Market Overview

eMagin Corporation Announces Second Quarter 2018 Financial Results

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- 34% Increase in Quarterly Revenue Over 2017; Improvement in Product
and Contract Gross Margins -

eMagin Corporation, or the "Company", (NYSE:EMAN), a
leader in the development, design and manufacture of Active Matrix OLED
microdisplays for high resolution imaging products, today announced
financial results and corporate highlights for the second quarter ended
June 30, 2018.

"Our revenues of $7.1 million for the quarter, an increase of 34% over
the prior year quarter, underscore the resurgence we have seen in our
military and commercial businesses, both in the U.S. and abroad. Demand
for our OLED microdisplays globally remains strong as demonstrated by
the growth in orders as well as the requested acceleration of existing
orders among many of our customers," said Andrew Sculley, President and
Chief Executive Officer. "During the quarter, we sold to 75 customers,
including three new customers, and supplied displays for 53 new customer
applications. We are supporting many programs that the U.S. military
considers to be of high importance, including applications for night
vision, thermal weapon sights, see-through HMD systems for mounted and
dismounted missions as well as aviation helmet upgrades and prototypes
for next generation helmet systems."

"From a production perspective, our efforts led to higher yields which
in turn contributed to a higher gross profit margin. In addition to the
investments we have made in engineering resources, equipment and
manufacturing processes, we received government funding in the second
quarter for OLED display production and yield improvement," continued
Mr. Sculley. "As a result of these efforts, we are experiencing better
delivery times and improving product quality, validated by the favorable
reports we received from multiple customers who have conducted quality
and service audits."

"On the commercial front, as we continue our discussions with consumer
OEM's about potential licensing agreements, we are moving forward on the
design and development work for next generation AR/VR microdisplays. We
held a final design review with a consumer customer in July for a very
high resolution VR microdisplay. During the quarter, we also completed
work on a 120Hz-capable, compact interface for our 2k x 2k display which
demonstrates the highest brightness and resolution in the market today.
We continue to believe that our direct patterning (dPdTM)
technology will be key to the acceptance of our displays in the consumer
AR/VR market with consumer electronics companies and advancing our
discussions with potential mass production and licensing partners."

"Our backlog at the end of June was $10.3 million, an increase of $0.5
million from the end of 2017 despite our increase in sales. While our
backlog may vary based on the timing of new orders and scheduled
shipment dates, we are encouraged by the strong demand for our OLED
microdisplays and expect our gross margins to expand as our volumes
increase and as we continue to enhance our manufacturing processes and
achieve additional yield improvements," concluded Mr. Sculley.

Business and Product Highlights

  • We are progressing with the OLED upgrade to a production helmet for a
    multi-service, multi-country, fixed wing aircraft program. Our OLED
    displays will be replacing the LCD displays currently employed in
    these helmets. Displays required for Initial Operational Capability
    will begin deliveries in the fourth quarter. All phases of this
    program are on schedule and continue to progress toward Limited Rate
    Initial Production in 2019.
  • We continue to make progress towards improving our dPd technology and
    we recently achieved a maximum brightness of more than 7,500 nits in
    full color, surpassing our previous brightness of 5,300 nits.
  • We completed the design review phase for a next generation AR/VR
    microdisplay and expect that the first prototype, which will use our
    dPd technology, will be ready in early 2019.
  • We received an order totaling $398,000 in support of the Javelin
    Missile program Command Launch Unit (CLU). The customer has scheduled
    a follow-on order worth over $795,000 for the fourth quarter.
  • We supported several prime contractors with display deliveries for
    pre-production units for the US Army Enhanced Night Vision Goggle –
    Binocular (ENVG-B) program. This program is expected to shift to
    production in early 2019 with an overall acquisition objective of
    190,000 systems over a 7-year period.
  • We continued to support a major US Army helicopter helmet upgrade
    program to retrofit high brightness microdisplays into the current
    fielded helmet. We delivered final displays for test helmets, with
    ground and flight tests scheduled for the third quarter.
  • We received a $245,000 contract from the US Army for an OLED display
    production and yield improvement project. Three additional projects
    totaling $585,000 were awarded in July for total awards for 2018 of
    $830,000.

Discontinuation of Consumer Night Vision Products

The Company has decided to discontinue its two consumer night vision
products, BlazeSpark and BlazeTorch. It was determined that the
engineering, marketing and managerial resources needed to advance these
products could be better utilized focusing on the Company's core
business. As a result, the Company recorded a write-down of $2.7
million, or $0.06 per share, in the second quarter related to consumer
night vision products inventory and production tooling. This impairment
charge is reflected in the Company's cost of revenues for the quarter.

