less than that.

Operator

(Operator Instructions). Our next question comes from the line of Tom McGuire, Private Investor. Please proceed.

Tom McGuire - Private Investor

Andrew, Paul if eMagin wins a contract with your strategic client for the EBF market when would we hear about it, is that something the next four to six weeks and then the follow-on is I think you mentioned that you have had a sales team deployed to Asia to bring prototypes to the XGA to camera manufacturers there, what kind of feedback have you gotten regarding those meetings?

Andrew Sculley

On the first one Tom a lot of times our customers are very hesitant to let us say anything about a contract and especially even using our name, so we might have, we might have a contract or a PO or both and not be able to say so. So the timing of some kind of announcement like that would be very sort of up in the air, I mean we might be able to make an announcement we might not, we might get the contract or we might not.

Paul Campbell

I think this is similar to the motion picture camera, we said we got one but we can’t tell you who it is because they didn’t want that so that could happen to us here as well. And what’s the second part of your question?

Operator

Our next question comes from the line of Vincent Pangio, Private Investor. Please proceed.

Vincent Pangio - Private Investor

Thank you it's already been asked and answered.

Operator

We have another question it comes from the line of (inaudible). Please proceed.

Unidentified Analyst

I was wondering how many (inaudible) are you running today on the machine and Satella?

Andrew Sculley

I can’t tell you that.

Unidentified Analyst

You mentioned during Q4 the SVGA XL would be validated certainly during Q4 can you give us more information about that if it was validated by you and by your customers?

Andrew Sculley

XGA?

Unidentified Analyst

No SVGA XL on the new deformation.

Andrew Sculley

This is the qualification of the SVGA for both products the standard and XL on the new deposition machine we’re finding there.

Unidentified Analyst

Okay and they were validated by you and your customers so you will produce some within your deformation now?

Andrew Sculley

I think the only thing wrong with that statement is the will, we did.

Operator

(Operator Instructions). Our final question comes from the line of Eugene Conroy, Private Investor.

Eugene Conroy - Private Investor

I was wondering when you were referring to the avionics the navy avionics and you were describing how high brightness was a key attribute and did I understand you to say that it was direct patterning that was going to allow you to meet that demand?

Andrew Sculley

There is two things that will happen there one is it will be a fixed single color at first and green is the color they like so during the day that high brightness screen is going to be required for seeing icons one to some reason these guys like fly into the sun and still see the icons on their face plate in front of their, on their helmet and at night they need to see night vision so let me just add the very difficult thing it is to get a display to do is that you need that extreme luminance and you have to have nice contrast there because otherwise the icons aren’t crisp and clear, our displays can do that but you also need to be able to have low luminance because at night you don’t want to blind the guy and in that low luminance to have the all the dynamic range because there they are flying at night and using night vision to see, so our displays are doing that so the first thing for aviation will be high brightness single color. The second thing is everybody who sees the color display says can you do that high brightness and color? So that’s what we’re working on with the Navair program that we should have a demonstration at the end of this year.

Eugene Conroy - Private Investor

Perhaps I misunderstood, I thought you had said that the thing that allowed you to meet that requirement that brightness requirement was the direct patterning.

Andrew Sculley

No forgive me, I apologize for misleading you there. No direct patterning is necessary for color absolutely but for monochrome green we can do that today.

Eugene Conroy - Private Investor

Okay so when you’re not using the term high brightness display to be the same as direct patterning display?

Andrew Sculley

No it's not, we can do a high brightness green display or yellow, we could red today.

Paul Campbell

We have shipped that product already.

Eugene Conroy - Private Investor

Okay without direct patterning?

Andrew Sculley

That’s correct, it's just -- I would be happy if you ever want I can tell you what I mean by direct patterning and why it's different. In terms of this the patterning is really occurs on the bottom electrode or anode the display and that’s not probably at all doing the green is just a single coded layer.

Operator

Ladies and gentlemen that will conclude the time we have for questions. I would now like to turn the presentation back over to Mr. Andrew Sculley for closing remarks.

Andrew Sculley

Thank you very much Jeff for helping us out and thank you to everybody on the phone. I appreciate your questions. I would like also to say this has been a we have had so much on our plates to do and the teams have done an outstanding job in driving this forward, our R&D group is shepherded the SNU machine through this very tough time. SNU has helped us on this as well. The new manufacturing under John Coleman has been going very nicely. The product development with all of these new products that we’re doing has been amazing to keep pace and the sales folks keep bringing us more things to take a look at and the administrative group under Paul is actually accelerated the closing very nicely and then an outstanding job.

So I want to thank the eMagine team, we feel very good about our team work, very good about our team and even though it's been very hectic time they have come through very nicely. So I want to thank them on this call and make sure you all know. I want to thank our shareholders for staying with us and our other stakeholders. We have made some terrific progress but we have a long way to go, we know that and we’re looking forward to 2013. So thank you very much. Hope to see you at show sometime and interact with all of you some more.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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