Quarter Results

Revenues for the second quarter of 2018 grew 34% to $7.1 million, an
increase of $1.8 million from revenues of $5.3 million reported a year
ago and up sequentially by $0.2 million from the first quarter of 2018.

Product revenues increased 34% to $6.2 million compared to $4.7 million
in the second quarter of 2017. The increase in product revenue was due
to growth from U.S. and foreign military programs and to a larger
proportion of sales of displays with higher average unit prices.
Contract revenues totaled $0.9 million in the second quarter of 2018
compared to $0.6 million in the same quarter of last year. The increase
in contract revenue was primarily due to acceleration of consumer
development work, the addition of several military contracts and work
performed in connection with the receipt of U.S. Government funding for
yield improvement projects.

Overall gross margin for the second quarter included the impact of the
one-time write-off of the consumer night vision products inventory.
Excluding the impairment charge of $2.7 million, the gross margin was
40% compared to 24% in the prior year period. The increase in gross
margin excluding the impairment charge was primarily due to increased
volumes and product revenue, higher average selling prices, and
favorable contract revenue gross margin in the 2018 period.

Operating expenses for the second quarter of 2018, including R&D
expenses, were $3.8 million compared to $3.3 million in the second
quarter of 2017. Operating expenses as a percentage of sales declined to
53% in the second quarter compared to 63% a year ago. The increase in
operating expenses was due to higher R&D expenses associated with the
ongoing development of the Company's dPd technology as well as costs
incurred to improve manufacturing processes. SG&A expenses declined to
29% of net revenue in the second quarter, or $2.0 million, reflecting a
more normalized run rate following the higher level of expenses incurred
in the first quarter of 2018 associated with the negotiation of consumer
initiatives.

Operating loss for the second quarter was $3.6 million inclusive of the
$2.7 million write-down of the consumer night vision products inventory,
versus an operating loss of $2.1 million in the second quarter of last
year. Excluding the impairment charge, the operating loss was $955
thousand.

Other expense for the second quarter was $1.4 million and was primarily
related to the non-cash expense related to the fair value of warrants
outstanding. Net loss for the second quarter of 2018, inclusive of the
$2.7 million for the night vision products inventory impairment charge
and $1.4 million for the warrant liability revaluation, was $5.1
million, or $0.11 per diluted share, compared to a net loss of $2.3
million, or $0.07 per diluted share, in the second quarter of 2017. The
adjusted net loss for the second quarter of 2018 excluding the
impairment charge and the warrant liability revaluation was $1.0
million, or $0.02 per diluted share.

Non-GAAP Adjusted EBITDA for the quarter was negative $2.9 million.
Excluding the night vision products inventory impairment charge of $2.7
million, Adjusted EBITDA for the quarter would have been negative $306
thousand in comparison to Adjusted EBITDA of negative $1.5 million in
the prior year period.

As of June 30, 2018, the Company had cash and cash equivalents of $8.7
million, working capital of $11.3 million, no outstanding borrowings and
borrowing availability under the ABL facility of $3.7 million.

Conference Call Information

A conference call and live webcast will begin today at 9:00 am ET. An
archive of the webcast will be available one hour after the live call
through September 9, 2018. To access the live webcast or archive, please
visit the Company's website at ir.emagin.com
or www.earnings.com.

About eMagin Corporation

A leader in OLED microdisplay technology, OLED microdisplay
manufacturing know-how and mobile display systems, eMagin manufactures
high-resolution OLED microdisplays and integrates them with magnifying
optics to deliver virtual images comparable to large-screen computer and
television displays in portable, low-power, lightweight personal
displays. eMagin's microdisplays provide near-eye imagery in a variety
of products from military, industrial, medical and consumer OEMs. More
information about eMagin is available at www.emagin.com.

Forward-Looking Statements

This press release contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934, including those regarding eMagin
Corporation's expectations, intentions, strategies and beliefs
pertaining to future events or future financial performance. Actual
events or results may differ materially from those in the
forward-looking statements as a result of various important factors,
including those described in the Company's most recent filings with the
SEC. For a more complete description of the risks that could cause our
actual results to differ from our current expectations, please see the
section entitled "Risk Factors" in eMagin's Annual Report on Form 10-K
for the fiscal year ended December 31, 2017, and Report on Form 10-Q for
the period ended June 30, 2018.

Non-GAAP Financial Measures

To supplement the Company's consolidated financial statements presented
on a GAAP basis, the Company has provided non-GAAP financial
information, namely earnings before interest, taxes, depreciation and
amortization, and non-cash compensation expense ("Adjusted EBITDA"). The
Company's management believes that this non-GAAP measure provides
investors with a better understanding of how the results relate to the
Company's historical performance. The additional adjusted information is
not meant to be considered in isolation or as a substitute for GAAP
financial statements. Management believes that these adjusted measures
reflect the essential operating activities of the Company. A
reconciliation of non-GAAP financial information appears below.

     
EMAGIN CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
 
June 30, December 31,
2018 2017
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,663 $ 3,526
Accounts receivable, net 3,481 4,528
Unbilled accounts receivable 947 406
Inventories 7,814 8,640
Prepaid expenses and other current assets     715   1,328
Total current assets 21,620 18,428
Equipment, furniture and leasehold improvements, net 8,403 8,553
Intangibles and other assets     336   326
Total assets $   30,359 $ 27,307
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,135 $ 1,714
Accrued compensation 1,658 1,557
Revolving credit facility, net 3,808
Common stock warrant liability 4,614 784
Other accrued expenses 1,490 719
Deferred revenue 765
Other current liabilities     408   469
Total current liabilities     10,305   9,816
 
Commitments and contingencies
 
Shareholders' equity:
Preferred stock, $.001 par value: authorized 10,000,000 shares:
Series B Convertible Preferred stock, (liquidation preference of
$5,659) stated value $1,000 per share, $.001 par value: 10,000
shares designated and 5,659 issued and outstanding as of June 30,
2018 and December 31, 2017
Common stock, $.001 par value: authorized 200,000,000 shares, issued
45,273,339 shares, outstanding 45,111,273 shares as of June 30, 2018
and issued 35,182,589 shares, outstanding 35,020,523 shares as of
December 31, 2017
45 35
Additional paid-in capital 254,425 244,726
Accumulated deficit (233,916) (226,770)
Treasury stock, 162,066 shares as of June 30, 2018 and December 31,
2017
    (500)   (500)
Total shareholders' equity     20,054   17,491
 
Total liabilities and shareholders' equity $   30,359 $ 27,307
 
       
EMAGIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
 
Three Months Ended Six Months Ended
June 30, June 30,
2018 2017 2018 2017
Revenues:
 
Product $ 6,216 $ 4,655 $ 12,079 $ 9,036
Contract   850   605   1,854   2,293
Total revenues, net   7,066   5,260   13,933   11,329
 
Cost of revenues:
 
Product 3,971 3,658 8,330 7,116
Contract 299 353 827 1,146
Impairment of Consumer Night Vision inventory   2,690     2,690  
Total cost of revenues   6,960   4,011   11,847   8,262
 
Gross profit   106   1,249   2,086   3,067
 
Operating expenses:
 
Research and development 1,720 1,177 3,351 2,511
Selling, general and administrative   2,031   2,153   4,943   4,616
Total operating expenses 3,751   3,330   8,294   7,127
 
Loss from operations (3,645) (2,081) (6,208) (4,060)
 
Other income (expense):
Change in fair value of common stock warrant liability (1,427) (924)
Interest expense, net (30) (188) (72) (223)
Other income, net   37   (1)   58   14
Total other expense   (1,420)   (189)   (938)   (209)
Loss before provision for income taxes (5,065) (2,270) (7,146) (4,269)
 
(Provision) benefit for income taxes      
 
Net loss $ (5,065) $ (2,270) $ (7,146) $ (4,269)
 
Loss per share, basic $ (0.11) $ (0.07) $ (0.16) $ (0.13)
Loss per share, diluted $ (0.11) $ (0.07) $ (0.16) $ (0.13)
 
Weighted average number of shares outstanding:
 
Basic   45,111,273   33,019,478   43,691,117   32,320,527
 
Diluted   45,111,273   33,019,478   43,691,117   32,320,527
 
       

Non-GAAP Information

 
Three Months Ended Six Months Ended
June 30, June 30,
2018 2017 2018 2017
 
Net income (loss) $ (5,065) $ (2,270) $ (7,146) $ (4,269)
Non-cash compensation 130 116 335 330
Change in fair value of common stock warrant liability 1,427 - 924 -
Depreciation and intangibles amortization expense 482 495 950 981
Interest expense 30 188 72 223
Provision for income taxes - - - -
Adjusted EBITDA $ (2,996) $ (1,471) $ (4,865) $ (2,735)
 

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